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Valuation of inventories

1. During 2007, which was the first year of operations, Luther Company had merchandise purchases of $985,000 before cash discounts. All purchases were made on terms of 2/10, n/30. Three-fourths of the items purchased were paid for within 10 days of purchase. All of the goods available had been sold at year end.

Which of the following recording procedures would result in the highest cost of goods sold for 2007?

1. Recording purchases at gross amounts
2. Recording purchases at net amounts, with the amount of discounts not taken shown under "other expenses" in the income statement

a. 1
b. 2
c. Either 1 or 2 will result in the same cost of goods sold.
d. Cannot be determined from the information provided.

2. During 2007, which was the first year of operations, Luther Company had merchandise purchases of $985,000 before cash discounts. All purchases were made on terms of 2/10, n/30. Three-fourths of the items purchased were paid for within 10 days of purchase. All of the goods available had been sold at year end.
Which of the following recording procedures would result in the highest net income for 2007?

1. Recording purchases at gross amounts
2. Recording purchases at net amounts, with the amount of discounts not taken shown under "other expenses" in the income statement

a. 1
b. 2
c. Either 1 or 2 will result in the same net income.
d. Cannot be determined from the information provided.

3. When using the periodic inventory system, which of the following generally would not be separately accounted for in the computation of cost of goods sold?
a. Trade discounts applicable to purchases during the period
b. Cash (purchase) discounts taken during the period
c. Purchase returns and allowances of merchandise during the period
d. Cost of transportation-in for merchandise purchased during the period

4. Costs which are inventoriable include all of the following except
a. costs that are directly connected with the bringing of goods to the place of business of the buyer.
b. costs that are directly connected with the converting of goods to a salable condition.
c. buying costs of a purchasing department.
d. selling costs of a sales department.

5. Which inventory costing method most closely approximates current cost for each of the following:

Ending Inventory Cost of Goods Sold

a. FIFO FIFO
b. FIFO LIFO
c. LIFO FIFO
d. LIFO LIFO

Solution Preview

1. During 2007, which was the first year of operations, Luther Company had merchandise purchases of $985,000 before cash discounts. All purchases were made on terms of 2/10, n/30. Three-fourths of the items purchased were paid for within 10 days of purchase. All of the goods available had been sold at year end.

Which of the following recording procedures would result in the highest cost of goods sold for 2007?
1. Recording purchases at gross ...

Solution Summary

This posting answers 5 multiple choice questions on valuation of inventories.

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