Question

The 2020 inventory data for Garden Corporation’s patio furniture Bermuda set is presented below. Assume that Garden uses periodic inventory tracking.

2020 Beginning Inventory (purchased in 2019)		50 units @ $280 per unit
Purchases:
Purchase 1 on 1/20/20		150 units @ $300 per unit
Purchase 2 on 6/15/20		600 units @ $320 per unit
Sales:
Sale 1 on 4/8/20		275 units @ $600 per unit
Sale 2 on 9/25/20		430 units @ $600 per unit

When Garden examines the actual units in ending inventory, they see that 15 of the units are from 2020 beginning inventory, 20 units are from the 1/20/20 purchase, and 60 units are from the 6/15/20 purchase.  

1. In a period of falling prices, which of the following statements is true?
   1. FIFO produces a lower amount of net income than LIFO
   2. LIFO produces a lower cost for ending inventory than FIFO
   3. Average cost produces a higher net income than FIFO or LIFO
   4. LIFO produces a higher cost of goods sold than FIFO

2. Heavenly Rest, Inc. uses a periodic inventory system. When a warehouse supervisor counts the inventory on December 31, 2019, he accidentally counts one pile of blankets twice, resulting in 2019 ending inventory being overstated by $100,000. The warehouse supervisor counts the December 31, 2020 inventory correctly. Which of the following statements is true related to Heavenly Rest's 2019 and 2020 financial statements?
   1. 2019 Cost of Goods Sold will be understated by $100,000.
   2. 2020 Beginning Inventory will be understated by $100,000.
   3. 2020 Cost of Goods Sold will be overstated by $100,000.
   4. All of the above are true.
   5. Both a and c are true.

3. On October 28, Unilever sells and ships $100,000 worth of merchandise to Target. The goods are shipped FOB shipping point and arrive at Target stores on November 4. Which of the following statements is TRUE?
   1. The goods are in transit on October 31 so neither company includes the $100,000 as part of its October 31 Inventory balance.
   2. Unilever includes the $100,000 as part of its October 31 Inventory balance.
   3. Target includes the $100,000 as part of its October 31 Inventory balance.
   4. Both companies include the $50,000 as part of their October 31 Inventory balances.

Answer 1

1.
The correct answers are, b. LIFO produces a lower cost for ending inventory than FIFO
d. LIFO produces a higher cost of goods sold than FIFO

In a period of falling prices, the most correct answer is d. LIFO produces a higher cost of goods sold than FIFO. It is because, the prices are falling and LIFO sells from.the latest purchases in which the prices are high. Therefore, the cost of goods sold will be higher.

FIFO:

Sales = (275 × $600) + (430 × $600) = $423,000

Cost of goods sold = $83,000 + $137,600 = $220,600

Gross profit = Sales - Cost of goods sold = $423,000 - $220,600 = $202,400

Ending inventory = $30,400

LIFO:

Sales = (275 × $600) + (430 × $600) = $423,000

Cost of goods sold = $88,000 + $135,500 = $223,500

Gross profit = Sales - Cost of goods sold = $423,000 - $223,500 = $199,500

Ending inventory = $27,500

Average cost:

Average cost per unit = $313.75

Sales = (275 × $600) + (430 × $600) = $423,000

Cost of goods sold = $86,281.25 + $134,912.50 = $221,193.75

Gross profit = Sales - Cost of goods sold = $423,000 - $221,193.75 = $201,806.25

Ending inventory = $29,806.25

2.
The correct is, d. Both a and c are true.

The equation is that,
Cost of goods sold = Beginning inventory + Cost of goods manufactured - Ending inventory

Based on the above equation we can observe that,
When ending inventory of 2019 is overstated by $100,000, it will result in understating of cost of goods sold of 2019 by $100,000. When ending inventory of 2019 is overstated, it will also overstate the beginning inventory of 2020 by $100,000. Therefore, it will overstate the cost of goods sold of 2020 by $100,000.
Thus, cost of goods sold of 2019 will be understated by $100,000 and Cost of Goods Sold of 2020 will be overstated by $100,000. Therefore, both a. and c. are true.

3.
The correct answer is c. Target includes the $100,000 as part of its October 31 Inventory balance.

It is given that, Unilever sells and ships $100,000 worth of merchandise to Target under FOB shipping point. Under FOB shipping point, the ownership is transferred to the buyer at the time of shipment of the goods. The goods are shipped by Unilever to Target on October 28. Therefore, the ownership is transferred to Target on October 28 at the shipping point. Therefore, on October 31, the goods in transit are under the ownership of Target. Thus, Target includes the $100,000 as part of its October 31 Inventory balance.
Unilever does not include $100,000 as part of its October 31 Inventory balance.