chapter 6 inventories - 南台科技大學知識分享平台:...

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1. The receiving report should be reconciled to the initial purchase order and the vendor’s invoice before recording or paying for inventory purchases. This procedure will verify that the inventory received matches the type and quantity of inventory ordered. It also verifies that the vendor’s invoice is charging the company for the actual quantity of inventory received at the agreed-upon price.

2. A physical inventory should be taken periodically to test the accuracy of the perpetual records. In addition, a physical inventory will identify inventory shortages or shrinkage.

3. No, they are not techniques for determining physical quantities. The terms refer to cost flow assumptions, which affect the determination of the cost prices assigned to items in the inventory.

4. a. LIFO c. LIFOb. FIFO d. FIFO

5. FIFO

6. LIFO. In periods of rising prices, the use of LIFO will result in the lowest net profit and thus the lowest income tax expense.

7. Net realizable value (estimated selling price less any direct cost of disposition, such as sales commissions).

8. a. Gross profit for the year was understated by $14,750.

b. Inventory and equity (retained earnings) were understated by $14,750.

9. Bibbins Company. Since the merchandise was shipped FOB shipping point, title passed to Bibbins Company when it was shipped and should be reported in Bibbins Company’s financial statements at May 31, the end of the fiscal year.

10. Manufacturer’s. The manufacturer retains title until the goods are sold. Thus, any unsold merchandise at the end of the year is part of the manufacturer’s (consignor’s) inventory, even though the merchandise is in the hands of the retailer (consignee).

CHAPTER 6INVENTORIES

DISCUSSION QUESTIONS

CHAPTER 6 Inventories


11. Net realizable value is the core of IAS 2 in the measurement of inventories. At the end of each reporting period, companies assess their inventories, and inventories are carried at LCNRV as required by IAS 2. In the case that the cost of inventories is not recoverable, inventories should be written down and carried at NRV. LCNRV reflects the accounting convention that assets should not be stated in excess of amounts expected to be realized from their sale or use. In principle, the write-down of inventories to NRV can be performed by item. However, write-down by group may be necessary and acceptable when separate valuation of inventory items is impractical because inventories have similar purposes or end uses, and are produced and marketed in the same geographical area. In this case, grouping similar or related items is acceptable for the purpose of write-downs. In this spirit, it is not acceptable to write inventories down simply on the basis of a classification of inventory such as finished goods, or all the inventories in a particular operating segment without relationship among inventories. Service providers generally accumulate costs related to each service for which a separate selling price is charged. Therefore, each such service is treated as a separate item.

12. Three types of inventories are excluded from the application of IAS 2 and have their own accounting standards. These inventories, governed by their own accounting standards, include:1. Work in process arising under construction contracts, whose accounting treatment is governed by IAS 11 Construction Contracts;2. Financial instruments, whose accounting treatment is governed by IAS 39 Financial Instruments: Recognition and Measurement;3. Biological assets related to agricultural activity and agricultural produce at the point of harvest, whose accounting treatment is governed by treated according to IAS 41 Agriculture.

13. The following inventories are covered by IAS 2 but excluded from only the measurement requirements of the standard. In particular, NRV rather than LCNRV is applied in the measurement of the inventories andrelated expense recognition:1. Inventories held by producers of agricultural and forest products, agricultural produce after harvest, and minerals and mineral products, to the extent that they are measured at net realizable value in accordance with well-established practices in the industries.2. Inventories held by commodity brokers and dealers who measure their inventories at net realizable value, i.e., fair value less costs of sales. These inventories are principally acquired with the purpose of selling in the near future and generating a profit from fluctuations in price or broker-traders’ margin. In the above two cases, changes in net realizable value are recognized in profit or loss in the period of the change rather than as other comprehensive income.


6-3© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in

part.

14. LCNRV of IAS 2 reflects a simple, general accounting convention that assets should not be carried in excess of the amounts to be realized from their sales or use. In the circumstances that the carrying amount, i.e., costs, of inventories may not be recoverable, application of LCNRV means a write-down of inventory to NRV and a related write-down expense.

15. At the end of each reporting period, companies should assess net realizable value of inventories to determine the need of an inventory write-down or a reversal of previous write-down. An item of inventories should be written down to net realizable value if its carrying cost is higher than its net realizable value. However, when the circumstances causing prior write-down of inventories no longer exist and there is clear evidence of an increase in net realizable value, the amount of the write-down should be reversed up to the amount of the original write-down for the portion of inventory still on hand and the new carrying amount is the lower of the cost and the revised net realizable value. Reversal of a write-down increases the carrying value of inventory and a decrease in inventory write-down expense should be recognized in the statement ofcomprehensive income in the period of the reversal.Therefore, inventories are expensed in two ways. First, when inventories are sold and revenue is recognized, the carrying amount of the inventories sold is recognized as an expense (often called cost-of-goods-sold). Second, any write-down to NRV and any inventory losses are also recognized as an expense as they occur.



Ex. 6–1Switching to a perpetual inventory system will strengthen Triple Creek Hardware’s internal controls over inventory, since the store managers will be able to keep track of how much of each item is on hand. This should minimize shortages of good-selling items and excess inventories of poor-selling items.

On the other hand, switching to a perpetual inventory system will not eliminate the need to take a physical inventory count. A physical inventory must be taken to verify the accuracy of the inventory records in a perpetual inventory system. In addition, a physical inventory count is needed to detect shortages of inventory due to damage or theft.

Ex. 6–2a. Appropriate. The inventory tags will protect the inventory from customer theft.

b. Inappropriate. The control of using security measures to protect the inventory is violated if the stockroom is not locked.

c. Inappropriate. Good controls include a receiving report, prepared after all inventory items received have been counted and inspected. Inventory purchased should only be recorded and paid for after reconciling the receiving report, the initial purchase order, and the vendor’s invoice.

EXERCISES



Ex. 6–3a.

Unit Total Unit Total Unit TotalQuantity Cost Cost Quantity Cost Cost Quantity Cost Cost

Apr. 1 120 39 4,6806 90 39 3,510 30 39 1,170

14 140 40 5,600 30 39 1,170140 40 5,600

19 30 39 1,170 60 40 2,40080 40 3,200

25 45 40 1,800 15 40 60030 160 43 6,880 15 40 600

160 43 6,88030 Balances 9,680 7,480

b. Since the prices rose from $39 for the April 1 inventory to $43 for the purchase on April 30, we would expect that under the weighted average cost method the inventory would be lower.

Date

Portable DVD PlayersPurchases Cost of Merchandise Sold Inventory



Ex. 6–4Cost of Goods Sold

Unit Total Unit Total Unit Total Quantity Cost Cost Quantity Cost Cost Quantity Cost Cost

Jan. 1 1,000 150.00 150,000 Mar. 18 800 150.00 120,000 200 150.00 30,000 May 2 1,800 155.00 279,000 2,000 154.50 309,000 Aug. 9 1,500 154.50 231,750 500 154.50 77,250 Oct. 20 700 160.50 112,350 1,200 158.00 189,600 Dec. 31 Balances 351,750 1,200 158.00 189,600

Inventory

Date

Purchases



Ex. 6–5Refer to EX. 6-4

Cost of Goods SoldUnit Total Unit Total Unit Total

Quantity Cost Cost Quantity Cost Cost Quantity Cost Cost Jan. 1 1,000 150.00 150,000 Mar. 18 800 150.00 120,000 200 150.00 30,000 May 2 1,800 155.00 279,000 200 150.00 30,000

1,800 155.00 279,000Aug 9 200 150.00 30,000

1,300 155.00 201,500 500 155.00 77,500Oct 20 700 160.50 112,350 500 155.00 77,500

700 160.50 112,350 Dec. 31 Balances 351,500 189,850

Ex. 6–6a. $62,496 (24 units at $1,980 plus 8 units at $1,872) = $47,520 + $14,976

b. $56,448 (32 units at $1,764; $211,680 ÷ 120 units = $1,764)

Cost of goods available for sale:units @ $1,440……………………………………units @ $1,656……………………………………units @ $1,872……………………………………units @ $1,980……………………………………units (at an average cost of $1,764)……………

364224

Date

InventoryPurchases

120

$ 25,920

$211,68047,52078,62459,616

18



Ex. 6–7

merchandiseInventory Method Inventory Sold

a. FIFO $39,888 $77,112b. Weighted average cost 37,440 79,560

Cost of merchandise available for sale:42 units at $720……………………………………………………...…………… $ 30,24058 units at $780………………………………………………...………………… 45,24020 units at $816………………………………………………………..………… 16,32030 units at $840………………………………………………….……………… 25,200

150 units (at an average cost of $780)………………………………………… $117,000

a. First-in, first-out:Inventory:

30 units at $840…………………………………………………..……………… $25,20018 units at $816………………………………………...………………………… 14,68848 units……………………………………………………..……………………… $39,888

Merchandise sold:$117,000 – $39,888…………………………………….…………………………… $77,112

b. Weighted average cost:Inventory:

48 units at $780 ($117,000 ÷ 150 units)………………………………………… $37,440

Merchandise sold:$117,000 – $37,440…………………………………...…………………………… $79,560

Cost


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publicly accessible website, in whole or in part.

Ex. 6–8

Lower-of-cost-or-net realizable

value

Lawnmowers:Self-propelled $15,000Push type 16,000Snowblowers:Manual 30,000Self-start 18,000Total inventory $79,000




Ex. 6–9

Cost Net Realizablevalue

Lower-of-cost-or-net

realizablevalue

$9,100 $9,940 $9,100DVD players 15,750 14,490 14,490

14,000 13,650 16,650Total inventory $38,850 $38,080 $37,240

Ex. 6–10

Cost Net Realizablevalue

Lower-of-cost-or-net

realizablevalue

€ 1,000 € 950 € 950B 4,500 4,500 4,500C 1,200 1,240 1,200

1,600 1,480 1,480Total inventory € 8,300 € 8,170 € 8,130

VCRs

Ipods

A

D



Ex. 6–11a.

Inventory*………………………………………………………… $13,850 understatedCurrent assets………………………………………………… $13,850 understatedTotal assets……………………………………………………… $13,850 understatedequity……………………………………………………………… $13,850 understated

* $13,850 = $338,500 – $324,650

b. Statement of Comprehensive Income

Cost of Goods Sold…………………………………………… $13,850 overstatedGross profit……………………………………………………… $13,850 understatedNet profit………………………………………………………… $13,850 understated

c. Statement of Comprehensive Income

Cost of Goods Sold…………………………………………… $13,850 understatedGross profit……………………………………………………… $13,850 overstatedNet profit………………………………………………………… $13,850 overstated

d. The December 31, 2015, statement of financial position would be correct, since the 2014inventory error reverses itself in 2015.

Ex. 6–12a.

Inventory*………………………………………………………… $21,600 overstatedCurrent assets………………………………………………… $21,600 overstatedTotal assets……………………………………………………… $21,600 overstatedequity……………………………………………………………… $21,600 overstated

* $21,600 = $640,500 – $618,900

b.Cost of Goods Sold…………………………………………… $21,600 understatedGross profit……………………………………………………… $21,600 overstatedNet profit………………………………………………………… $21,600 overstated

c.Cost of Goods Sold…………………………………………… $21,600 overstatedGross profit……………………………………………………… $21,600 understatedNet profit………………………………………………………… $21,600 understated

d. The December 31, 2015, statement of financial position would be correct, since the 2014 inventory error reverses itself in 2015.

Statement of Comprehensive Income

Statement of Financial Position

Statement of Comprehensive Income

Statement of Financial Position



Ex. 6–13When an error is discovered affecting the prior period, it should be corrected. In this case, the inventory account should be debited and the retainedearnings account credited for $33,000.

Failure to correct the error for 2013 and purposely misstating the inventory and the cost of goods sold in 2014 would cause the statement of comprehensive incomes for the two years to not be comparable. The statement of financial position at the end of 2014 would be correct, however, since the 2013 inventory error reverses itself in 2014.

Ex. 6–14a. Apple: 52.5 {$39,541,000 ÷ [($1,051,000 + $455,000) ÷ 2]}

American Greetings: 4.0 {$682,368 ÷ [($179,730 + $163,956) ÷ 2]}

b. Lower. Although American Greetings’ business is seasonal in nature, with most of its revenue generated during the major holidays, much of its nonholiday inventory may turn over very slowly. Apple, on the other hand, turns its inventory over very fast because it maintains a low inventory, which allows it to respond quickly to customer needs. Additionally, Apple’s computer products can quickly become obsolete, so it cannot risk building large inventories.



Ex. 6–15

$4,950.5175.1

$2,566.080.7

$661.514.2

b. The number of days’ sales in inventory and the inventory turnover ratios are relatively the same for Kroger and Safeway. Winn-Dixie has a significantly higher number of days’ sales in inventory and a significantly lower inventory turnover than Kroger and Safeway. These results suggest that Kroger and Safeway are more efficient than Winn-Dixie in managing inventory.

c. If Winn-Dixie matched Kroger’s days’ sales in inventory, then its hypothetical ending inventory would be determined as follows,

= 28 × ($5,182 ÷ 365) = 28 × $14.2

=Thus, the additional cash flow that would have been generated is the difference between the actual average inventory and the hypothetical average inventory, as follows:

Actual average inventory……………………………………… $661.5 millionHypothetical average inventory……………………………… 397.6 millionPositive cash flow potential………………………………… $263.9 million

That is, a lower average inventory amount would have required less cash than actually was required.

12.9

=

($2,623 + $2,509) ÷ 2 32 days$29,443 ÷ 365

($658 + $665) ÷ 2 47 days$5,182 ÷ 365

= 7.8($658 + $665) ÷ 2

= X

=

($5,182 ÷ 365)

Safeway: $29,443 =

($4,966 + $4,935) ÷ 2

($2,623 + $2,509) ÷ 2

Inventory Turnover = Cost of Goods SoldAverage Inventory

Winn-Dixie: = =

Number of Days’ Sales in Inventory

28 days

X

Kroger: $63,927 =

a.

Safeway:

Kroger: ($4,966 + $4,935) ÷ 2$63,927 ÷ 365

= =

= 28 days

X

Cost of Goods Sold ÷ 365Average Inventory

Number of Days’ Sales in Inventory = Average InventoryCost of Goods Sold ÷ 365

$397.6

11.5

Winn-Dixie: $5,182



Appendix Ex. 6–16$666,900 ($1,235,000 × 54%)

Appendix Ex. 6–17$241,804 ($396,400 × 61%)

Appendix Ex. 6–18$511,500 ($775,000 × 66%)

Appendix Ex. 6–19Cost Retail

Inventory, June 1 $ 165,000 $ 275,000Purchases in June (net) 2,361,500 3,800,000Merchandise available for sale $2,526,500 $4,075,000

$2,526,500$4,075,000

Sales for June (net) 3,550,000Inventory, June 30, at retail price $ 525,000Inventory, June 30,

at estimated cost ($525,000 × 62%) $ 325,500

Appendix Ex. 6–20

a. Inventory, January 1 $ 350,000Purchases (net), January 1–December 31 2,950,000Merchandise available for sale $3,300,000Sales (net), January 1–December 31 $4,440,000Less estimated gross profit ($4,440,000 × 35%) 1,554,000Estimated cost of goods sold 2,886,000Estimated inventory, December 31 $ 414,000

b. The gross profit method is useful for estimating inventories for monthly or quarterly financial statements. It is also useful in estimating the cost of merchandise destroyed by fire or other disasters.

Ratio of cost to retail price: = 62%



Appendix Ex. 6–21Merchandise available for sale………………………………………………………… $6,125,000Less cost of goods sold [$9,250,000 × (100% – 36%)]……………………………… 5,920,000Estimated ending inventory……………………………………………………………… $ 205,000

Appendix Ex. 6–22Merchandise available for sale………………………………………………………… $960,000Less cost of goods sold [$1,450,000 × (100% – 42%)]……………………………… 841,000Estimated ending inventory……………………………………………………………… $119,000



Prob. 6–1A1.


June 1 500 30.00 15,00010 1,500 34.00 51,000 500 30.00 15,000

1,500 34.00 51,00028 500 30.00 15,000

250 34.00 8,500 1,250 34.00 42,50030 250 34.00 8,500 1,000 34.00 34,000

July 5 100 34.00 3,400 900 34.00 30,60010 3,600 35.00 126,000 900 34.00 30,600

3,600 35.00 126,00016 900 34.00 30,600

900 35.00 31,500 2,700 35.00 94,50028 1,700 35.00 59,500 1,000 35.00 35,000

Aug. 5 3,000 35.80 107,400 1,000 35.00 35,0003,000 35.80 107,400

14 1,000 35.00 35,0001,000 35.80 35,800 2,000 35.80 71,600

25 500 36.00 18,000 2,000 35.80 71,600500 36.00 18,000

30 1,750 35.80 62,650 250 35.80 8,950500 36.00 18,000

31 Balances 290,450 26,950

PROBLEMS

2014Date

Purchases Cost of goods sold Inventory



Prob. 6–1A (Concluded)

2. Accounts Receivable 483,800Sales 483,800

Cost of goods sold 290,450Inventory 290,450

*$483,800 = $37,500 + $13,000 + $5,500 + $100,800 + $102,000 + $120,000 + $105,000

3. $193,350 ($483,800 – $290,450)

4. $26,950 ($8,950 + $18,000)

5. Since the prices rose from $30 for the June 1 inventory to $36 for the purchaseon August 25, we would expect that under the last-in, first-out method the inventory would be lower.

*



Prob. 6–2A1.


June 1 500 30.00 15,00010 1,500 34.00 51,000 2,000 33.00 66,00028 750 33.00 24,750 1,250 33.00 41,25030 250 33.00 8,250 1,000 33.00 33,000

July 5 100 33.00 3,300 900 33.00 29,70010 3,600 35.00 126,000 4,500 34.60 155,70016 1,800 34.60 62,280 2,700 34.60 93,42028 1,700 34.60 58,820 1,000 34.60 34,600

Aug. 5 3,000 35.80 107,400 4,000 35.50 142,00014 2,000 35.50 71,000 2,000 35.50 71,00025 500 36.00 18,000 2,500 35.60 89,00030 1,750 35.60 62,300 750 35.60 26,70031 Balances 290,700 26,700

2. Total sales…………………………………………………Total cost of goods sold…………………………………Gross profit…………………………………………………

*$483,800 = $37,500 + $13,000 + $5,500 + $100,800 + $102,000 + $120,000 + $105,000

3. $26,700 (750 units × $35.60)

$483,800290,700

$193,100

Cost of Goods Sold Inventory

Date

Purchases

*



Prob. 6–3A1. First-In, First-Out Method

Inventory, August 31, 2014…………………………………………………… $ 26,950Cost of goods sold……………………………………………………………… 290,450

Supporting computations

Inventory:500 units @ $36.00………………………………………………………… $18,000250 units @ $35.80………………………………………………………… 8,950750 units……………………………………………………………………… $26,950

Cost of goods sold:

Beginning inventory, June 1, 2014…………………………………………… $ 15,000Purchases………………………………………………………………………… 302,400Merchandise available for sale………………………………………………… $317,400Less ending inventory, August 31, 2014…………………………………… 26,950

Cost of goods sold……………………………………………………………… $290,450



Prob. 6–3A (Continued)2. Weighted Average Cost Method

Merchandise inventory, August 31, 2014……………………… $ 26,160Cost of merchandise sold………………………………………… 291,240


$317,4009,100 units

Merchandise inventory:

750 units × $34.88 = $26,160

Cost of merchandise sold:Beginning inventory, June 1, 2014……………………………… —Purchases…………………………………………………………… 37,200Merchandise available for sale…………………………………… $37,200Less ending inventory, August 31, 2014………………………… 26,160Cost of goods sold………………………………………………… $11,040

= = $34.88 per unit (rounded)

Weighted Average Unit Cost Units Available for SaleTotal Cost of Merchandise Available for Sale=



part.

Prob. 6–3A (Concluded)3. Weighted

FIFO AverageSales $483,800 $483,800Cost of goods sold — —Gross profit $483,800 $483,800

Inventory, August 31, 2014 $ 25,200 —



Prob. 6–4A1. First-In, First-Out Method

Model Quantity Unit Cost Total Cost

A10 4 $ 76 $ 3042 70 140

B15 6 184 1,1042 170 340

E60 5 70 350G83 9 259 2,331J34 15 270 4,050M90 3 130 390

2 128 256Q70 7 180 1,260

1 175 175Total $10,700



Prob. 6–4A (Concluded)2. Weighted Average Cost Method

Quantity Unit Cost* Total Cost

6 $ 70 $ 4208 174 1,3925 69 3459 253 2,277

15 258 3,8705 121 6058 172 1,376

$10,285

* Computations of unit costs:

A10: $70 = [(4 × $64) + (4 × $70) + (4 × $76)] ÷ (4 + 4 + 4)B15: $174 = [(8 × $176) + (4 × $158) + (3 × $170) + (6 × $184)] ÷ (8 + 4 + 3 + 6)E60: $69 = [(3 × $75) + (3 × $65) + (15 × $68) + (9 × $70)] ÷ (3 + 3 + 15 + 9)G83: $253 = [(7 × $242) + (6 × $250) + (5 × $260) + (10 × $259)] ÷ (7 + 6 + 5 + 10) J34: $258 = [(12 × $240) + (10 × $246) + (16 × $267) + (16 × $270)] ÷ (12 + 10 + 16 + 16)M90: $121 = [(2 × $108) + (2 × $110) + (3 × $128) + (3 × $130)] ÷ (2 + 2 + 3 + 3)Q70: $172 = [(5 × $160) + (4 × $170) + (4 × $175) + (7 × $180)] ÷ (5 + 4 + 4 + 7)

Model

A10B15E60

Total

G83J34M90Q70



Prob. 6–5A

Unit UnitCost Market

Description Price Price Cost Market LCM

B12 38 30 $ 60 $ 57 $ 1,800 $ 1,7108 59 57 472 456

2,272 2,166 $ 2,166E41 18 178 180 3,204 3,240 3,204G19 33 20 128 126 2,560 2,520

13 129 126 1,677 1,6384,237 4,158 4,158

L88 18 10 563 550 5,630 5,5008 560 550 4,480 4,400

10,110 9,900 9,900N94 400 8 7 3,200 2,800 2,800P24 90 80 22 18 1,760 1,440

10 21 18 210 1801,970 1,620 1,620

R66 8 5 248 250 1,240 1,2503 260 250 780 750

2,020 2,000 2,000T33 140 100 21 20 2,100 2,000

40 19 20 760 8002,860 2,800 2,800

Z16 15 10 750 752 7,500 7,5205 745 752 3,725 3,760

11,225 11,280 11,225Total $41,098 $39,964 $39,873

Quantity

Inventory SheetDecember 31, 2014

InventoryTotal




Prob. 6–6AJuly 1, 2014 Biological Asset—Cattle 24,400 Gain or Loss on Changes in Fair Value less Cost to sell 1,600 Cash 26,000During the year of 2014 Operating Expenses 8,000 Cash 8,000December 31, 2014 Biological Asset—Cattle 2,600 Gain or Loss on Change in Fair Value less Cost to SellFebruary 15, 2015 Biological Asset—Cattle 3,000 Gain or Loss on Change in Fair Value less Cost to Sell 3,000May 15, 2015 Biological Asset—Cattle 25,300 Gain or Loss on Change in Fair Value less Cost to Sell 1,700 Cash 27,000July 15, 2015 Agricultural Produce—Beef 29,100 Operating Expense 500 Biological Asset—Cattle 27,000 Gain or Loss on Change in Fair Value less Cost to Sell 2,100 Cash 500 Cash 29,100 Agricultural Produce—Beef 29,100During the year of 2015 Operating Expenses 10,000 Cash 10,000December 31 2015 Biological Assets—Cattle 6,000 Gain or Loss on Change in Fair Value less Cost to Sell 6,000



Appendix Prob. 6–7A1.

Cost Retail

Inventory, August 1 $ 300,000 $ 575,000Net purchases 2,149,000 3,375,000Merchandise available for sale $2,449,000 $3,950,000

$2,449,000$3,950,000

Sales $3,250,000Less sales returns and allowances 80,000Net sales 3,170,000Inventory, August 31, at retail $ 780,000Inventory, at estimated cost

($780,000 × 62%) $ 483,600

2.

Cost

a. Inventory, March 1 $ 880,000Net purchases 9,500,000Merchandise available for sale $10,380,000Sales $15,900,000Less sales returns and allowances 100,000Net sales $15,800,000Less estimated gross profit ($15,800,000 × 38%) 6,004,000Estimated cost of goods sold 9,796,000Estimated inventory, November 30 $ 584,000

b. Estimated inventory, November 30 $ 584,000Physical inventory count, November 30 369,750Estimated loss due to theft or damage,

March 1–November 30 $ 214,250

CELEBRITY TAN CO.

RANCHWORKS CO.




Prob. 6–1B1.


Apr. 3 25 1,200 30,0008 75 1,240 93,000 25 1,200 30,000

75 1,240 93,00011 25 1,200 30,000

15 1,240 18,600 60 1,240 74,40030 30 1,240 37,200 30 1,240 37,200

May 8 60 1,260 75,600 30 1,240 37,20060 1,260 75,600

10 30 1,240 37,20020 1,260 25,200 40 1,260 50,400

19 20 1,260 25,200 20 1,260 25,20028 80 1,260 100,800 20 1,260 25,200

80 1,260 100,800 June 5 20 1,260 25,200

20 1,260 25,200 60 1,260 75,60016 25 1,260 31,500 35 1,260 44,10021 35 1,264 44,240 35 1,260 44,100

35 1,264 44,24028 35 1,260 44,100

9 1,264 11,376 26 1,264 32,86430 Balances 310,776 32,864


Date

Purchases



Prob. 6–1B (Concluded)

2. Accounts Receivable 525,250Sales 525,250

Cost of Goods Sold 310,776Inventory 310,776

*$525,250 = $80,000 + $60,000 + $100,000 + $40,000 + $90,000 + $56,250 + $99,000

3. $214,474 ($525,250 – $310,776)

4. $32,864 ($26 units × $1,264)

5. Since the prices rose from $1,200 for the April 3 inventory to $1,264 for the purchasethe purchase on June 21, we would expect that under the weighted average (last-in, first-out) method the inventory wouldbe lower.

Note to Instructors: Problem 6–2B shows that the inventory is $32,786 ($31,560)under WA (LIFO).

*



Prob. 6–2B1.


Apr. 3 25 1,200 30,0008 75 1,240 93,000 100 1,230 123,000

11 40 1,230 49,200 60 1,230 73,80030 30 1,230 36,900 30 1,230 36,900

May 8 60 1,260 75,600 90 1,250 112,50010 50 1,250 62,500 40 1,250 50,00019 20 1,250 25,000 20 1,250 25,00028 80 1,260 100,800 100 1,258 125,800

June 5 40 1,258 50,320 60 1,258 75,48016 25 1,258 31,450 35 1,258 44,03021 35 1,264 44,240 70 1,261 88,27028 44 1,261 55,484 26 1,261 32,78630 Balances 310,854 32,786

2. Total sales…………………………………………………Total cost of goods sold………………………………Gross profit………………………………………………

*$525,250 = $80,000 + $60,000 + $100,000 + $40,000 + $90,000 + $56,250 + $99,000

3. $32,786 (26 units × $1,261)

$525,250310,854

$214,396


Date

Purchases

*



Prob. 6–3B1. First-In, First-Out Method

Inventory, June 30, 2014……………………………………….……………… $ 32,864Cost of goods sold………………………………………..…………………… 310,776


Inventory:26 units @ $1,264……………………………………………...………… $ 32,864

Cost of goods sold:

Beginning inventory, April 1, 2014………………………………………….… $ 30,000Purchases……………………………………………………………….………… 313,640Merchandise available for sale……………………………………….……… $343,640Less ending inventory, June 30, 2014……………………………………… 32,864Cost of goods sold…………………………………………………..………… $310,776



Prob. 6–3B (Continued)2. Weighted Average Cost Method

Inventory, June 30, 2014…………………………………………… $ 32,500Cost of goods sold…………………………………………………… 311,140


$343,640275 units

Inventory:

26 units × $1,250 = $32,500

Cost of goods sold:Beginning inventory, April 1, 2014…………………………. $ 30,000Purchases……………………………………………………………… 313,640Merchandise available for sale…………………………………… $343,640Less ending inventory, June 30, 2014…………………………… 32,500Cost of goods sold………………………………………………… $311,140

= = $1,250 per unit (rounded)

Weighted Average Unit Cost Units Available for SaleTotal Cost of Merchandise Available for Sale=



part.

Prob. 6–3B (Concluded)3. Weighted

FIFO AverageSales $525,250 $525,250Cost of merchandise sold 310,776 311,140Gross profit $214,474 $214,110

Inventory, June 30, 2014 $ 32,864 $ 32,500



Prob. 6–4B1. First-In, First-Out Method

Model Quantity Unit Cost Total Cost

C55 3 $1,070 $ 3,2101 1,060 1,060

D11 6 675 4,0505 666 3,330

F32 1 280 2801 260 260

H29 4 317 1,268K47 6 542 3,252

2 549 1,098S33 2 232 464X74 7 39 273Total $18,545

2. Weighted Average Cost Method

Quantity Unit Cost* Total Cost

4 $1,056 $ 4,22411 654 7,194

2 252 5044 311 1,2448 534 4,2722 227 4547 37 259

$18,151

* Computations of unit costs:

C55: $1,056 = [(3 × $1,040) + (3 × $1,054) + (3 × $1,060) + (3 × $1,070)] ÷ (3 + 3 + 3 + 3)D11: $654 = [(9 × $639) + (7 × $645) + (6 × $666) + (6 × $675)] ÷ (9 + 7 + 6 + 6)F32: $252 = [(5 × $240) + (3 × $260) + (1 × $260) + (1 × $280)] ÷ (5 + 3 + 1 + 1)H29: $311 = [(6 × $305) + (3 × $310) + (3 × $316) + (4 × $317)] ÷ (6 + 3 + 3 + 4)K47: $534 = [(6 × $520) + (8 × $531) + (4 × $549) + (6 × $542)] ÷ (6 + 8 + 4 + 6)S33: $227 = [(4 × $222) + (4 × $232)] ÷ (4 + 4)X74: $37 = [(4 × $35) + (6 × $36) + (8 × $37) + (7 × $39)] ÷ (4 + 6 + 8 + 7)

S33X74Total

Model

C55D11F32H29K47



Prob. 6–5B

Unit UnitCost Market

Commodity Price Price Cost Market LCM

A54 37 30 $ 60 $ 56 $ 1,800 $ 1,6807 58 56 406 392

2,206 2,072 $ 2,072C77 24 174 178 4,176 4,272 4,176F66 30 20 130 132 2,600 2,640

10 128 132 1,280 1,3203,880 3,960 3,880

H83 21 6 547 545 3,282 3,27015 540 545 8,100 8,175

11,382 11,445 11,382K12 375 6 5 2,250 1,875 1,875Q58 90 75 25 18 1,875 1,350

15 26 18 390 2702,265 1,620 1,620

S36 8 5 256 235 1,280 1,1753 260 235 780 705

2,060 1,880 1,880V97 140 100 17 20 1,700 2,000

40 16 20 640 8002,340 2,800 2,340

Y88 17 10 750 744 7,500 7,4407 740 744 5,180 5,208

12,680 12,648 12,648Total $43,239 $42,572 $41,873

Quantity

Inventory SheetDecember 31, 2014

InventoryTotal



Appendix Prob. 6–6B1.

Cost Retail

Inventory, February 1 $ 400,000 $ 615,000Net purchases 4,055,000 5,325,000Merchandise available for sale $4,455,000 $5,940,000

$4,455,000$5,940,000

Sales $5,220,000Less sales returns and allowances 120,000Net sales 5,100,000Inventory, February 28, at retail $ 840,000Inventory, at estimated cost

($840,000 × 75%) $ 630,000

2.

Cost

a. Inventory, May 1 $ 400,000Net purchases 3,150,000Merchandise available for sale $3,550,000Sales $4,850,000Less sales returns and allowances 100,000Net sales $4,750,000

Less estimated gross profit ($4,750,000 × 35%) 1,662,500Estimated cost of goods sold 3,087,500Estimated inventory, October 31 $ 462,500

b. Estimated inventory, October 31 $ 462,500Physical inventory count, October 31 366,500Estimated loss due to theft or damage,

May 1–October 31 $ 96,000

JAFFE CO.

CORONADO CO.




CP 6–1Since the title to merchandise shipped FOB shipping point passes to the buyer whenthe merchandise is shipped, the shipments made before midnight, October 31, 2014,should properly be recorded as sales for the fiscal year ending October 31, 2014.Hence, Ryan Frazier is behaving in a professional manner. However, Ryan shouldrealize that recording these sales in 2014 precludes them from being recognizedas sales in 2015. Thus, accelerating the shipment of orders to increase sales ofone period will have the effect of decreasing sales of the next period.

CASES & PROJECTS



CP 6–21. a. First-in, first-out method:

8,000 units at $48.00……………………………………………………… $ 384,0008,000 units at $44.85……………………………………………………… 358,800

12,800 units at $43.50……………………………………………………… 556,8003,200 units at $42.75……………………………………………………… 136,800

32,000 units……………………………………………………………...…… $1,436,400

b. Weighted average cost method:32,000 units at $40.74*……………………………………………………… $1,303,680

* ($8,148,000 ÷ 200,000) = $40.742. Weighted

AverageFIFO Cost

Sales………………………………………… $10,000,000 $10,000,000Cost of goods sold*……………………… 6,711,600 6,844,320Gross profit………………………………… $ 3,288,400 $ 3,155,680

* Cost of merchandise available for sale……………………………………… $8,148,000 $8,148,000

Less ending inventory……………………… 1,436,400 1,303,680Cost of goods sold…………………………… $6,711,600 $6,844,320

3. a. The WA method is viewed as a better method for reflecting income from operations than does the FIFO method. This is because the WA method include more recent cost the merchandise purchases against current sale. The matching of currrent costs with current sales results in a gross profit amount that many consider to better reflect the results of current operations. For Golden Eagle Company, the gross profit of $3,155,608 reflects the matching of the more recent costs of the product of $6,884,320 against the current period sales of $10,000,000. This matching of current costs with current sales also tends to minimize the effects of price trends on the results of operations.

However, the WA method will pick up some of the earlier inventory cost if the current-period quantity of sales exceeds the current-period quantity of purchase. In this case, the cost of goods sold will include a portion of the cost of the beginning inventory, which may have a unit cost from purchses made in prior years. The results of operations may then be distorted in the sense of the current matching concept. This situation occurs rarely in most businesses because of consistently increasing quantities of year-end inventory from year to year.



CP 6–2 (Continued)While the WA method can be viewed as a better method for matching revenues and expenses, the FIFO method is often consistent with the physical movement of merchandise in a business, since most businesses tend to dispose of commodities in the order of their acquisition. To the extent that this is the case, the FIFO method approximates the results that will be attained by a specific identification of costs.

The weighted average cost method is, in a sense, a compromise between LIFOand FIFO. The effect of price trends is averaged, both in determining net profit and in determining inventory cost.

Which inventory costing method best reflects the results of operations for Golden Eagle Company depends upon whether one emphasizes the importance of matching revenues and expenses (the LIFO method) or whether one emphasizes the physical flow of merchandise (the FIFO method). The average cost method might be considered best if one emphasizes the matching and physical flow of goods concepts equally.

b. The FIFO method provides the best reflection of the replacement cost of the ending inventory for the statement of financial position. This is because the amount reported on the statement of financial position for inventory will be assigned costs from the most recent purchases. For most businesses, these costs will reflect purchases made near the end of the period. For example, Golden Eagle Company’s ending inventory on December 31, 2014, is assigned costs totaling $1,436,400 under the FIFO method. These costs represent purchases made during the period of August through December. This FIFO inventory amount ($1,436,400) more closely approximates the replacement cost of the ending inventory than the average cost ($1,303,680) figures.

c. During periods of rising prices, such as shown for Golden Eagle Company, the WA method will result in a lesser amount of net profit than the other two methods. Hence, for Golden Eagle Company, the WA method would be preferred for the current year, since it would result in a lesser amount of income tax.

During periods of declining prices, the WA method will result in a lesser amount of net profit and would be preferred for income tax purposes.



CP 6–2 (Concluded)d. The advantages of the perpetual inventory system include the following:

(1) A perpetual inventory system provides an effective means of control over inventory. A comparison of the amount of inventory on hand with the balance of the subsidiary account can be used to determine the existence and seriousness of any inventory shortages.

(2) A perpetual inventory system provides an accurate method for determining inventories used in the preparation of interim statements.

(3) A perpetual inventory system provides an aid for maintaining inventories at optimum levels. Frequent review of the perpetual inventory records helps management in the timely reordering of merchandise, so that loss of sales and excessive accumulation of inventory are avoided. An analysis of Golden Eagle Company’s purchases and sales, as shown below, indicates that the company may have accumulated excess inventory from May through August because the amount of month-end inventory increased materially, while sales remained relatively constant for the period.

April 31,000 units 16,000 units 15,000 units 15,000 units 16,000 units May 33,000 16,000 17,000 32,000 20,000 June 40,000 20,000 20,000 52,000 24,000 July 40,000 24,000 16,000 68,000 28,000 August 27,200 28,000 (800) 67,200 28,000 September 0 28,000 (28,000) 39,200 18,000 October 12,800 18,000 (5,200) 34,000 10,000 November 8,000 10,000 (2,000) 32,000 8,000 December 8,000 8,000 0 32,000 0

It appears that during April through July, the company ordered inventory without regard to the accumulation of excess inventory. A perpetual inventory system might have prevented this excess accumulation from occurring.

The primary disadvantage of the perpetual inventory system is the cost of maintaining the necessary inventory records. However, computers may be used to reduce this cost.

Increase

Month Purchases(Decrease) in

Sales Inventory End of Month SalesInventory at Next Month’s



CP 6–3Cost of Goods SoldAverage Inventory

Number of Days’Sales in Inventory

Dell$50,098 $50,098

($1,051 + $1,301) ÷ 2 $1,176.0

Days’ Sales in ($1,051 + $1,301) ÷ 2 $1,176.0Inventory $50,098 ÷ 365 $137.3

Hewlett-Packard$96,089 $96,089

($6,128 + $6,466) ÷ 2 $6,297.0

Days’ Sales in ($6,128 + $6,466) ÷ 2 $6,297.0Inventory $96,089 ÷ 365 $263.3

b. Dell builds its computers primarily to a customer order, called a build-to-order strategy. Customers place their orders on the Internet. Dell then builds and delivers the computer, usually in a matter of days. HP, in contrast, builds computers before actual orders are received. This is called a build-to-stock strategy. HP must forecast the type of computers customers want before it receives the orders. This strategy results in greater inventory for HP, since the computers are built before there is a sale. HP has significant finished goods inventory, while Dell has less finished goods. It also explains the difference in their inventory efficiency ratios.

Note to Instructors: While Dell sells most of its computers online, it has alsobegun selling its computers through Best Buy. As a result, Dell’s inventory turnover has decreased and its days’ sales in inventory has increased from prior years.

a.

=

8.6 days

42.6Inventory Turnover = = =

=

=

= =

Average InventoryCost of Goods Sold ÷ 365

Inventory Turnover

15.3

23.9 days

Inventory Turnover = = =

= = =



CP 6–4InventoryTurnover

0.839.89

Computations:Tiffany Co.

Cost of Goods SoldAverage Inventory

$1,263($1,428 + $1,625) ÷ 2


Number of Days’ ($1,428 + $1,625) ÷ 2 = 441.19 daysSales in Inventory $1,263 ÷ 365 or 441 days (rounded)

Amazon.comCost of Goods SoldAverage Inventory

$26,561($2,171 + $3,202) ÷ 2


Number of Days’ ($2,171 + $3,202) ÷ 2 = 36.92 daysSales in Inventory $26,561 ÷ 365 or 37 days (rounded)

b. Amazon.com has a smaller investment in inventory for its volume than does Tiffany. Amazon.com’s inventory turnover is faster (larger), and the number of days’ sales in inventory is shorter (smaller). This is due to the fact that Amazon.com uses a different business model than Tiffany. That is, Amazon.com sells through the Internet, while Tiffany uses the traditional retail store model, which requires it to stock more inventory.

=

=

Average InventoryCost of Goods Sold ÷ 365=

=

= = 9.89

Cost of Goods Sold ÷ 365

Tiffany Co. 441.1536.92Amazon.com

= 0.83

=

=

Inventory Turnover

Inventory Turnover

Inventory Turnover

Average Inventory

a. Number of Days’Sales in Inventory

=Inventory Turnover



CP 6–5a. Costco Walmart JCPenney

1. Cost of goods sold………………………… $67,995 $315,287 $10,799Inventory, beginning……………………… $ 5,405 $ 32,713 $ 3,024Inventory, ending…………………………… 5,638 36,318 3,213

Total……………………………………… $11,043 $ 69,031 $ 6,237

2. Average Inventory(Total ÷ 2)…………………………………… $5,521.5 $34,515.5 $3,118.5

Inventory turnover………………………… 12.3 9.1 3.5

b. Costco Walmart JCPenney

1. Average inventory[from part (a)]……………………………… $5,521.5 $34,515.5 $3,118.5

Cost of goods sold………………………… $ 67,995 $ 315,287 $ 10,799Average daily cost of merchandise

sold (COMS ÷ 365)………………………… $ 186.3 $ 863.8 $ 29.6Number of day’s sales in inventory……… 29.6 40.0 105.4

c. Both the inventory turnover ratio and the number of day’s sales in inventory reflect the merchandising approaches of the three companies.

Costco is a club warehouse. Its approach is to hold only mass appeal items that are sold quickly off the shelf. Most items are sold in bulk quantities at very attractive prices. Costco couples thin margins with very fast inventory turnover.

Walmart has a traditional discounter approach. It has attractive pricing, but the inventory moves slower than would be the case at a club warehouse. For example, many purchases made at Walmart would not be packaged in the same bulk as would be the case at Costco.

JCPenney is a traditional department store with a wider assortment of goods that will not necessarily appeal to the mass market. That is, some of the merchandise items will be more specialized and unique. As such, its inventory moves slower, but at a higher price (and margin).

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