Question

Hi I would like some help with answering the problems and a brief explanation on how its done so I'm able to study, thank you

Question 2

Merchandise inventory at the end of the year was inadvertently overstated. Which of the following statements correctly states the effect of the error on cost of goods sold and net income?

cost of goods sold understated, net income is overstated

cost of goods sold no change, net income is no change

cost of goods sold overstated, net income is understated

none of the above

Question 3

The inventory flow assumption method that leaves the most recent costs in the end of the period inventory balance

LIFO

none of these

FIFO

Average

Question 8

The following items of a particular commodity were available for sale during the year:

Beginning inventory	10 units at $61
First purchase	25 units at $63
Second purchase	30 units at $64
Third purchase	15 units at $73

The firm uses the periodic system and there are 22 units of the commodity on hand at the end of the year. What is the amount of the inventory at the end of the year according to the AVERAGE COST method?  

$1,430  

$1,305

$1,300

$1,480

Question 4

The inventory data for an item for November are:

Nov. 1	Inventory	20 units at $20
4	Sold	10 units
10	Purchased	30 units at $21
17	Sold	20 units
30	Purchased	10 units at $22

Using the perpetual system, costing by the first-in, first-out method (FIFO), what is the cost of the merchandise inventory of 30 units on November 30?

$630

$640

$620

$610

Answer 1

Question 2:

Ending inventory and cost of goods sold are related as:

Beginning inventory + Purchases – Ending inventory = Cost of goods sold.

If ending inventory is incorrectly stated high, cost of goods sold will decline in the same amount. Decrease in cost of goods sold will consequently increase the net income before tax as per the relation:

Sales – Cost of goods sold = Gross income

On decreasing COGS net income increases and vice versa.

Hence option “Cost of goods sold understated, net income overstated” is correct answer.

Question 3:

AS per FIFO assumption, goods purchased first is also sold first. Goods with earliest price are consumed first and remaining inventory comprises of the latest priced goods.

Hence FIFO inventory assumption method leaves the most recent cost in the end of period inventory balance.

Option “FIFO” is correct answer.

Question 8:

	Number of units (n)	Cost per unit (p)	Total cost (n x p)
Beginning inventory	10	$ 61	$   610
First purchase	25	$63	$ 1,575
Second purchase	30	$64	$ 1,920
Third purchase	15	$73	$ 1,095
Total	80		$ 5,200

Average unit cost = Total cost/ Total units = $ 5,200/80 = $ 65

Cost of ending inventory = Average unit cost x Numbers of units in ending inventory

                                          = $ 65 x 22 = $ 1,430

Hence option “$ 1,430” is correct answer.

Question 4:

Perpetual Inventory card using FIFO method:

Date	Purchases	Sales	Balance
Nov 1	Beginning Balance		20 U x $ 20 = $ 400
Nov 4		10U x $ 20 = $ 200	10U x $ 20 = $ 200
Nov 10	30U x $ 21 = $ 630		10U x $ 20 = $ 200
			30U x $ 21 = $ 630
Nov 17		10U x $ 20 = $ 200
		10U x $ 21 = $ 210	20U x $ 21 = $ 420
Nov 30	10U x $ 22 = $ 220		20U x $ 21 = $ 420
			10U x $ 22 = $ 220
Total	$ 850	$ 610	$ 640

Cost of the merchandise inventory of 30 units in November is $ 640

Hence option “$ 640” is correct answer.