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Exam 6: Inventories

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Question 81

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Which statement is not correct about the retail inventory method?

A) It is an alternative to using a cost flow assumption.
B) It is acceptable for annual financial reporting in Canada.
C) It should only be used if reliable information is available about profit margins.
D) It is a method that estimates ending inventory by applying an average sales margin.

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

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Question 82

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Explain how a manufacturing company can manipulate earnings by including non-production costs in inventories. What does an auditor or financial statement user do to detect this type of manipulation?

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When an enterprise incurs an expenditure...

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Question 83

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Assume that a purchase invoice for $1,000 was appropriately recorded in fiscal 2019, but the inventory was excluded in error during the ending inventory count. What impact will this have on fiscal 2020 financial reporting?

A company has fixed production overhead costs totalling $20,000. The normal production level is 2,000 units per year, yielding a standard fixed overhead rate of $10.00 per unit. If the actual production level is 3,200 units, how much would be the amount of fixed overhead per unit and the amount of total fixed overhead included in inventory? Select the letter for the best answer:

What costs are not included in the cost of manufactured inventories?

What inventory costing methods are permissible under GAAP? Explain the impact of these alternative methods on the income statement and the balance sheet.

Garrit Limited's income statement reported the following for the year ended Dec 31, 2019: $\begin{array} { | l | r | } \hline \text { Sales revenue } & 881,000 \\\hline \text { Cost of goods sold } & 573,000 \\\hline \text { Expenses } & 129,000 \\\hline \text { Net income } & 179,000 \\\hline\end{array}$ Which is the correct statement about the income statement?

Which statement is correct about cost allocation methods under GAAP?

ABHAY Co. prepares monthly income statements. Inventory is counted only at year end; thus, month-end inventories must be estimated. All sales are made on account. The rate of mark-up on cost is 25%. The following information relates to the month of June. $\begin{array}{llcc} \text { Accounts receivable, June 1} & \$121,000 \\ \text { Inventory, June 1} &147,000\\ \text { Collections of accounts during June } &184,000\\ \text {Purchases during June } &165,000\\ \text { Accounts receivable, June 30 } &127,000\\\end{array}$ Instructions Calculate the estimated cost of the inventory on June 30.

SimBis Enterprises incurred the following costs to produce and sell its inventory in 2019: $\begin{array} { l | r } \hline \text { Raw materials consumed } & \$ 100,000 \\\hline \text { Labour used } & 75,000 \\\hline \text { Variable overhead incurred } & 50,000 \\\hline \text { Fixed overhead incurred } & 25,000 \\\hline \text { Selling costs } & 20,000 \\\hline \text { General administration } & 10,000 \\\hline \text { Freight costs to bring in raw materials } & 12,000 \\\hline \text { Freight costs on shipments to customers } & 7,000 \\\hline\end{array}$ SimBis also noted that the following errors were made in recording transactions in 2019 (note that these errors only affect part (d)of this question): $\begin{array} {| l | r | } \hline \text { Omitted recording the purchase invoice in 2019; } & \$ 6,000 \\ \text { ending inventory was properly stated } & \\\hline \text { Omitted counting inventory in 2019; purchase } & 7,000 \\ \text { account was properly stated } & \\\hline \text { Omitted from inventory count and from }&3,000 \\\text { purchase account in 2019 } \\\hline \text { Counted inventory twice in error in 2019 } & 5,000 \\\hline \text { Consignment inventory out at consignee } &10,000 \\\text { excluded in error in 2019 } \\\hline \text { Recorded a purchase invoice twice in } 2019&7,500\\\hline\end{array}$ Required: a)Determine the cost of inventory under the absorption costing method. b)Determine the cost of inventory under the variable costing method. c)Explain how management could potentially manipulate net income by using absorption costing. What can an analyst or investor do to check if income has been manipulated through the use of absorption costing? d)Assume that, before any corrections, gross margin was $500,000 and ending retained earnings was $750,000. Determine the impact of any inventory errors on cost of goods sold and ending retained earnings for 2019.

Assume that ending inventory in fiscal 2019 is overstated by $1,000.What impact will this have on fiscal 2020 financial reporting?

Assume that ending inventory in fiscal 2019 is overstated by $1,000.What impact will this have on fiscal 2020 financial reporting?

What journal entry is required when inventory is purchased under the perpetual inventory system?

Compare the FIFO and LIFO methods of inventory valuation. Which method provides better quality information and why?

Explain what happens if the value of inventory recovers after it has been written down. How often will such an adjustment actually be made to inventory?

Give some examples of how a merchandising company can manipulate earnings through its year-end inventories. What can an auditor do to detect this type of manipulation?

Which goods in transit would not be recorded in the buyer's inventory at year end?