Chapter 6 Question Review 1

Chapter 6 Questions
Multiple Choice
1. In a perpetual inventory system,
a. LIFO cost of goods sold will be the same as in a periodic inventory system.
b. average costs are based entirely on unit cost simple averages.
c. a new average is computed under the average cost method after each sale.
d. FIFO cost of goods sold will be the same as in a periodic inventory system.

2. Company Y has the following inventory data:

August 1 Beginning inventory 20 units at $10

8 Purchases 130 units at $15
17 Sale 80 units
25 Purchases 30 units at $20
30 Sale 60 units

Assuming that a perpetual inventory system is used, what is ending inventory (rounded) under the
average cost method for August? (DO NOT ROUND INTERMEDIATE CALCULATIONS).
a. $641.33
b. $611.11
c. $800.00
d. $500.00

3. Simpson Inc. purchased inventory as follows:

Jan. 5 500 units at $10.00
Jan. 15 1,000 units at $15.00
Jan. 25 200 units at $20.00

What is the average unit cost of inventory?

a. $14.12
b. $15.00
c. $13.00
d. $15.83

4. Delightful Discs has the following inventory data:

Nov. 1 Inventory 30 units @ $6.00 each

8 Purchase 120 units @ $6.45 each
17 Purchase 60 units @ $6.30 each
25 Purchase 90 units @ $6.60 each
A physical count of merchandise inventory on November 30 reveals that there are 100 units on hand.
Ending inventory under LIFO periodic inventory system is
a. $657
b. $632
c. $1,269
d. $1,295
 Chapter 6 Question Review 2

5. Hardaway Inc. purchased inventory as follows:

Jan. 10 200 units at $5.00
Jan. 20 500 units at $10.00
Jan. 30 800 units at $15.00

Hardaway Inc. had no beginning inventory and has 500 units on hand as of January 31. Assuming the
specific identification method is used and ending inventory consists of 100 units from the Jan. 10
purchase, 300 units from the Jan. 20 purchase, and 100 units from the Jan. 30 purchase, ending
inventory would be
a. $13,000
b. $4,000
c. $7,500
d. $5,000

6. Hardaway Inc. purchased inventory as follows:

Jan. 10 200 units at $5.00
Jan. 20 500 units at $10.00
Jan. 30 800 units at $15.00

Hardaway Inc. had no beginning inventory and has 500 units on hand as of January 31. Assuming the
specific identification method is used and ending inventory consists of 100 units from the Jan. 10
purchase, 300 units from the Jan. 20 purchase, and 100 units from the Jan. 30 purchase, cost of goods
sold would be
a. $13,000
b. $4,000
c. $7,500
d. $5,000

7. Baker Bakery Company just began business and made the following four inventory purchases in June:

June 1 150 units $ 1,040

June 10 200 units 1,560
June 15 200 units 1,680
June 28 150 units 1,320
$5.600
A physical count of merchandise inventory on June 30 reveals that there are 210 units on hand. Using the
FIFO periodic inventory method, the amount allocated to ending inventory for June is
a. $1,456
b. $1,508
c. $1,824
d. $1,848
 Chapter 6 Question Review 3

8. Goods held on consignment are

a. never owned by the consignee.
b. included in the consignee’s ending inventory.
c. kept for sale on the premises of the consignor.
d. included as part of no one’s ending inventory.

9. Reeves Company is taking a physical inventory on March 31, the last day of its fiscal year. Which of
the following must be included in this inventory count?
a. Goods in transit to Reeves, FOB destination
b. Goods that Reeves is holding on consignment for Parker Company
c. Goods in transit that Reeves has sold to Smith Company, FOB shipping point
d. Goods that Reeves is holding in inventory on March 31 for which the related Accounts Payable is 15
days past due

10. At December 31, 2019 Mohling Company’s inventory records indicated a balance of $632,000. Upon
further investigation it was determined that this amount included the following:

 $112,000 in inventory purchases made by Mohling shipped from the seller 12/27/19 terms FOB
destination, but not due to be received until January 2nd,
 $74,000 in goods sold by Mohling with terms FOB destination on December 27th. The goods are not
expected to reach their destination until January 6th.
 $6,000 of goods received on consignment from Dollywood Company

What is Mohling’s correct ending inventory balance at December 31, 2019?

a. $520,000
b. $626,000
c. $440,000
d. $514,000

11. Zimmerman Inc. uses a periodic inventory system. Details for the inventory account for the month of
October are shown below:

Assume that on October 31, there is 80 units on hand. If the company uses FIFO, what is the value of
ending inventory?
a. $400
b. $335
c. $373
d. $360
 Chapter 6 Question Review 4

12. Zimmerman Inc. uses a periodic inventory system. Details for the inventory account for the month
of October are shown below:

Assume that on October 31, there is 80 units on hand. If the company uses LIFO, what is the value of
cost of goods sold for October?
a. $1,000
b. $1,200
c. $1,065
d. $1,028

13. Nelson Corporation sells three different products. The following information is available on December
31:

Inventory Item Units Cost per unit Market value per unit
X 300 $4.00 $3.50
Y 600 $2.00 $1.50
Z 1,500 $3.00 $4.00

When applying the lower of cost or market rule to each item, what will Nelson's total ending inventory
balance be?
a. $6,900
b. $6,450
c. $7,950
d. $6,600

14. Inventory costing methods place primary reliance on assumptions about the flow of
a. goods.
b. costs.
c. resale prices.
d. values.
 Chapter 6 Question Review 5

15. The Boxwood Company sells blankets for $60 each. The following was taken from the inventory records
during May. The company had no beginning inventory on May 1.

Date Blankets Units Cost

May 3 Purchase 5 $20
10 Sale 3
17 Purchase 10 $24
20 Sale 6
23 Sale 3
30 Purchase 10 $30

Assuming that the company uses the perpetual inventory system, determine the COST OF GOODS SOLD for the
month of May using the LIFO inventory cost method.
a. $364
b. $300
c. $268
d. $276
 Chapter 6 Question Review 6

EXERCISES
1. Company M uses the perpetual inventory system. They want to calculate the cost of goods sold and
the value of their ending inventory using each of the following methods:
A) FIFO
B) LIFO
C) Average Cost Method

Use the information below along with the tables provided for each method.
Chapter 6 Question Review 7
 Chapter 6 Question Review 8

2. The Cain Company has just completed a physical inventory count at year end, December 31, 2017. Only
the items on the shelves, in storage, and in the receiving area were counted and costed on the FIFO basis.
The inventory amounted to $80,000. During the audit, the independent CPA discovered the following
additional information:

(a) There were goods in transit on December 31, 2017, from a supplier with terms FOB destination,
costing $10,000. Because the goods had not arrived, they were excluded from the physical inventory
count.
(b) On December 27, 2017, a regular customer purchased goods for cash amounting to $1,000 and had
them shipped to a bonded warehouse for temporary storage on December 28, 2017. The goods were
shipped via common carrier with terms FOB shipping point. The customer picked the goods up from
the warehouse on January 4, 2018. Cain Company had paid $500 for the goods and, because they were
in storage, Cain included them in the physical inventory count.
(c) Cain Company, on the date of the inventory, received notice from a supplier that goods ordered
earlier, at a cost of $4,000, had been delivered to the transportation company on December 28,
2017; the terms were FOB shipping point. Because the shipment had not arrived on December 31,
2017, it was excluded from the physical inventory.
(d) On December 31, 2017, there were goods in transit to customers, with terms FOB shipping point,
amounting to $800 (expected delivery on January 8, 2018). Because the goods had been shipped,
they were excluded from the physical inventory count.
(e) On December 31, 2017, Cain Company shipped $2,500 worth of goods to a customer, FOB
destination. The goods arrived on January 5, 2017. Because the goods were not on hand, they were
not included in the physical inventory count.
(f) Cain Company, as the consignee, had goods on consignment that cost $3,000. Because these goods were
on hand as of December 31, 2017, they were included in the physical inventory count.

Instructions
Analyze the above information and calculate a corrected amount for the ending inventory. Explain the
basis for your treatment of each item.
 Chapter 6 Question Review 9

3.
Hanlin Company uses the periodic inventory system to account for inventories. Information related to
Hanlin Company's inventory at January 31 is given below:

January 1 Beginning inventory 400 units @ $12.00 = $ 4,800

8 Purchase 800 units @ $12.40 = 9,920
16 Purchase 600 units @ $12.80 = 7,680
24 Purchase 200 units @ $13.20 = 2,640
Total units and cost 2,000 units $25,040

Instructions
A. Show computations to value the ending inventory using the FIFO cost assumption if 600 units remain
on hand at January 31.
B. Show computations to value the ending inventory using the weighted-average cost method if 600
units remain on hand at January 31.
C. Show computations to value the ending inventory using the LIFO cost assumption if 600 units remain
on hand at January 31.
 Chapter 6 Question Review 10

4. Wolf Camera Shop Inc. uses the lower-of-cost-or-market basis for its inventory. The following data
are available at December 31.

Market
Units Cost/Unit Value/Unit
Cameras
Minolta 5 $175 $168
Canon 7 148 152
Light Meters
Vivitar 15 125 119
Kodak 10 120 135

Instructions
What amount should be reported on Wolf Camera Shop's financial statements, assuming the lower-of-
cost-or-market rule is applied?

5. Match the items below by entering the appropriate code letter in the space provided.

A. Merchandise Inventory F. First-in, first-out (FIFO) method

B. Work in process G. Last-in, first-out (LIFO) method
C. FOB shipping point H. Average cost method
D. FOB destination I. LIFO reserve
E. Specific identification method J. Inventory turnover ratio
___ 1. The difference between inventory reported using LIFO and inventory using FIFO.
___ 2. Tracks the actual physical flow for each inventory item available for sale.
___ 3. Goods that are only partially completed in a manufacturing company.
___ 4. Cost of goods sold consists of the most recent inventory purchases.
___ 5. Goods ready for sale to customers by retailers and wholesalers.
___ 6. Title to the goods transfers when the public carrier accepts the goods from the
seller.
___ 7. Ending inventory valuation consists of the most recent inventory purchases.
___ 8. The same unit cost is used to value ending inventory and cost of goods sold.
___ 9. Title to goods transfers when the goods are delivered to the buyer.
___ 10. Measures the number of times the inventory sold during the period.
 Chapter 6 Question Review 11

Chapter 6 Solutions
Multiple Choice Solutions
1. D
2. A
3. A
4. B
5. D
6. A
7. C
8. A
9. D
10. D
11. A
12. C
13. B
14. B
15. D
 Chapter 6 Question Review 12

Chapter 6 Solutions (Cont.)

Exercise Solutions
1.
 Chapter 6 Question Review 13

Chapter 6 Solutions (Cont.)

Exercise Solutions (Cont.)
1. (Cont.)

2.

Start with $80,000

Item (a) – (Because the goods were shipped FOB destination title will
pass to Cain upon arrival. Properly excluded.)
Item (b) – 500 (Goods should be excluded. The customer accepted title when
the goods left Cain FOB shipping point.)
Item (c) + 4,000 (Goods belong to Cain. Title passed when supplier delivered the
goods to the transportation company.)
Item (d) – (Because the goods were shipped FOB shipping point Cain no
longer has title to these goods. Properly excluded.)
Item (e) + 2,500 (Goods were shipped FOB destination. Cain retains title until
the customer receives them.)
Item (f) – 3,000 (These goods are owned by the consignor, not the consignee,
and should not be included in Cain's inventory.)
Corrected inventory $83,000
 Chapter 6 Question Review 14

Chapter 6 Solutions (Cont.)

Exercise Solutions (Cont.)
3.
A. 600 units in ending inventory.

Under FIFO, the units remaining in inventory are the ones purchased most recently.
1/24 200 units @ $13.20 = $2,640 (1/24 units × 1/24 cost)
1/16 400 units @ $12.80 = 5,120 ((1/31 units − 1/24 units) × 1/16 cost)
600 units $7,760

B. 600 units in ending inventory.

Under average cost method, the weighted-average cost per unit must be computed.
$25,040 ÷ 2,000 units = $12.52
600 units x $12.52 = $7,512 (Tot. cost/tot. units) × end. inv. units

C. 600 units in ending inventory.

Under LIFO, the units remaining are the ones purchased earliest.
1/1 400 units @ 12.00 = $4,800 1/1 units × 1/1 cost
1/8 200 units @ 12.40 = 2,480 ((1/31 units − 1/1 units) × 1/8 cost)
600 units $7,280

4.

Market Lower-of-Cost- Lower-of-Cost-

Cost/Unit Value/Unit or-Market Units or-Market

Cameras:
Minolta $175 $168 $168 5 $ 840
Canon 148 152 148 7 1,036

Light Meters:
Vivitar 125 119 119 15 1,785
Kodak 120 135 120 10 1,200
Total $4,861

5. Answers to Matching

1. I 6. C
2. E 7. F
3. B 8. H
4. G 9. D
5. A 10. J