Question

1. At the end of the year, Blue Sales Company omitted $36,400 of inventory from their...

1. At the end of the year, Blue Sales Company omitted $36,400 of inventory from their year-end inventory count. As a result,

  1. Net income for the year will be understated and cost of goods sold will be correct.
  2. Net income for the year will be correct and cost of goods sold will be overstated.
  3. Net income for the year will be understated cost of goods sold will be overstated.
  4. Net income for the year will be overstated cost of goods sold will be overstated.

2. During its first year of operation, CD warehouse’s inventory costs were steadily rising. Which method( FIFO or LIFO) gives the lowest ending inventory valuation on the balance sheet and which methods gives the lowest net income?

A. Ending Inventory: LIFO /Net Income: FIFO

B. Ending Inventory: LIFO /Net Income: LIFO

C. Ending Inventory: FIFO /Net Income: FIFO

D. Ending Inventory: FIFO/Net Income: LIFO

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Homework Answers

Answer #1

1. The correct choice is-C. Net income for the year will be the understated cost of goods sold will be overstated.

Explanation-If the ending inventory of Blue Sales Company is omitted $36,400 from their year-end inventory count, the cost of goods sold is overstated (COGS=Starting inventory + purchases - ending inventory), resulting in an understatement of gross margin and net income.

2. The Correct choice is -B. Ending Inventory: LIFO /Net Income: LIFO

Explanation-If the purchase price per unit is being increased, the LIFO method will provide the lowest ending inventory valuation on the balance sheet because the ending inventory will be the materials bought earlier at cheaper prices will be left. The LIFO method gives us the lowest Net Income also because the ending inventory items bought are usually the cheapest, and issued units are of higher prices.

Thanks & all the best....

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