Question 1

Which statement is not correct about inventory errors?
A)Misstatements in inventory can affect the beginning inventory amounts.
B)Misstatements in inventory can affect the ending inventory amounts.
C)Misstatements in inventory affect current ratios.
D)Misstatements in inventory have no effect on net income.

Accepted Answer

Misstatements in inventory directly affect the cost of goods sold, which in turn affects net income. If inventory is overstated or understated, it will lead to incorrect calculation of gross profit and thus net income.

Question 2

Assume that a $400 purchase invoice received close to year-end is not recorded in fiscal 2019, but the inventory is appropriately included in the ending inventory count. What impact will this have on fiscal 2020 financial reporting?
A)Cost of sales is overstated by $400.
B)Gross margin is overstated.
C)Cost of goods available for sale is understated.
D)There is no effect on fiscal 2020.

Accepted Answer

By not recording the $400 purchase invoice in fiscal 2019, the cost of goods sold (COGS) in fiscal 2020 will be overstated when the invoice is eventually recorded. This is because the expense related to the inventory will be recognized in the wrong period, increasing COGS in 2020 rather than in 2019 where it belongs.

Question 3

Which statement is correct about inventory errors?
A)Misstatements in inventory can affect the beginning inventory amounts.
B)Misstatements in inventory are likely to affect only the current accounting period.
C)Misstatements in inventory are likely to only affect one reporting period.
D)Misstatements self-correct over three reporting periods.

Accepted Answer

Misstatements in inventory can affect the beginning inventory amounts, as they can carry over from the previous period if not corrected. They can also affect the current period and potentially future periods if not addressed. Option B, C, and D are not accurate as they underestimate the impact and potential longevity of inventory errors.

Question 4

Assume that a purchase invoice for $1,000 was appropriately recorded in fiscal 2019, but the inventory was excluded in error during the ending inventory count. What impact will this have on fiscal 2019 financial reporting?
A)Cost of goods sold is understated by $1,000.
B)Gross margin is overstated by $1,000.
C)Ending inventory is understated by $1,000.
D)Net income is overstated by $1,000.

Accepted Answer

Since the inventory was excluded by error, it means the ending inventory will be understated by $1,000. This will result in an understatement of the Cost of Goods Sold (COGS) by $1,000 as well. However, since COGS is subtracted from revenue to calculate Gross Margin, it will not be impacted by this error. Similarly, Net Income is calculated after deducting all expenses, including COGS, so it will be impacted by this error.

Question 5

Using the following cost information regarding finished goods, what would be the ending value of the finished goods inventory if the market value of the goods is $200,000? $$\begin{array} { | l | r | } 
\hline & { \text { Cost } } \
\hline \text { Materials } & \$ 150,000 \
\hline \text { Costs to process into finished product } & 100,000 \
\hline
\end{array}$$
A)$0
B)$150,000
C)$200,000
D)$250,000

Accepted Answer

The ending value of the finished goods inventory is based on its market value, not its cost. Therefore, the ending value would be the same as the market value, which is $200,000.

Question 6

Which statement is correct about inventory errors?
A)Misstatements in inventory usually affect two reporting periods.
B)Misstatements in inventory usually affect only the current accounting period.
C)Misstatements in inventory usually affect only beginning inventory amounts.
D)Misstatements in inventory usually affect only ending inventory amounts.

Accepted Answer

Misstatements in inventory typically affect two reporting periods because the ending inventory of one period becomes the beginning inventory of the next. Therefore, any error in the ending inventory of the current period will not only affect the cost of goods sold and net income of the current period but also the beginning inventory and, consequently, the financial results of the following period.

Question 7

Explain how items of inventory should be grouped for purposes of testing for impairment.

Accepted Answer

The answer of Explain how items of inventory should be...

Question 8

Assume that a purchase invoice for $1,000 was appropriately recorded in fiscal 2019, but the inventory was excluded in error during the ending inventory count. What impact will this have on fiscal 2019 financial reporting?
A)Gross margin is overstated.
B)Cost of sales is overstated by $1,000.
C)Ending inventory is overstated by $1,000.
D)Cost of goods available for sale is overstated by $1,000.

Accepted Answer

Since the inventory was excluded in error during the ending inventory count, it means that the cost of goods sold is understated by $1,000 which in turn leads to an overstatement of gross margin. Therefore, the correct answer is B which states that the cost of sales is overstated by $1,000.

Question 9

Use the following information: $$\begin{array} { | l | r | } 
\hline & { \text { Cost } } \
\hline \text { Materials } & \$ 150,000 \
\hline \text { Costs to process into finished product } & 100,000 \
\hline
\end{array}$$ If the market price at year end is $210,000, what is the write down required?
A)$0
B)$40,000
C)$210,000
D)$250,000

Accepted Answer

The write down required is the difference between the cost ($250,000) and the market price ($210,000), which is $40,000. Therefore, the best choice is B. Choice A is incorrect because there is a write down required. Choice C is incorrect because the full market price cannot be realized, and the company must account for this in the financial statements. Choice D is incorrect because it is not the difference between the cost and the market price.

Question 10

Assume that a $100 purchase invoice received close to year-end is not recorded in fiscal 2019, but the inventory is appropriately included in the ending inventory count. What impact will this have on fiscal 2019 financial reporting?
A)Cost of sales is understated by $100.
B)Gross margin is understated.
C)Sales are understated by $100.
D)Operating profit is understated by $100.

Accepted Answer

The cost of sales is understated by $100 because the purchase was not recorded, but the inventory was included, leading to an understatement of expenses and an overstatement of net income.

Question 11

A specialized retailer has a selection of five products. The following is information relating to these products.
 $$\begin{array} { | c | c | c | c | } 
\hline \text { Product } & \text { \# Units } & \begin{array} { c } 
\text { Cost per } \
\text { unit }
\end{array} & \begin{array} { c } 
\text { Selling } \
\text { price }
\end{array} \
\hline \text { A } & 80 & \$ 60 & \$ 50 \
\hline \text { B } & 130 & 100 & 180 \
\hline \text { C } & 60 & 70 & 220 \
\hline \text { D } & 80 & 120 & 60 \
\hline \text { E } & 60 & 90 & 120 \
\hline
\end{array}$$ The company estimates selling costs to be 4% of selling price, primarily for sales commissions.
Required:
Determine the amount of inventory write-down per product required, if any.

Accepted Answer

The answer of A specialized retailer has a selection of...

Question 12

Explain the meaning of net realizable value and when raw materials, work in progress and finished goods inventories need to be written down.

Accepted Answer

The answer of Explain the meaning of net realizable value...

Question 13

A particular production process requires two types of raw materials to produce the end product. Each unit of finished product requires three units of raw material A and 2 units of raw material B and processing costs of $35. The following provides information on inventories at year-end:
 $$\begin{array} { | l | r | r | r | r | } 
\hline \text { Inventory item } & \text { \# units } & \text { Cost per unit } & \begin{array} { r } 
\text { Replacement } \
\text { cost }
\end{array} & \begin{array} { r } 
\text { Net realizable } \
\text { value }
\end{array} \
\hline \text { Finished product } & 800 & \$ 181 & \mathrm { NA } & \$ 161 \
\hline \text { Raw material A } & 150 & 10 & \$ 17 & \text { NA } \
\hline \text { Raw material B } & 110 & 58 & 53 & \text { NA } \
\hline
\end{array}$$ Required:
a. Evaluate these inventories to determine the amount of write-down, if any.
b. Would your answer change if the replacement cost of raw material A were $11 per unit?

Accepted Answer

The answer of A particular production process requires two types...

Question 14

Explain what happens if the value of inventory recovers after it has been written down. How often will such an adjustment actually be made to inventory?

Accepted Answer

The answer of Explain what happens if the value of...

Question 15

What issues arise on the subsequent measurement of inventory?
A)Determining which expenditures to capitalize into the "inventory" account.
B)Determining which expenditures to expense into the "cost of goods sold" account.
C)Determining how much of the costs recognized in inventory should be expensed in the year.
D)Determining the appropriate valuation of inventories that remain on hand.

Accepted Answer

The subsequent measurement of inventory involves determining the appropriate valuation of the inventory that remains on hand. This includes issues such as identifying the cost method to use (e.g. FIFO, LIFO, average cost), determining the net realizable value, and considering any impairment or obsolescence of inventory. While options A, B, and C are all important considerations in accounting for inventory, they relate to the initial recognition and valuation of inventory, rather than subsequent measurement.

Question 16

Assume that a purchase invoice for $1,000 was appropriately recorded in fiscal 2019, but the inventory was excluded in error during the ending inventory count. What impact will this have on fiscal 2020 financial reporting?
A)Gross margin is understated by $1,000.
B)Cost of sales is overstated by $1,000.
C)Ending inventory is understated by $1,000.
D)Beginning inventory is understated by $1,000.

Accepted Answer

If the inventory was excluded in error during the ending inventory count of fiscal 2019, it means that it was not accounted for in the beginning inventory of fiscal 2020. Therefore, the beginning inventory for fiscal 2020 is understated by $1,000.

Question 17

Assume that a $1,000 purchase invoice received close to year-end is not recorded in fiscal 2019, but the inventory is appropriately included in the ending inventory count. What impact will this have on fiscal 2019 financial reporting?
A)Purchases are overstated.
B)Purchases are understated.
C)Gross margin is understated.
D)Cost of sales is overstated.

Accepted Answer

CIf a $1,000 purchase invoice received close to year-end is not recorded, purchases will be understated because the expense associated with acquiring inventory has not been recorded. Since the inventory is included in the ending inventory count but the cost is not recorded, the cost of goods sold will be understated, leading to an overstatement of gross margin.

Question 18

Assume that a $500 purchase invoice received close to year-end is not recorded in fiscal 2019, but the inventory is appropriately included in the ending inventory count. What impact will this have on fiscal 2020 financial reporting?
A)Cost of sales is understated by $500.
B)Gross margin is understated.
C)Operating expenses are overstated by $500.
D)Operating profit is overstated by $500.

Accepted Answer

The answer of Assume that a $500 purchase invoice received...

Question 19

At the end of 2019, a company reported cost of goods sold of $4,800, which represented 80% of the goods available for sale. The beginning inventory amount was twice as much as the ending inventory amount. What was the amount of purchases for 2019?
A)$1,200
B)$2,400
C)$3,600
D)$5,400

Accepted Answer

Let's start with the formula for cost of goods sold (COGS):
COGS = Beginning inventory + Purchases - Ending inventory

We know that COGS for 2019 was $4,800 and that ending inventory was half of beginning inventory. Let's use an algebraic equation for beginning inventory (BI):
BI = 2 x EI

Now let's plug in the values we know into the COGS formula:
$4,800 = BI + Purchases - $2,400

We can simplify this to:
$4,800 = 2 x EI + Purchases

And we know that purchases plus ending inventory equals the goods available for sale:
Purchases + EI = GAS

Since we know that COGS was 80% of GAS, we can write another equation:
COGS = 80% x GAS
$4,800 = 0.8(GAS)

Now we can plug in our known values for GAS and solve for Purchases:
GAS = Purchases + EI
GAS = Purchases + $2,400 (since EI was given as half of beginning inventory)
$4,800 = 0.8(Purchases + $2,400)
$4,800 = 0.8Purchases + $1,920
$2,880 = 0.8Purchases
Purchases = $3,600

Therefore, the amount of purchases for 2019 was $3,600. Choice C is the correct answer.

Question 20

For the year ended December 31, 2019, Complex Company reported gross margin of $29,700, which was 30% of the sales for the period. The cost of goods available for sale was 120% of the cost of goods sold. The beginning inventory was twice as much as the ending inventory. What was the amount of purchases for 2019?
A)$13,860
B)$29,700
C)$41,580
D)$55,440

Accepted Answer

Step 1: Calculate the sales for the period.
Gross Margin = 30% of Sales
$29,700 = 0.3 x Sales
Sales = $99,000

Step 2: Calculate the cost of goods sold.
Cost of Goods Sold + Gross Margin = Sales
Cost of Goods Sold + $29,700 = $99,000
Cost of Goods Sold = $69,300

Step 3: Calculate the cost of goods available for sale.
Cost of Goods Available for Sale = 120% of Cost of Goods Sold
Cost of Goods Available for Sale = 1.2 x $69,300
Cost of Goods Available for Sale = $83,160

Step 4: Calculate the ending inventory.
Beginning Inventory = 2 x Ending Inventory
Ending Inventory = $69,300 / 3 = $23,100

Step 5: Calculate the purchases for 2019.
Purchases = Cost of Goods Available for Sale – Ending Inventory
Purchases = $83,160 – $23,100
Purchases = $55,440

Therefore, the best choice is D) $55,440 because it is the correct calculation of the purchases for 2019.

Quiz 6: Inventories

Which statement is not correct about inventory errors?

Assume that a $400 purchase invoice received close to year-end is not recorded in fiscal 2019, but the inventory is appropriately included in the ending inventory count. What impact will this have on fiscal 2020 financial reporting?

Which statement is correct about inventory errors?

Assume that a purchase invoice for $1,000 was appropriately recorded in fiscal 2019, but the inventory was excluded in error during the ending inventory count. What impact will this have on fiscal 2019 financial reporting?

Which statement is correct about inventory errors?

Explain how items of inventory should be grouped for purposes of testing for impairment.

Assume that a purchase invoice for $1,000 was appropriately recorded in fiscal 2019, but the inventory was excluded in error during the ending inventory count. What impact will this have on fiscal 2019 financial reporting?

Use the following information: $\begin{array} { | l | r | } \hline & { \text { Cost } } \\\hline \text { Materials } & \$ 150,000 \\\hline \text { Costs to process into finished product } & 100,000 \\\hline\end{array}$ If the market price at year end is $210,000, what is the write down required?

Assume that a $100 purchase invoice received close to year-end is not recorded in fiscal 2019, but the inventory is appropriately included in the ending inventory count. What impact will this have on fiscal 2019 financial reporting?

Explain the meaning of net realizable value and when raw materials, work in progress and finished goods inventories need to be written down.

Explain what happens if the value of inventory recovers after it has been written down. How often will such an adjustment actually be made to inventory?

What issues arise on the subsequent measurement of inventory?

Assume that a purchase invoice for $1,000 was appropriately recorded in fiscal 2019, but the inventory was excluded in error during the ending inventory count. What impact will this have on fiscal 2020 financial reporting?

Assume that a $1,000 purchase invoice received close to year-end is not recorded in fiscal 2019, but the inventory is appropriately included in the ending inventory count. What impact will this have on fiscal 2019 financial reporting?

Assume that a $500 purchase invoice received close to year-end is not recorded in fiscal 2019, but the inventory is appropriately included in the ending inventory count. What impact will this have on fiscal 2020 financial reporting?

At the end of 2019, a company reported cost of goods sold of $4,800, which represented 80% of the goods available for sale. The beginning inventory amount was twice as much as the ending inventory amount. What was the amount of purchases for 2019?