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Listed below are eight technical accounting terms introduced in this chapter. |
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Retail method |
FIFO method |
Lower of cost or market |
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Gross profit method |
LIFO method |
Specific identification |
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Flow assumption |
Average cost method |
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Each of the following statements may (or may not) describe one of these technical terms. For each statement, indicate the term described, or answer “None” if the statement does not correctly describe any of the terms. |
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a. |
A pattern of transferring unit costs from the Inventory account to the Cost of Goods Sold that may (or may not) parallel the physical flow of merchandise. |
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b. |
The only flow assumption in which all units of merchandise are assigned the same per unit cost. |
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c. |
The method used to record the cost of goods sold when each unit in the inventory is unique. |
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d. |
The most conservative of the flow assumptions during a period of sustained inflation. |
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e. |
The flow assumption that provides the most current valuation of inventory in the balance sheet. |
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f. |
A technique for estimating the cost of goods sold and the ending inventory that is based on the relationship between cost and sales price during the current accounting period. |
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Speed World Cycles sells high performance motorcycles and motocross racers. One of Speed World’s most popular models is the Kazomma 900 dirt bike. During the current year, Speed World purchased eight of these cycles at the following costs: |
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Purchase Date |
Units Purchased |
Unit Cost |
Total Cost |
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July 1 |
2 |
$ |
4,950 |
$ |
9,900 |
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July 22 |
3 |
5,000 |
15,000 |
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Aug. 3 |
3 |
5,100 |
15,300 |
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8 |
$ |
40,200 |
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On July 28, Speed World sold four Kazomma 900 dirt bikes to the Vince Wilson racing team. The remaining four bikes remained in inventory at September 30, the end of Speed World’s fiscal year. |
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Assume that Speed World uses a perpetual inventory system. |
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a(1) |
Compute the cost of goods sold relating to the sale on July 28 and the ending inventory of Kazomma 900 dirt bikes at September 30, using average cost method. |
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Cost of goods sold |
$ |
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Ending inventory |
$ |
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a(2) |
Compute the cost of goods sold relating to the sale on July 28 and the ending inventory of Kazomma 900 dirt bikes at September 30, using FIFO method. |
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Cost of goods sold |
$ |
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Ending inventory |
$ |
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a(3) |
Compute the cost of goods sold relating to the sale on July 28 and the ending inventory of Kazomma 900 dirt bikes at September 30, using LIFO method. |
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Cost of goods sold |
$ |
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Ending inventory |
$ |
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b(1) |
Which of the three cost flow assumptions will result in Speed World Cycles reporting the highest net income for the current year? |
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b(2) |
Which of the three cost flow assumptions will minimize the income taxes owed by Speed World Cycles for the year? |
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b(3) |
May Speed World Cycles use the cost flow assumption that results in the highest net income for the current year in its financial statements, but use the cost flow assumption that minimizes taxable income for the current year in its income tax return? |
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