Reference no: EM13627

Question 1

1. The full disclosure principle:

a. Requires that when a change in inventory cost flow assumption is made, the notes to the statements report the type of change

b. Requires that when a change in inventory cost flow assumption is made, the notes to the statements report the justification for the change

c. Requires that any change in net income due to changes in the inventory cost assumption be disclosed

d. Does not require a company to use one cost flow assumption exclusively

e. All of these answers are correct

2. Goods on consignment are:

a. Goods shipped by the owner to the consignee who sells the goods for the owner

b. Reported in the consignee's books as inventory

c. Reported on the consignor's books as inventory

d. Both a. and b.

e. Both a. and c.

3. The pricing of an inventory where the purchase invoice of each item in the ending inventory is identified and used to determine the cost assigned to the inventory is the:

a. Moving weighted average method

b. First-in, first-out method

c. Last-in, first-out method

d. Specific identification method

e. Retail method

4. Which of the following describes the shipping term "FOB shipping point"?

a. Ownership of the merchandise transfers to the buyer at the seller's place of business.

b. Shipping charges for the merchandise are paid by the seller.

c. Shipping charges are debited to freight-out on the seller's books.

d. Shipping charges are debited to selling expense on the buyer's books.

e. Ownership of the merchandise transfers to the buyer at the buyer's place of business.

5. The consistency principle:

a. Requires a company to use the same accounting methods period after period

b. Does not require a company to use one method exclusively

c. Is also called the full disclosure principle

d. Both a. and b.

e. Both a. and c.

6. Tents Galore markets light and easy camping tents, and uses a perpetual inventory system to account for its merchandise. The beginning balance of the inventory and transactions during July were as follows:

July 1 Balance 18 units at $13

July 10 Purchased 30 units at $14

July 20 Sold 24 units

July 24 Purchased 24 units at $17

July 30 Sold 27 units

If the ending inventory is valued at $357, what inventory method was used?

a. Moving weighted average

b. Specific identification

c. FIFO

d. LIFO

e. Retail

7. Merchandise inventory includes:

a. All goods owned by a company and held for sale

b. Goods in transit

c. Goods on consignment

d. Damaged goods

e. All of the above

8. During a period of steadily rising prices, the inventory pricing method that results in reporting the highest net income is:

a. Specific identification

b. Average cost

c. Moving weighted average

d. FIFO

e. LIFO

9. Simmons Company had cost of goods sold of $3,000,000, ending inventory of $1,250,000, and average inventory of $1,000,000. The merchandise turnover is:

a. 2.40

b. 3.00

c. 0.33

d. 0.42

e. 12.00

10. Simmons Company had cost of goods sold of $3,000,000, ending inventory of $1,250,000, and average inventory of $1,000,000. The days' stock on hand is:

a. 152.1

b. 121.7

c. 876

d. 1,095

e. 30.5

Question 2

Fill in the blank for each of the statements below. Each blank is worth one mark.

1. Goods on consignment are goods shipped by their owner, called the ____________________, to another party called the ____________________.

2. The ____________________ ratio tells us how many times a company turns its inventory over during a period.

3. The ____________________ is the generally accepted accounting principle that requires financial statements to report all relevant information about the operations and financial position of an entity.

4. ____________________ is the amount reported in the balance sheet when sales value of an inventory item is lower than cost.

5. During 2012, Sunrise Ltd. had $50,000 in inventory on January 1st, purchased merchandise inventory worth $320,000, paid transportation costs of $5,000, returned merchandise inventory of $20,000, paid delivery expense of $4,000, and had cost of goods sold of $280,000. The merchandise inventory account balance should be __________ on December 31, 2012.

6. A major goal in accounting for inventory is ____________________ relevant costs against revenues.

7. Accounting for inventories is important because inventories affect the ____________________ section of the balance sheet and the ____________________ section of the income statement.

8. When shipping terms are ____________________, legal title to the goods remains with the seller until the goods are delivered to the buyer.Question 3 (9 marks)

 

Question 3

Part 1

Marty's Salvage purchases new and used construction materials (merchandise) for resale. The chart below lists costs related to the acquisition of materials.

Required: Indicate whether or not the amounts should be included in the cost of the merchandise for Marty's Salvage by typing either "Yes" or "No" in the space provided. Each answer is worth a ½ mark.

Mike Case, the owner of Mason Company, is analyzing the effect of the various merchandise inventory costing methods and has prepared the following schedule:

FIFO Specific Identification Moving Weighted Average
Merchandise Inventory, December 31, 2011 30,000 30,000 30,000
Purchases 165,000 165,000 165,000
Merchandise Inventory, December 31, 2012 ? ? ?
Cost of Goods Sold 168,000 155,000 163,000

Part 2

Mike Case, the owner of Mason Company, is analyzing the effect of the various merchandise inventory costing methods and has prepared the following schedule:

	FIFO	Specific Identification	Moving Weighted Average
Merchandise Inventory, December 31, 2011	30,000	30,000	30,000
Purchases	165,000	165,000	165,000
Merchandise Inventory, December 31, 2012	?	?	?
Cost of Goods Sold	168,000	155,000	163,000

Required:

1. Calculate the merchandise inventory values as at December 31, 2012 under each inventory costing method and fill in the missing information in the table above. Show all calculations.

FIFO:

Specific Identification:

Moving Weighted Average:

2. What method should Mason Company use if he wants to maximize assets?

Question 4

St. John's Company began the year with 400 units of product in its inventory that cost $4.50 per unit. St. John's Company sold 1,000 units during the year for $12 per unit and incurred operating costs of $1.50 per unit. The company had the following transactions during the year:

Date Transaction Number of Units Amount Per Unit
Jan. 30 Purchase 500 $5.00
Mar. 18 Sale 600
July 15 Purchase 300 5.80
Sep. 20 Sale 400
Dec. 28 Purchase 200 6.20

Required:

1. Calculate the cost of goods sold and ending inventory assuming a perpetual inventory system under the cost flow assumptions below. Show all calculations.

a. FIFO

b. Moving weighted average

2. What is the net income based on the FIFO cost flow assumption above? Show all calculations.

Question 5

Watson Supplies uses a perpetual inventory system and showed the following selected adjusted balances as at December 31, 2011 year-end:

During the year 2012, the following transactions occurred:

1. Purchases totalled $1,200,000, of which 90% were on account, terms 2/10, n30
2. Paid $4,000 transportation costs for merchandise purchased FOB shipping point
3. Purchases returned were $40,000, and 75% were from credit sales
4. Paid outstanding invoices of $800,000 within the discount period
5. Paid outstanding invoices of $300,000 after the discount period
6. Sales during the year totalled $2,800,000 for inventory costing $1,125,000 and all were on account
7. Paid $7,000 transportation costs to have merchandise delivery to its customers

Required:

1. Prepare the journal entries for all of the 2012 transactions. Show all calculations.

2. What is the balance in the Merchandise Inventory account as at December 31, 2012? Show all calculations.

3. What is the balance in the Accounts Payable account as at December 31, 2012? Show all calculations.

Question 6

Milton Company began 2012 with 1,000 units in its inventory account costing $8 each. The following additional data was obtained from the records of Milton Company who uses a perpetual inventory system for transaction during 2012:

Date Transaction Number of Units Amount Per Unit
Jan. 5 Purchase 900 $ 9.00
Jan. 31 Sold 1,100 20.00
Feb. 20 Purchase 800 7.00
Feb. 28 Sold 500 20.00

Required:

1. Calculate the cost of goods sold and ending inventory using:

a. FIFO cost-flow assumption.

b. Specific identification assuming the units sold January 31st were 400 from the beginning inventory and 700 from the January 5th purchase, and the units sold February 28th were 100 from the January 5th purchase and 400 from the February 20th purchase.

Question 7

1. Explain how the matching principle relates to accounting for merchandise inventory and advise which inventory cost flow method most accurately meets this principle.

2. Explain why a company would use the FIFO cost flow assumption.

Question 8

Connors Company reported the following amounts in its financial statements:

	2011	2012
Current Assets	$   185,000	$   180,000
Merchandise Inventory	44,000	50,000
Total Assets	530,000	620,000
Current Liabilities	170,000	178,000
Total Liabilities	480,000	500,000
Sales	1,200,000	1,100,000
Cost of Goods Sold	780,000	715,000

Required:

1. Calculate the current ratio for 2011 and 2012 and advise if the change from 2011 to 2012 is favourable or unfavourable. Show all calculations.

2. Calculate the debt ratio for 2011 and 2012 and advise if the change from 2011 to 2012 is favourable or unfavourable. Show all calculations.

3. Calculate the merchandise turnover ratio for 2012. Show all calculations.

4. Calculate the days' stock on hand for 2011 and 2012 and advise if the change from 2011 to 2012 is favourable or unfavourable. Show calculations.