(Learning Objective 2: Compare income, tax, and other effects of the inventory methods) This exercise tests your understanding of the four inventory methods. List the name of the inventory method that best fits the description. Assume that the cost of inventory is rising.
1. Results in a cost of ending inventory that is close to the current cost of replacing the inventory
2. Used to account for automobiles, jewelry, and art objects
3. Generally associated with saving income taxes
4. Provides a middle-ground measure of ending inventory and cost of goods sold
5. Maximizes reported income
6. Enables a company to keep reported income from dropping lower by liquidating older layers of inventory (assume rising prices)
7. Writes inventory down when its net realizable value drops below its historical cost
8. Results in an old measure of the cost of ending inventory
9. Matches the most current cost of goods sold against sales revenue
10. Enables a company to buy high-cost inventory at year-end and thereby decrease reported income and income tax
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Financial Accounting (12th Edition) (What's New in Accounting)
- This exercise tests your understanding of the four inventory methods. List the name of the inventory method that best fits the description. Assume that the cost of inventory is rising. 1. Results in a cost of ending inventory that is close to the current cost of replacing the inventory 2. Used to account for automobiles, jewelry, and art objects 3. Generally associated with saving income taxes 4. Provides a middle-ground measure of ending inventory and cost of goods sold 5. Maximizes reported income 6. Enables a company to keep reported income from dropping lower by liquidating older layers of inventory (assume rising prices) 7. Writes inventory down when its net realizable value drops below its historical cost 8. Results in an old measure of the cost of ending inventory 9. Matches the most current cost of goods sold against sales revenue 10. Enables a company to buy high-cost inventory at year-end and thereby decrease reported income and income taxarrow_forward(Learning Objective 3: Explain GAAP and apply the lower-of-cost-or-market ruleto inventories) Anderson Trade Mart has recently had lackluster sales. The rate of inventoryturnover has dropped, and the merchandise is gathering dust. At the same time, competitionhas forced Anderson’s suppliers to lower the prices that Anderson will pay when it replacesits inventory. It is now December 31, 2018, and the net realizable value of Anderson’s endinginventory is $55,000 below what the company actually paid for the goods, which was $265,000.Before any adjustments at the end of the period, the Cost of Goods Sold account has a balanceof $820,000.a. What accounting action should Anderson take in this situation?b. Give any journal entry required.c. At what amount should the company report Inventory on the balance sheet?d. At what amount should the company report Cost of Goods Sold on the incomestatement?e. Discuss the accounting principle or concept that is most relevant to this situationarrow_forward(Learning Objective 2: Apply various inventory costing methods) A Gold MedalSports outlet store began August 2018 with 42 pairs of running shoes that cost the store $31each. The sales price of these shoes was $63. During August, the store completed these inventory transactions:Units Unit CostSale ............. 16 $319 Purchase...... 81 33$6313 Sale ............. 26 31 63Sale ............. 33 6422 Sale ............. 36 33 6429 Purchase...... 18 35Aug 218 13Unit Sales PriceRequirements1. The preceding data are taken from the store’s perpetual inventory records. Which costmethod does the store use? Explain how you arrived at your answer.2. Determine the store’s cost of goods sold for August. Also compute gross profit for August.3. What is the cost of the store’s August 31 inventory of running shoes?arrow_forward
- (Learning Objectives 1, 2: Show how to account for inventory transactions; applythe FIFO cost method) Accounting records for Jubilee Corporation yield the following datafor the year ended June 30, 2018 (assume sales returns are non-existent):Inventory, June 30, 2017.......................................................................... $ 7,000Purchases of inventory (on account)......................................................... 61,000Sales of inventory—77% on account; 23% for cash (cost $49,000).........Inventory at FIFO, June 30, 2018 ............................................................100,00019,000Requirements1. Journalize Jubilee’s inventory transactions for the year under the perpetual system.2. Report ending inventory, sales, cost of goods sold, and gross profit on the appropriatefinancial statement.arrow_forward(Learning Objective 2: Compare inventory by three methods) Navy Surplus beganJuly 2018 with 80 stoves that cost $10 each. During the month, the company made the following purchases at cost:1826July 6 90 stoves @ $20100 stoves @ $2530 stoves @ $30= $1,800= 2,500= 900The company sold 250 stoves, and at July 31, the ending inventory consisted of 50 stoves. Thesales price of each stove was $52.Requirements1. Determine the cost of goods sold and ending inventory amounts for July under the averagecost, FIFO, and LIFO costing methods. Round the average cost per unit to two decimalplaces, and round all other amounts to the nearest dollar.2. Explain why cost of goods sold is highest under LIFO. Be specific.3. Prepare the Navy Surplus income statement for July. Report gross profit. Operating expensestotaled $3,250. The company uses average costing for inventory. The income tax rate is 40%.arrow_forwardLearning Objectives 1, 2: Show how to account for inventory in a perpetual systemusing the average-costing method) Western Trading Company purchases inventory in cratesof merchandise; each crate of inventory is a unit. The fiscal year of Western Trading ends eachJanuary 31. Assume you are dealing with a single Western Trading store in Nashville, Tennessee. The Nashville store began the year with an inventory of 20,000 units that cost a total of$1,060,000. During the year, the store purchased merchandise on account as follows:July (29,000 units at $59) ..................................... $1,711,000November (49,000 units at $63) ........................... 3,087,000December (59,000 units at $69)............................ 4,071,000Total purchases..................................................... $8,869,000Cash payments on account totaled $8,541,000. During fiscal year 2018, the store sold 155,000units of merchandise for $15,887,500, of which $4,900,000 was for cash and the balance…arrow_forward
- You have been asked by the financial vice president to develop a short presentation on the LCNRV method for inventory purposes. The financial VP needs to explain this method to the president because it appears that a portion of the company’s inventory has declined in value. Instructions The financial vice president asks you to answer the following questions. a. What is the purpose of the LCNRV method? b. What is meant by “net realizable value”? c. Do you apply the LCNRV method to each individual item, to a category, or to the total of the inventory? Explain. d. What are the potential disadvantages of the LCNRV method?arrow_forward(Learning Objectives 1, 2, 3: Apply GAAP for sales, sales returns, and salesdiscounts) Pastel Interiors reported the following transactions in June:June 210111519Sold merchandise on account to Elisa Birch, $700, terms 1/10, n/30.Sold merchandise on account to Melissa Movens, $2,400, terms 1/10, n/30.Collected payment from Elisa Birch for June 2 sale.Movens returned $1,400 of the merchandise purchased on June 10.Collected payment from Movens for the balance of the June 10 sale.Requirements1. Record the foregoing transactions in the journal of Pastel Interiors using the gross method.(You do not need to make the cost of sales journal entries; assume that these entries will bemade by the company when it makes its other adjusting entries at period end.)2. Calculate the amount of gross sales minus sales discounts for the month of Junearrow_forward(Learning Objectives 1, 2: Show how to account for inventory transactions; applythe FIFO cost method) Spear Corporation’s inventory records for its retail division show thefollowing at May 31:May 1 Beginning inventory ............... 10 units @ $160 = $1,60015 Purchase................................. 5 units @ 161 = 80526 Purchase................................. 14 units @ 170 = 2,380At May 31, 11 of these units are on hand. Journalize the following for Spear Corporation underthe perpetual system:1. Total May purchases in one summary entry. All purchases were on credit.2. Total May sales and cost of goods sold in two summary entries. The selling price was $560per unit, and all sales were on credit. Assume that Spear uses the FIFO inventory method.3. Under FIFO, how much gross profit would Spear earn for the month ending May 31? Whatis the FIFO cost of Spear Corporation’s ending inventory?arrow_forward
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