Merchandise Inventory

Question: Super Mart, a regional convenience store chain, maintains milk inventory by the gallon.

The first month’s milk purchases and sales at its Freeport, Florida, location follow:

Nov. 2 Purchased 11 gallons @ \(2.15 each

6 Purchased 2 gallons @ \)2.80 each

8 Sold 6 gallons of milk to a customer

13 Purchased 3 gallons @ $2.85 each

14 Sold 4 gallons of milk to a customer

Requirements

1. Determine the amount that would be reported in ending merchandise inventoryon November 15 using the FIFO inventory costing method.

 Empire State Carpets’s books show the following data. In early 2020, auditors found that the ending merchandise inventory for 2017 was understated by \(8,000 and that the ending merchandise inventory for 2019 was overstated by \)9,000. The ending merchandise inventory at December 31, 2018, was correct.

Requirements

3. Compute the inventory turnover and days’ sales in inventory using the corrected income statements for the three years. (Round all numbers to two decimals.)

Match the accounting terminology to the definitions.

1. Conservatism

2. Materiality concept

3. Disclosure principle

4. Consistency principle

a. A business should report the least favorable figures in the financial statements when two or more possible options are presented.

b. A business’s financial statements must report enough information for outsiders to make knowledgeable decisions about the company.

c. A business should use the same accounting methods and procedures from period to period.

d. A company must perform strictly proper accounting only for items that are significant to the business’s financial situation.

Serenity Books has the following transactions in August related to merchandise inventory.

Aug. 1 Beginning merchandise inventory, 10 books @ \(15 each

         3 Sold 3 books @ \)20 each

       12 Purchased 8 books @ \(18 each

       15 Sold 9 books @ \)20 each

       20 Purchased 4 books @ \(20 each

       28 Sold 5 books @ \)25 each

a. Determine the cost of goods sold and ending merchandise inventory by preparing a perpetual inventory record using the specific identification method. Assume the following costing information for the books sold during the month:

August 3: 3 books costing \(15 each

August 15: 4 books costing \)15 each and 5 books costing \(18 each

August 28: 2 books costing \)18 each and 3 books costing $20 each

Serenity Books has the following transactions in August related to merchandise inventory.

Aug. 1 Beginning merchandise inventory, 10 books @ \(15 each

         3 Sold 3 books @ \)20 each

       12 Purchased 8 books @ \(18 each

       15 Sold 9 books @ \)20 each

       20 Purchased 4 books @ \(20 each

       28 Sold 5 books @ \)25 each

b. Determine the cost of goods sold and ending merchandise inventory by preparing a perpetual inventory record using the FIFO inventory costing method.

Serenity Books has the following transactions in August related to merchandise inventory.

Aug. 1 Beginning merchandise inventory, 10 books @ \(15 each

         3 Sold 3 books @ \)20 each

       12 Purchased 8 books @ \(18 each

       15 Sold 9 books @ \)20 each

       20 Purchased 4 books @ \(20 each

       28 Sold 5 books @ \)25 each

c. Determine the cost of goods sold and ending merchandise inventory by preparing a perpetual inventory record using the LIFO inventory costing method.

Serenity Books has the following transactions in August related to merchandise inventory.

Aug. 1 Beginning merchandise inventory, 10 books @ \(15 each

         3 Sold 3 books @ \)20 each

       12 Purchased 8 books @ \(18 each

       15 Sold 9 books @ \)20 each

       20 Purchased 4 books @ \(20 each

       28 Sold 5 books @ \)25 each

d. Determine the cost of goods sold and ending merchandise inventory by preparing a perpetual inventory record using the weighted-average inventory costing method. Round weighted-average unit cost to the nearest cent and total cost to the nearest dollar.

Antelope Motors is considering which inventory costing method it should use. The business wants to maximize gross profits during a period of declining costs. Which inventory costing method should Antelope Motors select?

T. J. Jackson Supplies had merchandise inventory that cost \(1,300. The market value of the merchandise inventory is \)750

.

What value should Jackson Supplies show on the balance sheet for merchandise inventory? Record the adjusting entry, if one is needed.

The Shirley’s Gourmet Foods’ merchandise inventory data for the year ended December 31, 2018, follow:

Assume that the ending merchandise inventory was accidentally overstated by \)1,920. What are the correct amounts for cost of goods sold and gross profit?

The Opa’s Carving Shop had the following financial data for the year ended December 31, 2018:

                           Cost of Goods Sold                                 $484,000

                           Beginning Merchandise Inventory            88,800

                           Ending Merchandise Inventory                 111,200

What are the inventory turnover and days’ sales in inventory for the year?

Serenity Books has the following transactions in August related to merchandise inventory.

   Aug. 1 Beginning merchandise inventory, 10 books @ \(15 each

                          3 Sold 3 books @ \)20 each

                        12 Purchased 8 books @ \(18 each

                        15 Sold 9 books @ \)20 each

                        20 Purchased 4 books @ \(20 each

                        28 Sold 5 books @ \)25 each

a. Determine the cost of goods sold and ending merchandise inventory using the FIFO inventory costing method assuming Serenity Books uses the periodic inventory system.

Serenity Books has the following transactions in August related to merchandise inventory.

   Aug. 1 Beginning merchandise inventory, 10 books @ \(15 each

                          3 Sold 3 books @ \)20 each

                        12 Purchased 8 books @ \(18 each

                        15 Sold 9 books @ \)20 each

                        20 Purchased 4 books @ \(20 each

                        28 Sold 5 books @ \)25 each

b. Determine the cost of goods sold and ending merchandise inventory using the LIFO inventory costing method assuming Serenity Books uses the periodic inventory system.

Serenity Books has the following transactions in August related to merchandise inventory.

   Aug. 1 Beginning merchandise inventory, 10 books @ \(15 each

                          3 Sold 3 books @ \)20 each

                        12 Purchased 8 books @ \(18 each

                        15 Sold 9 books @ \)20 each

                        20 Purchased 4 books @ \(20 each

                        28 Sold 5 books @ \)25 each

c. Determine the cost of goods sold and ending merchandise inventory using the weighted-average inventory costing method assuming Serenity Books uses the periodic inventory system.

Which principle states that businesses should use the same accounting methods and procedures from period to period?

What does the disclosure principle require?

Discuss the materiality concept. Is the dollar amount that is material the same for a company that has annual sales of \(10,000 compared with a company that has annual sales of \)1,000,000?

What is the goal of conservatism?

 Discuss some measures that should be taken to maintain control over merchandise inventory.

Under a perpetual inventory system, what are the four inventory costing methods, and how does each method determine ending merchandise inventory and cost of goods sold?

When using a perpetual inventory system and the weighted-average inventory costing method, when does the business compute a new weighted-average cost per unit?

During periods of rising costs, which inventory costing method produces the highest gross profit?

What does the lower-of-cost-or-market (LCM) rule require?

What account is debited when recording the adjusting entry to write down merchandise inventory under the LCM rule?

What is the effect on the cost of goods sold, gross profit, and net income if ending merchandise inventory is understated?

When does an inventory error cancel out, and why?

How is inventory turnover calculated, and what does it measure?

How is days’ sales in inventory calculated, and what does it measure?

When using the periodic inventory system, which inventory costing method(s) always produces the same result as when using the perpetual inventory system?

 When using the periodic inventory system and weighted-average inventory costing method, when is the weighted-average cost per unit computed?

When using the periodic inventory system and weighted-average inventory costing method, when is the weighted-average cost per unit computed?

 Determining inventory accounting principles

Ward Hardware used the FIFO inventory costing method in 2018. Ward plans to continue using the FIFO method in future years. Which accounting principle is most relevant to Ward’s decision?

Question: Ward Hardware does not expect costs to change dramatically and wants to use an inventory costing method that averages cost changes.

Requirements

1. Which inventory costing method would best meet Ward’s goal?

2. Assume Ward wanted to expense out the newer purchases of goods instead.

Which inventory costing method would best meet that need?

Question: Boston Cycles started October with 12 bicycles that cost \(42 each. On October 16, Boston bought 40 bicycles at \)68 each. On October 31, Boston sold 34 bicycles for$100 each.

Preparing a perpetual inventory record and journal entries—Specific identification

Requirements

2. Journalize the October 16 purchase of merchandise inventory on the account and theOctober 31 sale of merchandise inventory on the account.

Question: Boston Cycles started October with 12 bicycles that cost \(42 each. On October 16, Boston bought 40 bicycles at \)68 each. On October 31, Boston sold 34 bicycles for\(100 each.

Requirements

1. Prepare Boston Cycle’s perpetual inventory record assuming the company usesthe specific identification inventory costing method. Assume that Boston sold 10bicycles that cost \)42 each and 24 bicycles that cost $68 each.

Question: Boston Cycles started October with 12 bicycles that cost \(42 each. On October 16, Boston bought 40 bicycles at \)68 each. On October 31, Boston sold 34 bicycles for$100 each.

Preparing a perpetual inventory record and journal entries—FIFO

Requirements

2. Journalize the October 16 purchase of merchandise inventory on the account and theOctober 31 sale of merchandise inventory on the account.

Question: Boston Cycles started October with 12 bicycles that cost \(42 each. On October 16, Boston bought 40 bicycles at \)68 each. On October 31, Boston sold 34 bicycles for$100 each.

Preparing a perpetual inventory record and journal entries—FIFO

Requirements

1. Prepare Boston Cycle’s perpetual inventory record assuming the company uses theFIFO inventory costing method.

Question: Boston Cycles started October with 12 bicycles that cost \(42 each. On October 16, Boston bought 40 bicycles at \)68 each. On October 31, Boston sold 34 bicycles for$100 each.

Preparing a perpetual inventory record and journal entries—LIFO

Requirements

2. Journalize the October 16 purchase of merchandise inventory on the account and theOctober 31 sale of merchandise inventory on the account.

Question: Boston Cycles started October with 12 bicycles that cost \(42 each. On October 16, Boston bought 40 bicycles at \)68 each. On October 31, Boston sold 34 bicycles for$100 each.

Preparing a perpetual inventory record and journal entries—LIFO

Requirements

1. Prepare Boston Cycle’s perpetual inventory record assuming the company uses theLIFO inventory costing method.

Question: Boston Cycles started October with 12 bicycles that cost \(42 each. On October 16, Boston bought 40 bicycles at \)68 each. On October 31, Boston sold 34 bicycles for$100 each.

Preparing a perpetual inventory record and journal entries— Weighted-average

Requirements

2. Journalize the October 16 purchase of merchandise inventory on the account and theOctober 31 sale of merchandise inventory on the account.

Question: Boston Cycles started October with 12 bicycles that cost \(42 each. On October 16, Boston bought 40 bicycles at \)68 each. On October 31, Boston sold 34 bicycles for$100 each.

Preparing a perpetual inventory record and journal entries— Weighted-average

Requirements

1. Prepare Boston Cycle’s perpetual inventory record assuming the company uses theweighted-average inventory costing method.

Question: Refer to Short Exercises S6-4 through S6-6. After completing those exercises, answer the following questions:

Requirements

3. If costs had been declining instead of rising, which inventory costing methodwould have produced the highest cost of goods sold?

Question: Refer to Short Exercises S6-4 through S6-6. After completing those exercises, answer the following questions:

Requirements

2. Which inventory costing method produced the highest cost of goods sold?

Question: Refer to Short Exercises S6-4 through S6-6. After completing those exercises, answer the following questions:

Requirements

1. Which inventory costing method produced the lowest cost of goods sold?

Question: Assume that a Logan Burger restaurant has the following perpetual inventory record for hamburger patties:

Date PurchasesCost ofMerchandise

Goods SoldInventory on Hand

Jul. 9 \( 450 \) 450

22 \( 270 180

31 210 390

At July 31, the accountant for the restaurant determines that the current replacementcost of the ending merchandise inventory is \)435. Make any adjusting entry needed toapply the lower-of-cost-or-market rule. Merchandise inventory would be reported onthe balance sheet at what value on July 31?

Question: New York Pool Supplies’s merchandise inventory data for the year ended December 31, 2019, follow:

Net Sales Revenue\( 58,000

Cost of Goods Sold:

Beginning Merchandise Inventory\) 4,900

Net Cost of Purchases      32,500

Cost of Goods Available for Sale37,400

Less: Ending Merchandise Inventory       4,700

Cost of Goods Sold32,700

Gross Profit $ 25,300

Requirements

2. How would the inventory error affect New York Pool Supplies’s cost of goodssold and gross profit for the year ended December 31, 2020, if the error is not correctedin 2019?

Question: New York Pool Supplies’s merchandise inventory data for the year ended December 31, 2019, follow:

Net Sales Revenue\( 58,000

Cost of Goods Sold:

Beginning Merchandise Inventory\) 4,900

Net Cost of Purchases      32,500

Cost of Goods Available for Sale37,400

Less: Ending Merchandise Inventory       4,700

Cost of Goods Sold32,700

Gross Profit \( 25,300

Requirements

1. Assume that the ending merchandise inventory was accidentally overstated by\)1,800. What are the correct amounts for cost of goods sold and gross profit?

Question: Broadway Communications reported the following figures in its annual financial statements:

Cost of Goods Sold $ 18,400

Beginning Merchandise Inventory 560

Ending Merchandise Inventory 450

Compute the rate of inventory turnover and days’ sales in inventory for BroadwayCommunications. (Round to two decimal places.)

Question: The periodic inventory records of Flexon Prosthetics indicate the following for the month of July:

Jul. 1 Beginning merchandise inventory 6 units @ \( 60 each

8 Purchase 5 units @ \) 67 each

15 Purchase 10 units @ \( 70 each

26 Purchase 5 units @ \) 85 each

At July 31, Flexon counts four units of merchandise inventory on hand.

Compute ending merchandise inventory and cost of goods sold for Flexon using theFIFO inventory costing method.

Question: The periodic inventory records of Flexon Prosthetics indicate the following for the month of July:

Jul. 1 Beginning merchandise inventory 6 units @ \( 60 each

8 Purchase 5 units @ \) 67 each

15 Purchase 10 units @ \( 70 each

26 Purchase 5 units @ \) 85 each

At July 31, Flexon counts four units of merchandise inventory on hand.

Compute ending merchandise inventory and cost of goods sold for Flexon using theLIFO inventory costing method.