MIDTERM ASSIGNMENT

Course Code: ACT512

Sections: 2
Faculty: Saifuddin Khondaker
Date: 21-05-2021

Rafin Mahmud
Id: 2021010005041
 Chapter 06

Do it- 01
Ans:

The goods of $15,000 held on consignment should be deducted from the inventory

count. The goods of $10,000 purchased FOB shipping point should be added to the

inventory count. Sold goods of $12,000 which were in transit FOB shipping point

should not be included in the ending inventory. Thus, inventory should be carried at

$195,000 ($200,000 2 $15,000 1 $10,000).

Do it- 02
Ans:

Cost of goods available for sale 5 (4,000 $3) + (6,000 $$4) = $36,000

Ending inventory =10,000 - 7,000 = 3,000 units

(a) FIFO: $36,000 - (3,000 $4) = $24,000

(b) LIFO: $36,000 - (3,000 $3) = $27,000

(c) Average cost per unit: [(4,000 $3) 1 (6,000 $4)] / 10,000 = $3.60

Average-cost: $36,000 - (3,000 $3.60) = $25,200

Do it- 03
Ans:

2016 2017
Ending inventory $22,000 overstated No effect
Cost of goods sold $22,000 understated $22,000 overstated
Owner’s equity $22,000 overstated No effect
REVIEW AND PRACTICE
1. Discuss how to classify and determine inventory-

Ans:

Merchandisers need only one inventory classifcation, merchandise inventory, to

describe the different items that make up total inventory. Manufacturers, on the other
hand, usually classify inventory into three categories: finished goods, work in process,
and raw materials. To determine inventory quantities, manufacturers,

 Take a physical inventory of goods on hand and

 Determine the ownership of goods in transit or on consignment.

2. Apply inventory cost fl ow methods and discuss their fnancial effects-

Ans:

The primary basis of accounting for inventories is cost. Cost of goods available for sale
includes

 Cost of beginning inventory.

 Cost of goods purchased.

The inventory cost flow methods are specifc identifcation and three assumed cost flow
methods—FIFO, LIFO, and average-cost. When prices are rising, the frst-in, f rst-out
(FIFO) method results in lower cost of goods sold and higher net income than the other
methods. The last-in, frst-out (LIFO) method results in the lowest income taxes. The
reverse is true when prices are falling. In the balance sheet, FIFO results in an ending
inventory that is closest to current value. Inventory under LIFO is the farthest from
current value

3. Indicate the effects of inventory errors on the fnancial statements-

Ans:

n the income statement of the currentyear:

 If beginning inventory is understated, net income is overstated. The reverse

occurs if beginning inventory is overstated.
 If ending inventory is overstated, net income is overstated. If ending inventory is
understated, net income is understated. In the following period, its effect on net
income for that period is reversed, and total net income for the two years will be
correct.
In the balance sheet: Ending inventory errors will have the same effect on total assets
and total owner’s equity and no effect on liabilities.

4. Explain the statement presentation and analysis of inventory-

Ans:

Inventory is classifed in the balance sheet as a current asset immediately below

receivables. There also should be disclosure of

1. The major inventory classifcations

2. The basis of accounting
3. The cost method

Companies use the lower-of-cost-or-market (LCM) basis when the current replacement
cost (market) is less than cost. Under LCM, companies recognize the loss in the period
in which the price decline occurs. The inventory turnover is cost of goods sold divided
by average inventory. To convert it to average days in inventory, divide 365 days by the
inventory turnover.

5. Apply the inventory cost fl ow methods to perpetual inventory records-

Ans:

Under FIFO and a perpetual inventory system, companies charge to cost of goods sold
the cost of the earliest goods on hand prior to each sale. Under LIFO and a perpetual
system, companies charge to cost of goods sold the cost of the most recent purchase
prior to sale. Under the moving-average (average-cost) method and a perpetual system,
companies compute a new average cost after each purchase.

6. Describe the two methods of estimating inventories-

Ans:

The two methods of estimating inventories are the gross prof t method and the retail
inventory method. Under the gross prof t method, companies apply a gross prof t rate to
net sales to determine estimated gross prof t and cost of goods sold. They then subtract
estimated cost of goods sold from cost of goods available for sale to determine the
estimated cost of the ending inventory.

Under the retail inventory method, companies compute a cost-to-retail ratio by dividing
the cost of goods available for sale by the retail value of the goods available for sale.
They then apply this ratio to the ending inventory at retail to determine the estimated
cost of the ending inventory.
PRACTICE MULTIPLE-CHOICE QUESTIONS:

Ans:

Number Answer
1 a
2 b
3 b
4 c
5 d
6 d
7 c
8 d
9 b
10 b
11 d
12 b
13 d
14 d
15 b

ANSWERS TO QUESTIONS:

1. Agree. Effective inventory management is frequently the key to successful business

operations. Management attempts to maintain sufficient quantities and types of goods to
meet expected customer demand. It also seeks to avoid the cost of carrying inventories
that are clearly in excess of anticipated sales.

2. Inventory items have two common characteristics:

1. They are owned by the company

2. They are in a form ready for sale in the ordinary course of business.

3. Taking a physical inventory involves actually counting, weighing or measuring each

kind of inventory on hand. Retailers, such as a hardware store, generally have
thousands of different items to count. This is normally done when the store is closed.

4. (a)

1. The goods will be included in Jovad’s Company inventory if the terms of sale
are FOBdestination.
 2. They will be included in Martin’s Company inventory if the terms of sale are
FOB shipping point.

(b) Jovad’sCompany should include goods shipped to another company on consignment

in its inventory. Goods held by Jovad’s Company on consignment should not be
included in inventory.

5. nventoriable costs are $3,020 (invoice cost $3,000 + freight charges $50 – cash
discount $30). The amount paid to negotiate the purchase is a buying cost that normally
is not included in the cost of inventory because of the difficulty of allocating these costs.
Buying costs are expensed in the year incurred.

6. FOB shipping point means that ownership of goods in transit passes to the buyer
when the public carrier accepts the goods from the seller. FOB destination means that
ownership of goods in transit remains with the seller until the goods reach the buyer.

7. Actual physical flow may be impractical because many items are indistinguishable
from one another. Actual physical flow may be inappropriate because management may
be able to manipulate net income through specific identification of items sold.

8. The major advantage of the specific identification method is that it tracks the actual
physical flow of the goods available for sale. The major disadvantage is that
management could manipulate net income.

9. No. Selection of an inventory costing method is a management decision. However,

once a method has been chosen, it should be used consistently from one accounting
period to another.

10.

(a) FIFO.

(b) Average-cost.

(c) FIFO.
11. Bert Company is using the FIFO method of inventory costing, and Ernie Company
is using the LIFO method. Under FIFO, the latest goods purchased remain in inventory.
Thus, the inventory on the statement of financial position should be close to current
costs. The reverse is true of the LIFO method. Bert Company will have the higher gross
profit because cost of goods sold will include a higher proportion of goods purchased at
lower costs.

15. Warnke Stores should report the toasters at $27 each for a total of $540. The $27 is
the lower of cost or net realizable value. It is used because it is the lower of the
inventory’s cost and net realizable value.

16.

(a) Sayaovang Company’s 2016 net income will be understated €7,000

(b) 2017 net income will be overstated €7,000

(c) the combined net income for the two years will be correct.

17.

Dreher Company should disclose:

(1) the major inventory classifications

(2) the basis of accounting (cost or lower-of-cost-or-net realizable value)

(3) the costing method (FIFO or average cost).

18.

An inventory turnover that is too high may indicate that the company is losing sales
opportunities because of inventory shortages. Inventory outages may also cause
customer ill will and result in lost future sales.

19.

Apple uses the average-cost method for its inventories.

20.

Disagree. The results under the FIFO method are the same but the results under the
average-cost method are different. The reason is that the pool of inventoriable costs
(cost of goods available for sale) is not the same. Under a periodic system, the pool of
costs is the goods available for sale for the entire period, whereas under a perpetual
system, the pool is the goods available for sale up to the date of sale.

21.

In a periodic system, the average is a weighted average based on total goods available
for sale for the period. In a perpetual system, the average is a moving average of goods
available for sale after each purchase.

22.

Inventories must be estimated when:

1. Management wants monthly or quarterly financial statements but a physical

inventory is only taken annually

2. A fire or other type of casualty makes it impossible to take a physical inventory.

23.

In the gross profit method, the average is the gross profit rate, which is gross profit
divided by net sales. The rate is often based on last year’s actual rate. The gross profit
rate is applied to net sales in using the gross profit method. In the retail inventory
method, the average is the cost-to-retail ratio, which is the goods available for sale at
cost divided by the goods available for sale at retail. The ratio is based on current year
data and is applied to the ending inventory at retail.

24.

Net sales ........................................................................................................... $400,000

Less: Gross profit ($400,000 X 35%)............................................................... 140,000

Estimated cost of goods sold............................................................................ $260,000

Cost of goods available for sale....................................................................... $300,000

Less: Cost of goods sold .................................................................................... 260,000

Estimated cost of ending inventory................................................................. $ 40,000

The estimated cost of the ending inventory is $40,000

25.

Ending inventory at retail: (120,000 – 80,000) = 40,000

Cost-to-retail ratio: 84,000 /120,000 = 70%

Ending inventory at cost: (40,000 70%) = 28,000

The estimated cost of the ending inventory is 28,000