Book 2 - Chapter 27

Multiple Choice
1.	c	FIFO puts the oldest costs into cost of goods sold and in a period of rising prices the oldest costs will be lowest costs. This leaves the latest and highest costs in the ending inventory.
2.	a
3.	d	LIFO puts the most recent costs into cost of goods sold and in a period of decreasing prices the most recent costs will be lowest costs. This leaves the oldest and highest costs in the ending inventory.
4.	c	Using the gross profit method, we can estimate cost of goods sold as 100% – 30% = 70%, and then multiply: $100,000 ×.7 = $70,000 cost of goods sold. The difference between cost of goods available for sale and cost of goods sold is the ending inventory: $10,000 + $80,000 – $70,000 = $20,000.
5.	d	FIFO assigns the oldest costs to cost of goods sold, so this leaves the most recent costs for ending inventory.
6.	a	LIFO assigns the most recent costs to cost of goods sold, so this leaves the oldest costs for ending inventory. Whether or not this results in the highest cost of goods sold depends on whether prices have been increasing or decreasing.
7.	d	For a and b, LIFO and FIFO should be reversed, and weighted average is simply an average of all costs.
8.	d	Remember the basic inventory formula: BI + net P – EI = C of GS, which still applies regardless of how costs are assigned. Put some simple numbers into the formula, and you can see that errors in either beginning inventory (BI) or net purchases (net P) result in the same amount of error in cost of goods sold.
9.	a	Another review of the basic formula. Put some simple numbers into the formula, and you can see that an error in ending inventory (EI) results in the opposite error in cost of goods sold.
10.	c	As you recall, event analysis refers to the elements of: (a) classification of items affected, (b) valuation of items affected, and (c) timing of the event. Significant loss of asset value is an event that GAAP requires be recognized in the accounting period in which it occurred.
11.	d
12.	a	$350,000 × .6 = $210,000 estimated cost of goods sold. Cost of goods available is $220,000. The difference between the cost of what was available and the cost of what was sold is the ending inventory.
13.	d	A perpetual inventory requires daily attention to inventory purchases and sales. Analyzing cost of goods sold for sudden and/or unexplained increases or decreases is a way to detect fraud. For example, unexplained increases in cost of goods sold can mean that either inventory is disappearing or that sales are not being recorded (so cash can be stolen). Unexplained decreases can indicate financial reporting fraud as sales are overstated or as accounts payable and inventory purchases are written off, or otherwise “disappear”
14.	d	The person who has access to the accounting records should not have access to assets. If one person controls all purchasing or selling activities, excess purchases can occur or unrecorded sales can occur.
15.	b	This happens because the last purchases always go into cost of goods sold.
16.	d	An error students frequently make with the periodic method is forgetting that FIFO or LIFO doesn’t refer to what is left over (ending inventory) but rather what goes into cost of goods sold . So, if you are calculating the ending inventory, be sure to remember that this is the cost of what is still there.
17.	c	Cost of ending inventory consists of the last layer of 900 units @ $7 plus 100 units of the previous layer @ $6. FIFO inventory consists of the most recent cost layers because the first cost layers have gone into cost of goods sold.

Learning Goal 27

SOLUTIONS

Learning Goal 27: Record, Report, and Control Merchandise Inventory

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