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Exam 7: Inventory

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Question 51

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Jones Pharmaceuticals is reviewing the value of one of its more expensive drugs.The drug has been selling for $32, but a competitor has recently introduced a new product that provides the same benefits with fewer side effects.Therefore, the drug can only be sold for $12 per unit.Its unit purchase cost was $22.The current replacement cost is $10.If inventory is reported at lower of cost or net realizable value, what amount should be reported for the inventory of 30,000 units?

A) $660,000
B) $300,000
C) $360,000
D) $960,000

E) None of the above
F) B) and D)

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Question 52

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In order to prevent companies from selecting inventory costing methods just to avoid tax, the Canada Revenue Agency:

A) allows only the FIFO method to be used.
B) allows only average cost to be used.
C) places restrictions on the company's ability to change methods.
D) accepts any method that is used for accounting purposes.

E) None of the above
F) A) and B)

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Question 53

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The basic accounting concept that refers to the tendency of accountants to resolve uncertainty in favour of understating assets and income is known as:

A company that makes the following journal entry at the time of sale is using which of the following inventory systems? $\begin{array}{l}\text { Dr. Cost of sales } \quad \mathrm { xxx }\\\text { Cr. Inventory } \quad \mathrm { xxx }\end{array}$

Which cost flow assumption assumes that the goods purchased first are still in inventory?

Fundy Corp.has the following information about their inventory at year-end: $\begin{array}{lrr}\text { Item}&\text { Cost }&\text { NRV }\\\hline\# 1 & \$ 12,000 & \$ 12,500 \\\# 2 & 21,250 & 19,750 \\\# 3 & 18,600 & 18,500\end{array}$ If Fundy values their inventory at the lower of cost and net realizable value on an individual basis, what would be loss on inventory write down for the current year?

All of the following are types of inventory except?

Axelrods Inc.uses a perpetual inventory system.In Dec 2013, the accountant neglected to record a purchase of merchandise on account at year end.This merchandise was also omitted from the year-end physical count.How will this error affect assets, liabilities, and shareholders' equity at year end and net income for the year? $\begin{array}{llll}&\text { Assets } & \text { Liabilities } & \text { Shareholders' Equity }& \text { Net Income }\\\hlineA.&\text { No effect } & \text { Understated } & \text { Overstated } & \text { Overstated. } \\B.&\text { No effect } & \text { Overstated } & \text { Understated } & \text { Understated. } \\C.&\text { Understated } & \text { Understated } & \text { No effect } & \text { No effect. } \\D.&\text { Understated } & \text { No effect } & \text { Understated } & \text { Understated }\end{array}$

In October 2013, Harvest Moon Produce entered into a contract with Boblaws Distribution to sell them 100,000 cases of oranges during the coming year.Harvest Moon grows their oranges on approximately 100 acres of prime land for orange trees.At the time of the contract, the fair value of oranges was $25 per case.The weather had been unusually warm and Harvest Moon expects to harvest approximately 130,000 cases.The additional 30,000 cases will have a selling cost of $2 per case. Unfortunately, by the end of the year, the excess supply of oranges has driven the market price down to $20 per case.In their December 31 financial statements, Harvest Moon should value their agricultural inventory at:

Loblaw Companies Limited operates several grocery chains under the Loblaws and other banners.Recently, they have been expanding the amount of household goods, such as dishes, home décor items and furniture that they carry in order to meet the increasing competitive threat from Wal-Mart, who carries grocery items in addition to their broad product line.How would you expect this shift in Loblaw's product line to have affected their inventory turnover? Why?

After the financial statements were prepared for 2012, Wickham Ltd.discovered that an error had been made during the year-end inventory count and one room containing $40,000 worth of goods, at cost, had been missed.A review of the accounting records showed that all purchases had been recorded.The company's tax rate is 40%.If the error is not corrected, what is the effect of this error on 2013 net income?

The use of the FIFO cost flow assumption:

Huron Company had the following activity for the month of October: $\begin{array}{llll}&\text { Units }\\&\text { Purchased }&\text {Unit Cost }&\text {Total Costs }&\text {Units Sold }\\\hline\text { Opening Inventory: } & 8,000 & \$ 60.00 & \$ 480,000 \\\text { October 3 } & 7,000 & \$ 62.00 & \$ 434,000 \\\text { October 10 } & & &&12,000\\\text { October } 15 & 10,000 & \$ 60.00 & \$ 600,000 \\\text { October } 22 & & & &7,000\\\text { October } 28 & 5,000 & \$ 62.50 & \$ 312,500\\\text { October } 31 & & & &7,000\\\end{array}$ If Huron Company uses a periodic inventory system, calculate the following: A) Ending inventory and cost of goods sold using average costing. B) Ending inventory and cost of goods sold using FIFO costing.

During a period of rising prices, which of the following cost flow assumptions will result in the highest cost of goods sold?

If a company is using a perpetual inventory system, which of the following entries is the correct journal entry to record the purchase of $10,000 of merchandise on account? A. Dr. Inventory $\quad 10,000$ $\quad$ Cr. Accounts payable $\quad 10,000$ B. Dr. Inventory $\quad 10,000$ $\quad$ Cr. Purchases $\quad 10,000$ C. Dr. Purchases $\quad 10,000$ $\quad$ Cr. Inventory $\quad$ 10,000 D. Dr. Purchases $\quad 10,000$ $\quad$ Cr. Accounts payable $\quad 10,000$

During a period of rising prices, which of the following cost flow assumptions will result in the highest ending inventory?

Which cost-based inventory valuation system is more useful to a user trying to predict future profitability?

Find the missing values in each of the following independent scenarios: $\begin{array}{lrrrr}&1&2&3&4\\\text { Beginning inventory } & \$ 12,500 & & \$ 225,000 & \$ 187,500 \\\text { Purchases } & 232,000 & 75,000 & & 762,500 \\\text { Ending inventory } & 11,750 & 6,400 & 212,500 & \\\text { Cost of goods sold } & & 75,800 & 940,000 & 757,500 \\\text { Sales } & & 112,000 & & 975,000\\\text { Gross margin }&142,250&&128,000\end{array}$

For income tax purposes, if the NRV of inventory at year end is lower than cost, the company is permitted:

Harvest Moon Produce has several acres of farmland on which they grow asparagus.Asparagus takes five or more years to produce its first crop, and afterwards produces every two years.Harvest Moon grows the crop in rotation so they will have product every year.The costs that Harvest Moon undertakes to maintain the non-producing acreage in a given year should be charged to: