Accounting Principles 7Th Canadian Edition Volume 1 By Jerry J. Weygandt

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Accounting Principles 7Th Canadian Edition Volume 1 By Jerry J. Weygandt

CHAPTER 6

 

INVENTORY costing

 

CHAPTER STUDY OBJECTIVES

 

 

  1. Describe the steps in determining inventory quantities. The steps in determining inventory quantities are (1) taking a physical inventory of goods on hand, and (2) determining the ownership of goods in transit, on consignment, and in similar situations.

 

 

  1. Calculate cost of goods sold and ending inventory in a perpetual inventory system using the specific identification, FIFO, and weighted average methods of cost determination. Costs are allocated to the Cost of Goods Sold account each time a sale occurs in a perpetual inventory system. The cost is determined by specific identification or by one of two cost formulas: FIFO (first-in, first-out) and weighted average.

Specific identification is used for goods that are not ordinarily interchangeable. T is method tracks the actual physical flow of goods, allocating the exact cost of each merchandise item to cost of goods sold and ending inventory.

The FIFO cost formula assumes a first-in, first-out cost flow for sales. Cost of goods sold consists of the cost of the earliest goods purchased. Ending inventory is determined by allocating the cost of the most recent purchases to the units on hand.

The weighted average cost formula is used for goods that are homogeneous or non-distinguishable. Under weighted average, a new weighted (moving) average unit cost is calculated after each purchase and applied to the number of units sold. Inventory is updated by subtracting cost of goods sold for each sale from the previous ending inventory balance.

 

 

  1. Explain the financial statement effects of inventory cost determination methods. Specific identification results in the best match of costs and revenues on the income statement. When prices are rising, weighted average results in a higher cost of goods sold and lower profit than FIFO. Weighted average results in a better match on the income statement because it results in an expense amount made up of more current costs. On the balance sheet, FIFO results in an ending inventory that is closest to the current (replacement) value and the best balance sheet valuation. All three methods result in the same cash flow.

 

 

  1. Determine the financial statement effects of inventory errors. An error in beginning inventory will have a reverse effect on profit in the current year (e.g., an overstatement of beginning inventory results in an overstatement of cost of goods sold and an understatement of prof t). An error in the cost of goods purchased will have a reverse effect on profit (e.g., an overstatement of purchases results in an overstatement of cost of goods sold and an understatement of profit). An error in ending inventory will have a similar effect on profit (e.g., an overstatement of ending inventory results in an understatement of cost of goods sold and an overstatement of profit). If ending inventory errors are not corrected in the following period, their effect on profit for the second period is reversed and total prof t for the two years will be correct. On the balance sheet, ending inventory errors will have the same effects on total assets and total owner’s equity, and no effect on liabilities.

 

 

  1. Value inventory at the lower of cost and net realizable value. The cost of the ending inventory is compared with its net realizable value. If the net realizable value is lower, a write-down is recorded, which results in an increase in cost of goods sold, and a reduction in inventory. The write-down is reversed if the net realizable value of the inventory increases, but the value of the inventory can never be higher than its original cost.

 

 

  1. Demonstrate the presentation and analysis of inventory. Ending inventory is reported as a current asset on the balance sheet at the lower of cost and net realizable value. Cost of goods sold is reported as an expense on the income statement. Additional disclosures include the cost determination method.

The inventory turnover ratio is a measure of liquidity. It is calculated by dividing the cost of goods sold by average inventory. It can be converted to days sales in inventory by dividing 365 days by the inventory turnover ratio.

 

 

  1. Calculate ending inventory and cost of goods sold in a periodic inventory system using FIFO and weighted average inventory cost formulas (Appendix 6A). Under the FIFO cost formula, the cost of the most recent goods purchased is allocated to ending inventory. The cost of the earliest goods on hand is allocated to cost of goods sold. Under the weighted average cost formula, the total cost available for sale is divided by the total units available to calculate a weighted average unit cost. The weighted average unit cost is applied to the number of units on hand at the end of the period to determine ending inventory. Cost of goods sold is calculated by subtracting ending inventory from the cost of goods available for sale.

The main difference between applying cost formulas in a periodic inventory system and applying cost formulas in a perpetual inventory system is the timing of the calculations. In a periodic inventory system, the cost formula is applied at the end of the period. In a perpetual inventory system, the cost formula is applied at the date of each sale to determine the cost of goods sold.

 

 

  1. Estimate ending inventory using the gross profit and retail inventory methods (Appendix 6B). Two methods of estimating inventories are the gross profit method and the retail inventory method. Under the gross prof t method, the gross profit margin is applied to net sales to determine the estimated cost of goods sold. The estimated cost of goods sold is subtracted from the cost of goods available for sale to determine the estimated cost of the ending inventory. Under the retail inventory method, a cost-to-retail ratio is calculated by dividing the cost of goods available for sale by the retail value of the goods available for sale. This ratio is then applied to the ending inventory at retail to determine the estimated cost of the ending inventory.

 

Exercises

 

 

Exercise 1

Workman Art Sales uses the perpetual inventory system. On September 30, 2017, the company’s year end, a physical count was taken of the inventory on hand. The cost of the inventory on hand was determined to be $325,400. However, the accountant has questions about the following items:

  1. On the store shelves, the staff counted 7 paintings held by Workman on consignment from a local artist. The paintings are included on the inventory count at a cost of $4,200.
  2. On September 30, a shipment of goods was sent to a customer, FOB destination. The cost of the goods shipped is $7,800, and freight, which is to be paid by Workman, will cost $200. These items are not included in the inventory count. Delivery is expected to take three days.
  3. On October 2, a freight company delivered goods that cost $10,000 to Workman’s warehouse. The goods had been shipped by the vendor on September 29, FOB shipping point. Freight on this shipment will amount to $500 and will be paid by the appropriate party. The goods are not included on the inventory count.
  4. On September 30 a loyal customer visited Workman’s retail shop and asked that certain items be set aside for him. The goods set aside have a cost of $1,300. The customer intends to let Workman know no later than October 2 whether or not he wishes to finalize the sale and have the goods shipped to his home. The freight will cost $50 and will be paid by Workman. The sales person was fairly sure the customer will take the items; and so prepared the sales invoice on September 30. The items are not included on the inventory count.
  5. Residing in Workman’s warehouse is merchandise costing $5,000 that was purchased in September and found to be defective. Workman’s purchasing manager has arranged with the vendor to accept return of the goods and has packaged them for return shipment. The vendor processed a credit to Workman’s account on September 28, and has arranged to have the goods picked up on October 1. The items are included on the inventory count.

 

Instructions

Calculate the correct inventory balance at September 30, 2017. For each of the above items, explain the basis of your treatment of the item.

 

Solution 1 (15 min.)

List       $325,400       Unadjusted inventory balance

 

  1. (4,200) The goods on consignment do not belong to Workman.

 

  1. 7,800 Because they were sent FOB destination, the goods belong to Workman

until delivered.

 

  1. 10,500 The goods are the responsibility of Workman from the shipping point.

Include freight-in in the merchandise inventory cost.

 

  1. 1,300 Because the sale is not final, the goods belong to Workman, not

the customer.

 

  1. (5,000) Because the vendor has approved the return and processed the credit,

______       these goods should not be included in Workman’s inventory.

$335,800       Adjusted inventory balance.

 

Bloomcode: Analysis

Difficulty: Medium

Learning Objective: Describe the steps in determining inventory quantities.

Section Reference: Determining Inventory Quantities

CPA: Financial Reporting

 

 

Exercise 2

Helsinki Furniture Sales uses the periodic inventory system. On April 30, 2017, the company’s year end, a physical count was taken of the inventory on hand in both the warehouse and the retail store area for the purpose of determining cost of goods sold and ending inventory value. The preliminary inventory list prepared by the warehouse manager shows a total inventory on hand of $738,000. The following are items that the warehouse manager noted on a separate sheet. None of these items are currently part of the final inventory listing because the manager was not sure how they should be treated for inventory purposes.

  1. On April 30, Helsinki shipped an order to a customer, FOB shipping point. The cost of the goods shipped is $9,650. Freight, which is to be paid by the appropriate party, will cost $375.
  2. On April 30, a customer visited Helsinki’s shop and selected a desk that she wanted to purchase and paid for it in full. The sales price of the desk was $3,500, and the cost was $2,200. The customer intends to send a truck to pick up the desk no later than May 2. The freight will cost $50 and will be paid by the customer. A “Sold” sign has been placed on the desk but it is still on display in the store.
  3. Residing in Helsinki’s warehouse is furniture costing $21,000 that was purchased in April and needs to be returned. The goods were special ordered for a customer who has since decided not to buy them after all. Helsinki’s supplier has agreed to accept return of the goods and will allow a full credit on Helsinki’s account as soon as they are received. A freight company is scheduled to pick up the merchandise on the morning of May 1, and so they have been set aside near the loading dock. The freight, which will be paid by the customer as a fee for the cancellation, is to cost $300.
  4. Helsinki sells some of its merchandise in smaller towns by placing samples on consignment with local hardware stores. The manager noted that 15 desks at a cost of $1,200 each and 30 chairs at $75 each are currently out on consignment.
  5. On May 2, a freight company delivered goods that cost $65,000 to Helsinki’s warehouse. The goods had been shipped by the vendor on April 29, FOB destination. Freight on this shipment will amount to $400 and will be paid by the appropriate party.

 

Instructions

Calculate the correct inventory balance at April 30, 2017. For each of the above items, explain the basis of your treatment of the item.

 

Solution 2 (15 min.)

List       $738,000       Unadjusted inventory balance

 

  1. 0 Because the sale is FOB shipping point, the customer has already taken

title at April 30. The freight is the customer’s responsibility.

 

  1. 0 The sale was completed on April 30, so the desk does not belong to

Helsinki and should not be included in their inventory.

 

  1. 21,000 The goods are in Helsinki’s possession, and at this point they have not

yet received a credit from the vendor, so the goods should be included in

inventory.

 

  1. 20,250 The goods belong to Helsinki even though they are not in their

possession. Total cost is ($1,200 x 15) + ($75 x 30) = $20,250

 

  1. 0 Because the goods are shipped FOB destination, Helsinki does not get

title until they arrive. The vendor is responsible for the freight.

______

$779,250       Adjusted inventory balance

Bloomcode: Analysis

Difficulty: Medium

Learning Objective: Describe the steps in determining inventory quantities.

Section Reference: Determining Inventory Quantities

CPA: Financial Reporting

 

 

Exercise 3
Fyodorov Company, using a periodic inventory system, has just completed a physical inventory count at year end, December 31, 2017. Only the items on the shelves, in storage, and in the receiving area were counted. The inventory amounted to $60,000. During the audit, the independent CPA discovered the following additional information:
  1. There were goods in transit on December 31, 2017, from a supplier with terms FOB destination, costing $8,000. Because the goods had not arrived, they were excluded from the physical inventory count.
  2. On December 27, 2017, a regular customer purchased goods for cash amounting to $1,000 and left them for pickup on January 4, 2018. Fyodorov Company had paid $500 for the goods and, because they were on hand, included them in the physical inventory count.
  3. Fyodorov Company, on the date of the inventory count, received notice from a supplier that goods ordered earlier, at a cost of $4,000, had been delivered to the transportation company on December 28, 2017; the terms were FOB shipping point. Because the shipment had not arrived on December 31, 2017, it was excluded from the physical inventory.
  4. On December 31, 2017, there were goods in transit to customers, with terms FOB shipping point, amounting to $800 (expected delivery on January 8, 2018). Because the goods had been shipped, they were excluded from the physical inventory count.
  5. On December 31, 2017, Fyodorov Company shipped $2,500 worth of goods to a customer, FOB destination, in Thunder Bay. The goods arrived in Thunder Bay on January 5, 2018. Because the goods were not on hand, they were not included in the physical inventory count.
  6. Fyodorov Company, as the consignee, had goods on consignment that cost $8,000. Because these goods were on hand as of December 31, 2017, they were included in the physical inventory count.

 

Instructions

Analyze the above information for Fyodorov Company and calculate a corrected amount for the ending inventory. Explain the basis for your treatment of each item.

 

Solution 3 (20 min.)

List:         $60,000       Unadjusted inventory balance

 

  1. 0 Because the goods were shipped FOB destination,

the title will pass to Fyodorov upon arrival. Properly excluded.

 

  1. 500 Goods should be excluded. The customer owns them.

 

  1. + 4,000 Goods belong to Fyodorov. Title passed when supplier

delivered the goods to the transportation company.

 

  1. 0 Because the goods were shipped FOB shipping point,

Fyodorov no longer has title to these goods. Properly excluded.

 

  1. + 2,500 Goods were shipped FOB destination.

Fyodorov retains title until the customer receives them.

 

  1. – 8,000 These goods are owned by the consignor, not the consignee,

and should not be included in Fyodorov’s inventory.

______

$58,000       Corrected inventory

 

Bloomcode: Analysis

Difficulty: Medium

Learning Objective: Describe the steps in determining inventory quantities.

Section Reference: Determining Inventory Quantities

CPA: Financial Reporting

 

 

Exercise 4

Dark Matter Coffee is a sole proprietorship owned by Evan Fantom. The company is in its second year of operations and only has one coffee blend available in one size. Evan does not have any background in accounting and would like your expertise to determine the individual and total impact of the following items on the ending inventory balance for the company’s December 31, 2017 year end.

  1. Evan keeps all inventory in his basement which he claims has a total cost of $40,000 (500 units). Of this amount, 50 units costing $3,000 spilled and could not be salvaged or sold.
  2. Evan has 80 units with a cost of $5,500 loaded in a delivery van ready to be shipped to customers. The terms of these sales are FOB destination.
  3. Evan has decided to try and sell goods on consignment for the first time. At year end, Evan has shipped out 100 units on consignment for a total cost of $7,750. These goods have not yet been sold by the consignee at year end and Evan has not received any proceeds.

 

Solution 4 (10 min.)
  1. The damaged goods (50 units) costing $3,000 should not be included in the ending inventory balance. This leaves 450 units with a cost of $37,000 to be included in ending inventory.

 

  1. The terms FOB destination implies that title to the goods remain with Dark Matter until the goods have reached the destination and delivery is complete. All 80 units costing $5,500 should be included in ending inventory.

 

  1. Legal title to the goods on consignment remains with Dark Matter until ultimate sale to the end consumer since the consignee is only acting as an agent to facilitate the sale. As a result the 100 units costing $7,750 should be included in ending inventory.

 

Total impact on the December 31, 2017 ending inventory = 450 + 80 + 100 = 630 units; $37,000 + 5,500 + $7,750 = $50,250

 

Bloomcode: Analysis

Difficulty: Easy

Learning Objective: Describe the steps in determining inventory quantities.

Section Reference: Determining Inventory Quantities

CPA: Financial Reporting

 

 

Exercise 5

Olynik Company uses the perpetual inventory system and the weighted average cost formula. The following information is available for the month of June:

      Date             Explanation                  Units         Unit Cost

Jun 1            Beginning Inventory        200                 $10

Jun 15          Purchase                         300                   11

Jun 17          Sale                                 250                     ?

Jun 24          Purchase                         400                   12

 

Instructions

Prepare a schedule to show cost of goods sold and the value of the ending inventory for the month of June.

 

Solution 5 (10 min.)

 

Purchases Cost of Goods Sold Balance
Date Units Cost Total Units Cost Total Units Cost Total
Jun 1 200 $10.00 $2,000
Jun 15 300 $11 $3,300 500 10.60 5,300
Jun 17 250 $10.60 $2,650 250 10.60 2,650
Jun 24 400 12 4,800 650 11.46 7,450
  700 $8,100 250 $2,650

 

Cost of Goods Sold:   $2,650

Ending Inventory:        $7,450

 

Check:

Beginning Inventory + Purchases − Cost of Goods Sold = Ending Inventory:

$2,000 + $8,100 – $2,650 = $7,450

Bloomcode: Application

Difficulty: Medium

Learning Objective: Calculate cost of goods sold and ending inventory in a perpetual inventory system using the specific identification, FIFO, and weighted average methods of cost determination.

Section Reference: Inventory Cost Determination Methods

CPA: Financial Reporting

 

 

Exercise 6

Gabbins Company uses the perpetual inventory system and the FIFO cost formula.

                                                                         Purchases                                       Sales              

                                                                 Units            Unit Cost            Units  Selling Price/Unit

Mar       1         Beginning inventory          100                  $50

3         Purchase                             60                  $60

4         Sales                                                                                   70                   $100

10         Purchase                           200                  $70

16         Sales                                                                                   80                   $110

19         Sales                                                                                   80                   $110

25         Sales                                                                                   50                   $110

30         Purchase                             40                  $75

 

Instructions

  1. a) Using the inventory and sales data above, calculate the value assigned to cost of goods sold in March and to the ending inventory at March 31.
  2. b) Prepare the journal entries to record the sales on March 4 and March 19. All sales are made on credit.

 

Solution 6 (20 min.)

a)

Purchases Cost of Goods Sold Balance
Date Units Cost Total Units Cost Total Units Cost Total
Mar 1 100 $50 $ 5,000
Mar 3 60 $60 $  3,600 100

60

50

60

8,600
Mar 4 70 $50 $3,500 30

60

50

60

5,100
Mar 10 200 70 14,000 30

60

200

50

60

70

19,100
Mar 16 30

50

50

60

4,500 10

200

60

70

14,600
Mar 19 10

70

60

70

5,500  

130

 

70

 

9,100

Mar 25 50 70 3,500 80 70 5,600
Mar 30 40 75 3,000 80

40

70

75

8,600
  300 $20,600 280 $17,000

 

Ending Inventory:             $8,600

Cost of Goods Sold:      $17,000

 

Check:

Beginning Inventory + Purchases − Cost of Goods Sold = Ending Inventory:

$5,000 + $20,600 − $17,000 = $8,600

 

b)

Mar      4     Accounts Receivable…………………………………………………..           7,000

Sales (70 x $100)………………………………………………….                              7,000

 

Cost of Goods Sold……………………………………………………..           3,500

Inventory (70 x $50)………………………………………………                              3,500

 

Mar    19     Accounts Receivable…………………………………………………..           8,800

Sales (80 x $110)………………………………………………….                              8,800

 

Cost of Goods Sold……………………………………………………..           5,500

Inventory [(10 x $60) + (70 x $70)]………………………….                              5,500

 

Bloomcode: Application

Difficulty: Hard

Learning Objective: Calculate cost of goods sold and ending inventory in a perpetual inventory system using the specific identification, FIFO, and weighted average methods of cost determination.

Section Reference: Inventory Cost Determination Methods

CPA: Financial Reporting

 

 

Exercise 7

Starshine Coffee Equipment sells European style coffee makers and uses a perpetual inventory system. Its inventory records show that on June 1, Starshine had 12 units on hand at a cost of $220 each. Transactions related to purchase and sale of coffee makers in June were as follows:

 

      Per unit
Date Transaction Units Cost Sales price
June 10 Sale 3 $510
June 15 Sale 4 $510
June 20 Purchase 5 $230
June 22 Purchase 6 $240
June 30 Sale 10 $500

 

Instructions

For each of the following cost formulas, calculate the ending inventory as at June 30 and the cost of goods sold for the month of June. Prove the cost of goods sold calculations.

  1. a) FIFO
  2. b) Weighted Average

 

Solution 7 (25 min.)

  1. a) FIFO

 

  Purchases Cost of goods sold Balance
Date Units Cost Total Units Cost Total Units Cost Total
Jun 1 12 $220 $ 2,640
Jun 10 3  $220  $660 9 220 1,980
Jun 15 4 220 880 5 220 1,100
Jun 20 5 $230 $1,150 5 220
5 230 2,250
Jun 22 6 240 1,440 5 220
5 230
6 240 3,690
Jun 30 5 220 1,100
5 230 1,150 6 240 $ 1,440
 $2,590  $3,790

 

Check: $2,640 + $2,590 − $3,790 = $1,440

 

  1. b) Weighted Average

 

  Purchases Cost of goods sold Balance
Date Units Cost Total Units Cost Total Units Cost Total
Jun 1 12 $220 $2,640
Jun 10 3 $220 $   660 9 220 1,980
Jun 15 4 220 880 5 220 1,100
Jun 20 5 $230 1,150 10 225 2,250
Jun 22 6 240 1,440 16 230.63 3,690
Jun 30 10 230.63 2,306 6 230.63 1,384
  $2,590 $3,846

 

Check:  $2,640 + $2,590 − $3,846 = $1,384

 

Bloomcode: Application

Difficulty: Hard

Learning Objective: Calculate cost of goods sold and ending inventory in a perpetual inventory system using the specific identification, FIFO, and weighted average methods of cost determination.

Section Reference: Inventory Cost Determination Methods

CPA: Financial Reporting

 

 

Exercise 8

In July, Brilliant Jewellers Company purchased the following items:

Date Purchased # Rings Cost per ring
Jul. 2 1 $15,000
Jul 5 2 9,250
Jul 10 1 750
Jul 19 3 12,500
Jul 20 4 945

 

On July 22, one ring from the July 2 purchase was sold for $19,500 and 2 rings from the July 20 purchase were sold for $1,520 each. All sales and purchases are made on credit.

 

Instructions

  1. a) Calculate ending inventory and cost of goods sold using specific identification.
  2. b) Prepare the journal entry to record the July 22 sale.

 

Solution 8

  1. a) Specific Identification

 

Purchases Cost of Goods Sold Balance
Date Units Cost Total Units Cost Total Units Cost Total
Jul 2

 

1 $15,000 $15,000 1 $15,000 $15,000
Jul 5 2 $9,250 18,500 1

2

$15,000

$18,500

$15,000

$18,500

Jul 10 1 $750 $750 1

2

1

$15,000

$18,500

$750

$15,000

$18,500

$750

Jul 19 3 $12,500 $37,500 1

2

1

3

$15,000

$18,500

$750

$12,500

 

$15,000

$18,500

$750

$37,500

Jul 20 4 $945 $3,780 1

2

1

3

4

$15,000

$18,500

$750

$12,500

$ 945

$15,000

$18,500

$750

$37,500

$3,780

Jul 22 1

2

$15,000

$945

$15,000

$1,890

           2

1

3

2

$18,500

$750

$12,500

$ 945

$18,500

$750

$37,500

$1,890

Total 11 $75,530 3 $16,890 8 $58,640

 

Cost of Goods Sold = $16,890

Ending Inventory = $58,640

 

b)

Jul      22     Accounts Receivable…………………………………………………..         22,540

Sales [($19,500 + (1,520 x 2)]…………………………………                            22,540

 

Cost of Goods Sold……………………………………………………..         16,890

Inventory (15,000 + 1,890)……………………………………..                            16,890

 

Bloomcode: Application

Difficulty: Medium

Learning Objective: Calculate cost of goods sold and ending inventory in a perpetual inventory system using the specific identification, FIFO, and weighted average methods of cost determination.

Section Reference: Inventory Cost Determination Methods

CPA: Financial Reporting

 

 

Exercise 9

Gabi’s Boutique Company uses a perpetual inventory system. Beginning Inventory is 2,500 T-shirts at a cost $2.50 per shirt. During the year Gabi’s Boutique purchased the following shirts:

Jan 12 Purchased 500 units @ $2.15 per unit
Feb 18 Sold 1,350 units @ $6.50 per unit
Jul   1 Purchased 1,000 units @ $2.65 per unit
Aug 29 Sold 1,475 units @ $7.50 per unit
Dec 19 Purchased 500 units @ $3.05 per unit

All purchases and sales are on account.

 

Instructions

  1. a) Calculate the cost of goods sold and ending inventory using weighted average.
  2. b) Prepare journal entries to record the February 18 and the August 29 sales. All sales and purchases are made in cash only.

 

Solution 9

  1. a) Weighted Average

 

Purchases Cost of Goods Sold Balance
Date Units Cost Total Units Cost Total Units Cost Total
Jan 1 2,500 $2.5000 $6,250
Jan 12 500 $2.15 $1,075 3,000 $2.4418 $7,325
Feb 18 1350 $2.4418 $3,296 1,650 $2.4418 $4,029
Jul 1 1,000 $2.65 $2,650 2,650 $2.5203 $6,679
Aug 29 1,475 $2.5203 $3,717 1,175 $2.5203 $2,962
Dec 19 500 $3.05 $1,525 1,675 $2.6789 $4,487
Total 2,000 $5,250 2,825 $7,013 1,675 $4,487

 

Check: $6,250 + $5,250 = $7,013 + $4,487

 

Cost of Goods sold = $7,013

Ending Inventory = $4,487

 

b)

Feb    18     Cash………………………………………………………………………….           8,775

Sales (1,350 x $6.50)…………………………………………….                              8,775

 

Cost of Goods Sold……………………………………………………..           3,296

Inventory (1,350 x $2.4418)……………………………………                              3,296

 

Aug    29     Cash………………………………………………………………………….    11,062.50

Sales (1,475 x $7.50)…………………………………………….                       11,062.50

 

Cost of Goods Sold……………………………………………………..           3,717

Inventory (1,475 x $2.5203)……………………………………                              3,717

 

Bloomcode: Application

Difficulty: Easy

Learning Objective: Calculate cost of goods sold and ending inventory in a perpetual inventory system using the specific identification, FIFO, and weighted average methods of cost determination.

Section Reference: Inventory Cost Determination Methods

CPA: Financial Reporting

 

 

Exercise 10

The Lighting Showcase sells many different light bulbs and uses a perpetual inventory system. During February, the company had beginning inventory, purchases, and sales for bulb 101 as follows:

 

    Per unit
Date Transaction Units Cost
Beginning Inventory 100 $15
February 5 Sale 50
February 10 Purchase 70 $13
February 15 Sale 25
February 25 Sale 35

 

Instructions

Prepare a schedule to determine the cost of goods sold and ending inventory using the FIFO cost formula for the period ended February 28, 2017.

 

Solution 10 (10 min.)

 

  Purchases Cost of goods sold Balance
Date Units Cost Total Units Cost Total Units Cost Total
Feb 1 100 $15 $ 1,500
Feb 5 50  $15  $750 50 15 750
Feb 10 70 $13 $910 50 15 1,100
70 13 910
Feb 15 25 15 375 25 15 375
70 13 910
Feb 25 25 15 375
10 13 130 60 13 $780
 $  910  $   1,630  

 

Check: $1,500 + $910 − $1,630 = $780

 

Bloomcode: Application

Difficulty: Medium

Learning Objective: Calculate cost of goods sold and ending inventory in a perpetual inventory system using the specific identification, FIFO, and weighted average methods of cost determination.

Section Reference: Inventory Cost Determination Methods

CPA: Financial Reporting

 

 

Exercise 11

The Lighting Showcase sells many different light bulbs and uses a perpetual inventory system. During February, the company had beginning inventory, purchases, and sales for bulb 101 as follows:

 

    Per unit
Date Transaction Units Cost
Beginning Inventory 100 $15
February 5 Sale 50
February 10 Purchase 70 $13
February 15 Sale 25
February 25 Sale 35

 

Instructions

  1. a) Prepare a schedule to determine the cost of goods sold and ending inventory using the weighted average cost formula for the period ended February 28, 2017.
  2. b) Assuming Lighting Showcase used FIFO cost formula, what balance would be reported for inventory at February 28, 2017? What impact would this have on the profit/loss?

 

Solution 11 (10 min.)

  1. a) Weighted Average

 

  Purchases Cost of goods sold Balance
Date Units Cost Total Units Cost Total Units Cost Total
Feb 1 100 $15 $ 1,500
Feb 5 50  $15  $750 50 15 750
Feb 10 70 $13 $910 120 13.83 1,660
Feb 15 25 13.83 346 95 13.83 1,314
Feb 25 35 13.83 484 60 13.83 $830
 $  910  $   1,580  

 

Check: $1,500 + $910 − $1,580 = $830

 

  1. b) FIFO = 60 units in ending inventory x $13 per unit = $780

 

The difference between the two methods will be transferred to cost of goods sold = $830 – $780 = $50 increase in cost of goods sold resulting in a reduction in profit by the same amount. Proof: $1,500 + $910 = $2,410 (goods available for sale) – $780 (FIFO ending inventory) = $1,630 vs. $1,580 (cost of goods sold) per part a).

 

Bloomcode: Application

Difficulty: Medium

Learning Objective: Calculate cost of goods sold and ending inventory in a perpetual inventory system using the specific identification, FIFO, and weighted average methods of cost determination.

Section Reference: Inventory Cost Determination Methods

Learning Objective: Explain the financial statement effects of inventory cost determination methods.

Section Reference: Financial Statement Effects

CPA: Financial Reporting

 

 

Exercise 12

O’Meara Sales sells golf bags and uses a perpetual inventory system. O’Meara’s inventory records show that at March 1, there were 30 units on hand at a cost of $135 each. Transactions related to purchase and sale of golf bags in March were as follows:

 

      Per unit
Date Transaction Units Cost Sales price
Mar 2 Purchase 17 $127
Mar 5 Sale 10 $150
Mar 15 Purchase 12 $125
Mar 20 Purchase 5 $120
Mar 30 Sale 50 $150

 

Instructions

  1. a) For each of the following cost formulas, calculate the ending inventory as at March 31 and the cost of goods sold for the month of March.
  2. FIFO
  3. Weighted Average
  4. b) Calculate the gross profit and gross profit margin that will be reported under each of the two cost formulas.
  5. c) Assume that O’Meara is motivated to report the highest profit possible. Which method will they prefer? Would your answer be different if the cost of golf bags was increasing, instead of decreasing? What if the cost was fluctuating randomly? Assume the selling price of the golf bags is the same regardless of which cost formula is used.

 

Solution 12 (30 min.)

  1. a) (i) FIFO

 

  Purchases Cost of goods sold Balance
Date Units Cost Total Units Cost Total Units Cost Total
Mar 1 30 $135  $4,050
Mar 2 17  $127  $2,159 30 135
17 127 6,209
Mar 5 10  $135  $1,350 20 135
17 127 4,859
Mar 15 12 125 1,500 20 135
17 127
12 125 6,359
Mar 20 5 120 600 20 135
17 127
12 125
5 120 6,959
Mar 30 20 135
17 127
12 125
1 120 6,479 4 120  $480
 $4,259  $7,829

 

a)(ii) Weighted Average

 

  Purchases Cost of goods sold Balance
Date Units Cost Total Units Cost Total Units Cost Total
Mar 1 30 $135.00 $4,050
Mar 2 17 $127.00  $2,159 47 132.11 6,209
Mar 5 10 $132.11  $1,321 37 132.11 4,888
Mar 15 12 125.00 1,500 49 130.37 6,388
Mar 20 5 120.00 600 54 129.41 6,988
Mar 30 50 129.41  $6,470 4 129.41 518
 $4,259  $7,791

 

b)

  FIFO Weighted Average  
Sales revenue (A) 60 x $150 $9,000 $9,000
Cost of goods sold (7,829) (7,791)  
Gross profit (B) $1,171 $1,209  
Gross profit margin (B ÷ A) 13.0% 13.4%

 

  1. c) To report the highest profit possible, O’Meara must use the cost formula that produces the lowest cost of goods sold. When costs are decreasing, this is weighted average. If costs were steadily increasing, FIFO would produce the highest profit. If costs were fluctuating, the choice of cost formulas would not produce a consistently higher or lower profit.

 

Bloomcode: Application

Difficulty: Hard

Learning Objective: Calculate cost of goods sold and ending inventory in a perpetual inventory system using the specific identification, FIFO, and weighted average methods of cost determination.

Section Reference: Inventory Cost Determination Methods

Learning Objective: Explain the financial statement effects of inventory cost determination methods.

Section Reference: Financial Statement Effects

CPA: Financial Reporting

 

Exercise 13

Windsor Company reported the following summarized information at the end of 2017:

Sales revenue……………………………………………………… $1,200,000

Cost of goods sold*……………………………………………….     800,000

Gross profit…………………………………………………………..       400,000

Operating expenses………………………………………………       150,000

Profit…………………………………………………………………… $   250,000

*Calculated using ending FIFO inventory of $250,000.

 

The controller of the company is considering a switch from FIFO to weighted average. He has determined that under weighted average, the ending inventory would have been $150,000.

 

Instructions

  1. a) Restate the above summarized information using weighted average.
  2. b) What effect, if any, would the proposed change have on Windsor’s profit and cash flows?
  3. c) If you were an owner of this business, what would your reaction be to this proposed change?

 

Solution 13 (20 min.)
  1. a) Restate to weighted average cost formula:

Sales revenue……………………………………………………… $1,200,000

Cost of goods sold*……………………………………………….      900,000

Gross profit…………………………………………………………..       300,000

Operating expenses………………………………………………      150,000

Profit…………………………………………………………………… $   150,000

*Ending inventory would be $100,000 less ($250,000 – $150,000 = $100,000) under weighted average, thereby increasing cost of goods by $100,000.

 

  1. b) Switching to the weighted average cost formula would result in $100,000 less profit. Profit is $150,000 under the weighted average cost formula, compared to $250,000 profit reported under FIFO.

No impact to cash is caused by his change. The cash impact comes when purchases and sales are made, and not from the choice of cost formula allocating cost of goods available for sale between cost of goods sold and ending inventory.

 

c)… Reporting more profit may appear to be desirable when reporting the company’s financial results, or when seeking additional financing. On the other hand, reporting less profit reduces the amount of income tax.

Nonetheless, a smart reader of these financial results would realize that there is no substantive difference between the financial results when using the two cost formulas. In total, over the life of the inventory, both cost formulas will result in the same financial position. The difference in each year is a timing difference only, resulting only from the method used to allocate the cost of goods available for sale between cost of goods sold and ending inventory. There is no cash impact. Changes to the costing method can only be undertaken if the physical flow of the goods changes.

 

Bloomcode: Analysis

Difficulty: Medium

Learning Objective: Calculate cost of goods sold and ending inventory in a perpetual inventory system using the specific identification, FIFO, and weighted average methods of cost determination.

Section Reference: Inventory Cost Determination Methods

Learning Objective: Explain the financial statement effects of inventory cost determination methods.

Section Reference: Financial Statement Effects

CPA: Financial Reporting

 

Exercise 14

Pete’s Packaging reported its cost of goods sold as follows:

 

2017 2016
Beginning inventory $     26,000 $19,000
Cost of goods purchased 195,000 168,000
Ending inventory (34,500) (26,000)
Cost of goods sold $   186,500 $161,000

 

The ending inventory at September 30, 2016 was overstated by $6,500.

 

Instructions

  1. a) Calculate the correct cost of goods sold for both years.
  2. b) Describe how the error has affected the financial statements for 2016 and for 2017, and for the two years combined.

 

Solution 14 (10 min.)

a)

2017 2016
Beginning inventory $  19,500 $  19,000
Cost of goods purchased 195,000 168,000
Ending inventory (34,500) (19,500)
Cost of goods sold $  80,000 $167,500

 

  1. b) The balance sheet for 2016 will have been incorrect, with current assets overstated by $6,500 due to the incorrect inventory amount. This will have resulted in an incorrect working capital ratio. Owner’s equity will also be overstated; if cost of goods sold is too low, then profit and owner’s equity will also be overstated.

 

The profit for 2016 was overstated by $6,500 due to cost of goods sold being calculated incorrectly, while 2017’s profit was understated by a corresponding amount. When both years are added together, the total profit is correct. However, due to the error affecting both years, a greater variability in cost of goods sold and profit has been reported.

Bloomcode: Analysis

Difficulty: Medium

Learning Objective: Calculate cost of goods sold and ending inventory in a perpetual inventory system using the specific identification, FIFO, and weighted average methods of cost determination.

Section Reference: Inventory Cost Determination Methods

Learning Objective: Determine the financial statement effects of inventory errors.

Section Reference: Inventory Errors

CPA: Financial Reporting

 

Exercise 15
Winston Auto Parts reported the following information in its income statement for 2016 and 2017:

 

2017 2016
Sales     $ 126,000   $  119,000
Cost of goods sold 88,000 67,000
Gross profit     $  38,000     $ 52,000

 

Additional Information:

 

2017 2016
Beginning inventory       8,000       5,000
Cost of goods purchased      90,000      70,000
Cost of goods available for sale      98,000      75,000
Ending inventory      (10,000)      (8,000)
     88,000      67,000

 

While completing Winston’s 2018 financial statements, the accountant realized that errors had been made in previous years’ inventory calculations. The correct ending inventory at December 31, 2015 was $6,000, the correct ending inventory at December 31, 2016 was $4,000, and the correct ending inventory at December 31, 2017 was $7,000.

 

Instructions

  1. a) Calculate the correct cost of goods sold and gross profit for 2016 and for 2017.
  2. b) Calculate the inventory turnover for 2016 and 2017:

(i) using the originally reported information; and

(ii) using the corrected information.

  1. c) Calculate the gross profit margin for 2016 and 2017:

(i) using the originally reported information; and

(ii) using the corrected information.

  1. d) Explain how the errors will have caused management performance to be improperly evaluated.

 

Solution 15 (25 min.)

a)

Corrected COGS & GP 2017 2016
Sales     $ 126,000    $ 119,000
Cost of goods sold 87,000 72,000
Gross profit     $ 39,000    $   47,000

 

COGS calculated as follows:

2017 2016
Beginning inventory       4,000       6,000
Cost of goods purchased      90,000      70,000
Cost of goods available for sale      94,000      76,000
Ending inventory      (7,000)      (4,000)
Cost of goods sold      87,000      72,000

 

  1. b) (i) Inventory turnover using the originally reported information:
Turnover: 2017 2016
Average inventory (8,000+10,000) ÷ 2 =9,000  (5,000+8,000) ÷ 2 = $6,500
Turnover 88,000 ÷ 9,000 = 9.78 times   67,000 ÷ 6,500 = 10.31 times

 

  1. b) (ii) Inventory turnover using the corrected information:
Turnover: 2017 2016
Average inventory  (4,000+7,000) ÷ 2 = 5,500  (6,000+4,000) ÷ 2 = $5,000
Turnover 87,000 ÷ 5,500 = 15.82 times   72,000 ÷ 5,000 = 14.40 times

 

  1. c) (i) Gross profit margin using the originally reported information:
2017 2016
$38,000 ÷ $126,000 $52,000 ÷ $119,000
Gross profit margin 30.2% 43.7%

 

  1. c) (ii) Gross profit margin using the corrected information:
2017 2016
$39,000 ÷ $126,000 $47,000 ÷ $119,000
Gross profit margin 31.0% 39.5%

 

  1. Based on the incorrect figures, inventory turnover appears to have decreased (from 10.31 times to 9.78), while the corrected figures show that inventory turnover has in fact increased (from 14.40 to 15.82) which is an improvement, rather than the deterioration shown using the incorrect data.

Based on the incorrect figures, the gross profit margin had decreased significantly, dropping by 13.5% from 2010 to 2011 (43.7% – 30.2%). The gross profit margin has in fact decreased, but only by 8.5% (39.5% – 31.0%) which is not as great a drop as the incorrect figures suggest.

Both of the performance measures when based on incorrect figures would result in a more negative evaluation of management’s performance than is warranted.

Bloomcode: Application

Difficulty: Hard

Learning Objective: Calculate cost of goods sold and ending inventory in a perpetual inventory system using the specific identification, FIFO, and weighted average methods of cost determination.

Section Reference: Inventory Cost Determination Methods

Learning Objective: Determine the financial statement effects of inventory errors.

Section Reference: Inventory Errors

Learning Objective: Demonstrate the presentation and analysis of inventory.

Section Reference: Reporting and Analyzing Inventory

CPA: Financial Reporting

 

Exercise 16

Labco Company reported the following partial income statement for the previous two years of operations:

                                                                                                                            2017          2018

Sales…………………………………………………………………………………………..     $340,000    $360,000

Cost of goods sold………………………………………………………………………..       181,000      187,000

Gross Profit…………………………………………………………………………………     $159,000    $173,000

 

Additional Information:

Beginning Inventory……………………………………………………………………..         36,000        37,000

Cost of goods purchased……………………………………………………       182,000      196,000

Cost of goods available for sale…………………………………………..       218,000      233,000

Ending inventory………………………………………………………………..      (37,000)      (46,000)

Cost of goods sold……………………………………………………………..       181,000      187,000

 

Labco uses a perpetual inventory system. The company accountant, while reviewing the financial records of the company noticed that the December 31, 2017 ending inventory was understated by $5,000.

 

Instructions

  1. a) Prepare the correct partial income statement data for 2017 and 2018.
  2. b) What is the cumulative effect of the inventory error on total gross profit for the two years?

 

Solution 16 (10 min.)
  1. a) 2017          2018

Sales…………………………………………………………………………………………..     $340,000    $360,000

Cost of goods sold………………………………………………………………………..       176,000      192,000

Gross profit………………………………………………………………………………….     $164,000    $168,000

 

Additional Information

Beginning inventory………………………………………………………………..         36,000        42,000

Cost of goods purchased………………………………………………………..      182,000      196,000

Cost of goods available for sale……………………………………………….       218,000      238,000

Ending inventory……………………………………………………………………      (42,000)      (46,000)

Cost of goods sold………………………………………………………………….       176,000      192,000

 

  1. b) The cumulative effect on total gross profit is zero. Total gross profit over the two years equals $332,000 regardless of whether or not the error is corrected.

 

Bloomcode: Application

Difficulty: Easy

Learning Objective: Determine the financial statement effects of inventory errors.

Section Reference: Inventory Errors

CPA: Financial Reporting

 

 

Exercise 17

O’Neil’s Hardware Store, in St. John’s, NL, prepared the following analysis of cost of goods sold for the previous three years:

                                                                                2016                2017                2018  

Beginning inventory, Jan. 1……………………..       $40,000           $18,000           $25,000

Cost of goods purchased…………………………         50,000             97,000             70,000

Deduct Ending inventory, Dec. 31…………….       (18,000)          (25,000)          (40,000)

Cost of goods sold………………………………….       $72,000           $90,000           $55,000

 

Profit for the years 2016, 2017, and 2018 was $83,000, $32,000, and $67,000, respectively. Since income had declined so much from 2016 to 2018, Mr. O’Neil hired an accountant to investigate the cause(s) for the declines.

 

The accountant determined the following:

  1. Purchases of $42,000 that occurred in 2016 were not recorded until 2017.
  2. The December 31 2016 inventory should have been $23,000.
  3. The 2017 ending inventory included inventory costing $6,000 that was purchased FOB destination point and was in transit at year end.
  4. The 2018 ending inventory did not include goods costing $3,000 that were shipped on December 29 to Rosewell Plumbing Company, FOB shipping point. The goods were still in transit at the end of the year.

 

Instructions

Determine the correct income for each year. (Show all calculations.)

Solution 17 (25 min.)

                                                                                  2016                2017                2018

Beginning inventory, Jan. 1……………………..     $  40,000    (2)  $23,000     (4) $19,000

Cost of goods purchased………………………… (1)   92,000    (3)    55,000             70,000

Deduct Ending inventory, Dec. 31……………. (2) (23,000)     (4) (19,000)     (5) (40,000)

Cost of goods sold………………………………….     $109,000           $59,000           $49,000

 

   2016                2017                2018

Income previously reported……………………..      $ 83,000           $32,000           $67,000

Add: Prior cost of goods sold……………………         72,000             90,000             55,000

Less: Revised cost of goods sold……………..    (109,000)          (59,000)          (49,000)

Corrected income…………………………………..      $ 46,000           $63,000           $73,000

 

(1)   Additional purchases $50,000 + $42,000 = $92,000

(2)   Correct ending 2016 inventory given = $23,000

(3)   Correct 2017 purchases $97,000 – $42,000 = $55,000

(4)   2017 ending inventory should not include goods in transit $25,000 – 6,000 = $19,000

(5)   The goods in transit were correctly excluded from inventory, as title passed to the customer after the goods left O’Neil’s premises.

 

Bloomcode: Application

Difficulty: Easy

Learning Objective: Determine the financial statement effects of inventory errors.

Section Reference: Inventory Errors

CPA: Financial Reporting

 

 

Exercise 18

For each of the independent events listed below, using a perpetual inventory system, analyze the impact on the indicated items at the end of the current year by placing the appropriate code letter in the box under each item.

Code:  O     = item is overstated

U     = item is understated

NA  = item is not affected

Owner’s         Cost of            Net

Events                                                                 Assets         Equity        Goods Sold    Income

——————————————————————————————————————————

  1. The ending inventory in the previous period was overstated.

——————————————————————————————————————————

  1. A physical count of goods on hand at the

end of the current year resulted in some

goods being counted twice.

——————————————————————————————————————————

  1. Goods purchased on account in December of the current year and shipped FOB destination were recorded as purchases, but were not included in the count of goods on hand on December 31 because they had not arrived by December 31.

——————————————————————————————————————————

  1. Goods purchased on account in December of the current year and shipped FOB shipping point were recorded as purchases, but were not included in the count of goods on hand on December 31 because they had not arrived by December 31.

——————————————————————————————————————————

  1. The internal auditors discovered that the

ending inventory in the previous period

was understated $15,000 and that the

ending inventory in the current period

was overstated $25,000.

 

Solution 18 (15 min.)

Owner’s         Cost of            Net

Events                                                                     Assets         Equity        Goods Sold    Income

——————————————————————————————————————————

  1. NA              NA                 O                     U

 

  1. O O                   U                     O

 

  1. NA               U                  O                     U

 

  1. U U                  O                     U

 

  1. O                O                   U                     O

 

Bloomcode: Comprehension

Difficulty: Medium

Learning Objective: Determine the financial statement effects of inventory errors.

Section Reference: Inventory Errors

CPA: Financial Reporting

 

 

Exercise 19

Roxanna’s Wigs reported cost of goods sold as follows:

                                                                         2017                            2018    

Beginning inventory                                     $   54,000                   $   64,000

Cost of goods purchased                                847,000                      891,000

Deduct Ending inventory                                (64,000)                    ( 55,000)

Cost of goods sold                                        $837,000                    $900,000

 

Roxanna made two errors:

  1. 2017 ending inventory was overstated by $3,000.
  2. 2018 ending inventory was understated by $9,000.

 

Instructions

Assuming the errors had not been corrected; indicate the dollar effect that the errors had on the items appearing on the financial statements listed below. Also indicate if the amounts are overstated (O) or understated (U).

                                                                             2017                                         2018                 

Overstated/                            Overstated/

Amount        Understated         Amount      Understated

Total assets                                         $______            ______           $______            ______

Owner’s equity                                    $______            ______           $______            ______

Cost of goods sold                              $______            ______           $______            ______

Profit                                                   $______            ______           $______            ______

 

Solution 19 (15 min.)

                                                                             2017                                         2018                 

Overstated/                            Overstated/

Amount         Understated         Amount      Understated

Total assets…………………………..           $3,000                 O                   $9,000                 U

Owner’s equity………………………           $3,000                 O                   $9,000                 U

Cost of goods sold…………………           $3,000                 U                 $12,000                 O

Profit……………………………………           $3,000                 O                 $12,000                 U

 

Correct cost of goods sold:

   2017                                          2018

Beginning inventory……………….       $  54,000                                   $  61,000

Cost of goods purchased………..         847,000                                     891,000

Deduct Ending inventory………..        (61,000)                                   (64,000)

Cost of goods sold…………………       $840,000                                   $888,000

 

Bloomcode: Application

Difficulty: Medium

Learning Objective: Determine the financial statement effects of inventory errors.

Section Reference: Inventory Errors

CPA: Financial Reporting

 

 

Exercise 20

For each of the independent events listed below, using a perpetual inventory system, analyze the impact on the indicated items at the end of the current year by placing the appropriate code letter in the box under each item.

Code:  O     = item is overstated

U     = item is understated

NA  = item is not affected

Cost of         Gross         Operating          Net

Events                                                             Goods Sold     Profit           Expenses    Income

——————————————————————————————————————————

  1. Overstating beginning inventory.

——————————————————————————————————————————

  1. Understating beginning inventory.

——————————————————————————————————————————

  1. Overstating ending inventory.

——————————————————————————————————————————

  1. Understating ending inventory.

——————————————————————————————————————————

 

Solution 20 (10 min.)

Cost of         Gross         Operating          Net

Events                                                             Goods Sold     Profit           Expenses    Income

——————————————————————————————————————————

  1. O                 U                 NA                    U

 

  1. U                O                 NA                    O

 

  1. U                O                 NA                    O

 

  1. O                 U                 NA                    U

 

Bloomcode: Comprehension

Difficulty: Easy

Learning Objective: Determine the financial statement effects of inventory errors.

Section Reference: Inventory Errors

CPA: Financial Reporting

 

 

Exercise 21

The controller of Lawn-Man Company is applying the lower of cost and net realizable value of valuing ending inventory. The following information is available:

                                                                   Cost                  Net Realizable Value

Lawnmowers:

Self-propelled……………………..     $  19,000                $  21,000

Push type……………………………         25,000                    20,000

Total…………………………….         44,000                    41,000

Snowblowers:

Manual……………………………….         38,000                    37,000

Self-start…………………………….        24,000                    26,000

Total…………………………….         62,000                    63,000

Total inventory…………………….     $106,000                $104,000

 

Instructions

  1. a) Prepare a schedule which shows the value of the inventory by applying the lower of cost and net realizable value to each item in inventory.
  2. b) Prepare the journal entry to record any inventory write-down required.

 

Solution 21 (10 min.)

a)

                                                                   Cost                     NRV                  LCNRV

Lawnmowers:

Self-propelled…………………………. $  19,000             $  21,000              $  19,000

Push type……………………………….     25,000                 20,000                  20,000

Total…………………………………..    44,000                 41,000                  39,000

Snowblowers:

Manual……………………………………… 38,000                 37,000                  37,000

Self-start………………………………..     24,000                 26,000                  24,000

Total………………………………….     62,000                 63,000                  61,000

Total inventory………………………… $106,000             $104,000              $100,000

 

  1. b) Cost of Goods Sold……………………………………………………………….. 6,000

Merchandise Inventory…………………………………………………….                              6,000

To record decline in inventory value to net realizable value

 

Bloomcode: Application

Difficulty: Medium

Learning Objective: Value inventory at the lower of cost and net realizable value.

Section Reference: Presentation and Analysis of Inventory

CPA: Financial Reporting

 

 

Exercise 22

Benjaha Company is preparing the annual financial statements dated December 31, 2017. Information about inventory stocked for regular sale follows:

                           Quantity                    Unit Cost                    Net Realizable Value

     Item               on Hand               When Acquired                    at year end

A                        25                              $25                                    $22

B                      100                                55                                      55

C                       20                                60                                      88

D                       80                                50                                      46

 

Instructions

  1. a) Calculate the correct value for the December 31, 2017 ending inventory using the lower of cost and net realizable value.
  2. b) Assume Benjaha uses a perpetual inventory system. Prepare the journal entry to record any inventory write-down required.

 

Solution 22 (10 min.)
  1. a) Quantity

                 Item               On Hand                        Cost                    NRV           LCNRV

A                        25                           $     625             $     550           $     550

B                      100                               5,500                 5,500               5,500

C                       20                               1,200                 1,760               1,200

D                       80                               4,000                 3,680               3,680

$11,325             $11,490           $10,930

 

  1. b) Cost of Goods Sold ($11,325 – $10,930)………………………………….. 395

Merchandise Inventory…………………………………………………….                                 395

To adjust inventory to lower of cost and realizable value

 

Bloomcode: Application

Difficulty: Medium

Learning Objective: Value inventory at the lower of cost and net realizable value.

Section Reference: Presentation and Analysis of Inventory

CPA: Financial Reporting

 

 

Exercise 23

The following information is available about the inventory of Read’s Ski House at the company’s year end, December 31:

 

Product line Item Units on hand Unit cost Net realizable value
Downhill skis Brand A 40 $300 $280
Brand B 50 $260 $275
Snowboards Brand G 80 $190 $250
Brand H 75 $140 $138

 

Instructions

  1. a) Calculate the total cost of the ending inventory at December 31.
  2. b) Calculate the total net realizable value of the ending inventory at December 31.
  3. c) What amount would be reported on Read’s December 31 balance sheet?

 

Solution 23 (15 min.)

  1. a) Total cost

 

Product line Item Units Unit cost Cost
Downhill skis Brand A 40 $300  $       12,000
Brand B 50 $260           13,000
Snowboards Brand G 80 $190           15,200
Brand H 75 $140           10,500
 $       50,700

 

  1. b) Total net realizable value

 

Product line Item Units on hand NRV/Unit Net Realizable Value
Downhill skis Brand A 40 $280 $  11,200
Brand B 50 $275 13,750
Snowboards Brand G 80 $250 20,000
Brand H 75 $138 10,350
$  55,300

 

  1. c) Reported inventory value based on applying lower of cost or net realizable value by item:

 

Product line Item Units Unit cost NRV Lower Inventory
Downhill skis Brand A 40 $300 $280 $280  $ 11,200
Brand B 50 $260 $275 $260          13,000
Snowboards Brand G 80 $190 $250 $190          15,200
Brand H 75 $140 $138 $138          10,350
 $   49,750

 

Bloomcode: Application

Difficulty: Easy

Learning Objective: Value inventory at the lower of cost and net realizable value.

Section Reference: Presentation and Analysis of Inventory

CPA: Financial Reporting

 

 

Exercise 24

The following data was compiled from the physical inventory count for Vortex Watch Company’s June 30, 2017 year end.

                                                                                             Net Realizable

                                                                   Cost                        Value

Luxury Watches:

Model A………………………………       $  9,200                $  12,800

Model B……………………………..         14,100                    11,600

Model C……………………………..           8,900                      9,900

Total…………………………….         32,200                    34,300

Sports Watches:

Model A………………………………         14,000                    13,600

Model B……………………………..           8,500                      8,500

Model C……………………………..        17,200                    22,000

Total…………………………….         39,700                    44,100

Casual Watches:

Model A………………………………         22,000                    25,000

Model B……………………………..         16,000                    14,000

Total…………………………….         38,000                    39,000

Total inventory…………………….     $109,900                $117,400

 

Instructions

  1. a) Prepare a schedule which shows the value of the inventory by applying the lower of cost and net realizable value to each item in inventory.
  2. b) Prepare the journal entry to record any inventory write-down required.

 

Solution 24 (15 min.)

a)

                                                                   Cost                     NRV                  LCNRV

Luxury Watch:

Model A…………………………………… $  9,200             $  12,800                $  9,200

Model B……………………………………. 14,100                  11,600                  11,600

Model C…………………………………..     8,900                   9,900                    8,900

Total…………………………………..    32,200                 34,300                  29,700

Sport Watches:

Model A…………………………………….. 14,000                 13,600                  13,600

Model B………………………………………. 8,500                   8,500                    8,500

Model C…………………………………     17,200                 22,000                  17,200

Total………………………………….     39,700                 44,100                  39,300

Casual Watches:

Model A…………………………………….. 22,000                 25,000                  22,000

Model B………………………………….     16,000                 14,000                  14,000

Total………………………………….     38,000                 39,000                  36,000

Total inventory………………………… $109,900              $117,400              $105,000

 

  1. b) Cost of Goods Sold……………………………………………………………….. 4,900

Merchandise Inventory…………………………………………………….                              4,900

To record decline in inventory value to net realizable value. ($105,000 – $109,900)

 

Bloomcode: Application

Difficulty: Medium

Learning Objective: Value inventory at the lower of cost and net realizable value.

Section Reference: Presentation and Analysis of Inventory

CPA: Financial Reporting

 

 

Exercise 25

The following information is available from the financial statements of Complete Home Furnishings. The company is a manufacturer of home furnishings, and its sales are mainly on credit.

                                                                                                (In millions)

                                                                                        2018                      2017 

Sales…………………………………………………………………. $76,704               $69,656

Cost of goods sold………………………………………………… 49,761                 47,257

Beginning inventory………………………………………………. 26,031                 14,816

Ending inventory…………………………………………………… 34,162                 26,031

Total current assets……………………………………………….. 87,246                 76,857

Total current liabilities…………………………………………….. 33,589                 33,671

 

Instructions

Evaluate the company’s liquidity position for 2018. As part of your analysis, you will have to calculate the current ratio, inventory turnover ratio, and days in inventory for the company for 2018 and 2017.

 

Solution 25 (10 min.)

 

2018 2017
Current Ratio $87,246 ÷ $33,589 = 2.60:1 $76,857 ÷ $33,671 = 2.28:1
Inventory Turnover $49,761 ÷ [($26,031+$34,162) ÷ 2] = 1.65 times $47,257 ÷ [($14,186+$26,031) ÷ 2] = 2.35 times
Days in Inventory 365 ÷ 1.65 = 221 days 365 ÷ 2.35 = 155 days

 

The company’s current ratio has improved, which would indicate that the company is more liquid. However, the company’s inventory turnover has decreased, indicating that it is taking Complete Home Furnishings longer to sell its inventory, which has resulted in higher inventory balances. This would have a negative impact on the company’s liquidity.

 

Bloomcode: Application

Difficulty: Easy

Learning Objective: Demonstrate the presentation and analysis of inventory.

Section Reference: Reporting and Analyzing Inventory

CPA: Financial Reporting

 

 

Exercise 26

The following information is available for Dahlia’s Deli for three recent years:

 

2018 2017 2016
Sales  $          500,000  $          490,000  $          465,500
Cost of goods sold              325,000              323,400              316,540
Inventory                42,000                40,000                37,800

 

The ending inventory at December 31, 2015 was $36,000.

 

Instructions

Calculate the inventory turnover, the days sales in inventory, and gross profit margin for Dalhia’s Deli for each of the three years, and comment on any trends.

 

Solution 26 (15 min.)

 

2018 2017 2016
Sales $           500,000 $           490,000 $           465,500
Cost of goods sold 325,000 323,400 316,540
Gross profit 175,000 166,600 148,960
Gross profit margin 35.0% 34.0% 32.0%

 

Average inventory (42,000 + 40,000) ÷ 2 (40,000 + 37,800) ÷ 2 (37,800 + 36,000) ÷ 2
= 41,000 = 38,900 = 36,900
Inventory turnover (325,000 ÷ 41,000) (323,400 ÷ 38,900) (316,540 ÷ 36,900)
= 7.9 = 8.3 = 8.6
Days sales in inventory (365 ÷ 7.9) (365 ÷ 8.3) (365 ÷ 8.6)
= 46.2 = 43.98 = 42.44

 

The Deli’s gross profit margin is increasing year by year, so it appears that the management is keeping costs down, or has increased prices sufficiently to cover any increased costs.

 

However, the decreasing inventory turnover (and increased number of days sales in inventory) suggest that management is not doing as well at managing inventory, by allowing it to build up.

 

Bloomcode: Application

Difficulty: Easy

Learning Objective: Demonstrate the presentation and analysis of inventory.

Section Reference: Reporting and Analyzing Inventory

CPA: Financial Reporting

 

Exercise 27

Data relating to Jaso Jerseys’ cost of goods sold and inventory balances are as follows:

 

2018 2017 2016
Cost of goods sold           $  352,800           $  377,500          $  401,100
Ending Inventory                82,000                89,900                95,600

 

The beginning inventory at January 1, 2016 was $92,200.

 

Instructions

Calculate the inventory turnover and the days sales in inventory for Jaso Jerseys for each of the three years. (Round ratios to two decimal places)

 

Solution 27 (10 min.)

2018                              2017                              2016

Average inventory (89,900 + 82,000) ÷ 2 (95,600 + 89,900) ÷ 2 (92,900 + 95,600) ÷ 2
= 85,950 = 92,750 = 94,250
Inventory turnover (352,800 ÷ 85,950) (377,500 ÷ 92,750) (401,100 ÷ 94,250)
= 4.10 = 4.07 = 4.26
Days sales in inventory (365 ÷ 4.10) (365 ÷ 4.07) (365 ÷ 4.26)
= 89.02 = 89.68 = 85.68

 

Bloomcode: Application

Difficulty: Easy

Learning Objective: Demonstrate the presentation and analysis of inventory.

Section Reference: Reporting and Analyzing Inventory

CPA: Financial Reporting

 

 

*Exercise 28

Willets Coffee Equipment sells European style coffee makers and uses a periodic inventory system. Its inventory records show that at July 1, Willets had 12 units on hand at a cost of $220 each. Transactions related to purchase and sale of coffee makers in July were as follows:

 

      Per unit
Date Transaction Units Cost Sales price
Jul 10 Sale 3 $510
Jul 15 Sale 4 $510
Jul 20 Purchase 5 $230
Jul 22 Purchase 6 $240
Jul 30 Sale 10 $500

 

Instructions

For each of the following cost formulas, calculate the ending inventory as at July 31 and the cost of goods sold for the month of July. Prove the cost of goods sold calculations.

  1. a) FIFO
  2. b) Weighted Average

 

*Solution 28 (20 min.)

  1. a) FIFO

Beginning inventory (12 x $220)………………………………………………                            $2,640

Purchases:

5 x $230………………………………………………………………………………..         $1,150

6 x $240………………………………………………………………………………..           1,440          2,590

Goods available for sale………………………………………………………….                              5,230

Ending inventory

Units (12 + 11 – 17 = 6)

6 units at $240……………………………………………………………….                            (1,440)

Cost of goods sold………………………………………………………………….                            $3,790

 

Check of cost of goods sold:

July 1 (12 @ $220)…………………………………………………………………         $2,640

July 20 (5 @ $230)…………………………………………………………………           1,150

Total……………………………………………………………………………………..         $3,790

 

  1. b) Weighted Average

Beginning inventory (12 x $220)………………………………………………                            $2,640

Purchases:

5 x $230………………………………………………………………………………..         $1,150

6 x $240………………………………………………………………………………..           1,440          2,590

Goods available for sale………………………………………………………….                              5,230

Units available: 12 + 5 + 6 = 23

Weighted average cost per unit: $5,230 ÷ 23 = $227.39

Ending inventory

Units: 12 + 11 – 17 = 6

6 units at $227.39…………………………………………………………..                            (1,364)

Cost of goods sold………………………………………………………………….                            $3,866

 

Check of cost of goods sold:

3 + 4 + 10 = 17 Units sold at $227.39 weighted average cost………                           $3,866

 

Bloomcode: Application

Difficulty: Medium

Learning Objective: Calculate ending inventory and cost of goods sold in a periodic inventory system using FIFO and weighted average inventory cost formulas.

Section Reference: Inventory Cost Formulas in Periodic Systems (Appendix 6A)

CPA: Financial Reporting

 

 

*Exercise 29

Garcia Sales sells golf bags and uses a periodic inventory system. Garcia’s inventory records show that at April 1, there were 30 units on hand at a cost of $135 each. Transactions related to purchase and sale of golf bags in April were as follows:

 

      Per unit
Date Transaction Units Cost Sales price
Apr 2 Purchase 17 $127
Apr 5 Sale 10 $150
Apr 15 Purchase 12 $125
Apr 20 Purchase 5 $120
Apr 30 Sale 50 $150

 

Instructions

  1. a) For each of the following cost formulas, calculate the ending inventory as at April 30 and the cost of goods sold for the month of April. Prove the cost of goods sold calculations.
  2. FIFO
  3. Weighted Average
  4. b) Calculate the gross profit and gross profit margin that will be reported under each of the two cost formulas.
  5. c) Assume that Garcia is motivated to report the highest profit possible. Which method will they prefer? Would your answer be different if the cost of golf bags was increasing, instead of decreasing? What if the cost was fluctuating randomly? Assume Garcia cannot change the selling price of their product.

 

*Solution 29 (25 min.)

  1. a) (i) FIFO

Beginning inventory (30 x $135)………………………………………………                            $4,050

Purchases:

17 x $127………………………………………………………………………………         $2,159

12 x $125………………………………………………………………………………           1,500

5 x $120………………………………………………………………………………..              600          4,259

Goods available for sale………………………………………………………….                              8,309

Ending inventory

Units (30 + 17 + 12 + 5) – (10 + 50)

4 units at $120……………………………………………………………….                               (480)

Cost of goods sold………………………………………………………………….                           $ 7,829

 

Check of cost of goods sold:

Apr 1 (30 @ $135)………………………………………………………………….         $4,050

Apr 2 (17 @ $127)………………………………………………………………….           2,159

Apr 15 (12 @ $125)………………………………………………………………..           1,500

Apr 20 (1 @ $120)………………………………………………………………….              120

Total…………………………………………………………………………….         $7,829

 

  1. a) (ii) Weighted Average

Beginning inventory (30 x $135)………………………………………………                            $4,050

Purchases:

17 x $127………………………………………………………………………………         $2,159

12 x $125………………………………………………………………………………           1,500

5 x $120………………………………………………………………………………..              600          4,259

Goods available for sale………………………………………………………….                              8,309

Units available (30 + 17 + 12 + 5) = 64

Weighted average cost per unit ($8,309 ÷ 64 = $129.83)

Ending inventory

Units (30 + 17 + 12 + 5) – (10 + 50)

4 units at $129.83…………………………………………………………..                              (519)

Cost of goods sold………………………………………………………………….                            $7,790

 

Check of cost of goods sold:

(10 + 50) = 60 Units sold at $129.83 weighted average cost per unit                         $7,790

 

b)

FIFO Weighted

Average

Sales revenue (A)

60 x $150

 

$9,000

 

$9,000

Cost of goods sold (7,829) (7,790)
Gross profit (B) $1,171 $1,210
Gross profit margin (B ÷ A) 13.0% 13.4%

 

  1. c) To report the highest profit possible, Garcia must use the cost formula that produces the lowest cost of goods sold. When costs are decreasing, this is weighted average. If costs were steadily increasing, FIFO would produce the highest profit. If costs were fluctuating, the choice of cost formulas would not produce a consistently higher or lower profit.

 

Bloomcode: Analysis

Difficulty: Medium

Learning Objective: Calculate ending inventory and cost of goods sold in a periodic inventory system using FIFO and weighted average inventory cost formulas.

Section Reference: Inventory Cost Formulas in Periodic Systems (Appendix 6A)

CPA: Financial Reporting

 

 

*Exercise 30

Chico Company uses the periodic inventory method and had the following inventory information available:

 Units               Unit Cost           Total Cost

Jan 1            Beginning Inventory             200                    $4                   $   800

Jan 20          Purchase                              400                    $5                     2,000

Jul 25           Purchase                              300                    $7                     2,100

Oct 20          Purchase                              400                    $8                     3,200

1,300                                           $8,100

 

A physical count of inventory on December 31 revealed that there were 600 units on hand.

 

Instructions

Answer the following independent questions and show calculations supporting your answers.

  1. a) Assume that the company uses the FIFO cost formula. The value of the ending inventory at December 31 is $______.
  2. b) Assume that the company uses the weighted average cost formula. The value of the ending inventory on December 31 is $______.
  3. c) Determine the difference in the amount of income that the company would have reported if it had used FIFO instead of Weighted Average. Would income have been greater or less?

 

*Solution 30 (20 min.)
  1. a) FIFO: Ending inventory $4,600

400 units @ $8      =           $3,200

200 units @ $7      =             1,400

600 units                             $4,600

 

  1. b) Weighted Average: Ending inventory $3,738

$8,100 ÷ 1,300 = $6.23 per unit × 600 units = $3,738 (rounded)

 

  1. c) FIFO: Cost of goods sold $3,500

Cost of goods available for sale:     $8,100

Less: ending inventory:                     4,600

Cost of goods sold:                          $3,500

Weighted Average: Cost of goods sold $4,362

Cost of goods available for sale:     $8,100

Less: ending inventory:                     3,738

Cost of goods sold:                          $4,362

 

Income would have been $862 ($4,362 cost of goods sold vs. $3,500) greater if the company used FIFO instead of weighted average.

 

Bloomcode: Application

Difficulty: Medium

Learning Objective: Calculate ending inventory and cost of goods sold in a periodic inventory system using FIFO and weighted average inventory cost formulas.

Section Reference: Inventory Cost Formulas in Periodic Systems (Appendix 6A)

CPA: Financial Reporting

 

 

*Exercise 31

Hixenbaugh Company uses the periodic inventory system to account for inventories. Information related to Hixenbaugh Company’s inventory at October 31 is given below:

Oct    1       Beginning inventory                   300     units @ $10.00 =           $  3,000

8       Purchase                                   800     units @ $10.40 =               8,320

16       Purchase                                   700     units @ $10.80 =               7,560

24       Purchase                                   200     units @ $11.60 =                2,320

Total units and cost                        2,000     units                               $21,200

 

On October 31 there were 500 units on hand.

 

Instructions

  1. a) Show calculations to value the ending inventory using FIFO.
  2. b) Show calculations to value the ending inventory using weighted average.

 

*Solution 31 (20 min.)
  1. a) Under FIFO, the cost of the units remaining in inventory is determined using the cost of the units purchased most recently.

200   units @ $11.60 =    $2,320

300   units @   10.80 =      3,240

500   units                        $5,560

 

  1. b) Under weighted average, the weighted average cost per unit must be calculated.

$21,200 ÷ 2,000 units = $10.60 weighted average cost per unit

500 units × $10.60 = $5,300

 

Bloomcode: Application

Difficulty: Medium

Learning Objective: Calculate ending inventory and cost of goods sold in a periodic inventory system using FIFO and weighted average inventory cost formulas.

Section Reference: Inventory Cost Formulas in Periodic Systems (Appendix 6A)

CPA: Financial Reporting

 

 

*Exercise 32

Kavenja Company sells many products. Whamo is one of its popular items. Below is an analysis of the inventory purchases of Whamo for the month of March. At the end of the month, there were 120 units on hand. Kavenja Company uses the periodic inventory system.

                                                                      Purchases

                                                            Units          Unit Cost

Mar 1            Beginning inventory       100                  $60

Mar 3            Purchase                          60                  $75

Mar 10          Purchase                        200                  $82

Mar 30          Purchase                          40                  $90

 

Instructions

  1. a) Using the FIFO cost formula, calculate the cost of goods sold for March. (Show calculations.)
  2. b) Using the weighted average cost formula, calculate the inventory on hand on March 31. (Show calculations.)

 

*Solution 32 (20 min.)

Cost of goods available for sale:

                  Purchases

                                                            Units          Unit Cost Total Cost

Mar 1            Beginning inventory       100                  $60            $ 6,000

Mar 3            Purchase                          60                  $75               4,500

Mar 10          Purchase                        200                  $82             16,400

Mar 30          Purchase                          40                  $90               3,600

400                                   $30,500

 

  1. a) Using FIFO – the earliest units purchased were the first sold.

3/1          100     @  $60      =    $  6,000

3/3            60     @    75      =        4,500

3/10        120     @    82      =        9,840

280   units                   $20,340   = the cost of goods sold

 

  1. b) Calculate the weighted average unit cost:

$30,500 ÷ 400 = $76.25

$76.25 × 120 units in ending inventory (400 available less 280 sold = 120)

$76.25 × 120 = $9,150

 

Bloomcode: Analysis

Difficulty: Hard

Learning Objective: Calculate ending inventory and cost of goods sold in a periodic inventory system using FIFO and weighted average inventory cost formulas.

Section Reference: Inventory Cost Formulas in Periodic Systems (Appendix 6A)

CPA: Financial Reporting

 

 

*Exercise 33

At the end of April, Greenland Company reports the following for the month:

    Date             Explanation                 Units           Unit Cost      Total Costs

Apr      1        Beginning Inventory          200                    $9                $1,800

12        Purchase                           300                  $12                $3,600

23        Purchase                           500                  $15                $7,500

30        Ending Inventory               180

 

Instructions

  1. a) Assuming Greenland uses a periodic inventory system, calculate the cost of ending inventory and the cost of goods sold under (1) FIFO, (2) weighted average.
  2. b) Which cost assumption results in the highest ending inventory? Why?
  3. c) Which cost assumption results in the highest cost of goods sold?
  4. d) Which cost assumption results in the highest cash flow? Why?
*Solution 33 (25 min.)
  1. a) Cost of goods available for sale:

Date            Explanation                     Units           Unit Cost      Total Costs

Apr      1        Beginning Inventory          200                    $9                $1,800

12        Purchase                           300                  $12                  3,600

23        Purchase                          500                  $15                  7,500

Total                               1,000                                      $12,900

 

(1)   FIFO

Ending inventory (180 × $15)…………………………………………………………        $ 2,700

 

Cost of Goods Sold:

Cost of goods available for sale……………………………………………….       $12,900

Less: ending inventory……………………………………………………………           2,700

Cost of goods sold………………………………………………………………….       $10,200

 

Check:

(200 × $9)……………………………………………………………………………..       $  1,800

(300 × $12)……………………………………………………………………………          3,600

(320 × $15)……………………………………………………………………………          4,800

Cost of Goods Sold………………………………………………………………………       $10,200

 

(2)   Weighted Average

Weighted average cost per unit = $12,900 ÷ 1,000 units = $12.90 per unit

Ending Inventory = 180 units × $12.90 per unit = $2,322

 

Cost of Goods Sold:

Cost of goods available for sale……………………………………………….       $12,900

Less: ending inventory……………………………………………………………           2,322

Cost of goods sold………………………………………………………………….       $10,578

 

Check:

Cost of Goods Sold = (1,000 – 180) × $12.90 = $10,578

 

  1. b) The FIFO cost formula will produce the highest ending inventory because costs have been rising. Under FIFO, the earliest costs are assigned to cost of goods sold, and the latest costs remain in ending inventory.

 

  1. c) The weighted average-cost cost formula will produce the highest cost of goods sold for Greenland Company.

 

  1. d) The selection of a cost formula does not affect cash flow. Cash flow is determined by purchases and payments, not the allocation of costs between cost of goods sold and ending inventory.

 

Bloomcode: Application

Difficulty: Hard

Learning Objective: Calculate ending inventory and cost of goods sold in a periodic inventory system using FIFO and weighted average inventory cost formulas.

Section Reference: Inventory Cost Formulas in Periodic Systems (Appendix 6A)

CPA: Financial Reporting

 

 

*Exercise 34

The Lighting Showcase sells many different light bulbs and uses a periodic inventory system. During February, the company had beginning inventory, purchases, and sales for bulb 101 as follows:

 

    Per unit
Date Transaction Units Cost
Beginning Inventory 100 $15
February 5 Sale 50
February 10 Purchase 70 $13
February 15 Sale 25
February 25 Sale 35

 

Instructions

Prepare a schedule to determine the cost of goods sold and ending inventory using the FIFO cost formula for the period ended February 28, 2017.

 

*Solution 34 (10 min.)

Cost of goods available for sale:

Date            Explanation                     Units           Unit Cost      Total Costs

Apr      1        Beginning Inventory          100                  $15                $1,500

10        Purchase                             70                  $13                     910

Total                                  170                                        $2,410

 

FIFO

Ending inventory (60 × $13)…………………………………………………………..           $ 780

 

Cost of Goods Sold:

Cost of goods available for sale……………………………………………….         $2,410

Less: ending inventory……………………………………………………………              780

Cost of goods sold………………………………………………………………….         $1,630

 

Check:

(50 × $15)……………………………………………………………………………..          $  750

(25 × $15)  …………………………………………………………………………….             375

(25 × $15)  …………………………………………………………………………….             375

(10 × $13)  …………………………………………………………………………….             130

Cost of Goods Sold………………………………………………………………………         $1,630

 

Bloomcode: Application

Difficulty: Medium

Learning Objective: Calculate ending inventory and cost of goods sold in a periodic inventory system using FIFO and weighted average inventory cost formulas.

Section Reference: Inventory Cost Formulas in Periodic Systems (Appendix 6A)

CPA: Financial Reporting

 

 

*Exercise 35

The Lighting Showcase sells many different light bulbs and uses a periodic inventory system. During February, the company had beginning inventory, purchases, and sales for bulb 101 as follows:

 

    Per unit
Date Transaction Units Cost
Beginning Inventory 100 $15
February 5 Sale 50
February 10 Purchase 70 $13
February 15 Sale 25
February 25 Sale 35

 

Instructions

Prepare a schedule to determine the cost of goods sold and ending inventory using the weighted average cost formula for the period ended February 28, 2017.

 

*Solution 35 (10 min.)

 

Cost of goods available for sale:

Date            Explanation                     Units           Unit Cost      Total Costs

Apr      1        Beginning Inventory          100                  $15                $1,500

10        Purchase                             70                  $13                     910

Total                                  170                                        $2,410

 

Weighted Average

Weighted average cost per unit = $2,410 ÷ 170 units = $14.18 per unit

Ending Inventory = 60 units × $14.18 per unit = $850

 

Cost of Goods Sold:

Cost of goods available for sale……………………………………………….         $2,410

Less: ending inventory……………………………………………………………              850

Cost of goods sold………………………………………………………………….         $1,560

 

Check:

Cost of Goods Sold = (170 – 60) × $14.18 = $1,560

 

Bloomcode: Application

Difficulty: Medium

Learning Objective: Calculate ending inventory and cost of goods sold in a periodic inventory system using FIFO and weighted average inventory cost formulas.

Section Reference: Inventory Cost Formulas in Periodic Systems (Appendix 6A)

CPA: Financial Reporting

 

 

*Exercise 36
Passarant Company reports goods available for sale at cost, $156,000. Beginning inventory at retail is $60,000 and goods purchased during the period at retail were $180,000. Sales for the period amounted to $90,000.

 

Instructions

Determine the estimated cost of the ending inventory using the retail inventory method.

 

Solution 36 (10 min.)

                                                                      At Cost                       At Retail

Beginning inventory                                                             $  60,000

Goods purchased                                                                  180,000

Goods available for sale                  $156,000                       240,000

Net sales                                                                                  90,000

Ending inventory                                                                  $150,000

 

First calculate the cost to retail ratio. $156,000 ÷ $240,000 = 65%

Apply this ratio to the ending inventory at retail. $150,000 × 65% = $97,500

Therefore, $97,500 is the estimated cost of the ending inventory.

 

Bloomcode: Application

Difficulty: Medium

Learning Objective: Estimate ending inventory using the gross profit and retail inventory methods.

Section Reference: Estimating Inventories (Appendix 6B)

CPA: Financial Reporting

 

 

*Exercise 37

Sudbury Department Store prepares monthly financial statements but only takes a physical count of merchandise inventory at the end of the year. The following information has been developed for the month of July:

                                                           At Cost                                    At Retail       

Beginning inventory                         $  50,000                     $  60,000

Merchandise purchases                    125,000                       190,000

 

The net sales for July amounted to $150,000.

 

Instructions

Use the retail inventory method to estimate the ending inventory at cost for July. Show all calculations to support your answer.

 

*Solution 37 (10 min.)

                                                           At Cost                                      At Retail      

Beginning inventory                         $  50,000                     $  60,000

Merchandise purchases                    125,000                       190,000

Goods available for sale                  $175,000                       250,000

Net sales                                                                                150,000

 

Ending inventory at retail = $100,000

Cost to retail ratio = 70% ($175,000 ÷ $250,000).

Ending inventory at cost = ($100,000 × 70%) = $70,000.

 

Bloomcode: Application

Difficulty: Medium

Learning Objective: Estimate ending inventory using the gross profit and retail inventory methods.

Section Reference: Estimating Inventories (Appendix 6B)

CPA: Financial Reporting

 

 

*Exercise 38
Chris’s Electronics uses the retail method to determine inventory cost. The following information is available for the month of January, 2017:

Beginning inventory, at cost…………………………………………………….       $64,000

Goods purchased at cost (net of allowances)……………………………       168,000

Net sales……………………………………………………………………………….       295,000

Beginning inventory, at retail……………………………………………………       110,000

Goods purchased, at retail………………………………………………………       315,000

 

Instructions

Calculate the estimated cost of the January 31, 2017 inventory using the retail inventory method.

 

*Solution 38 (10 min.)

 

Cost Retail
Beginning inventory   $ 64,000 $  110,000
Purchases    168,000    315,000
Available for sale          $ 232,000            425,000
Net sales  295,000
Ending inventory at retail     $ 130,000
Cost to retail ratio               232,000 = 54.6%
              425,000
Estimated cost of ending inventory     $130,000
X 54.6%
   $ 70,965

 

Bloomcode: Application

Difficulty: Medium

Learning Objective: Estimate ending inventory using the gross profit and retail inventory methods.

Section Reference: Estimating Inventories (Appendix 6B)

CPA: Financial Reporting

 

 

*Exercise 39

North Bay Company suffered a loss of its inventory on March 28 due to a fire in its warehouse. As a basis for filing a claim with its insurance company, North Bay Company developed the following information:

March net sales through March 28…………………………………………..     $500,000

Beginning Inventory, March 1………………………………………………….       190,000

Merchandise purchases through March 28……………………………….       225,000

The company has experienced an average gross profit margin of 30% in the past and this margin appears to be appropriate in the current period.

 

Instructions

Using the gross profit method, prepare an estimate of the cost of the inventory destroyed by fire on March 28. Show all calculations in good form.

 

Solution 39 (10 min.)

Net sales……………………………………………………………………………………..     $500,000

Less: Estimated gross profit ($500,000 × 30%)………………………………..       150,000

Estimated cost of goods sold…………………………………………………………     $350,000

 

Beginning inventory………………………………………………………………………     $190,000

Merchandise purchases………………………………………………………………..       225,000

Goods available for sale………………………………………………………………..       415,000

Less: Estimated cost of goods sold…………………………………………………      350,000

Estimated cost of ending inventory destroyed by fire……………………….     $  65,000

 

Bloomcode: Application

Difficulty: Medium

Learning Objective: Estimate ending inventory using the gross profit and retail inventory methods.

Section Reference: Estimating Inventories (Appendix 6B)

CPA: Financial Reporting

 

 

*Exercise 40
The inventory of Schooler Company was destroyed by fire on April 1. From an examination of the accounting records, the following data for the first three months of the year are obtained:

Sales…………………………………………………………………………………….     $155,000

Sales Returns and Allowances…………………………………………………           5,000

Purchases…………………………………………………………………………….         85,000

Freight In………………………………………………………………………………           3,500

Purchase Returns and Allowances…………………………………………..           4,000

 

Instructions

Determine the merchandise lost by fire, assuming a beginning inventory of $60,000 and a gross profit margin of 40% on net sales.

*Solution 40 (10 min.)

Net Sales ($155,000 – $5,000)………………………………………………..     $150,000

Less: Estimated gross profit (40% × $150,000)………………………….         60,000

Estimated cost of goods sold…………………………………………………..     $  90,000

 

Beginning inventory………………………………………………………………..     $  60,000

Cost of goods purchased ($85,000 – $4,000 + $3,500)………………         84,500

Cost of goods available for sale……………………………………………….       144,500

Less: Estimated cost of goods sold…………………………………………..         90,000

Estimated cost of merchandise lost………………………………………….     $  54,500

 

Bloomcode: Application

Difficulty: Hard

Learning Objective: Estimate ending inventory using the gross profit and retail inventory methods.

Section Reference: Estimating Inventories (Appendix 6B)

CPA: Financial Reporting

 

 

*Exercise 41

Featherstone Dollar Stores uses the periodic inventory, and completes a physical count of inventory annually and adjusts inventory to actual at each year end. For quarterly (interim) financial statements, they use the gross profit method to estimate inventory. The average of the actual gross profit margin for the most recent two years is used to estimate the quarter-end inventory. The average gross profit margin for the years ending December 31, 2015 and 2016 was 26%.

 

For Quarter 1, 2017, the following sales and purchases data is available:

 

Sales $ 420,000
Sales allowances and discounts                 2,500
Purchases             326,400
Purchase returns               10,000
Freight in                 9,800
Inventory, December 31, 2016    69,000
Operating expenses 50,000
Interest income 2,800

 

Instructions

Prepare Featherstone’s multi-step income statement for the three months ended March 31, 2017, and calculate the estimated inventory at March 31, 2017.

 

*Solution 41 (15 min.)

 

FEATHERSTONE DOLLAR STORES

Income Statement

Three months ended March 31, 2017

 

Sales revenue

Sales…………………………………………………………………………………….                        $420,000

Sales allowances and discounts………………………………………………           2,500    $417,500

Cost of goods sold ($417,500 x (1 – 0.26)……………………………………….                          308,950

Gross profit………………………………………………………………………………….                          108,550

Operating expenses……………………………………………………………………..                            50,000

Income from operations………………………………………………………………..                            58,550

Other income

Interest………………………………………………………………………………….                             2,800

Profit…………………………………………………………………………………………..                         $ 61,350

 

Estimated inventory:

Inventory, December 31, 2016………………………………………………………                        $  69,000

Purchases…………………………………………………………………………………..                        $326,400

Purchase returns………………………………………………………………………….      (10,000)

Freight in……………………………………………………………………………………..           9,800      326,200

Goods available for sale………………………………………………………………..                          395,200

Estimated cost of goods sold (see above)……………………………………….                       (308,950)

Estimated ending inventory, Mar 31, 2017………………………………………                        $  86,250

 

Bloomcode: Application

Difficulty: Hard

Learning Objective: Estimate ending inventory using the gross profit and retail inventory methods.

Section Reference: Estimating Inventories (Appendix 6B)

CPA: Financial Reporting

 

 

*Exercise 42
John’s Menswear uses the retail method and has the following information relating to the December 31, 2017 year end:

                                                                                            Cost                  Retail

Beginning inventory                                                        $ 222,860          $   345,000

Net purchases                                                                  589,500            1,220,800

Net sales                                                                                                     1,250,000

 

Instructions

Calculate the estimated cost of the December 31, 2017 inventory using the retail inventory method. (Round cost-to-retail ratio to one decimal place)

 

*Solution 42 (10 min.)

 

Cost Retail
Beginning inventory   $ 222,860 $  345,000
Net purchases    589,500    1,220,800
Available for sale          $ 812,360            1,565,800
Net sales  1,250,000
Ending inventory at retail     $ 315,800
Cost to retail ratio               812,360 = 51.9%
              1,565,800
Estimated cost of ending inventory     $315,800
X 51.9%
   $ 163,900

 

Bloomcode: Application

Difficulty: Medium

Learning Objective: Estimate ending inventory using the gross profit and retail inventory methods.

Section Reference: Estimating Inventories (Appendix 6B)

CPA: Financial Reporting

 

 

*Exercise 43

Hot Garage Company needs to estimate the value of the inventory destroyed by a flood in order to properly file the claim with the insurance company.  The following data was gathered:

Beginning inventory………………………………………………………………..     $105,500

Purchases…………………………………………………………………………….       450,050

Purchase returns and allowances…………………………………………….           6,800

Sales…………………………………………………………………………………….       625,850

Sales returns and allowances………………………………………………….         10,660

The company has experienced a consistent gross profit margin of 35% in past years which is also considered reasonable for the current period.

 

Instructions

Using the gross profit method, prepare an estimate of the cost of the inventory destroyed by flood. Show all calculations in good form. (Round all amounts to nearest whole dollar)

 

*Solution 43 (10 min.)

Net sales ($625,850 – $10,660)……………………………………………………..     $615,190

Less: Estimated gross profit ($615,190 × 35%)………………………………..      215,317

Estimated cost of goods sold…………………………………………………………     $399,873

 

Beginning inventory………………………………………………………………………     $105,500

Net purchases ($450,050 – $6,800)………………………………………………..      443,250

Goods available for sale………………………………………………………………..       548,750

Less: Estimated cost of goods sold…………………………………………………      399,873

Estimated cost of ending inventory destroyed by flood……………………..     $148,877

 

Bloomcode: Application

Difficulty: Medium

Learning Objective: Estimate ending inventory using the gross profit and retail inventory methods.

Section Reference: Estimating Inventories (Appendix 6B)

CPA: Financial Reporting

 

 

 

 

 

LEGAL NOTICE

 

 

 

Copyright © 2016 by John Wiley & Sons Canada, Ltd. or related companies. All rights reserved.

 

 

The data contained in these files are protected by copyright. This manual is furnished under licence and may be used only in accordance with the terms of such licence.

 

The material provided herein may not be downloaded, reproduced, stored in a retrieval system, modified, made available on a network, used to create derivative works, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise without the prior written permission of John Wiley & Sons Canada, Ltd.

 

 

CHAPTER 7

 

internal control and cash

 

CHAPTER STUDY OBJECTIVES

 

 

  1. Define cash and internal control. Cash not only includes coins and paper currency, it may also include cash equivalents. Cash equivalents are short-term, highly liquid (easily sold) investments that are not subject to significant risk of changes in value. Internal control consists of all the related methods and measures that management implements in order to achieve reliable financial reporting, effective and efficient operations, and compliance with relevant laws and regulations. Control activities include (a) establishment of responsibility, (b) segregation of duties, (c) documentation procedures, (d) physical and IT controls, (e) independent checks of performance, and (f) human resource controls.

 

 

  1. Apply control activities to cash receipts and cash payments. Internal controls over cash receipts include (a) designating only personnel such as cashiers to handle cash; (b) assigning the duties of handling or receiving cash, and recording cash to different individuals; (c) using remittance advices for mail receipts, cash register tapes (or point-of-sale computerized systems) for over-the-counter receipts, and deposit slips for bank deposits; (d) using company safes and bank vaults to store cash, with only authorized personnel having access, and using cash registers; (e) depositing all cash intact daily; (f) making independent daily counts of register receipts and daily comparisons of total receipts with total deposits; and (g) bonding personnel who handle cash. Debit and credit card transactions increase internal control but have related bank charges. Electronic funds transfer receipts also increase internal control over cash receipts.

Internal controls over cash payments include (a) authorizing only specified individuals such as the controller to sign cheques and authorize electronic funds transfer payments; (b) assigning the duties of approving items for payment, paying for the items, and recording the payment to different individuals; (c) using pre-numbered cheques and accounting for all cheques, with each cheque supported by an approved invoice; (d) storing blank cheques and signing machines in a safe or vault, with access restricted to authorized personnel; (e) comparing each cheque with the approved invoice before issuing the cheque and making monthly reconciliations of bank and book balances; and (f) stamping each approved invoice “Paid” after payment.

 

 

  1. Describe the operation of a petty cash fund. Companies operate a petty cash fund to pay relatively small amounts of cash. They must establish the fund, make payments from the fund, and replenish the fund. Journal entries are made only when the fund is established and replenished.

 

 

  1. Describe the control features of a bank account and prepare a bank reconciliation. A bank account contributes to good internal control by giving physical and IT controls for the storage of cash, reducing the amount of currency that must be kept on hand, and creating a double record of a depositor’s bank transactions.

It is customary to reconcile the balance per books and balance per bank to their adjusted balance. Reconciling items include deposits in transit, outstanding cheques, errors by the bank, unrecorded bank memoranda, and errors by the company. Adjusting entries must be made for any errors made by the company and unrecorded bank memoranda (e.g., interest).

 

 

  1. Report cash on the balance sheet. Cash is usually listed first in the current assets section of the balance sheet. Cash may be reported together with highly liquid, very short-term investments called cash equivalents. Cash that is restricted for a special purpose is reported separately as a current asset or a non-current asset, depending on when the cash is expected to be used.

 

Exercises

 
 
Exercise 1

Below are descriptions of internal control problems. In the space to the left of each item, enter the code letter of the one best internal control activity that is related to the problem described. Each code letter can be used more than once.

Control Activities

  1. Establishment of responsibility
  2. Segregation of duties
  3. Physical and IT controls
  4. Documentation procedures
  5. Independent checks of performances
  6. Human resource controls

 

____    1.    The same person opens incoming mail and posts to the accounts receivable subsidiary ledger.

____    2.    Three people handle cash sales from the same cash register drawer.

____    3.    A clothing store is experiencing a high level of inventory shortages because people try on clothing and walk out of the store without paying for the merchandise.

____    4.    The person who is authorized to sign cheques approves purchase orders for payment.

____    5.    Some cash payments are not recorded because cheques are not pre-numbered.

____    6.    Cash shortages are not discovered because there are no daily cash counts by supervisors.

____    7.    The controller of the company has not taken a vacation for over 20 years.

 

Solution 1 (5 min.)
  1. B

 

  1. A

 

  1. C

 

  1. B

 

  1. D

 

  1. E

 

  1. F
 

Bloomcode: Comprehension

Difficulty: Easy

Learning Objective: Define cash and internal control.

Section Reference: Cash and Internal Control

CPA: Financial Reporting

 

 

Exercise 2

Andrea Portowski has worked for Dr. Lee Hum for several years. Andrea demonstrates a loyalty that is rare among employees. She hasn’t taken a vacation in the last four years. One of Andrea’s primary duties at the medical office is to open the mail and list the cheques received. She also takes cash from patients at the cashier window as patients leave. At times it is so hectic that Andrea doesn’t bother with giving each patient a receipt for the cash paid on their accounts. She assures them she will see to it that they receive the proper credit. When the traffic is slow in the office, Andrea offers to help the bookkeeper post the payments to the patients’ accounts receivable. She is always happy to receive Andrea’s help, because she is a very conscientious worker.

 

Instructions

Identify any internal control activities that may be violated in this medical office situation.

 
Solution 2 (10 min.)

Violations

  1. Although it appears to be a small office, it is not appropriate that Andrea opens the mail, receives and records cash receipts from patients, and also appears to have custody of cash. This situation violates the segregation of duties principle. By posting to patients’ accounts it would be possible to post credits to patient accounts and pocket the cash.
  2. The documentation principle is violated when patients are not given cash receipts. Although many professional offices do not have cash registers, computerized or manual receipts are customary and necessary.
  3. Independent checks of performance are also being violated. There is no independent counting of the cash and comparison to total receipts.
  4. Human resource controls are being violated. There is no mention of Andrea being bonded. Also, personnel should be required to take vacations.
 

Bloomcode: Analysis

Difficulty: Medium

Learning Objective: Define cash and internal control.

Section Reference: Cash and Internal Control

CPA: Financial Reporting

 

 

Exercise 3

The following situations are independent of each other:

  1. A company has two retail outlets, North and South. A separate bank account is maintained for each location. At head office, there are two employees in the accounting department, Stephanie and Nick. Stephanie records all of the accounts payable, issues cheques, and completes the bank reconciliation for the South outlet. Nick completes all of these duties for the North outlet.
  2. A law firm has three partners and eight employees who provide legal services to clients, and two administrative staff. When a case is completed, an invoice is supposed to be issued by “whoever has time to do it”.
  3. An accounting firm completes many personal tax returns in a very short period of time each April. In order to speed up the process of updating client personal data (address, contact information and so on), the firm has placed a computer terminal in the reception area and ask the clients to enter any relevant changes while waiting for their account manager to see them. The terminal is connected to the main server and a user-friendly screen has been developed to guide the client through the data entry process. The screen can access any client’s data simply by typing in the client’s surname.
  4. A warehouse operates 24 hours a day. Employees work either an eight- or a twelve-hour shift. Three managers each work an eight-hour shift. Before leaving at the end of his or her shift, each manager makes a note on a clipboard of which employees were working during that shift. Once a week, someone from payroll gathers all of these notes to use in preparing the hourly employees’ pay cheques.
  5. Marnie is the supervisor of accounting for a small business and has three junior accountants reporting to her. At the end of every day she reviews her assistants’ work and corrects any errors that she observes. She notices that one employee makes the same types of errors repeatedly and she hopes that she is catching and correcting all of the errors because otherwise the manager’s financial reports will not be reliable.

 

Instructions

For each weakness, describe what could go wrong as a result of the weakness described, state which type of internal control is required to correct the weakness, and describe a recommended control. The first item has been completed for you.

 

Example:

Item What could go wrong Type of internal control Recommendation
1 Stephanie or Nick could (deliberately or accidentally) record and pay incorrect payables, and cover it up when completing the bank reconciliation. Segregation of duties Have Stephanie and Nick each prepare the bank reconciliation for the bank account for which the other employee issued the cheques.

 

Solution 3 (15 min.)

 

Item What could go wrong Type of internal control Recommendation
1 Stephanie or Nick could (deliberately or accidentally) record and pay incorrect payables, and cover it up when completing the bank reconciliation. Segregation of duties Have Stephanie and Nick each prepare the bank reconciliation for the bank account for which the other employee issued the cheques.
2 No one might get around to issuing the invoice and revenue would be lost. Establishment of responsibility Assign one person to issue all invoices when the file is completed.
3 One client could (accidentally or deliberately) access the confidential information of another client. Physical and IT controls Ensure the client data is password protected so the client can access only his or her own data screen.
4 Employees might be paid for the wrong hours. The employees working twelve-hour shifts may be reported on two different managers’ clipboards, resulting in confusion about who worked when. Documentation A more organized documentation system such as individual employee time sheets should be implemented.
5 Marnie may not catch all the errors made by an employee, and the employee will continue to make errors. Independent checks of performances Instead of correcting the errors, Marnie should ask the employees to correct them, and train them to do their work correctly. Then the employees could be held accountable for improving their accuracy.
 

Bloomcode: Evaluation

Difficulty: Hard

Learning Objective: Define cash and internal control.

Section Reference: Cash and Internal Control

CPA: Financial Reporting

 

 

Exercise 4

The following internal control procedures are used by Brooks Company for cash receipts and disbursements:

  1. Cashiers receive all over-the-counter receipts and place the cash into a single cash drawer.
  2. When cash in the drawer exceeds $500, it is placed in an envelope marked “cash” and stored in a drawer in the supervisor’s office.
  3. The company’s accountant makes daily bank deposits.
  4. The clerk in the receiving department authorizes all payments for purchases.
  5. Blank cheques are kept in the main office.
  6. The company’s internal auditor prepares bank reconciliations annually.

 

Instructions

For each of the above procedures, explain the weakness in internal control, identify the control policy or procedure violated, and suggest a change in procedure that will result in better control.

 

Solution 4 (15 min.)

 

Weakness Control Violated Recommended Change
1. Inability to establish responsibility for cash on a specific clerk. Establishment of responsibility There should be separate cash drawers and register codes for each clerk.
2. Cash is not adequately protected from theft. Physical & IT controls Cash should be stored in a safe until it is deposited in the bank.
3. The accountant should not handle cash. Segregation of duties The cashier’s department should make the deposits.
4. Receiving department approves purchases. Segregation of duties Purchasing department should approve bills for payment.
5. Cheques are not stored in a secure area. Physical & IT controls Cheques should be stored in a safe or locked file drawer.
6. Bank reconciliations are prepared annually. Independent checks of performances Bank reconciliations should be prepared monthly.
 

Bloomcode: Evaluation

Difficulty: Medium

Learning Objective: Define cash and internal control.

Section Reference: Cash and Internal Control

Learning Objective: Apply control activities to cash receipts and cash payments.

Section Reference: Cash Controls

CPA: Financial Reporting

 

 

Exercise 5

Pacific Used Books sells all of its products by “mail order”. Customers can select their purchases from an online catalogue. Once the books are selected, the customer sends an order in by email, then prints out the email and mails it in with a cheque. For individual customers, Pacific does not send out the order until the payment is received. For corporate customers like bookstores, Pacific will send out the order with an invoice before payment is received. Occasionally, “walk in” customers will come in to purchase specific books. These customers are expected to pay cash, and the receptionist prepares the invoices and takes the cash for the cash transactions.

 

The following procedures relate to the handling of cash payments from customers:

  1. Pacific’s mail clerk opens all of the mail, which usually takes him the entire day. Orders from customers are placed in one file folder and the cheques received are placed in another file folder.
  2. The cheques are delivered to the Accounts Receivable department at the end of the day, and placed in a filing cabinet by Joanie, the Accounts Receivable clerk. The file folder of orders is given to the shipping department.
  3. The following morning Joanie prepares a bank deposit with all of the cheques received the previous day, and gives it to the receptionist to hold in her desk drawer.
  4. At the end of the day, the receptionist adds any cash received from “walk in customers” to the deposit and then takes the deposit to the bank on her way to the bus stop.
  5. From a photocopy of the bank deposit slip, Joanie prepares a list for the shipping department indicating which customer’s orders have been paid so that they know which orders are cleared for shipping. If the list includes payments from corporate customers, the shipping department ignores this information, assuming the orders have been sent previously.
  6. Working from a photocopy of the bank deposit slip, Joanie enters the customer payments in the accounts receivable subledger, and records the cash received in the cash receipts journal.
  7. At the end of the month, Joanie adds up all of the bank deposit slips, and reconciles this amount to the total cash receipts (per the cash receipts journal) for the month. There is very seldom a difference between the two amounts.

 

Instructions

  1. a) For each procedure, explain one weakness in internal control.
  2. b) For each procedure, identify the control activity that is violated.
  3. c) For each weakness, recommend an improvement that will increase internal control over cash receipts.

 

Solution 5 (20 min.)

 

  a) Weakness b) Control c) Recommendation
1. The clerk is not making a list of cheques as the mail is opened for later comparison to amounts deposited. Documentation The mail clerk should not just put the cheques in a folder, but should also make a list of cheques received.
1. The orders are given to the shipping department without an indication of which are prepaid and which are not. Documentation The mail clerk should note on each order whether or not it was paid before the orders go to the shipping department.
2. The cheques are kept overnight and placed in an unlocked drawer. Physical & IT controls The cheques should be deposited the same day received. If this is not possible, they should be placed in a safe or securely locked location.
3. Joanie makes up the deposit from the cheques in the folder without an independent source (such as the list described in #1) to verify that all the cheques received have been accounted for. Documentation/

segregation of duties

The total amount of the deposit should be agreed to an independent source of information so that there is documentation to show that all cheques received have been deposited.
3. The receptionist holds the deposit plus any cash from cash sales at her work station which is in a publicly open area. Physical & IT controls Until it is taken to the bank, the deposit and any additional cash should be stored in a more secure area (for example a safe or locked drawer) that is not in a public area such as reception.
4. The receptionist makes cash sales and deposits it with no other person involved in recording the transaction. Segregation of duties Someone other than the person making the deposit (the receptionist) should handle the sale and invoicing for cash sales.
4. The receptionist may not be bonded, and she takes the deposit including both cheques and cash to the bank without security. Physical & IT controls Recommend hiring a bonded courier to deliver the deposit to the bank.
5. Joanie makes up the list for the shipping department from the deposit slip, which may not be accurate since it has not been verified against independently prepared information. Segregation of duties If Joanie makes up the deposit, the amount should be agreed to an independently prepared list.
5. The shipping department receives information that may or may not be relevant (the names of payees for orders already shipped) and ignores it. Documentation/ establishment of responsibility The shipping department should be given the information to know which customers have prepaid and which have not so they don’t have to guess and risk releasing orders that should be held for payment.
6. Joanie has too much overlapping responsibility for handling cash, recording customer sales and recording customer deposits. Segregation of duties The credits to the customer accounts should be recorded from the list prepared at the time of receipt (e.g., by the mail clerk) and by someone other than the person who prepares the deposit. If Joanie is to record customer credits, then someone else (perhaps the receptionist) should prepare the deposit.
7. Since the cash receipts ledger was prepared by looking at the deposit slip, reconciling the two lists to each other does not provide verification. Documentation The cash receipts journal, if prepared from looking at the deposit slips, should be reconciled to an independent cash listing, not to the same source on which it was based.

 

Note: There are multiple weaknesses in some of the procedures. The student is required to identify just one per item. Accept other valid recommendations.

 

Bloomcode: Evaluation

Difficulty: Hard

Learning Objective: Define cash and internal control.

Section Reference: Cash and Internal Control

Learning Objective: Apply control activities to cash receipts and cash payments.

Section Reference: Cash Controls

CPA: Financial Reporting

 

 

Exercise 6

The following are internal control procedures over cash payments in place at Harts Music Supplies.

  1. Cheques are signed using an automated cheque signing machine. The machine is stored in a safe that requires two keys to open it. The Controller and Vice President Finance, each have custody of one of the keys.
  2. Only original vendor invoices with unique invoice numbers are approved for payment. Faxes and photocopies are not acceptable, and if a vendor sends two invoices with the same number, they are returned and the vendor is asked to re-issue one of them with a different invoice number.
  3. The Purchasing Manager is authorized to approve purchase orders, the Receiving Manager approves invoices after matching them to receiving reports, an Accounts Payable assistant records the purchase invoices, the Accounts Payable manager prepares cheques and the VP Finance signs them.
  4. The computer system produces a log showing how many errors have been made and corrected by each Accounting Assistant in recording vendor invoices.

 

Instructions

For each internal control, identify which type of control is described, and describe a weakness that the control is designed to prevent or detect.

 

Solution 6 (10 min.)

  1. Physical & IT controls. Without the dual keys, one of the parties could issue and sign unauthorized cheques.
  2. Documentation. Without this control, there is a risk that vendor invoices might be paid more than once. Even if the original invoice was stamped “Paid”, the fax or photocopy might be paid without this control.
  3. Segregation of duties. If the same person, for example the Accounts Payable Manager, were able to approve invoices, record them, and issue and sign cheques, it would be easy for him or her to issue unauthorized cheques with no one to detect this.
  4. Independent checks of performances. By examining each employee’s error rate, steps can be taken to determine the reasons and provide the necessary training to reduce the number of errors and therefore the reliability of the financial records.
 

Bloomcode: Comprehension

Difficulty: Medium

Learning Objective: Define cash and internal control.

Section Reference: Cash and Internal Control

Learning Objective: Apply control activities to cash receipts and cash payments.

Section Reference: Cash Controls

CPA: Financial Reporting

 

 

Exercise 7

Cashway Auto Parts allows customers to pay for merchandise with cash, debit cards, bank credit cards, or a Cashway credit card. The bank charges Cashway $1.00 for each debit card sale and a 4% fee for bank credit card sales. On September 25 a customer makes a $1,200 purchase from Cashway using her debit card.

 

Instructions

  1. a) Prepare Cashway’s journal entry to record this transaction.
  2. b) Assume instead the customer pays for her purchase using her MasterCard. Record the transaction.
  3. c) Assume instead the customer uses her Cashway store credit card. Record the transaction.

 

Solution 7 (10 min.)

a)

Sep 25     Cash…………………………………………………………………………….           1,199

Bank Service Charges…………………………………………………..                  1

Sales……………………………………………………………………..                              1,200

 

  1. b) Cash……………………………………………………………………………. 1,152

Credit Card Expense ($1,200 x 4%)………………………………..                48

Sales……………………………………………………………………..                              1,200

 

  1. c) Accounts Receivable…………………………………………………….. 1,200

Sales……………………………………………………………………..                              1,200

 

Bloomcode: Application

Difficulty: Medium

Learning Objective: Apply control activities to cash receipts and cash payments.

Section Reference: Cash Controls

CPA: Financial Reporting

 

 

Exercise 8

The following situations are independent of each other:

  1. Jim’s Electronic Games is a very relaxed place to work. Unissued blank cheques are left in a box on the floor near the printer.
  2. XL Products requires every cheque to be signed by the President and the VP Finance. Because the President travels a lot, he signs several blank cheques in advance of each trip so that his absences will not interfere with the operations of the Accounts Payable department.
  3. Dubois Books is short staffed and the accounting department is very busy. As soon as the cheques are printed they are sent to the Executive office to be signed while the invoices that were paid are immediately filed so that the work will not get backlogged.
  4. At Nora Sales, two accounting clerks share cheque disbursement duties. They can tell which invoices have been paid by whether they are located in the “unpaid” basket or in the vendor file.

 

Instructions

For each weakness, describe what could go wrong and make a recommendation to improve internal control.

 

Solution 8 (10 min.)

  1. Cheque blanks could be stolen, lost or damaged. Recommendation: Store the cheque blanks in a locked safe and restrict access to authorized personnel.
  2. The purpose of requiring dual authorized signatures is defeated by pre-signing blank cheques. The VP Finance might sign unauthorized cheques. Recommendation: Identify someone other than the President who can be authorized as an alternative cheque signatory.
  3. The cheque being signed may be different than the invoice being paid. Recommendation: Attach the invoices to the cheque so that the signer can verify that the payment is valid and accurate.
  4. If the invoices are filed in the wrong folder or are removed for any reason, there is a risk they could be paid a second time. Recommendation: Stamp the invoices as “Paid” when the cheques are issued and before they are filed.
 

Bloomcode: Evaluation

Difficulty: Medium

Learning Objective: Apply control activities to cash receipts and cash payments.

Section Reference: Cash Controls

CPA: Financial Reporting

 

 

Exercise 9

The following procedures are used by Kurtz Renovations in handling cash payments. The individuals involved in the cheque preparation and payment process are Howie, the Accounts Payable clerk, who reports to the Controller, and Jane, the Construction Manager.

  1. When purchase invoices are received, Jane approves them for payment. After they are approved, Howie records the purchase invoices in the Accounts Payable subledger and then files them in an “unpaid invoices” file. Once or twice a week, Howie scans through the file and decides which invoices should be paid.
  2. Howie prepares the cheques manually. He enters cheque numbers on the cheques which are not pre-numbered.
  3. The unsigned cheques are put into Jane’s in box to be signed.
  4. Jane does not feel she needs to see the invoices again when she signs the cheques so only the cheques are given to her.
  5. Jane is often out of the office on construction projects, but she tries to make sure that she signs the cheques within two or three days.
  6. After she has signed the cheques, Jane returns them to Howie for mailing. After Howie has mailed the cheques, he files the paid invoices in the vendor invoice files.

 

Instructions

For each procedure, describe what could go wrong as a result of the weakness described, and recommend an internal control to correct the weakness.

 

Solution 9 (20 min.)

  1. The same person who records the cheques (Howie) should not be the person who decides which suppliers are to be paid. Howie could overlook important suppliers who should be paid, or prepare cheques earlier than is necessary. Recommendation: On a regular basis Howie should prepare a list of invoices due for payment and obtain controller approval before preparing the cheques.
  2. Because the cheques are not pre-numbered, it would be difficult to notice if any cheque blanks go missing. Recommendation: Use pre-numbered cheques and store them in a locked location.
  3. The same person signs cheques and makes purchases. Therefore she could be making special deals with suppliers and no one would notice. Recommendation: Identify someone else in management to sign the cheques.
  4. If there were differences between the invoice and the cheque Jane would not notice. Recommendation: The invoices should be attached to the cheques so that the person signing them can verify that amounts are correct.
  5. Because the cheques are left unattended in Jane’s in box, they could be tampered with. Recommendation: Keep the unsigned cheque in a secure location until the person is available to sign them.
  6. Because Howie files the invoices without marking them “paid” there is a risk of duplicate payment. Recommendation: The invoices should be stamped “paid” and the cheque number noted on the invoice to prevent duplicate payments.

 

Bloomcode: Evaluation

Difficulty: Hard

Learning Objective: Apply control activities to cash receipts and cash payments.

Section Reference: Cash Controls

CPA: Financial Reporting

 

 
Exercise 10

The petty cash fund of $300 for Marsh Systems includes the following on December 31, 2017:

Cash…………………………………………………                            $93.60

Petty cash receipts:

Freight in…………………………………….         $89.40

Postage………………………………………           55.00

Balloons for a special occasion……..           27.00

Meals………………………………………….           30.00

 

Instructions

  1. a) Briefly describe when the petty cash fund should be replenished. Because there is cash on hand, is there a need to replenish the fund at year end on December 31? Explain.
  2. b) Prepare in general journal form the entry to replenish the fund. The company uses a perpetual inventory system.
  3. c) On December 31, the office manager gives instructions to increase the petty cash fund by $50. Make the appropriate journal entry.

 

Solution 10 (10 min.)
  1. a) Petty cash should be replenished at the end of an accounting period or when the cash is low. It must be replenished on the balance sheet date so that the expenses represented by the petty cash vouchers can be recorded in the proper accounting period.

 

  1. b) Merchandise Inventory………………………………………………………….. 40

Postage Expense…………………………………………………………………..           55.00

Miscellaneous Expense………………………………………………………….           27.00

Meals Expense………………………………………………………………………           30.00

Cash Over and Short……………………………………………………………..             5.00

Cash…………………………………………………………………………….                            206.40

 

  1. c) Petty Cash……………………………………………………………………………. 00

Cash…………………………………………………………………………….                              50.00

 

Bloomcode: Application

Difficulty: Easy

Learning Objective: Describe the operation of a petty cash fund.

Section Reference: Petty Cash Fund

CPA: Financial Reporting

 

 

Exercise 11

On October 1, 2017, Griwatz Company establishes a petty cash fund by issuing a cheque for $200 to Jean Ladd, the custodian of the petty cash fund. On October 31, 2017, Jean Ladd submitted the following paid petty cash receipts for replenishment of the petty cash fund when there is $6 cash in the fund:

Freight in…………………………………………         $27

Office Supplies Expense…………………..           83

Entertainment of Clients……………………           58

Postage Expense……………………………..           22

 

Instructions

Prepare the journal entries required to establish the petty cash fund on October 1 and the replenishment of the fund on October 31. The company uses a perpetual inventory system.

 
Solution 11 (10 min.)

Oct    1       Petty Cash………………………………………………………………….              200

Cash……………………………………………………………………                                 200

To establish a petty cash fund

 

31       Cash Over and Short…………………………………………………..                  4

Merchandise Inventory………………………………………………..                27

Office Supplies Expense……………………………………………..                83

Entertainment Expense………………………………………………..                58

Postage Expense………………………………………………………..                22

Cash……………………………………………………………………                                 194

To record expenses for October and to replenish

the petty cash fund

 

Bloomcode: Application

Difficulty: Easy

Learning Objective: Describe the operation of a petty cash fund.

Section Reference: Petty Cash Fund

CPA: Financial Reporting

 

 

Exercise 12

Deep Diving World established a $500 petty cash fund on July 1. During the month of July, petty cash was issued in exchange for the following receipts:

July   2       Supplies……………………………………………………………………..             $ 65

July 10       …………………………………………………………………………………. Postage expense               52

July 17       …………………………………………………………………………………. Freight out               125

July 25       …………………………………………………………………………………. Advertising expense          47

July 28       …………………………………………………………………………………. Meals expense                  70

 

On July 31, the cash is counted and the balance remaining is found to be $136. A cheque is issued to replenish the fund.

 

Instructions

Prepare the necessary journal entries for July 1 and July 31.

 

Solution 12 (10 min.)

Jul     1       Petty Cash………………………………………………………………….              500

Cash……………………………………………………………………                                 500

 

Jul 31         Supplies……………………………………………………………………..                65

Postage Expense………………………………………………………..                52

Freight out Expense…………………………………………………….              125

Advertising Expense……………………………………………………                47

Meals Expense……………………………………………………………                70

Cash Over and Short…………………………………………………..                  5

Cash……………………………………………………………………                                 364

 

Bloomcode: Application

Difficulty: Easy

Learning Objective: Describe the operation of a petty cash fund.

Section Reference: Petty Cash Fund

CPA: Financial Reporting

 

 

Exercise 13

Gadget Overhead Doors established a petty cash fund on April 1, 2017 to facilitate the payment of small items. The following petty cash transactions were noted by the petty cash custodian during the month of April 2017:

 

Apr 1      Received cash of $200 to establish the petty cash fund.

10     Received cash to replenish the fund (zero cash remaining) for the following expenditures since April 1 and to increase the petty cash fund to $300:

  1. a) $70 for office supplies
  2. b) $25 for postage
  3. c) $45 for overtime meals
  4. d) $50 for floor cleaner

30     Received cash to replenish the fund ($150 cash remaining) for the following expenditures since April 10 and to decrease the petty cash fund to $250:

  1. a) $60 for office supplies
  2. b) $15 for postage
  3. c) $75 for vehicle operation

 

Instructions

Prepare the journal entries required for the above transactions.

 
Solution 13 (15 min.)

Apr    1       Petty Cash………………………………………………………………….              200

Cash……………………………………………………………………                                 200

To establish a petty cash fund

 

10       Cash Over and Short…………………………………………………..                10

Maintenance Expense…………………………………………………                50

Office Supplies Expense……………………………………………..                70

Meals and Entertainment Expense………………………………..                45

Postage Expense………………………………………………………..                25

Petty Cash………………………………………………………………….              100

Cash……………………………………………………………………                                 300

To record expenses to April 10, replenish and increase

the petty cash fund

 

30       Vehicle Operation Expense………………………………………….                75

Office Supplies Expense……………………………………………..                60

Postage Expense………………………………………………………..                15

Petty Cash……………………………………………………………                                   50

Cash……………………………………………………………………                                 100

To record expenses to April 30, replenish and decrease

the petty cash fund

 

Bloomcode: Application

Difficulty: Medium

Learning Objective: Describe the operation of a petty cash fund.

Section Reference: Petty Cash Fund

CPA: Financial Reporting

 

 

Exercise 14

Isabelle’s Cabinet Design established a petty cash fund on April 1, 2017 to facilitate the payment of small items. The following petty cash transactions were noted by the petty cash custodian during the month of April 2017:

 

Apr 1      Received cash of $100 to establish the petty cash fund.

10     The petty cash fund was replenished when there was $15 on hand and the following receipts:

  1. a) $20 for office supplies
  2. b) $40 for freight in charges
  3. c) $15 for postage

15     The petty cash fund was increased to $125

 

Instructions

Prepare the journal entries required for the above transactions.

 
Solution 14 (10 min.)

Apr    1       Petty Cash………………………………………………………………….              100

Cash……………………………………………………………………                                 100

To establish a petty cash fund

 

10       Cash Over and Short…………………………………………………..                10

Office Supplies Expense……………………………………………..                20

Freight in…………………………………………………………………….                40

Postage Expense………………………………………………………..                15

Cash……………………………………………………………………                                   85

To record expenses to April 10 and replenish

the petty cash fund

 

15       Petty Cash………………………………………………………………….                25

Cash……………………………………………………………………                                   25

To increase the petty cash fund to $125

 

Bloomcode: Application

Difficulty: Easy

Learning Objective: Describe the operation of a petty cash fund.

Section Reference: Petty Cash Fund

CPA: Financial Reporting

 

 

Exercise 15

Using the code letters below, indicate how each of the items listed would be handled when preparing a bank reconciliation. Enter the appropriate code letter in the space to the left of each item.

Code

A     Add to books.

B     Deduct from books.

C     Add to bank.

D     Deduct from bank.

E     Does not affect the bank reconciliation.

 

Items

____     1.   Outstanding cheques

____     2.   Bank service charge

____     3.   Cheque for $320 correctly written and paid by the bank but incorrectly entered in the general journal for $230.

____     4.   Deposit in transit

____     5.   Bank returns deposited cheque marked NSF.

____     6.   Bank collects accounts receivable for depositor electronically.

____     7.   Bank debit memorandum for cheque printing fees

____     8.   Petty cash custodian has $86 in paid petty cash vouchers that have not been reimbursed.

____     9.   Bank charged a cheque against the company which should have been charged to another company.

____   10.   A cheque for $236 was correctly paid by the bank but was incorrectly entered in the general journal for $263.

 

Solution 15 (10 min.)
  1. D

 

  1. B

 

  1. B

 

  1. C

 

  1. B

 

  1. A

 

  1. B

 

  1. E

 

  1. C

 

  1. A
 

Bloomcode: Comprehension

Difficulty: Hard

Learning Objective: Describe the control features of a bank account and prepare a bank reconciliation.

Section Reference: Bank Accounts

CPA: Financial Reporting

 

 
Exercise 16

Listed below are items that may be useful in preparing the March 2017 bank reconciliation for Armstrong Machine Works.

 

Using the following code, insert in the space before each item the letter where the amount would be located or otherwise treated in the bank reconciliation process.

Code                    Located or Treated

A                        Add to the cash balance per books.

B                        Deduct from the cash balance per books.

C                       Add to the cash balance per bank.

D                       Deduct from the cash balance per bank.

E                        Does not affect the bank reconciliation.

 

____     1.   Included with the bank statement materials was a cheque from Joe Terrell for $40 stamped “account closed.”

____     2.   A personal deposit by Ted Armstrong to his personal account in the amount of $300 for dividends on his Bank of Montreal common shares was credited to the company account.

____     3.   The bank statement included a debit memorandum for $22 for four books of blank cheques for Armstrong Machine Works.

____     4.   The bank statement contains a credit memorandum for $42.75 interest on the average chequing account balance.

____     5.   The daily deposits of March 30 and March 31, for $3,362 and $3,125 respectively, were not included in the bank statement postings.

____     6.   Two cheques totalling $316.86, which were outstanding at the end of February, cleared in March and were returned with the March statement.

____     7.   The bank statement included a credit memorandum dated March 28, 2017, for $62 for the monthly interest on a 6-month, $15,000 guaranteed investment certificate that the company owns.

____     8.   Four cheques, #8712, #8716, #8718, #8719, totalling $5,369.65, did not clear the bank during March.

____     9.   On March 24, 2017, a $3,400 EFT from Tom Jacobs was received as a payment on account. The receipt of funds was determined from a review of the March bank statement.

____   10.   The bank statement included a debit memorandum for $20 for monthly service charges.

 

Solution 16 (10 min.)
  1. B

 

  1. D

 

  1. B

 

  1. A
 
5.      C

 

  1. E
 
7.      A

 

  1. D

 

  1. A

 

  1. B

 

Bloomcode: Comprehension

Difficulty: Hard

Learning Objective: Describe the control features of a bank account and prepare a bank reconciliation.

Section Reference: Bank Accounts

CPA: Financial Reporting

 

 
Exercise 17

The following adjusting entries for Stone Company were prepared after completing a bank reconciliation:

  1. Bank Charges Expense…………………………………………………………. 20

Cash…………………………………………………………………………….                                   20

 

  1. Accounts Receivable—S. Ruder…………………………………………….. 420

Cash…………………………………………………………………………….                                 420

 

  1. Cash……………………………………………………………………………………. 2,200

Accounts Receivable……………………………………………………..                              2,200

 

  1. Sales……………………………………………………………………………………. 81

Cash…………………………………………………………………………….                                   81

 

  1. Supplies……………………………………………………………………………….. 150

Cash…………………………………………………………………………….                                 150

 

Instructions

For each of the adjustments, prepare a probable explanation for the adjusting entry.

 

Solution 17 (10 min.)
  1. To reduce the book balance for bank service or cheque printing charges.

 

  1. To record an NSF cheque returned with the bank statement.

 

  1. To record an EFT collection of an accounts receivable upon notification by bank through bank statement.

 

  1. To adjust book balance for transposition error in recording sales.

 

  1. To adjust book balance for error in recording supplies.

 

Bloomcode: Comprehension

Difficulty: Medium

Learning Objective: Describe the control features of a bank account and prepare a bank reconciliation.

Section Reference: Bank Accounts

CPA: Financial Reporting

 

 

Exercise 18

The following information was used to prepare the March, 2017 bank reconciliation for the Armstrong Machine Works:

  1. Included with the bank statement materials was a cheque from Joe Terrell for $40 stamped “NSF.”
  2. A personal deposit by Ted Armstrong to his personal account in the amount of $300 for dividends on his General Electric common shares was credited to the company account.
  3. The bank statement included a debit memorandum for $22 for four books of blank cheques for Armstrong Machine Works.
  4. The bank statement contains a credit memorandum for $42.75 interest on the chequing account balance.
  5. The daily deposits of March 30 and March 31, for $3,362 and $3,125 respectively, were not included in the bank statement postings.
  6. Two cheques totalling $316.86, which were outstanding at the end of February, cleared in March and were returned with the March statement.
  7. The bank statement included a credit memorandum dated March 28, 2017, for $62 for the monthly interest on a 6-month guaranteed investment certificate that the company owns.
  8. Four cheques, #8712, #8716, #8718, #8719, totalling $5,369.65, did not clear the bank during March.
  9. On March 24, 2017, an EFT for $3,400 was received from Tom Jacobs as a payment on account. The receipt of funds was determined from a review of the March bank statement.
  10. The bank statement included a debit memorandum for $20 for monthly service charges.

 

Instructions

Identify the items that require adjustment to the cash balance per books and prepare the appropriate adjusting entries.

 

Solution 18 (20 min.)
  1. Accounts Receivable…………………………………………………………….. 40.00

Cash…………………………………………………………………………….                              40.00

 

  1. Bank Charges Expense…………………………………………………………. 22.00

Cash…………………………………………………………………………….                              22.00

 

  1. Cash……………………………………………………………………………………. 42.75

Interest Revenue…………………………………………………………..                              42.75

 

  1. Cash……………………………………………………………………………………. 62.00

Interest Revenue…………………………………………………………..                              62.00

 

  1. Cash……………………………………………………………………………………. 3,400.00

Accounts Receivable……………………………………………………..                         3,400.00

 

  1. Bank Charges Expense…………………………………………………………. 20.00

Cash…………………………………………………………………………….                              20.00

 

Bloomcode: Application

Difficulty: Medium

Learning Objective: Describe the control features of a bank account and prepare a bank reconciliation.

Section Reference: Bank Accounts

CPA: Financial Reporting

 
 
Exercise 19

The cash records of Janzen Company show the following:

  1. The June 30 bank reconciliation indicated that deposits in transit totalled $390. During July, the general ledger account Cash shows deposits of $9,800, but the bank statement indicates that only $9,540 in deposits were received during the month.
  2. The June 30 bank reconciliation also reported outstanding cheques of $800. During the month of July, the Janzen Company books show that $11,070 of cheques were issued, yet the bank statement showed that $11,500 of cheques cleared the bank in July.

 

There were no bank debit or credit memoranda and no errors were made by either the bank or the Janzen Company.

 

Instructions

  1. a) What were the deposits in transit at July 31?
  2. b) What were the outstanding cheques at July 31?

 

Solution 19 (10 min.)
  1. a) Deposits in transit:

Deposits per books in July………………………………………………………                           $ 9,800

Deposits per the bank in July…………………………………………………..        $ 9,540

Less: June 30 deposits in transit………………………………………………             390

July receipts deposited in July…………………………………………………                             9,150

Deposits in transit, July 31………………………………………………………                              $ 650

 

  1. b) Outstanding cheques:

Cheques per books in July………………………………………………………                          $11,070

Cheques clearing the bank in July……………………………………………       $11,500

Less: Outstanding cheques, June 30………………………………………..             800

July cheques clearing in July…………………………………………………..                           10,700

Outstanding cheques, July 31………………………………………………….                              $ 370

 

Bloomcode: Application

Difficulty: Easy

Learning Objective: Describe the control features of a bank account and prepare a bank reconciliation.

Section Reference: Bank Accounts

CPA: Financial Reporting

 

 

Exercise 20

Belbin’s Grocery Store developed the following information for the month of March, 2017:

Balance per books March 31…………………………………………………..        $ 1,905

Balance per bank statement March 31……………………………………..       $11,400

 

  1. Cheques written in March but still outstanding $8,000.
  2. Cheques written in February but still outstanding $2,800.
  3. Deposits of March 30 and 31 not yet recorded by bank $5,200.
  4. NSF cheque of customer returned by bank $700.
  5. Cheque No. 210 for $594 was correctly issued and paid by bank but incorrectly entered in the general journal as payment on account for $549.
  6. Bank service charge for March was $50.
  7. A payment on account was incorrectly entered in the general journal and posted to the Accounts Payable subsidiary ledger for $824 when Cheque No. 318 was correctly prepared for $284. The cheque cleared the bank in March.
  8. A review of the bank statement revealed Belbin’s Grocery received electronic payments from customers on account of $4,150 during March.

 

Instructions

Prepare a bank reconciliation at March 31, 2017.

 

Solution 20 (20 min.)

 

BELBIN’S GROCERY STORE

Bank Reconciliation

March 31, 2017

 

Cash balance per bank statement…………………………………                          $11,400

Add: Deposits in transit (3)……………………………………………                             5,200

16,600

 

Less: Outstanding cheques

March (1)……………………………………………………………………           8,000

February (2)……………………………………………………………….           2,800        10,800

Adjusted cash balance per bank……………………………………                           $ 5,800

 

Cash balance per books………………………………………………                           $ 1,905

Add:

Error on Cheque No. 318 (7)………………………………………..           $ 540

Receipt of EFT collections (8)………………………………………          4,150         4,690

 

Less:

NSF Cheque (4)………………………………………………………….              700

Error on Cheque No. 210 (5)………………………………………..                45

Bank Service Charge (6)……………………………………………..               50            795

Adjusted cash balance per books………………………………….                            $5,800

 

Bloomcode: Application

Difficulty: Medium

Learning Objective: Describe the control features of a bank account and prepare a bank reconciliation.

Section Reference: Bank Accounts

CPA: Financial Reporting

 

 

Exercise 21

Conneaut Lake Boat Company’s bank statement for the month of September, 2017 showed a balance per bank of $7,000. The company’s Cash account in the general ledger had a balance of $5,459 at September 30. Other information is as follows:

  1. Cash receipts for September 30 recorded on the company’s books were $5,200 but this amount does not appear on the bank statement.
  2. The bank statement shows a debit memorandum for $50 for cheque printing charges.
  3. Cheque No. 119 payable to Lynch Company was recorded in the general journal and cleared the bank for $248. A review of the Accounts Payable subsidiary ledger shows a $36 credit balance in the account of Lynch Company and that the payment to it should have been for $284.
  4. The total amount of cheques still outstanding at September 30 amounted to $6,000.
  5. Cheque No. 138 was correctly written and paid by the bank for $409. The cash payment journal reflects an entry for Cheque No. 138 as a debit to Accounts Payable and a credit to Cash in Bank for $490.
  6. The bank returned an NSF cheque from a customer for $550.
  7. The bank included a credit memorandum for $1,260 which represents an EFT collection of a customer’s account.

 

Instructions

  1. a) Prepare a bank reconciliation for Conneaut Lake Boat Company at September 30, 2017.
  2. b) Prepare any adjusting entries necessary as a result of the bank reconciliation.

 

Solution 21 (25 min.)

a)

CONNEAUT LAKE BOAT COMPANY

Bank Reconciliation

September 30, 2017

 

Cash balance per bank………………………………………………..                           $ 7,000

Add:    (1)   Deposit in transit…………………………………………                             5,200

…………………………………………………………………         12,200

Less:   (4)   Outstanding cheques………………………………….                             6,000

Adjusted cash balance per books………………………………….                           $ 6,200

 

Cash balance per books………………………………………………                           $ 5,459

Add:    (5) Accounts payable error…………………………………             $ 81

(7) EFT collection……………………………………………..          1,260         1,341

…………………………………………………………………           6,800

Less:   (2) Cheque printing……………………………………………                50

(6) NSF cheque………………………………………………..             550            600

Adjusted cash balance per books………………………………….                           $ 6,200

 

Note: Item (3) is not a reconciling item.

 

b)

Sep    30       Cash………………………………………………………………………..                81

Accounts Payable……………………………………………….                                   81

To correct error in recording Cheque No. 138

 

30       Cash………………………………………………………………………..           1,260

Accounts Receivable…………………………………………..                              1,260

To record collection of account receivable

 

30       Bank Charges Expense……………………………………………..                50

Cash………………………………………………………………….                                   50

To record cheque printing charges

 

30       Accounts Receivable…………………………………………………              550

Cash………………………………………………………………….                                 550

To record NSF cheque

 

Bloomcode: Application

Difficulty: Hard

Learning Objective: Describe the control features of a bank account and prepare a bank reconciliation.

Section Reference: Bank Accounts

CPA: Financial Reporting

 

 

Exercise 22

Fuentes Company’s bank statement for the month ended January 31 showed a balance per bank of $34,728. The company’s Cash balance at January 31 was $16,398. Other information is as follows:

  1. Cash receipts for January were $87,679 of which $5,200 was outstanding at January 31.
  2. The bank statement shows a debit memorandum for $40 for cheque printing charges.
  3. Cheque No. 119 payable to Cain Company was recorded in the general journal and cleared the bank for $248. A review of the Accounts Payable subsidiary ledger shows a $36 credit balance in the account of Cain Company and that the payment to it should have been for $284.
  4. The total amount of cheques written during January was $74,936 of which $5,789 was outstanding at January 31.
  5. Cheque No. 127 was correctly written and paid by the bank for $409. The general journal reflects an entry for Cheque No. 127 as a debit to Accounts Payable and a credit to Cash for $490.
  6. The bank returned an NSF cheque from a customer for $560.
  7. The bank included a credit memorandum for $18,260, which represents an EFT collection of a customer’s account.

 

Instructions

  1. a) Prepare a bank reconciliation for Fuentes Company at January 31.
  2. b) Prepare any adjusting entries necessary as a result of the bank reconciliation.

 

Solution 22 (25 min.)

 

a)

FUENTES COMPANY

Bank Reconciliation

January 31

Cash balance per bank………………………………………………..                          $34,728

Add:    (1)   Deposit in transit…………………………………………                             5,200

39,928

Less:   (4)   Outstanding cheques………………………………….                           5,789

Adjusted cash balance per books………………………………….                           $34,139

 

Cash balance per books………………………………………………                          $16,398

Add:    (5)   Accounts payable error……………………………….             $ 81

(7)   EFT collection……………………………………………         18,260       18,341

34,739

Less:   (2)   Cheque printing………………………………………….               $ 40

(6)   NSF cheque………………………………………………                560          600

Adjusted cash balance per books………………………………….                          $34,139

Note: Item (3) is not a reconciling item.

 

b)

Jan  31       Cash………………………………………………………………………….                81

Accounts Payable…………………………………………………                                   81

To correct error in recording Cheque No. 127

 

31       Cash………………………………………………………………………….         18,260

Accounts Receivable…………………………………………….                            18,260

To record collection of accounts receivable by the bank

 

31       Bank Expense…………………………………………………………….                40

Cash……………………………………………………………………                                   40

To record cheque printing charges

 

31       Accounts Receivable…………………………………………………..              560

Cash……………………………………………………………………                                 560

To record NSF cheque

 

Bloomcode: Application

Difficulty: Hard

Learning Objective: Describe the control features of a bank account and prepare a bank reconciliation.

Section Reference: Bank Accounts

CPA: Financial Reporting

 

 

Exercise 23

The cash balance per books for the Senjavarah Company on October 31, 2017 is $8,736.01. The following cheques and receipts were recorded for the month of October, 2017:

                       Cheques                                                                     Receipts            

No.    Amount          No.     Amount                               Amount                      Date

17         $372.96       22         $ 578.84                               $843.86                   Oct. 5

18         $780.62       23       $1,687.50                               $941.54                   Oct. 21

19         $157.00       24         $ 921.30                               $808.58                   Oct. 27

20         $587.50       25         $ 246.03                               $967.00                   Oct. 30

21         $234.15

 

In addition, the bank statement for the month of October is presented below:

 

Cheques and other debits                                             Deposits         Date         Balance

—————————————————————————————————————————

No.     Amount        No.    Amount       No.     Amount

—————————————————————————————————————————

Sep 30      $5,404.84

14       $148.29       17    $372.96        22      $578.84     $5,484.38          Oct 1        $9,789.13

18         708.62       24      921.30                                         843.86          Oct 8        $9,003.07

19         157.00       25      246.03                                         941.54          Oct 23      $9,541.58

21         234.15                    15.00  SC                                  808.58          Oct 29    $10,101.01

250.00   NSF                                                        1,200.00  CM  Oct 31    $11,051.01

—————————————————————————————————————————

Symbols: NSF (Not sufficient funds) SC (Service charge) CM (Credit memo)

 

Cheque No. 18 was correctly written for $708.62 for a payment on account. The NSF cheque was from S. Horn, a customer, in settlement of an accounts receivable. An entry had not been made for the NSF cheque. The credit memo is for an EFT from a customer account.

 

Instructions

  1. a) Prepare a bank reconciliation at October 31, 2017.
  2. b) Prepare the adjusting journal entries required by the bank reconciliation.

 

Solution 23 (30 min.)

a)

Senjavarah COMPANY

Bank Reconciliation

October 31, 2017

 

Cash balance per bank statement…………………………………                          $11,051.01

Add:    Deposits in transit……………………………………………..                                967.00

…………………………………………………………………                            12,018.01

Less:   Outstanding cheques

No. 20……………………………………………………………..      $ 587.50

No. 23……………………………………………………………..     1,687.50         2,275.00

Adjusted cash balance per bank……………………………………                           $ 9,743.01

 

Cash balance per books………………………………………………                           $ 8,736.01

Add:    Error in recording cheque No. 18………………………..        $ 72.00

EFT receipt………………………………………………………      1,200.00         1,272.00

10,008.01

Less:   Bank service charge…………………………………………        $ 15.00

NSF cheque…………………………………………………….         250.00            265.00

Adjusted cash balance per books………………………………….                           $ 9,743.01

 

 

b)

Oct      31   Cash………………………………………………………………………….                72

Accounts Payable…………………………………………………                                   72

To correct recording error on cheque No. 18

 

31   Cash………………………………………………………………………….           1,200

Accounts Receivable…………………………………………….                              1,200

To record collection of account receivable

 

31   Bank Charges Expense……………………………………………….                15

Cash……………………………………………………………………                                   15

To record bank service charge for the month of October

 

31   Accounts Receivable—S. Horn…………………………………….              250

Cash……………………………………………………………………                                 250

To record NSF cheque

 

Bloomcode: Application

Difficulty: Hard

Learning Objective: Describe the control features of a bank account and prepare a bank reconciliation.

Section Reference: Bank Accounts

CPA: Financial Reporting

 

 

Exercise 24
  1. On May 31, 2017 the Cash account of Gowganda Supply Company (GSC) had a balance of $43,708. On that date, the bank statement indicated a balance of $54,600.
  2. Outstanding cheques amounted to $13,400.
  3. The May 31 cash receipts for $8,900 were deposited but were only processed by the bank after May 31.
  4. A debit memorandum of $8 representing bank charges appeared on the bank statement.
  5. The bank reported an EFT credit memoranda for the collection of a receivable from Frank Edgar of $6,300.
  6. The bank incorrectly recorded a cheque payment of $600 as $500.

 

Instructions

Prepare a bank reconciliation for GSC as of May 31, 2017.

 

Solution 24 (10 min.)

GOWGANDA SUPPLY COMPANY

Bank Reconciliation

May 31, 2017

 

Cash balance per bank statement…………………………………                               $54,600

Add:    Deposits in transit……………………………………………..                                  8.900

63,500

Less:   Outstanding cheques…………………………………………                                13,400

Error by bank in recording cheque………………………                                     100

Adjusted cash balance per bank……………………………………                               $50,000

 

Cash balance per books………………………………………………                               $43,708

Add:    EFT receipt………………………………………………………                                  6,300

Less:   Bank service charge…………………………………………                                         8

Adjusted cash balance per books………………………………….                               $50,000

 

Bloomcode: Application

Difficulty: Easy

Learning Objective: Describe the control features of a bank account and prepare a bank reconciliation.

Section Reference: Bank Accounts

CPA: Financial Reporting

 

 

Exercise 25
  1. On May 31, 2017 the Cash account of Gowganda Supply Company (GSC) had a balance of $43,828. On that date, the bank statement indicated a balance of $54,600.
  2. After reviewing the April 30, 2017 bank reconciliation, cheque #568 for $3,450 written to Jose’s Catering had still not cleared the bank in May.
  3. In checking the disbursements journal, cheques #575 for $4,725 and #588 for $5,225 did not appear on the May bank statement.
  4. The bank reported an EFT credit memoranda for the collection of a receivable from Frank Edgar of $6,300. A second credit memoranda was identified for $300 representing interest earned on the bank account.
  5. A $1,700 cheque of a customer, Florence Olivier, was returned by the bank because of non-sufficient funds. The bank charged GSC a $60 NSF fee.
  6. The bank has not credited the company’s account for a $4,200 deposit made on May 30th and a $4,700 made on May 31st.
  7. The Accounts Payable clerk recorded an insurance expense payment of $160 as $1,600. Cheque #572 was correctly written for $160.
  8. There was an $8 service charge on the bank statement.

 

Instructions

  1. a) Prepare a bank reconciliation for GSC as of May 31, 2017.
  2. b) Prepare the necessary journal entries to adjust GSC’s’ records based on the bank reconciliation.

 

Solution 25 (20 min.)

a)

GOWGANDA SUPPLY COMPANY

Bank Reconciliation

May 31, 2017

 

Cash balance per bank statement…………………………………                            $54,600

Add:    Deposits in transit – May 30……………………………….                               4,200

Deposits in transit – May 31……………………………….                               4,700

63,500

Less:   Outstanding cheques

No. 568……………………………………………………..         $3,450

No. 575……………………………………………………..          4,725

No. 588……………………………………………………..          5,225          13,400

Adjusted cash balance per bank……………………………………                            $50,100

 

Cash balance per books………………………………………………                            $43,828

Add:    Error in recording cheque No. 572………………………        $ 1,440

Interest earned………………………………………………….             300

EFT receipt………………………………………………………          6,300           8,040

51,868

Less:   Bank service charge…………………………………………               $ 8

NSF cheque…………………………………………………….           1,760           1,768

Adjusted cash balance per books………………………………….                            $50,100

 

b)

May     31   Cash………………………………………………………………………….           1,440

Insurance Expense……………………………………………….                              1,440

To correct the error made to record cheque

 

31   Cash………………………………………………………………………….              300

Interest Revenue…………………………………………………..                                 300

To record interest earned on bank account

 

31   Cash………………………………………………………………………….           6,300

Accounts Receivable—Frank Edgar……………………….                              6,300

To record EFT collection of account receivable

 

31   Bank Charges Expense……………………………………………….                  8

Cash……………………………………………………………………                                     8

To record bank service charge for the month of May

 

31   Accounts Receivable—Florence Olivier…………………………           1,760

Cash……………………………………………………………………                              1,760

To record NSF cheque

 

Bloomcode: Application

Difficulty: Hard

Learning Objective: Describe the control features of a bank account and prepare a bank reconciliation.

Section Reference: Bank Accounts

CPA: Financial Reporting

 

 

Exercise 26

On November 30, 2017, the bank reconciliation for McLaughlin Drilling Company had no deposits in transit, however the following cheques were still outstanding:

#1158 for $926

#1162 for $55.89

#1173 for $2,346

 

On December 31, the bank balance was $14,081. The unadjusted cash balance was $32,695. The following is selected information from the December bank statement:

 

Cheques Cleared   Other bank transactions
Date Chq # Amount   Date Amount Transaction
Dec 1 1158 $926.00 Dec 2 $35,000+ Deposit
8 1173 2,346.00 5 252+ Deposit
11 1174 15.89 14 12,985– NSF cheque
19 1176 453.00 22 34– Service charge
23 1165 786.25 23 42.50+ Interest
25 1159 31,622.67 25 3,000+ Deposit

 

The NSF cheque was from Ray Bronson, a customer, in payment of his account of $12,940; the bank included a $45.00 service charge for a total of $12,985. Information from the company’s accounting records follows:

 

Cash Receipts   Cash Payments
Date Amount   Date Cheque # Amount
Dec 1 $35,000 Dec 4 1174 15.89
3 252 9 1176 435.00
22 3,000 20 1165 786.25
24 4,000 22 1159 31,622.67
29 1,675

 

Investigation reveals that cheque # 1176 was issued to pay the utilities bill. All deposits are for sales. The bank made no errors.

 

Instructions

Prepare bank reconciliation at December 31, 2017.

 

Solution 26

MCLAUGHLIN DRILLING COMPANY

Bank Reconciliation

December 31, 2017

 

Unadjusted cash balance per bank balance……………………                         $14,081.69

Add:    Deposits in transit……………………………………………..                             5,675.00

19,756.69

Less:   Outstanding cheques

#1162………………………………………………………………                                  55.89

Adjusted cash balance per bank……………………………………                          $19,700.80

 

Unadjusted cash balance per books………………………………                          $32,695.30

Add:    Interest…………………………………………………………….                                  42.50

32,737.80

Less:   NSF cheque returned……………………………………….. $12,985.00

Error: Cheque # 1176 ($453 – $435)…………………..           18.00

Bank service charge…………………………………………          34.00        13,037.00

Adjusted cash balance…………………………………………………                          $19,700.80

 

Bloomcode: Application

Difficulty: Medium

Learning Objective: Describe the control features of a bank account and prepare a bank reconciliation.

Section Reference: Bank Accounts

CPA: Financial Reporting

 

 

Exercise 27

The following is information about Full Moon Auto Repairs cash and related accounts at December 31, 2017:

  1. Postdated cheques from customers total $5,500. The cheques are dated January 31, 2018.
  2. The petty cash box contains $500 cash.
  3. The company has a savings account with a balance of $5,250 after all adjustments are recorded.
  4. The company has guaranteed investment certificates totalling $10,000 due in 30 days.
  5. The company maintains a cash float of $1,000 for use in the cash registers and which is stored in a locked safe overnight. On December 31, the cash custodian lent the senior manager $100 from the cash float, leaving an “IOU” note in the safe.
  6. The chequing account is overdrawn, showing a negative balance of $12,400 after all adjustments.

 

Instructions

  1. a) Calculate what amount of cash and cash equivalents will be reported on Full Moon’s December 31, 2017 balance sheet.
  2. b) For each of the items listed that is not included in cash on hand, indicate how the amount will be reported in Full Moon’s December 31, 2017 financial statements.

 

Solution 27 (10 min.)

  1. a) Cash and cash equivalents include:

Petty cash………………………………………………………….         $ 500

Savings account…………………………………………………         5,250

30 day GIC…………………………………………………………       10,000

Cash float ($1,000 – $100)…………………………………..            900

Total reported……………………………………………………..     $16,650

 

  1. b) Not included in cash and cash equivalents:

Post dated cheques of $5,500 should be included in accounts receivable.

The IOU from the sales manager should be shown as an account receivable.

The overdrawn chequing account balance should be shown as a current liability (bank indebtedness).

 

Bloomcode: Application

Difficulty: Medium

Learning Objective: Report cash on the balance sheet.

Section Reference: Reporting Cash

CPA: Financial Reporting

 

 

Exercise 28

The following information is taken from the accounting records of Village Pet Shelter at December 31, 2017, the organization’s year end:

  1. The Petty Cash box contained $20 in cash and $280 in receipts on the morning of December 31, 2017 and was replenished before the end of the day.
  2. The organization owned $50,000 in guaranteed investment certificates due June 30, 2018.
  3. The Bank of Montreal chequing account balance was $4,566 after all adjusting entries had been made.
  4. The Bank of Montreal savings account balance was $35,600 before recording $150 in December interest revenue.
  5. The Bank of Nova Scotia chequing account balance, after all adjustments, is $80,700. The funds in this account were donated by a private foundation for the purpose of purchasing new shelter furnishings, which they plan to do in February, 2018.

 

Instructions

Prepare a partial balance sheet for Village Pet Shelter at December 31 showing how this information should be presented.

 

Solution 28 (15 min.)

VILLAGE PET SHELTER

Balance Sheet

December 31, 2017

 

Assets

 

Current assets

Cash ($300 + $4,566 + $35,750)……………………………………………..      $ 40,616

Cash, restricted for new furnishings…………………………………………         80,700

Short-term investments, unrestricted………………………………………..         50,000

 

Bloomcode: Application

Difficulty: Medium

Learning Objective: Report cash on the balance sheet.

Section Reference: Reporting Cash

CPA: Financial Reporting

 

 

Exercise 29

The following information is taken from the accounting records of Joudrey Law Firm at December 31, 2017, the firm’s year end.

  1. The Petty Cash box holds $200 after having been replenished that day.
  2. The firm has two chequing accounts:

–      The general account has a balance of $67,000 after all adjustments and is used to pay for the firm’s operating expenses.

–    The trust account has a balance of $450,000 and contains funds belonging to clients, which can only be used on behalf of the clients to whom the funds belong.

  1. The firm has a savings account balance of $22,400 after recording $90 in December interest revenue.
  2. On December 31, a client paid a $1,500 invoice in cash. The office manager did not have time to take the funds to the bank on December 31, so the money was locked in the firm’s safe.
  3. The cash custodian lent the senior manager $400 from the safe for personal use, and left an “IOU” note. The senior manager repaid the cash on January 3, 2018.
  4. In the safe there are two postdated cheques from clients totalling $25,000. Both are dated February 28, 2018.

 

Instructions

Prepare a partial balance sheet for Joudrey Law Firm at December 31 showing how this information should be presented. Assume the firm has no accounts receivable other than those described in the above information.

 

Solution 29 (15 min.)

JOUDREY LAW FIRM

Balance Sheet

December 31, 2017

 

Assets

 

Current assets

Cash and cash equivalents:

($200 + $67,000 + $22,400 + $1,500 – $400)……………………………………………. …. $ 90,700

Cash, client trust funds………………………………………………………………………………… 450,000

Accounts receivable ($25,000 + $400)…………………………………………………………….. 25,400

 

Bloomcode: Application

Difficulty: Medium

Learning Objective: Report cash on the balance sheet.

Section Reference: Reporting Cash

CPA: Financial Reporting

 

 

 

 

LEGAL NOTICE

 

 

 

Copyright © 2016 by John Wiley & Sons Canada, Ltd. or related companies. All rights reserved.

 

 

The data contained in these files are protected by copyright. This manual is furnished under licence and may be used only in accordance with the terms of such licence.

 

The material provided herein may not be downloaded, reproduced, stored in a retrieval system, modified, made available on a network, used to create derivative works, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise without the prior written permission of John Wiley & Sons Canada, Ltd.

 

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