Study Guide 20. Part One Identifying Accounting Terms. Column II. Answers. Column I

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1 Study Guide 20 Name Identifying Accounting Terms Analyzing Inventory Systems Analyzing LIFO, FIFO, and Weighted-Average Methods Total Perfect Score 9 Pts. 10 Pts. 12 Pts. 31 Pts. Your Score Part One Identifying Accounting Terms Directions: Select the one term in Column I that best fits each definition in Column II. Print the letter identifying your choice in the Answers column. Column I Column II A. first-in, first-out inventory costing method (FIFO) B. gross profit method of estimating inventory C. inventory record D. last-in, first-out inventory costing method (LIFO) E. lower of cost or market F. market value G. stock ledger H. stock record I. weighted-average inventory costing method 1. A form used during a physical inventory to record information about each item of merchandise on hand. (p. 622) 2. A form used to show the kind of merchandise, quantity received, quantity sold, and balance on hand. (p. 623) 3. A file of stock records for all merchandise on hand. (p. 623) 4. Using the price of merchandise purchased first to calculate the cost of merchandise sold first. (p. 626) 5. Using the price of merchandise purchased last to calculate the cost of merchandise sold first. (p. 627) 6. Using the average cost of beginning inventory plus merchandise purchased during a fiscal period to calculate the cost of merchandise sold. (p. 628) 7. The price that must be paid to replace an asset. (p. 630) 8. Using the lower of cost or market price to calculate the cost of ending merchandise inventory. (p. 630) 9. Estimating inventory by using the previous year s percentage of gross profit on operations. (p. 633) Answers 1. C 2. H 3. G 4. A 5. D 6. I 7. F 8. E 9. B Chapter 20 Accounting for Inventory 59

2 Part Two Analyzing Inventory Systems Directions: Place a T for True or an F for False in the Answers column to show whether each of the following statements is true or false. 1. Merchandise inventory on hand is typically the largest asset of a merchandising business. (p. 620) 2. The only financial statement on which the value of merchandise on hand is reported is the income statement. (p. 620) 3. The net income of a business can be increased by maintaining a merchandise inventory that is larger than needed. (p. 621) 4. A merchandise inventory evaluated at the end of a fiscal period is known as a periodic inventory. (p. 621) 5. A periodic inventory conducted by counting, weighing, or measuring items of merchandise on hand is also called a physical inventory. (p. 622) 6. A minimum inventory balance is the amount of merchandise that will typically last until ordered merchandise can be received from vendors. (p. 623) 7. A perpetual inventory system provides day-to-day information about the quality of merchandise on hand. (p. 623) 8. Many merchandising businesses use a POS terminal to read UPC codes on products and update the stock ledger. (p. 623) 9. The first-in, first-out method is used to determine the quantity of each type of merchandise on hand. (p. 626) 10. The gross profit method makes it possible to prepare monthly income statements without taking a physical inventory. (p. 633) Answers 1. T 2. F 3. F 4. T 5. T 6. T 7. F 8. T 9. F 10. T 60 Working Papers TE

3 Name Date Class Part Three Analyzing LIFO, FIFO and Weighted-Average Methods Directions: For each of the following items, select the choice that best completes the statement. Print the letter identifying your choice in the Answers column. 1. Calculating an accurate inventory cost to assure that gross profit and net income are reported correctly on the income statement is an application of the accounting concept (A) Consistent Reporting (B) Perpetual Inventory (C) Adequate Disclosure (D) none of the above. (p. 620) 2. When the FIFO method is used, cost of merchandise sold is valued at (A) the average cost (B) the most recent cost (C) the earliest cost (D) none of these. (p. 626) 3. The LIFO method is based on the assumption that the merchandise purchased first is the merchandise (A) sold first (B) sold last (C) that cost the most (D) none of these. (p. 627) 4. When the LIFO method is used, ending inventory units are priced at the (A) average price (B) earliest price (C) most recent price (D) none of these. (p. 627) 5. Using an inventory costing method to charge costs of merchandise against current revenue is an application of the accounting concept (A) Adequate Disclosure (B) Consistent Reporting (C) Matching Expenses with Revenue (D) none of these. (p. 627) 6. The FIFO method is based on the assumption that the merchandise purchased first is the merchandise (A) sold first (B) sold last (C) in ending inventory (D) none of these. (p. 626) 7. When the FIFO method is used, cost of merchandise sold is priced at (A) the average price (B) the earliest price (C) the most recent price (D) none of these. (p. 626) 8. The weighted-average method is based on the assumption that the cost of merchandise sold should be calculated using the (A) average price per unit of beginning inventory (B) average price of ending inventory (C) average price of beginning inventory plus purchases during the fiscal period (D) average price of ending inventory plus purchases during the fiscal period. (p. 628) 9. When the weighted-average method is used, units sold are priced at (A) the earliest price (B) the most recent price (C) the average price (D) none of these. (p. 628) 10. A business that uses the same inventory costing method for all fiscal periods is applying the accounting concept (A) Consistent Reporting (B) Accounting Period Cycle (C) Perpetual Inventory (D) Adequate Disclosure. (p. 630) 11. In a year of rising prices, the inventory method that gives the highest possible value for ending inventory is (A) FIFO (B) LIFO (C) weighted-average (D) gross profit. (p. 630) 12. In a year of falling prices, the inventory method that gives the highest possible value for ending inventory is (A) weighted-average (B) LIFO (C) FIFO (D) gross profit. (p. 630) Answers 1. C 2. C 3. B 4. B 5. C 6. A 7. B 8. C 9. C 10. A 11. A 12. B Chapter 20 Accounting for Inventory 61

4 1 M 2 S A T 3 R S T O C K R E E O C O R D K 4 F T L A 5 A C T I V I T Y B V A S E E C D C O S T I N G L G O 6 I N V E N T O R Y R U E C O E R D R Y O V E R H E A D Across 3. A form used to show the kind of merchandise, quantity received, quantity sold, and balance on hand. 5. Allocating factory overhead based on the level of major activities. 6. A form used during a physical inventory to record information about each item of merchandise on hand. Down 1. The price that must be paid to replace an asset. 2. A file of stock records for all merchandise on hand. 4. All expenses other than direct materials and direct labor that apply to making products. 62 Working Papers TE

5 Name Date Class 20-1 WORK TOGETHER, p. 625 Preparing a stock record 1. STOCK RECORD Description Soaker Hose Stock No. GL764-3 Reorder Minimum 10 Location Bin INCREASES DECREASES BALANCE PURCHASE INVOICE NO. QUANTITY DATE SALES INVOICE NO. QUANTITY DATE QUANTITY Sept Oct Oct Oct Dec ON YOUR OWN, p. 625 Preparing a stock record 1. STOCK RECORD Description O-rings Stock No. 7461XG Reorder 150 Minimum 20 Location Rack INCREASES DECREASES BALANCE PURCHASE INVOICE NO. QUANTITY DATE SALES INVOICE NO. QUANTITY DATE QUANTITY Oct Nov Nov Nov Dec Chapter 20 Accounting for Inventory 63

6 20-2 WORK TOGETHER, p. 632 Determining the cost of inventory using the FIFO, LIFO, and weighted-average inventory costing methods FIFO Method Purchase Dates Units Purchased Unit Price Total Cost January 1, beginning inventory 14 $32.00 $ March 29, purchases May 6, purchases August 28, purchases November 8, purchases Totals 50 $1, FIFO Units on Hand FIFO Cost 6 $ $ LIFO Method Purchase Dates Units Purchased Unit Price Total Cost January 1, beginning inventory 14 $32.00 $ March 29, purchases May 6, purchases August 28, purchases November 8, purchases Totals 50 $1, LIFO Units on Hand LIFO Cost 14 $ $ Weighted-Average Method Purchases Date Units Unit Price January 1, beginning inventory 14 $32.00 March 29, purchases May 6, purchases August 28, purchases November 8, purchases 9.00 Totals 50 Total Cost $ $1, Total of Beginning Weighted-Average Total Units = Inventory and Purchases Price per Unit $1, = $35.56 Units in Weighted-Average Cost of = Ending Inventory Price per Unit Ending Inventory 15 $35.56 = $ Working Papers TE

7 Name Date Class 20-2 ON YOUR OWN, p. 632 Determining the cost of inventory using the FIFO, LIFO, and weighted-average inventory costing methods FIFO Method Purchase Dates Units Purchased Unit Price Total Cost January 1, beginning inventory 18 $3.60 $ April 9, purchases June 12, purchases September 22, purchases November 20, purchases Totals 75 $ LIFO Method Purchase Dates Units Purchased Unit Price Total Cost January 1, beginning inventory 18 $3.60 $ April 9, purchases June 12, purchases September 22, purchases November 20, purchases Totals 75 $ FIFO Units on Hand LIFO Units on Hand FIFO Cost 10 $ $ LIFO Cost 18 $ $94. Weighted-Average Method Purchases Date Units Unit Price January 1, beginning inventory 18 $3.60 April 9, purchases June 12, purchases September 22, purchases November 20, purchases Totals 75 Total Cost $ $ Total of Beginning Weighted-Average Total Units = Inventory and Purchases Price per Unit $ = $3.84 Units in Weighted-Average Cost of = Ending Inventory Price per Unit Ending Inventory 26 $3.84 = $99.84 Chapter 20 Accounting for Inventory 65

8 20-3 WORK TOGETHER, p. 635 Estimating ending inventory using the gross profit method 1. STEP 1: Beginning inventory, June 1... Plus net purchases for June 1 to June Equals cost of merchandise available for sale... STEP 2: Net sales for June 1 to June Times previous year's gross profit percentage... Equals estimated gross profit on operations... STEP 3: Net sales for June 1 to June Less estimated gross profit on operations... Equals estimated cost of merchandise sold... STEP 4: Cost of merchandise available for sale... Less estimated cost of merchandise sold... Equals estimated ending merchandise inventory... $ 77, , $101, $122, % $ 55, $122, , $ 67, $101, , $ 33, Goldsmith Company Income Statement For Month Ended June 30, 20-- Operating revenue: Net sales Cost of merchandise sold: Beginning inventory, June 1 Net purchases Merchandise available for sale Less Estimated ending Inventory, June 30 Cost of merchandise sold Gross profit on operations Operating expenses Net income % OF NET SALES Working Papers TE

9 Name Date Class 20-3 ON YOUR OWN, p. 635 Estimating ending inventory using the gross profit method 1. STEP 1: Beginning inventory, April 1... Plus net purchases for April 1 to April Equals cost of merchandise available for sale... STEP 2: Net sales for April 1 to April Times previous year's gross profit percentage... Equals estimated gross profit on operations... STEP 3: Net sales for April 1 to April Less estimated gross profit on operations... Equals estimated cost of merchandise sold... STEP 4: Cost of merchandise available for sale... Less estimated cost of merchandise sold... Equals estimated ending merchandise inventory... $ 49, , $ 73, $112, % $ 61, $112, , $ 50,0.00 $ 73, ,0.00 $ 22, Leah Enterprises Income Statement For Month Ended April 30, 20-- Operating revenue: Net sales Cost of merchandise sold: Beginning inventory, April 1 Net purchases Merchandise available for sale Less Estimated ending Inventory, April 30 Cost of merchandise sold Gross profit on operations Operating expenses Net income % OF NET SALES Chapter 20 Accounting for Inventory 67

10 20-1 APPLICATION PROBLEM (LO1), p. 639 Preparing a stock record Description 42-inch flat-screen television STOCK RECORD Stock No. 891DC-5 Reorder 10 Minimum 4 Location Shelf B DATE INCREASES DECREASES BALANCE PURCHASE INVOICE NO. QUANTITY DATE SALES INVOICE NO. QUANTITY QUANTITY Jan Feb Feb Mar Mar Working Papers TE

11 Name Date Class 20-2 APPLICATION PROBLEM (LO2, 3, 4), p. 639 Determining the cost of inventory using the FIFO, LIFO, and weighted-average inventory costing methods FIFO Method Units Purchase Dates Purchased Unit Price Total Cost January 1, beginning inventory 100 $4.00 $ 0.00 March 13, purchases June 8, purchases September 16, purchases December 22, purchases Totals 470 $1, FIFO Units on Hand FIFO Cost 94 $ $835. LIFO Method Units Purchase Dates Purchased Unit Price Total Cost January 1, beginning inventory 100 $4.00 $ 0.00 March 13, purchases June 8, purchases September 16, purchases December 22, purchases Totals 470 $1, LIFO Units on Hand LIFO Cost 100 $ $ Weighted-Average Method Purchases Date Units Unit Price January 1, beginning inventory 100 $4.00 March 13, purchases June 8, purchases September 16, purchases December 22, purchases Totals 470 Total Cost $ $1, Total of Beginning Weighted-Average Total Units = Inventory and Purchases Price per Unit $1, = $4.21 Units in Weighted-Average Cost of = Ending Inventory Price per Unit Ending Inventory 192 $4.21 = $ Chapter 20 Accounting for Inventory 69

12 20-3 APPLICATION PROBLEM (LO5), p. 639 Estimating ending inventory using the gross profit method 1. STEP 1: Beginning inventory, March 1... Plus net purchases for March 1 to March Equals cost of merchandise available for sale... STEP 2: Net sales for March 1 to March Times previous year's gross profit percentage... Equals estimated gross profit on operations... STEP 3: Net sales for March 1 to March Less estimated gross profit on operations... Equals estimated cost of merchandise sold... STEP 4: Cost of merchandise available for sale... Less estimated cost of merchandise sold... Equals estimated ending merchandise inventory... $49, , $72, $93, % $51, $93, , $41, $72, , $30, Lee Industries Income Statement For Month Ended March 31, 20-- Operating revenue: Net sales Cost of merchandise sold: Beginning inventory, March 1 Net purchases Merchandise available for sale Less Estimated ending Inventory, March 31 Cost of merchandise sold Gross profit on operations Operating expenses Net income % OF NET SALES Working Papers TE

13 Name Date Class 20-M MASTERY PROBLEM (LO2, 3, 4), p. 6 Determining the cost of inventory using the FIFO, LIFO, and weighted-average inventory costing methods 1. STOCK RECORD Description Print cartridge Stock No. 120-HP Reorder Minimum 20 Location Bin 27-X INCREASES DECREASES BALANCE PURCHASE INVOICE NO. QUANTITY DATE SALES INVOICE NO. QUANTITY DATE QUANTITY Jan Jan Apr Apr July Aug Dec Dec Chapter 20 Accounting for Inventory 71

14 20-M MASTERY PROBLEM (continued) 2. FIFO Method Purchase Dates Units Purchased Unit Price Total Cost FIFO Units on Hand FIFO Cost January 1, beginning inventory 16 $ 9.96 $ January 6, purchases April 14, purchases August 3, purchases December 12, purchases Totals $1, $ $ LIFO Method Purchase Dates Units Purchased Unit Price Total Cost LIFO Units on Hand LIFO Cost January 1, beginning inventory 16 $ 9.96 $ $ January 6, purchases April 14, purchases August 3, purchases December 12, purchases Totals $1, $ Weighted-Average Method Purchases Total Date Units Unit Price Cost January 1, beginning inventory 16 $ 9.96 $ January 6, purchases April 14, purchases August 3, purchases December 12, purchases Totals $1, Total of Beginning Weighted-Average Total Units = Inventory and Purchases Price per Unit $1, = $10.36 Units in Weighted-Average Cost of = Ending Inventory Price per Unit Ending Inventory 52 $10.36 = $ Working Papers TE

15 Name Date Class 20-M MASTERY PROBLEM (concluded) 3. Merchandise Available for Sale Ending Inventory Cost of Merchandise Sold FIFO LIFO Weighted- Average $1, $1, $1, $1, $1, $1, Lowest Cost of Merchandise Sold: FIFO Chapter 20 Accounting for Inventory 73

16 20-C CHALLENGE PROBLEM (LO5), p. 6 Determining the cost of merchandise inventory destroyed in a fire 1. Gross profit on operations... Divided by net sales... Equals gross profit percentage of net sales (prior year)... $ 161, , % 2. STEP 1: Beginning inventory, May 1... Plus net purchases for May 1 to May Equals cost of merchandise available for sale... STEP 2: Net sales for May 1 to May Times previous year s gross profit percentage... Equals estimated gross profit on operations... STEP 3: Net sales for May 1 to May Less estimated gross profit on operations... Equals estimated cost of merchandise sold... STEP 4: Cost of merchandise available for sale... Less estimated cost of merchandise sold... Equals estimated ending merchandise inventory... $ 17, , $ 20, $ 11, % $ 5, $ 11, , $ 5, $ 20, , $ 15, Estimated merchandise inventory, May Less cost of merchandise inventory not destroyed... Equals estimated cost of merchandise inventory destroyed... $ 15, $ 14, Working Papers TE

17 Name Date Class 20-C CHALLENGE PROBLEM (continued) 4. Albertson Painting Company Income Statement For the Period May 1 to May 12, 20-- Operating revenue: Net sales Cost of merchandise sold: Beginning inventory, May 1 Net purchases Merchandise available for sale Less Estimated ending Inventory, May 12 Cost of merchandise sold Gross profit on operations Operating expenses Net income % OF NET SALES Chapter 20 Accounting for Inventory 75

18 20-C CHALLENGE PROBLEM (concluded) 5. Book value of the inventory is the value shown on Albertson Painting's financial records. Since Albertson Painting does not maintain a perpetual inventory, the book value is the amount of estimated ending inventory on May 12. Replacement value of the inventory is the amount Albertson Painting would have to pay to replace the inventory at current prices. 6. The FIFO inventory costing method uses the most recent invoice prices to determine the cost of inventory on hand. Since the book value of the inventory is based on the most recent unit prices, the book value and replacement value of the inventory might be very similar. 7. The value the insurance company uses should be determined by the terms of the insurance policy. In most cases, a higher insurance premium is paid if replacement value is written into the policy. 76 Working Papers TE