HWChap006

Chapter 06 - Inventories and Cost of Sales

6-1

Chapter 6

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.

2. 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.

3. Incidental costs sometimes are ignored in computing the cost of inventory because the expense of tracking such costs on a precise basis can outweigh the benefits gained from the increased accuracy. The accounting constraint of materiality permits such practices when the effects on the financial statements are not significant (that is, when such practices do not impact business decisions).

4. 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.

5. The full-disclosure principle requires that the nature of the accounting change, the justification for the change, and the effect of the change on net income be disclosed in the notes or in the body of a company's financial statements.

6. No; changing the inventory method each period would violate the accounting concept of consistency.

7. No; the consistency concept does not preclude changes in accounting methods from ever being made. Instead, a change from one acceptable method to another is allowed if the company justifies the change as an improvement in financial reporting.

8. 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.)

9. 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. Since an understatement (overstatement) of one period offsets the overstatement (understatement) in the next, such errors are said to correct themselves.


6-2

10. Market usually means replacement cost of inventory when applied in the LCM. 11. The accounting constraint of conservatism guides preparers of accounting reports

to select the less optimistic estimate in uncertain situations where two estimates of amounts are about equally likely. Users of information must also be cognizant of the potential conservatism in accounting reports when making business decisions.

12. Factors that contribute to inventory shrinkage are breakage, loss, deterioration, decay, and theft.

13.A Accounts that are used only in a periodic inventory system include Purchases, Purchase Discounts, Purchase Returns and Allowances, and Transportation-In.

14. On February 27, 2010, inventory as a percent of current assets is ($ in thousands):

$622 / $5,813 = 10.7%.

15. Cost of goods available for sale equals ending inventory plus cost of sales. As of September 26, 2009, this is computed as ($ millions):

Ending Inventory of $455 + Cost of Sales of $25,683 = $26,138

16. Cost of goods available for sale equals ending inventory plus cost of sales. As of December 31, 2009, this is computed as (in EUR millions):

Ending Inventory of 1,865 + Cost of Sales of 27,720 = 29,585

17. Merchandise inventory ($ thousands) comprises 5.6% ($19,716 / $353,579) of Palm’s current assets as of May 31, 2009, and 12.5% ($67,461 / $540,086) of its current assets as of May 31, 2008.

18.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.


6-3

QUICK STUDIES Quick Study 6-1 (10 minutes) FIFO

Date Goods Purchased Cost of Goods Sold Inventory Balance

1/ 1 320 @ $6.00 = $1,920

1/ 9 85 @ $6.40 320 @ $6.00 = $2,464

85 @ $6.40

1/25 110 @ $6.60 320 @ $6.00 85 @ $6.40 = $3,190 110 @ $6.60

1/26 320 @ $6.00 = $1,920 45 @ $6.40 = $1,014

40 @ $6.40 = 256 110 @ $6.60 360 $2,176

Alternate solution format FIFO: 110 @ $6.60 = $ 726 45 @ $6.40 = 288 155 $1,014 Ending inventory cost


6-4

Quick Study 6-2 (10 minutes) LIFO


1/ 1 320 @ $6.00 = $1,920

1/ 9 85 @ $6.40 320 @ $6.00 = $2,464

85 @ $6.40

1/25 110 @ $6.60 320 @ $6.00 85 @ $6.40 = $3,190 110 @ $6.60

1/26 110 @ $6.60 = $ 726 155 @ $6.00 = $ 930 85 @ $6.40 = 544 165 @ $6.00 = 990 360 $2,260

Alternate solution format

LIFO: 155 @ $6.00 = $ 930 Ending inventory cost

Quick Study 6-3 (10 minutes) Weighted Average


1/ 1 320 @ $6.00 = $1,920

1/ 9 85 @ $6.40 320 @ $6.00 85 @ $6.40 = $2,464 (avg. cost is $6.084*)

1/25 110 @ $6.60 320 @ $6.00 85 @ $6.40 = $3,190 110 @ $6.60 (avg. cost is $6.194*)

1/26 360 @ $6.194 = $2,230* 155 @ $6.194 = $ 960*

*rounded


6-5

Alternate solution format

Weighted average: 320 @ $6.00 = $1,920 85 @ $6.40 = 544 110 @ $6.60 = 726

515 $3,190 Cost of goods available for sale

$3,190/515 = $6.194 (rounded) weighted average cost per unit 155 units @ $6.194 = $ 960 Ending inventory cost (rounded)


6-6

Quick Study 6-4 (10 minutes) Beginning inventory ..................................... 10 units @ $50 $ 500 Plus: 1st week purchase ....................................... 10 units @ $51 510 2nd week purchase ...................................... 10 units @ $52 520 3rd week purchase ....................................... 10 units @ $55 550 4th week purchase ....................................... 10 units @ $60 600 Units available for sale ................................ 50 units Cost of goods available for sale ................. $2,680

Quick Study 6-5 (10 minutes) FIFO


12/ 7 10 @ $ 9 = $ 90 10 @ $ 9 = $ 90

12/14 20 @ $10 = $200 10 @ $ 9 = $290 20 @ $10

12/15 10 @ $ 9 12 @ $10 = $120 8 @ $10 = $170

12/21 15 @ $12 = $180 12 @ $10 = $300

____ 15 @ $12 $170


6-7

Quick Study 6-6 (10 minutes) LIFO


12/ 7 10 @ $ 9 = $ 90 10 @ $ 9 = $ 90

12/14 20 @ $10 = $200 10 @ $ 9 = $290 20 @ $10

12/15 18 @ $10 = $180 10 @ $ 9 = $110 2 @ $10

12/21 15 @ $12 = $180 10 @ $ 9 2 @ $10 = $290 ____ 15 @ $12 $180


6-8

Quick Study 6-7 (10 minutes) Weighted Average

Quick Study 6-8 (10 minutes) Specific identification

(3 units x $9) + (9 units x $10) + (15 units x $12) = $297. Quick Study 6-9 (10 minutes) 1. Specific identification

2. LIFO

3. LIFO

4. LIFO

5. FIFO


12/ 7 10 @ $ 9 = $ 90 10 @ $ 9 = $ 90

12/14 20 @ $10 = $200 10 @ $ 9 = $290 20 @ $ 10 (avg cost is $9.667)

12/15 18 @ $9.667 =$174 12 @ $9.667 = $116

12/21 15 @ $12 = $180 12 @ $9.667 = $296 ____ 15 @ $ 12

$174 (avg cost is $10.963)


6-9

Quick Study 6-10 (10 minutes)

Units in ending inventory Units stored in basement ............................ 1,500 units Less damaged (unsalable) units ................. (30) Plus units in transit ...................................... 250 Plus units on consignment ......................... 70 Total units in ending inventory ................... 1,790 units


6-10


Cost ..................................................................................... $3,000 Plus Transportation-in ............................................................. 150 Import duties .................................................................... 200 Insurance .......................................................................... 50 Inventory cost .................................................................. $3,400

The $25 advertising cost and the $250 cost for sales staff salaries are included in operating expenses—not part of inventory costs. Those two costs are not necessary to get the vehicle in a place and condition for sale.


Per Unit Total Total LCM Applied to Items

Inventory Items Units Cost Market Cost Market

Mountain bikes 9 $360 $330 $ 3,240 $ 2,970 $ 2,970

Skateboards 12 210 270 2,520 3,240 2,520

Gliders 25 480 420 12,000 10,500 10,500

$17,760 $15,990

LCM applied to each product ...................................................... $15,990


a. Overstates 2011 cost of goods sold.

b. Understates 2011 gross profit.

c. Understates 2011 net income.

d. Overstates 2012 net income.

e. The understated 2011 net income and the overstated 2012 net income combine to yield a correct total income for the two-year period.

f. The 2011 error will not affect years after 2012.


6-11

Quick Study 6-14 (10 minutes) Inventory turnover = Cost of goods sold/Average merchandise inventory = $1,600,000 / [($200,000 + $230,000)/2 ] = 7.44 times Days’ sales in inventory = Ending Inventory/Costs of goods sold x 365 = ($230,000 / $1,600,000) x 365 = 52.47 days Quick Study 6-15A (10 minutes)

Ending Cost of Inventory Goods Sold FIFO (45 x $6.40) + (110 x $6.60) ................................. $1,014 (320 x $6.00) + (40 x $6.40) ................................. $2,176

Quick Study 6-16A (10 minutes)

Ending Cost of Inventory Goods Sold LIFO (155 x $6.00) ......................................................... $ 930 (110 x $6.60) + (85 x $6.40) + (165 x $6.00) ....... $2,260


Ending Cost of Inventory Goods Sold Weighted Average ($3,190/ 515 = $6.194* cost per unit) (155 x $6.194) ....................................................... $ 960* (360 x $6.194) ....................................................... $2,230*

*rounded


6-12


Ending Cost of Inventory Goods Sold FIFO (12 x $10) + (15 x $12) ........................................ $300 (10 x $9) + (8 x $10) ............................................ $170 Quick Study 6-19A (10 minutes)

Ending Cost of Inventory Goods Sold LIFO (10 x $9) + (17 x $10) .......................................... $260 (15 x $12) + (3 x $10) ......................................... $210 Quick Study 6-20A (10 minutes) Ending Cost of Inventory Goods Sold Weighted Average ($470 / 45 = $10.444 cost per unit)*

(27 x $10.444) ..................................................... $282* (18 x $10.444) ..................................................... $188* *rounded

Quick Study 6-21A (10 minutes) Ending Cost of Inventory Goods Sold Specific Identification (3 x $9) + (9 x $10) + (15 x $12) .......................... $297 (7 x $9) + (11 x $10) ............................................ $173


6-13

Quick Study 6-22B (15 minutes)

Goods available for sale

Inventory, January 1 ...................................................................... $180,000

Cost of goods purchased (net) ..................................................... 342,000

Goods available for sale (at cost) ................................................. 522,000

Net sales at retail .............................................................................. $675,000

Estimated cost of goods sold [$675,000 x (1 - 42%)] .......................... (391,500)

Estimated September 5 inventory destroyed ................................ $130,500

Quick Study 6-23 (10 minutes) a. Both IFRS and U.S. GAAP provide broad and similar guidance on the

accounting for items and costs making up merchandise inventory. Specifically, merchandise inventory includes all items that a company owns and holds for sale. Further, merchandise inventory includes costs of expenditures necessary, directly or indirectly, to bring those items to a salable condition and location.

b. Yes, companies reporting under IFRS can apply cost flow assumptions in assigning costs to inventory. FIFO and weighted average are two popular cost flow assumptions applied by companies reporting under IFRS. (LIFO is not presently acceptable under IFRS.)

c. U.S. GAAP prohibits any later increase in the recorded value of inventory that had been written down even if that decline in value is reversed through value increases in later periods. However, IFRS allows reversals of those write-downs up to the original acquisition cost.


6-14

EXERCISES Exercise 6-1 (10 minutes) 1. The consignor is Jolie Company. The consignee is China Company. The

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

2. The title will pass at ―destination‖ which is China Company’s receiving dock. Jolie should show the $850 in its inventory at year-end as Jolie retains title until the goods reach China Company.

Exercise 6-2 (10 minutes)

Cost of inventory (estate’s contents) Price ........................................................................................ $37,500 Transportation-in ................................................................... 1,200 Insurance on shipment .......................................................... 150 Cleaning and refurbishing ..................................................... 490 Total cost of inventory ........................................................... $39,340

Exercise 6-3 (30 minutes) a. Specific identification

Ending inventory—90 units from March 30, 80 units from March 20, and 55 units from beginning inventory

Ending Cost of Computations Inventory Goods Sold

(90 x $5.00) + (80 x $6.00) + (55 x $7.00) ......... $1,315 $2,820 - $1,315 .................................................. $1,505

Exercise 6-3 (Continued)


6-15

b. Weighted average perpetual


3/ 1 150 @ $7.000 = $1,050

3/10 90 @ $ 7.00 = $ 630 60 @ $7.000 = $ 420

3/20 220 @ $6.00 60 @ $7.000 = $1,740

220 @ $6.000 (avg. cost is $6.214*)

3/25 145 @ $6.214 = $ 901* 135 @ $6.214 = $ 839*

3/30 90 @ $5.00 135 @ $6.214 = $1,289

_____ 90 @ $5.000 $1,531 (avg. cost is $5.729*)

*rounded

c. FIFO Perpetual


3/ 1 150 @ $7.00 = $1,050

3/10 90 @ $7.00 = $ 630 60 @ $7.00 = $ 420

3/20 220 @ $6.00 60 @ $7.00 = $1,740 220 @ $6.00

3/25 60 @ $7.00 85 @ $6.00 = $ 930 135 @ $6.00 = $ 810

3/30 90 @ $5.00 _____ 135 @ $6.00 = $1,260 $1,560 90 @ $5.00

d. LIFO Perpetual


3/ 1 150 @ $7.00 = $1,050

3/10 90 @ $7.00 = $ 630 60 @ $7.00 = $ 420

3/20 220 @ $6.00 60 @ $7.00 = $1,740 220 @ $6.00

3/25 145 @ $6.00 = $ 870 60 @ $7.00 = $ 870 75 @ $6.00

3/30 90 @ $5.00 60 @ $7.00 _____ 75 @ $6.00 = $1,320 $1,500 90 @ $5.00


6-16

Exercise 6-3 (Concluded) Alternate Solution Format for FIFO and LIFO Perpetual

Ending Cost of Computations Inventory Goods Sold

c. FIFO (135 x $6.00) + (90 x $5.00) ............................................... $1,260 (90 x $7.00) + (60 x $7.00) + (85 x $6.00) ......................... $1,560 d. LIFO (60 x $7.00) + (75 x $6.00) + (90 x $5.00) ......................... $1,320 (90 x $7.00) + (145 x $6.00) ............................................... $1,500


PARK COMPANY Income Statements

For Month Ended March 31 Specific

Identification Weighted Average

FIFO

LIFO

Sales ...................................... $3,525 $3,525 $3,525 $3,525 (235 units x $15 price)

Cost of goods sold .............. 1,505 1,531 1,560 1,500 Gross profit .......................... 2,020 1,994 1,965 2,025 Expenses .............................. 1,600 1,600 1,600 1,600 Income before taxes ............ 420 394 365 425 Income tax expense (30%) ........ 126 118* 110* 128* Net income ........................... $ 294 $ 276 $ 255 $ 297

* Rounded to nearest dollar.

1. LIFO method results in the highest net income of $297. 2. Weighted average net income of $276 falls between the FIFO net

income of $255 and the LIFO net income of $297. 3. If costs were rising instead of falling, then the FIFO method would yield

the highest net income.


6-17

Exercise 6-5 (20 minutes) a. FIFO Perpetual


1/1 100 @ $10 = $ 1,000

1/10 90 @ $10 = $ 900 10 @ $10 = $ 100

3/14 250 @ $15 = $ 3,750 10 @ $10 = $ 3,850 250 @ $15

3/15 10 @ $10 120 @ $15 = $ 1,800 130 @ $15 = $2,050

7/30 400 @ $20 = $ 8,000 120 @ $15 = $ 9,800 400 @ $20

10/5 120 @ $15 180 @ $20 = $5,400 220 @ $20 = $ 4,400

10/26 600 @ $25 = $15,000 220 @ $20 _____ 600 @ $25 = $19,400 $8,350

b. LIFO Perpetual


1/1 100 @ $10 = $ 1,000

1/10 90 @ $10 = $ 900 10 @ $10 = $ 100

3/14 250 @ $15 = $ 3,750 10 @ $10 = $ 3,850 250 @ $15

3/15 10 @ $10 = $ 1,750 140 @ $15 = $2,100 110 @ $15

7/30 400 @ $20 = $ 8,000 10 @ $10 110 @ $15 = $ 9,750 400 @ $20

10/5 10 @ $10 300 @ $20 = $6,000 110 @ $15 = $ 3,750 100 @ $20

10/26 600 @ $25 = $15,000 10 @ $10 110 @ $15 100 @ $20 = $ 18,750 _____ 600 @ $25 $9,000


6-18

Exercise 6-5 (Concluded) Alternate Solution Format

Ending Cost of Inventory Goods Sold

a. FIFO: (600 x $25) + (220 x $20) ..................................................... $19,400 (90 x $10) + (10 x $10) + (130 x $15) + (120 x $15)+ (180 x $20) ...................................................... $8,350 b. LIFO: (10 x $10) + (110 x $15) + (100 x $20) + (600 x $25) ......... $18,750 (90 x $10) + (140 x $15) + (300 x $20) ................................. $9,000

FIFO Gross Margin

Sales Revenue (530 units sold x $40 selling price) ............... $21,200 Less: FIFO cost of goods sold ............................................... 8,350 Gross margin ............................................................................. $12,850

LIFO Gross Margin

Sales Revenue (530 units sold x $40 selling price) ............... $21,200 Less: LIFO cost of goods sold ............................................... 9,000 Gross margin ............................................................................ $12,200

Exercise 6-6 (15 minutes) a. Specific identification method—Cost of goods sold

Cost of goods available for sale ............................................. $27,750 Ending inventory under specific identification

3/14 purchase (100 @ $15) ............................................... $ 1,500 7/30 purchase (120 @ $20) ................................................ 2,400 10/26 purchase (600 @ $25) ................................................ 15,000

Total ending inventory under specific identification .......... 18,900 Cost of goods sold under specific identification ................ $ 8,850

b. Specific identification method—Gross margin

Sales Revenue (530 units sold x $40 selling price) .............. $21,200 Less: Specific identification cost of goods sold .................. 8,850 Gross margin ............................................................................ $12,350


6-19


Per Unit Total Total LCM Applied to Items


Helmets ........... 22 $50 $54 $1,100 $1,188 $1,100 Bats ................. 15 78 72 1,170 1,080 1,080 Shoes .............. 36 95 91 3,420 3,276 3,276 Uniforms ......... 40 36 36 1,440 1,440 1,440 $7,130 $6,984 $6,896

Lower of cost or market of inventory by product = $6,896 Exercise 6-8 (25 minutes)

1. Gross profit = $900,000 - $500,000 = $400,000 (for each year) 2. Year 2010 Year 2011 Year 2012

Sales .................................. $900,000 $900,000 $900,000 Cost of goods sold Beginning inventory ..... $200,000 $180,000 $200,000

Cost of purchases ......... 500,000 500,000 500,000

Good available for sale .... 700,000 680,000 700,000

Ending inventory ........... 180,000 200,000 200,000

Cost of goods sold ........ 520,000 480,000 500,000

Gross profit ...................... $380,000 $420,000 $400,000

Exercise 6-9 (20 minutes) 1. a. LIFO ratio computations

LIFO current ratio (2011) = $210/$190 = 1.1

LIFO inventory turnover (2011) = $730/ [($150+$100)/2] = 5.8

LIFO days’ sales in inventory (2011) = ($150/$730) x 365 = 75 days b. FIFO ratio computations

FIFO current ratio (2011) = $280*/$190 = 1.5

FIFO inventory turnover (2011) = $685/ [($220+$125)/2] = 4.0

FIFO days’ sales in inventory (2011) = ($220/$685) x 365 = 117.2 days

*FIFO inventory is $70 greater than LIFO inventory ($220 vs $150), thus FIFO current assets are also $70 greater.


6-20

Exercise 6-9 (Concluded) 2. The use of LIFO versus FIFO for Chess markedly impacts the ratios

computed. Specifically, LIFO makes Chess appear worse in comparison to FIFO numbers on the current ratio (1.1 vs. 1.5) but better on inventory turnover (5.8 vs. 4.0) and days’ sales in inventory (75 vs. 117.2). 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 the FIFO numbers for these ratios because they are considered more representative of current replacement costs for inventory.

Exercise 6-10 (20 minutes) 2010 Inventory turnover 2010 Days' Sales in Inventory $426,650/[($91,500 + $86,750)/2] $86,750/$426,650 x 365 days = 74.2 days

= 4.8 times 2011 Inventory turnover 2011 Days' Sales in Inventory $643,825/[($86,750 + $96,400)/2]

= 7.0 times $96,400/$643,825 x 365 days = 54.7 days Analysis comment: It appears that during a period of increasing sales, Ryder has been efficient in controlling its amount of inventory. Specifically inventory turnover increased by 2.2 times (7.0 - 4.8) from 2010 to 2011. In addition, days' sales in inventory decreased by 19.5 days (74.2 - 54.7).


6-21

Exercise 6-11A (20 minutes)


a. Specific Identification

(90 x $5.00) + (80 x $6.00) + (55 x $7) .......................... $1,315

$2,820 - $1,315 .............................................................. $1,505

b. Weighted Average

($2,820 / 460 units = $6.130* average cost per unit)

225 x $6.130 .................................................................. $1,379*

235 x $6.130 .................................................................. $1,441*

c. FIFO

(90 x $5.00) + (135 x $6.00) .......................................... $1,260

(150 x $7.00) + (85 x $6.00) ......................................... $1,560

d. LIFO

(150 x $7.00) + (75 x $6.00) .......................................... $1,500

(90 x $5.00) + (145 x $6.00) .......................................... $1,320

*rounded


6-22


Cost of goods available for sale = (100 x $10) + (250 x $15) + (400 x $20) + (600 x $25)

= $27,750


a. FIFO

(600 x $25) + (220 x $20) ............................................ $19,400

(90 x $10) + (10 x $10) + (130 x $15) + (120 x $15)+ (180 x $20) ........................................... $8,350

b. LIFO

(100 x $10) + (250 x $15) + (400 x $20) + (70 x $25) .... $14,500

530 x $25 ..................................................................... $13,250

c.

FIFO Gross Margin

Sales Revenue (530 units sold x $40 selling price) ............... $21,200 Less: FIFO cost of goods sold ............................................... 8,350 Gross margin ............................................................................. $12,850

LIFO Gross Margin

Sales Revenue (530 units sold x $40 selling price) ............... $21,200 Less: LIFO cost of goods sold ............................................... 13,250 Gross margin ............................................................................. $ 7,950


6-23


Ending Inventory

Cost of Goods Sold

a. Specific identification (100 x $2.90) + (100 x $2.80) + (100 x $2.50) ....... $820 $7,706 - $820 .......................................................... $6,886 b. Weighted average ($7,706/3,000 = $2.57*) $2.57 x 300 ............................................................. 771 $7,706 - $771 .......................................................... 6,935 c. FIFO (300 x $2.90) .......................................................... 870 (200 x $2.00) + (440 x $2.25) + (1,080 x $2.50) + (960 x $2.80) + (20 x 2.90) ...............................

6,836

d. LIFO (200 x $2.00) + (100 x $2.25) ................................. 625 (320 x $2.90) + (960 x $2.80) + (1,080 x $2.50) + (340 x $2.25) ......................................................

7,081

*rounded

Income effect: FIFO provides the lowest cost of goods sold, the highest gross profit, and the highest net income.


Ending Inventory

Cost of Goods Sold

a. Specific identification (100 x $2.00) + (100 x $2.30) + (100 x $2.50) ....... $680 $7,550 - $680 .......................................................... $6,870 b. Weighted average ($7,550/3,030 = $2.49*) $2.49 x 300 ............................................................. 747 $7,550 - $747 .......................................................... 6,803 c. FIFO (250 x $2.00) + (50 x $2.30) ................................... 615 (280 x $3.00) + (600 x $2.80) + (800 x $2.50) + (1,050 x $2.30) ..................................................

6,935

d. LIFO (280 x $3.00) + (20 x $2.80) ................................... 896 (250 x $2.00) + (1,100 x $2.30) + (800 x $2.50) + (580 x $2.80) .....................................................

6,654

*rounded

Income effect: FIFO provides the highest cost of goods sold, the lowest gross profit, and the lowest net income.


6-24

Exercise 6-15B (20 minutes) At Cost At Retail

Goods available for sale Beginning inventory ................................................... $ 31,900 $ 64,200 Cost of goods purchased .......................................... 57,810 98,400 Goods available for sale ............................................ 89,710 162,600 Deduct net sales at retail .............................................. 130,000 Ending inventory at retail .............................................. $ 32,600

Cost ratio: ($89,710/$162,600) = 0.55 ...............................

Ending inventory at cost ($32,600 x 55%) ................... $ 17,930 Exercise 6-16B (20 minutes)

Goods available for sale Inventory, January 1 ..................................................... $ 450,000

Net cost of goods purchased* ...................................... 1,604,500

Goods available for sale ............................................... 2,054,500

Less estimated cost of goods sold

Net sales ......................................................................... $2,000,000

Estimated cost of goods sold

[$2,000,000 x (1 – 30%)] ........................................... (1,400,000) Estimated March 31 inventory ........................................ $ 654,500

* $1,590,000 - $23,100 + $37,600 = $1,604,500

Exercise 6-17 (15 minutes) 1. Samsung generally applies the (weighted) average cost assumption when

assigning costs to its inventories. An exception is for its materials-in-transit where it applies specific identification.

2. Samsung recorded losses on valuation of inventories amounting to ￦651,296

million for 2008.

3. Under IFRS, Samsung would reverse inventory valuation losses if inventory values increased in subsequent periods. Specifically, it would reduce

inventory costs by ￦900 million in 2009 for the reversal. However, had

Samsung followed U.S. GAAP, it would have ignored the reversal in inventory

value and would not record the ￦900 million cost reduction in 2009.


6-25

PROBLEM SET A Problem 6-1A (40 minutes) 1. Compute cost of goods available for sale and units available for sale

Beginning inventory ........................... 50 units @ $50 $ 2,500

March 5 ................................................ 200 units @ $55 11,000

March 18 ............................................... 60 units @ $60 3,600

March 25 ............................................... 100 units @ $62 6,200

Units available ..................................... 410 units

Cost of goods available for sale $23,300

2. Units in ending inventory

Units available (from part 1) ............................ 410 units

Less: Units sold (210 + 80) .............................. 290 units

Ending Inventory (units) .................................. 120 units

3a. FIFO perpetual


Mar. 1 50 @ $50 = $ 2,500

Mar. 5 200 @ $55 = $11,000 50 @ $50 200 @ $55 = $13,500

Mar. 9 50 @ $50 = $ 2,500 160 @ $55 = $ 8,800

40 @ $55 = $ 2,200

Mar. 18 60 @ $60 = $ 3,600 40 @ $55 60 @ $60 = $ 5,800

Mar. 25 100 @ $62 = $ 6,200 40 @ $55 60 @ $60 100 @ $62 = $12,000

Mar. 29 40 @ $55 = $ 2,200 40 @ $60 = $ 2,400

20 @ $60 100 @ $62 = $ 7,400

$15,900


6-26

Problem 6-1A (Continued) 3b. LIFO perpetual


Mar. 1 50 @ $50 = $ 2,500

Mar. 5 200 @ $55 = $11,000 50 @ $50 200 @ $55 = $13,500

Mar. 9 200 @ $55 = $11,000 10 @ $50 = $ 500

40 @ $50 = $ 2,000

Mar. 18 60 @ $60 = $ 3,600 40 @ $50 60 @ $60 = $ 5,600

Mar. 25 100 @ $62 = $ 6,200 40 @ $50 60 @ $60 100 @ $62 = $11,800

Mar. 29

80 @ $62 = $ 4,960

______

40 @ $50 60 @ $60 20 @ $62 = $ 6,840

$16,460

3c. Weighted Average perpetual Date Goods Purchased Cost of Goods Sold Inventory Balance

Mar. 1 50 @ $50 = $ 2,500

Mar. 5 200 @ $55 = $11,000 50 @ $50 200 @ $55 = $13,500

(avg. = $54)

Mar. 9 210 @ $54 = $11,340 40 @ $54 = $ 2,160

(avg. = $54)

Mar. 18 60 @ $60 = $ 3,600 40 @ $54 60 @ $60 = $ 5,760

(avg. = $57.60)

Mar. 25 100 @ $62 = $ 6,200 40 @ $54 60 @ $60 100 @ $62 = $11,960

(avg. = $59.80)

Mar. 29 80 @ $59.8 = $ 4,784 120 @ $59.80 = $ 7,176 ________ (avg. = $59.80)

$16,124


6-27

Problem 6-1A (Concluded) 3d. Specific Identification


Mar. 1 50 @ $50 = $ 2,500

Mar. 5 200 @ $55 = $11,000 50 @ $50 200 @ $55 = $13,500

Mar. 9 40 @ $50 = $ 2,000 170 @ $55 = $ 9,350

10 @ $50 30 @ $55 = $ 2,150

Mar. 18 60 @ $60 = $ 3,600 10 @ $50 30 @ $55 60 @ $60 = $ 5,750

Mar. 25 100 @ $62 = $ 6,200 10 @ $50 30 @ $55 60 @ $60 100 @ $62 = $11,950

Mar. 29

20 @ $60 = $ 1,200 60 @ $62 = $ 3,720

______

10 @ $50 30 @ $55 40 @ $60 40 @ $62 = $ 7,030

$16,270

4.

FIFO

LIFO

Weighted Average

Specific Identifi-cation

Sales* ...................................... $25,450 $25,450 $25,450 $25,450

Less: Cost of goods sold ...... 15,900 16,460 16,124 16,270

Gross profit ............................. $ 9,550 $ 8,990 $ 9,326 $ 9,180

*Sales = (210 units x $85) + (80 units x $95) = $25,450


6-28

Problem 6-2A (40 minutes) 1. Calculate cost of goods available for sale and units available for sale

Beginning inventory ........................... 600 units @ $44 $26,400

Feb. 10 ................................................. 200 units @ $40 8,000

Mar. 13 ................................................. 100 units @ $20 2,000

Aug. 21 ................................................. 160 units @ $60 9,600

Sept. 5 ................................................. 280 units @ $48 13,440

Units available ..................................... 1,340 units

Cost of goods available for sale $59,440


Units available (from part 1) ............................ 1,340

Less: Units sold (400+200) .............................. 600

Ending Inventory (units) .................................. 740


6-29

Problem 6-2A (Continued)

3a. FIFO perpetual Date Goods Purchased Cost of Goods Sold Inventory Balance

1/1 600 @ $44 = $26,400

2/10 200 @ $40 = $ 8,000 600 @ $44 200 @ $40 = $34,400

3/13 100 @ $20 = $ 2,000 600 @ $44 200 @ $40 = $36,400 100 @ $20

3/15 400 @ $44 = $17,600 200 @ $44 200 @ $40 100 @ $20

8/21 160 @ $60 = $ 9,600 200 @ $44 200 @ $40 100 @ $20 = $28,400 160 @ $60

9/5 280 @ $48 = $13,440 200 @ $44 200 @ $40 100 @ $20 = $41,840 160 @ $60 280 @ $48

9/10 200 @ $44 = $ 8,800

______

200 @ $40 100 @ $20 160 @ $60 = $33,040 280 @ $48

$26,400

FIFO Alternate Solution Format

Cost of goods available for sale $59,440 Less: Cost of sales 400 @ $44 $17,600

200 @ $44 8,800 Total cost of goods sold 26,400 Ending Inventory $33,040 Proof of Ending Inventory 200 @ $40 $ 8,000 100 @ 20 2,000 160 @ 60 9,600 280 @ 48 13,440 Ending Inventory ................... 740 units $33,040

= $18,800


6-30

Problem 6-2A (Continued) 3b. LIFO perpetual Date Goods Purchased Cost of Goods Sold Inventory Balance

1/1 600 @ $44 = $26,400

2/10 200 @ $40 = $ 8,000 600 @ $44 200 @ $40 = $34,400

3/13 100 @ $20 = $ 2,000 600 @ $44 200 @ $40 = $36,400 100 @ $20

3/15 100 @ $20 200 @ $40 100 @ $44 = $14,400

500 @ $44 = $22,000

8/21 160 @ $60 = $ 9,600 500 @ $44 160 @ $60 = $31,600

9/5 280 @ $48 = $13,440 500 @ $44 160 @ $60 = $45,040 280 @ $48

9/10 200 @ $48 = $ 9,600

______

500 @ $44 160 @ $60 = $35,440 80 @ $48

$24,000

LIFO alternate solution format

Cost of goods available for sale $59,440 Less: Cost of sales 100 @ $20 $ 2,000 200 @ 40 8,000 100 @ 44 4,400 200 @ 48 9,600 Cost of Goods Sold 24,000 Ending Inventory $35,440 Proof of Ending Inventory 500 @ $44 $22,000 160 @ 60 9,600 80 @ 48 3,840 Ending Inventory… 740 units $35,440


6-31

Problem 6-2A (Continued)

3c. Specific Identification

Cost of goods available for sale ............. $59,440 Less: Cost of Goods Sold 500 @ $44 .................................... $22,000 100 @ $20 .................................... 2,000 Total cost of goods sold .......................... 24,000 Ending Inventory ...................................... $35,440

Proof of Ending Inventory 100 @ $44 $ 4,400 200 @ 40 8,000 160 @ 60 9,600 280 @ 48 13,440 Ending Inventory…. 740 units $35,440

3d. Weighted Average Date Goods Purchased Cost of Goods Sold Inventory Balance

1/1 600 @ $44.00 = $26,400

2/10 200 @ $40 = $ 8,000 600 @ $44.00 200 @ $40.00

(avg. cost is $43.00)

3/13 100 @ $20 = $ 2,000 600 @ $44.00 200 @ $40.00 = $36,400 100 @ $20.00

(avg. cost is $40.44*)

3/15 400 @ $40.44 = $16,176 500 @ $40.44 = $20,220

8/21 160 @ $60 = $ 9,600 500 @ $40.44 160 @ $60.00


9/5 280 @ $48 = $13,440 660 @ $45.18 280 @ $48.00 = $43,259**


9/10 200 @ $46.02 = $ 9,204 740 @ $46.02 = $34,055***

$25,380

* rounded to nearest cent ** rounded to nearest dollar *** Total cost of goods sold plus ending inventory = $25,380 + $34,055 = $59,435 (the $5

difference from cost of goods available for sale of $59,440 is due to rounding)

}

= $34,400

= $29,820


6-32

Problem 6-2A (Concluded) 4.

FIFO

LIFO


Weighted Average

Sales (600 x $75) .................... $45,000 $45,000 $45,000 $45,000


Gross profit ............................. $18,600 $21,000 $21,000 $19,620

5. The company’s manager would likely prefer the LIFO method or the

Specific Identification method since these methods’ gross profit is the largest at $21,000. This would give the manager his/her highest bonus based on gross profit. It is only by coincidence that the LIFO and Specific Identification method have the same cost of goods sold and gross profit. This would not necessarily be the case.


6-33

Problem 6-3A (50 minutes)

Per Unit Total Total LCM Applied to Items Inventory Items Units Cost Market Cost Market

Audio equipment:

Receivers .................... 335 $ 90 $ 98 $ 30,150 $ 32,830 $ 30,150

CD players .................. 250 111 100 27,750 25,000 25,000

MP3 players ............... 316 86 95 27,176 30,020 27,176

Speakers..................... 194 52 41 10,088 7,954 7,954

Video equipment:

Handheld LCDs ......... 470 150 125 70,500 58,750 58,750

VCRs ........................... 281 93 84 26,133 23,604 23,604

Camcorders ............... 202 310 322 62,620 65,044 62,620

Car audio equip:

Satellite radios ........... 175 70 84 12,250 14,700 12,250

CD/MP3 radios........... 160 97 105 15,520 16,800 15,520 Total ............................... $282,187 $263,024

1. Lower of cost or market for inventory applied separately = $263,024 2.

Dec 31 Cost of Goods Sold ..................................................... 19,163 Merchandise Inventory ......................................... 19,163 To adjust inventory cost to market.

$19,163 = $282,187 - $263,024


6-34

Problem 6-4A (35 minutes) Part 1 (a)

Cost of goods sold 2010 2011 2012

Reported ....................................... $ 725,000 $ 955,000 $ 790,000 Adjustments: 12/31/2010 error ...... - 50,000 + 50,000 12/31/2011 error ...... . + 20,000 - 20,000 Corrected ..................................... $ 675,000 $1,025,000 $ 770,000 (b)

Net income 2010 2011 2012

Reported ....................................... $ 268,000 $ 275,000 $ 250,000 Adjustments: 12/31/2010 error ...... + 50,000 - 50,000 12/31/2011 error ...... . - 20,000 + 20,000 Corrected ..................................... $ 318,000 $ 205,000 $ 270,000 (c)

Total current assets 2010 2011 2012

Reported ....................................... $1,247,000 $1,360,000 $1,230,000 Adjustments: 12/31/2010 error ...... + 50,000 12/31/2011 error ...... . - 20,000 . Corrected ..................................... $1,297,000 $1,340,000 $1,230,000 (d)

Equity 2010 2011 2012

Reported ....................................... $1,387,000 $1,580,000 $1,245,000 Adjustments: 12/31/2010 error ...... + 50,000 12/31/2011 error ...... _________ - 20,000 . Corrected ..................................... $1,437,000 $1,560,000 $1,245,000

Part 2 Total net income for the combined three-year period ($793,000) 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.

Part 3 The understatement of inventory by $50,000 results in an overstatement of cost of goods sold by that same amount. The $50,000 overstatement of cost of goods sold results in an understatement of gross profit by the same amount. This understatement of gross profit carries through to an understatement of net income. Since the understated net income is closed to equity, the final equity figure is understated by the amount of the inventory understatement.


6-35

Problem 6-5AA (25 minutes)

Part 1

Number and total cost of units available for sale: 20,000 units in beginning inventory @ $15 .......................... $ 300,000 28,000 units purchased @ $18 ............................................... 504,000 30,000 units purchased @ $22 ............................................... 660,000 20,000 units purchased @ $24 ............................................... 480,000 33,000 units purchased @ $27 ............................................... 891,000 131,000 units available for sale .............................................. $2,835,000

Part 2 a. FIFO periodic Total cost of 131,000 units available for sale ........................ $2,835,000 Less ending inventory on a FIFO basis 33,000 units @ $27 ................................................................ $891,000 2,000 units @ $24 ................................................................ 48,000 939,000 Cost of units sold ..................................................................... $1,896,000

b. LIFO periodic Total cost of 131,000 units available for sale ........................ $2,835,000 Less ending inventory on a LIFO basis 20,000 beginning inventory units @ $15 ............................. $300,000 15,000 units @ $18 ................................................................ 270,000 570,000 Cost of units sold ..................................................................... $2,265,000

c. Weighted average periodic Total cost of 131,000 units available for sale ........................ $2,835,000 Less ending inventory at weighted average ($2,835,000/131,000) x 35,000 .............................................. 757,443 *

Cost of units sold ..................................................................... $2,077,557 *

* Amount can slightly vary due to differences in rounding.


6-36


Part 1

BOTCH CORP. Income Statements Comparing FIFO, LIFO, and Weighted Average

For Year Ended December 31, 2011

FIFO

LIFO Weighted Average

Sales .............................................................. $247,500 $247,500 $247,500

Cost of goods sold

Inventory, Dec. 31, 2010 ............................. 10,800 10,800 10,800

Cost of purchases....................................... 123,500 123,500 123,500

Cost of goods available for sale ................ 134,300 134,300 134,300

Inventory, Dec. 31, 2011 ............................. 22,000 18,400 20,662 *

Cost of goods sold ..................................... 112,300 115,900 113,638 *

Gross profit ................................................... 135,200 131,600 133,862 *

Expenses ....................................................... 33,000 33,000 33,000

Income before taxes ..................................... 102,200 98,600 100,862 *

Income taxes expense ................................. 30,660 29,580 30,259 *

Net income .................................................... $ 71,540 $ 69,020 $ 70,603 *

*Amounts can slightly vary due to differences in rounding.

Supporting calculations:

FIFO

LIFO

Weighted Average

Dec. 31, 2010, inventory (600 x $18). ................ $ 10,800 $ 10,800 $ 10,800 Purchases 1,500 x $19 = $28,500 700 x $20 = 14,000 400 x $21 = 8,400 3,300 x $22 = 72,600 $123,500 $123,500 $123,500

Dec. 31, 2011, inventory (6,500 - 5,500 = 1,000 units) FIFO: 1,000 x $22 = $22,000 $ 22,000 LIFO: 600 x $18 = $10,800

400 x $19 = $ 7,600 $ 18,400

W.A.: ($134,300/6,500) x 1,000 $ 20,662* *Amounts can slightly vary due to differences in rounding.


6-37

Problem 6-6AA (Concluded) Part 2 If Botch, Corp. had been experiencing declining costs in the acquisition of inventory, we would observe the opposite results in our comparisons. Specifically, LIFO would have resulted in a higher ending inventory, lower cost of goods sold, higher gross profit, and higher net income. FIFO would have resulted in a lower ending inventory, higher cost of goods sold, lower gross profit, and lower net income. Part 3 Advantages: LIFO: Given the cost trends in the problem, the advantage of using LIFO is that the lower net income will result in a lower tax obligation (tax deferral). Also, LIFO is likely to better match current costs against revenues. FIFO: The advantage of using FIFO is that the inventory figure reported on the balance sheet is likely similar to the current replacement cost. Disadvantages: LIFO: Given the cost trends in the problem, the disadvantage of using LIFO is that the inventory figure, which is also reported on the income statement, will likely be understated in comparison to the current replacement costs. FIFO: The disadvantage of using FIFO is that it will produce a greater tax obligation for the current period as a result of a higher reported net income.


6-38


Part 1

NILSON COMPANY Estimated Inventory

December 31 At Cost At Retail

Goods available for sale Beginning inventory............................................ $ 471,350 $ 927,150 Cost of goods purchased ................................... 3,276,030 6,279,350 Goods available for sale ..................................... $3,747,380 $7,206,500

Sales ....................................................................... 5,495,700

Less: Sales returns ............................................... (44,600) Net sales ................................................................. 5,451,100

Ending inventory at retail ($7,206,500 - $5,451,100) $1,755,400 Cost-to-retail ratio: $3,747,380/$7,206,500 = 0.52 or 52%

Ending inventory at cost ($1,755,400 x 52%) ................. $ 912,808

Part 2 Estimated physical inventory at cost: $1,675,800 x 52% = $871,416

NILSON COMPANY Inventory Shortage


Estimated inventory (from part 1) ............................ $ 912,808 $ 1,755,400

Physical inventory (given) ........................................ 871,416 1,675,800

Inventory shortage .................................................... $ 41,392 $ 79,600


6-39

Problem 6-8AB (25 minutes)

WAYMAN COMPANY Estimated Inventory at March 31

At Cost At Retail


Inventory, January 1 .............................................. $ 300,260

Cost of goods purchased ...................................... 939,050

Goods available for sale ........................................ 1,239,310


Sales ........................................................................ $1,191,150

Less sales returns ................................................. (9,450)

Net sales ................................................................. $1,181,700

Estimated cost of goods sold

[$1,181,700 x (1 – 35%)] .................................... (768,105)

Estimated March 31 inventory ................................. $ 471,205


6-40

PROBLEM SET B Problem 6-1B (40 minutes) 1. Compute cost of goods available for sale and units available for sale

Beginning inventory ........................... 15 units @ $3,000 $ 45,000

April 6 .................................................. 35 units @ $3,500 122,500

April 17 ................................................. 8 units @ $4,500 36,000

April 25 ................................................. 10 units @ $4,580 45,800

Units available ..................................... 68 units

Cost of goods available for sale ........ $249,300


Units available (from part 1) ............................ 68 units

Less: Units sold (18 + 30) ................................ 48 units

Ending Inventory (units) .................................. 20 units

3a. FIFO perpetual


Apr. 1 15 @ $3,000 = $ 45,000

Apr. 6 35 @ $3,500 = $122,500 15 @ $3,000 35 @ $3,500 = $167,500

Apr. 9 15 @ $3,000 = $ 45,000 3 @ $3,500 = $ 10,500

32 @ $3,500 = $112,000

Apr. 17 8 @ $4,500 = $ 36,000 32 @ $3,500 8 @ $4,500 = $148,000

Apr. 25 10 @ $4,580 = $ 45,800 32 @ $3,500 8 @ $4,500 10 @ $4,580 = $193,800

Apr. 30

30 @ $3,500 = $105,000 _______

2 @ $3,500 8 @ $4,500 10 @ $4,580 = $ 88,800

$160,500


6-41

Problem 6-1B (Continued) 3b. LIFO perpetual


Apr. 1 15 @ $3,000 = $ 45,000

Apr. 6 35 @ $3,500 = $122,500 15 @ $3,000 35 @ $3,500 = $167,500

Apr. 9 18 @ $3,500 = $ 63,000 15 @ $3,000 17 @ $3,500 = $104,500

Apr. 17 8 @ $4,500 = $ 36,000 15 @ $3,000 17 @ $3,500 8 @ $4,500 = $140,500

Apr. 25 10 @ $4,580 = $ 45,800 15 @ $3,000 17 @ $3,500 8 @ $4,500 10 @ $4,580 = $186,300

Apr. 30

10 @ $4,580 = $ 45,800 8 @ $4,500 = $ 36,000

12 @ $3,500 = $ 42,000

15 @ $3,000 5 @ $3,500 = $ 62,500

$186,800

3c. Weighted Average perpetual


Apr. 1 15 @ $3,000 = $ 45,000

Apr. 6 35 @ $3,500 = $122,500 15 @ $3,000 35 @ $3,500 = $167,500

(avg. = $3,350)

Apr. 9 18 @ $3,350 = $ 60,300 32 @ $3,350 = $107,200 (avg. = $3,350)

Apr. 17 8 @ $4,500 = $ 36,000 32 @ $3,350 8 @ $4,500 = $143,200

(avg. = $3,580)

Apr. 25 10 @ $4,580 = $ 45,800 32 @ $3,350 8 @ $4,500 10 @ $4,580 = $189,000

(avg. = $3,780)

Apr. 30 30 @ $3,780 = $113,400 20 @ $3,780 = $ 75,600 _________ (avg. = $3,780)

$173,700


6-42

Problem 6-1B (Concluded) 3d. Specific Identification


Apr. 1 15 @ $3,000 = $ 45,000

Apr. 6 35 @ $3,500 = $122,500 15 @ $3,000 35 @ $3,500 = $167,500

Apr. 9 8 @ $3,000 = $ 24,000 10 @ $3,500 = $ 35,000

7 @ $3,000 25 @ $3,500 = $108,500

Apr. 17 8 @ $4,500 = $ 36,000 7 @ $3,000

25 @ $3,500 8 @ $4,500 = $144,500

Apr. 25 10 @ $4,580 = $ 45,800 7 @ $3,000 25 @ $3,500 8 @ $4,500 10 @ $4,580 = $190,300

Apr. 30

20 @ $3,500 = $ 70,000

10 @ $4,580 = $ 45,800

7 @ $3,000 5 @ $3,500 8 @ $4,500 = $ 74,500

$174,800

4.

FIFO

LIFO

Weighted Average


Sales* ...................................... $636,000 $636,000 $636,000 $636,000


Gross profit ............................. $475,500 $449,200 $462,300 $461,200

*Sales = (18 units x $12,000) + (30 units x $14,000) = $636,000


6-43

Problem 6-2B (40 minutes) 1. Calculate cost of goods available for sale and units available for sale:

Beginning inventory ........................... 600 units @ $55 = $ 33,000

Jan. 10 .................................................. 450 units @ $56 = 25,200

Feb. 13 .................................................. 200 units @ $57 = 11,400

July 21 .................................................. 230 units @ $58 = 13,340

Aug. 5 .................................................. 345 units @ $59 = 20,355

Units available ..................................... 1,825 units

Cost of goods available for sale ........ $103,295

2. Units in ending inventory:

Units available (from part 1) .................... 1,825

Less: Units sold (given) ........................... 765

Ending Inventory ...................................... 1,060


6-44

Problem 6-2B (Continued)

3a. FIFO perpetual


1/1 600 @ $55 = $33,000

1/10 450 @ $56 = $25,200 600 @ $55 450 @ $56

2/13 200 @ $57 = $11,400 600 @ $55 450 @ $56 = $69,600 200 @ $57

2/15 430 @ $55 = $23,650 170 @ $55 450 @ $56 = $45,950 200 @ $57

7/21 230 @ $58 = $13,340 170 @ $55 450 @ $56 200 @ $57 230 @ $58

8/5 345 @ $59 = $20,355 170 @ $55 450 @ $56 200 @ $57 = $79,645 230 @ $58 345 @ $59

8/10 170 @ $55 165 @ $56 = $18,590

______

285 @ $56 200 @ $57 = $61,055 230 @ $58 345 @ $59

$42,240

Alternate FIFO solution format

Cost of goods available for sale ........................... $103,295 Less: Cost of Goods Sold 430 @ $55 ............................................................... $23,650 170 @ 55 ............................................................... 9,350 165 @ 56 ............................................................... 9,240 765 Total cost of goods sold ........................................ 42,240 Ending Inventory .................................................... $ 61,055 Proof of Ending Inventory 285 @ $56 $ 15,960 200 @ 57 11,400 230 @ 58 13,340 345 @ 59 20,355 Ending Inventory…… 1,060 units $ 61,055

= $59,290

= $58,200


6-45

Problem 6-2B (Continued) 3b. LIFO perpetual Date Goods Purchased Cost of Goods Sold Inventory Balance

1/1 600 @ $55 = $33,000

1/10 450 @ $56 = $25,200 600 @ $55 450 @ $56 = $58,200

2/13 200 @ $57 = $11,400 600 @ $55 450 @ $56 200 @ $57 = $69,600

2/15 200 @ $57 230 @ $56 = $24,280

600 @ $55 220 @ $56 = $45,320

7/21 230 @ $58 = $13,340 600 @ $55 220 @ $56 230 @ $58 = $58,660

8/5 345 @ $59 = $20,355 600 @ $55 220 @ $56 230 @ $58 345 @ $59

8/10 335 @ $59 = $19,765

______

600 @ $55 220 @ $56 230 @ $58 10 @ $59

$44,045

Alternate LIFO solution format

Cost of goods available for sale ........................... $103,295 Less: Cost of Goods Sold 200 @ $57 ............................................................... $11,400 230 @ 56 ............................................................... 12,880 335 @ 59 ............................................................... 19,765 765 Cost of Goods Sold ................................................ 44,045 Ending Inventory ...................................................... $ 59,250 Proof of Ending Inventory 600 @ $55 $ 33,000 220 @ 56 12,320 230 @ 58 13,340 10 @ 59 590 Ending inventory ...................................................... 1,060 units $ 59,250

= $59,250

= $79,015


6-46

Problem 6-2B (Continued)

3c. Specific Identification

Cost of goods available for sale ........ $103,295 Less: Cost of Goods Sold 600 @ $55 ............................................ $33,000 165 @ $57 ............................................ 9,405 765 ....................................................... Cost of Goods Sold ............................. 42,405 Ending inventory ................................. $ 60,890

Proof of Ending Inventory 450 @ $56 $25,200 35 @ 57 1,995 230 @ 58 13,340 345 @ 59 20,355

Ending inventory .................. 1,060 Units $60,890

3d. Weighted Average


1/1 600 @ $55.00 = $33,000

1/10 450 @ $56 = $25,200 600 @ $55.00 450 @ $56.00


2/13 200 @ $57 = $11,400 600 @ $55.00 450 @ $56.00 = $69,600 200 @ $57.00


2/15 430@ $55.68 = $23,942** 820 @ $55.68 = $45,658**

7/21 230 @ $58 = $13,340 820 @ $55.68 230 @ $58.00


8/5 345 @ $59 = $20,355 820 @ $55.68 230 @ $58.00 = $79,353** 345 @ $59.00


8/10 335@ $56.88 = $19,055** 1,060@ $56.88 $42,997

* rounded to nearest cent ** rounded to nearest dollar

Note: Total cost of goods sold plus ending inventory = $42,997 + $60,293 = $103,290. The $5 difference from the cost of goods available for sale of $103,295 is due to rounding.

= $58,200

= $58,998**

= $60,293**


6-47

Problem 6-2B (Concluded) 4.

FIFO

LIFO

Specific Identifica-

tion

Weighted Average

Sales (765 x $90) .......................... $68,850 $68,850 $68,850 $68,850

Less: Cost of goods sold ............ 42,240 44,045 42,405 42,997

Gross profit .................................. $26,610 $24,805 $26,445 $25,853

5. The manager of Venus Company likely will prefer the FIFO method

because it would yield the largest gross profit. This would give the manager his/her highest bonus based on gross profit.


6-48

Problem 6-3B (50 minutes)

Per Unit Total Total LCM Applied

Inventory Items Units Cost Market Cost Market to Items

Office furniture

Desks .................... 436 $261 $305 $113,796 $132,980 $113,796

Credenzas ............ 295 227 256 66,965 75,520 66,965

Chairs .................... 587 49 43 28,763 25,241 25,241

Bookshelves ........ 321 93 82 29,853 26,322 26,322

Filing cabinets

Two-drawer .......... 214 81 70 17,334 14,980 14,980

Four-drawer ......... 398 135 122 53,730 48,556 48,556

Lateral ................... 175 104 118 18,200 20,650 18,200

Office equipment

Fax machines ...... 430 168 200 72,240 86,000 72,240

Copiers ................. 545 317 288 172,765 156,960 156,960

Telephones .......... 352 125 117 44,000 41,184 41,184

Total ......................... $617,646 $584,444

1. Lower of cost or market for inventory applied separately = $584,444 2.

Dec 31 Cost of Goods Sold ..................................................... 33,202 Merchandise Inventory ......................................... 33,202 To adjust inventory cost to market.

$33,202 = $617,646 - $584,444


6-49

Problem 6-4B (35 minutes) Part 1 (a)

Cost of goods sold 2010 2011 2012

Reported ................................... $ 655,000 $ 957,000 $ 799,000 Adjustments: 12/31/2010 error + 70,000 - 70,000 12/31/2011 error _________ - 55,000 + 55,000 Corrected .................................. $ 725,000 $ 832,000 $ 854,000 (b)

Net income 2010 2011 2012

Reported ................................... $ 225,000 $ 277,000 $ 244,000 Adjustments: 12/31/2010 error - 70,000 + 70,000 12/31/2011 error _________ + 55,000 - 55,000 Corrected .................................. $ 155,000 $ 402,000 $ 189,000 (c)

Total current assets 2010 2011 2012

Reported ................................... $1,251,000 $1,360,000 $1,200,000 Adjustments: 12/31/2010 error - 70,000 12/31/2011 error _________ + 55,000 _________ Corrected .................................. $1,181,000 $1,415,000 $1,200,000 (d)

Equity 2010 2011 2012

Reported ........................................... $1,387,000 $1,520,000 $1,250,000 Adjustments: 12/31/2010 error - 70,000 12/31/2011 error _________ + 55,000 _________ Corrected .......................................... $1,317,000 $1,575,000 $1,250,000

Part 2 Total net income for the combined three-year period ($746,000) 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.

Part 3 The overstatement of inventory by $70,000 results in an understatement of cost of goods sold by that same amount. The $70,000 understatement of cost of goods sold results in an overstatement of gross profit by the same amount. This overstatement of gross profit carries through to an overstatement of net income. Since the overstated net income is closed to equity, the final equity figure is overstated by the amount of the inventory overstatement.


6-50

Problem 6-5BA (25 minutes)

Part 1

Number and total cost of units available for sale 6,300 units in beginning inventory @ $35 ............................. $ 220,500 10,500 units purchased @ $33 ................................................. 346,500 13,000 units purchased @ $32 ................................................. 416,000 12,000 units purchased @ $29 ................................................. 348,000 15,500 units purchased @ $26 ................................................. 403,000 57,300 units available for sale .................................................. $1,734,000

0 Part 2 a. FIFO periodic

Total cost of 57,300 units available for sale............. $1,734,000 Less ending inventory on a FIFO basis 15,500 units @ $26................................................... $403,000 1,000 units @ $29................................................... 29,000 432,000 Cost of units sold ....................................................... $1,302,000

b. LIFO periodic

Total cost of 57,300 units available for sale............. $1,734,000 Less ending inventory on a LIFO basis 6,300 beg. inv. units @ $35 ..................................... $220,500 10,200 units @ $33..................................................... 336,600 557,100 Cost of units sold ....................................................... $1,176,900

c. Weighted average periodic

Total cost of 57,300 units available for sale............. $1,734,000 Less ending inventory at weighted average cost ($1,734,000/57,300) x 16,500 units.......................... 499,319* Cost of units sold ....................................................... $1,234,681*

*Amount can slightly vary due to differences in rounding.


6-51

Problem 6-6BA (30 minutes)

Part 1

RIKKERS CORP. Income Statements Comparing FIFO, LIFO, and Weighted Average

For Year Ended December 31, 2011

FIFO

LIFO Weighted Average

Sales .............................................................. $245,000 $245,000 $245,000

Cost of goods sold Inventory, Dec. 31, 2010 ............................. 42,920 42,920 42,920

Cost of purchases....................................... 161,900 161,900 161,900

Cost of goods available for sale ................ 204,820 204,820 204,820

Inventory, Dec. 31, 2011 ............................. 54,560 48,820 51,512 *

Cost of goods sold ..................................... 150,260 156,000 153,308 *

Gross profit ................................................... 94,740 89,000 91,692 *

Expenses ....................................................... 35,000 35,000 35,000

Income before taxes ..................................... 59,740 54,000 56,692 *

Income taxes expense ................................. 14,935 13,500 14,173 *

Net income .................................................... $ 44,805 $ 40,500 $ 42,519 *

*Amounts can slightly vary due to differences in rounding.

Supporting calculations:

FIFO

LIFO

Weighted Average

Dec. 31, 2010, inventory (740 x $58) .................. $ 42,920 $ 42,920 $ 42,920 Purchases 700 x $59 = $41,300 600 x $61 = 36,600 500 x $64 = 32,000 800 x $65 = 52,000 $161,900 $161,900 $161,900 Dec. 31, 2011, inventory FIFO: 800 x $65 = $52,000

40 x $64 = 2,560 $ 54,560

LIFO: 740 x $58 = $42,920 100 x $59 = 5,900 $ 48,820

W.A.: ($204,820/3,340) x 840 $ 51,512* *Amounts can slightly vary due to differences in rounding.


6-52

Problem 6-6BA (Concluded)

Part 2 If Rikkers Corp. had been experiencing decreasing costs in the acquisition of inventory, we would observe the opposite results in our comparisons. Specifically, LIFO would have resulted in a higher ending inventory, lower cost of goods sold, higher gross profit, and higher net income. FIFO would have resulted in a lower ending inventory, higher cost of goods sold, lower gross profit, and lower net income. Part 3 Advantages: LIFO: Assuming a trend of increasing costs, the advantage of using LIFO is that the lower net income will result in a lower tax obligation (tax deferral). Also, LIFO is likely to better match current costs against revenues. FIFO: The advantage of using FIFO is that the inventory figure reported on the balance sheet is likely similar to the current replacement cost. Disadvantages: LIFO: Assuming a trend of increasing costs, the disadvantage of using LIFO is the inventory figure, which is also reported on the income statement, will likely be understated in comparison to the current replacement costs. FIFO: The disadvantage of using FIFO is that it will produce a greater tax obligation for the current period as a result of a higher reported net income.


6-53

Problem 6-7BB (25 minutes)

Part 1

SATURN CO. Estimated Inventory


Goods available for sale: Beginning inventory .............................................. $ 81,670 $114,610 Cost of goods purchased ...................................... 492,250 751,730 Goods available for sale ........................................ $573,920 $866,340

Sales .......................................................................... 786,120 Less: Sales returns .................................................. (4,480) Net sales ................................................................... 781,640

Ending inventory at retail ($866,340 - $781,640) ... $ 84,700 Cost ratio: $573,920/$866,340 = 0.66 or 66%

Ending inventory at cost ($84,700 x 66%) ..................... $ 55,902

Part 2 Estimated physical inventory at cost: $78,550 x 66% = $51,843

SATURN CO. Inventory Shortage


Estimated inventory (from part 1) ............................ $55,902 $84,700

Physical inventory (given) ........................................ 51,843 78,550

Inventory shortage .................................................... $ 4,059 $ 6,150


6-54

Problem 6-8BB (25 minutes)

ERNST EQUIPMENT CO. Estimated Inventory at March 31

At Cost At Retail


Inventory, January 1 ....................................... $ 752,880

Cost of goods purchased ............................... 2,159,630

Goods available for sale ................................. 2,912,510


Sales ................................................................. $3,710,250

Less sales returns .......................................... (74,200)

Net sales .......................................................... $3,636,050

Estimated cost of goods sold [$3,636,050 x (1 - 30%)] .............................. (2,545,235) Estimated March 31 inventory .......................... $ 367,275

SERIAL PROBLEM — SP 6 Serial Problem — SP 6, Business Solutions (20 minutes) Part A 1.

Per Unit Total Total


Office productivity ........... 3 $ 76 $ 74 $228 $222 Desktop publishing.......... 2 103 100 206 200 Accounting ....................... 3 90 96 270 288 Totals ................................ $704 $710

Assuming LCM is applied to the ―whole of inventory,‖ the $704 total cost

of inventory is less than the $710 total market value. Thus, the company would not adjust the currently reported inventory value of $704.


6-55

Serial Problem — SP 6, Business Solutions (concluded) 2.

Per Unit Total Total LCM Applied

Inventory Items Units Cost Market Cost Market To Items

Office productivity ........ 3 $ 76 $ 74 $228 $222 $222 Desktop publishing ...... 2 103 100 206 200 200 Accounting .................... 3 90 96 270 288 270 $704 $710 $692

Assuming LCM is applied to the ―items of inventory,‖ the $692 market

value (per items) is less than the $704 total cost of inventory. Thus, the company must adjust the currently reported inventory value from $704 to the LCM value of $692.

Part B 1. Ratio computations for the three months ended March 31, 2012: Inventory Turnover = Cost of Goods Sold / Average Inventory = $14,052 / [($0 + $704)/2] = 40 times (Because this is the first period of carrying

inventory, it is acceptable to substitute ending inventory for average inventory. This would yield a turnover of 20 times.)

Days’ Sales in Inventory = (Ending Inventory/Cost of Goods Sold) x 365 = ($704 / $14,052) x 365 = 18.3 days 2. Business Solutions outperforms its competitors on both ratios. Its

inventory turnover is 40 (or 20) times versus the competitors’ 15 times. Also, its days’ sales in inventory is 18.3 days versus the competitors’ 25 days. Thus, Business Solutions appears to be successfully managing its inventory.


6-56

Reporting in Action — BTN 6-1 ($ thousands for all parts)

1. Ending inventories at February 27, 2010: $621,611. Ending inventories at February 28, 2009: $682,400. 2. February 27, 2010: $621,611/$10,204,409 = 0.061 or 6.1% February 28, 2009: $682,400/ $ 8,101,372 = 0.084 or 8.4% 3. Research In Motion’s inventories are less than a fourth of its largest

asset and more than 4 times its smallest asset as of February 27, 2010. Although not the largest asset, merchandise inventories are an important item for Research In Motion and should command management’s attention.

4. Reviewing notes to its financial statements, we see Note 1 under the

subheading ―inventories‖ that Research In Motion’s raw materials are stated at the lower of cost and replacement cost. Work in process and finished goods inventories are stated at the lower of cost and net realizable value. Research In Motion uses the first-in-first-out basis to determine cost.

5. a. Inventory turnover = Average inventory = ($621,611 + $682,400)/2 = $652,006 Inventory turnover = $8,368,958 / $652,006 = 12.8 times b. Days’ sales in inventory = x 365 = ($621,611/$8,368,958) x 365 = 27.1 days 6. Solution depends on the financial statement information obtained.

Cost of sales

Average inventory

Ending inventory

Cost of sales


6-57

Comparative Analysis — BTN 6-2 ($ millions)

1. Inventory turnover = Research In Motion — current year Inventory turnover = = 12.8 times Research In Motion — one year prior Inventory turnover = = 11.1 times Apple — current year Inventory turnover = = 53.3 times Apple — one year prior Inventory turnover = = 56.8 times

Cost of sales Average inventory

$5,968

($682 + $396)/2

$8,369

($622 + $682)/2

$24,294

($509 + $346)/2

$25,683

($455 + $509)/2


6-58

Comparative Analysis (Concluded) 2. Days’ sales in inventory = x 365 Current year — Research In Motion’s days’ sales in inventory x 365 = 27.1 days One year prior —Research In Motion’s days’ sales in inventory x 365 = 41.7 days Two years prior—Research In Motion’s days’ sales in inventory x 365 = 49.3 days

Current year — Apple’s days’ sales in inventory x 365 = 6.5 days One year prior —Apple’s days’ sales in inventory x 365 = 7.6 days

Two years prior—Apple’s days’ sales in inventory x 365 = 7.7 days 3. For all years examined here, Apple manages its inventory more

efficiently than does Research In Motion. Apple’s inventory turnover is higher, and its days’ sales in inventory is shorter. Apple compares favorably to (exceeds) the industry average of 10 for inventory turnover; Research In Motion’s inventory turnover slightly exceeds the industry average.

Ending Inventory

Costs of Goods Sold

$682

$5,968

$622

$8,369

$ 509

$24,294

$455

$25,683

$396

$2,929

$346

$16,426


6-59

Ethics Challenge — BTN 6-3 1. Profit Margin: In an economic environment of rising costs, the use of

FIFO results in a lower cost of goods sold than LIFO. If cost of goods sold is lower, then net income will be higher. A higher net income will improve the profit margin ratio, which is calculated as net income divided by net sales.

Current Ratio: With rising costs, FIFO results in the most recent, higher

costs being reflected in ending inventory. This means that the balance sheet FIFO inventory figure will be larger than under LIFO. In the numerator of the current ratio, inventory is included as part of the current asset total. A larger inventory from FIFO results in a larger numerator and, therefore, a larger current ratio than under LIFO.

2. First, it is true that managers have discretion in choosing an inventory costing method. It appears, however, that Golf Mart’s owner does not understand that changing methods can only be done very selectively over time. A change in method must be justified by management for improving the financial reporting of the company.

Second, the consistency concept does not allow frequent changes in

inventory costing methods by management. If Golf Mart’s owner can justify the method change as improving the financial reports of the company, then the owner’s action is ethical. However, the owner must realize that changing methods can only be an infrequent occurrence given that consistency in financial reporting is required.

Third, the full disclosure principle requires the owner to disclose to the

bank that the company has implemented a change in inventory costing method from LIFO to FIFO.

Finally, if LIFO is currently being used for tax reporting, then the tax

reporting method must also change due to the LIFO Conformity Rule—which demands that if LIFO is used for tax reporting, it must be used for financial reporting.


6-60

Communicating in Practice — BTN 6-4

[Note: An acceptable memorandum format should be used.] The body of the memo would likely recommend use of the LIFO method for this start-up business. The memo should explain that this would allow for the matching of the most recent (higher) costs against revenue through cost of goods sold. It should further explain that this would result in a lower net income (and taxable income) and, therefore, lower tax (cash) payments. The justification for this method is a better matching of current costs against revenue to more fairly reflect the results of operation. A statement could be made that the actual physical flow of goods does not dictate the inventory method a business uses.

Taking It to the Net — BTN 6-5 1. Polaris manufactures off-road vehicles such as all terrain vehicles

(ATV) and snowmobiles, and on-road vehicles such as motorcycles.

2. Its summary of significant accounting policies (Note 1) reports: ―Inventories are stated at the lower of cost (first-in, first-out method) or market.‖

3. Its gross margin for 2009 is ($ thousands)

Sales ..................................................................... $1,565,887 Cost of sales ........................................................ (1,172,668) Gross margin ....................................................... $ 393,219

Gross margin ratio is: $393,219 / $1,565,887 = 0.251 or 25.1% Comment: Its gross margin ratio is slightly lower (less favorable) than

the industry average gross margin ratio of 27%. 4. 2009 Inventory turnover* = $1,172,668 / [($179,315 + $222,312)/2] = 5.8 times 2009 Days’ sales in inventory* = ($179,315 / $1,172,668) x 365 = 56 days * $ thousands

Comment: Its inventory turnover is lower (less favorable) than the industry average turnover of 5.9. Similarly, its days’ sales in inventory is greater (less favorable) than the industry norm of 55 days.


6-61

Teamwork in Action — BTN 6-6 Concepts and procedures to illustrate in expert presentation:

Specific Identification Expert:

(a) and (b) Concept: Purchases are always recorded at the actual specific costs. The specific identification cost flow assumption requires units sold be assigned their actual cost. Total cost of goods sold is tallied based on these individual cost assignments. The new inventory balance is perpetually determined to be the amount after sales at actual cost is deducted. (a) and (b) Procedures: Date Goods Purchased Cost of Goods Sold Inventory Balance

Jan. 1 50 @ $10 = $ 500

Jan.10 30 @ $10 = $ 300 20 @ $10 = $ 200

Jan.14 150 @ $12 = $1,800 20 @ $10 = $ 200 150 @ $12 = 1,800 $2,000

Feb.15 100 @ $ 12 = $1,200 20 @ $10 = $ 200 50 @ $12 = 600 $ 800

Apr.30 200 @ $15 = $3,000 20 @ $10 = $ 200 50 @ $12 = 600 200 @ $15 = 3,000 $3,800

Sept 26 300 @ $20 = $6,000 20 @ $10 = $ 200 50 @ $12 = 600 200 @ $15 = 3,000 300 @ $20 = 6,000 $9,800

Oct. 5 100 @ $ 15 = $1,500 250 @ $ 20 = $5,000

_____

20 @ $10 = $ 200 50 @ $12 = 600 100 @ $15 = 1,500 50 @ $20 = 1,000

$8,000 $3,300


6-62

Teamwork in Action (Continued)

LIFO Expert:

(a) and (b) Concept: Purchases are always recorded at actual costs. The LIFO cost flow assumption requires (i) units sold be assigned the most recent cost—total cost of goods sold is tallied based on these individual cost assignments, and (ii) that the inventory balance be perpetually determined to be the amount after goods sold (using the most recent costs) are deducted. (a) and (b) Procedures:


Jan. 1 50 @ $10 = $ 500

Jan.10 30 @ $10 = $ 300 20 @ $10 = $ 200

Jan.14 150 @ $12 = $1,800 20 @ $10 = $ 200 150 @ $12 = 1,800 $ 2,000

Feb.15 100 @ $12 = $ 1,200 20 @ $10 = $ 200 50 @ $12 = 600 $ 800

Apr.30 200 @ $15 =$3,000 20 @ $10 = $ 200 50 @ $12 = 600 200 @ $15 = 3,000 $ 3,800

Sept 26 300 @ $20 = $6,000 20 @ $10 = $ 200 50 @ $12 = 600 200 @ $15 = 3,000 300 @ $20 = 6,000 $ 9,800

Oct. 5 300 @ $20 = $ 6,000 50 @ $15 = $ 750

______ $ 8,250

20 @ $10 = $ 200 50 @ $12 = 600 150 @ $15 = 2,250 $ 3,050


6-63


FIFO Expert:

(a) and (b) Concept: Purchases are always recorded at actual costs. The FIFO cost flow assumption requires units sold be assigned the first (earliest) cost of purchases. Total cost of goods sold is tallied based on these individual cost assignments. The inventory balance is perpetually determined to be the amount after deducting goods sold using the earliest costs. (a) and (b) Procedures:


Jan. 1 50 @ $10 = $ 500

Jan.10 30 @ $10 = $ 300 20 @ $10 = $ 200

Jan.14 150 @ $12 = $1,800 20 @ $10 = $ 200 150 @ $12 = 1,800 $ 2,000

Feb.15 20 @ $ 10 = $ 200 80 @ $ 12 = 960

70 @ $12 = $ 840

Apr.30 200 @ $15 = $3,000 70 @ $12 = $ 840 200 @ $15 = 3,000 $ 3,840

Sept 26 300 @ $20 = $6,000 70 @ $12 = $ 840 200 @ $15 = 3,000 300 @ $20 = 6,000 $ 9,840

Oct. 5 70 @ $12 = $ 840 200 @ 15 = 3,000 80 @ 20 = 1,600

______

220 @ $20 = $ 4,400

______ $ 6,900 $ 4,400


6-64


Weighted Average Expert:

(a) and (b) Concept: Purchases are always recorded at actual costs. The Weighted Average cost flow assumption requires units sold be assigned a cost based on running weighted average cost per unit in the inventory balance. This requires the computation of a new weighted average cost per unit after each purchase. The total cost of goods sold is tallied based on cost assignments. The new inventory balance is perpetually determined to be the residual amount after goods sold are deducted using this weighted average cost.

(a) and (b) Procedures: Date Goods Purchased Cost of Goods Sold Inventory Balance

Jan. 1 50 @ $10 = $ 500

Jan.10 30 @ $10 = $ 300 20 @ $10 = $ 200

Jan.14 150 @ $12 = $1,800 170 @ $11.7647 = $2,000

(200+1,800) / (20+150)

Feb.15 100 @ $11.7647 = $1,176* 70 @ $11.7647 = $ 824*

Apr.30 200 @ $15 = $3,000 270 @ $14.163* = $3,824*

(824+3,000) / (70+200)

Sept 26

300 @ $20 = $6,000 570 @ $17.235* = $9,824*

(3,824+6,000)/(270+300)

Oct. 5 350 @ $17.235 = $6,032 220 @ $17.235* = $3,792** _____

$7,508

* rounded ** adjusted for rounding


6-65

Teamwork in Action (Concluded) (c) Cost Flow versus Actual Physical Flow Typical comments experts may express in response to (c):

Physical flow of goods can be affected by the type of products in inventory and/or the way inventory is stored and/or displayed.

Actual physical flow of goods is not relevant in selecting an acceptable method of accounting for inventory. Any one of the four methods is acceptable. The method chosen should be consistently applied.

More Specific Expert Comments to (c): Specific Identification--Always reflects the actual cost flow. Electronic scanning has increased the ability to use this method in businesses that sell homogeneous goods.

FIFO--Most businesses try to move their older or earlier acquired inventory first, particularly if they sell perishable goods. Therefore, FIFO will frequently reflect the physical flow of goods.

LIFO--Few actually sell their most recently acquired inventory first. This could follow actual physical flow if inventory is stocked in a manner that requires accessing most recent cost first.

Weighted Average--This cost is rarely the actual cost flow. This would require the mixing or combining of units on hand. This is possible for inventory such as oil but it still unlikely that the actual blending would be as complete as the averaging of costs.

(d) Impact of Methods

Typical comments experts may express in response to (d): In a period of rising prices LIFO will generally result in the highest cost of goods sold and therefore the lowest net income and lowest tax. However, LIFO must be used for financial reporting if it is used for tax purposes.

In a period of rising prices FIFO will generally result in the lowest cost of goods sold and therefore the highest net income and highest tax.

Weighted Average will usually result in a reported net income and tax consequences somewhere in between LIFO and FIFO.

Specific Identification will result in a cost of goods sold, net income and tax expense dependent on whether the actual cost of units sold were the higher or lower priced items.

(e) Valuation

Typical comments experts may express in response to (e): FIFO tends to value ending inventory closest to replacement cost whereas LIFO does not. Weighted average tends to value inventory between old and new market values, and specific identification depends on whether the items remaining in inventory have costs similar to current replacement costs.


6-66

Entrepreneurial Decision — BTN 6-7

Part 1

(a) Current inventory turnover = $1,200,000 / $300,000 = 4 times

Current days’ sales in inventory = ($300,000/$1,200,000) x 365

= 91.25 days

(b) Proposed inventory turnover = $1,200,000 / $150,000 = 8 times

Proposed days’ sales in inventory = ($150,000 / $1,200,000) x 365

= 45.63 days

*Ratio definitions: Inventory turnover = Days’ sales in inventory = x 365

Part 2

The owner’s proposal for his company would yield a much improved inventory turnover of 8 vis-à-vis the current turnover of 4. On the downside, its days’ sales in inventory would dramatically decline from 91 days to 46 days. Assuming an inventory buffer of 46 days is sufficient, then the proposal should be implemented. We need to recognize that the major concern with this proposal is with the company’s confidence in both maintaining its current sales level and with not losing or alienating its current and future customers due to delays in acquiring merchandise. Assuming the company’s predictions are reasonable, we need to focus on the customer concern. That is, we need to be certain that the company can continue to satisfactorily serve customers with a 46-day buffer in inventory. If not, then current and future sales could suffer to an extent that would outweigh the benefit of slashing inventory.

Hitting the Road — BTN 6-8

There is no formal solution for this field activity. The required solution does allow students to see the relevance of studying merchandise activities and inventory accounting.

Cost of goods sold

Average inventory

Ending inventory

Cost of goods sold


6-67

Global Decision — BTN 6-9 1. Inventory turnover = Current year — Nokia (EUR Millions): Inventory turnover = = 12.6 times One year prior — Nokia (EUR Millions): Inventory turnover = = 12.3 times

Days’ sales in inventory = x 365 Current year —Nokia days’ sales in inventory (EUR Millions): x 365 = 24.6 days

One year prior—Nokia days’ sales in inventory (EUR Millions): x 365 = 27.7 days

Inventory Turnover Days’ Sales in Inventory

Company Current Prior Year Current Prior Year

Nokia .................................................. 12.6 12.3 24.6 27.7

Research In Motion ............................ 12.8 11.1 27.1 41.7

Apple ...................................................... 53.3 56.8 6.5 7.6 Note: Computations for Research In Motion and Apple are in BTN 6-2.

2. For the current year, Nokia and Research In Motion have fairly

comparable inventory turnover and days’ sales in inventory. For the prior year, Nokia outperformed Research In Motion in both inventory turnover and days sales in inventory. Apple manages its inventory more efficiently than both Nokia and Research In Motion for both years.

Cost of sales Average inventory

33,337

(2,533 + 2,876) / 2

Ending Inventory

Costs of Goods Sold

2,533

33,337

27,720

(1,865 + 2,533) / 2

1,865

27,720

Documents

HWChap006