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H. International Financial Reporting Standards (IFRS)

H. International Financial Reporting Standards (IFRS)

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Module 10: Inventory



233



NOTE: If LCM were applied under US standards, additional information would be needed. Specifically, US

GAAP would require the replacement cost and the normal profit margin in order to arrive at the ceiling and

the floor.











c. Rules for capitalization of interest are also different.

(1) US GAAP allows no capitalization of interest for inventories that are routinely manufactured or

otherwise pro­duced in quantities on a repetitive basis.

(2) Similar to US GAAP, IFRS does not allow interest or financing costs to be capitalized as an inventory

cost if it is paid under normal credit terms. However, IFRS allows interest costs to be capitalized if there

is a lengthy production period to prepare the goods for sale.

NOW REVIEW MULTIPLE-CHOICE QUESTIONS 62 THROUGH 68



KEY TERMS

Absorption costing. Considers both variable and fixed manufacturing costs as product costs.

Ceiling. Which is net realizable value (selling price less selling costs and costs to complete).

Completed-contract method. Recognition of contract revenue and profit at contract completion.

Direct (Variable) costing. Considers only variable costs as product costs and fixed production costs as period costs.

Dollar-value LIFO. LIFO applied to pools of inventory items rather than to individual items.

First-In, First-Out (FIFO). The goods from beginning inventory and the earliest purchases are assumed to be the

goods sold first.

Floor. Which is net realizable value less normal profit.

FOB destination. Title passes to the buyer when the goods are received at their final destination.

FOB shipping point. Title passes to the buyer when the carrier receives the goods.

Gross method. Any subsequent discount taken is shown as purchase discount which is netted against the pur­chases

account in determining cost of goods sold.

Inventory turnover. Measures the number of times inventory was sold and reflects inventory order and invest­ment

policies.

Last-In, First-Out (LIFO). The most recent purchases are assumed to be the first goods sold; thus, ending inven­tory is

assumed to be composed of the oldest goods.

LIFO conformity rule. If LIFO is used for tax purposes, it must be used for financial reporting purposes.

LIFO reserve. The account used to reduce inventory from the internal valuation to the LIFO valuation.

Moving-average. The average cost of goods on hand must be recalculated any time additional inventory is pur­chased

at a unit cost different from the previously calculated average cost of goods on hand.

Net method. Any purchase discounts offered are assumed taken and the purchase account reflects the net price.

Number of days’ supply in average inventory. Number of days inventory is held before sale; reflects on efficiency of

inventory policies.

Percentage-of-completion. Recognition of contract revenue and profit during construction based on expected to­tal

profit and estimated progress towards completion in the current period.

Periodic system. Inventory is counted periodically and then priced.

Perpetual system. A running total is kept of the units on hand (and possibly their value) by recording all increases and

decreases as they occur.

Purchase commitments. Result from legally enforceable contracts to purchase specific quantities of goods at fixed

prices in the future.

Simple average. The seller does not weight the average for units purchased or in beginning inventory.

Specific identification. The seller determines which item is sold.

Standard costs. Predetermined costs in a cost accounting system, generally used for control purposes.

Trade discounts. These are discounts that are allowed to the entity because of its being a wholesaler, a good cus­tomer,

or merely the fact that the item is on sale at a reduced price.

Weighted-average. The seller averages the cost of all items on hand and purchased during the period. The units in end­

ing inventory and units sold (CGS) are costed at this average cost.



c07.indd 233



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Module 10: Inventory



234



Multiple-Choice Questions (1–68)

A.  Determining Inventory and Cost of Goods

Sold

1. The following information applied to Fenn, Inc. for year 2:

Merchandise purchased for resale

Freight-in

Freight-out

Purchase returns



2. On December 28, year 2, Kerr Manufacturing Co. pur­

chased goods costing $50,000. The terms were FOB desti­

nation. Some of the costs incurred in connection with the sale

and deliv­ery of the goods were as follows:



a.$54,500

b.$53,500

c.$52,000

d.$50,000



3 . On June 1, year 2, Pitt Corp. sold merchandise with a list

price of $5,000 to Burr on account. Pitt allowed trade dis­counts

of 30% and 20%. Credit terms were 2/15, n/40 and the sale

was made FOB shipping point. Pitt prepaid $200 of delivery

costs for Burr as an accommodation. On June 12, year 2, Pitt

received from Burr a remittance in full payment amounting to











Decrease in raw materials inventory

Increase in finished goods inventory

Raw material purchased

Direct labor payroll

Factory overhead

Freight-out



$ 15,000

35,000

430,000

200,000

300,000

45,000



There was no work in process inventory at the beginning or

end of the year. Cody’s year 2 cost of goods sold is

a.$895,000

b.$910,000



$90,000

124,000

34,000

30,000



a.$218,000

b.$184,000

c.$150,000

d.$124,000



6. How should the following costs affect a retailer’s in­ventory?

Freight-in



Interest on inventory loan



a. Increase

b. Increase

c. No effect

d. No effect



No effect

Increase

Increase

No effect



7. According to the net method, which of the following items

should be included in the cost of inventory?

a.

b.

c.

d.



Freight costs



Purchase discounts not taken



Yes

Yes

No

No



No

Yes

Yes

No



8. The following information pertained to Azur Co. for the year:

Purchases

Purchase discounts

Freight in

Freight out

Beginning inventory

Ending inventory



a.$2,744

b.$2,940

c.$2,944

d.$3,140



4. The following information was taken from Cody Co.’s ac­

counting records for the year ended December 31, year 2:



c07.indd 234













$1,000

1,500

2,000



These goods were received on December 31, year 2. In Kerr’s

December 31, year 2 balance sheet, what amount of cost for

these goods should be included in inventory?











Inventory, 12/31/Y1

Year 2 purchases

Year 2 write-off of obsolete inventory

Inventory, 12/31/Y2



The inventory written off became obsolete due to an unex­

pected and unusual technological advance by a competitor. In

its year 2 income statement, what amount should Deal report

as cost of goods sold?



a.$400,000

b.$404,000

c.$408,000

d.$413,000



Packaging for shipment

Shipping

Special handling charges



5. The following information pertains to Deal Corp.’s year 2

cost of goods sold:



$400,000

10,000

5,000

2,000



Fenn’s year 2 inventoriable cost was











c.$950,000

d.$955,000



$102,800

10,280

15,420

5,140

30,840

20,560



What amount should Azur report as cost of goods sold for the year?











a.$102,800

b.$118,220

c.$123,360

d.$128,500



9. When allocating costs to inventory produced for the period,

fixed overhead should be based upon











a.The actual amounts of goods produced during the pe­riod.

b. The normal capacity of production facilities.

c.The highest production levels in the last three periods.

d. The lowest production level in the last three periods.



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Module 10: Inventory



10. Per the Codification, what is considered the normal

capacity of production facilities?











a.The average production over the previous five-year

pe­riod.

b. Actual production for the period.

c.Actual production for the period plus loss of capac­ity

for planned maintenance.

d.A range that may vary based on business and

industry-specific factors.



11. How should unallocated fixed overhead costs be treated?











a.Allocated to finished goods and cost of goods sold

based on ending balances in the accounts.

b.Allocated to raw materials, work in process, and fin­ished

goods, based on the ending balances in the ac­counts.

c.Recognized as an expense in the period in which they

are incurred.

d.Allocated to work in process, finished goods, and cost

of goods sold based on ending balances in the ac­counts.



12. When manufacturing inventory, what is the accounting

treatment for abnormal freight-in costs?











a. Charge to expense for the period.

b. Charge to the finished goods inventory.

c. Charge to raw materials inventory.

d.Allocate to raw materials, work in process, and

finished goods.



13. On December 15, year 2, Flanagan purchased goods

costing $100,000. The terms were FOB shipping point. Costs

incurred by Flanagan in connection with the purchase and

delivery of the goods were as follows:

Normal freight charges

Handling costs

Insurance on shipment

Abnormal freight charges for express

 shipping



$3,000

2,000

500

1,200



The goods were received on December 17, year 2. What is

the amount that Flanagan should charge to inventory and

to current period expense?

Inventory



a.

b.

c.

d.



$3,000

$5,000

$5,500

$6,700



Current period expense



$3,700

$1,700

$1,200

$0



B.  Inventory Valuation and Cost-Flow

Methods

14. Bach Co. adopted the dollar-value LIFO inventory

method as of January 1, year 2. A single inventory pool and an

internally computed price index are used to compute Bach’s

LIFO inven­tory layers. Information about Bach’s dollar value

inventory follows:



c07.indd 235



Date

1/1/Y1

Year 1 layer

Year 2 layer



235

Inventory

At base

At dollar

year cost

value LIFO

$90,000

$90,000

20,000

30,000

40,000

80,000



What was the price index used to compute Bach’s year 2 dollar

value LIFO inventory layer?











a.1.09

b.1.25

c.1.33

d.2.00



15. Nest Co. recorded the following inventory information

during the month of January:



Balance on 1/1

Purchased on 1/8

Sold on 1/23

Purchased on 1/28



Units

2,000

1,200

1,800

800



Unit

cost

$1

3



Total

cost

$2,000

3,600



5



4,000



Units

on

hand

2,000

3,200

1,400

2,200



Nest uses the LIFO method to cost inventory. What amount

should Nest report as inventory on January 31 under each of

the following methods of recording inventory?

a.

b.

c.

d.



Perpetual



Periodic



$2,600

$5,400

$2,600

$5,400



$5,400

$2,600

$2,600

$5,400



B.2. Weighted-Average

16. The weighted-average for the year inventory cost flow

method is applicable to which of the following inventory

systems?

a.

b.

c.

d.



Periodic



Perpetual



Yes

Yes

No

No



Yes

No

Yes

No



B.4.  Moving Average

17. During January year 2, Metro Co., which maintains a per­

petual inventory system, recorded the following informa­tion

pertaining to its inventory:



Balance on 1/1/Y2

Purchased on

1/7/Y2

Sold on 1/20/Y2

Purchased on

1/25/Y2



Unit

cost

$1



Total

cost

$1,000



Units on

hand

1,000



600

900



3



1,800



1,600

700



400



5



2,000



1,100



Units

1,000



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Module 10: Inventory



236



Under the moving-average method, what amount should Metro

report as inventory at January 31, year 2?











a.$2,640

b.$3,225

c.$3,300

d.$3,900



B.5.  Lower of Cost or Market

18. Based on a physical inventory taken on December 31,

year 2, Chewy Co. determined its chocolate inventory on a

FIFO basis at $26,000 with a replacement cost of $20,000.

Chewy estimated that, after further processing costs of

$12,000, the chocolate could be sold as finished candy bars

for $40,000. Chewy’s normal profit margin is 10% of sales.

Under the lower of cost or market rule, what amount should

Chewy report as choc­olate inventory in its December 31, year

2 balance sheet?











a.$28,000

b.$26,000

c.$24,000

d.$20,000



19. Reporting inventory at the lower of cost or market is a de­

parture from the accounting principle of











a. Historical cost.

b.Consistency.

c.Conservatism.

d. Full disclosure.









B.6.  Losses on Purchase Commitments

23. On January 1, year 2, Card Corp. signed a three-year

non­cancelable purchase contract, which allows Card to pur­

chase up to 500,000 units of a computer part annually from

Hart Supply Co. at $.10 per unit and guarantees a minimum

annual purchase of 100,000 units. During year 2, the part

unexpectedly became obsolete. Card had 250,000 units of this

inventory at Decem­ber 31, year 2, and believes these parts can

be sold as scrap for $.02 per unit. What amount of probable

loss from the purchase commitment should Card report in its

year 2 income statement?











a.

b.

c.

d.



Replacement cost.

Net realizable value.

Net realizable value less normal profit margin.

Original cost.



21. Which of the following statements are correct when a

com­pany applying the lower of cost or market method re­ports

its inventory at replacement cost?



Inventory

method



a.

b.

c.

d.



a. I only.

b.II only.

c. Both I and II.

d.Neither I nor II.



22. The original cost of an inventory item is above the

­­re­place­ment cost and the net realizable value. The replace­ment

cost is below the net realizable value less the normal profit

margin. As a result, under the lower of cost or market method,

the inventory item should be reported at the







c07.indd 236



a. Net realizable value.

b. Net realizable value less the normal profit margin.



Perpetual

Perpetual

Periodic

Periodic



Cost or market

application



Total inventory

Individual item

Total inventory

Individual item



B.7. and B.8.  First-In, First-Out (FIFO); and

Last-In, First-Out (LIFO)

25. Marsh Company had 150 units of product A on hand at

January 1, year 2, costing $21 each. Purchases of product A

dur­ing the month of January were as follows:



I. The original cost is less than replacement cost.

II. The net realizable value is greater than replacement

cost.











a.$24,000

b.$20,000

c.$16,000

d.$8,000



24. Thread Co. is selecting its inventory system in prepara­tion

for its first year of operations. Thread intends to use either the

periodic weighted-average method or the perpetual movingaverage method, and to apply the lower of cost or market rule

either to individual items or to the total inven­tory. Inventory

prices are expected to generally increase throughout year 2,

al­though a few individual prices will de­crease. What inventory

system should Thread select if it wants to maximize the

inventory carrying amount at De­cember 31, year 2?



20. The original cost of an inventory item is below both

replace­ment cost and net realizable value. The net realizable

value less normal profit margin is below the original cost.

Under the lower of cost or market method, the inventory item

should be valued at











c. Replacement cost.

d. Original cost.



Jan. 10

18

28



Units

200

250

100



Unit cost

$22

23

24



  A physical count on January 31, year 2, shows 250 units of

prod­uct A on hand. The cost of the inventory at January 31,

year 2, under the LIFO method is











a.$5,850

b.$5,550

c.$5,350

d.$5,250



26. During January year 2, Metro Co., which maintains a per­

petual inventory system, recorded the following informa­tion

pertaining to its inventory:



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Module 10: Inventory



Balance on 1/1/Y2

Purchased on 1/7/

Y2

Sold on 1/20/Y2

Purchased on 1/25/

Y2



Units

on

hand

1,000



Unit

cost

$1



Total

cost

$1,000



600

900



3



1,800



1,600

700



400



5



2,000



1,100



Units

1,000



  Under the LIFO method, what amount should Metro report

as inventory at January 31, year 2?











a.$1,300

b.$2,700

c.$3,900

d.$4,100



27. Drew Co. uses the average cost inventory method for

inter­nal reporting purposes and LIFO for financial statement

and income tax reporting. At December 31, year 2, the in­

ventory was $375,000 using average cost and $320,000 us­ing

LIFO. The unadjusted credit balance in the LIFO Re­serve

account on De­cember 31, year 2, was $35,000. What adjusting

entry should Drew record to adjust from average cost to LIFO

at Decem­ber 31, year 2?

Debit



a. Cost of goods sold

Inventory

b. Cost of goods sold

LIFO reserve

c. Cost of goods sold

Inventory

d. Cost of goods sold

LIFO reserve



Credit



$55,000

$55,000

$55,000

$55,000

$20,000



a.

b.

c.

d.



No

Yes

Yes

No



31. On January 1, year 1, Poe Company adopted the dollarvalue LIFO inventory method. Poe’s entire inventory con­

stitutes a single pool. Inventory data for year 1 and year 2 are

as follows:



Date

1/1/Y1

12/31/Y1

12/31/Y2



Inventory

at current

year cost

$150,000

220,000

276,000













Net income



Increase

Increase

Decrease

Decrease



Increase

Decrease

Decrease

Increase



Cost of goods sold



Ending inventory



LIFO

LIFO

FIFO

FIFO



FIFO

LIFO

FIFO

LIFO



Relevant

price index

1.00

1.10

1.20



a.$230,000

b.$236,000

c.$241,000

d.$246,000



32. Brock Co. adopted the dollar-value LIFO inventory

method as of January 1, year 1. A single inventory pool and an

internally computed price index are used to compute Brock’s

LIFO inven­tory layers. Information about Brock’s dollar-value

inventory follows:



$20,000



Ending inventory



Inventory

at base

year cost

$150,000

200,000

230,000



   Poe’s LIFO inventory value at December 31, year 2, is



$20,000



30. During periods of rising prices, a perpetual inventory

system would result in the same dollar amount of ending

inventory as a periodic inventory system under which of the

following inventory cost flow methods?



c07.indd 237



LIFO



Yes

Yes

No

No



$20,000



29. Generally, which inventory costing method approxi­

mates most closely the current cost for each of the

follow­ing?

a.

b.

c.

d.



FIFO



B.9.  Dollar-Value LIFO



Date

1/1/Y1

Year 1 layer

12/31/Y1

Year 2 layer

12/31/Y2



28. A company decided to change its inventory valuation

method from FIFO to LIFO in a period of rising prices. What

was the result of the change on ending inventory and net

income in the year of the change?

a.

b.

c.

d.



237



At base

year cost

$40,000

5,000

45,000

15,000

$60,000



Inventory

At current

year cost

$40,000

14,000

54,000

26,000

$80,000



At dollar

value LIFO

$40,000

6,000

46,000

?

?



  What was Brock’s dollar-value LIFO inventory at Decem­

ber 31, year 2?











a.$80,000

b.$74,000

c.$66,000

d.$60,000



33. Estimates of price-level changes for specific inventories

are required for which of the following inventory methods?











a.

b.

c.

d.



Conventional retail.

Dollar-value LIFO.

Weighted-average cost.

Average cost retail.



34. When the double-extension approach to the dollar-value

LIFO inventory method is used, the inventory layer added in

the current year is multiplied by an index number. Which

of the following correctly states how components are used in

the calcu­lation of this index number?



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Module 10: Inventory



238











a. In the numerator, the average of the ending inven­tory at

base year cost and at current year cost.

b. In the numerator, the ending inventory at current year

cost, and, in the denominator, the ending in­ventory at

base year cost.

c. In the numerator, the ending inventory at base year cost,

and, the denominator, the ending inventory at current

year cost.

d. In the denominator, the average of the ending in­ven­tory

at base year cost and at current year cost.



35. Jones Wholesalers stocks a changing variety of prod­ucts.

Which inventory costing method will be most likely to give

Jones the lowest ending inventory when its product lines are

subject to specific price increases?











a. Specific identification.

b.Weighted-average.

c. Dollar-value LIFO.

d. FIFO periodic.



36. Dart Company’s accounting records indicated the fol­

lowing information:

$500,000

2,500,000

3,200,000



38. Herc Co.’s inventory at December 31, year 2, was

$1,500,000 based on a physical count priced at cost, and

before any necessary adjustment for the following:







































a.$25,000

b.$100,000

c.$175,000

d.$225,000



37. On July 1, year 2, Casa Development Co. purchased a

tract of land for $1,200,000. Casa incurred additional cost

of $300,000 during the remainder of year 2 in preparing the

land for sale. The tract was subdivided into residential lots as

follows:

Lot class

A

B

C



Number

of lots

100

100

200



Sales price

per lot

$24,000

16,000

10,000



  Using the relative sales value method, what amount of costs

should be allocated to the Class A lots?

a.$300,000

b.$375,000



• Merchandise costing $90,000, shipped FOB shipping

point from a vendor on December 30, year 2, was re­

ceived and recorded on January 5, year 3.

• Goods in the shipping area were excluded from in­ven­

tory although shipment was not made until Janu­ary 4,

year 3. The goods, billed to the customer FOB shipping

point on December 30, year 2, had a cost of $120,000.



a.$1,500,000

b.$1,590,000

c.$1,620,000

d.$1,710,000



39. Kew Co.’s accounts payable balance at December 31, year

2, was $2,200,000 before considering the following data:



  A physical inventory taken on December 31, year 2, resulted

in an ending inventory of $575,000. Dart’s gross profit on sales

has remained constant at 25% in recent years. Dart suspects

some inventory may have been taken by a new employee. At

Decem­ber 31, year 2, what is the estimated cost of missing

inventory?



B.14.  Cost Apportionment by Relative

Sales Value



c07.indd 238



C.  Items to Include in Inventory



  What amount should Herc report as inventory in its Decem­

ber 31, year 2 balance sheet?



B.10.  Gross Profit



Inventory, 1/1/Y2

Purchases during year 2

Sales during year 2



c.$600,000

d.$720,000



• Goods shipped to Kew FOB shipping point on De­cem­

ber 22, year 2, were lost in transit. The invoice cost

of $40,000 was not recorded by Kew. On January 7,

year 3, Kew filed a $40,000 claim against the

common carrier.

• On December 27, year 2, a vendor authorized Kew to

re­turn, for full credit, goods shipped and billed at

$70,000 on December 3, year 2. The returned goods

were shipped by Kew on December 28, year 2. A

$70,000 credit memo was received and recorded by

Kew on January 5, year 3.

• Goods shipped to Kew FOB destination on Decem­

ber 20, year 2, were received on January 6, year 3. The

in­voice cost was $50,000.



  What amount should Kew report as accounts payable in its

De­cember 31, year 2 balance sheet?











a.$2,170,000

b.$2,180,000

c.$2,230,000

d.$2,280,000



40. Lewis Company’s usual sales terms are net sixty days,

FOB shipping point. Sales, net of returns and allowances,

totaled $2,300,000 for the year ended December 31, year 2,

before year-end adjustments. Additional data are as follows:









• On December 27, year 2, Lewis authorized a customer to

return, for full credit, goods shipped and billed at $50,000

on December 15, year 2. The returned goods were

received by Lewis on January 4, year 3, and a $50,000

credit memo was issued and recorded on the same date.

• Goods with an invoice amount of $80,000 were billed

and recorded on January 3, year 3. The goods were

shipped on December 30, year 2.



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Module 10: Inventory

• Goods with an invoice amount of $100,000 were billed

and recorded on December 30, year 2. The goods were

shipped on January 3, year 3.



Lewis’ adjusted net sales for year 2 should be











a.$2,330,000

b.$2,280,000

c. $2,250,000

d.$2,230,000



41. On January 1, year 2, Dell, Inc. contracted with the city

of Little to provide custom built desks for the city schools. The

contract made Dell the city’s sole supplier and required Dell to

supply no less than 4,000 desks and no more than 5,500 desks

per year for two years. In turn, Little agreed to pay a fixed

price of $110 per desk. During year 2, Dell pro­duced 5,000

desks for Little. At December 31, year 2, 500 of these desks

were segre­gated from the regular inventory and were accepted

and awaiting pickup by Little. Little paid Dell $450,000

during year 2. What amount should Dell recognize as contract

revenue in year 2?











a.$450,000

b.$495,000

c.$550,000

d.$605,000



D. Consignments

42. On October 20, year 2, Grimm Co. consigned forty

freezers to Holden Co. for sale at $1,000 each and paid $800 in

transpor­tation costs. On December 30, year 2, Holden reported

the sale of ten freezers and remitted $8,500. The remittance

was net of the agreed 15% commission. What amount should

Grimm rec­ognize as consignment sales reve­nue for year 2?











a.$7,700

b.$8,500

c.$9,800

d.$10,000



43. The following items were included in Opal Co.’s inven­

tory account at December 31, year 2:

Merchandise out on consignment, at sales price,

includ­ing 40% markup on selling price

Goods purchased, in transit, shipped FOB

shipping point

Goods held on consignment by Opal



$40,000

36,000

27,000



  By what amount should Opal’s inventory account at Decem­

ber 31, year 2, be reduced?











a.$103,000

b.$67,000

c.$51,000

d.$43,000



44. On December 1, year 2, Alt Department Store received

505 sweaters on consignment from Todd. Todd’s cost for

the sweat­ers was $80 each, and they were priced to sell at

$100. Alt’s commission on consigned goods is 10%. At

December 31, year 2, five sweaters remained. In its



c07.indd 239



239



Decem­ber 31, year 2 balance sheet, what amount should Alt

report as payable for consigned goods?











a.$49,000

b.$45,400

c.$45,000

d.$40,400



45. Southgate Co. paid the in-transit insurance premium for

consignment goods shipped to Hendon Co., the consignee.

In addition, Southgate advanced part of the commissions that

will be due when Hendon sells the goods. Should Southgate

include the in-transit insurance premium and the advanced

commissions in inventory costs?

Insurance premium



a.

b.

c.

d.



Advanced commissions



Yes

No

Yes

No



Yes

No

No

Yes



46. Jel Co., a consignee, paid the freight costs for goods

shipped from Dale Co., a consignor. These freight costs are to

be de­ducted from Jel’s payment to Dale when the con­signment

goods are sold. Until Jel sells the goods, the freight costs

should be included in Jel’s













a. Cost of goods sold.

b. Freight-out costs.

c. Selling expenses.

d. Accounts receivable.

e.Ratios



E. Ratios

47. Heath Co.’s current ratio is 4:1. Which of the follow­ing

transactions would normally increase its current ratio?











a.

b.

c.

d.



Purchasing inventory on account.

Selling inventory on account.

Collecting an account receivable.

Purchasing machinery for cash.



48. During year 2, Rand Co. purchased $960,000 of inven­

tory. The cost of goods sold for year 2 was $900,000, and the

ending inventory at December 31, year 2, was $180,000. What

was the inventory turnover for year 2?











a.6.4

b.6.0

c.5.3

d.5.0



49. In a comparison of year 2 to year 1, Neir Co.’s inven­tory

turnover ratio increased substantially although sales and

inven­tory amounts were essentially unchanged. Which of

the follow­ing statements explains the increased inventory

turnover ratio?











a.

b.

c.

d.



Cost of goods sold decreased.

Accounts receivable turnover increased.

Total asset turnover increased.

Gross profit percentage decreased.



13-05-2014 07:28:08



Module 10: Inventory



240



50. Selected data pertaining to Lore Co. for the calendar year

2 is as follows:

Net cash sales

Cost of goods sold

Inventory at beginning of year

Purchases

Accounts receivable at beginning of year

Accounts receivable at end of year



$ 3,000

18,000

6,000

24,000

20,000

22,000



53. Lake Construction Company has consistently used the

percentage-of-completion method of recognizing income. Dur­

ing year 1, Lake entered into a fixed-price contract to construct

an office building for $10,000,000. Information relating to the

contract is as follows:



Percentage of completion

Estimated total cost at

completion

Income recognized

(cumulative)



  Lore would use which of the following to determine the

average days’ sales in inventory?

a.

b.

c.

d.



Numerator



Denominator



365

365

Average inventory

Sales divided by 365



Average inventory

Inventory turnover

Sales divided by 365

Inventory turnover



F.  Long-Term Construction Contracts

51. Cord Builders, Inc. has consistently used the percentageof-completion method of accounting for construction-type

con­tracts. During year 1 Cord started work on a $9,000,000

fixed-price construction contract that was completed in year 3.

Cord’s accounting records disclosed the following:



$3,900,000



$6,300,000



7,800,000



8,100,000



a.$100,000

b.$300,000

c.$600,000

d.$700,000













c07.indd 240



a.$50,000

b.$108,000

c.$128,000

d.$228,000



1,200,000



a.$3,200,000

b.$3,300,000

c.$3,500,000

d.$4,800,000



Costs incurred

Estimated cost to complete

Progress billings

Collections



$ 930,000

2,170,000

1,100,000

700,000













a.$230,000

b.$100,000

c.$30,000

d.$0



Items 55 and 56 are based on the following data pertaining to

Pell Co.’s construction jobs, which commenced during year 2:



Year 1



Year 2



$100,000

105,000

122,000

100,000



$300,000

192,000

364,000

420,000



  Profit recognized from the long-term construction contract

in year 2 should be











500,000



54. Hansen Construction, Inc. has consistently used the

percentage-of-completion method of recognizing income. Dur­

ing year 2, Hansen started work on a $3,000,000 fixed-price

con­struction contract. The accounting records dis­closed the

fol­lowing data for the year ended December 31, year 2:



52. State Co. recognizes construction revenue and expenses

using the percentage-of-completion method. During year 1, a

single long-term project was begun, which continued through

year 2. Information on the project follows:

Accounts receivable from

construction contract

Construction expenses

Construction in progress

Partial billings on contract



$8,000,000



  How much loss should Hansen have recognized in year 2?



  How much income would Cord have recognized on this

contract for the year ended December 31, year 2?











$7,500,000



Contract costs incurred during year 2 were



December 31

Year 1

Year 2

Cumulative contract costs

incurred

Estimated total cost at

completion



At December 31,

Year 1

Year 2

20%

60%



Contract price

Costs incurred during year 2

Estimated costs to complete

Billed to customers during year 2

Received from customers during

year 2



Project 1

$420,000

240,000

120,000

150,000



Project 2

$300,000

280,000

40,000

270,000



90,000



250,000



55. If Pell used the completed contract method, what amount

of gross profit (loss) would Pell report in its year 2 income

state­ment?











a.$(20,000)

b.$0

c.$340,000

d.$420,000



56. If Pell used the percentage-of-completion method, what

amount of gross profit (loss) would Pell report in its year 2 in­

come statement?



13-05-2014 07:28:08















Module 10: Inventory

a.$(20,000)

b.$20,000

c.$22,500

d.$40,000



Historical cost

Estimated selling price

Estimated costs to complete and sell

Replacement cost



57. Which of the following is used in calculating the in­come

recognized in the fourth and final year of a contract accounted

for by the percentage-of-completion method?

Actual total costs Income previously recognized



a.

b.

c.

d.



Yes

Yes

No

No



Yes

No

Yes

No



58. A company used the percentage-of-completion method of

accounting for a five-year construction contract. Which of the

following items will the company use to calculate the income

recognized in the third year?



a.

b.

c.

d.



Progress

billings to date



Income

previously recognized



Yes

No

No

Yes



No

Yes

No

Yes



a.

b.

c.

d.



Total costs incurred to date to total estimated costs.

Total costs incurred to date to total billings to date.

Cost incurred in year three to total estimated costs.

Costs incurred in year three to total billings to date.



60. When should an anticipated loss on a long-term con­tract

be recognized under the percentage-of-completion method and

the completed-contract method, respectively?

a.

b.

c.

d.



Percentage-of-completion



Completed-contract



Over life of project

Immediately

Over life of project

Immediately



Contract complete

Contract complete

Immediately

Immediately



61. In accounting for a long-term construction contract using

the percentage-of-completion method, the progress billings on

contracts account is a











a.

b.

c.

d.



Contra current asset account.

Contra noncurrent asset account.

Noncurrent liability account.

Revenue account.



H.  International Financial Reporting

Standards (IFRS)

62. Brady Corporation values its inventory at the lower of

cost or net realizable value as required by IFRS. Brady has the

fol­lowing information regarding its inventory:



c07.indd 241



$1,000

900

50

800



  What is the amount for inventory that Brady should report

on the balance sheet under the lower of cost or net realizable

value method?











a.$1,000

b.$900

c.$850

d.$750



63. A company determined the following values for its in­ven­

tory as of the end of its fiscal year:

Historical cost

Current replacement cost

Net realizable value

Net realizable value less a normal profit

margin

Fair value



$100,000

70,000

90,000

85,000

95,000



  Under IFRS, what amount should the company report as

inven­tory on its balance sheet?



59. The calculation of the income recognized in the third year

of a five-year construction contract accounted for using the

percentage-of-completion method includes the ratio of











241













a.$70,000

b.$85,000

c.$90,000

d.$95,000



64. Under IFRS, which of the following inventory items are

not valued at the lower of cost or net realizable value?











a.

b.

c.

d.



Manufactured inventory items.

Retail inventory items.

Biological inventory items.

Industrial inventory items.



65. Under IFRS, the specific identification method of ac­

count­ing for inventory is required for











a. All inventory items.

b. Inventory items which are interchangeable.

c. Inventory items that are not interchangeable and goods

that are produced and segregated for specific projects.

d. Biological (agricultural) inventories.



66. The information provided below is for an item in Harris

Corporation’s inventory at year end. Harris presents its

financial statements in accordance with IFRS:

Historical cost

Estimated selling price

Estimated completion and selling costs

Replacement cost



$1,200

1,300

150

1,100



What should be the value of this inventory item in the com­

pany’s financial statements?











a.$1,100

b.$1,150

c.$1,200

d.$1,300



13-05-2014 07:28:09



242



67. Which of the following is not true about accounting for

inventory under IFRS?



68. Which of the following methods of accounting for in­

ventory is not allowed under IFRS?

























c07.indd 242



Module 10: Inventory



a. FIFO is allowed.

b. Interest costs may be capitalized if there is a lengthy

pro­duction period to prepare goods for sale.

c. The weighted-average method is acceptable.

d. Inventories are always valued at net realizable value.



a.LIFO.

b. Specific identification.

c.FIFO.

d.Weighted-average.



13-05-2014 07:28:09







Module 10: Inventory



243



Multiple-Choice Answers and Explanations

Answers

1.c

2.d

3.c

4.b

5.c

6.a

7.a

8.b

9.b

10.d

11.c

12.a

13.c

14.d



__ __

__ __

__ __

__ __

__ __

__ __

__ __

__ __

__ __

____

____

____

____

____



15.b

16.b

17.b

18.c

19.a

20.d

21.b

22.b

23.c

24.a

25.c

26.b

27.d

28.c



____

____

____

____

____

____

____

____

____

____

____

____

____

____



29.a

30.a

31.c

32.c

33.b

34.b

35.c

36.a

37.c

38.d

39.a

40.d

41.c

42.d



____

____

____

____

____

____

____

____

____

____

____

____

____

____



Explanations

1.(c) Inventoriable costs include all costs necessary to pre­

pare goods for sale. For a merchandising concern these costs

in­clude the purchase price of the goods, freight-in, insurance,

ware­housing, and any costs necessary to get the goods to the

point of sale (except interest on any loans ob­tained to purchase

the goods). In this problem, inventoriable costs total $408,000.

Purchase price less returns ($400,000 – $2,000)

Freight‑in



$398,000

10,000

$408,000



Note that freight-out is a selling expense, not an inventori­able

cost, as the diagram below indicates.

Customer

Inventoriable

costs



Point

of sale



Selling expense



2.(d) When the shipping terms are FOB destination, the

seller bears all costs of transporting the goods to the buyer.

Therefore, the seller is responsible for the payment of

packaging costs ($1,000), shipping costs ($1,500), and the

special handling charges ($2,000). The only amount to be

included as the buyer’s cost of the inventory purchased is the

purchase price ($50,000).

3.(c) Purchases are always recorded net of trade dis­counts.

When more than one trade discount is applied to a list price,

it is called a chain discount. Chain discounts are applied in

steps; each discount applies to the previously dis­counted

price. The cost, net of trade discounts, is $2,800 [$5,000 –

(30% × $5,000) = $3,500; and $3,500 – (20% × $3,500) =

$2,800]. Payment was made within the discount period, so

the net purchase price is $2,744 [$2,800 – (2% × $2,800)].

The remittance from Burr would also include re­imbursement

of the $200 of delivery costs. Since the terms were FOB



c07.indd 243



43.d

44.c

45.c

46.d

47.b

48.b

49.d

50.b

51.a

52.a

53.b

54.b

55.a

56.b



____

____

____

____

____

____

____

____

____

____

____

____

____

____



57.a ____

58.b ____

59.a ____

60.d ____

61.a ____

62.c ____

63.c ____

64.c ____

65.c ____

66.b ____

67.d ____

68.a ____

1st: __/68 = __%



2nd: __/68 = __%



shipping point, Burr is responsible for paying this amount, and

must reimburse Pitt, who prepaid the freight. Thus, the total

remittance is $2,944 ($2,744 + $200).

4.(b) Three computations must be performed: raw materi­als

used, cost of goods manufactured, and cost of goods sold.

(1)Raw materials purchased

Decrease in RM inventory

  Raw materials used



$430,000

15,000

$445,000







(2)Beginning WIP

RM used (from above)

Direct labor

Factory overhead

  Cost to account for

Ending WIP

  Cost of goods manuf.



$



(3)Cost of goods manuf.

Increase in FD inventory



$945,000

35,000



-445,000

200,000

300,000

945,000

-$945,000



The decrease in RM inventory is added when computing RM

used because RM were used in excess of those pur­chased.

The increase in FG inventory is deducted when computing

cost of goods sold because it represents the por­tion of

goods manufactured which were not sold. The freight-out

is irrelevant for this question be­cause freight-out is a selling

expense and therefore does not affect cost of goods sold.

5.(c) To compute cost of goods sold, the solutions ap­proach

is to set up a T-account for inventory

Inventory

12/31/Y1

Purchases



90,000

124,000



12/31/Y2



30,000



34,000

?



Write-off

Cost of goods sold



Purchases increase inventory, while the write-off and cost

of goods sold decrease inventory. Cost of goods sold can



13-05-2014 07:28:10



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