Chapter 6 Inventories

C. Are included in inventory at their net realizable value.

67. Damaged and obsolete goods:
A. Are never counted as inventory.
B. Are included in inventory at their full cost.
C. Are included in inventory at their net realizable value.
D. Should be disposed of immediately.
E. Are assigned a value of zero.

A. All goods owned by a company and held for sale.

68. Merchandise inventory includes:
A. All goods owned by a company and held for sale.
B. All goods in transit.
C. All goods on consignment.
D. Only damaged goods.
E. All of these.

B. When the purchaser is responsible for paying freight charges.

69. Goods in transit are included in a purchaser's inventory:
A. At any time during transit.
B. When the purchaser is responsible for paying freight charges.
C. When the supplier is responsible for freight charges.
D. If the goods are shipped FOB destination.
E. After the half-way point between the buyer and seller.

A. Are goods shipped by the owner to the consignee who sells the goods for the owner.
70. Goods on consignment:
A. Are goods shipped by the owner to the consignee who sells the goods for the owner.
B. Are reported in the consignee's books as inventory.
C. Are goods shipped to the consignor who sells the goods for the owner.
D. Are not reported in the consignor's inventory since they do not have possession of the
inventory.
E. Are always paid for by the consignee when they take possession.

D. ending inventory and cost of goods sold.

71. Regardless of the inventory costing system used, cost of goods available for sale must be
allocated between
A. beginning inventory and net purchases during the period.
B. ending inventory and beginning inventory.
C. net purchases during the period and ending inventory.
D. ending inventory and cost of goods sold.
E. beginning inventory and cost of goods sold.
E. $156,000
72. On December 31 of the current year, Hewett Company reported an ending inventory
balance of $215,000. The following additional information is also available:
• Hewett sold goods costing $38,000 to Trump Enterprises on December 28 and shipped the
goods on that date with shipping terms of FOB shipping point. The goods were not included in
the ending inventory amount of $215,000 because they were not in Hewett's warehouse.
• Hewett purchased goods costing $44,000 on December 29. The goods were shipped FOB
destination and were received by Hewett on January 2 of the following year. The shipment was
a rush order that was supposed to arrive by December 31. These goods were included in the
ending inventory balance of $215,000.
• Hewett's ending inventory balance of $215,000 included $15,000 of goods being held on
consignment from Rumsfeld Company. (Hewett Company is the consignee.)
• Hewett's ending inventory balance of $215,000 did not include goods costing $95,000 that
were shipped to Hewett on December 27 with shipping terms of FOB destination and were still
in transit at year-end.
Based on the above information, the correct balance for ending inventory on December 31 is:
A. $194,000
B. $209,000
C. $200,000
D. $171,000
E. $156,000

Start with beginning inventory of $215,000. The information in the first bullet point was handled
correctly, although the explanation for why is incorrect. No adjustment. For the second bullet
point, the $44,000 of goods should not have been included in ending inventory since the goods
were shipped FOB destination. Subtract $44,000. For the third bullet point, ending inventory
should not include goods held on consignment from another company. Subtract $15,000. The
information in the fourth bullet point was handled correctly.
No adjustment. $215,000 - $44,000 - $15,000 = $156,000.

E. $319,000
73. Gotham Company reported a December 31 ending inventory balance of $412,000. The
following additional information is also available:

• The ending inventory balance of $412,000 included $72,000 of consigned inventory for which
Gotham was the consignor.
• The ending inventory balance of $412,000 included $22,000 of office supplies that were stored
in the warehouse and were to be used by the company's supervisors and managers during the
coming year.
• The ending inventory balance of $412,000 did not include goods costing $48,000 that were
purchased by Gotham on December 28 and shipped FOB destination on that date. Gotham did
not receive the goods until January 2 of the following year.
• The ending inventory balance of $412,000 included damaged goods at their original cost of
$38,000. The net realizable value of the damaged goods was $10,000.
• The ending inventory balance of $412,000 included $43,000 of consigned inventory for which
Gotham was the consignee.
Based on this information, the correct balance for ending inventory on December 31 is:
A. $247,000
B. $341,000
C. $362,000
D. $309,000
E. $319,000

Start with beginning inventory of $412,000. The information in the first bullet point was handled
correctly since inventory should include consigned goods for which the subject company is the
consignor. No adjustment. With respect to the second bullet point, inventory should not include
office supplies held for use. Subtract $22,000. The information in the third bullet point was
handled correctly since inventory should not include goods shipped FOB destination that have
not yet been received by the buyer. With respect to the fourth bullet point, damaged goods
should not be included in inventory at their original cost if the net realizable value is materially
below cost. Subtract $28,000 ($38,000 - $10,000). With respect to the fifth bullet point, inventory
should not include the value of consigned inventory for which the subject company is the
consignee. Subtract $43,000. Thus, ending inventory should be $412,000 - $22,000 - $28,000 -
$43,000 = $319,000.

E. All of these.
74. Costs included in the Merchandise Inventory account can include:
A. Invoice price minus any discount.
B. Transportation-in.
C. Storage.
D. Insurance.
E. All of these.

E. All of these.
75. Internal controls that should be applied when a business takes a physical count of inventory
should include
A. Prenumbered inventory tickets.
B. Counters of inventory should not be those who are responsible for the inventory.
C. Counters must confirm the validity of inventory existence, amounts, and quality.
D. Second counts by a different counter.
E. All of these.

B. Are necessary to measure and adjust for inventory shrinkage.

76. Physical counts of inventory:
A. Are not necessary under the perpetual system.
B. Are necessary to measure and adjust for inventory shrinkage.
C. Must be taken at least once a month.
D. Requires the use of hand-held portable computers.
E. Are not necessary under the cost-to benefit constraint.

E. All of these.
77. Incidental and necessary costs of inventory:
A. Can be assigned to each inventory unit.
B. May be immaterial.
C. Can be allocated to cost of goods sold.
D. Are subject to the cost-to-benefit constraint when deciding how to account for them.
E. All of these.

E. LIFO method.
78. During a period of steadily rising costs, the inventory valuation method that yields the lowest
reported net income is:
A. Specific identification method.
B. Average cost method.
C. Weighted-average method.
D. FIFO method.
E. LIFO method.

B. Weighted average.
79. The inventory valuation method that tends to smooth out erratic changes in costs is:
A. FIFO.
B. Weighted average.
C. LIFO.
D. Specific identification.
E. WIFO

A. FIFO.
80. The inventory valuation method that has the advantages of assigning an amount to
inventory on the balance sheet that approximates its current cost, and also mimics the actual
flow of goods for most businesses is:
A. FIFO.
B. Weighted average.
C. LIFO.
D. Specific identification.
E. All of these.

A. LIFO method.
81. The inventory valuation method that results in the lowest taxable income in a period of
inflation is:
A. LIFO method.
B. FIFO method.
C. Weighted-average cost method.
D. Specific identification method.
E. Gross profit method.

A. Requires a company to consistently apply the same accounting method of inventory

valuation, an exception being when a change from one method to another will improve its
financial reporting.
82. The consistency concept:
A. Requires a company to consistently apply the same accounting method of inventory
valuation, an exception being when a change from one method to another will improve its
financial reporting.
B. Requires a company to use one method of inventory valuation exclusively.
C. Requires that all companies in the same industry use the same accounting methods of
inventory valuation.
D. Is also called the full disclosure principle.
E. Is also called the matching principle.

A. Requires that when a change in inventory valuation method is made, the notes to the
statements report the type of change, its justification and its effect on net income.
83. The full disclosure principle:
A. Requires that when a change in inventory valuation method is made, the notes to the
statements report the type of change, its justification and its effect on net income.
B. Requires that companies use the same accounting method for inventory valuation period
after period.
C. Is not subject to the materiality principle.
D. Is only applied to retailers.
E. Is also called the consistency principle.

C. Specific identification and FIFO

84. Which of the following inventory costing methods will always result in the same values for
ending inventory and cost of goods sold regardless of whether a perpetual or periodic inventory
system is used?
A. FIFO and LIFO
B. LIFO and weighted-average cost
C. Specific identification and FIFO
D. FIFO and weighted-average cost
E. LIFO and specific identification

E. All of these.
85. If a period-end inventory amount is reported in error, it can cause a misstatement in:
A. Cost of goods sold.
B. Gross profit.
C. Net income.
D. Current assets.
E. All of these.

B. It is sometimes said to be self-correcting.

86. An error in the period-end inventory causes an offsetting error in the next period and
therefore:
A. Managers can ignore the error.
B. It is sometimes said to be self-correcting.
C. It affects only income statement accounts.
D. If affects only balance sheet accounts.
E. Is immaterial for managerial decision making.

A. Cost of goods sold to be overstated and net income to be understated.

87. The understatement of the ending inventory balance causes:
A. Cost of goods sold to be overstated and net income to be understated.
B. Cost of goods sold to be overstated and net income to be overstated.
C. Cost of goods sold to be understated and net income to be understated.
D. Cost of goods sold to be understated and net income to be overstated.
E. Cost of goods sold to be overstated and net income to be correct

B. Cost of goods sold to be understated and net income to be overstated.

88. The understatement of the beginning inventory balance causes:
A. Cost of goods sold to be understated and net income to be understated.
B. Cost of goods sold to be understated and net income to be overstated.
C. Cost of goods sold to be overstated and net income to be overstated.
D. Cost of goods sold to be overstated and net income to be understated.
E. Cost of goods sold to be overstated and net income to be correct.

A. $291,000
89. Thelma Company reported cost of goods sold for Year 1 and Year 2 as follows:

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Thelma Company made two errors: 1) ending inventory at the end of Year 1 was understated by
$15,000 and 2) ending inventory at the end of Year 2 was overstated by $6,000. Given this
information, the correct cost of goods sold figure for Year 2 would be:
A. $291,000
B. $276,000
C. $264,000
D. $285,000
E. $249,000

If ending inventory for Year 1 was reported at $130,000 but was understated by $15,000, the
correct ending inventory figure for Year 1 was $145,000. That amount becomes the beginning
inventory for Year 2. Add to that amount the $275,000 of cost of goods purchased in Year 2 and
you get cost of goods available for sale of $420,000. Finally, the reported ending inventory
figure for Year 2 of $135,000 was overstated by $6,000. Thus, the correct ending inventory
figure for Year 2 was $129,000. Subtracting ending inventory of $129,000 from cost of goods
available for sale of $420,000 yields cost of goods sold of $291,000.

C. $129,000 for Year 1 and $276,000 for Year 2.

90. Louise Company reported the following income statement information for Year 1 and Year 2:

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The beginning inventory balance for Year 1 is correct. The ending inventory balance for Year 2
is also correct. However, the ending inventory figure for Year 1 was overstated by $20,000.
Given this information, the correct gross profit figures for Year 1 and Year 2 would be:
A. $129,000 for Year 1 and $256,000 for Year 2.
B. $281,000 for Year 1 and $274,000 for Year 2.
C. $129,000 for Year 1 and $276,000 for Year 2.
D. $169,000 for Year 1 and $236,000 for Year 2.
E. $169,000 for Year 1 and $276,000 for Year 2.

If ending inventory of $144,000 for Year 1 were overstated by $20,000, the correct amount of
ending inventory was $124,000. As a result, cost of goods sold for Year 1 was not $261,000 as
reported, but rather $281,000. Thus, gross profit for Year 1 was $129,000 (Sales of $410,000 -
Cost of Goods Sold of $281,000). The adjusted ending inventory balance for Year 1 ($124,000)
becomes the beginning inventory balance for Year 2. Adding to that figure the $302,000 of
purchases during the year and you get cost of goods available for sale of $426,000. If we then
subtract the $152,000 of ending inventory for Year 2, we get cost of goods sold in Year 2 of
$274,000. Accordingly, gross profit for Year 2 is $276,000 (Sales of $550,000 - Cost of Goods
Sold of $274,000).

A. An overstatement of assets and equity on the balance sheet.

91. An overstatement of ending inventory will cause
A. An overstatement of assets and equity on the balance sheet.
B. An understatement of assets and equity on the balance sheet.
C. An overstatement of assets and an understatement of equity on the balance sheet.
D. An understatement of assets and an overstatement of equity on the balance sheet.
E. No effect on the balance sheet

C. Reveals how many times a company turns over (sells) its merchandise inventory.
92. The inventory turnover ratio:
A. Is used to analyze profitability.
B. Is used to measure solvency.
C. Reveals how many times a company turns over (sells) its merchandise inventory.
D. Validates the acid-test ratio.
E. Calculation depends on the company's inventory valuation method.

A. Is also called days' stock on hand.

93. Days' sales in inventory:
A. Is also called days' stock on hand.
B. Focuses on average inventory rather than ending inventory.
C. Is used to measure solvency.
D. Is calculated by dividing cost of goods sold by ending inventory.
E. Is a substitute for the acid-test ratio.

A. Cost of goods sold divided by average merchandise inventory.

94. The inventory turnover ratio is calculated as:
A. Cost of goods sold divided by average merchandise inventory.
B. Sales divided by cost of goods sold.
C. Ending inventory divided by cost of goods sold.
D. Cost of goods sold divided by ending inventory.
E. Cost of goods sold divided by ending inventory times 365.

C. Ending inventory divided by cost of goods sold times 365.

95. Days' sales in inventory is calculated as:
A. Ending inventory divided by cost of goods sold.
B. Cost of goods sold divided by ending inventory.
C. Ending inventory divided by cost of goods sold times 365.
D. Cost of goods sold divided by ending inventory times 365.
E. Ending inventory times cost of goods sold.

C. 4.79.
96. Toys "R" Us had cost of goods sold of $9,421 million, ending inventory of $2,089 million, and
average inventory of $1,965 million. Its inventory turnover equals:
A. 0.21.
B. 4.51
C. 4.79.
D. 76.1 days.
E. 80.9 days.

9,421/1,965 = 4.79 times

E. 80.9.days
97. Toys "R" Us had cost of goods sold of $9,421 million, ending inventory of $2,089 million, and
average inventory turnover of $1,965 million. Its days' sales in inventory equals:
A. 0.21.
B. 4.51.
C. 4.79.
D. 76.1 days.
E. 80.9.days.

2,089//9,421 * 365 = 80.9 days

E. All of these.
98. Acceptable inventory methods include:
A. LIFO method.
B. FIFO method.
C. Specific identification method.
D. Weighted average method.
E. All of these.

E. All of these.
99. Management must confront which of the following considerations when accounting for
inventory:
A. Costing (valuation) method.
B. Inventory system (perpetual or periodic).
C. Items to be included and their cost.
D. Use of lower of cost or market or other estimate.
E. All of these.

D. Specific identification method

100. The inventory valuation method that identifies each item in ending inventory with a specific
purchase and invoice is the:
A. Weighted average inventory method.
B. First-in, first-out method.
C. Last-in, first-out method.
D. Specific identification method
E. Retail inventory method.
B. $3,800.
101. A company had the following purchases during the current year:

Jan 10 units at $120

Feb 20 units at $130
May 15 units at $140
Sep 12 units at $150
Nov 10 units at $160

On December 31, there were 26 units remaining in ending inventory. These 26 units consisted
of 2 from January, 4 from February, 6 from May, 4 from September, and 10 from November.
Using the specific identification method, what is the cost of the ending inventory?
A. $3,500.
B. $3,800.
C. $3,960.
D. $3,280.
E. $3,640.

E. $276
102. A company had inventory on November 1 of 5 units at a cost of $20 each. On November 2,
they purchased 10 units at $22 each. On November 6 they purchased 6 units at $25 each. On
November 8, 8 units were sold for $55 each. Using the LIFO perpetual inventory method, what
was the value of the inventory on November 8 after the sale?
A. $304
B. $296
C. $288
D. $280
E. $276
Units available = 5 + 10 + 6 = 21 units
Units in inventory = 21 - 8 units = 13 units
Cost of inventory = (5 x $20) + (8 x $22) = $276

C. $158.40.
103. Acme-Jones Corporation uses a weighted-average perpetual inventory system.
August 2, 10 units were purchased at $12 per unit.
August 18, 15 units were purchased at $14 per unit.
August 29, 12 units were sold.
What was the amount of the cost of goods sold for this sale?
A. $148.00.
B. $150.50.
C. $158.40.
D. $210.00.
E. $330.00.

Average cost = [(10 x $12) + (15 x $14)]/25 units = $13.20/unit

Cost of sale = 12 units x $13.20/unit = $158.40

B. $124.
104. A company has inventory of 10 units at a cost of $10 each on June 1. On June 3, it
purchased 20 units at $12 each. 12 units are sold on June 5. Using the FIFO perpetual
inventory method, what is the cost of the 12 units that were sold?
A. $120.
B. $124.
C. $128.
D. $130.
E. $140.

(10 units x $10) + ($2 x $12) = $124

C. $210.
105. A company has inventory of 15 units at a cost of $12 each on August 1. On August 5, it
purchased 10 units at $13 per unit. On August 12 it purchased 20 units at $14 per unit. On
August 15, it sold 30 units. Using the FIFO perpetual inventory method, what is the value of the
inventory at August 12 after the sale?
A. $140.
B. $160.
C. $210.
D. $380.
E. $590.

Units available for sale = 15 + 10 + 20 = 45 units

Units in inventory = 45 - 30 = 15 units
Cost of inventory = 15 x $14 each = $210

B. $410.
106. A company had inventory of 5 units at a cost of $20 each on November 1. On November 2,
it purchased 10 units at $22 each. On November 6 it purchased 6 units at $25 each. On
November 8, it sold 18 units for $54 each. Using the LIFO perpetual inventory method, what
was the cost of the 18 units sold?
A. $395.
B. $410.
C. $450.
D. $510.
E. $520.

(6 x $25) + (10 x $22) + (2 x $20) = $410

A. LIFO method.
107. A company sells a climbing kit and uses the perpetual inventory system to account for its
merchandise. The beginning balance of the inventory and its transactions during January were
as follows:

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If the ending inventory is reported at $276, what inventory method was used?
A. LIFO method.
B. FIFO method.
C. Weighted-average method.
D. Specific identification method.
E. Retail inventory method.

C. $15.42.
108. Acme-Jones Company uses a weighted-average perpetual inventory system.
August 2, 10 units were purchased at $12 per unit.
August 18, 15 units were purchased at $15 per unit.
August 29, 20 units were sold.
August 31, 14 units were purchased at $16 per unit.
What is the per-unit value of ending inventory on August 31?
A. $12.00.
B. $13.80.
C. $15.42.
D. $16.00.
E. $17.74.

C. $380.
109. Given the following information, determine the cost of the inventory at June 30 using the
LIFO perpetual inventory method.

Jun 1 beginning inventories, 15 units at $20

Jun 15 sale 6 units at $50
Jun 29 purchase 8 units at $25
The cost of the ending inventory is
A. $200.
B. $220.
C. $380.
D. $275.
E. $300.

B. Current replacement cost.

110. In applying the lower of cost or market method to inventory valuation, market is defined as:
A. Historical cost.
B. Current replacement cost.
C. Current sales price.
D. FIFO.
E. LIFO.

C. Lower of cost or market.

111. Generally accepted accounting principles require that the inventory of a company be
reported at:
A. Market value.
B. Historical cost.
C. Lower of cost or market.
D. Replacement cost.
E. Retail value.

A. Requires that when multiple estimates of amounts to be received or paid in the future are
equally likely, then the least optimistic amount should be used
112. The conservatism constraint:
A. Requires that when multiple estimates of amounts to be received or paid in the future are
equally likely, then the least optimistic amount should be used.
B. Requires that a company use the same accounting methods period after period.
C. Requires that revenues and expenses be reported in the period in which they are earned or
incurred.
D. Requires that all items of a material nature be included in financial statements.
E. Requires that all inventory items be reported at full cost

B. $2,600.
113. A company normally sells its product for $20 per unit. However, the selling price has fallen
to $15 per unit. This company's current inventory consists of 200 units purchased at $16 per
unit. Replacement cost has now fallen to $13 per unit. Calculate the value of this company's
inventory at the lower of cost or market.
A. $2,550.
B. $2,600.
C. $2,700.
D. $3,000.
E. $3,200.

200 units @ $13 per unit = $2,600

C. $1,075.00 or $1,112.50, depending upon whether LCM is applied to individual items or the
inventory as a whole.
114. A company has the following per unit original costs and replacement costs for its inventory:

Part A: 50 units with a cost of $5, and replacement cost of $4.50

Part B: 75 units with a cost of $6, and replacement cost of $6.50
Part C: 160 units with a cost of $3, and replacement cost of $2.50

Under the lower of cost or market method, the total value of this company's ending inventory is:
A. $1,180.00.
B. $1,075.00.
C. $1,075.00 or $1,112.50, depending upon whether LCM is applied to individual items or the
inventory as a whole.
D. $1,112.50.
E. $1180.00 or $1075.00, depending upon whether LCM is applied to individual items or to the
inventory as a whole.

B. $124.
115. A company has inventory of 10 units at a cost of $10 each on June 1. On June 3, it
purchased 20 units at $12 each. 12 units are sold on June 5. Using the FIFO periodic inventory
method, what is the cost of the 12 units that were sold?
A. $120.
B. $124.
C. $128.
D. $130.
E. $140.

(10 units x $10) + ($2 x $12) = $124

C. $210.
116. A company has inventory of 15 units at a cost of $12 each on August 1. On August 5, it
purchased 10 units at $13 per unit. On August 12 it purchased 20 units at $14 per unit. On
August 15, it sold 30 units. Using the FIFO periodic inventory method, what is the value of the
inventory at August 15 after the sale?
A. $140.
B. $160.
C. $210.
D. $380.
E. $590.
Units available for sale = 15 + 10 + 20 = 45 units
Units in inventory = 45 - 30 = 15 units
Cost of inventory = 15 x $14 each = $210

A. $470.
117. A company had inventory of 10 units at a cost of $20 each on November 1. On November
2, it purchased 10 units at $22 each. On November 6 it purchased 6 units at $25 each. On
November 8, it sold 22 units for $54 each. Using the FIFO perpetual inventory method, what
was the cost of the 22 units sold?
A. $470.
B. $490.
C. $450.
D. $570.
E. $520.

(10 x $20) + (10 x $22) + (2 x $25) = $470

B. $2,200.
118. A company uses the periodic inventory system and had the following activity during the
current monthly period.

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In a periodic inventory system, using the weighted-average inventory method, the company's
ending inventory would be:
A. $2,000.
B. $2,200.
C. $2,250.
D. $2,400.
E. $4,400.

Weighted average cost per unit: $6,600/300 units = $22

Ending inventory: (300 units - 200 units) x $22 = $2,200
B. FIFO.
119. A company sells a climbing kit and uses the periodic inventory system to account for its
merchandise. The beginning balance of the inventory and its transactions during January were
as follows:

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If the ending inventory is reported at $357, what inventory method was used?
A. LIFO.
B. FIFO.
C. Weighted average.
D. Specific identification.
E. Retail inventory method.

A. $ 9,705.
120. A company's warehouse was destroyed by a tornado on March 15. The following
information was the only information that was salvaged:

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The company's average gross profit ratio is 35%. What is the estimated cost of the lost
inventory?
A. $ 9,705.
B. $25,995.
C. $29,250.
D. $44,000.
E. $45,000.
COGS = ($55,000 - $700) x 65% = $35,295
Goods available for sale = $28,000 + $17,000 = $45,000
EI = $45,000 - $35,295 = $9,705

B. $ 56,700.
121. A company reported the following information regarding its inventory.

Beginning inventory: cost is $70,000; retail is $130,000

Net purchases: cost is $65,000; retail is $120,000
Sales at retail: $145,000

The year-end inventory showed $105,000 worth of merchandise available at retail prices. What
is the cost of the ending inventory?
A. $ 48,300.
B. $ 56,700.
C. $ 56,441.
D. $ 78,300.
E. $105,000.

E. $34,000.
122. On September 30 a company needed to estimate its ending inventory to prepare its third
quarter financial statements. The following information is available:
Beginning inventory, July 1: $4,000
Net sales: $40,000
Net purchases: $41,000
The company's gross margin ratio is 15%. Using the gross profit method, the cost of goods sold
would be:

A. $ 4,000.
B. $ 5,000.
C. $21,000.
D. $25,000.
E. $34,000.

85% x $40,000 = $34,000

C. $20,000.
123. A company that has operated with a 30% average gross profit ratio for a number of years
had $100,000 in sales during the first quarter of this year. If it began the quarter with $18,000 of
inventory at cost and purchased $72,000 of inventory during the quarter, its estimated ending
inventory by the gross profit method is:
A. $30,000.
B. $21,000.
C. $20,000.
D. $18,000.
E. $27,000.

COGS = $100,000 x 70% = $70,000

Costs available for sale = $18,000 + $72,000 = $90,000
EI = $90,000 - $70,000 = $20,000

B. $ 6,000.
124. On December 31, a company needed to estimate its ending inventory to prepare its fourth
quarter financial statements. The following information is currently available:
Inventory as of October 1: $12,500
Net sales for fourth quarter: $40,000
Net purchases for fourth quarter: $27,500

This company typically achieves a gross profit ratio of 15%. Ending Inventory under the gross
profit method would be:
A. $ 4,000.
B. $ 6,000.
C. $10,000.
D. $16,000.
E. $34,000.

COGS = $40,000 x 85% = $34,000

Costs available for sale = $12,500 + $27,500 = $40,000
EI = $40,000 - $34,000 = $6,000

C. Are usually monthly or quarterly statements prepared for periods less than the traditional,
annual statements.
125. Interim statements:
A. Are required by the Congress.
B. Are necessary to achieve full disclosure about a business's operations.
C. Are usually monthly or quarterly statements prepared for periods less than the traditional,
annual statements.
D. Require the use of the perpetual method for inventories.
E. Cannot be prepared if the company follows the conservatism principle.

A. $60,000
126. The Jackson Company has sales of $300,000 and cost of goods available for sale of
$270,000. If the gross profit ratio is typically 30%, the estimated cost of the ending inventory
under the gross profit method would be:
A. $60,000
B. $180,000
C. $30,000
D. $90,000
E. Impossible to determine from the information provided.

If sales for the period were $300,000 and the company's typical gross profit ratio is 30%, gross
profit would be approximately $90,000. That means that cost of goods sold must have been
$210,000. Subtracting cost of goods sold of $210,000 from the $270,000 of cost of goods
available for sale yields ending inventory of $60,000.

D. 64.1%
127. The Georgia Peach Company reported net sales in June of the current year of $1,000,000.
At the beginning of June, the company reported beginning inventory of $368,000. Cost of goods
purchased during June amounted to $217,500. The company reported ending inventory at the
end of June of $226,750.
The company's gross profit rate for June of the current year was:
A. 35.9%
B. 18.8%
C. 81.2%
D. 64.1%
E. Impossible to determine from the information provided.

Combining beginning inventory of $368,000 with purchases for the period of $217,500 yields
cost of goods available for sale of $585,500. If we then subtract the ending inventory of
$226,750, we get cost of goods sold of $358,750. Subtracting cost of goods sold ($358,750)
from sales ($1,000,000) yields gross profit of $641,250. Dividing gross profit of $641,250 by
sales of $1,000,000 yields a gross profit percentage of 64.125% or 64.1% rounded.

B. $103,300
128. On July 24 of the current year, The Georgia Peach Company experienced a natural
disaster that destroyed the company's entire inventory. At the beginning of July, the company
reported beginning inventory of $226,750. Inventory purchased during July (until the date of the
disaster) was $197,800. Sales for the month of July through July 24 were $642,500. Assuming
the company's typical gross profit ratio is 50%, estimate the amount of inventory destroyed in
the natural disaster.
A. $212,275
B. $103,300
C. $217,950
D. $321,250
E. $157,788

Beginning inventory on July 1 was $226,750. Purchases for the month of July amounted to
$197,800, yielding cost of goods available for sale of $424,550. If the company's typical gross
profit ratio is 50% and if sales for the month of July were $642,500, then the cost of goods sold
during July was $321,250. Subtracting that amount from the cost of goods available for sale
yields ending inventory of $103,300.