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Exam 7: Reporting and Interpreting Cost of Goods Sold and Inventory

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Question 21

True/False

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An overstatement of the 2015 ending inventory results in an overstatement of stockholders' equity as of the end of 2016.

A) True
B) False

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Question 22

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During periods of decreasing unit costs, use of the FIFO inventory method results in lower gross profit than would use of the LIFO method.

A) True
B) False

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Question 23

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Which of the following statements is incorrect?

At the end of 2016, a $5,000 understatement was discovered in the amount of the 2016 ending inventory as reflected in the inventory records. What were the 2016 effects of the $5,000 inventory error (before correction) ?

Jennings Company uses the periodic inventory system and applies FIFO inventory costing. At the end of the annual accounting period, December 31, 2016, the accounting records for the best selling item in inventory showed the following: Required: Calculate the following: 1. Goods available for sale 2. Ending inventory 3. Cost of goods sold

Lauer Corporation uses the periodic inventory system and has provided the following information about one of its laptop computers: During the year, Lauer sold 750 laptop computers. What was ending inventory using the LIFO cost flow assumption?

An understatement of ending inventory results in an overstatement of net income.

Wilmington Company reported pretax income of $25,000 during 2015 and $30,000 during 2016. Later it was discovered that the ending inventory for 2015 was understated by $2,000 (and not corrected in 2015) . What is the correct pretax income for each year?

Which of the following statements is correct when inventory unit costs are decreasing?

A $25,000 overstatement of the 2015 ending inventory was discovered after the financial statements for 2015 were prepared. Which of the following describes the effect of the inventory error on the 2016 financial statements?

Abel Company must write-down its inventory by $30,000 to the net realizable value of $450,000 at December 31, 2016. What is the effect of this writedown on the year 2016 financial statements?

A grocery store probably would use the specific identification inventory costing method for most of the items in its inventory.

Which of the following is correct when, in the same year, beginning inventory is understated by $1,300 and ending inventory is understated by $700?

Which of the following statements does not accurately describe the effects of a write-down of inventory on December 31, 2016 using the lower of cost or market (LCM) valuation method?

During periods of increasing unit costs, the LIFO inventory method will result in a higher inventory amount on the balance sheet and a lower net income than will the FIFO inventory method.

An increase in inventory is subtracted from net income when determining cash flow from operating activities.

The records of Atlantis Company reflected the following for the month of February: Required: Determine the amount of ending inventory and cost of goods sold using the following periodic system inventory costing methods:

Quest Inc. provided the following disclosure note to the financial statements in its annual report: Inventories are stated at the lower of cost or market. The cost of inventories has been determined using last in first out (LIFO) method. Cost of goods sold under LIFO costing were $22.2 billion for 2016 and ending inventory under LIFO was $1.3 billion. Inventory in 2015 under LIFO costing was $1.2 billion. The LIFO Reserve account carried a credit balance of $0.8 billion in 2016 and $0.6 billion in 2015. Required: Compute the following:

The journal entry to write-down inventory under the lower of cost or market (LCM) rule results in a debit to cost of goods sold and a credit to inventory.

Lauer Corporation uses the periodic inventory system and has provided the following information about one of its laptop computers: During the year, Lauer sold 750 laptop computers. What was ending inventory using the FIFO cost flow assumption?