Solution Manual Financial and Managerial Accounting 8th Edition by John J Wild, Ken W. Shaw

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INSTANT DOWNLOAD WITH ANSWERS AFTER PURCHASED

 

Sample Chapter

Chapter 5

 

Inventories and Cost of Sales

 

QUESTIONS

 

  1. (a) FIFO: The cost of the first (earliest) items purchased in inventory flow to cost of goods sold first.

        (b) LIFO: The cost of the last (most recent) items purchased in inventory flow to cost of goods sold first.

  1. Merchandise inventory is disclosed on the balance sheet as a current asset.  It is also sometimes reported in the income statement as part of the calculation of cost of goods sold.
  2. LIFO will result in the lower cost of goods sold when costs are declining because it assigns the most recent, lower cost purchases to cost of goods sold.
  3. Many people make important business decisions based on period-to-period fluctuations in a company’s financial numbers, including gross profit and net income. As such, inventory errors—which can substantially impact gross profit, net income, current assets, and cost of sales—should not be permitted to cause such fluctuations and impair business decisions.  (Note: Since such errors are “self-correcting,” they will distort net income in only two consecutive accounting periods—the period of the error and the next period.)
  4. An inventory error that causes an understatement (or overstatement) for net income in one accounting period, if not corrected, will cause an overstatement (or understatement) in the next. Because an understatement (overstatement) of one period offsets the overstatement (understatement) in the next, such errors are said to correct themselves.
  5. Market as used in the LCM rule refers to replacement cost for LIFO, but net realizable value for FIFO, WA, and SI.
  6. Factors that contribute to inventory shrinkage are breakage, loss, deterioration, decay, and theft.

8.B   For interim reporting, companies can estimate costs of goods sold and ending inventory by either the retail inventory method or the gross profit method.

  1. Inventory as a percent of current assets is ($ millions): $4,855 / $128,645 = 3.8%.

 

 

  1. Cost of goods available for sale equals ending inventory plus cost of sales. It is computed as ($ millions):

        Ending Inventory of $4,855 + Cost of Sales of $141,048 = $145,903

  1. Cost of goods available for sale equals ending inventory plus cost of sales. It is computed as (in KRW millions):

Ending Inventory of ₩24,983,355 + Cost of Sales of ₩129,290,661 = ₩154,274,016

  1. Inventory comprises 17.0% (computed as ₩24,983,355 / ₩146,982,464) of Samsung’s current assets as of December 31, 2017 (in KRW millions).

        Inventory comprises 13.0% (computed as ₩18,353,503 / ₩ 141,429,704) of its current assets as of December 31, 2016 (in KRW millions).

 

 

QUICK STUDIES

 

Quick Study 5-1 (10 minutes)

Units in ending inventory    
Units stored in basement………………………. 1,300 units
Less damaged (unsalable) units…………….. (20)  
Plus units in transit……………………………….. 350  
Plus units on consignment……………………..      80  
Total units in ending inventory……………….
1,710 units

 

 

Quick Study 5-2 (10 minutes)

 

 Cost………………………………………………………. $14,000
Plus  
Transportation-in………………………………… 250
Import duties……………………………………… 900
Insurance……………………………………………        300
Inventory Cost…………………………………… $15,450

 

The $150 advertising cost, the $1,250 cost for sales staff salaries, and the $180 trimming costs are included in operating expenses—they are not part of inventory costs.  Those three costs are not necessary to get the vehicle in a place and condition for sale.

 

Quick Study 5-3 (10 minutes)

 

Beginning inventory……………………………… 10 units @ $60 $   600
Plus    
1st week purchase………………………………… 10 units @ $61 610
2nd week purchase………………………………. 10 units @ $62 620
3rd week purchase……………………………….. 10 units @ $65 650
4th week purchase……………………………….. 10 units @ $70      700
Units Available for sale…………………………. 50 units  
Cost of Goods Available for Sale……………   $3,180

 

 

Quick Study 5-4 (10 minutes)

 

FIFO—Perpetual

 

Date     Goods Purchased Cost of Goods Sold Inventory Balance
1/1     320 @ $3.00
}

= $   960.00

1/9 80 @ $3.20   320 @ $3.00    
      80 @ $3.20   = $1,216.00
         
1/25 100 @ $3.34   320 @ $3.00    
      80 @ $3.20
}
= $1,550.00
      100 @ $3.34    
1/26   320 @ $3.00 =$  960.00  
}
 
     30 @ $3.20 =      96.00 50 @ $3.20  
    $1,056.00 100 @ $3.34   = $   494.00

 

Alternate solution format

 

FIFO: 100 @ $3.34 = $   334.00  
    50 @ $3.20 =      160.00  
  150   $  494.00 Ending inventory cost

 

 

Quick Study 5-5 (10 minutes)

 

LIFO—Perpetual

 

Date Goods Purchased Cost of Goods Sold Inventory Balance
1/1     320 @ $3.00 = $   960.00
1/9 80 @ $3.20   320 @ $3.00
}
 
      80 @ $3.20   = $1,216.00
         
1/25 100 @ $3.34   320 @ $3.00    
      80 @ $3.20
}
= $1,550.00
      100 @ $3.34    
1/26   100 @ $3.34 =$   334.00    
    80 @ $3.20 =     256.00    
    170 @ $3.00 =     510.00 150 @ $3.00 = $   450.00
    $1,100.00      

 

Alternate solution format

LIFO:   150 @ $3.00 = $   450.00 Ending inventory cost

 

Quick Study 5-6 (10 minutes)

 

Weighted Average—Perpetual

 

Date Goods Purchased Cost of Goods Sold Inventory Balance
1/1     320 @ $3.00 = $   960.00
}

1/9

80 @ $3.20   320 @ $3.00    
      80 @ $3.20   = $1,216.00
       (avg. cost is $3.04)  
1/25 100 @ $3.34   320 @ $3.00    
      80 @ $3.20
}
= $1,550.00
      100 @ $3.34    
       (avg. cost is $3.10)  
  1/26   350 @ $3.10 = $1,085.00 150 @ $3.10 = $  465.00

 

Alternate solution format

Weighted average:

  320 @ $3.00 = $   960.00  
  80 @ $3.20 = 256.00  
  100 @ $3.34 =      334.00  
  500   $1,550.00 Cost of goods available for sale

 

                         $1,550.00/500 = $3.10 weighted average cost per unit

 

                         150 units @ $3.10 =  $   465.00   Ending inventory cost

 

Quick Study 5-7A (10 minutes)

 

                                                                                       Ending       Cost of

FIFO—Periodic                                                          Inventory      Goods Sold

 

FIFO

       (100 x $3.34) + (50 x $3.20)……………………………. $494.00

       (320 x $3.00) + (30 x $3.20)…………………………….                 $1,056.00

      

 

 

 

 

Quick Study 5-8A (10 minutes)

 

                                                                                       Ending       Cost of

LIFO—Periodic                                                          Inventory      Goods Sold

 

LIFO

       (150 x $3.00)………………………………………………… $450.00

       (100 x $3.34)  + (80 x $3.20) + (170 x $3.00)…….                 $1,100.00      

 

 

Quick Study 5-9A (10 minutes)

 

                                                                                       Ending       Cost of

Weighted Average—Periodic                                   Inventory      Goods Sold

 

Weighted Average ($1,550/ 500 = $3.10 cost per unit)

        (150 x $3.10)……………………………………………….. $465.00

        (350 x $3.10)………………………………………………..                 $1,085.00

      

 

 

 

Quick Study 5-10 (25 minutes)

 

FIFO—Perpetual

Date Goods Purchased Cost of Goods Sold Inventory Balance
12/ 7 10 @ $ 6  = $  60   10 @ $ 6   = $   60.00
12/14 20 @ $12 = $240   10 @ $ 6   = $300.00  
      20 @ $12  
12/15   10 @ $  6 15 @ $12   = $180.00
      5 @ $12 = $120.00

 

     
12/21 15 @ $14 = $210   15 @ $12   = $390.00
    ______ 15 @ $14  
    $120.00      

 

 

Quick Study 5-11 (25 minutes)

LIFO—Perpetual

 

Date Goods Purchased      Cost of Goods Sold Inventory Balance
12/7 10 @ $ 6  = $  60   10 @ $  6    = $   60
12/14 20 @ $12 = $240   10 @ $  6 = $300
      20 @ $12  
12/15   15 @ $12 = $180 10 @ $  6   = $120
        5 @ $12  
12/21 15 @ $14 = $210   10 @ $  6    
        5 @ $12   = $330
    ____ 15 @ $14    
    $180      

 

 

Quick Study 5-12

Weighted Average—Perpetual (25 minutes)

Date Goods Purchased      Cost of Goods Sold Inventory Balance
12/7 10 @  $6  =   $60   10 @ $6   = $   60
}
 

12/14

20 @ $12 = $240   10 @ $6 = $300
      20 @ $12
      (avg cost is $10)    
12/15   15 @ $10 = $150 15 @ $10   = $150
}

12/21

 15 @ $14 = $210   15 @ $10   = $360
    ____ 15 @ $14  
    $150 (avg cost is $12)    

 

 

 

Quick Study 5-13 (10 minutes)

Specific Identification—Perpetual

 

 

Ending inventory under specific identification:

(2 units x $6) + (13 units x $12) + (15 units x $14) = $378.

 

 

Quick Study 5-14A (10 minutes)

 

                                                                                       Ending       Cost of

FIFO—Periodic                                                          Inventory      Goods Sold

 

FIFO

       (15 x $12) + (15 x $14)……………………………….        $390

       (10 x $6) + (5 x $12)…………………………………..                              $120

 

 

 

Quick Study 5-15A (10 minutes)

 

                                                                                       Ending       Cost of

LIFO—Periodic                                                          Inventory      Goods Sold

 

LIFO

       (10 x $6) + (20 x $12)…………………………………         $300

       (15 x $14) ………………………………………………..                              $210

 

 

Quick Study 5-16A (10 minutes)

 

                                                                                       Ending       Cost of

Weighted Average—Periodic                                   Inventory      Goods Sold

 

Weighted Average ($510/ 45 = $11.33 cost per unit)*

        (30 x $11.33 [rounded to dollars and cents])……………         $339.90

        (15 x $11.33 [rounded to dollars and cents])……………                         $169.95

 

*If unit cost is not rounded, then ending inventory is $340 and cost of goods sold is $170.

 

 

Quick Study 5-17A (10 minutes)

 

                                                                                       Ending       Cost of

Specific Identification—Periodic                              Inventory      Goods Sold

 

Specific Identification

       (2 x $6) + (13 x $12) + (15 x $14)………………..         $378

       (8 x $6) + (7 x $12)…………………………………….                              $132

 

 

 

Quick Study 5-18 (10 minutes)

 

  1. 1. LIFO
  2. FIFO
  3. 3. LIFO
  4. 4. LIFO
  5. 5. Specific identification

 

Quick Study 5-19 (20 minutes)

 

  Per Unit Total Total LCM – Items  
Inventory Items Units Cost Market Cost Market  
Mountain bikes   11 $600 $550 $  6,600 $  6,050 $  6,050  
Skateboards 13 350 425 4,550 5,525 4,550  
Gliders 26 800 700   20,800   18,200   18,200  
        $31,950 $29,775 $28,800  
LCM applied to each product ………………………………………………. $28,800

 

 

Quick Study 5-20 (15 minutes)

 

  1. a. Overstates Year 1 cost of goods sold (because EI too low).
  2. b. Understates Year 1 net income (because COGS too high).
  3. c. Understates Year 2 cost of goods sold (because BI too low).
  4. Overstates Year 2 net income (because COGS too low).

 

         Instructor note: The understated Year 1 net income and the overstated Year 2 net income yield a correct combined income for the two-year period. Also, the Year 1 inventory error does not affect years after Year 2.

 

 

Quick Study 5-21 (10 minutes)

 

Inventory turnover      = Cost of goods sold/Average merchandise inventory

                                      = $1,200,000 / [($140,000 + $180,000)/2] = 7.50 times

 

Days’ sales in inventory = Ending Inventory/Costs of goods sold x 365

                                          = ($180,000 / $1,200,000)  x  365  =  54.75 days

 

 

 

Quick Study 5-22B (15 minutes)

 

Goods available for sale    
  Inventory, January 1………………………………….. $190,000  
  Cost of goods purchased (net)…………………….   352,000  
  Goods available for sale (at cost)……………….. 542,000  
Net sales at retail………………………………………….   $685,000
Estimated cost of goods sold [$685,000 x (1 – 44%)]………………………………………………………………….  (383,600)  
Estimated September 5 inventory destroyed… $158,400  

 

 

Quick Study 5-23 (10 minutes)

 

Cost……………………………………………………….. $9,000
Plus  
Transportation-in………………………………… 280
Shipping insurance……………………………. 135
Panel Restoration……………………………….        550
Inventory Cost…………………………………… $9,965

 

The $110 advertising cost, the $1,500 cost for sales staff salaries, and the $300 in lawn care are included in operating expenses—not part of inventory costs.  Those costs are not necessary to get the solar panel in a place and condition for sale.

 

 

EXERCISES

 

Exercise 5-1 (10 minutes)

 

  1. Answer: Barr Co.

 

        The title will pass at “destination,” which is Lee Company’s receiving dock. Barr should show the $12,500 in its inventory at year-end as Barr retains title until the goods reach Lee Company.

 

  1. The consignor is Parris Company. The consignee is Harlow Company.

 

The consignor, Parris Company, should include any unsold and consigned goods in its inventory.

 

 

Exercise 5-2 (10 minutes)

 

Cost of inventory  
  Price……………………………………………………………………… $75,000
  Transportation-in…………………………………………………… 2,400
  Insurance on shipment…………………………………………… 300
  Cleaning and refurbishing……………………………………….        980
  Total cost of inventory……………………………………………. $78,680

 

 

Exercise 5-3 (45 minutes)

 

  1. Specific identification

      Ending inventory—180 units from January 30, 5 units from January 20, and 15 units from beginning inventory

                                                                                  Ending       Cost of Specific Identification                                         Inventory      Goods Sold

 

      (180 x $4.50) + (5 x $5.00) + (15 x $6.00)………     $  925

 

      $1,950 [Total Goods Available] – $925 [Ending Inventory]……..                         $1,025

 

 

Exercise 5-3 (continued)

  1. Weighted Average—Perpetual

 

Date Goods Purchased      Cost of Goods Sold Inventory Balance
1/1     140 @ $6.00 = $   840.00
1/10    100 @ $6.00 =  $   600.00 40 @ $6.00 = $   240.00
1/20  60 @ $5.00   40 @ $6.00    = $   540.00
      60 @ $5.00
                                                  (avg. cost is $5.40)  
1/25   80 @ $5.40 =  $   432.00 20 @ $5.40 = $   108.00
1/30 180 @ $4.50   20 @ $5.40 = $   918.00
    $1,032.00 180 @ $4.50
                                                  (avg. cost is $4.59)  

 

 

  1. FIFO—Perpetual

 

Date Goods Purchased Cost of Goods Sold Inventory Balance
1/1     140 @ $6.00 = $   840.00  
1/10    100 @ $6.00 =  $   600.00 40 @ $6.00 = $   240.00  
1/20 60 @ $5.00   40 @ $6.00    = $   540.00  
      60 @ $5.00  
$   440.00

1/25

          40 @ $6.00      
            40 @ $5.00 20 @ $5.00      = $   100.00  
1/30   180 @ $4.50   20 @ $5.00     = $   910.00
    $1,040.00 180 @ $4.50          

 

 

  1. LIFO—Perpetual

 

Date Goods Purchased Cost of Goods Sold Inventory Balance  
1/1     140 @ $6.00 = $   840.00  
1/10    100 @ $6.00 =  $   600.00 40 @ $6.00 = $   240.00  
1/20 60 @ $5.00   40 @ $6.00    = $   540.00  
      60 @ $5.00  
$   420.00

1/25

          60 @ $5.00      
            20 @ $6.00 20 @ $6.00      = $   120.00  
1/30   180 @ $4.50   20 @ $6.00     = $   930.00
    $1,020.00 180 @ $4.50          

 

Exercise 5-3 (Concluded)

 

Alternate Solution Format for FIFO and LIFO Perpetual

                                                                                                        Ending                Cost of

     Computations                                                                         Inventory          Goods Sold

  1. FIFO

       (180 x $4.50) + (20 x $5.00)…………………………………….    $  910.00

 

       (100 x $6.00) + (40 x $6.00) + (40 x $5.00)……………….                               $1,040.00

      

  1. LIFO

       (20 x $6.00) + (180 x $4.50)…………………………………….    $  930.00

 

       (100 x $6.00) + [(60 x $5.00) + (20 x $6.00)]……………..                               $1,020.00

 

 

 

Exercise 5-4 (20 minutes)

 

LAKER COMPANY

Income Statements

For Month Ended January 31

 
  Specific Identification Weighted Average
FIFO

LIFO
 
Sales………………………. $2,700.00 $2,700.00 $2,700.00 $2,700.00
 (180 units x $15 price)        
Cost of goods sold…..   1,025.00   1,032.00   1,040.00   1,020.00
Gross profit…………….. 1,675.00 1,668.00 1,660.00 1,680.00
Expenses…………………   1,250.00   1,250.00   1,250.00   1,250.00
Income before taxes… 425.00 418.00 410.00 430.00
Income tax expense (40%)……………………………..      170.00      167.20      164.00      172.00
  Net income……………… $   255.00 $   250.80 $   246.00 $   258.00

 

  1. LIFO method results in the highest net income of $258.00.

 

  1. Weighted average net income of $250.80 falls between the FIFO net income of $246.00 and the LIFO net income of $258.00.

 

  1. If costs were rising instead of falling, then the FIFO method would yield the highest net income.

 

Exercise 5-5A (35 minutes)

 

                                                                                       Ending       Cost of     Periodic Inventory Computations                        Inventory       Goods Sold

 

  1. Specific Identification—Periodic

     (180 x $4.50) + (5 x $5.00) + (15 x $6)………………. $   925.00

     $1,950 [Total Goods Available] – $925 [Ending Inventory]………….                 $1,025.00

 

  1. Weighted Average—Periodic

($1,950 / 380 units  = $5.13* average cost per unit)

     200 x $5.13……………………………………………………. $1,026.00

     180 x $5.13…………………………………………………….                 $   923.40

 

  1. FIFO—Periodic

     (180 x $4.50) + (20 x $5.00)……………………………… $  910.00

 

     (140 x $6.00) + (40 x $5.00)………………………………                 $1,040.00

    

  1. LIFO—Periodic

     (140 x $6.00) + (60 x $5.00)……………………………… $1,140.00

     (180 x $4.50)…………………………………………………..                 $   810.00

           

 

*rounded to dollars and cents

 

Exercise 5-6 (20 minutes)

 

LAKER COMPANY

Income Statements

For Month Ended January 31

 
  Specific Identification Weighted Average
FIFO

LIFO
 
Sales………………………. $2,700.00 $2,700.00 $2,700.00 $2,700.00
 (180 units x $15 price)        
Cost of goods sold…..   1,025.00      923.40   1,040.00      810.00
Gross profit…………….. 1,675.00 1,776.60 1,660.00 1,890.00
Expenses…………………   1,250.00   1,250.00   1,250.00   1,250.00
Income before taxes… 425.00 526.60 410.00 640.00
Income tax expense (40%)……………………………..      170.00      210.64      164.00      256.00
  Net income……………… $   255.00 $   315.96 $   246.00 $   384.00

 

 

  1. LIFO method results in the highest net income of $384.00.

 

  1. Weighted average net income of $315.96 falls between the FIFO net income of $246.00 and the LIFO net income of $384.00.

 

  1. If costs were rising instead of falling, then the FIFO method would yield the highest net income.

 

Exercise 5-7 (20 minutes)

 

  1. FIFO—Perpetual

 

Date Goods Purchased Cost of Goods Sold Inventory Balance
1/1     200 @ $10 = $  2,000
1/10         150 @ $10 = $  1,500 50 @ $10 = $     500
3/14 350 @ $15 = $5,250   50 @ $10 = $  5,750
      350 @ $15
3/15    50 @ $10 100 @ $15 = $  1,500
        250 @ $15 = $  4,250    
7/30 450 @ $20 = $9,000   100 @ $15 = $10,500
      450 @ $20
10/5   100 @ $15    
        330 @ $20 = $  8,100 120 @ $20 = $  2,400
10/26 100 @ $25 = $2,500   120 @ $20  
    ______ 100 @ $25 = $  4,900
             $13,850    

 

  1. LIFO—Perpetual
Date Goods Purchased   Cost of Goods Sold Inventory Balance
1/1     200 @ $10 =  $   2,000
1/10      150 @ $10 =   $ 1,500 50 @ $10 =  $      500
3/14 350 @ $15 = $  5,250   50 @ $10 =  $   5,750
      350 @ $15
3/15     50 @ $10 =  $   1,250
       300 @ $15 =   $ 4,500 50 @ $15
7/30 450 @ $20 = $  9,000   50 @ $10  
      50 @ $15   =  $ 10,250
      450 @ $20  
10/5     50 @ $10  
    430 @ $20 =   $8,600 50 @ $15 =  $   1,650
      20 @ $20  
10/26 100 @ $25 = $  2,500   50 @ $10  
      50 @ $15  
      20 @ $20 $   4,150
    _______ 100 @ $25  
        $14,600    

 

Exercise 5-7 (Concluded)

 

Alternate Solution Format

                                                                                                         Ending            Cost of                                                                                                       Inventory  Goods Sold

  1. FIFO

       (100 x $25) + (120 x $20)……………………………………………..    $4,900

       (150 x $10) + (50 x $10) + (250 x $15) +

       (100 x $15)+ (330 x $20)………………………………………………                               $13,850

  1. LIFO

       (50 x $10) + (50 x $15) + (20  x $20) + (100 x $25)………….     $4,150

       (150 x $10) + (300 x $15) + (430 x $20)…………………………                               ……………………………………………………………………………. $14,600

 

FIFO Gross Margin

Sales revenue (880 units sold x $40 selling price)……….. $35,200
Less:  FIFO cost of goods sold……………………………………   13,850
Gross profit……………………………………………………………….. $21,350
   
LIFO Gross Margin  
Sales revenue (880 units sold x $40 selling price)……….. $35,200
Less:  LIFO cost of goods sold……………………………………   14,600
  Gross profit……………………………………………………………….. $20,600

 

 

Exercise 5-8 (15 minutes)

 

  1. Specific Identification method—Cost of goods sold

 

Cost of goods available for sale…………………….   $18,750
  Ending inventory under specific identification    
  3/14 purchase (  45 @ $15) …………………….. $   675  
  7/30 purchase (  75 @ $20)………………………  1,500  
10/26 purchase (100 @ $25)………………………   2,500  
   Total ending inventory under specific identification………………………………………………….       4,675
  Cost of goods sold under specific identification…………………………………………………   $14,075

 

  1. Specific Identification method—Gross margin
Sales revenue (880 units sold x $40 selling price).   $35,200
Less:  Specific identification cost of goods sold….     14,075
Gross profit……………………………………………………….   $21,125

 

 

Exercise 5-9A (20 minutes)

 

                                                                                    Ending     Cost of

Periodic Inventory System                                      Inventory    Goods Sold

  1. FIFO—Periodic

     (100 x $25) + (120 x $20)…………………………………..     $4,900

     (200 x $10) + (350 x $15) + (330 x $20)……………….                   $13,850

 

  1. LIFO—Periodic

     (200 x $10) + (20 x $15)………………………………………     $2,300

(100 x $25) + (450 x $20) + (330 x $15)……………….                   $16,450

 

c.

FIFO—Periodic Gross Margin

Sales revenue (880 units sold x $40 selling price).. $35,200
Less:  FIFO cost of goods sold…………………………….   13,850
Gross margin…………………………………………………….. $21,350
   
LIFO—Periodic Gross Margin  
Sales revenue (880 units sold x $40 selling price).. $35,200
Less:  LIFO cost of goods sold…………………………….   16,450
Gross margin…………………………………………………….. $18,750

 

 

 

 

Exercise 5-10 (15 minutes)

 

    Per Unit Total Total LCM Applied to Items  
Inventory Items

Units

Cost Market Cost Market
Helmets…..
24 $50 $54 $1,200 $1,296 $1,200  
Bats……….. 17 78 72 1,326 1,224 1,224  
Shoes…….. 38 95 91 3,610 3,458 3,458  
Uniforms… 42 36 36   1,512   1,512   1,512    
          $7,648 $7,490 $7,394    

 

Lower of cost or market of inventory by product = $7,394

 

Exercise 5-11 (20 minutes)

 

  1. a. LIFO ratio computations

          LIFO current ratio (Year 2) = $220/$200 = 1.1

          LIFO inventory turnover (Year 2) = $740/ [($110+$160)/2] = 5.5

          LIFO days’ sales in inventory (Year 2) = ($160/$740) x 365 = 78.9 days

 

  1. FIFO ratio computations

          FIFO current ratio (Year 2) = $300/$200 = 1.5

          FIFO inventory turnover (Year 2) = $660/ [($110+$240)/2] = 3.8

          FIFO days’ sales in inventory (Year 2) = ($240/$660) x 365 = 132.7 days

 

  1. The use of LIFO versus FIFO for Cruz markedly impacts the ratios computed. Specifically, LIFO makes Cruz appear worse in comparison to FIFO numbers on the current ratio (1.1 vs. 1.5) but better on inventory turnover (5.5 vs. 3.8) and days’ sales in inventory (78.9 vs. 132.7).

          These results can be generalized. That is, when costs are rising and quantities are stable or rising, the FIFO inventory exceeds LIFO inventory.  This suggests that (relative to FIFO) the LIFO current ratio is understated, the LIFO inventory turnover is overstated, and the days’ sales in inventory is understated. Overall, users prefer FIFO numbers for these ratios because they are considered more representative of current replacement costs for inventory.

 

 

Exercise 5-12 (25 minutes)

  1. Correct gross profit = $850,000 – $500,000 = $350,000 (for each year)

 

  1. Reported income figures
   Year 1 Year 2 Year 3
Sales……………………   $850,000   $850,000   $850,000
Cost of goods sold            
Beginning inventory………………. $250,000   $230,000   $250,000  
Cost of purchases   500,000     500,000     500,000  
Good available for sale……………………………… 750,000   730,000   750,000  
Ending inventory..   230,000     250,000     250,000  
Cost of goods sold     520,000     480,000     500,000
Gross profit………….   $330,000   $370,000   $350,000

 

Exercise 5-13 (20 minutes)

 

Year 2 Inventory turnover               Year 2 Days’ Sales in Inventory

 

$426,650/[($92,500 + $87,750)/2]      $87,750/$426,650 x 365 days = 75.1 days

 

 = 4.7 times

 

Year 3 Inventory turnover               Year 3 Days’ Sales in Inventory

 

 

 

$643,825/[($87,750 + $97,400)/2]

 = 7.0 times                              $97,400/$643,825 x 365 days = 55.2 days

 

Analysis comment:  It appears that during a period of increasing sales, Palmer has been efficient in controlling its amount of inventory. Specifically, inventory turnover increased by 2.3 times (7.0 – 4.7) from Year 2 to Year 3.  Also, days’ sales in inventory decreased by 19.9 days (75.1 – 55.2).

 

Exercise 5-14A (20 minutes)

  Ending
Inventory
Cost of
Goods Sold
a.  Specific identification    
        (50 x $2.90) + (50 x $2.80) + (50 x $2.50)…………. $410.00  
        $3,855 [Goods Available] – $410.00 [Ending Inventory]………….   $3,445.00
b.  Weighted average ($3,855/1,500 = $2.57)    
        150 x $2.57 [rounded to cents]………………………………….. 385.50  
        $3,855 [Goods Available] – $385.50 [Ending Inventory]………….   3,469.50
c.  FIFO    
        (150 x $2.90)…………………………………………………. 435.00  
        (96 x $2.00) + (220 x $2.25) + (544 x $2.50) +
(480 x $2.80) + (10 x 2.90)………………………….
   

3,420.00

d.  LIFO    
        (96 x $2.00) + (54 x $2.25)………………………………. 313.50  
        (160 x $2.90) + (480 x $2.80) + (544 x $2.50) +
(166 x $2.25)……………………………………………..
 
3,541.50

 

  1. FIFO: FIFO provides the lowest cost of goods sold, the highest gross profit, and the highest net income. This is expected during a period of rising costs.

 

Exercise 5-15A (20 minutes)

 

Periodic Inventory

Ending
Inventory
Cost of
Goods Sold
a.  Specific Identification    
        (50 x $2.80) + (10 x $2.00)………………………………. $160.00  
        $2,540.00 [Goods Available] – $160.00 [Ending Inventory]……..   $2,380.00
b.  Weighted Average ($2,540.00/1,000 = $2.54)    
        (60 x $2.54)…………………………………………………… 152.40  
        $2,540.00 [Goods Available] – $152.40 [Ending Inventory]……..   2,387.60
c.  FIFO    
        (22 x $2.00) + (38 x 2.30)………………………………… 131.40  
        (138 x $3.00) + (300 x $2.80) + (502 x $2.30)…….   2,408.60
d.  LIFO    
        (60 x $3.00)…………………………………………………… 180.00  
        (22 x $2.00) + (540 x $2.30) + (300 x $2.80) +
(78 x $3.00)……………………………………………….
 
2,360.00

 

  1. FIFO: FIFO results in the highest cost of goods sold, which produces the lowest gross profit and lowest net income. A lower income from using FIFO is expected during a period of declining costs.

 

 

 

 

Exercise 5-16B (20 minutes)

 

  At Cost At Retail
Goods available for sale    
   Beginning inventory……………………………….
$  63,800 $128,400
   Cost of goods purchased……………………….   115,060   196,800
   Goods available for sale………………………… $178,860 325,200
Deduct net sales at retail…………………………..     260,000
Ending inventory at retail………………………….   $  65,200
Cost ratio: ($178,860/$325,200) = 0.55…………..    
  Ending inventory at cost ($65,200 x 55%)….. $  35,860  

 

 

Exercise 5-17B (20 minutes)

 

Goods available for sale    
   Beginning inventory, January 1…………………..
$   225,000
   Net cost of goods purchased*………………………      802,250
   Goods available for sale…………………………….. 1,027,250
Less estimated cost of goods sold    
   Net sales…………………………………………………….   $1,000,000
   Estimated cost of goods sold    
        [$1,000,000 x (1 – 30%)]…………………………..     (700,000)
Estimated March 31 inventory……………………….. $   327,250

 

* $795,000 – $11,550 + $18,800 = $802,250

 

 

 

Exercise 5-18 (20 minutes)

 

  1. FIFO—Perpetual

 

Date Goods Purchased Cost of Goods Sold Inventory Balance
1/1     40 @ $2 =     $  80
1/3   30 @ $2  = $ 60 10 @ $2 =     $  20
2/14 70 @ $3 = $210   10 @ $2 =     $230
      70 @ $3
2/15   10 @ $2 20 @ $3 =     $  60
    50 @ $3  = $170    
6/30 90 @ $4 = $360   20 @ $3 =     $420
      90 @ $4
11/6   20 @ $3    
    66 @ $4  = $324 24 @ $4 =      $ 96
11/19 20 @ $5 = $100   24 @ $4  
                     ______ 20 @ $5 =    $196
                       $554    

 

 

 

Exercise 5-18 (Concluded)

 

  1. LIFO—Perpetual
Date Goods Purchased   Cost of Goods Sold Inventory Balance
1/1     40 @ $2 =    $  80
1/3      30 @ $2 =   $ 60 10 @ $2 =    $  20
2/14 70 @ $3 = $  210   10 @ $2 =    $230
      70 @ $3
2/15     10 @ $2 =    $  50
       60 @ $3 =   $ 180 10 @ $3
6/30 90 @ $4 = $  360   10 @ $2  
      10 @ $3   =    $410
      90 @ $4  
11/6     10 @ $2  
       86 @ $4 =   $344 10 @ $3 =    $  66
      4 @ $4  
11/19 20 @ $5 = $  100   10 @ $2  
      10 @ $3  
      4 @ $4 =    $166
                     _______ 20 @ $5  
                  $584    

 

 

 

                                                                                                         Ending            Cost of      Alternate Solution Format                                                Inventory  Goods Sold

  1. FIFO

       (20 x $5) + (24 x $4)…………………………………………………….       $196

       (30 x $2) + (10 x $2) + (50 x $3) +

       (20 x $3)+ (66 x $4)……………………………………………………..                                 $554

  1. LIFO

       (10 x $2) + (10 x $3) + (4 x $4) + (20 x $5)……………………..        $166

       (30 x $2) + (60 x $3) + (86 x $4)……………………………………                                 $584

 

  1. Gross Margin Computations

Gross Margin under FIFO perpetual

Sales revenue (176 units sold x $8 selling price)…………………… $1,408
Less:  FIFO cost of goods sold……………………………………………..      554
Gross margin……………………………………………………………………… $   854
   
Gross Margin under LIFO perpetual  
Sales revenue (176 units sold x $8 selling price)…………………… $1,408
Less:  LIFO cost of goods sold……………………………………………..      584
Gross margin……………………………………………………………………… $   824

 

 

Exercise 5-19A (20 minutes)

 

                                                                                    Ending     Cost of

Periodic Inventory System                                      Inventory    Goods Sold

      Instructor note: The assignment reports there are 220 units available for sale and that 176 units are sold. Thus, we see that 44 units remain in inventory.

 

  1. FIFO—Periodic

     (20 x $5) + (24 x $4)………………………………………….        $196

     (40 x $2) + (70 x $3) + (66 x $4)………………………….                        $554

 

  1. LIFO—Periodic

     (40 x $2) + (4 x $3)…………………………………………….          $92

(20 x $5) + (90 x $4) + (66 x $3)………………………….                        $658

 

c.

FIFO—Periodic Gross Margin

Sales revenue (176 units sold x $8 selling price)……… $1,408
Less:  FIFO cost of goods sold…………………………………      554
Gross margin…………………………………………………………. $   854
   
LIFO—Periodic Gross Margin  
Sales revenue (176 units sold x $8 selling price)……… $1,408
Less:  LIFO cost of goods sold…………………………………      658
Gross margin…………………………………………………………. $   750

 

 

 

PROBLEM SET A

 

Problem 5-1A (40 minutes)

 

  1. Compute cost of goods available for sale and units available for sale

 

Beginning inventory……………………
100 units @ $50.00 $  5,000
March  5
400 units @ $55.00 22,000
March 18……………………………………. 120 units @ $60.00 7,200
March 25……………………………………. 200 units @ $62.00   12,400
Units available……………………………. 820 units  
Cost of goods available for sale
  $46,600

 

  1. Units in ending inventory

 

Units available (from part 1)…………. 820 units
Less: Units sold (420 + 160)…………. 580 units
Ending Inventory (units)………………. 240 units 

 

 

3a.  FIFO perpetual

 

Date Goods Purchased Cost of Goods Sold Inventory Balance  
Mar.  1     100 @ $50.00      = $  5,000
Mar.  5 400 @ $55.00 = $22,000   100 @ $50.00     

400 @ $55.00      = $27,000

Mar.  9   100 @ $50.00 = $  5,000

320 @ $55.00 = $17,600

  80 @ $55.00      = $  4,400
Mar. 18 120 @ $60.00 = $  7,200     80 @ $55.00

120 @ $60.00      = $11,600

Mar. 25 200 @ $62.00 = $ 12,400     80 @ $55.00

120 @ $60.00

200 @ $62.00      = $24,000

Mar. 29     80 @ $55.00 = $  4,400

  80 @ $60.00 = $  4,800

  40 @ $60.00

200 @ $62.00      = $14,800

      $31,800  

 

Problem 5-1A (Continued)

 

3b.  LIFO perpetual

 

Date Goods Purchased Cost of Goods Sold Inventory Balance  
Mar.  1     100 @ $50.00      = $  5,000
Mar.  5 [email protected] $55.00= $22,000   100 @ $50.00     

400 @ $55.00      = $27,000

Mar.  9   400 @ $55.00 = $22,000

  20 @ $50.00 = $  1,000

  80 @ $50.00      = $  4,000
Mar. 18 [email protected] $60.00= $  7,200     80 @ $50.00

120 @ $60.00      = $11,200

Mar. 25 [email protected] $62.00= $12,400     80 @ $50.00

120 @ $60.00

200 @ $62.00      = $23,600

 

Mar. 29

   

160 @ $62.00 = $  9,920

 

  80 @ $50.00

120 @ $60.00

  40 @ $62.00      = $13,680

      $32,920  

 

3c.  Weighted Average perpetual

 

Date Goods Purchased Cost of Goods Sold Inventory Balance  
Mar.  1     100 @ $50.00      = $  5,000
Mar.  5 [email protected] $55.00= $22,000   100 @ $50.00 

400 @ $55.00      = $27,000

       (avg. = $54.00)
Mar.  9   420 @ $54.00 = $22,680   80 @ $54.00      = $  4,320
       (avg. = $54.00)
Mar. 18 [email protected] $60.00= $  7,200     80 @ $54.00

120 @ $60.00      = $11,520

       (avg. = $57.60)
Mar. 25 [email protected] $62.00= $12,400     80 @ $54.00

120 @ $60.00

200 @ $62.00      = $23,920

       (avg. = $59.80)
Mar. 29   160 @ $59.80 = $  9,568 240 @ $59.80      = $14,352
       (avg. = $59.80)
      $32,248  

 

 

Problem 5-1A (Concluded)

 

3d.  Specific Identification

 

        Cost of goods sold—    80 units from beginning inventory

                                             340 units from March 5 purchase

                                               40 units from March 18 purchase

                                             120 units from March 25 purchase

                                             580 units sold in total

 

                                                                                       Ending Cost of                                                                        Specific Identification                                                              Inventory Goods Sold

 

      (80x$50) + (340x$55) + (40x$60) + (120x$62)……..                 $32,540

 

      $46,600 [Total Goods Available] – $32,540 [Cost of Goods Sold]…..    $14,060

 

 

 

   

 

FIFO

 

 

LIFO

 

Weighted

Average

Specific

Identifi-cation

Sales*…………………………….. $50,900 $50,900 $50,900 $50,900
Less: Cost of goods sold….   31,800   32,920   32,248   32,540
Gross profit……………………..
$ 19,100 $17,980 $ 18,652 $ 18,360

 

 *Sales = (420 units x $85.00) + (160 units x $95.00) = $50,900

 

Problem 5-2A (40 minutes)

 

  1. Compute cost of goods available for sale and units available for sale

 

Beginning inventory…………………….
100 units @ $50.00 $  5,000
March  5………………………………………
400 units @ $55.00 22,000
March 18…………………………………….. 120 units @ $60.00 7,200
March 25…………………………………….. 200 units @ $62.00   12,400
Units available……………………………. 820 units  
Cost of goods available for sale
  $46,600

 

  1. Units in ending inventory

 

Units available (from part 1)………….. 820 units
Less: Units sold (420 + 160)………….. 580 units
Ending Inventory (units)……………….. 240 units 

 

3.

 

Periodic Inventory

Ending
Inventory
Cost of
Goods Sold
a.  FIFO    
        (200 x $62.00) + (40 x $60.00)…………………………… $14,800.00  
        (100 x $50.00) + (400 x $55.00) + (80 x $60.00)……   $31,800.00
b.  LIFO    
        (100 x $50.00) + (140 x $55.00)…………………………. $12,700.00  
        (200 x $62.00) + (120 x $60.00) + (260 x $55.00)….   $33,900.00
c.  Weighted average ($46,600/820 = $56.83)    
        (240 x $56.83)………………………………………………….. $13,639.20  
        $46,600 [Goods Available] – $13,639.20 [Ending Inventory]……..   $32,960.80
d.  Specific identification    
        (20 x $50)+(60 x $55)+(80 x $60)+(80 x $62)………. $14,060.00  
        $46,600 [Goods Available] – $14,060.00 [Ending Inventory]……..   $32,540.00

 

Problem 5-2A (Concluded)

 

   

 

FIFO

 

 

LIFO

 

Weighted

Average

Specific

Identifi-cation

Sales*………………………………. $50,900.00 $50,900.00 $50,900.00 $50,900.00
Less: Cost of goods sold…..   31,800.00   33,900.00   32,960.80   32,540.00
Gross profit………………………
$19,100.00 $17,000.00 $17,939.20 $18,360.00

 

*Sales = (420 units x $85.00) + (160 units x $95.00) = $50,900

 

Problem 5-3A (40 minutes)

 

 

  1. Calculate cost of goods available for sale and units available for sale

 

Beginning inventory………………………
    600 units @ $45.00 $27,000
Feb.    10……………………………………….
    400 units @ $42.00 16,800
Mar.    13……………………………………….     200 units @ $27.00 5,400
Aug.   21……………………………………….     100 units @ $50.00 5,000
Sept.    5……………………………………….     500 units @ $46.00   23,000
Units available………………………………  1,800 units  
Cost of goods available for sale
  $77,200

 

 

 

 

  1. Units in ending inventory

 

Units available (from part 1)…………… 1,800
Less: Units sold (800 + 600)……………. 1,400
Ending Inventory (units)………………….    400 

 

Problem 5-3A (Continued)

3a. FIFO  perpetual

 

  Date Goods Purchased Cost of Goods Sold Inventory Balance  
1/1     600 @ $45.00    = $27,000
2/10 400 @ $42.00= $16,800   600 @ $45.00     

400 @ $42.00    = $43,800

3/13 200 @ $27.00= $  5,400   600 @ $45.00

400 @ $42.00    = $49,200

200 @ $27.00

3/15   600 @ $45.00

200 @ $42.00 = $35,400

200 @ $42.00

200 @ $27.00    = $13,800

8/21 100 @ $50.00= $  5,000   200 @ $42.00

200 @ $27.00    = $18,800

100 @ $50.00

9/5 500 @ $46.00= $23,000   200 @ $42.00

200 @ $27.00

100 @ $50.00

500 @ $46.00    = $41,800

  9/10   200 @ $42.00

200 @ $27.00

100 @ $50.00

100 @ $46.00 = $23,400

 

 

400 @ $46.00    = $18,400

      $58,800  

 

 

FIFO Alternate Solution Format

  Cost of goods available for sale   $77,200
  Less:  Cost of sales 600 @  $45.00 $27,000  
    400 @  $42.00 16,800  
    200 @  $27.00    5,400  
    100 @  $50.00    5,000  
    100 @  $46.00    4,600  
  Total cost of goods sold     58,800
  Ending Inventory   $18,400
       
  Proof of Ending Inventory    
         
    400 @  $46.00   $18,400
  Ending Inventory………..      400 units   $18,400

 

Problem 5-3A (Continued)

 

3b.  LIFO perpetual

 

  Date Goods Purchased Cost of Goods Sold Inventory Balance  
1/1     600 @ $45.00    = $27,000
2/10 400 @ $42.00= $16,800   600 @ $45.00     

400 @ $42.00    = $43,800

3/13 200 @ $27.00= $  5,400   600 @ $45.00

400 @ $42.00    = $49,200

200 @ $27.00

3/15   200 @ $27.00

400 @ $42.00

200 @ $45.00 = $31,200

 

400 @ $45.00    = $18,000

8/21 100 @ $50.00= $  5,000   400 @ $45.00

100 @ $50.00    = $23,000         

9/5 500 @ $46.00= $23,000   400 @ $45.00

100 @ $50.00

500 @ $46.00    = $46,000

  9/10   500 @ $46.00

100 @ $50.00 = $28,000

 

400 @ $45.00    = $18,000

      $59,200  

 

 

LIFO alternate solution format

  Cost of goods available for sale   $77,200
  Less:  Cost of sales 500 @   $46 $23,000    
    100 @     50 5,000    
    200 @     27 5,400    
    400 @     42   16,800    
    200 @     45    9,000    
  Cost of Goods Sold     59,200
  Ending Inventory   $18,000  
         
  Proof of Ending Inventory    
           
    400 @     45     18,000  
    Ending Inventory…      400  units   $18,000

 

Problem 5-3A (Continued)

 

3c.  Weighted Average

 

Date Goods Purchased Cost of Goods Sold Inventory Balance  
1/1     600 @ $45.00    = $27,000
2/10 400 @ $42.00= $16,800   600 @ $45.00     

400 @ $42.00    = $43,800

      (avg. cost is $43.80)
3/13 200 @ $27.00= $  5,400   600 @ $45.00

400 @ $42.00    = $49,200

200 @ $27.00

      (avg. cost is $41.00)
3/15   800 @ $41.00 = $32,800 400 @ $41.00    = $16,400
8/21 100 @ $50.00= $  5,000   400 @ $41.00

100 @ $50.00    = $21,400         

      (avg. cost is $42.80)
9/5 500 @ $46.00= $23,000   400 @ $41.00

100 @ $50.00

500 @ $46.00    = $44,400

      (avg. cost is $44.40)
  9/10   600 @ $44.40 = $26,640 400 @ $44.40    = $17,760
      $59,440  

 

 

Problem 5-3A (Continued)

3d.  Specific Identification

 
Cost of goods available for sale………….
  $77,200
  Less:  Cost of Goods Sold      
    600 @ $45.00………………………….. $27,000  
    300 @ $42.00…………………………..    12,600  
    200 @ $27.00………………………….. 5,400  
      50 @ $50.00………………………….. 2,500  
    250 @ $46.00…………………………..    11,500  
 
Total cost of goods sold……………………..
    59,000
    Ending Inventory………………………………..   $18,200
       
  Proof of Ending Inventory      
    100  @  $42 $  4,200  
    50  @  $50 $  2,500  
      250  @  $46   11,500  
    Ending Inventory……….   400 units $18,200  

 

 

   

 

FIFO

 

 

LIFO

Specific

Identifi-cation

 

Weighted

Average

Sales (1,400 x $75)…………… $105,000 $105,000 $105,000 $105,000
Less: Cost of goods sold….      58,800     59,200     59,000     59,440
Gross profit……………………..
$  46,200 $  45,800 $  46,000 $  45,560

 

 

  1. FIFO. Montoure’s manager would prefer the FIFO method since this methods’ gross profit is the largest at $46,200. This would give the manager the highest bonus based on gross profit.

 

Problem 5-4A (40 minutes)

 

  1. Calculate cost of goods available for sale and units available for sale

 

Beginning inventory…………………….
    600 units @ $45.00 $27,000
Feb. 10……………………………………….
    400 units @ $42.00 16,800
Mar. 13……………………………………….     200 units @ $27.00 5,400
Aug. 21……………………………………….     100 units @ $50.00 5,000
Sept.  5……………………………………….     500 units @ $46.00   23,000
Units available……………………………..  1,800 units  
Cost of goods available for sale
  $77,200

 

 

 

 

  1. Units in ending inventory

 

Units available (from part 1)………….. 1,800
Less: Units sold (800 + 600)………….. 1,400
Ending Inventory (units)………………..    400 

 

Problem 5-4A (Concluded)

 

3.

 

Periodic Inventory

Ending
Inventory
Cost of
Goods Sold
a.  FIFO    
    (400 x $46.00)……………………………………………………… $18,400.00  
    (600 x $45.00) + (400 x $42.00) + (200 x $27.00) +

    (100 x $50.00) + (100 x $46.00)……………………………..

  $58,800.00
b.  LIFO    
    (400 x $45.00)……………………………………………………… $18,000.00  
    (500 x $46.00) + (100 x $50.00) + (200 x $27.00) +

    (400 x $42.00) + (200 x $45.00)……………………………..

  $59,200.00
 

c.  Weighted average ($77,200/1,800 = $42.89 [rounded])

   
    (400 x $42.89)……………………………………………………… $17,156.00  
    $77,200 [Goods Available] – $17,156.00 [Ending Inventory]…………   $60,044.00
d.  Specific identification    
    (100 x $42.00) + (50 x $50.00) + (250 x $46.00)………. $18,200.00  
    $77,200 [Goods Available] – $18,200.00 [Ending Inventory]…………   $59,000.00

 

 

   

 

FIFO

 

 

LIFO

Specific

Identifi-cation

 

Weighted

Average

Sales (1,400 x $75)…………… $105,000 $105,000 $105,000 $105,000
Less: Cost of goods sold….      58,800     59,200     59,000     60,044
Gross profit……………………..
$  46,200 $  45,800 $  46,000 $  44,956

 

 

  1. FIFO. The manager would prefer the FIFO method since this methods’ gross profit is the largest at $46,200. This would give the manager the highest bonus based on gross profit.

 

Problem 5-5A (50 minutes)

 

    Per Unit Total Total LCM Applied

to Items

Inventory Items Units Cost Market Cost Market
Car audio equipment          
  Speakers………………. 345 $ 90 $ 98 $  31,050 $  33,810 $  31,050
  Stereos…………………. 260 111 100 28,860 26,000 26,000
  Amplifiers……………… 326 86 95 28,036 30,970 28,036
  Subwoofers…………… 204 52 41     10,608       8,364 8,364
Security equipment      
  Alarms………………….. 480 150 125 72,000 60,000 60,000
  Locks……………………. 291 93 84 27,063 24,444 24,444
  Cameras……………….. 212 310 322     65,720     68,264 65,720
Binocular equipment            

  Tripods………………….

185 70 84 12,950 15,540 12,950
  Stabilizers…………….. 170 97 105     16,490     17,850     16,490
Total………………………..       $292,777 $285,242 $273,054

 

 

  1. Lower of cost or market for inventory applied separately = $273,054

 

2.

Dec 31
Cost of Goods Sold……………………………………….
19,723  
        Merchandise Inventory……………………………..   19,723
     Adjust inventory cost to market.

   $19,723 = $292,777 – $273,054

   

 

Problem 5-6A (35 minutes)

Part 1

(a)      
Cost of goods sold Year 1 Year 2 Year 3
Reported……………………………………. $   615,000 $   957,000 $   780,000
Adjustments: 12/31/Year 1 error…….. –    56,000 +    56,000  
                        12/31/Year 2 error……..                  .  +    20,000  –     20,000
Corrected………………………………….. $   559,000 $1,033,000 $   760,000
       
(b)      
Net income Year 1 Year 2 Year 3
Reported……………………………………. $   230,000 $   285,000 $   241,000
Adjustments: 12/31/Year 1 error…….. +    56,000 –     56,000  
                        12/31/Year 2 error……..                  .  –     20,000  +    20,000
Corrected………………………………….. $   286,000 $   209,000 $   261,000
       
(c)      
Total current assets Year 1 Year 2 Year 3
Reported……………………………………. $1,255,000 $1,365,000 $1,200,000
Adjustments: 12/31/Year 1 error…….. +    56,000    
                        12/31/Year 2 error……..                  .  –     20,000                  .
Corrected………………………………….. $1,311,000 $1,345,000 $1,200,000
       
(d)      
Equity Year 1 Year 2 Year 3
Reported……………………………………. $1,387,000 $1,530,000 $1,242,000
Adjustments: 12/31/Year 1 error…….. +    56,000    
                        12/31/Year 2 error…….. _________  –     20,000                  .
Corrected………………………………….. $1,443,000 $1,510,000 $1,242,000

 

 

Part 2

 

Zero (there is no error in combined net income).

 

Explanation: Total net income for the combined three-year period ($756,000) is not affected by the errors.  This is because these errors are “self-correcting”—that is, each overstatement (or understatement) of net income is offset by a matching understatement (or overstatement) in the following year.

 

Problem 5-7AA (25 minutes)

Part 1

    Number and total cost of units available for sale

        23,000   units in beginning inventory @ $15………………………        $   345,000

        30,000   units purchased @ $18               540,000

        39,000   units purchased @ $20               780,000

        23,000   units purchased @ $25               575,000

        35,000   units purchased @ $26………………………………………..               910,000

      150,000   units available for sale                      $3,150,000

 

Part 2

 

  1. FIFO periodic

    

Total cost of 150,000 units available for sale…………………………………………………….   $3,150,000
Less ending inventory on a FIFO basis    
   35,000 units @ $26…………………………… $910,000  
     5,000 units @ $25……………………………   125,000   1,035,000
Cost of goods sold………………………………   $2,115,000

 

 

  1. LIFO periodic

 

Total cost of 150,000 units available for sale…………………………………………………….   $3,150,000
Less ending inventory on a LIFO basis    
   23,000 beginning inventory units @ $15…………………………………………………….. $345,000  
   17,000 units @ $18……………………………   306,000      651,000
Cost of goods sold………………………………   $2,499,000

 

 

  1. Weighted average periodic

 

Total cost of 150,000 units available for sale…..   $3,150,000  
  Less ending inventory at weighted average      
     ($3,150,000/150,000) x 40,000……………………….        840,000  
  Cost of goods sold…………………………………………   $2,310,000  

 

 

Purchase for continue…….