Chapter 6: 2RQ (page 357)
What does the disclosure principle require?
The disclosure principle requires disclosing the information regarding the procedure and methods adopted to prepare financial statements.
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During periods of rising costs, which inventory costing method produces the highest gross profit?
Question:Antique Carpets’s books show the following data. In early 2020, auditors found that the ending merchandise inventory for 2017 was understated by \(8,000 and that theending merchandise inventory for 2019 was overstated by \)9,000. The ending merchandiseinventory at December 31, 2018, was correct.
2019 | 2018 | 2017 | |
Net Sales Revenue | \( 212,000 | \) 161,000 | \( 170,000 |
Cost of Goods Sold: | |||
Beginning Merchandise Inventory | \)22,000 | \(28,000 | \)41,000 |
Net cost of purchase | 131,000 | 100,000 | 86,000 |
Cost of goods available for sale | 153,000 | 128,000 | 127,000 |
Less: Ending Merchandise Inventory | 34,000 | 22,000 | 28,000 |
Cost of goods sold | 119,000 | 106,000 | 99,000 |
Gross Profit | 93,000 | 55,000 | 71,000 |
Operating Expenses | 63,000 | 28,000 | 39,000 |
Net Income | \( 30,000 | \) 27,000 | $ 32,000 |
Requirements
2. State whether each year’s net income—before your corrections—is understated oroverstated, and indicate the amount of the understatement or overstatement.
Question:Golf Unlimited carries an inventory of putters and other golf clubs. The sales price of each putter is \(119. Company records indicate the following for a particular line ofGolf Unlimited’s putters:
Date Item Quantity Unit Cost
Nov. 1 Balance 24 \) 53
6 Sale 20
8 Purchase 30 70
17 Sale 30
30 Sale 2
Requirements
2. Journalize Golf Unlimiteds inventory transactions using the LIFO inventory costingmethod. (Assume purchases and sales are made on account.)
Question:Assume that Toys Galore store bought and sold a line of dolls during December as follows:
Dec. 1 Beginning merchandise inventory 13 units @ \( 9 each
8 Sale 8 units @ \) 22 each
14 Purchase 16 units @ \( 14 each
21 Sale 14 units @ \) 22 each
Requirements
4. Which method results in a higher cost of ending merchandise inventory?
Clarmont Resources, which uses the FIFO inventory costing method, has the following account balances at May 31, 2019, prior to releasing the financial statements for the year:
Merchandise Inventory, ending \( 13,500
Cost of Goods Sold 68,000
Net Sales Revenue 123,000
Clarmont has determined that the current replacement cost (current market value) of the May 31, 2019, ending merchandise inventory is \)12,400.
Requirements
1. Prepare any adjusting journal entry required from the information given.
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