91. On February 2, 2016, a fire destroyed the entire inventory of Orange Co. The following information was found in accounting records: Purchases, $420,000; Sales $690,000; beginning inventory, $120,000; average gross margin percentage during the past five years, 30%. Based on the above information, indicate whether each of the following statements is true or false.
_____ a) The cost of goods available for sale is $540,000.
_____ b) The cost of goods sold as a percent of sales is 70%.
_____ c) The estimated cost of goods sold is $303,000.
_____ d) Estimated inventory lost in the fire is $66,000.
_____ e) Estimated gross margin for the period up to the date of the fire was $483,000.
a) This is true. $120,000 beginning inventory + $420,000 purchases = $540,000 cost of goods available for sale
b) This is true. If average gross margin percentage is 30%, cost of goods sold percentage is 1-30%, or 70%.
c) This is false. Estimated cost of goods sold = $690,000 x 70% = $483,000
d) This is false. $120,000 beg. inventory + $420,000 purchases - $483,000 est. cost of goods sold = $57,000 estimated ending inventory
e) This is false. $690,000 sales - $483,000 est. cost of goods sold = $207,000 est. gross margin
92. Iona Corporation's ending inventory as of December 31, 2015, was overstated by $28,000. Indicate whether each of the following statements relating to the above error is true or false.
_____ a) Cost of goods sold is overstated in 2015 by $28,000.
_____ b) Net Income is overstated in 2015 by $14,000.
_____ c) Retained Earnings at December 31, 2015 is overstated by $28,000.
_____ d) Beginning inventory will be understated in 2016 by $28,000.
_____ e) Retained Earnings will not be affected by this error at the end of 2016.
a) This is false. Overstating ending inventory at the end of 2015 will understate cost of goods sold by $28,000.
b) This is false. Overstating ending inventory for 2015 by $28,000 also overstates net income for 2015 by $28,000, not $14,000.
c) This is true. Overstating ending inventory for 2015 by $28,000 also overstates retained earnings for 12/31/15 by $28,000.
d) This is false. Overstating ending inventory for 2015 will also result in overstating beginning inventory for 2016.
e) This is true. By the end of 2016, the inventory error for 2015 will have been reversed, and retained earnings will be correctly stated.
93. Bell Company has provided the following figures as of December 31, 2016: Sales, $600,000; cost of goods sold, $320,000; net income, $120,000; inventory, $64,000. Indicate whether each of the above statements pertaining to the Bell Company is true or false.
_____ a) Bell's inventory turnover is 5.0.
_____ b) Bell's average number of days to sell inventory ratio is 39.5.
_____ c) Bell could increase its inventory turnover by increasing prices.
_____ d) Bell's gross margin as a percentage of sales was 46.7%.
_____ e) A local competitor in the same line of business has an inventory turnover of 3.5. Assuming each firm has approximately the same gross margin rate, Bell Company is likely to be more profitable than the competitor.
a) This is true. $320,000 cost of goods sold/$64,000 inventory = 5.0
b) This is false. 365 days/5.0 = 73 days
c) This is false. Inventory turnover is calculated by dividing cost of goods sold, not sales, by inventory. Furthermore, raising prices will likely cause inventory to sell more slowly.
d) This is true. $600,000 sales - $320,000 cost of goods sold = $280,000 gross margin; $280,000/$600,000 = 46.7%
e) This is false. With an inventory turnover ratio of 5.0, Bell Company turns its inventory more quickly than the competitor, and thus is likely to be more profitable than the competitor.
True / False Questions
94. One of the disadvantages of the specific identification inventory cost flow method is that it can allow managers of a business to manipulate the amount of income the business reports.
95. The specific identification inventory method is not practical for companies that sell many low-priced, high turnover items.
96. The last-in, first-out cost flow method assigns the cost of the items purchased first to ending inventory.
97. Generally accepted accounting principles do not allow the cost flow pattern for merchandise inventory to differ from the physical flow of merchandise within the business.
98. In most businesses, the physical flow of goods occurs on a FIFO basis, but a different cost flow method is allowed under generally accepted accounting principles.
99. A company's gross margin reported on the income statement is not affected by the inventory cost flow method it uses.
100. During a period of rising prices the LIFO cost flow method will result in higher total assets than FIFO.