Reference no: EM132588755

As a result of a physical inventory count, Palermo Ltd. determined that it had inventory of $120,000 on hand at December 31. This count did not take into consideration the following:

a. Redshoe Inc. was holding goods worth $24,000 on its sales floor that it was selling on consignment for Palermo.

b. Palermo purchased $10,000 of goods that were shipped on December 30, FOB shipping point and were expected to arrive January 3.

c. Palermo sold goods that had a cost of $26,000 to Whiteshoe Inc. on December 30 with terms FOB destination. The goods are expected to be delivered January 2.

d. Palermo purchased $18,000 of goods from Rosebud with terms FOB destination that were shipped on December 30. They are expected to arrive January 2.

Question 1: Indicate which of the following statements is correct (select as many as appropriate)

a. Palermo's ending inventory should be $156,000.

b. The items held by Redshoe on consignment should not be included in Palermo's yearend inventory number.

c. The goods sold to Whiteshoe on December 30 should be included in Palermo's yearend inventory number.

d. Palermo's ending inventory should be $180,000.

e. Palermo's ending inventory should be $198,000.

f. The goods sold to Whiteshoe on December 30 should be excluded from Palermo's yearend inventory number because the items are no longer in Palermo's possession.

g. The inventory purchased from Rosebud should not be included in Palermo's December 31 inventory because it has not yet been received.

Question 2: Indicate which cost formula (FIFO, Average or specific identification) is most closely linked to the following statements

a. Ending inventory includes the most current costs

b. Cost of goods sold includes the most current costs

c. Most closely matches costs and revenues on the income statement

d. Must be used if the goods sold and are unique and non-homogenous

e. Approximates the physical flow for retailers

f. Smooths the effect of price changes in inventory

g. Tracks the actual physical flow of goods

Question 3: In a period of rising prices, indicate which cost formula (FIFO or average) would have the highest

a. Ending inventory

b. Net income

c. Cost of goods sold

d. Current assets

e. Retained earnings

f. Gross profit

g. Total assets

Question 4: Indicate whether each of the following would be "understated", "overstated" or "unaffected" if the purchase of inventory on account was recorded too early (i.e. inventory purchased FOB destination was recorded in inventory at yearend before it was received). Assume the company uses FIFO costing.

a. Accounts payable

b. Retained earnings

c. Inventory

d. Current liabilities

e. Net Income

f. Cost of goods sold

g. Current assets

Question 5: Indicate which of the following statements are correct with in relation to valuing inventory at Lower cost and net realizable value (market).

a. The assessment is unaffected by the company's choice of cost formula

b. The requirement to carry inventory at the lower cost and net realizable value is to ensure that assets are not carried at amounts in excess of the future economic benefits expected from them.

c. For a merchandizing (retailing) company, net realizable value is the selling price less any costs to make the sale

d. If the net realizable value is less than cost, then the COGS should be adjusted by debiting it.

e. If the net realizable value is less than cost, then the inventory account should be adjusted by debiting it.

f. If the net realizable value is more than cost, then the inventory account should be adjusted by debiting it

g. If the net realizable value is more than cost, then no adjustment is needed to inventory or to COGS