Principles of Accounting: Step-by-Step Guidance for Inventory, Depreciation, and Asset-Related Questions

Q1. Calculate the cost of goods sold under a periodic inventory system given: Beginning Inventory = $60,000, Purchases = $380,000, Ending Inventory = $50,000.

Background

Topic: Inventory Accounting – Periodic System

This question tests your understanding of how to compute cost of goods sold (COGS) using the periodic inventory system, which relies on periodic counts rather than continuous tracking.

Key Terms and Formula:

• Beginning Inventory: The value of inventory at the start of the period.

• Purchases: The cost of inventory bought during the period.

• Ending Inventory: The value of inventory at the end of the period.

• COGS Formula (Periodic):

$\text{COGS} = \text{Beginning Inventory} + \text{Purchases} - \text{Ending Inventory}$

Step-by-Step Guidance

1. Identify the values for beginning inventory, purchases, and ending inventory from the question.

2. Write out the COGS formula for the periodic system.

3. Substitute the given values into the formula.

4. Perform the addition and subtraction as indicated by the formula, but stop before stating the final result.

Try solving on your own before revealing the answer!

Final Answer: $390,000$

$\text{COGS} = 60,000 + 380,000 - 50,000 = 390,000$

This is the total cost of goods sold for the period under the periodic inventory system.

Q2. For Horne Inc. (Periodic Inventory): Given purchases and inventory counts, compute ending inventory and cost of goods sold under FIFO, LIFO, and Weighted Average methods.

Background

Topic: Inventory Cost Flow Assumptions

This question tests your ability to apply different inventory costing methods (FIFO, LIFO, Weighted Average) to determine ending inventory and cost of goods sold.

Key Terms and Formulas:

• FIFO (First-In, First-Out): Oldest inventory costs are assigned to COGS; newest to ending inventory.

• LIFO (Last-In, First-Out): Newest inventory costs are assigned to COGS; oldest to ending inventory.

• Weighted Average: Average cost per unit is used for both COGS and ending inventory.

• Average Cost per Unit Formula:

$\text{Average Cost per Unit} = \frac{\text{Total Cost of Goods Available for Sale}}{\text{Total Units Available for Sale}}$

Step-by-Step Guidance

1. Calculate total units available for sale and total cost.

2. Determine the number of units sold and units in ending inventory.

3. For FIFO: Assign the most recent costs to ending inventory and the oldest costs to COGS.

4. For LIFO: Assign the oldest costs to ending inventory and the most recent costs to COGS.

5. For Weighted Average: Compute the average cost per unit and apply it to both ending inventory and COGS.

6. Set up the calculations for each method, but stop before computing the final dollar amounts for COGS and ending inventory.

Try solving on your own before revealing the answer!

Final Answers:

• FIFO: Ending Inventory = $209; COGS = $729

• LIFO: Ending Inventory = $171; COGS = $767

• Weighted Average: Ending Inventory = $192; COGS = $746

Each method allocates costs differently, affecting both COGS and ending inventory values.

Q3. Comstock Company: Calculate (a) sales revenue, (b) cost of goods sold, (c) ending inventory, and (d) gross profit given units purchased, sold, and their costs.

Background

Topic: Inventory and Gross Profit Calculations

This question tests your ability to compute sales revenue, COGS, ending inventory, and gross profit using basic inventory and sales data.

Key Terms and Formulas:

• Sales Revenue = Units Sold × Selling Price per Unit

• COGS = Units Sold × Cost per Unit

• Ending Inventory = (Units Purchased – Units Sold) × Cost per Unit

• Gross Profit = Sales Revenue – COGS

Step-by-Step Guidance

1. Calculate the number of units sold and the number of units remaining.

2. Multiply units sold by the selling price to find sales revenue.

3. Multiply units sold by the cost per unit to find COGS.

4. Multiply remaining units by the cost per unit to find ending inventory.

5. Subtract COGS from sales revenue to set up the gross profit calculation, but stop before stating the final gross profit value.

Try solving on your own before revealing the answer!

Final Answers:

• (a) Sales Revenue: $8,000

• (b) COGS: $4,800

• (c) Ending Inventory: $1,200

• (d) Gross Profit: $3,200

Each calculation uses the basic formulas for sales, COGS, and gross profit.

Q4. Draper Sales, Inc.: Compute ending inventory and COGS under FIFO, LIFO, and Average Cost methods given purchase and sales data.

Background

Topic: Inventory Costing Methods

This question tests your ability to apply FIFO, LIFO, and Average Cost methods to determine ending inventory and COGS for a company with multiple purchases and sales.

Key Terms and Formulas:

• FIFO: Ending inventory consists of the most recently purchased units.

• LIFO: Ending inventory consists of the earliest purchased units.

• Average Cost: All units are valued at the average cost per unit.

• Average Cost per Unit = Total Cost of Goods Available for Sale / Total Units Available

• COGS = Total Cost of Goods Available for Sale – Ending Inventory

Step-by-Step Guidance

1. Calculate total units available for sale and total cost.

2. Determine the number of units sold and the number of units in ending inventory.

3. For FIFO: Assign the most recent purchase costs to ending inventory and the oldest to COGS.

4. For LIFO: Assign the oldest purchase costs to ending inventory and the most recent to COGS.

5. For Average Cost: Compute the average cost per unit and apply it to both ending inventory and COGS.

6. Set up the calculations for each method, but stop before stating the final dollar amounts.

Try solving on your own before revealing the answer!

Final Answers:

• FIFO: Ending Inventory = $35,000; COGS = $79,800

• LIFO: Ending Inventory = $30,800; COGS = $84,000

• Average Cost: Ending Inventory = $32,800; COGS = $82,000

Each method results in different values for ending inventory and COGS due to the order in which costs are assigned.

Q5. Ken Tuckie TV: Apply the lower-of-cost-or-market (LCM) rule to inventory items with given cost and market values.

Background

Topic: Inventory Valuation – Lower-of-Cost-or-Market (LCM)

This question tests your understanding of the LCM rule, which requires inventory to be reported at the lower of its historical cost or current market value.

Key Terms and Formula:

• LCM Rule: For each inventory item, compare cost and market value; use the lower value for reporting.

Step-by-Step Guidance

1. List each inventory item with its cost and market value.

2. For each item, compare the cost and market value.

3. Select the lower value for each item.

4. Add up the selected lower values to determine the total inventory value under LCM, but stop before stating the final total.

Try solving on your own before revealing the answer!

Final Answer: $159,000

The total inventory value under the LCM rule is $159,000, which is the sum of the lower values for each item.

Q6. Wang, Inc.: Depreciation Methods (Straight-Line, Declining-Balance, Units-of-Activity), Disposal, and Partial-Year Depreciation

Background

Topic: Depreciation Methods and Asset Disposal

This question tests your ability to apply different depreciation methods, calculate book value, and account for asset disposal and partial-year depreciation.

Key Terms and Formulas:

• Straight-Line Depreciation: $\text{Depreciation Expense} = \frac{\text{Cost} - \text{Salvage Value}}{\text{Useful Life}}$

• Declining-Balance Depreciation: $\text{Depreciation Expense} = \text{Book Value at Beginning of Year} \times \text{Declining-Balance Rate}$

• Units-of-Activity Depreciation: $\text{Depreciation Expense} = \text{Depreciation Cost per Unit} \times \text{Units Used}$

• Book Value: $\text{Asset Cost} - \text{Accumulated Depreciation}$

• Partial-Year Depreciation: $\text{Annual Depreciation} \times \frac{\text{Months Used}}{12}$

Step-by-Step Guidance

1. For each method, calculate the depreciable cost (cost minus salvage value).

2. For straight-line, determine the annual depreciation expense and set up the book value calculation for each year.

3. For declining-balance, calculate the depreciation rate and set up the formula for each year's expense.

4. For units-of-activity, compute the depreciation cost per unit and set up the calculation for each year's usage.

5. For disposal, compare the asset's book value at disposal to the proceeds received to determine gain or loss.

6. For partial-year depreciation, set up the calculation using the fraction of the year the asset was in use, but stop before stating the final depreciation expense or gain/loss.

Try solving on your own before revealing the answer!

Final Answers:

• Straight-Line (2019): Depreciation Expense = $16,000; Book Value = $53,000

• Declining-Balance (2019): Depreciation Expense = $20,400; Book Value = $30,600

• Units-of-Activity (2019): Depreciation Expense = $28,000; Book Value = $39,400

• Disposal (Junked): $5,000 loss; Disposal (Sold for $10,000): $5,000 gain

• Partial-Year Depreciation (2018, straight-line, 6 months): $8,000

Each method uses a different approach to allocate the cost of the asset over its useful life.

Q7. Analytical Methods & Ratio Analysis: Review of Inventory and Depreciation Multiple-Choice Questions

Background

Topic: Inventory Costing, Depreciation, and Financial Ratios

These questions test your conceptual understanding of inventory methods, depreciation, and key financial ratios used in accounting.

Key Terms and Concepts:

• FIFO, LIFO, Average-Cost: Inventory cost flow assumptions.

• Gross Profit: Sales minus COGS.

• Inventory Turnover: $\text{COGS} / \text{Average Inventory}$

• Days in Inventory: $365 / \text{Inventory Turnover}$

• Depreciable Cost: Cost minus salvage value.

• Asset Turnover: $\text{Net Sales} / \text{Average Total Assets}$

Step-by-Step Guidance

1. For each multiple-choice question, identify the key concept being tested (e.g., which method yields highest net income in rising prices, or how to calculate inventory turnover).

2. Recall the relevant formula or definition for the concept.

3. Set up the calculation or reasoning process (e.g., for inventory turnover, calculate average inventory and then divide COGS by this amount).

4. For questions involving calculations, substitute the given values into the formula, but stop before computing the final answer.

5. For conceptual questions, eliminate clearly incorrect options and narrow down to the most plausible choices, but stop before selecting the final answer.

Try solving on your own before revealing the answer!

Final Answers:

1. B

2. C

3. B

4. C

5. D

6. D

7. C

8. D

9. D

10. B

11. B

12. D

13. A

14. A

15. B

16. C

17. B

18. D

19. D

20. C

21. D

22. A

23. B

24. C

25. C

26. B

27. B

28. C

29. D

30. B

31. D

32. C

33. A

34. C

35. D

36. C

These answers correspond to the concepts and calculations discussed in the guidance above.