Deck 7: Reporting and Analyzing Inventory

Question 1

Manufacturing firms typically report three categories of inventory as raw materials, work-in-process, and finished goods.

Answer 1

True

Question 2

FIFO inventory costing yields more accurate reporting of the inventory balance on the balance sheet.

Answer 2

True

Question 3

In general, in a period of rising prices, FIFO produces higher gross profits than LIFO.

Answer 3

True

Question 4

In periods of rising prices, companies that use FIFO inventory costing report higher gross profit as a result of inventory holding gains.

Question 5

A low inventory turnover indicates that a firm is able to sell its inventory more quickly.

Question 6

In the period of rising costs and prices, a reduction in inventory quantities when FIFO is used is known as FIFO liquidation, and it yields an increase in gross profit and income.

Question 7

When using the LIFO inventory method in periods of rising prices, upon the liquidation of inventory quantities, lower cost units are transferred from the balance sheet when a sale is recorded, resulting in lower gross profit.

Question 8

Inventory costing procedures used by businesses are the same in all countries.

Question 9

Companies can easily affect gross profit with selling price increases.

Question 10

When a company uses LIFO and prices are declining, profits will be higher than if the company had used FIFO.

Question 11

A decline in gross profit margin can be caused by selling fewer units to customers.

Question 12

The cost of acquiring inventory includes adding the cost of freight associated with obtaining the inventory and subtracting the amount of cash discount allowed from timely payment.

Question 13

Which of the following is an inventory account for manufacturing companies?

A) Overhead
B) Finished goods
C) Cost of goods sold
D) Direct labor

Question 14

On which financial statement would you look to find the total costs of merchandise that remains and the total that has flowed through a company's accounting system?

A) Balance sheet and statement of cash flows
B) Income statement and balance sheet
C) Statement of cash flows and balance sheet
D) Statement of stockholders' equity and balance sheet

Question 15

The average cost inventory costing method is used by Indiana, Inc. Sales are $160,000, the number of units available for sale is 100, the number of units sold during the period is 75, and the average cost of the goods available for sale is $800 each.
How much is gross profit for the company?

A) $ 40,000
B) $ 60,000
C) $100,000
D) $ 50,000

Question 16

Garfield's Goods purchases $80,000 of inventory during the period, has beginning of the period inventory of $12,000, and sells $72,000 of inventory during the period for $120,000.
What is the company's inventory balance to be reported on its balance sheet at year end?

A) $36,000
B) $20,000
C) $10,000
D) $12,000

Question 17

Assuming rising prices, which method will give the highest dollar value for cost of goods sold on the income statement?

A) FIFO
B) Average Cost
C) LIFO
D) All of these give equal values for cost of goods sold

Question 18

Which expense recognition system is used to recognize cost of goods sold?

A) Direct association
B) Immediate recognition
C) Systematic allocation
D) Reserve association

Question 19

The following data refer to Cambridge Company's ending inventory:
How much is the inventory if the lower of cost or market rule is applied to each item of inventory?

A) $250,000
B) $252,640
C) $265,440
D) None of the above

Question 20

Which statement is true concerning write-downs under U.S. GAAP and IFRS?

A) GAAP allows inventory that has been written down to be revalued later at higher levels
B) IFRS allows inventory that has been written down to be revalued later at higher levels
C) GAAP and IFRS both allow inventory to be revalued higher once it has been written down
D) IFRS allows inventory revaluation only up to the point of a previous write down

Question 21

Assuming sales hold steady, which of the following actions would result in lowering income taxes for a company that uses the LIFO inventory method?

A) Increasing sales prices
B) Buying extra inventory at the end of the year in an inflationary environment
C) Allowing the inventory quantity at year end to fall below beginning year levels
D) None of these. All would cause increasing taxes

Question 22

Anka Company uses the LIFO inventory costing method for both its tax reporting purposes and its financial reporting purposes. Anka Company's inventories are reported at $1,004 million on its balance sheet. In its footnotes, Anka Company is required to report the amount at which inventories would have been reported under FIFO method.
The difference between these two numbers is commonly referred to as what?

A) LCM disclosures
B) LIFO holding gain
C) LIFO liquidation
D) LIFO reserve

Question 23

Red Company and White Company reported the following information in their financial statements, prior to their merger:
To the closest hundredth, how much is the 2016 inventory turnover for Red Company?

A) 53.65
B) 4.27
C) 3.09
D) 3.62

Question 24

Red Company and White Company reported the following information in their financial statements, prior to their merger:
The LIFO reserve for White Company is $3,560 at the end of 2016 and $3,040 at the end of 2015.
What is the 2016 adjusted inventory turnover for White Company?

A) 2.45
B) 2.70
C) 2.72
D) 2.22

Question 25

Which of the following is not a reason that so much attention is paid to inventory in financial statement analysis?

A) Risks of inventory losses are often high
B) It can provide insight into future performance
C) Low inventories may result in substantial costs for the company
D) The magnitude of a company's inventory investment is often very large

Question 26

The following data refer to Sean Company's ending inventory:
How much is ending inventory if the lower of cost or market rule is applied to the total inventory?

A) $35,224
B) $35,220
C) $35,248
D) $34,140

Question 27

The following hammers were available for sale during the year for Felicity Tools:
Felicity has 30 hammers on hand at the end of the year. What is the dollar amount of inventory at the end of the year according to the first-in, first-out method?

A) $5,100
B) $5,950
C) $7,900
D) $7,800

Question 28

The following hammers were available for sale during the year for Felicity Tools:
Felicity has 45 hammers on hand at the end of the year. What is the dollar amount of cost of goods sold for the year according to the first-in, first-out method?

A) $10,550
B) $ 7,700
C) $ 6,600
D) $ 7,600

Question 29

If inventory at the end of the year is understated by $60,000, what will this error cause?

A) An understatement of cost of goods sold for the year by $60,000
B) An overstatement of gross profit for the year by $60,000
C) An overstatement of inventory for the year by $60,000
D) An understatement of net income for the year by $60,000

Question 30

Use the following information for questions below:
Wonderland Company imports and sells a product produced in Canada. In the summer of 2016, a natural disaster disrupted production, affecting its supply of product. On January 1, 2016, Wonderland's inventory records were as follows:
Through mid-December of 2016, purchases were limited to16,000 units, because the cost had increased to $320 per unit. Wonderland sold 18,400 units during 2016 at a price of $392 per unit, which significantly depleted its inventory.

-Assume that Wonderland makes no further purchases during 2016. Wonderland uses the LIFO inventory method.
Compute Wonderland's gross profit for 2016.

A) $1,762,400
B) $1,564,800
C) $2,494,000
D) $1,714,400

Question 31

Use the following information for questions below:
Wonderland Company imports and sells a product produced in Canada. In the summer of 2016, a natural disaster disrupted production, affecting its supply of product. On January 1, 2016, Wonderland's inventory records were as follows:
Through mid-December of 2016, purchases were limited to16,000 units, because the cost had increased to $320 per unit. Wonderland sold 18,400 units during 2016 at a price of $392 per unit, which significantly depleted its inventory.

-Assume that Wonderland purchases 22,800 more of the $320 units on December 31, 2016. Wonderland uses the FIFO inventory method.
Compute Wonderland's gross profit for 2016.

A) $2,964,800
B) $2,044,800
C) $2,073,200
D) $1,714,400

Question 32

The following amounts and costs of platters were available for sale by Cari's Ceramics during 2016:
Cari's Ceramics has 60 platters on hand at the end of the year.
What is the dollar amount of inventory at the end of the year according to the average cost method?

A) $14,880
B) $ 6,200
C) $11,500
D) $ 9,720

Question 33

The following amounts and costs of platters were available for sale by Cari Ceramics during 2016:
Cari Ceramics has 60 platters on hand at the end of the year.
How much is cost of goods sold in dollars at the end of the year according to the average cost method?

A) $ 9,920
B) $ 4,960
C) $ 6,200
D) $11,500

Question 34

Felix Inc. owes $80,000 to Cat, Inc. for inventory acquired with terms of 3/15.
A. How much will Felix pay if payment is made within the discount period?
B. What transaction will Felix Inc. record on November 30, the company's fiscal year end, if the invoice is dated November 28 and payment will be made on December 12?

Question 35

Complete the grid to calculate Cost of Goods Sold:

Question 36

Yellow Star Software Company's 2016 balance sheet reveals that inventories reported on a LIFO basis are $22,480 million. In a footnote, management stated that the LIFO reserve was $3,776 million.
A. How much would Yellow Star's ending inventory be using FIFO?
B. What is the total cumulative tax effect of using LIFO given a 35% income tax rate?

Question 37

Magnolia's inventories are determined using FIFO. Magnolia's provided the following information for the first quarter of 2016:
A. Compute the company's cost of goods sold for the first quarter.
B. Computer the ending inventory to be reported on Magnolia's balance sheet at March 31, 2016.

Question 38

A company reports the following in its inventory records for June:
During June, the company sold 18 units. Compute the cost of goods sold for June and the June 30 ending inventory balance for this product using the average cost method.

Question 39

Fabulous Fabricators, Inc. has 10 units in beginning inventory costing $60 each. It purchased 90 more for $48 each during the month. The company sold 80 units during the month.
Calculate cost of goods sold using:
A. FIFO
B. Average cost
C. LIFO

Question 40

Selected balance sheet and income statement information for American Symbol Outfitters, Inc. and Taylor S., Inc. for 2016 follows: (in thousands)
A. Compute the inventory turnover rate for American Symbol and Taylor S., Inc. for 2016.
B. Comment on the differences you observe between the turnover rates for these two companies.

Question 41

Greencastle, Inc. reports the following information in its annual report:
Sales for 2016 totaled $12,800,000. Cost of goods sold under LIFO totaled $7,400,000.
Compute Greencastle's cost of goods sold and gross profit, assuming it uses the FIFO method.

Question 42

As a shareholder of Wesleyan Industries, a manufacturer of DVD players, you are interested in comparing gross profits over a 3-year period. Calculate the gross profit margin for years 2016, 2015, and 2014 using the income statement items below (in thousands). Interpret your results.

Question 43

Use the following financial statements to answer exercises below
The following are the income statement, the assets section of the balance sheet, and inventory disclosures from Terrific Toys, Inc., a toy manufacturer, for 2016.

Inventories
Inventories, net of an allowance for excess quantities and obsolescence, are stated at the lower of cost or market. Cost is determined by the first-in, first-out method.
-Use the financial information presented for Terrific Toys, Inc. to answer the following:
A. Compute the ratio of inventories to total current assets for 2016 and 2015. Explain the change.
B. Compute the inventory turnover for both 2016 and 2015. The 2014 ending inventories were $1,159,695. Interpret and explain the change in inventory turnover as a positive or a negative for the company.
C. What inventory costing method does Terrific Toys, Inc. use?

Question 44

Use the following financial statements to answer exercises below
The following are the income statement, the assets section of the balance sheet, and inventory disclosures from Terrific Toys, Inc., a toy manufacturer, for 2016.

Inventories
Inventories, net of an allowance for excess quantities and obsolescence, are stated at the lower of cost or market. Cost is determined by the first-in, first-out method.
-Using the financial information presented for Terrific Toys, Inc. to answer the following:
A. Compute the average inventory days outstanding for Terrific Toys, Inc. for 2016 and 2015. Discuss what this measures and the importance of this measurement in analyzing company performance.
B. Discuss what would be included in a detailed analysis of an inventory turnover decrease and possible reasons for a potential decrease in that ratio.
C. Is there any adjustment required to Terrific Toys' balance sheet amount of inventory for a LIFO reserve? Describe why such an adjustment is needed or not needed for Terrific Toys, Inc.

Question 45

Awesome Clothing had the following inventory at December 31, 2016:
A. Determine ending inventory by applying the lower of cost or market rule to:
1. Each item of inventory
2. Each major category of inventory
3. Total inventory
B. Which of the LCM procedures from requirement A results in the lowest net income for 2016? Explain.

Question 46

Hannibal Company imports and sells a product produced in Germany. In the summer of 2015, a natural disaster disrupted production, affecting its supply of product. Hannibal uses the LIFO inventory method. On January 1, 2016, Hannibal's inventory records were as follows:
Through mid-December of 2016, purchases were limited to 50,000 units, because the cost had increased to $100 per unit. Hannibal sold 55,000 units during 2016, at a selling price of $200 per unit, which significantly depleted its inventory. The cost was expected to drop to $84 per unit by early January, 2017.
A. Assume that Hannibal makes no further purchases during 2016. Compute the gross profit for 2016.
B. Assume that Hannibal purchases 8,800 units before the end of December, 2016 at $100 each. Compute its gross profit for 2016.
C. If Hannibal's corporate tax rate is 30%, how much tax savings will result from the purchase of inventory before year end?

Question 47

At the beginning of July, Travelers' Favorite Luggage holds 15 units of its only product with a per-unit cost of $560. During July, Travelers' Favorite sells 40 units. A summary of purchases during the current period follows:
Assume that Travelers' Favorite utilizes the LIFO method and instead of making the third purchase during July, the company allows its inventory level to decline by delaying the third purchase until August.
A. Compute cost of goods sold for July under both scenarios:
1. If the third purchase is made during July
2. If the third purchase is delayed to August
B. Discuss the effect of LIFO liquidation on profit for this company.

Question 48

At the beginning of the current period, Haitijah Industries has 150 units of a product with a unit cost of $640. Its inventory records report the following transactions:
During the current period, Haitijah sells 340 units.
A. Assume Haitijah uses the FIFO method. Compute the cost of goods sold for the current period and the ending inventory balance for this product.
B. Assume Haitijah uses the LIFO method. Compute the cost of goods sold for the current period and the ending inventory balance for this product.
C. Assume Haitijah uses the average cost method. Compute the cost of goods sold for the current period and the ending inventory balance for this product.

Question 49

Trusted Tires has the following inventory records for the month ending July 31, 2016:
Trusted Tires sold 140 tires during July.
Compute the ending inventory and the cost of goods sold for the period using FIFO, LIFO, and average cost inventory methods.

Question 50

Munich Shoes' sales totaled $12,000,000 for 2016. Information concerning Munich's gross profit under three inventory costing methods follows:
Compute the gross profit margin for each costing method. What method shows the highest gross profit? Explain the reasoning behind this.

Question 51

A summary of inventory records for Refrigerator Company reveals the following:
During 2016, 35 units were sold at $2,840 per unit, generating total sales revenue of $99,400.
A. Determine cost of goods sold, gross profit, and the inventory balance under LIFO method.
B. Determine and explain the LIFO reserve for Refrigerator Company.

Question 52

A summary of inventory records for Goldwater Company reveals the following:
During 2016, 35 units were sold at $2,200 per unit for total sales revenue of $77,000
Compute cost of goods sold, gross profit, and the inventory balance for the current period under FIFO, LIFO, and average cost.

Question 53

The following are excerpted from Super Drug Store's 2016 financial statements (in millions):
Super Drug Store's inventory footnote follows:
Inventories
Inventories are valued on a lower of last-in, first-out (LIFO) cost or market basis. At August 31, 2016 and 2015, inventories would have been greater by $3,794 million and $3,174 million, respectively, if they had been valued on a lower of first-in, first-out (FIFO) cost or market basis. Inventory includes product cost, inbound freight, warehousing costs and vendor allowances that are not included as a reduction of advertising expense.
A. How much is Super Drug Store's ratio of inventories to current assets for each year? Does this percentage make sense in Super Drug Store's industry? What does the change suggest about Super Drug Store?
B. Calculate the ratio of inventories to current assets under the FIFO method for both years. Why does it differ from your answer to part A?
C. Compute the inventory turnover ratios for 2016 and 2015 (ending inventory in 2014 is $18,445). What does this say about the company?
D. Is it correct to include in-bound freight in Super Drug Store's inventory cost? Why or why not?

Question 54

What does it mean to capitalize inventory cost, and what is the effect on the income statement?

Question 55

When making investment decisions, why is it important to know what type of inventory costing system the company uses? Give examples of ratios and accounts that may be affected in your analysis.

Question 56

Mountain Gas Company, a large national company uses the LIFO inventory method for most of its inventories. Its inventory costs are heavily dependent on the price of petroleum. In 2015, when the price of oil was down, Mountain followed the lower of cost of market rule and wrote down its inventory by $880 million. In 2016, when the price of petroleum recovered, the company disclosed that the market price exceeded the LIFO carrying value by $10 billion.
Explain why the lower of cost or market rule resulted in a write-down during 2015. What is inconsistent about the treatment for 2015 and 2016, in terms of conservatism in accounting? If the price of petroleum declines significantly in 2017, what is the likely consequence?

Question 57

Gross profit is calculated as net sales less the cost of goods sold. Gross profit margin (GPM = gross profit / sales) on the other hand, is considered a more useful metric for gross profit analysis.
A. Why is GPM a more useful metric than gross profit in dollars?
B. What factors most influence gross profit margin?