1. b

Return on sales is equal to net income divided by sales.

2. c.

A manufacturing company can have three different types of inventories called raw materials inventory, work in process inventory, and finished goods. A merchandising company has one inventory account called merchandise inventory.

3. b.

The cost of the sale on 7/10/2000 consists of the most recently purchased goods so LIFO must be the method used.

4. a.

The cost of goods sold is $25,615 computed by adding the three amounts $22,400 plus $975 plus $2,240.

5. a.

The current ending inventory at 12/28/2000 is $37,360. The company purchased 5 more units @ $330 or $1,650 of inventory. The next sale would consist of 5 units @ $330 and 5 units @ 320 or a total cost of sales of $3,250. The ending inventory would therefore be equal to $37,360 + $1,650 – $3,250 or $35,760.

6. c.

The specific identification cost flow assumption must correspond with the physical movement of the goods.

7. d.

The major division of expenses in a traditional income statement is between cost of goods sold and selling, general and administrative expenses.

8. a.

The gross margin ratio (also called the gross profit ratio) is calculated by dividing the gross margin on sales divided by sales. The gross margin on sales is equal to sales less COGS or $9,000 in this case. The gross margin ratio is then $9,000 ¸ $30,000 or 30%.

9. d.

This is the false response. A perpetual inventory system can be used with FIFO or LIFO.

10. d.

The sales under LIFO and FIFO would be equal to 5 items at $1,500 apiece or $7,500. Under FIFO, the COGS would be 3 units at $3,000 and 2 units at $1,100 or $5,200 meaning profit would be $2,300 before tax. Apply a tax rate of 30% and taxes would be $690 and after tax income would be $1,610. Under LIFO, COGS would be 2 units at $1,100, 2 units at $1,000 and 1 unit at $1,200 or $5,400 for a profit before tax of $2,100. A 30% tax would be $630 so after tax income under LIFO would be $1,470. The FIFO net income after tax of $1,610 is $140 more than the LIFO income after tax of $1,470.

 11. c.

The sales under LIFO and FIFO would be equal to 5 items at $1,500 apiece or $7,500. Under FIFO, the COGS would be 3 units at $3,000 and 2 units at $1,100 or $5,200 meaning profit would be $2,300 before tax. Apply a tax rate of 30% and taxes would be $690. Under LIFO, COGS would be 2 units at $1,100, 2 units at $1,000 and 1 unit at $1,200 or $5,400 for a profit before tax of $2,100. A 30% tax would be $630. The cash paid for the FIFO tax of $690 is $60 more than the LIFO tax of $630 so the LIFO cash balance will be $60 more after tax. Note that cash payments for purchases are the same under both methods. COGS does not affect cash. The dollar amount of sales received in cash is also the same for both methods.

12. b.

The two true statements are that the dollar amount recorded for sales is the same under LIFO and FIFO and the dollar amount recorded for purchases is the same under LIFO and FIFO. The other two statements are false.

13. d.

LIFO generally results in a lower inventory valuation than FIFO in a period of rising prices as all of the higher most recent costs are assigned to COGS and the older (cheaper) costs are in ending inventory.