Question

16.			To apply the gross margin method, the rate of gross margin on sales is multiplied by __________ __________ to arrive at gross margin. The gross margin is then subtracted from net sales to arrive at __________ __________ __________ __________ __________. This figure is then subtracted from __________ __________ __________ __________ __________ __________ to arrive at ending inventory.
17.			Use the following information and the retail inventory method to estimate the ending inventory at cost:
							Cost		Retail
			Beginning inventory				$44,000		$70,000
			Purchases, net				550,000		920,000
			Sales						900,000
18.			The Computational Error Company reported net income of $240,000 and $270,000 for 2006 and 2007. It was discovered later that the ending inventory for 2006 was understated by $28,000. The net income for 2006 was __________, and the net income for 2007 was __________.
19.			A company began an accounting period with 100 units of an item that cost $7.50 each. During the period it purchased 400 units of the item at $9 each and it sold 390 units. In the spaces below give the costs assigned to the ending inventory and to goods sold under each of the three assumptions using periodic inventory procedures.
											Ending Inventory		Cost of Goods Sold
			1.	The costs were assigned on a LIFO basis
			2.	The costs were assigned on a weighted-average cost basis
			3.	Costs were assigned on a FIFO basis

Fill in the blank options questions 16:

0.66:1

cost of goods available for sale

estimated cost of goods sold

FIFO

first-in, first-out

gross margin method

higher      

historical

last-in, first-out

less

LIFO

Lower

Merchandise Inventory

net sales

replacement

retail inventory method

Fill in the blank options questions 17:

$840

$957

$990

$1017

$1525.50

$3360

$3393

$3510

$32250

$32500

$54000

$55880

Fill in the blank options questions 18:

Overstated

understated

Fill in the blank options questions 19(1-3 Ending Inventory/Cost of Goods Sold):

$840

$957

$990

$1017

$1525.50

$3360

$3393

$3510

$32250

$32500

$54000

$55880

Fill in the blank options questions 20:

0.66:1

cost of goods available for sale

estimated cost of goods sold

FIFO

first-in, first-out

gross margin method

higher      

historical

last-in, first-out

less

LIFO

Lower

Merchandise Inventory

net sales

replacement

retail inventory method

Answer 1

16. To apply the gross margin method, the rate of gross margin on sales is multiplied by net sales to arrive at gross margin. The gross margin is then subtracted from net sales to arrive at Cost of goods sold. This figure is then subtracted from Cost of goods available for sale to arrive at ending inventory.

.

17. $54,000

	Cost	Retail
Beginning inventory	$44,000	$70,000
Purchases, net	550,000	920,000
Cost of goods available for sale	594,000	990,000
Less: Sales		900,000
Ending Inventory	54,000	90,000
(90,000 x 0.6)

Cost to retail ratio = 594,000 / 990,000 = 0.6

.

18.

The net income for 2006 was understated, and the net income for 2007 was overstated.

19.

		Ending Inventory	Cost of Goods Sold
1.	The costs were assigned on a LIFO basis	840	3,510
		(100*7.50) + (10*9)	(4,350 - 840)
2.	The costs were assigned on a weighted-average cost basis	957	3,393
		(4,350 / 500) * 110	(4,350 - 957)
3.	Costs were assigned on a FIFO basis	990	3,360
		(110*9)	(4,350 - 990)

Cost of goods available for sale

= (100*7.50) + (400*9)

= 4,350