In its first month of operations, Minh Lo Company made three purchases of merchandise in the following sequence: (1) 300 units at $6, (2) 400 units at $8, and

(3) 500 units at $9. Assuming there are 400 units on hand, compute the cost of the end-

Goods sold but being held for customer pickup.

Goods held on consignment from another company.

295 Moondog Music Center has five CD players on hand at the balance sheet date that cost $400 each. The current replacement cost is $320 per unit. Under the lower of cost or market basis of accounting for inventories, what value should Moondog report for the CD players on the balance sheet? Why?

Brief Exercises C6 What cost flow assumption may be used under the lower of cost or market basis of accounting for inventories?

Why is it inappropriate for a company to include freight-out expense in the Cost of Goods Sold account?

Dawn & Ken Company's balance sheet shows Inventories

$162,800. What additional disclosures should be made?

> C6 Under what circumstances might the inventory turnover ratio be too high—that is, what possible negative consequences might occur?

C6 What is the LIFO reserve? What are the consequences of ignoring a large LIFO reserve when analyzing a company?

“When perpetual inventory records are kept, the results under the FIFO and LIFO methods are the same as they would be in a periodic inventory system.” Do you agree? Explain.

How does the average method of inventory costing differ between a perpetual inventory system and a periodic inventory system?

Linx Company discovers in 2007 that its ending inventory at December 31, 2006, was $5,000 understated.

What effect will this error have on

(a) 2006 net income,

(b) 2007 net income, and

(c) the combined net income for the 2 years?

Identify items to be included in taking a physical inventory.

(SO 1)

Compute ending inventory using FIFO and LIFO.

(SO 2)

ing inventory under

(a) the FIFO method and

(b) the LIFO method. Minh Lo uses a periodic inventory system.

296 Compute the ending inventory using average costs.

(SO 2)

Explain the financial statement effect of inventory cost flow assumptions. (SO 3)

&

Explain the financial statement effect of inventory cost flow assumptions.

(SO 3)

Determine the LCM valuation.

(SO 4)

Compute inventory turnover ratio and days in inventory.

(SO 5)

CEE Determine ending inventory and cost of goods sold using LIFO reserve.

(SO 6)

Cee Apply cost flow methods to perpetual inventory records.

(SO 7)

Determine correct financial statement amount.

(SO 8)

CHAPTER 6 Reporting and Analyzing Inventory