Review For MidtermI Solution 1092

Review for Midterm I of
Financial Accounting (2)

2021/4/1
1

Part I: Multiple-Choice Questions (60 points)
1. Sawyer Company uses the perpetual inventory system and the LIFO method to value inventories. On August 1, there were 10,000 units valued at $60,000 in
the beginning inventory. On August 10, 20,000 units were purchased for $12 per unit. On August 15, 24,000 units were sold for $24 per unit. The
amount charged to ending inventory on August 15 was
a. $36,000.
b. $60,000.
c. $240,000.
d. $264,000.
2

A
LIFO Unit UC TC
Begin INV 10,000 $6.0 60,000

Purchase#1 20,000 $12.0 240,000
30,000 $300,000
End INV
6,000 $6.0 36,000

0 $12.0 0
3

2. Sawyer Company uses the perpetual inventory system and the LIFO method to value inventories. On August 1, there were 10,000 units valued at $60,000 in
amount charged to cost of goods sold on August 15 was
a. $36,000.
b. $60,000.
c. $240,000.
d. $264,000.
4

D
LIFO Unit UC TC
Begin INV 10,000 $6.0 60,000

Purchase#1 20,000 $12.0 240,000
30,000 $300,000
End INV
6,000 $6.0 36,000

0 $12.0 0
6,000 $36,000
COGA $300,000
Less: End INV 36,000
COGS $264,000
5

3. Sawyer Company uses the perpetual inventory system and the FIFO method to value inventories. On August 1, there were 10,000 units valued at $60,000 in
amount charged to ending inventory on August 15 was
a. $60,000.
b. $72,000.
c. $240,000.
d. $228,000.
6

B
FIFO Unit UC TC
Begin INV 10,000 $6.0 60,000

Purchase#1 20,000 $12.0 240,000
30,000 $300,000
End INV
0 $6.0 0
6,000 $12.0 72,000
7

4. Sawyer Company uses the perpetual inventory system and the FIFO method to value inventories. On August 1, there were 10,000 units valued at $60,000 in
amount charged to cost of goods sold on August 15 was
a. $60,000.
b. $72,000.
c. $240,000.
d. $228,000.
8

D
FIFO Unit UC TC
Begin INV 10,000 $6.0 60,000

Purchase#1 20,000 $12.0 240,000
30,000 $300,000
End INV
0 $6.0 0
6,000 $12.0 72,000
6,000 $72,000
COGA $300,000
COGS $228,000
9

5. Sawyer Company uses the perpetual inventory system and the weighted average method to value inventories. On August 1, there were 10,000 units valued at
$60,000 in the beginning inventory. On August 10, 20,000 units were purchased for $12 per unit. On August 15, 24,000 units were sold for $24 per unit.
The amount charged to ending inventory on August 15 was
a. $60,000.
b. $72,000.
c. $240,000.
d. $228,000.
10

A
AC Unit UC TC
Begin INV 10,000 $6.0 60,000

Purchase#1 20,000 $12.0 240,000
30,000 $300,000
End INV $10.0
6,000 $10.0 60,000

0 $10.0 0
11

6. Sawyer Company uses the perpetual inventory system and the moving-average (or average-cost) method to value inventories. On August 1, there were
10,000 units valued at $60,000 in the beginning inventory. On August 10, 20,000 units were purchased for $12 per unit. On August 15, 24,000 units
were sold for $24 per unit. The amount charged to cost of goods sold on August 15 was
a. $60,000.
b. $72,000.
c. $240,000.
d. $228,000.
12

C
AC Unit UC TC
Begin INV 10,000 $6.0 60,000

Purchase#1 20,000 $12.0 240,000
30,000 $300,000
End INV $10.0
6,000 $10.0 60,000

0 $10.0 0
6,000 $60,000
COGA $300,000
COGS $240,000
13

7. Bordeaux Corp., a French subsidiary of a US company, sells one product and uses a perpetual inventory system. The beginning inventory consisted of 40
units that cost €2,000 per unit. During the current month, the company purchased: 240 units at €2,100 each. Sales during the month totaled 180 units for
€4,350 each. What is the cost of goods sold using the LIFO cost flow assumption?
a. €360,000.
b. €374,000.
c. €378,000.
d. €375,429.
14

C
LIFO Unit UC TC
Begin INV 40 $2,000.0 80,000

Purchase#1 240 $2,100.0 504,000
280 $584,000
End INV
40 $2,000.0 80,000
60 $2,100.0 126,000
100 $206,000
COGA $584,000
COGS $378,000
15

€4,350 each. What is the cost of goods sold using the FIFO cost flow assumption?
a. €360,000.
b. €374,000.
c. €378,000.
d. €375,429.
16

B
FIFO Unit UC TC
Begin INV 40 $2,000.0 80,000

Purchase#1 240 $2,100.0 504,000
280 $584,000
End INV
0 $2,000.0 0
100 $2,100.0 210,000
100 $210,000
COGA $584,000
COGS $374,000
17

€4,350 each. What is the cost of goods sold using the weighted-average cost flow assumption?
a. €360,000.
b. €374,000.
c. €378,000.
d. €375,429.
18

D
AC Unit UC TC
Begin INV 40 $2,000.0 80,000

Purchase#1 240 $2,100.0 504,000
280 $584,000
End INV $2,085.7
100 $2,085.7 208,571

0 $2,085.7 0
100 $208,571
COGA $584,000
COGS $375,429
19

10. Brocken Co. has the following data related to an item of inventory:
Inventory, May 1 3,000 units @ £4.20
Purchase, May 7 10,500 units @ £4.40
Inventory, May 31 3,900 units
The value assigned to cost of goods sold if Brocken uses average-cost is

a. £51,188.
b. £50,700.
c. £50,883.
d. £51,690.
20

A
AC Unit UC TC
Begin INV 3,000 $4.2 12,600

Purchase#1 10,500 $4.4 46,200
Purchase#2 2,100 $4.5 9,450
15,600 $68,250
End INV $4.38
3,900 $4.4 17,063

0 $4.4 0
0 $4.4 0
3,900 $17,063
COGA $68,250
COGS $51,188
21

The value assigned to cost of goods sold if Brocken uses FIFO is

a. £50,700.
b. £50,880.
c. £51,207.
d. £51,690.
22

B
FIFO Unit UC TC
Begin INV 3,000 $4.2 12,600

Purchase#1 10,500 $4.4 46,200
Purchase#2 2,100 $4.5 9,450
15,600 $68,250
End INV
0 $4.2 0
1,800 $4.4 7,920
2,100 $4.5 9,450
3,900 $17,370
COGA $68,250
COGS $50,880
23

The value assigned to cost of goods sold if Brocken uses LIFO is

a. £50,700.
b. £50,880.
c. £51,207.
d. £51,690.
24

D
LIFO Unit UC TC
Begin INV 3,000 $4.2 12,600

Purchase#1 10,500 $4.4 46,200
Purchase#2 2,100 $4.5 9,450
15,600 $68,250
End INV
3,000 $4.2 12,600

900 $4.4 3,960
0 $4.5 0
3,900 $16,560
COGA $68,250
COGS $51,690
25

13. Shandy Shutters has the following inventory information.
Nov. 1 Inventory 45 units @ €6.00
8 Purchase 180 units @ €6.45
A physical count of merchandise inventory on November 30 reveals that there are 150 units on hand. Assume a periodic inventory system is used. Cost
of goods sold under the average-cost method is
a. €1,904.
b. €1,926.
c. €1,942.
d. €2,011.
26

B
AC Unit UC TC
Begin INV 45 $6.0 270

Purchase#1 180 $6.5 1,161
Purchase#2 90 $6.3 567
Purchase#3 135 $6.6 891
450 $2,889
End INV $6.4
150 $6.4 963

0 $6.4 0
0 $6.4 0
0 $6.4 0
150 $963
COGA $2,889
Less: End INV 963
COGS $1,926
27

of goods sold under the FIFO method is
a. €1,904.
b. €1,926.
c. €1,942.
d. €2,011.
28

A
FIFO Unit UC TC
Begin INV 45 $6.0 270

Purchase#1 180 $6.5 1,161
Purchase#2 90 $6.3 567
Purchase#3 135 $6.6 891
450 $2,889
End INV
0 $6.0 0
0 $6.5 0
15 $6.3 95
135 $6.6 891
150 $986
COGA $2,889
Less: End INV 986
COGS $1,904
29

of goods sold under the LIFO method is
a. €1,904.
b. €1,926.
c. €1,942.
d. €2,011.
30

C
LIFO Unit UC TC
Begin INV 45 $6.0 270

Purchase#1 180 $6.5 1,161
Purchase#2 90 $6.3 567
Purchase#3 135 $6.6 891
450 $2,889
End INV
45 $6.0 270
105 $6.5 677
0 $6.3 0
0 $6.6 0
150 $947
COGA $2,889
Less: End INV 947
COGS $1,942
31

16. Neighborly Industries has the following inventory information.
July 1 Beginning Inventory 30 units at $60
5 Purchases 180 units at $56
14 Sale 120 units
21 Purchases 90 units at $57.50
30 Sale 84 units
Assuming that a periodic inventory system is used, what is the amount allocated to ending inventory on a LIFO basis?
a. $5,496
b. $5,511
c. $11,544
d. $11,559
32

A
LIFO Unit UC TC
Begin INV 30 $60.0 1,800

Purchase#1 180 $56.0 10,080
Purchase#2 90 $57.5 5,175
300 $17,055
End INV
30 $60.0 1,800
66 $56.0 3,696
0 $57.5 0
96 $5,496
33

14 Sale 120 units
30 Sale 84 units
Assuming that a periodic inventory system is used, what is the amount allocated to cost of goods sold (COGS) on a LIFO basis?
a. $5,496
b. $5,511
c. $11,544
d. $11,559
34

D
LIFO Unit UC TC
Begin INV 30 $60.0 1,800

Purchase#1 180 $56.0 10,080
Purchase#2 90 $57.5 5,175
300 $17,055
End INV
30 $60.0 1,800
66 $56.0 3,696
0 $57.5 0
96 $5,496
COGA $17,055
Less: End INV 5,496
COGS $11,559
35

14 Sale 120 units
30 Sale 84 units
Assuming that a periodic inventory system is used, what is the amount allocated to ending inventory on a FIFO basis?
a. $5,496
b. $5,511
c. $11,544
d. $11,559
36

B
FIFO Unit UC TC
Begin INV 30 $60.0 1,800

Purchase#1 180 $56.0 10,080
Purchase#2 90 $57.5 5,175
300 $17,055
End INV
0 $60.0 0
6 $56.0 336
90 $57.5 5,175
96 $5,511
37

14 Sale 120 units
30 Sale 84 units
Assuming that a periodic inventory system is used, what is the amount allocated to cost of goods sold (COGS) on a FIFO basis?
a. $5,496
b. $5,511
c. $11,544
d. $11,559
38

C
FIFO Unit UC TC
Begin INV 30 $60.0 1,800

Purchase#1 180 $56.0 10,080
Purchase#2 90 $57.5 5,175
300 $17,055
End INV
0 $60.0 0
6 $56.0 336
90 $57.5 5,175
96 $5,511
COGA $17,055
Less: End INV 5,511
COGS $11,544
39

14 Sale 120 units
30 Sale 84 units
Assuming that a periodic inventory system is used, what is the amount allocated to cost of goods sold (COGS) on a weight-average cost basis?
a. $5,200
b. $5,253
c. $11,541
d. $13,253
40

C
AC Unit UC TC
Begin INV 30 $60.0 1,800

Purchase#1 180 $56.0 10,080
Purchase#2 90 $57.5 5,175
300 $17,055
End INV $56.85
96 $56.9 5,458
0 $56.9 0
0 $56.9 0
96 $5,458
COGA $17,055
Less: End INV 5,458
COGS $11,597
41

14 Sale 120 units
30 Sale 84 units
Assuming that a perpetual inventory system is used, what is the amount allocated to cost of goods sold (COGS) on a weight-average cost basis?
a. $5,200
b. $5,253
c. $11,541
d. $13,253
42

C (rough answer)
AC Unit UC TC
Begin INV 30 $60.0 1,800

Purchase#1 180 $56.0 10,080
Purchase#2 90 $57.5 5,175
210 $11,880 $56.57
End INV
6 $56.6 339
0 $56.0 0
90 $57.5 5,175
96 $5,514
COGA $17,055
Less: End INV 5,514
COGS $11,541
43

(specific answer)
The difference between rough answer and specific answer is less than 1%.
11,541/11,580 = 0.9966. 1-0.9966 = 0.003368.
AC Unit UC TC
Begin INV 30 $60.0 1,800

Purchase#1 180 $56.0 10,080
Purchase#2 90 $57.5 5,175
210 $11,880 $56.57

-120 -$6,788.57
180 10,266 $57.04
End INV
6 $57.0 342
0 $56.0 0
90 $57.0 5,133
96 $5,475
COGA $17,055
Less: End INV 5,475
COGS $11,580
0.003368
$56.57 = $11,880 / 210

210 = 30 + 180
Sales of 120 units has the COGS of $6,788.57
$6,788.57 = 120*$56.57
$10,266 = $11,880 -$6,788.57 + $5,175
180 = 210 - 120 + 90
$57.04 = $10,266 / 180
44

14 Sale 120 units
30 Sale 84 units
Assuming that a perpetual inventory system is used, what is the amount allocated to cost of goods sold (COGS) on a FIFO basis?
a. $5,496
b. $5,511
c. $11,544
d. $12,559
45

C
FIFO Unit UC TC
Begin INV 30 $60.0 1,800

Purchase#1 180 $56.0 10,080
Purchase#2 90 $57.5 5,175
300 $17,055
End INV
0 $60.0 0
6 $56.0 336
90 $57.5 5,175
96 $5,511
COGA $17,055
Less: End INV 5,511
COGS $11,544
46

14 Sale 120 units
30 Sale 84 units
Assuming that a perpetual inventory system is used, what is the amount allocated to cost of goods sold (COGS) on a LIFO basis?
a. $15,496
b. $15,511
c. $11,550
d. $12,559
47

C
LIFO Unit UC TC Balance
Begin INV 30 $60.0 1,800 30

Purchase#1 180 $56.0 10,080 60
Purchase#2 90 $57.5 5,175 6
End INV
30 $60.0 1,800
60 $56.0 3,360
6 $57.5 345
96 $5,505
COGA $17,055
Less: End INV 5,505
COGS $11,550
Sales of 120 units reduce 180 to be 60

Sales of 84 units reduce 90 to be 6
48

24. If the month-end bank statement shows a balance of $75,000, outstanding checks are $30,000, a deposit of $10,000 was in transit at month end, and a check
for $1,250 was erroneously charged by the bank against the account, the correct balance in the bank account at month end is
a. $53,750.
b. $56,250.
c. $36,250.
d. $93,750.
49

Answer: B
Adjusted cash balance per bank
= Balance per bank statement - outstanding checks + deposit in transit + bank error (restore to the account)
$56,250 = $75,000 - $30,000 + $10,000 + $1,250.

50

25. Wynn Company developed the following reconciling information in preparing its September bank
reconciliation:
Cash balance per bank statement, 9/30 $9,000

Note receivable collected by bank 4,000
Outstanding checks 6,000
Deposits in transit 3,000
Bank service charge 50
NSF check 800
Determine the cash balance per books (before adjustments) for Wynn Company.
a. $6,850.
b. $12,000.
c. $2,850.
d. $10,000.
51

Answer: C
= Cash balance per bank statement + Deposits in transit - Outstanding checks
= $6,000 = $9,000 + $3,000 - $6,000.
Adjusted cash balance per books

= unadjusted balance per books - NSF check - Bank service charge + Note receivable collected by bank
= $6,000 = unadjusted balance per books - $800 - $50 + $4,000.
Unadjusted balance per books

= $6,000 + $800 + $50 - $4,000 = $2,850.
52

26. Osborn Company assembled the following information in completing its March bank reconciliation:
balance per bank $3,820; outstanding checks $775; deposits in transit $1,250; NSF check $80; bank service
charge $25; cash balance per books $4,400. As a result of this reconciliation, Osborn will
a. reduce its cash (per books) account by $475.
b. reduce its cash (per books) account by $25.
c. increase its cash (per books) account by $55.
d. reduce its cash (per books) account by $105.
53

Answer: D
= balance per bank $3,82 - outstanding checks $775 + deposits in transit $1,250
= $4,295 = $3,820 - $775 + $1,250.

= cash balance per books $4,400 - NSF check $80 - bank service charge $25
= $4,295 = $4,400 - $80 - $25.
Adjusted cash balance per books decreases by $105 from $4,400 to $4,295 (or equivalently, $80 + $25).
54

27. Tavarez Company assembled the following information in completing its July bank reconciliation:
balance per bank $7,640; outstanding checks $1,550; deposits in transit $2,500; NSF check $160; bank
service charge $50; cash balance per books $8,800. As a result of this reconciliation, Tavarez will
a. reduce its cash (per books) account by $950.
b. reduce its cash (per books) account by $50.
c. increase its cash (per books) account by $110.
d. reduce its cash (per books) account by $210.
55

Answer: D
= balance per bank $7,640 - outstanding checks $1,550 + deposits in transit $2,500
= $8,590 = $7,640 - $1,550 + $2,500.

= cash balance per books $8,800 - NSF check $160 - bank service charge $50
= $8,590 = $8,800 - $160 - $50.
Adjusted cash balance per books decreases by $210 from $8,800 to $8,590 (or equivalently, $160 + $50).

56

28. Bertram Company assembled the following information in completing its May bank reconciliation: balance per bank ₤15,640 outstanding checks ₤3,550;
deposits in transit ₤2,500; NSF check ₤1,360; bank service charge ₤50; cash balance per books ₤16,000.
As a result of this reconciliation, Bertram will

a. reduce its cash (per books) account by ₤50.
b. reduce its cash (per books) account by ₤1,410.
c. increase its cash (per books) account by ₤1,050.
d. increase its cash (per books) account by ₤360.
57

Answer: B
= cash balance per books of ₤16,000 - NSF check of ₤1,360 - bank service charge of ₤50
= $14,590
-$1,410 = -$1,360 - $50.

58

29. The following information is available for 2020 for Greenwich Company:
Beginning inventory £ 2,816,000

Purchases 7,999,000
Sales 15,000,000
Markup on sales (or gross profit ratio) 35%
In May 2020, a flood washed away Greenwich’s inventory. Using the gross profit method, the estimated value of the inventory destroyed is:
a. £3,785,250
b. £2,799,650
c. £1,065,000
d. £525,000
59

C
COGS = Sales*(1-gross profit rate) = $15,000*0.65 = $9,750
End INV = Begin + Purchase – COGS = $2,816+$7,999-$9,750 = $1,065
60

30. Quigley Company's records indicate the following information for the year:
Inventory, 1/1 ₤ 660,000
Purchases 2,700,000
Net sales 3,600,000
On December 31, a physical inventory determined that ending inventory of ₤720,000 was in the warehouse. Quigley's gross profit on sales has remained
constant at 30%. Quigley suspects some of the inventory may have been taken by some new employees. At December 31, what is the estimated cost of
missing inventory?
a. ₤120,000
b. ₤240,000
c. ₤360,000
d. ₤840,000
61

A
COGS = Sales*(1-gross profit rate) = $3,600*0.7 = $2,520
End INV = Begin + Purchase – COGS = $660 + $2,700 - $2,520 = $840
Loss = End INV - Actual End INV = $840 - $720 = $120K
62

Part II: Problem-Solving (40 points)
P1. Dyna Distribution markets CDs of the performing artist King James. At the beginning of March, Dyna had in beginning inventory 1,500 King James CDs
with a unit cost of €22. During March, Dyna made the following purchases of King James CDs.
March 5 3,500 @ €21; March 21 2,000 @ €19
March 13 4,000 @ €20; March 26 2,000 @ €18
During March, 10,000 units were sold. Dyna uses a periodic inventory system.
Instructions
a. Determine the cost of goods available for sale.
b. Determine (1) the ending inventory and (2) the cost of goods sold under the three assumed cost flow methods (FIFO, average-cost, LIFO).
c. Which cost flow method results in (1) the higher inventory amount for the statement of financial position and (2) the lower cost of goods sold for the income
statement?
Under FIFO:
cost of ending inventory x1
cost of goods sold x2
Under Weighted-Average:
63

Under LIFO:
Higher ending inventory x7

Lower net income x8
64

Under FIFO:
cost of ending inventory x1 $55,000
cost of goods sold x2 $205,500
Under LIFO:
Higher ending inventory x7 LIFO

Lower net income x8 LIFO
65

Under FIFO:
FIFO Unit UC TC
Begin INV 1,500 $22.0 33,000

Purchase#1 3,500 $21.0 73,500
Purchase#2 4,000 $20.0 80,000
Purchase#3 2,000 $19.0 38,000
Purchase#4 2,000 $18.0 36,000
13,000 $260,500
End INV
0 $22.0 0
0 $21.0 0
0 $20.0 0
1,000 $19.0 19,000
2,000 $18.0 36,000
3,000 $55,000
COGA $260,500
COGS $205,500
66

AC Unit UC TC
Begin INV 1,500 $22.0 33,000

Purchase#1 3,500 $21.0 73,500
Purchase#2 4,000 $20.0 80,000
Purchase#3 2,000 $19.0 38,000
Purchase#4 2,000 $18.0 36,000
13,000 $260,500
End INV $20.04
3,000 $20.0 60,115

0 $20.0 0
0 $20.0 0
0 $20.0 0
0 $0.0 0
3,000 $60,115
COGA $260,500
COGS $200,385
67

Under LIFO:
LIFO Unit UC TC
Begin INV 1,500 $22.0 33,000

Purchase#1 3,500 $21.0 73,500
Purchase#2 4,000 $20.0 80,000
Purchase#3 2,000 $19.0 38,000
Purchase#4 2,000 $18.0 36,000
13,000 $260,500
End INV
1,500 $22.0 33,000

1,500 $21.0 31,500
0 $20.0 0
0 $19.0 0
0 $18.0 0
3,000 $64,500
COGA $260,500
COGS $196,000
68

Higher ending inventory x7 LIFO
Lower net income x8 LIFO
FIFO Unit UC TC AC Unit UC TC LIFO Unit UC TC
Begin INV 1,500 $22.0 33,000 Begin INV 1,500 $22.0 33,000 Begin INV 1,500 $22.0 33,000
Purchase#1 3,500 $21.0 73,500 Purchase#1 3,500 $21.0 73,500 Purchase#1 3,500 $21.0 73,500
13,000 $260,500 13,000 $260,500 13,000 $260,500
End INV End INV $20.04 End INV
0 $22.0 0 3,000 $20.0 60,115 1,500 $22.0 33,000

0 $21.0 0 0 $20.0 0 1,500 $21.0 31,500
0 $20.0 0 0 $20.0 0 0 $20.0 0
1,000 $19.0 19,000 0 $20.0 0 0 $19.0 0
2,000 $18.0 36,000 1 $0.0 0 0 $18.0 0
3,000 $55,000 3,001 $60,115 3,000 $64,500
COGA $260,500 COGA $260,500 COGA $260,500

Less: End INV 55,000 Less: End INV 60,115 Less: End INV 64,500
COGS $205,500 COGS $200,385 COGS $196,000
Higher inventory LIFO
Lower cost of goods sold LIFO
69

P2. The cost of goods sold computations for Gouda Company and Edam Company are shown below.
Gouda Edam
Company Company
Beginning inventory € 47,000 € 71,000
Cost of goods purchased 200,000 290,000
Cost of goods available 247,000 361,000
for sale
Ending inventory 58,000 69,000
Cost of goods sold €189,000 €292,000
Instructions
a. Compute inventory turnover and days in inventory for each company.
b. Which company moves its inventory more quickly?
Days in Inventory for Gouda Company x9
Which company has higher days in inventory x10
70

Days in Inventory for Gouda Company x9 101 days
Which company has higher days in inventory x10 Gouda
EXERCISE 6.13
(a) Gouda Company Edam Company

Inventory Turnover €189,000 €292,000
(€47,000 + €58,000)/2 (€71,000 + €69,000)/2
= 3.60 = 4.17
Days in Inventory 365/3.60 = 101 days 365/4.17 = 88 days
(b) Edam Company is moving its inventory quicker, since its inventory turnover is higher, and its days in inventory is lower.
71

P3. This information is available for Sepia Photos for 2018, 2019, and 2020.
2018 2019 2020

Beginning £ 100,000 £ 330,000 £ 400,000
inventory
Ending inventory 330,000 400,000 480,000
Cost of goods 900,000 1,120,000 1,300,000
sold
Sales revenue 1,200,000 1,600,000 1,900,000
Instructions
Calculate inventory turnover, days in inventory, and gross profit rate for Sepia Photos for 2018, 2019, and 2020. Comment on any trends.
Days in Inventory in 2018 x11
Which year has higher days in inventory x12
72

Days in Inventory in 2018 x11 87 days
Which year has higher days in inventory x12 2020
EXERCISE 6.12
2018 2019 2020

Inventory £900,000 £1,120,000 £1,300,000
turnover
(£100,000 + £330,000) ÷ 2 (£330,000 + £400,000) ÷ 2 (£400,000 + £480,000) ÷ 2
£900,000 £1,120,000 £1,300,000

= 4.19 = 3.07 = 2.95
£215,000 £365,000 £440,000
Days in 365 365 365

inventory = 87.1 days = 118.9 days = 123.7 days
4.19 3.07 2.95
Gross £1,200,000 – £900,000 £1,600,000 – £1,120,000 £1,900,000 – £1,300,000

profit rate = .25 = .30 = .32
£1,200,000 £1,600,000 £1,900,000
The inventory turnover decreased by approximately 30% (2.95/4.19=0.704057) from 2018 to 2020 while the days in inventory increased by almost 42%
(123.7/87.1 = 1.42) over the same time period. Both of these changes would be considered negative since it’s better to have a higher inventory turnover with a
correspondingly lower days in inventory. However, Sepia Photo’s gross profit rate increased by 28% (0.32/0.25 = 1.28) from 2018 to 2020, which is a positive
sign.
73

P4. Premier Bank and Trust is considering giving Alan Company a loan. Before doing so, management decides that further discussions with Alan’s accountant
may be desirable. One area of particular concern is the inventory account, which has a year-end balance of £297,000. Discussions with the accountant reveal the
following.
1. Alan sold goods costing £38,000 to Comerico Company, FOB shipping point, on December 28. The goods are not expected to arrive at Comerico until
January 12. The goods were not included in the physical inventory because they were not in the warehouse.
2. The physical count of the inventory did not include goods costing £91,000 that were shipped to Alan FOB destination on December 27 and were still in
transit at year-end.
3. Alan received goods costing £25,000 on January 2. The goods were shipped FOB shipping point on December 26 by Grant Co. The goods were not included
in the physical count.
4. Alan sold goods costing £35,000 to Emerick Co., FOB destination, on December 30. The goods were received at Emerick on January 8. They were not
included in Alan’s physical inventory.
5. Alan received goods costing £44,000 on January 2 that were shipped FOB shipping point on December 29. The shipment was a rush order that was supposed
to arrive December 31. This purchase was included in the ending inventory of £297,000.
Instructions
Determine the correct inventory amount on December 31.
The correct inventory amount x13
The correct inventory amount x14
74

The correct inventory amount x13 357,000
The correct inventory amount x14 357,000
75

January 12. The goods were not included in the physical inventory because they were not in the warehouse.
76

January 12. The goods were not included in the physical inventory because they were not in the warehouse. (Ownership passed to the buyer: Comerico; in
transit on FOB shipping point; goods were not included in the physical inventory; so no action required)
77

transit at year-end.
78

transit at year-end. (Ownership not passed to the buyer: Alan; in transit on FOB destination; goods were not included in the physical inventory; so no action
required)
79

in the physical count.
80

in the physical count. (Ownership passed to the buyer: Alan; in transit on FOB shipping point; goods were not included in the physical inventory; so add
$25,000)
81

included in Alan’s physical inventory.
82

included in Alan’s physical inventory. (Ownership not passed to the buyer: Emerick; ownership remains at Alan; in transit on FOB destination; goods were
not included in the physical inventory; so add $35,000)
83

to arrive December 31. This purchase was included in the ending inventory of £297,000.
84

to arrive December 31. This purchase was included in the ending inventory of £297,000. (Ownership passed to the buyer: Alan; in transit on FOB shipping
point; goods were included in the physical inventory; so no action required)
85

January 12. The goods were not included in the physical inventory because they were not in the warehouse. (Ownership passed to the buyer: Comerico; in
transit on FOB shipping point; goods were not included in the physical inventory; so no action required)
transit at year-end. (Ownership not passed to the buyer: Alan; in transit on FOB destination; goods were not included in the physical inventory; so no action
required)
in the physical count. (Ownership passed to the buyer: Alan; in transit on FOB shipping point; goods were not included in the physical inventory; so add
$25,000)
included in Alan’s physical inventory. (Ownership not passed to the buyer: Emerick; ownership remains at Alan; in transit on FOB destination; goods were
not included in the physical inventory; so add $35,000)
to arrive December 31. This purchase was included in the ending inventory of £297,000. (Ownership passed to the buyer: Alan; in transit on FOB shipping
point; goods were included in the physical inventory; so no action required)
86

Correct inventory amount at Alan is:
a. $297,000
b. $357,000
c. $322,000
d. $332,000
87

Answer: B
$357,000 = $297,000 + $25,000 + $35,000
EXERCISE 6.1
Ending inventory—physical count .................................................................................... £297,000

1. No effect: Title passes to purchaser upon shipment
when terms are FOB shipping point .................................................................... 0
2. No effect: Title does not transfer to Alan until
goods are received ............................................................................................... 0
3. Add to inventory: Title passed to Alan when goods
were shipped ........................................................................................................ 25,000
4. Add to inventory: Title remains with Alan until
purchaser receives goods ..................................................................................... 35,000
5. No effect: Title passes to purchaser upon shipment
when terms are FOB shipping point .......................................................... 0
Correct inventory ............................................................................................................... £357,000
88

P5. Kale Wilson, an auditor with Sneed Chartered Accountants, is performing a review of Platinum Stereos’ inventory account. Platinum did not have a good
year, and top management is under pressure to boost reported income. According to its records, the inventory balance at year-end was £740,000. However, the
following information was not considered when determining that amount.
1. Included in the company’s count were goods with a cost of £250,000 that the company is holding on consignment. The goods belong to Superior Ltd.
2. The company received an order on December 29 that was boxed and sitting on the loading dock awaiting pick-up on December 31. The shipper picked up the
goods on January 1 and delivered them on January 6. The shipping terms were FOB shipping point. The goods had a selling price of £49,000 and a cost of
£33,000. The goods were not included in the count because they were sitting on the dock.
Instructions
Prepare a schedule to determine the correct inventory amount. Provide explanations for each item above, saying why you did or did not make an adjustment for
each item.
Correct inventory amount x15

Correct inventory amount x16
89

Correct inventory amount x15 523,000
Correct inventory amount x16 523,000
90

91

(Ownership remains at Superior; goods were included in the physical inventory; so $250,000 should be deducted from the physical inventory count)
92

£33,000. The goods were not included in the count because they were sitting on the dock.
93

£33,000. The goods were not included in the count because they were sitting on the dock. (Ownership remains at Platinum; not in transit yet for FOB
shipping point; goods were not included in the physical inventory; so $33,000 should be included in the physical inventory count)
94

(Ownership remains at Superior; goods were included in the physical inventory; so $250,000 should be deducted from the physical inventory count)
£33,000. The goods were not included in the count because they were sitting on the dock. (Ownership remains at Platinum; not in transit yet for FOB
shipping point; goods were not included in the physical inventory; so $33,000 should be included in the physical inventory count)
95

Correct inventory amount at Plantinum is:
a. $523,000
b. $533,000
c. $543,000
d. $553,000
96

Answer: A
$523,000 = $740,000 - $250,000 + $33,000
EXERCISE 6.2
Ending inventory—as reported .......................................................................................... £740,000

1. Subtract from inventory: The goods belong to
Superior Ltd: Platinum is merely holding
them as a consignee ............................................................................................ (250,000)
2. Add to inventory: The goods belong to Platinum
until they are shipped (Jan. 1) ............................................................................. 33,000
Correct inventory ................................................................................................................ £523,000
97

P6. Anya Clark opened Anya’s Cleaning Service on July 1, 2020. During July, the following transactions were completed.
July 1 Shareholders invested €35,000 cash in the business in exchange for

ordinary shares.
1 Purchased used truck for €12,000, paying €5,000 cash and the balance on
account
3 Purchased cleaning supplies for €2,100 on account.
5 Paid €3,000 cash on a 1-year insurance policy effective July 1.
12 Billed customers €6,500 for cleaning services.
18 Paid €1,500 cash on amount owed on truck and €1,400 on amount owed
on cleaning supplies.
20 Paid €2,800 cash for employee salaries.
21 Collected €3,400 cash from customers billed on July 12
25 Billed customers €6,000 for cleaning services.
31 Paid €350 for the monthly gasoline bill for the truck.
31 Declared and paid a €6,600 cash dividend.
Instructions
a. Journalize and post the July transactions. Use page J1 for the journal and the three-column form of account.
b. Prepare a trial balance at July 31 on a worksheet.
c. Enter the following adjustments on the worksheet and complete the worksheet.
98

1. Unbilled and uncollected revenue for services performed at July 31 were €2,700.
2. Depreciation on equipment for the month was €500.
3. One-twelfth of the insurance expired.
4. An inventory count shows €500 of cleaning supplies on hand at July 31.
5. Accrued but unpaid employee salaries were €1,000.
d. Journalize and post adjusting entries. Use page J2 for the journal.
e. Prepare the income statement and a retained earnings statement for July and a classified statement of financial position at July 31.
On Trial Balance
Debit total balance x17

Debit total balance x18
On Adjusted Trial Balance
Credit total balance x19

Credit total balance x20
99

On Trial Balance
Debit total balance x17 53,700

Debit total balance x18 53,700
On Adjusted Trial Balance
Credit total balance x19 57,900

Credit total balance x20 57,00
100

Answer:

a. Journalize and post the July transactions. Use page J1 for the journal and the three-column form of account.

Date Dr. Cr.
1-Jul Cash 35,000

Share capital 35,000
1 Equipment 12,000
Cash 5,000
AP 7,000
3 Supplies 2,100
AP 2,100
5 Prepaid insurance 3,000

Cash 3,000
12 AR 6,500
Service REV 6,500
18 AP 2,900
Cash 2,900
20 Salaries expense 2,800

101

Cash 2,800
21 Cash 3,400
AR 3,400
25 AR 6,000
Service REV 6,000
31 Gas expense 350

Cash 350
31 Dividends 6,600
Cash 6,600

102

b. Prepare a trial balance at July 31 on a worksheet.
Trial Balance
Dr. Cr.
ASSET Cash $17,750

AR 9,100
Supplies 2,100
Prepaid 3,000
Equipment 12,000
LIABILITIES AP $6,200
EQUITY Share capital 35,000
Dividends 6,600
INCOME Service REV 12,500
Gas expense 350
Salaries expense 2,800
$53,700 $53,700

CASH
Date Dr. Cr. Balance
1 35,000 35,000
1 5,000 30,000
5 3,000 27,000
18 2,900 24,100
103

20 2,800 21,300
21 3,400 24,700
31 350 24,350
31 6,600 17,750
AR
12 6,500 6,500
21 3,400 3,100
25 6,000 9,100
Supplies
3 2,100 2,100
Prepaid
5 3,000 3,000
Equipment
104

1 12,000 12,000
AP
1 7,000 7,000
3 2,100 9,100
18 2,900 6,200
Share capital
1 35,000 35,000
Dividends
31 6,600 6,600
Service REV
105

12 6,500 6,500
25 6,000 12,500
Gas expense
31 350 350
Salaries expense
20 2,800 2,800

106

c. Enter the following adjustments on the worksheet and complete the worksheet.
1. Unbilled and uncollected revenue for services performed at July 31 were €2,700.
2. Depreciation on equipment for the month was €500.
3. One-twelfth of the insurance expired.
4. An inventory count shows €500 of cleaning supplies on hand at July 31.
5. Accrued but unpaid employee salaries were €1,000.

Date Dr. Cr.
31 AR 2,700
Service REV 2,700
31 Dep. Expense 500

Acc. Dep. - Equip. 500
31 Insurance expense 250

Prepaid insurance 250
(1/12 x $3,000 = $250)
31 Supplies expense 1,600

Supplies 1,600
($2,100-$500 = $1,600)
107

31 Salaries expense 1,000
Salaries payable 1,000
108

d. Journalize and post adjusting entries. Use page J2 for the journal.
Trial Balance
Dr. Cr.
ASSET Cash $17,750

AR 9,100
Supplies 2,100
Prepaid 3,000
Equipment 12,000
LIABILITIES AP $6,200
EQUITY Share capital 35,000
Dividends 6,600
INCOME Service REV 12,500
Gas expense 350
$53,700 $53,700
Dep expense
Acc. Dep - Equip.
Insurance expense
Supplies expense
Salaries payable
109

Adjustments
Dr. Cr.
Cash
AR $2,700
Supplies $1,600
Prepaid 250
Equipment
AP
Share capital
Dividends
Service REV 2,700
Gas expense
Dep expense 500

Acc. Dep - Equip. 500
Insurance expense 250
Supplies expense 1,600
$6,050 $6,050
110

Adjusted Trial Balance
Dr. Cr.
Cash $17,750
AR 11,800
Supplies 500
Prepaid 2,750
Equipment 12,000
AP $6,200
Dividends 6,600
Service REV 15,200
Gas expense 350
Dep expense 500

Acc. Dep - Equip. 500
$57,900 $57,900
111

Income Statement Statement of Financial Position
Dr. Cr. Dr. Cr.
$17,750
11,800
500
2,750
12,000
$6,200
35,000
6,600
$15,200
$350
3,800
500
500
250
1,600
1,000
6,500 15,200 51,400 42,700
112

8,700 8,700
$15,200 $15,200 $51,400 $51,400
113

e. Prepare the income statement and a retained earnings statement for July and a classified statement of financial position at July 31.

Income Statement
Service REV $15,200
Salaries expense $3,800

Dep expense 500
Gas expense 350
Total expense 6,500
Net income $8,700
RE statement
RE (begin) $0
Plus: Net income 8,700
Less: dividends 6,600
RE (end) $2,100

114

Statement of Financial Position
NON-CURRENT
ASSETS
PP&E
Equipment $12,000
Less: Accu. Dep-Equip. -500 $11,500
CURRENT ASSETS
Prepaid 2,750
Supplies 500
AR 11,800
Cash $17,750 32,800
ASSET TOTAL 44,300
EQUITY

RE $2,100 37,100
CURRENT LIABILITIES
115

AP $6,200
Salaries payable 1,000 $7,200
LIABILITIES & EQUITY TOTAL $44,300
116

f. Journalize and post-closing entries and complete the closing process. Use page J3 for the journal.
Closing Entries
Service REV $15,200

Income Summary $15,200

Salaries expense $3,800
Supplies expense $1,600
Dep expense $500
Gas expense $350
Insurance expense $250

RE $8,700
RE 6,600
Dividends 6,600
RE (Balance) $2,100

117

g. Prepare a post-closing trial balance at July 31.
Post-Closing Trial Balance
Dr. Cr.
Cash $0
AR 0
Supplies 0
Prepaid 0
Equipment $0
Acc. Dep.-Equip. 0
AP $0
Salaries payable 0
Share capital 0
RE $0
$0 $0

118

Post-Closing Trial Balance
Dr. Cr.
Cash $17,750
AR 11,800
Supplies 500
Prepaid 2,750
Equipment $12,000
Acc. Dep.-Equip. 500
AP $6,200
RE $2,100
$44,800 $44,800

119

Student#:__________________________ Score: _______________
Signature: __________________________Name:_______________
MC 60 Problem 40
1 21 1
2 22 2
3 23 3
4 24 4
5 25 5
6 26 6
7 27 7
8 28 8
9 29 9
10 30 10
11 11
12 12
13 13
14 14
15 15
16 16
17 17
18 18
19 19
20 20 120

Review For MidtermI Solution 1092

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Financial Accounting (2)

Begin INV 10,000 $6.0 60,000

6,000 $6.0 36,000

Begin INV 10,000 $6.0 60,000

6,000 $6.0 36,000

Begin INV 10,000 $6.0 60,000

Begin INV 10,000 $6.0 60,000

Begin INV 10,000 $6.0 60,000

End INV $10.0

6,000 $10.0 60,000

Begin INV 10,000 $6.0 60,000

End INV $10.0

6,000 $10.0 60,000

Begin INV 40 $2,000.0 80,000

Begin INV 40 $2,000.0 80,000

Begin INV 40 $2,000.0 80,000

End INV $2,085.7

100 $2,085.7 208,571

Inventory, May 31 3,900 units

The value assigned to cost of goods sold if Brocken uses average-cost is

Begin INV 3,000 $4.2 12,600

End INV $4.38

3,900 $4.4 17,063

Inventory, May 31 3,900 units

The value assigned to cost of goods sold if Brocken uses FIFO is

Begin INV 3,000 $4.2 12,600

Inventory, May 31 3,900 units

The value assigned to cost of goods sold if Brocken uses LIFO is

Begin INV 3,000 $4.2 12,600

3,000 $4.2 12,600

Begin INV 45 $6.0 270

End INV $6.4

150 $6.4 963

Begin INV 45 $6.0 270

Begin INV 45 $6.0 270

Begin INV 30 $60.0 1,800

Begin INV 30 $60.0 1,800

Begin INV 30 $60.0 1,800

Begin INV 30 $60.0 1,800

Begin INV 30 $60.0 1,800

End INV $56.85

Begin INV 30 $60.0 1,800

210 $11,880 $56.57

Begin INV 30 $60.0 1,800

210 $11,880 $56.57

$56.57 = $11,880 / 210

Begin INV 30 $60.0 1,800

LIFO Unit UC TC Balance

Begin INV 30 $60.0 1,800 30

Sales of 120 units reduce 180 to be 60

Cash balance per bank statement, 9/30 $9,000

Adjusted cash balance per books

Unadjusted balance per books

Adjusted cash balance per books

Adjusted cash balance per books

As a result of this reconciliation, Bertram will

Beginning inventory £ 2,816,000

March 5 3,500 @ €21; March 21 2,000 @ €19

March 13 4,000 @ €20; March 26 2,000 @ €18

a. Determine the cost of goods available for sale.

Higher ending inventory x7