Which Statement Below Correctly Explains What Merchandise Inventory Is

Explain how to compute gross profit by completing the following sentence. Gross profit is calculated by taking the net goods sold. Sales (sales/costs) of a product and subtractin (adding/subtracting) the cost of the Which statement below correctly explains what merchandise inventory is? Merchandise inventory is increased when products are sold to customers. Merchandise inventory is subtracted from net sales on the income statement to determine gross profit for the period. Merchandise inventory is an expense account reported on the income statement and contains the cost of products purchased for sale. Merchandise inventory is an asset reported on the balance sheet and contains the cost of products purchased for sale. Determine which statements below are correct regarding merchandise available for sale during a period. (Check all that apply.) Beginning inventory + Ending inventory = Merchandise available for sale Cost of goods sold + Beginning inventory = Merchandise available for sale Beginning inventory + Net purchases = Merchandise available for sale Ending inventory + Cost of goods sold = Merchandise available for sale To compute net income for a merchandiser, you will start with net sales, subtract cost of goods sold and subtract other Expenses. Toys R Fun purchased $4,000 of merchandise and paid immediately. To record this transaction, Toys R Fun's accountant would debit the Merchand Merchandise Inventory , Correct Unavailable (Merchandise Inventory/Accounts Payable/Cash) account and credit the Unavailable (Cash/Merchandise Inventory/Accounts Payable) account. Cash Cash , Correct Which of the statements below are correct regarding cost of goods sold? Cost of goods sold is the expense of buying and preparing merchandise. Cost of goods sold can be determined by subtracting the cost of a merchandise sold from its sales price. Cost of goods sold is the price received from selling a product. Cost of goods sold is an asset account reported on the balance sheet. Credit terms of n/15 EOM were printed on an invoice. Explain what this means. The credit period ends on the 15th of the month. The credit terms stand for net 15 days after end of month. The buyer will receive a 15% discount if the invoice is paid by the 15 of the month. The discount period lasts only 15 days from the invoice date. Determine which of the definitions below describes gross profit. The original cost of the merchandise when purchased from the supplier The difference between net sales and the cost of the goods sold The amount of money received on the sale of goods The total money paid by the merchandiser to its supplier including freight costs Explain what the credit terms of 2/10,n/30 mean. (Check all that apply.) The full payment is due within a 30-day credit period. The full payment is due within 10 days. The buyer can deduct 2% of the invoice amount if payment is made within 10 days of the invoice date. The buyer can take a discount of 10% if the invoice is paid with 30 days of the invoice date. Merchandise inventory can be described as: (Check all that apply.) an account increased with a debit. an account appearing on a balance sheet of a service company. an asset account. products that a company owns and intends to sell. an account appearing on a balance sheet of a merchandiser. an expense account. Complete the following statement. Merchandise inventory that is still available for sale is considered a(n) ________ (asset/expense/revenue) and is reported on the ____________ (balance sheet/income statement) and merchandise that is sold during the period is considered a(n) _______ (asset/expense/liability) and reported on the ____________ (balance sheet/income statement). expense -> income statement -> asset -> balance sheet asset -> income statement -> expense -> balance sheet expense -> balance sheet -> asset -> income statement asset -> balance sheet -> expense -> income statement A cash discount can be summarized as a discount given to encourage them to pay earlier buyer (buyers/creditors/sellers) to (earlier/later/less/more). X-Mart purchased $300 of merchandise on account. Demonstrate the journal entry to record this transaction, assuming the perpetual inventory system is used. Debit Merchandise Inventory $300; credit Accounts Payable $300. Debit Merchandise Inventory $300; credit Sales $300. Debit Purchases $300; credit Accounts Payable $300. Credit Merchandise Inventory $300; debit Accounts Payable $300. between (before/between) the invoice date and a specified date on reduced which the payment amount owed can be (increased/reduced) because of early payment. The discount period is the time Credit terms of 1/10, net 30 means. The buyer will receive a 1% discount if they pay within 10 days of the date of the invoice. The buyer will receive a 90% discount if they pay within 1 day. The buyer will receive a 10% discount if they pay within 10 days of the date of the invoice. The buyer will receive a 10% discount if they pay within 30 days. On June 5, X-Mart purchased $400 of merchandise with terms of 2/10,n/30. If payment is made on June 11, calculate the purchase discount that may be taken by X-Mart. $12 Reason: $400 x .02 =$8. $0 Reason: $400 x .02 =$8. Terms are 2/10 which means that they have 10 days in order to take the discount. $8 $40 Reason: $400 x .02 =$8. Review the following credit terms and identify the one that states that the buyer will receive a 3% discount if the payment is made within 15 days. Otherwise, full payment is expected within 45 days of the invoice date. 3/15,eom/45 3/10,n/45 3/45, n/15 3/15,n/45 Describe good cash management practices involving inventory purchases. (Check all that apply.) Inventory should be purchased with cash whenever possible. Reason: Purchases should be made using credit assuming the cash payment amount will be the same if paid within a discount period defined by the vendor. Invoices should be paid on the first day of the discount period. Reason: Invoices should be paid on the last day of the discount period. Invoices should be paid on the last day of the discount period. Buyers should take advantage of early payment discounts. LOL Music Store uses the perpetual inventory system to account for its merchandise. On November 17, it purchased $1,000 of merchandise with terms of 2/5,n/60. If payment is made on December 21, demonstrate the required journal entry to record the payment by selecting all of the correct actions below. (Check all that apply.) Credit Merchandise Inventory $20. Reason: No discount is earned because payment is made on December 21, not November 21. Credit Cash $980. Reason: No discount is earned because payment is made on December 21, not November 21. Debit Accounts Payable $1,000. Credit Accounts Payable $1,000. Reason: Debit Accounts Payable. Credit Cash $1,000. Review the following statements and select the one that best describes a discount period. The discount period is the time period in which a discount may be taken by the buyer. The discount period is the time between a sale and when payment is due from the buyer. Reason: This is the description of when the full payment is due without a discount, usually 30 days. The discount period is the time period in which a discount may be taken by the buyer. The discount period is another name for the credit terms of a sale. Reason: The discount period is the time period in which a discount may be taken by the buyer. Identify the statements below which summarize what cash discounts are. (Check all that apply.) A seller views a cash discount as a purchase discount. Reason: It is viewed as a sales discount. Cash discounts are described in credit terms. A seller views a cash discount as a sales discount. Sellers can grant a cash discount to encourage buyers to pay earlier. A reduced payment applies to the credit period. Reason: A reduced payment applies to the discount period. A reduced payment applies to the discount period. A buyer views a cash discount as a purchase discount. What is a purchase return? A purchase return refers to merchandise a seller acquires, but then returns to the buyer. A purchase return is the cash discount given for early payment of an invoice. A purchase return is designed to shorten the payment period between the buyer and the seller. A purchase return refers to merchandise a buyer acquires, but then returns to the seller. A purchase allowance can be described as: the reduction in the sales price of an item because of the quantity purchased Reason: An allowance is a reduction in the amount owed on a purchase due to the inferior quality of the goods or a defect in the product. the implied interest paid when not taking advantage of a purchase discount Reason: An allowance is the reduction in the amount owed by a customer due to the quality of a product or a defect. a reduction in the cost of defective or unacceptable merchandise that a buyer acquires a discount given by the seller of merchandise for early payment Reason: An allowance is the reduction in the amount owed due to quality of the product or a defect. On May 14, X-Mart purchased $500 of merchandise with terms of 3/15,n/40. If payment is made on May 28, calculate the purchase discount that may be taken by X-Mart. $15 $70 Reason: $500x.03=$15 $75 Reason: $500x.03=$15 $20 Reason: $500x.03=$15 On Dec. 20, X-Mart received a $100 allowance because the merchandise it purchased on account, earlier in the month, was of poor quality. Demonstrate the required journal entry on X-Mart's books for the allowance assuming the perpetual inventory method. Debit Accounts Payable $100; credit Purchase Returns $100. Reason: Credit Merchandise Inventory. Merchandise Inventory is credited because the merchandise was of inferior quality. Since they returned merchandise they purchased, you will need to debit Accounts Payable and credit Merchandise Inventory to reduce them. Debit Accounts Payable $100; credit Merchandise Inventory $100. Debit Merchandise Inventory $100; credit Accounts Payable $100. Reason: Your debits and credits are reversed. Since they received an allowance for damaged merchandise, you will need to debit Accounts Payable and credit Merchandise Inventory to reduce them. Even though the merchandise wasn't actually returned, the journal entry for an allowance is handled the same as a return. Debit Accounts Payable $100; credit Cash $100. Reason: Cash is not involved. You need to credit Merchandise Inventory. Since they received an allowance for damaged merchandise, you will need to debit Accounts Payable and credit Merchandise Inventory to reduce them. Even though the merchandise wasn't actually returned, the journal entry for an allowance is handled the same as a return. LOL Music Store uses the perpetual inventory system to account for its merchandise. On November 17, it purchased $1,000 of merchandise with terms of 2/5,n/60. If payment is made on November 21, demonstrate the required journal entry to record the payment by selecting all of the correct actions below. (Check all that apply.) Debit Accounts Payable $1,000. Debit Merchandise Inventory $20. Reason: Credit Merchandise Inventory for the $20 discount. Credit Accounts Payable $1,000. Reason: Debit Accounts Payable. Credit Cash $980. Credit Purchase Discounts $20. Reason: Credit Merchandise Inventory for the discount. Credit Merchandise Inventory $20. Credit Cash $1,000. Reason: Credit Cash for $1,000-$20 = $980. On Dec. 7, Toys R Fun purchased $1,000 of merchandise with terms of 2/10,n/30. If payment is made on December 30, demonstrate the required journal entry for Toys R Fun to record the payment under the perpetual inventory system. Debit Accounts Payable $1,000; credit Cash $980; credit Merchandise Inventory $20. Reason: No discount is earned because payment is made after 10 days. Debit Cash $1,000; Credit Accounts Payable $1,000. Reason: Your debits and credits are reversed. Debit Accounts Payable $1,000; credit Cash $1,000. A purchase return refers to merchandise a the seller buyer (buyer/seller/creditor) purchased, but then returns to (buyer/seller/creditor) for a refund of the purchase price or reduction in the amount owed. Explain what a debit memorandum is by completing the following sentence. When a buyer returns or takes an allowance on merchandise, the buyer (buyer/creditor/seller) issues a debit memorandum to inform seller the (buyer/creditor/seller) of a debit made to the seller's account in the buyer's records. of a debit made to the seller's account in the buyer's records. X-Mart uses the perpetual inventory system to account for its merchandise. On May 1, it purchased $400 of merchandise on account with terms of 2/15, n/40. On May 3, X-Mart returned $50 of merchandise due to defect. Assuming that the purchase was paid for within the discount period, demonstrate the required journal entry for X-Mart to record the payment by selecting all of the correct actions below. (Check all that apply.) Debit Accounts Payable $350. Credit Cash $392. Reason: Take discount on $350 only. ($350-$7=$343) Credit Accounts Payable $350. Reason: Debit Accounts Payable. Debit Merchandise Inventory $7. Reason: Credit Merchandise Inventory for the $7 discount. Credit Purchase Discounts $7. Reason: Credit Merchandise Inventory for the discount. Credit Cash $343. Credit Merchandise Inventory $7. The buyer and seller of merchandise must agree on who is responsible for paying freight terms. Show your understanding of freight terms by selecting all of the correct statements below. (Check all that apply.) Terms FOB shipping point means the buyer accepts ownership when the goods depart the seller's place of business. Terms FOB destination means that the seller is responsible for shipping costs. Terms FOB shipping point means the seller of the goods is responsible for freight charges. When the shipping costs are the responsibility of the seller, then the Merchandise Inventory account is debited. Reason: The Delivery Expense account is debited. Revenue for the sale will be recorded after the goods reach their destination, if the goods are shipped FOB destination. When the shipping costs are the responsibility of the buyer, then the Merchandise Inventory account is debited for the freight charges. Dogs R US uses the perpetual inventory system to account for its merchandise. On May 1, it returned $50 of merchandise due to a defect. Assuming that the purchase was originally bought on credit, demonstrate the required journal entry to record the return by selecting all of the correct actions below. (Check all that apply.) Debit Accounts Payable $50. Credit Merchandise Inventory $50. Credit Accounts Payable $50. Reason: Debit Accounts Payable. Debit Merchandise Inventory $50. Reason: Credit Merchandise Inventory for the $50 discount. Credit Purchase Returns $50. Reason: Credit Merchandise Inventory for the discount. Debit Cash $50. Reason: The Cash account is not involved. Jerry's Flowers sold and shipped merchandise across the country to a buyer. The terms were FOB destination. Assuming it paid the bill immediately, demonstrate the journal entry required by Jerry's Flowers under the perpetual inventory system to record the freight charges. Debit Merchandise Inventory; credit Freight-Out. Reason: Since the terms are FOB destination, the seller will assume responsibility for the shipping costs, so they are debited to Delivery Expense. The credit is to the Cash account. Debit Delivery Expense; credit Cash. Debit Sales; credit Cash. Debit Merchandise Inventory; credit Cash. Reason: Since the terms are FOB destination, the seller will assume responsibility for the shipping costs, so they are debited to Delivery Expense. The credit is to the Cash account. Jello's Market purchased $1,000 of goods on account with terms of 2/10,n/30. They returned $200 of the goods due to defect the next day. If Jello pays for the purchase within the discount period and uses the perpetual inventory system, the required journal entry to record the payment would: debit Accounts Payable $800; credit Cash $780; and credit Merchandise Inventory $20 Reason: Discount is $800 x 2%= $16. $200 was returned, so the discount is based on $800. debit Accounts Payable $800 and credit Cash $800 Reason: You need to consider the discount. debit Accounts Payable $800; credit Merchandise Inventory $16; and credit Cash $784 debit Accounts Payable $1,000; credit Cash 980; and credit Purchase Discounts $20 Reason: Take a discount on only $800 of the balance still owed. Purchase Discounts is not involved. Calculate the total cost of merchandise purchased using the information in the following table: Invoice cost of merchandise purchases Purchase discounts received Cost of transportation-in (shipping) $40,000 $ 3,000 $ 500 Costs of purchase returns and allowances $37,600 Reason: You must subtract returns. $36,500 Reason: $40,000 - $3,000 - $100 + $500 = $37,400. $40,000 Reason: $40,000 - $3,000 - $100 + $500 = $37,400. $ 100 $37,400 Show your understanding of the ownership of goods in transit by completing the following statement. If goods are shipped FOB shipping point, then the charges and the seller purchaser (purchaser/seller) is responsible for paying freight (purchaser/seller) will not include the merchandise in their inventory. Which of the statements below summarize why a buyer would desire a purchase allowance? (Check all that apply.) The buyer purchased a large amount of merchandise and was eligible for a reduced purchase price. Reason: This is a trade discount. In order to keep defective, but still marketable merchandise, the buyer would need a reduction in the purchase price. The seller could not pay within the discount period. Purchased merchandise was defective or unacceptable. If the seller is responsible for the shipping costs of merchandise sold, the shipping terms will be specified as: FOB shipping point Reason: FOB shipping point is when the buyer/purchaser pays for the shipping charges. FOB factory FOB start FOB destination ABC Mart received a $20 freight bill for merchandise it purchased with freight terms of FOB shipping point. ABC Mart uses a perpetual inventory system. Assuming it paid the bill immediately, demonstrate the journal entry required to record the freight charges. Debit Merchandise Inventory $20; credit Cash $20. Debit Freight In $20; credit Cash $20. Reason: Under the perpetual inventory method, you will debit Merchandise Inventory $20 and credit Cash $20. Debit Freight In $20; credit Merchandise Inventory $20 Reason: Under the perpetual inventory method, you will debit Merchandise Inventory $20 and credit Cash $20. Debit Transportation In $20; credit Cash $20. Reason: Under the perpetual inventory method, you will debit Merchandise Inventory $20 and credit Cash $20. Which of the costs below would be included in the recorded cost of merchandise inventory? (Check all that apply.) Insurance costs Storage costs Selling costs Wages costs Invoice cost Which statement(s) below is(are) correct regarding the purpose of taking a physical inventory count? (Check all that apply.) The physical count of inventory is optional under U.S. GAAP and required under IFRS. Reason: A physical count is required under U.S. GAAP. The physical count is used to determine if management needs to reassign sales responsibilities. The physical count is used to determine if customers are paying within the discount period. The physical count is used to determine if there has been any theft, loss, damage or errors in inventory. The physical count is used to adjust the Inventory account balance to the actual inventory available. Determine which of the following statements are correct regarding the difference between physical flow and the cost flow of inventory. (Check all that apply.) Cost flow is an assumption about which goods/items are sold. Perishable items must have an actual physical flow of LIFO. Physical flow is focused on the actual movement of goods. A business may adopt any cost flow assumption when accounting for perishable items. Perishable items must have an actual physical flow of FIFO. One identical unit is purchased on each of the following three dates and at the respective costs: June 1 at $10 June 2 at $15 July 4 at $20 The company sells two units during the period. Conclude which inventory items are sold first and which unit remains in ending inventory if the company is using the FIFO cost flow assumption. The June 2 at $15 and the July 4 at $20 are both sold; the June 1 at $10 remains in ending inventory. Reason: FIFO assumes first ones in inventory are the first ones sold, so the June 1 and June 2 items are sold first. The June 1 at $10 is sold; the June 2 at $15 and the July 4 at $20 remain in ending inventory. Reason: FIFO assumes that the first items purchased are sold first, so the June 1 and June 2 are sold first. The June 1 at $10 and the June 2 at $15 are both sold; the July 4 unit remains in ending inventory. Which of the following statements is correct regarding goods in transit? Goods shipped FOB shipping point will be included in the seller's inventory. Reason: Goods shipped FOB shipping point will be included in the buyer's inventory. Goods shipped FOB shipping point will be included in the buyer's inventory. Goods shipped FOB destination will be included in the buyer's inventory. Reason: Goods shipped FOB destination are not included in the buyer's inventory until they arrive at their destination. Goods shipped FOB purchaser will be included in the buyer's inventory. Reason: FOB purchaser is a non-existent term. The LIFO cost flow assumption assumes that the cost of items purchased ______ are the costs that will be transferred first to cost of goods sold on the ______ ______. earliest/balance sheet Reason: The last-in, first-out cost flow assumption assumes that the most recently purchased costs are transferred to cost of goods sold first. latest/income statement The _____ principle states that inventory costs are expensed as cost of goods sold when inventory is sold. expense recognition cost revenue recognition inventory recognition Which statement(s) below correctly describe(s) the relationship of cost of goods sold and ending inventory? (Check all that apply.) Cost of goods sold will equal total ending inventory. Cost of goods available for sale must be allocated between cost of goods sold and ending inventory. Cost of goods sold plus ending inventory will equal the total goods available for sale. Cost of goods sold plus goods available for sale will equal total goods in ending inventory. Why would the physical count of inventory be different than what is shown in perpetual inventory records? (Check all that apply.) Events such as sales discounts Events such as theft Events such as errors Events such as loss Events such as damage The kind of business that would use the specific identification method of inventory costing includes: A car dealership A department store A grocery store Which of the following lists the four methods used to assign costs to inventory and to cost of goods sold? FIFO, FILO, weighted average and specific identification Reason: FILO is not a method. It should be LIFO. FIFO, LIFO, weighted average and specific Identification LIFO, LILO, weighted average and specific identification Reason: LILO is not a method. It should be FIFO. FIFO, FILO, weighted average and Individual Reason: FILO is not a method. This should be LIFO. earliest (earliest/latest) are The FIFO cost flow assumption assumes that the cost of items purchased the costs that will be transferred first to cost of goods sold on the statement). income sta (balance sheet/income The LIFO cost flow assumption assumes that the cost of items purchased ______ are the costs that will be transferred first to cost of goods sold on the ______ ______. earliest/balance sheet Reason: The last-in, first-out cost flow assumption assumes that the most recently purchased costs are transferred to cost of goods sold first. latest/income statement Assume that three identical units are purchased separately on the following three dates and at the respective costs: June 1 at $10 June 2 at $15 July 4 at $20 The company sells two units during the period. Conclude which inventory items are sold first and which unit remains in ending inventory if the company is using the LIFO perpetual cost flow assumption. The June 1 at $10 and the June 2 at $15 are both sold; the July 4 unit remains in ending inventory. Reason: LIFO assumes that the last items purchased are sold first, so the June 2 and the July 4 are sold first. The June 2 at $15 and the July 4 at $20 are both sold; the June 1 at $10 remains in ending inventory. The June 1 at $10 is sold; the June 2 at $15 and the July 4 at $20 remains in ending inventory. Reason: LIFO assumes that the last items purchased are sold first, so the June 2 and July 4 are sold first. Identify the safeguards that companies implement to protect their inventory. (Check all that apply.) Control access to inventory records. Restrict access to inventory. Allow all warehouse personnel to order inventory. Match inventory received with purchase orders. Implement security measures, such as cameras. All multiple workers access to inventory areas. Assuming purchase costs are rising in a periodic inventory system, determine which of the statements below are correct regarding the cost of goods sold under FIFO, LIFO and weighted average cost flow methods. (Check all that apply.) Companies using FIFO will report the smallest cost of goods sold. Weighted average cost of goods sold will be between FIFO and LIFO costs of goods sold. Companies using LIFO will report the smallest cost of goods sold. Companies using FIFO will pay higher taxes than companies using LIFO, assuming all else being equal. Companies using FIFO will report the highest gross profit and net income. Assuming purchase costs are declining and a periodic inventory system is used, determine the statements below which correctly describe what is happening to cost of goods sold under FIFO, LIFO and weighted average cost flow methods. (Check all that apply.) Companies using FIFO will report the smallest cost of goods sold compared to companies using LIFO or weighted average. Companies using LIFO will report the smallest cost of goods sold. Companies using FIFO will report the highest gross profit and net income. Weighted average cost of goods sold will be between FIFO and LIFO costs of goods sold. Companies using LIFO will report the highest ending inventory on their balance sheets, as compared to companies using FIFO or weighted average. Companies using LIFO will pay higher taxes than companies using FIFO, assuming all else being equal. All of the following are safeguards for inventory except: security measures authorized requisitions preventing risk restricted access rising When purchase costs are (rising/declining) , Correct Unavailable, FIFO will report the lowest cost of goods sold yielding the highest gross profit and net income. declining When purchase costs are (rising/declining) , Correct Unavailable, LIFO will report the lowest cost of goods sold yielding the highest gross profit and net income. Which of the statements below explain why LCM is used? (Check all that apply.) LCM allows companies to recognize a gain in value of an asset in the period the gain occurs. Accounting principles require conservatism when reporting financial information. LCM allows companies to recognize a loss in value of an asset in the period the loss occurs. Assets are not shown at an inflated value on the balance sheet, but rather at lower of cost or replacement cost. Companies never want to report inventory on a balance sheet that is higher than replacement cost. Review the steps below that apply LCM to individual items of inventory. Place them in the correct order of occurrence. Correct Answer 1. List the number of units of each product. 2. List the cost of each item. 3. List the market price of each item. 4. Compute total cost and total market value for each item. 5. Compare recorded cost of each inventory item with its replacement cost. List lower of cost or market. 6. Adjust inventory downward when market is less than cost. An inventory error not only affects the current year's cost of goods sold, gross profit, net income, current assets and equity, but also the next period's statements because net purchases in one period is also the net purchases in the next period. beginning inventory of one period is the ending inventory of the next period. ending inventory of one period is the beginning inventory of the next period. cost of goods sold of one period is the cost of goods sold in the next period. Explain what lower of cost or market means in regards to reporting merchandise inventory on the balance sheet. Inventory should be reported at its original cost if the replacement market value (cost) is less. Inventory should be reported at the original cost paid for it and not what it can be sold for in the market place. Inventory should be reported at the current market value of replacing it when lower than cost. Explain the inventory and cost of goods sold relationship by selecting the correct formula below. Beginning inventory + Cost of goods sold = Ending inventory. Beginning inventory + Net purchases = Cost of goods sold. Beginning inventory + Net purchases - Ending inventory = Cost of goods sold. Beginning inventory + Ending inventory = Cost of goods sold. If ending inventory at the end of the year is understated, what is the effect on cost of goods sold and net income? Cost of goods sold will be overstated and net income will be understated. Cost of goods sold will be understated and net income will be understated. Cost of goods sold will be overstated and net income will be overstated. Identify the ways in which lower of cost or market can be applied to merchandise inventory. (Check all that apply.) It can be applied to major categories of items. It can be applied to the inventory as a whole. It can be applied to individual sales departments. Reason: The three ways to apply LCM is individually, major categories, or inventory as a whole. It can be applied to each item individually. XYZ Company made a mistake in counting its ending inventory. Determine which of the items below will be affected by this error. (Check all that apply.) Cost of goods sold Long-term assets Reason: Long-term assets are unaffected because inventory is a current asset. Cost of goods sold, net income and current assets are affected. Revenues Reason: Revenues are unaffected by this error in ending inventory. Cost of goods sold, net income and current assets are affected. Current assets Net income Guns R Us overstated its ending inventory in the current year by $5,000. The company incorrectly reported $100,000 of net income. Explain the consequences of this error on the current period's income statement. The correct net income amount should have been $105,000. Reason: Net income was too high by $5,000, so correct net income amount was $100,000-$5,000= $95,000. Cost of goods sold will be too low by $5,000. Cost of goods sold will be too high by $5,000. Reason: Overstating inventory caused cost of goods sold to be too low. This caused net income to be reported too high. Determine which of the following statements is correct regarding the relationship of ending inventory and beginning inventory. The beginning inventory of the previous period is the ending inventory of the current period. The ending inventory of the previous period is the beginning inventory of the current period. The ending inventory of the previous period is the ending inventory of the current period. The beginning inventory of the current period is the beginning inventory of the previous period. Cake Mart understated its ending inventory in the current year by $5,000. The company incorrectly reported net income of $100,000. Determine the effect of the error on the financial statements. Cost of goods sold will be too high by $5,000, and this caused net income to be understated by $5,000. Cost of goods sold will be too high by $5,000, and this caused net income to be overstated by $5,000. Reason: Cost of goods sold is too high, so net income will be too low. Cost of goods sold was too low by $5,000, which caused net income to be overstated. Reason: Cost of goods sold will be too high, so net income will be too low. Total assets on the balance sheet will be too high by $5,000. Reason: Current assets will be understated. Storm Windows Company understated their ending inventory during their first year of operations by $2,000. What is the effect of this error at the end of the year? Select all answers which apply. $2,000 overstatement of net income. Reason: net income will be understated. $2,000 understatement of net income. $2,000 overstatement of cost of goods sold. $2,000 understatement of cost of goods sold. Reason: cost of goods sold will be overstated. True or false: If Dogs R Us overstates ending inventory on the balance sheet, then total equity on the balance sheet will be overstated as well. True False Reason: Remember that Assets = Liabilities + Equity. If assets are too high, then equity must also be too high in order to keep the equation equal. If ending inventory is too high, then cost of goods sold is too low, hence net income and equity will be too high. Which of the following statements correctly explains what the inventory turnover ratio assesses. The inventory turnover ratio assesses how quickly a company is selling its merchandise, so that it can generate cash to pay debts. The inventory turnover ratio assesses the company's ability to generate a profit from the sales of its inventory. The inventory turnover ratio assesses what percentage of a company's assets are tied up in its inventory. Sparky's incorrectly included inventory that was on consignment in its ending inventory count. Consequently, the ending inventory was overstated on the balance sheet. Explain how this error will affect this year's income statement. (Check all that apply.) This year's cost of goods sold will be too low. This year's net income will be too high. This year's cost of goods sold will be too high. Reason: Cost of goods sold will be too low which will make net income too high. This year's net income will be too low. Reason: Cost of goods sold will be too low which will make net income too high. Q-mart failed to include inventory that was kept in a separate warehouse in its 12/31 end-of-the-period inventory count. Consequently, the ending inventory on 12/31 was understated on the balance sheet. Explain how this error will effect the income statement. (Check all that apply.) The current year's net income will be too low. The current year's cost of goods sold will be too low. Reason: Cost of goods sold will be too high and net income will be too low. The current year's net income will be too high. Reason: Cost of goods sold will be too high and net income will be too low. The current year's cost of goods sold will be too high. Q-mart failed to include inventory that was kept in a separate warehouse in its end-of-the-period inventory count. Explain how this error will affect this year's balance sheet. (Check all that apply.) This year's total equity will be understated. This year's total equity will be overstated. Reason: Total assets and total equity will be understated. This year's total assets will be understated. This year's total assets will be overstated. Reason: Total assets and total equity will be understated. Recall the formula for figuring a company's inventory turnover ratio. Inventory turnover = Merchandise Inventory/Average inventory Inventory turnover = Cost of goods sold/Gross profit Inventory turnover = Merchandise Inventory/Cost of goods sold Inventory turnover = Cost of goods sold/Average inventory