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Exam 5: Accounting for Inventories

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Question 21

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Vargas Company uses the perpetual inventory system and the FIFO cost flow method. During the current year, Vargas purchased 1,300 units of inventory that cost $14 each. At a later dateduring the year, the company purchased an additional 1,700 units of inventory that cost $15 each. Vargas sold 1,400 units of inventory for $18.What is the amount of cost of goods sold that will appear on the current year's income statement?

A) $5,500
B) $18,200
C) $4,200
D) $19,700

E) All of the above
F) C) and D)

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Question 22

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Generally accepted accounting principles do not allow the cost flow pattern for merchandise inventory to differ from the physical flow of merchandise within the business.

A) True
B) False

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Question 23

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If a company uses the LIFO cost flow method, it is not required by generally accepted accounting principles to apply the lower-of-cost-or-market rule.

The following information is for Benitez Company for Year 2: Required:Assuming that Benitez uses the FIFO cost flow method,a)How much product cost would be allocated to cost of goods sold?b)How much product cost would be allocated to inventory at the end of the year?c)Calculate the average number of days to sell inventory for the year.

When prices are rising, which method of inventory, if any, will result in the lowest relative net cash outflow (including the effects of taxes, if any) ?

On February 2, Year 2, a fire destroyed the entire inventory of Orange Co. The following information was found in accounting records: purchases of $420,000, sales of $690,000, beginning inventory of $120,000, and average gross margin percentage of 30%. Based on the above information, indicate whether each of the following statements is true or false.________ a)The cost of goods available for sale is $540,000.________ b)The cost of goods sold as a percent of sales is 70%.________ c)The estimated cost of goods sold is $303,000.________ d)Estimated inventory lost in the fire is $66,000.________ e)Estimated gross margin for the period up to the date of the fire was $483,000.

Nelson Corporation is required to record an inventory write-down of $2,500 as a result of using the lower-of-cost-or-market rule. Which of the following shows how this business event would affect the financial statements?

If the replacement cost of inventory is greater than its historical cost, the increase in value does not affect the company's financial statements.

Sierra Company uses the perpetual inventory system. How would the company calculate the cost of goods sold when recording a sale under the weighted-average cost flow method?

International Financial Reporting Standards (IFRS)do not permit the use of the LIFO inventory cost flow method.

Glasgow Enterprises started the period with 80 units in beginning inventory that cost $2.00 each. During the period, the company purchased inventory items as follows: Glasgow sold 230 units after purchase 3 for $8.10 each. What is Glasgow's ending inventory under weighted-average? (Round your intermediate computation to 2 decimal places.)

Which of the following circumstances would be a valid reason to estimate the amount of inventory that is on hand at the end of the period?

Stan's Surf Shack purchased five surfboards for $200 each. Later it purchased two additional surfboards for $250 each. Stan's sold a total of six surfboards during the period for $350 cash each. The company uses the perpetual inventory system and has not yet accrued any income taxes for the period.Indicate how the event described in the question affects the elements of the financial statements. Use the following letters to record your answer in the box shown below. If an event increases one account and decreases another account within the same element, record I/D. If an event has no impact on the element, record NA. You do not need to enter amounts.Increase = IDecrease = DNot Affected = NAStan's sold the six surfboards for cash. The company uses the FIFO inventory cost flow method. (Consider the effects of both parts of this event.)

Which of the following is not required to apply the gross margin method?

A discount merchandiser is likely to have a higher inventory turnover than more upscale stores with higher merchandise prices.

Hoover Company purchased two identical inventory items. The item purchased first cost $46.00. The item purchased second cost $51.75. Then Hoover sold one of the inventory items for $75. Based on this information, which of the following statements is true?

Glasgow Enterprises started the period with 80 units in beginning inventory that cost $2.10 each. During the period, the company purchased inventory items as follows: Glasgow sold 360 units after purchase 3 for $8.40 each. What isGlasgow's ending inventory under LIFO?

Glasgow Enterprises started the period with 80 units in beginning inventory that cost $1.90 each. During the period, the company purchased inventory items as follows: Glasgow sold 265 units after purchase 3 for $7.80 each. What is Glasgow's cost of goods sold under FIFO?

Burton Supply uses the perpetual inventory method. At the end of the year Burton Supply had the following items in inventory. Required:a)Determine the amount of inventory Burton Supply is showing on its books before any adjustment.b)Determine the amount of ending inventory using lower of cost or market applied to each individual inventory item.c)Determine the amount of ending inventory using lower of cost or market applied to the total stock of inventory in the aggregate.d)Which approach of applying the lower-of-cost-or-market rule (apply to each individual inventory item or apply to the entire stock of inventory in the aggregate)produces the smallest amount of total assets?

At the end of the Year 2 accounting period, DeYoung Company determined that the market value of its inventory was $79,800. The historical cost of this inventory was $81,400. DeFazio uses the perpetual inventory method. Assuming the amount is immaterial, how will the necessary write-down to reduce the inventory to the lower-of-cost-or-market affect the company's financial statements?