Accounting 115

Fall 2006

Quiz 3 and 4

Name ______Student Number ______

Question Topic Points

1 Retail Inventory Method 15

2 Gross Profit Method 16

3 Inventory 24

Total 55

The work shown on the quiz must support the answer that you give. An unsupported correct answer will receive no credit. State clearly any assumptions that you may have to make with regard to any question. You may use your book and notes, but you must work independently and not discuss the quiz with anyone.

Honor Code:

I have followed the above directions and have neither given nor accepted any help from another person on this quiz.

______

Signature

(1)

Blues Clues Signs uses the retail method to estimate ending inventory in its monthly financial statements. The following information is available for the month ended April 30:

Cost / Retail
Sales / $ 750,000
Inventory, April 1 / 300,000 / $ 500,000
Net purchases / 250,000 / 500,000
Goods available for sale / $550,000 / $1,000,000

Using the retail method:

(a) Determine the cost ratio that should be used in estimating the
Inventory at April 30. ______55__%
(b) Estimate the cost of the inventory at April 30. $__137,500______
(c) Estimate the cost of goods sold for April. $__412,500______

(2)

On April 30, Peter Rabbit, Inc. lost its entire inventory in a flood. The following information is available from the company's accounting records, which were recovered from the waterproof safe:

Inventory, January 1 / $275,000
Purchases, January 1 through April 30 / 625,000
Net sales, January 1 through April 30 / 925,000

The gross profit of Peter Rabbit, Inc. over the past several years has consistently averaged 30% of net sales. Using the gross profit method, estimate the cost of the inventory lost in the flood on April 30.

Solution

Cost of goods available for sale - Cost of goods sold = Ending inventory

900,000 - 647,500 = 252,500

(3)

__B__ The specific identification method is more appropriate than a flow assumption:

A) For a large inventory of identical low-priced items.

B) If each item in the inventory is unique.

C) If purchase costs are rising.

D) If purchase costs are falling.

__C__ Which of the following statements is not a characteristic of the LIFO method of pricing inventory?

A) During a period of rising prices, LIFO tends to minimize the amounts of income taxes owed.

B) The cost of goods sold is measured in relatively current costs.

C) Inventory is valued at relatively current costs.

D) None of the above; these statements all describe characteristics of the LIFO method.

__B__ In a perpetual inventory system, the flow of inventory cost is:

A) First through the income statement, then through the balance sheet.

B) First through the balance sheet, then through the income statement.

C) Only through the balance sheet and not the income statement.

D) Only through the income statement and not the balance sheet.

__C__ During a period of steadily falling prices, which of the following methods of measuring the cost of goods sold is likely to result in reporting the highest gross profit?

A) Specific identification.

B) Average cost.

C) LIFO.

D) FIFO.

__A__ During periods of inflation which method will yield the smallest ending inventory and the largest cost of goods sold?

A) LIFO.

B) FIFO.

C) Average.

D) None of the above.

__B__ Which of the following is not considered an acceptable inventory cost method according to GAAP?

A) First-in, first-out

B) First-in, last-out

C) Last-in, first-out

D) Average cost

(3 cont.)

Elmo, Inc. uses a periodic inventory system. The purchases of a particular product during the year are shown below:

At December 31 the ending inventory consisted of 2,000 units.

_____ Refer to the above data. Compute the cost of the ending inventory based on the LIFO method of inventory valuation.

$ __15,450_____

_____ Refer to the above data. Compute the cost of goods sold for the current year based on the LIFO method of inventory valuation.

$ __27,000______

_____ Refer to the above data. Compute the cost of the ending inventory based on the FIFO method of inventory valuation.

$ __17,500______

_____ Refer to the above data. Compute the cost of goods sold for the current year based on the FIFO method of inventory valuation.

$ __24,950______

_____ Refer to the above data. Compute the cost of the ending inventory based on the average-cost method of inventory valuation. (Rounded)

$ __16,485______

_____ Refer to the above data. Compute the cost of goods sold for the current year based on the average-cost method of inventory valuation.

$ __25,965______