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SHORT ANSWER QUESTIONS, EXERCISES, AND PROBLEMS INVENTORY MANAGEMENT Questions Why does an error in ending inventory affect two accounting periods? What the meaning of taking physical inventory? Which cost elements are included in inventory? What practical problems arise by including the costs of such elements? Which accounts that are used under periodic inventory procedure are not used under perpetual inventory procedure? What entries are necessary under perpetual inventory procedure when goods are sold? Why there closer control over inventory under perpetual inventory procedure than under periodic inventory procedure? Why perpetual inventory procedure being used increasingly in business? What the cost flow assumption? Wha is meant by the physical flow of goods? Does relationship between cost flows and the physical flow of goods exist, or should such relationship exist? Indicate how company can manipulate its net income if uses LIFO Is the same opportunity available under FIFO? Why or why not? What are the main advantages of using FIFO and LIFO? Which inventory method is the correct one? Can company change inventory methods? Why are ending inventory and cost of goods sold the same under FIFO perpetual and FIFO periodic? Would you agree with the following statement Reducing the amount of taxes payable currently is : valid objective of business management and, since LIFO results in such reduction, all businesses should use LIFO. What net realizable value, and how used? Why is i acceptable accounting practice to recognize loss by writing down an item in inventory to market, but unacceptable to recognize a gain by writing up an inventory item? What are the main reasons for estimating ending inventory? Should company rely exclusively on the gross margin method to determine the ending inventory and cost of goods sold for the end of- year financial statements? How can the retail method be used to estimate inventory? The Limited Based on the notes to the financial statements of The Limited contained in the Annual Report Appendix, what inventory methods were used? Exercises Exercise 1. Crocker Company reported annual net income as follows 2008 $484,480 2009 187,680 2010 409,984 Analysis of its inventories revealed the following incorrect inventory amounts and these correct amounts Incorrect Inventory Correct inventory Amount amount 2008 December $76,800 $89,600 31 2009 December .400 .600 31 Compute the annual net income for each of the three years assuming the correct inventories had been used Exercise 2. Slate Truck Company manufactures trucks and identifies each truck with unique serial plate. On December 31 custom ordered trucks from the company which currently has 20 trucks its inventory Ten of these trucks cost $20,000 each and the other 10 cost $25 000 each Slate wished minimize its net income which trucks would ship? By how much could Slate reduce net income by selecting units from one group versus the other group? Exercise 3. Miami Discount Company inventory records show Unit Total Units Cost Cost Beginning inventory 3,000 $38.00 $114,000 Purchases February 14 900 39.00 100 March 2,400 40.00 96,000 July 1,800 40.30 72,540 September 27 1,800 40.60 73,080 November 27 600 41.00 24,600 Sales: April 2,800 August 20 2,000 October 3 1,500 The December 31 inventory was 4,200 units. Miami Discount Company uses perpetual nventory procedure Present schedule showing the measurem ent of the ending inventory using FIFO perpetual inventory procedure. Exercise 4. Using the data in the previous exercise for Miami Discount Company present schedule showing the measurement of the ending inventory using LIFO perpetual inventory procedure Exercise London Company had beginning inventory of 160 units at $24 (total = $3 .840) and the following inventory transactions during the year January sold 40 units January 11 purchased 80 units USD 30 00. January 15, purchased 80 units USD 32 00 January 22, sold units Using the preceding information price the ending inventory at its weighted average cost, assuming perpetual inventory procedure Exercise 6. Kettle Company made the following purchases of Product i n its first year of operations Unit Units Cost January 2 1,400 @ $7.40 March 1,200 @ 7.00 July 2,400 @ 7.60 November 1 1,800 @ 8.00 The ending inventory that year consisted of .400 units Kettle uses periodic inventory procedure 1 Compute the cost of the ending inventory using each of the following methods: (1) FIFO. (2) LIFO. and (3) weighted average 2. Which method would yield the highest amount of gross margin? Explain why does. Exercise following are selected transactions and other data of the Custer Company Purchased 20 units at $360 per unit on account on 2010 September 18 Sold units on account for $576 per unit on 2010 September 20 Discovered shortage $2. 640 at year-end after physical inventory Prepare entries these transactions using FIFO perpetual inventory procedure Assume the beginning inventory consists of 20 units at $336 per

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