MICROLINK INFORMATION TECHNOLOGY COLLEGE

DEPARTMENT OF ACCOUNTING
Maintain Inventory Records test III
I. True or False
_____1. A physical inventory should be taken at least annually even when a perpetual inventory system is used.
____2. When goods are shipped F.O.B. shipping point, title posses only when the seller receives full payment
____3. An understatement of Ending Inventory will understated cost goods sold and overstated net income for that period
____4. The ending inventory under a FIFO periodic inventory system is the same as under a FIFO perpetual Inventory system.
II. Multiple Choices
____1. Valuation of inventories requires the determination of all of the following except.
A. The costs to be included in inventory
B. The physical goods to be included in inventory
C. The cost of goods held on consignment from other companies.
D. The cost flow assumption to be adopted.
____2. The ending inventory of Narramore Company is understated in year one by Br. 20, 000. This error is not
corrected in year one or in year two. What impact will this error have on total net income for year one.
A. No effect on total net income for the two years
B. Overstate total income by Br. 20, 000
C. Understate total income by Br. 20, 000
D. Overstate net income for year one by Br. 20, 000 and year two by Br. 20, 000
____3. Which of the following inventory methods comes closest to stating ending inventory at replacement cost?
A. FIFO B. LIFO C. Weighted-average D. ALL
_____4. The use of LIFO under a perpetual inventory system (units and costs):
A. May yield a higher inventory valuation than LIFO under a periodic inventory system when prices are falling.
B. May yield a higher inventory valuation than LIFO under a periodic inventory system when prices are rising.
C. Always yields the same inventory valuation an LIFO under a periodic inventory system.
D. Can never yield the same inventory valuation as LIFO under a periodic inventory system.
____5. The purchase of inventory items on account using the perpetual inventory method:
A. Decrease working capital and the current ratio
B. Has no effect on working capital but decrease the current ratio
C. Has no effect on the current ratio but decreases working capital
D. Has no effect on working capital or the current ratio
____6. In periods of rising prices, use of LIFO rather than the FIFO inventory method will most likely have what
effect on the following items?
Net Income Cost of Goods Sold Working Capital
A. Higher Lower Lower
B. Lower Higher Lower
C. Higher Higher Higher
D. Lower Higher Higher
____7. Goldstein Co., is clothing store uses retail inventory method. The following relates to 1993 operations:
Inventory, January 1, 1993, at cost ……………..Br. 14, 200
Inventory, January 1, 1993, at sales price……….Br. 20, 100
Purchases in 1993 at cost……………………..…Br. 32, 600
Purchases in 1993 at sales price…………………Br. 50, 000
Sales of items ……………………………..…….Br. 60,.000
The cost of the Dec. 31, 1993 inventory determined by the conventional retail method is:
A. Br. 9, 800 B. Br. 6, 375 C. Br. 6, 743 D. Br. 6, 543
___8. Under retail inventory method, purchase returns and allowance are normally considered a reduction of price at
Cost Retail
A No No
B No Yes
C Yes No
D Yes Yes
___9. The following pertains to an inventory item:
Cost……………………………………..….Br. 60
Estimated Selling price of disposal…………..Br. 68
Estimated cost of disposal………………..……Br. 1
Replacement cost…………………………….Br. 51
Under the lower-of-cost-or-market rule, this inventory item is valued at:
a) Br. 51 b) Br. 56 c) Br. 60 d) Br. 67 e) some other amount
ABC Company shipped inventory items that cost Br. 100 to XYZ Company (Consignee) on January 10, 1990 and the
consigned goods are unsold till December 31, 1991. However ABC Company recorded these items as a sale by Br. 110 on
January 10, 1990 (on the date of shipment to the consignee). (Disregard income tax).
Answer question no. 1 and 2 based on the above information
____ 10. What is the effect of the error on the financial statements of ABC Company prepared for 1990?
A. Overstatement of cost of goods sold by Br. 10
B. Overstatement of net income by Br. 10
C. Overstatement of current assets by Br. 10
D. Overstatement of gross profit by Br. 110
E. All of the above
____ 11. What is the effect of the error on the financial statements of ABC Company prepared for 1991.
A. Overstatement of net income by Br. 10
B. Understatement of current assets by Br. 100
C. The capital account is correct
D. The net income is correct
E. A and C
Based on the data given below taken from the income statement columns of the worksheet of a merchandising
business prepared for the year ended December 31, 2002. answer questions 12–14.
Net Income Br. 12,500
Sales 45,000
Income Summary 10,000 Dr. and 6,000 Cr.
Gross Purchase 19,750
Purchase Ret. & Allowances 200
Purchase Discount 50
____12. What is the total cost of goods sold for the year?
A. Br. 69,500 B. Br. 89,250 C. Br. 23,500 D. Br. 57,000 E. none
____13. What is the amount of total operating expenses?
A. Br. 9,000 B. Br. 32,5000 C. Br. 21,500 D. Br. 36,000 E. none
____14. What is the amount of gross profit fort the year?
A. Br. 9000 B. Br. 21,500 C. Br. 23,500 D. Br. 25,000 E. none

PART III. Exercise

1. Dexter Company sells water bees. The perpetual inventory balance was Br. 19, 600 in the accounting records
on December 32, year 4. Some events that occurred near the end A year 4 are listed below:
A. Beds shipped to a customer on January 2, year 5, costing Br. 2, 000, were included in inventory on December 31,
year 4. The sale was recorded in tear 5.
B. Beds costing Br. 9, 000 received on Dec. 30, year 4, were recorded as having been received on January 2, year 5.
C. Be4ds received costing Br. 1, 900 were entered twice in the perpetual inventory record.
D. Beds shipped “FOB shipping point” on Dec. 28, year 4, which cost Br. 8, 000 were not recorded as a sale by Dexter
unit January 3, year 5. The beds were included in the ending inventory.
E. Beds on hand that cost Br. 2, 300 were not entered in the accounting records in year 4.
Required Prepare a working rarer showing the correct amount of Dexter Company’s inventory on Dec. 31, year 4.
2. Novel Company reported Br. 140, 000 of inventory on December 31, 2002, based on a physical count.
Additional information:
a) Included in the physical count were machines billed to a costumer FOB shipping point on December 31,
2002. These machines had a cost of Br., 6,000 and had been billed at Br. 10, 000. The shipment was on
Novel loading dock waiting to be picked by the carrier.
b) Goods were in transit from a vendor to Novel. The invoice cost was Br. 16, 000 and the goods were
shipped FOB shipping point on December 29, 2002.
c) Goods out on consignment amount Sales to Br. 9, 200 & shipping costs, Br. 240. (Gross margin is 15% on cost)
Required: Compute the correct amount of ending Inventory for Novel Company.
3. Stationers Company had 200 calculators on hand on January 1, year 9, and costing Br. 18 each. Purchases
and sales of calculators during the month of January, year 9, were as follows:
Date Purchases Sales
Jan. 12……………………………………………………….150@Br. 28
14………………………………100@Br. 20
29………………………………100@Br. 22
30………………………………………………………..100@Br. 32
A stationer does not maintain perpetual inventory records. According to physical count, 150 calculators were on
hand on Jan. 31, year 9. Compute the cost of Stationers Company’s Jan. 31, year 9, inventory under
(A) The FIFO method, and (B) The LIFO method A inventory valuation.
4. The Company had the following inventory transactions in 2003:
Date Transactions Units Cost per Unit
Jan 1, 2003 Balance 50 Br. 30
Feb 14 Sale 25
May 23 Purchase 100 Br. 40
Aug. 21 Sale 50
Nov. 5 Purchase 25 Br. 60
Nov. 18 Sale 95
Required: Compute the cost of goods sold and the ending inventory using the following Periodic and Perpetual
systems under each method
a. FIFO
b. FIFO
c. Average
5. Jan 1. Beginning Inventory 180 Units at Br. 40 each
Purchase:
Jan. 7 120 Units at Br. 50 each
Jan. 17 100 Units at Br. 60 each
Sales:
Jan. 10 140 Units
Jan.19 40 Units.
Required: Compute the cost of goods sold and the ending inventory using the following Periodic and
Perpetual systems under each method
a. FIFO
b. FIFO
c. Average
6. On January 1 the Bea Company began business with e purchase of 250 Units of inventory for Br. 225, 000.
During the month Bea had the following inventory transactions.
Date
Janu-6- purchased 50 Units at Br. 1, 000 per Units.
11. Sold 220untis
17. Sold 60 units.
24. Purchase 80 units at Br. 1,250 per unit.
28. Sold 80 units
30. Purchased 200 units at Br. 1,100 per unit
Required: Compute the cost of goods sold and cost of the inventory at the end of inventory at the end of
January under the following inventory costing methods.
7. Answer each of the following questions by inserting one of these abbreviations in the space provided:
(SI) Specific Identification (FIFO) firist-in, first -out
(WA) Weighted average (LIFO) Last -in, First-out
___1. Which inventory cost method best matches current costs with current revenues on the income statement.
___2. Which inventory cost method yields the most realistic inventory amount compared to replacement cost,
___3. Which method is based on the assumption inventory flow is “mixed" and therefore “mixes all acquisition prices?
During a period of rising prices, which method yields the:
_____ 4. Lowest net income figure?
_____ 5. Lowest amount for inventory on the balance sheet?
_____ 6. Lowest cost of goods sold figure?
_____ 7. Lowest owners' equity figure?
_____ 8. Lowest income tax bill for the current year?
During a period of declining price, which method yields the:
_____9. Lowest net income figure?
_____ 10. Lowest amount for inventory on the balance sheet?
_____ 11. Lowest cost of goods sold figure?
_____ 12. Lowest owners' equity figure?
_____ 13. Best cash flow/
8. Consider the following data for ABC trading company for the month ended Sene 30, 1993. [This data are
copied from Activity 6. You need to compare the answer of this activity with that of Activities 6 and 7].
Date Purchases Sold units
Sene 1, 1993 2,000 units @Birr 16 no sales
Sene 5, 1993 3,000 units @Birr 18 no sales
Sene 12, 1993 no purchases 4,000 units
Sene 20, 1993 3,000 units @Birr 19 no sales
Sene 27, 1993 no purchases 2,000 units
Required:
1. Compute cost of end inventory in units & in Birr using Weighted Average method under periodic
inventory system.
2. Prepare the ledger card that shows the movement of units and account balance using Weighted Average
method under perpetual inventory system.
9. ABC Company uses a periodic inventory system and had the following beginning inventory and purchases
during the month Hamle, 1992 for item X.
Date Units unit cost
Hamle 1,1992 Beginning inventory 400 Birr 14
Hamle 10, 1992 Purchases 200 Birr 15
Hamle 19, 1992 Purchases 300 Birr 16
Hamle 22, 1992 Purchases 250 Birr 20
Hamle 28, 1992 Purchases 100 Birr 21
As of Hamle 30, 1992, there were 550 units of X on hand. Sale of units were as follows:
Hamle 12, 1992 200 units at Birr 30
Hamle 20, 1992 200 units at Birr 30
Hamle 25, 1992 300 units at Birr 35
Required:
i. Calculate the cost of goods available for sales and
ii. Under the periodic inventory systems, compute the cost of end inventory, C.G.S, and gross profit using:
A. FIFO method
B. LIFO method
C. The weighted average method.
10. Crystal Corporation’s ending inventory includes the following items.
Product Units on hand Unit cost Replacement cost per unit
W 40 Br. 30 Br. 34
X 50 48 40
Y 60 26 24
Z 44 20 20
Calculate lower of cost or market for the inventory As
A. Whole
B. Applied separately to each products
C. By major group
11. The following information relates to commodity of willing company for the month of January:
Inventory, Jan. 1……………………………………………..100 units@Br. 5
Purchases……………………………………[email protected]; 100 unit@Br. 7
Inventory, Jan. 31…………………. 200 units
A. Compute the balance of willing company’s January 31, inventory under FIFO cost flow assumption.
B. Compute willing Company’s cost of goods sold for January under LIFO cost flow assumption
12. Seeley Company uses the gross profit method to estimate monthly inventories. In recent months gross profit
has averaged 35% of net sales. The following data are available for the month of January, year 9:
Inventories Jan. 1, year 9………………………………Br. 26, 590
Purchases …………………………………………..…….120, 000
Purchases returns……………………………………………5, 000
Freight-in………………………………………………...….6, 000
Gross sales………………………………………………..169, 000
Sales returns and allowances………………………………10, 000
Required:- Compute the estimated cost of Seeler Company’s inventories on Jan. 31, year 9 by the gross profit method.
13. You are provided with the following data from the records of three merchandising companies :(a), (b) & (c).
Determine each of the missing numbers for each company.
a b c
Invoice cost of merchandise purchase Br.90, 000 Br.40, 000 Br.30, 500
Purchase discounts 4000 ? 650
Purchase returns and allowances 3,000 1,500 1,100
Transportation-In ? 3,500 4,000
Merchandise inventory (beginning of period) 7,000 ? 9,000
Total cost of merchandise purchases 89,400 39,500 ?
Merchandise inventory (end of period) 4,400 7,500 ?
Cost of goods sold ? 41,600 34,130