1. Copyright © 2007 Prentice-Hall. All rights reserved 1 Merchandise Inventory Chapter 6

2. Copyright © 2007 Prentice-Hall. All rights reserved 2 Which cost flow assumption assigns the oldest costs of purchases to its inventory? 1.FIFO 2.LIFO 3.Average 4.Specific Units Cost

3. Copyright © 2007 Prentice-Hall. All rights reserved 3 Answer: 2 The most recent costs are assigned to cost of goods sold. The oldest costs remain in inventory.

4. Copyright © 2007 Prentice-Hall. All rights reserved 4 Chez Company uses FIFO perpetual inventory. It had 6 units of inventory in beginning inventory that cost $1 each. It then purchased 4 units for $2 each. Next, it sold 5 units. How much was assigned to cost of goods sold?

5. Copyright © 2007 Prentice-Hall. All rights reserved 5 FIFO: First units in are the first units sold 5 units x $1 = $5

6. Copyright © 2007 Prentice-Hall. All rights reserved 6 Chez Company uses LIFO perpetual inventory. It had 6 units of inventory in beginning inventory that cost $1 each. It then purchased 4 units for $2 each. Next, it sold 5 units. How much was assigned to cost of goods sold?

7. Copyright © 2007 Prentice-Hall. All rights reserved 7 LIFO: Last units in are the first units sold 4 units x $2 = $8 1 unit x $1 =1 $9

8. Copyright © 2007 Prentice-Hall. All rights reserved 8 Chez Company uses the average perpetual inventory. It had 6 units of inventory in beginning inventory that cost $1 each. It then purchased 4 units for $2 each. Next, it sold 5 units. How much was assigned to cost of goods sold?

9. Copyright © 2007 Prentice-Hall. All rights reserved 9 Average cost: [(6 units x $1) + (4 units x $2)] ÷ 10 units = $1.40 $1.40 x 5 = $7

10. Copyright © 2007 Prentice-Hall. All rights reserved 10 Companies that seek a “middle-ground” solution to inventory valuation would use which inventory costing method? 1.FIFO 2.LIFO 3.Average

11. Copyright © 2007 Prentice-Hall. All rights reserved 11 Answer: 3

12. Copyright © 2007 Prentice-Hall. All rights reserved 12 The accounting principal that states that businesses should use the same accounting methods from period to period. 1.Conservatism 2.Consistency 3.Materiality 4.Disclosure

13. Copyright © 2007 Prentice-Hall. All rights reserved 13 Answer: 2

14. Copyright © 2007 Prentice-Hall. All rights reserved 14 The accounting principle that states that a company should report enough information for outsiders to make wise decisions about the company. 1.Conservatism 2.Consistency 3.Materiality 4.Disclosure

15. Copyright © 2007 Prentice-Hall. All rights reserved 15 Answer: 4

16. Copyright © 2007 Prentice-Hall. All rights reserved 16 The accounting principle that states that a company must perform strictly proper accounting only for significant items is 1.Conservatism 2.Consistency 3.Materiality 4.Disclosure

17. Copyright © 2007 Prentice-Hall. All rights reserved 17 Answer: 3

18. Copyright © 2007 Prentice-Hall. All rights reserved 18 Which inventory costing method lets companies pay the lowest income taxes when inventory costs are rising? 1.FIFO 2.LIFO 3.Average

19. Copyright © 2007 Prentice-Hall. All rights reserved 19 Answer: 2 Higher costs are assigned to cost of goods sold, results in a lower operating income and lower income tax liability.

20. Copyright © 2007 Prentice-Hall. All rights reserved 20 When inventory costs are rising, net income is also the highest under which inventory costing method? 1.FIFO 2.LIFO 3.Average

21. Copyright © 2007 Prentice-Hall. All rights reserved 21 Answer: 1 With FIFO, the earlier costs are assigned to cost of goods sold, resulting in a higher gross profit and net income.

22. Copyright © 2007 Prentice-Hall. All rights reserved 22 The lower-of-cost-or-market rule is an example of which accounting principle? 1.Conservatism 2.Consistency 3.Materiality 4.Disclosure

23. Copyright © 2007 Prentice-Hall. All rights reserved 23 Answer: 1

24. Copyright © 2007 Prentice-Hall. All rights reserved 24 Inglis Company paid $500 for inventory. By the end of the accounting period, the market value is $460. The entry to apply the LCM rule is: 1.Debit Inventory, credit Cost of Goods Sold, $460 2.Debit Inventory, credit Cost of Goods Sold, $40 3.Debit Cost of Goods Sold, credit Inventory $40 4.Debit Inventory Loss, credit Cost of Goods Sold, $460

25. Copyright © 2007 Prentice-Hall. All rights reserved 25 Answer: 3

26. Copyright © 2007 Prentice-Hall. All rights reserved 26 Alfred Company uses the gross profit method to estimate ending inventories. Historically, the company has had a 40% gross profit rate. The following information is available: Net sales$9,000 Beginning inventory1,000 Cost of goods purchased7,000 What is the estimated cost of Alfred Company's inventory at the end of the month?

27. Copyright © 2007 Prentice-Hall. All rights reserved 27 Answer: Net sales$9,000 Estimated gross profit ($9,000 x 40%)3,600 Estimated cost of goods sold$5,400 Beginning inventory$1,000 Cost of goods purchased7,000 Goods available for sale$8,000 Less estimated cost of goods sold5,400 Estimated ending inventory$2,600

28. Copyright © 2007 Prentice-Hall. All rights reserved 28