Accounting

Sheet (4)
Tegara English 2021
First year
Edited by/ Dr. magdy kamel
‫للتواصل على جروب الخاص كلمنى وتس اضيفك‬
Tel/ 01273949660

1 | Page Dr. Magdy Kamel

Example:
Houston electronics Company uses the perpetual inventory system to account for
inventories. Information related to Company inventory at October 31 is given
below: Balance
Date Explanation Units Unit Cost Total Cost in units
1/1 Beginning inventory 100 $10 $ 1,000 100
15/4 Purchase 200 $11 2,200 300
24/8 Purchase 300 $12 3,600 600
10/9 Sales 550 50
27/11 Purchase 400 $13 5,200 450
$12,000
Assuming the Perpetual Inventory System, compute Cost of Goods Sold and
Ending Inventory under FIFO and Average cost.
Solution
Under using First in first Out (FIFO)
Purchase Cost of Goods Sold Balance
1/1 100 10 1,000
15/4 200 11 2,200 100 10 1,000
200 11 2,200
300 3,200
24/8 300 12 3,600 100 10 1,000
200 11 2,200
300 12 3,600
600 6,800
10/9 100 10 1,000
200 11 2,200 50 12 600
250 12 3,600
550 6,200
27/11 400 13 5,200 50 12 600
400 13 5,200
450 5,800
 Cost of goods sold = 6,200
 Ending inventory = 5,800

2 | Page Dr. Magdy Kamel

Under using Last in first out ( LIFO)
Purchase Cost of Goods Sold Balance
1/1 100 10 1,000
15/4 200 11 2,200 100 10 1,000
200 11 2,200
300 3,200
24/8 300 12 3,600 100 10 1,000
200 11 2,200
300 12 3,600
600 6,800
10/9 300 12 3,600
200 11 2,200 50 10 500
50 10 500
550 6,300
27/11 400 13 5,200 50 10 500
400 13 5,200
5,700
 Cost of goods sold = 6,300
 Ending inventory = 5,700
Under using (moving average cost)
Purchase Cost of Goods Sold Balance
1/1 100 10 1,000
15/4 200 11 2,200 100 10 1,000
200 11 2,200
300 10.667 3,200
24/8 300 12 3,600 300 10.667 3,200
300 12 3,600
600 11.333 6,800
10/9 550 11.333 6,233 50 11.333 567
27/11 400 13 5,200 50 11.333 567
400 13 5,200
450 12.816 5,767
 Cost of goods sold = 6,233
 Ending inventory = 5,767

3 | Page Dr. Magdy Kamel

Using Cost Flow Methods Consistently
 Method should be used consistently, enhances comparability.
 Although consistency is preferred, a company may change its inventory
costing method.

Lower-of-Cost-or-Net Realizable Value

When the value of inventory is lower than its cost
 Companies can “write down” the inventory to its net realizable value in the
period in which the price decline occurs.
 Net realizable value refers to the net amount that a company expects to
realize (receive) from the sale of inventory.
 Market value = replacement cost
 Example of conservatism.

Example:
Assume that Ken Tuckie TV has the following lines of merchandise with costs and
market values as indicated.

Cost Net realizable Lower of cost or

value net realizable value
(Lcnrv)
A 60,000 55,000 55,000
B 45,000 52,000 45,000
C 48,000 45,000 45,000
D 15,000 14,000 14,000
Total inventory 159,000
Example:
Alou appliance center accumulates the following cost and market data at Dec 31.

Categories Inventory Cost Data Market Data

Cameras $12,000 $12,100
Camcorders 9,500 9,700
DVD players 14,000 12,800
4 | Page Dr. Magdy Kamel
Compute the lower-of-cost-or-market valuation for the company’s total inventory.

Solution

Total inventory = 12,000 + 9,500 + 12,800 = 25,300

Inventory errors
Common Cause:
 Failure to count or price inventory correctly.
 Not properly recognizing the transfer of legal title to goods in transit.
 Errors affect both the income statement and statement of financial position.

First: Income Statement Effects

Inventory errors affect the computation of cost of goods sold and net income.

Inventory errors affect the computation of cost of goods sold and net income in
two periods.
 An error in ending inventory of the current period will have a reverse effect on
net income of the next accounting period.
 Over the two years, the total net income is correct because the errors offset
each other.
 The ending inventory depends entirely on the accuracy of taking and costing
the inventory.

5 | Page Dr. Magdy Kamel

 Income statement
2011 2012
Incorrect Correct Incorrect Correct
Sales $ 80,000 $ 80,000 $ 90,000 $ 90,000
Beginning inventory 20,000 20,000 12,000 15,000
Cost of goods purchased 40,000 40,000 68,000 68,000
Cost of goods available 60,000 60,000 80,000 83,000
Ending inventory 12,000 15,000 23,000 23,000
Cost of good sold 48,000 45,000 57,000 60,000
Gross profit 32,000 35,000 33,000 30,000
Operating expenses 10,000 10,000 20,000 20,000
Net income $ 22,000 $ 25,000 $ 13,000 $ 10,000

($3,000) $3,000
Net Income Net Income
understated overstated

MCQ
Understating ending inventory will overstate:
a. assets. b. cost of goods sold.
c. net income. d. equity.

Second: Statement of Financial Position Effects

Effect of inventory errors on the statement of financial position is determined by
using the accounting equation:

Assets = Liablilities + owner’s equity

6 | Page Dr. Magdy Kamel

MCQ
1. Which of the following should not be included in the physical inventory of a company?
a. Goods held on consignment from another company.
b. Goods shipped on consignment to another company.
c. Goods in transit from another company shipped FOB shipping point.
d. None of the above.

2. As a result of a thorough physical inventory, Railway Company determined that it had

inventory worth $180,000 at December 31, 2014. This count did not take into consideration
the following facts. Rogers Consignment store currently has goods worth $35,000 on its sales
floor that belong to Railway but are being sold on consignment by Rogers. The selling price of
these goods is $50,000. Railway purchased $13,000 of goods that were shipped on December
27, FOB destination, that will be received by Railway on January 3. Determine the correct
amount of inventory that Railway should report.
a. $230,000.
b. $215,000.
c. $228,000.
d. $193,000.

3. Cost of goods available for sale consists of two elements: beginning inventory and:
a. ending inventory. b. cost of goods purchased.
c. cost of goods sold. d. All of the above.

4. Tinker Bell Company has the following:

inventory Jan 1 8,000 units $11
Purchase June 19 13,000 units $12
Purchase Nov 8 5,000 units $13
If Tinker Bell has 9,000 units on hand at December 31, the cost of the ending inventory under
FIFO is:
a. $99,000.
b. $108,000.
c. $113,000.
d. $117,000.

5. Using the data in Question 4 above, the cost of the ending inventory under LIFO is:
a. $113,000. b. $108,000.
c. $99,000. d. $100,000.

7 | Page Dr. Magdy Kamel

6. Davidson Electronics has the following:
inventory Jan 1 5,000 units $8
purchase April 2 15,000 units $10
purchase August 28 20,000 units $12

If Davidson has 7,000 units on hand at December 31, the cost of ending inventory under the
average-cost method is:
a. $84,000.
b. $70,000.
c. $56,000.
d. $75,250.

7. In periods of rising prices, LIFO will produce:

a. higher net income than FIFO.
b. the same net income as FIFO.
c. lower net income than FIFO.
d. higher net income than average-cost.

8. Factors that affect the selection of an inventory costing method do not include:
a. tax effects.
b. balance sheet effects.
c. income statement effects.
d. perpetual vs. periodic inventory system.

9. Rickety Company purchased 1,000 widgets and has 200 widgets in its ending inventory at a
cost of $91 each and a current replacement cost of $80 each.
The ending inventory under lower-of-cost-or-market is:
a. $91,000.
b. $80,000.
c. $18,200.
d. $16,000.

10. Atlantis Company's ending inventory is understated $4,000. The effects of this error on the
current year's cost of goods sold and net income, respectively, are:
a. understated, overstated.
b. overstated, understated.
c. overstated, overstated.
d. understated, understated.

8 | Page Dr. Magdy Kamel

11. Harold Company overstated its inventory by $15,000 at December 31, 2013. It did not
correct the error in 2013 or 2014. As a result, Harold's stockholders' equity was:
a. overstated at December 31, 2013, and understated at December 31, 2014.
b. overstated at December 31, 2013, and properly stated at December 31, 2014.
c. understated at December 31, 2013, and understated at December 31, 2014.
d. overstated at December 31, 2013, and overstated at December 31, 2014.

12. Which of these would cause the inventory turnover ratio to increase the most?
a. Increasing the amount of inventory on hand.
b. Keeping the amount of inventory on hand constant but increasing sales.
c. Keeping the amount of inventory on hand constant but decreasing sales.
d. Decreasing the amount of inventory on hand and increasing sales.

13. Carlos Company had beginning inventory of $80,000, ending inventory of $110,000,
cost of goods sold of $285,000, and sales of $475,000. Carlos's days in inventory is:
a. 73 days.
b. 121.7 days.
c. 102.5 days.
d. 84.5 days.

14. Songbird Company has sales of $150,000 and cost of goods available for sale of $135,000.
If the gross profit rate is 30%, the estimated cost of the ending inventory under the gross
profit method is:
a. $15,000.
b. $30,000.
c. $45,000.
d. $75,000.

15. 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 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.

9 | Page Dr. Magdy Kamel