Financial Accounting: An Integrated Statements Approach, 2nd Edition

Chapter 6 Inventories 287

3. a.Inventory Turnover 

Cost of Merchandise Sold

Average Inventory

Inventory Turnover 

$173,800

($50,000 + $95,200)/2

Inventory Turnover 2.39

b.Number of Days’ Sales in Inventory 

Average Inventory

Average Daily Cost of Merchandise Sold

Number of Days’ Sales in Inventory 

($50,000 + $95,200)/2

$173,800/365

Number of Days’ Sales in Inventory 152.5 days

SELF-STUDY QUESTIONS Answers at end of chapter

1. The direct labor cost should be recognized first in
   which inventory account?
   A. Materials Inventory
   B. Merchandise Inventory
   C. Finished Goods Inventory
   D. Work-in-Process Inventory


2. The following units of a particular item were purchased
   and sold during the period:

Beginning inventory 40 units at $20

First purchase 50 units at $21

Second purchase 50 units at $22

First sale 110 units

Third purchase 50 units at $23

Second sale 45 units

What is the cost of the 35 units on hand at the end of

the period as determined under the perpetual inventory

system by the lifo costing method?

A. $715 C. $700

B. $705 D. $805

3. The following units of a particular item were available
   for sale during the period:
   Beginning inventory 40 units at $20
   First purchase 50 units at $21
   Second purchase 50 units at $22
   Third purchase 50 units at $23
   What is the unit cost of the 35 units on hand at the end
   of the period as determined under the periodic inven-
   tory system by the fifo costing method?
   A. $20 C. $22
   B. $21 D. $23


4. If merchandise inventory is being valued at cost and
   the price level is steadily rising, the method of costing
   that will yield the highest net income is:
   A. lifo C. average
   B. fifo D. periodic


5. The average inventory is $50,000, and the cost of mer-
   chandise sold is $175,000. Determine the inventory
   turnover ratio.
   A. 2.92 C. 3.7
   B. 3.5 D. 4.375

DISCUSSION QUESTIONS

1. How are manufacturing inventories different than those
   of a merchandiser?


2. What security measures may be used by retailers to pro-
   tect merchandise inventory from customer theft?


3. Which inventory system (perpetual or periodic) provides
   the more effective means of controlling inventories? Why?


4. Before inventory purchases are recorded, the receiving
   report should be reconciled to what documents?
   5. Why is it important to periodically take a physical in-
   ventory if the perpetual system is used?
   6. Do the terms fifoandliforefer to techniques used in de-
   termining quantities of the various classes of merchan-
   dise on hand? Explain.
   7. Does the term last-inin the lifo method mean that the
   items in the inventory are assumed to be the most recent
   (last) acquisitions? Explain.