Exam 3



340 a

Exam 3

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Class time:

Please read the following instructions before starting the exam.

1. You have 1 hour and 15 minutes to finish this exam. Plan your time wisely.

2. The test consists of 16 multiple choice questions (worth a total of 96 points) and 3 problems (worth a total of 100 points). The remaining 4 points are given.

3. You should have 8 numbered pages in your exam.

4. You are to complete the exam individually.

5. You may use pencils, pens, and a calculator to complete this exam. All other items must be placed under your desk.

6. Please fill in the answers to the multiple choice on the scantron. Check your answers carefully!

7. Show all of your work for maximum partial credit.

8. In fairness to all students, I can not answer any questions during the exam.

9. Do not begin the exam until you are instructed to do so.

10. Good luck.

Multiple Choice (6 points each. Approx. time: 25-35 minutes)

Please choose the best answer for each of the following.

1. Which of the following valuation bases is used to value Ending Inventory on the Balance Sheet?

a. Net realizable value.

b. Historical Cost.

c. Market value.

d. Lower-of-cost-or-market.

e. Replacement cost.

2. In determining the market value of ending inventory, which of the following is NOT considered as a possible market value?

a. Replacement cost of the inventory.

b. Ceiling price, calculated as the Selling price less costs to complete or selling costs.

c. Net realizable value

d. Floor price, calculated as the Ceiling price less the profit margin.

e. Selling price without any adjustments.

3. Which of the following statements is NOT correct regarding inventory pools?

a. One company can have several inventory pools at the same time.

b. Pools of inventory can include items that are not identical.

c. The chance of a LIFO liquidation decreases as the number of different inventory items within a particular pool increases.

d. Managers have no opportunity to manipulate income if inventory pools are used.

e. Inventory pools can ease the bookkeeping for inventory.

4. Dollar Value LIFO uses all of the following to compute ending inventory and Cost of goods sold except:

a. End of year inventory from the general ledger.

b. Layers of Dollar Value LIFO inventory from prior years.

c. Costs of individual items in inventory.

d. Price indexes for each year.

e. Beginning Dollar Value LIFO balance.

5. In order to approximate the Lower-of-Cost-or-Market when using the Retail Inventory Method, the cost-to-retail ratio should:

a. ignore both markups and markdowns in the denominator.

b. include markups but not markdowns in the denominator.

c. include markdowns but not markups in the denominator.

d. include markups and markdowns in the denominator.

e. include only those markdowns that were not cancelled in the numerator.

6. Which of the following is not one of the steps in computing the Retail DV LIFO inventory cost?

a. Compute the FIFO cost-to-retail ratio, ignoring the LCM adjustment.

b. Convert the Ending inventory at Retail to base year $$'s using the current year index.

c. Calculate the change from beginning Retail to ending Retail in base year $$'s.

d. Convert the Retail inventory change in base year $$'s to current year $$'s using the current year index to get the current year Retail DV LIFO layer.

e. Add the current year Retail DV LIFO layer to the Ending inventory at Retail to get the ending Retail DV LIFO inventory at cost.

7. An overstatement of ending inventory for 1998 will:

a. understate the 1998 income.

b. understate the 1998 current assets by the same amount.

c. overstate the 1998 costs of goods sold by the same amount.

d. overstate the 1998 income.

e. overstate the 1998 goods available for sale by the same amount.

8. Goods out on consignment were accidentally left out of the 1999 ending inventory count. This error, if undetected, will:

a. understate 1999 ending inventory.

b. overstate 1999 Cost of goods sold.

c. understate 2000 beginning inventory.

d. understate 1999 income.

e. all of the above are results of this error.

9. Which of the following items should NOT be included in ERINCO's inventory?

a. Goods ERINCO has shipped FOB destination (title passes at delivery) that are still in transit.

b. Goods that ERINCO has had in stock for a long time that will be sold at a discounted price.

c. Goods that ERINCO has out on consignment to a distributor.

d. Goods that ERINCO holds on consignment from another manufacturer.

e. Goods that ERINCO has in stock.

10. Which of the following should be included in the unit cost of an inventory item?

a. Purchase discounts lost on the purchase of inventory.

b. Freight costs incurred as part of the purchase of inventory.

c. Purchase price of the inventory.

d. Commissions paid when inventory is sold.

e. Both b and c should be included in the unit cost of an inventory item.

11. When a periodic inventory system is used:

a. Cost of goods sold is calculated each time a sale is made during the year.

b. Ending inventory is continually updated each time a sale is made.

c. Purchases are recorded in a separate purchases account during the year.

d. There is no need to do a physical inventory count at year end.

e. Beginning inventory plus purchases equals cost of goods sold.

12. The following information relates to GRAHAMCO's inventory activity for 1999:

Purchases = $160,000

Ending inventory = $25,000

Cost of goods sold = $180,000

The balance in beginning inventory at January 1, 1999 must have been:

a. $0.

b. $25,000.

c. $5,000.

d. $45,000.

e. There is not enough information given to compute the beginning inventory.

13. When prices are falling, which of the following statements are generally true?

a. Using LIFO as the inventory cost method will result in higher total assets than will result if FIFO is used as the inventory cost method.

b. Using Average cost as the inventory cost method will result in the highest possible total asset balance of any available cost method.

c. Using LIFO as the inventory cost method will result in higher Cost of goods sold than will result if FIFO is used as the inventory cost method.

d. Using the FIFO periodic system will result in higher Cost of Goods Sold than will result if the FIFO perpetual system is used.

e. NIFO will produce the highest Cost of goods Sold.

14. When prices are rising, which of the following inventory methods will result in the highest debt to equity ratio?

a. FIFO

b. LIFO

c. Average cost

d. HIFO

e. The ratios will be the same.

15. LIFO liquidation occurs when

a. All of the inventory is exposed to extreme heat, causing it to melt.

b. Ending inventory is higher than beginning inventory.

c. Beginning inventory is higher than ending inventory, causing old costs to be reflected in Cost of Goods Sold.

d. Inventory grows at an extreme pace.

e. Management throws all of the inventory into the company inventory "pool" at the annual summer barbecue.

16. Sam's Fresh Fish is a national chain of fish markets. Generally accepted accounting principles require that Sam's use which of the following methods to determine inventory cost?

a. The First-in-First-Out method must be used because of the nature of Sam's business.

b. The Last-in-Last-Out method must be used to avoid health-related issues with the fish.

c. The Average Cost method must be used to account for different availability of certain fish in certain locations.

d. Generally accepted accounting principles allow Sam's to use any GAAP method, regardless of the physical flow of the fish.

e. Sam's will not have inventory so there is no issue here.

Problem 1 (45 points; expected time: 10-15 minutes)

The following information comes from CROW Inc.'s inventory records:

|Purchase date |Units |Cost per unit |Sale date |Units sold |

| | | | | |

|Beginning inventory |40 |$12 | | |

|Jan 2 |150 |$10 |Jan 10 |125 |

|Jan 12 |100 |$8 |Jan 15 |100 |

|Jan 20 |100 |$5 |Jan 31 |50 |

Required:

1. (15 points) Determine Ending inventory using the LIFO perpetual method.

2. (15 points) Determine Cost of goods sold using the FIFO periodic method.

3. (15 points) Determine Ending inventory using the Average periodic method.

Problem 2 (35 points, expected time: 15-20 minutes)

Ruby's has the following information regarding inventory balances for 1997,1998 and 1999. Ruby is considering changing from a FIFO system to the Dollar Value LIFO system as of January 1, 1998.

Ending balance, at cost, from books Price Index

Balance, 12/31/97 beginning balance $9,000 1.00

Balance, 12/31/98 $10,000 1.10

Balance, 12/31/99 $13,500 1.12

Purchases: 1998 $ 20,000

Purchases: 1999 $ 21,000

Required:

1. (25 points) Calculate Ruby's Ending Inventory and Cost of Goods Sold for the 1998 and 1999 year end according to the Dollar Value LIFO method.

DV LIFO ending inventory DV LIFO Cost of Goods Sold

1998:

1999:

2. (5 points) What would the journal entry look like that Ruby's would use to adjust her records to the Dollar Value LIFO ending inventory and Cost of Goods Sold in 1998, in proper form ?

3. (5 points) Which method of inventory (FIFO or DV LIFO) would Ruby's managers prefer in 1999 if their bonuses were based on earnings per share? Explain very briefly.

Problem 3 (20 points, expected time 10-15 minutes)

NOTE: Show all of your work for maximum partial credit!

Skittles-R-Us is trying to determine its ending inventory in accordance with Generally Accepted Accounting Principles. Skittles has chosen to use FIFO as the cost basis for the inventory.

At the end of the year, the ending inventory under FIFO was $64,000,000 in total for 8,000,000 bags of Skittles.

The following information is also available regarding each individual bag of Skittles:

Sales price: $15 per bag

Disposal cost: $2 per bag

Profit margin: 60% of sales price

Replacement cost: $6 per bag is the most current purchase price

Required:

1) (15 points) Determine the ending inventory in accordance with generally accepted accounting principles. Show all calculations.

2) (5 points) Record any necessary adjusting entry (your choice of methods) in proper form.

Blank page for calculations - Exam 3

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