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Exam 6: Inventories and Cost of Sales

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Question 101

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The consistency concept:

A) Prescribes a company to consistently apply the same accounting method of inventory valuation, an exception being when a change from one method to another will improve its financial reporting.
B) Requires a company to use one method of inventory valuation exclusively.
C) Requires that all companies in the same industry use the same accounting methods of inventory valuation.
D) Is also called the full disclosure principle.
E) Is also called the matching principle.

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

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Question 102

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The inventory turnover ratio is calculated as:

A) Cost of goods sold divided by average merchandise inventory.
B) Sales divided by cost of goods sold.
C) Ending inventory divided by cost of goods sold.
D) Cost of goods sold divided by ending inventory.
E) Cost of goods sold divided by ending inventory times 365.

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

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Question 103

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Whether purchase costs are rising or falling, FIFO always will yield the highest gross profit and net income.

A company's cost of inventory was $317,500. Due to phenomenal demand the market value of its inventory increased to $323,000. This company should write up the value of its inventory according to the consistency principle.

How do the consistency concept and the full disclosure principle affect inventory valuation?

The reasoning behind the retail inventory method is that if we can get a good estimate of the cost-to-retail ratio, we can multiply ending inventory at retail by this ratio to estimate ending inventory at cost.

Explain the effects of inventory valuation methods on the cost of ending inventory, income, and income taxes.

An overstatement of ending inventory will cause an overstatement of assets and an understatement of equity on the balance sheet.

Explain how the inventory turnover ratio and the days' sales in inventory ratio are used to evaluate inventory management.

Axme Corporation uses a weighted-average perpetual inventory system. August 2, 10 units were purchased at $12 per unit. August 18, 15 units were purchased at $14 per unit. August 29, 12 units were sold. What was the amount of the cost of goods sold for this sale?

Using the information given below, prepare general journal entries to record the March 16 sale assuming a cash sale and the FIFO method is used.

One of the most important decisions in accounting for inventory is determining the unit costs assigned to inventory items.

Georgia Peach Company reported net sales in June of the current year of $1,000,000. At the beginning of June, the company reported beginning inventory of $368,000. Cost of goods purchased during June amounted to $217,500. The company reported ending inventory at the end of June of $226,750. The company's gross profit rate for June of the current year was:

A company's warehouse was destroyed by a tornado on March 15. The following information was the only information that was salvaged: The company's average gross profit ratio is 35%. What is the estimated cost of the lost inventory?

Identify the inventory valuation method that is being described for each situation below. In all cases, assume a period of rising prices. Use the following to identify the inventory valuation method: a. The method that can only be used if each inventory item can be matched with a specific purchase and its invoice. b. The method that will cause the company to have the lowest income taxes. c. The method that will cause the company to have the lowest cost of goods sold. d. The method that will assign a value to inventory that approximates its current cost. e. The method that will tend to smooth out erratic changes in costs.

An understatement of ending inventory will cause an understatement of assets and equity on the balance sheet.

The retail inventory method estimates the cost of ending inventory by applying the gross profit ratio to net sales.

Flaxco purchases inventory from overseas and incurs the following costs: the cost of the merchandise is $50,000, credit terms are 2/10, n/30 that apply only to the $50,000; FOB shipping point freight charges are $1,500; insurance during transit is $500; and import duties are $1,000. Flaxco paid within the discount period and incurred additional costs of $1,200 for advertising and $5,000 for sales commissions. Compute the cost that should be assigned to the inventory.