2100 Solutions - CH6

Chapter 6: Reporting and Analysing Inventory

Kimmel, Weygandt, Kieso, Trenholm

Financial Accounting, Second Canadian Edition

CHAPTER 6

Reporting and Analysing InventoryASSIGNMENT CLASSIFICATION TABLE

Study ObjectivesQuestionsBriefExercisesExercisesAProblemsBProblems

1.Describe the steps in determining inventory quantities.1, 2, 311, 21A, 7A

1B, 7B

2.Explain the basis of accounting for inventories and apply the inventory cost flow assumptions under a periodic inventory system.4, 5, 6, 723, 4, 5, 12*, 13*2A, 3A, 4A, 8A* 2B, 3B, 4B, *8B

3.Explain the financial statement effects of each of the inventory cost flow assumptions.8, 9, 10352A, 3A, 7A, 9A*, 10A*2B, 3B, 7B, 9B*, 10B*

4.Indicate the effects of inventory errors on the financial statements.11, 124, 56, 75A, 6A5B, 6B

5.Explain the lower of

cost and market basis of accounting for inventories.13, 14684A4B

6.Calculate and interpret inventory turnover.15, 16, 177, 89, 104A, 5A, 7A4B, 7B

7.*Apply the inventory cost flow assumptions under a perpetual inventory system (Appendix A).18*, 19*, 20*9*, 10*, 11*11*, 12*, 13*8A*, 9A*, 10A*8B*, 9B*, 10B*

*Note: All asterisked Questions, Exercises, and Problems relate to material contained in the appendices to each chapter.

ASSIGNMENT CHARACTERISTICS TABLE

ProblemNumberDescriptionDifficultyLevelTimeAllotted (min.)

1AIdentify items in inventory.Simple30-40

2AApply cost flow assumptions in periodic inventory system, and assess financial statement effects.Moderate30-40

3AApply cost flow assumptions in periodic inventory system, prepare statements of earnings, and answer questions.Moderate30-40

4APrepare journal entries for purchaser and seller using FIFO periodic; apply lower of cost and market. Moderate30-40

5ADetermine effects of inventory errors.Moderate15-20

6ADetermine effects of inventory errors.Moderate15-20

7ACalculate ratios; comment on liquidity and effect of cost flow assumptions on ratios.Moderate20-30

*8AApply average cost flow assumption in periodic and perpetual inventory system.Moderate40-50

*9AApply cost flow assumptions in perpetual inventory systems, and assess financial statement effects. Moderate40-50

*10APrepare journal entries under perpetual inventory system. Assess financial statement effects.Moderate30-40

1BIdentify items in inventory.Simple30-40

2BApply cost flow assumptions in periodic inventory system and assess financial statement effects.Moderate30-40

3BApply cost flow assumptions in periodic inventory system, prepare statement of earnings, and answer questions.Moderate30-40

4BPrepare journal entries for purchaser and seller using average periodic; apply lower of cost and market.Moderate30-40

5BDetermine effects of inventory errors.Moderate15-20

6BDetermine effects of inventory errors.Moderate15-20

7BCalculate ratios; comment on liquidity and effect of cost flow assumptions on ratios.Moderate20-30

*8BApply FIFO cost flow assumption in periodic and perpetual inventory system.Moderate40-50

*9BApply cost flow assumptions in perpetual inventory systems, and assess financial statement effects. Moderate40-50

*10BPrepare journal entries under perpetual system. Assess financial statement effects.Moderate30-40

ANSWERS TO QUESTIONS

1.Inventoriable costs are $3,010 (invoice cost $3,000 + freight charges $70 ( purchase discounts $60). The amount paid to negotiate the purchase is a buying cost that normally is not included in the cost of inventory because of the difficulty of allocating these costs. Buying costs are expensed in the year incurred.

2.Taking a physical inventory involves actually counting, weighing or measuring each kind of inventory on hand. Retailers, such as hardware stores, generally have thousands of different items to count. This is normally done when the store is closed. Tom will probably count items and mark the quantity, description, and inventory number on prenumbered inventory tags.

Purchased inventory in transit shipped FOB shipping point will have to be included in inventory. Inventory that has been shipped to customers FOB destination and not received by the customer before year-end will also have to be included in the count. Finally, any inventory held by other retailers on consignment will have to be included in the count as well.

3.(a)(1)The goods will be included in Janine Ltd.s inventory if the terms of sale

are FOB destination.

(2)They will be included in Fastrak Corporations inventory if the terms of sale are FOB shipping point.

(b)Janine Ltd. should include goods shipped to a consignee in its inventory. Goods held by Janine Ltd. on consignment should not be included in inventory

4.Actual physical flow may be impractical because many items are indistinguishable from one another. Actual physical flow may also be inappropriate because management may be able to manipulate net income through specific identification of items sold.

5Because the specific identification method requires that records be kept of the original cost of each individual inventory item it is possible to manipulate the cost of goods sold by deliberately selecting to sell inventory items with higher or lower costs.

LIFO values the cost of goods sold at the most recent purchase price, therefore a company could decide to buy or delay buying inventory at year-end to manipulate the cost of goods sold.

6.

(a) Average cost

(b) LIFO

(c)

FIFO

Questions (Continued)

7.(1)No effect cash is not affected by inventory cost flow assumptions

(2) In a period of declining prices FIFO will produce a lower ending inventory as inventory is valued using the most recent (lower) prices; LIFO will produce a higher ending inventory as ending inventory is valued at the higher older prices.

(3) The cost of goods sold effect is opposite to that of ending inventory. Hence, cost of goods sold will be higher under FIFO and lower under LIFO.

(4) Because of the effect on the cost of goods sold, net earnings will be lower under FIFO and higher under LIFO.

8.Plato Ltd. is using the FIFO cost flow assumption of inventory costing, and York Ltd. is using the LIFO cost flow assumption. Under FIFO, the latest goods purchased remain in inventory. Thus, the inventory on the balance sheet should be close to current costs. The reverse is true of the LIFO cost flow assumption. Plato Ltd. will have the higher gross profit because cost of goods sold will include a higher proportion of goods purchased at earlier (lower) costs.

9.Swift Corporation may experience severe cash shortages if this policy continues. All of its net earnings is being paid out as dividends, yet some of the earnings must be reinvested in inventory to maintain inventory levels. Some earnings must be reinvested because net earnings is calculated with cost of goods sold based on older, lower costs while the inventory must be replaced at current, higher costs. Because of this factor, net earnings under FIFO are sometimes referred to as phantom profits.

10.No. Selection of an inventory cost flow assumption is a management decision made to best match costs to revenues. However, once an assumption has been chosen, it should be consistently applied.

11.(a) Mila Ltd.s 2004 net earnings will be understated $5,000; (b) 2005 net earnings will be overstated $5,000; and (c) the 2005 retained earnings will be correct.

12.Assets will be understated because the items will not be included in inventory. If the items are not in inventory, management will assume they have been sold or lost through spoilage or theft. If the items are not in the inventory they will be expensed and therefore the shareholders equity will also be understated. Liabilities will not be affected.

13.Lucy should know the following:

(a)A departure from the cost basis of accounting for inventories is justified when the value of the goods is no longer as great as its cost. The write down to market should be recognized in the period in which the price decline occurs.

(b)Market means current replacement cost or net realizable value. For a merchandising company, current replacement cost is the cost at the present time from the usual suppliers in the usual quantities. Other companies use net realizable value, which is the selling price less the purchase cost and any disposal costs.

Questions (Continued)14.Rock Music Centre should report the CD players at $320 each for a total of $1,600. $320 is the net realizable value under the lower of cost and market basis of accounting for inventories. A decline in replacement cost recognizes losses as soon as they are evident so as not to impact decision making unfavourably. Valuation at LCM is conservative.

15.Agree. Effective inventory management is frequently the key to successful business operations. Management attempts to maintain sufficient quantities and types of goods to meet expected customer demand. It also seeks to avoid the cost of carrying inventories that are clearly in excess of anticipated sales.

16.An inventory turnover ratio that is too high may indicate that the company is losing sales opportunities because of inventory shortages. Inventory outages may also cause customer ill will and result in lost future sales.

17.An increase in the days in inventory ratio from one year to the next would be seen as deterioration in the companys efficiency in managing inventory. It means that more inventory is being held relative to sales.

18.Periodic and perpetual inventory systems differ in the accounting treatment for inventories. Under a perpetual inventory system inventory records are updated for every purchase and sale transaction. The cost of goods sold is recorded each time a sale is made. Under a periodic system, the inventory is only updated at the end of the period when a physical inventory count is performed. Inventory purchases throughout the year are debited to a purchases account. When a sale is recorded, no entry is made to record the cost of the sale. Cost of goods sold is calculated separately after the physical inventory count is performed.

*19.Disagree. The results under the FIFO cost flow assumption are the same but the results under the LIFO cost flow assumption are different. The reason is that the pool of inventoriable costs (costs of goods available for sale) is not the same. Under a periodic system, the pool of costs is the goods available for sale for the entire period, whereas under a perpetual system, the pool is the goods available for sale up to the date of sale.

*20.In a periodic system, the average is a weighted average based on total goods available for sale for the period. In a perpetual system, the average is a moving average of goods available for sale after each purchase.

SOLUTIONS TO BRIEF EXERCISES

BRIEF EXERCISE 6-1

(a)Ownership of the goods belongs to the consignor (Helgeson). Thus, these goods should be included in Helgesons inventory.

(b)Goods held on consignment belong to the other company and should not be included in Helgesons inventory.

(c)The goods being held belong to the customer. They should not be included in Helgesons inventory.

(d)The goods in transit should not be included in the inventory count because ownership by Helgeson does not occur until the goods reach the buyer.

(e)The goods in transit belong to the customer because ownership transferred at the point of shipping. They should not be included in Helgesons inventory.

BRIEF EXERCISE 6-2

UnitsDollars

Beginning inventory0$ 0

Purchases (300@$6 + 400@$7 +300@$8)1,000 7,000

Goods available for sale1,000$7,000

Goods sold (600)

Ending inventory 400(a)FIFO

Cost of Goods Sold: (300 x $6) + (300 x $7) = $3,900

Ending Inventory: (300 x $8) + (100 x $7)= 3,100

Total$7,000(b)Weighted Average

Weighted Average Cost = $7,000 1,000 = $7

Cost of Goods Sold: 600 x $7 = $4,200

Ending Inventory: 400 x $7 = 2,800

Total $7,000(c)

LIFO

Cost of Goods Sold: (300 x $8) + (300 x $7) = $4,500

Ending Inventory: (300 x $6) + (100 x $7) = 2,500

Total $7,000BRIEF EXERCISE 6-3

(a) LIFO. The ending inventory is valued at the earlier, higher costs.

(b)FIFO.The cost of goods is valued using the earlier, higher costs.

(c)Cash flow is not affected by the inventory cost flow assumptions, therefore the pretax income will be the same under all assumptions.

(d)The factor that management should consider when choosing an inventory cost flow assumptions is which assumption results in the fairest matching of costs to revenues.

BRIEF EXERCISE 6-4

The overstatement of ending inventory caused cost of goods sold to be understated $7,000 and net earnings to be overstated $7,000. The correct net earnings for 2004 is $83,000 ($90,000 - $7,000).

Total assets in the balance sheet will be overstated by the amount that ending inventory is overstated, $7,000.BRIEF EXERCISE 6-5

2004

2005

Assets

Understated

No effect

Liabilities

No effect

No effect

Shareholders Equity

Understated

No effectBRIEF EXERCISE 6-6

Inventory Categories

Cost

MarketCameras$12,000$10,200

Camcorders.9,0009,500

VCRs 14,000 12,800Total valuation$35,000$32,500The lower of cost and market is $32,500.

BRIEF EXERCISE 6-7

Inventory Turnover Ratio:

Days in Inventory:

BRIEF EXERCISE 6-8

(a) Increase

(b) Decrease

(c) No effect

*BRIEF EXERCISE 6-9

(1) FIFO

DatePurchasesCost of Goods SoldBalance

May 750 @ $10 = $50050 @ $10 = $500

June 130 @ $10 = $30020 @ $10 = 200

July 2830 @ $15 = 45020 @ $10

30 @ $15 = 650

August 2720 @ $10

13 @ $15 = 39517 @ $15 = 255

TotalGAS $950CGS $695EI $255

(2) Average Cost


May 750 @ $10 = $50050 @ $10 = $500

June 130 @ $10 = $30020 @ $10 = 200

July 2830 @ $15 = 45050 @ $13 = 650

August 2733 @ $13 = 42917 @ $13 = 221

TotalGAS $950CGS $729EI $221

*BRIEF EXERCISE 6-10

UnitsDollars

Beginning inventory0$ 0

Purchases (300 @ $6 + 400 @ $7 + 300 @ $8)1,000 7,000

Goods available for sale1,000$7,000

Goods sold (600)

Ending inventory 400(a)FIFOCost of Goods Sold: (200 x $6) + [(100 x $6) + (300 x $7)] = $3,900


Total $7,000(b)Moving AverageCost of Goods Sold: (200 x $6) + (400 x $6.801) = $3,920

Ending Inventory: 400 x $7.702 = 3,080

Total $7,0001 (100 x $6) + (400 x $7) = $3,400; $3,400 500 = $6.80 2 (100 x $6.80) + (300 x $8) = $3,080; $3,080 400 = $7.70

(c)LIFOCost of Goods Sold: (400 x $7) + (200 x $6)= $4,000


Total $7,000*BRIEF EXERCISE 6-11

(a) FIFO Periodic

Date

Account Titles and Explanation

DebitCreditJan.1No entry required

3Accounts Receivable

2,500

Sales

2,500

9Purchases

4,000

Accounts Payable

4,000

15Cash

6,400

Sales

6,400

(b)FIFO Perpetual

Date

Account Titles and Explanation

DebitCreditJan.1No entry required


2,500

Sales

2,500

Cost of Goods Sold

1,500

Merchandise Inventory

1,500

9Merchandise Inventory

4,000

Accounts Payable

4,000

15Cash

6,400

Sales

6,400

Cost of Goods Sold (200 @ $3 + 600 @ $4)

3,000

Merchandise Inventory

3,000

SOLUTIONS TO EXERCISES

EXERCISE 6-1

(a)Do not include Shippers does not own items held on consignment

(b)Include in inventory Shippers still owns the items as they were only shipped on consignment.

(c)Include in inventory Shipping terms FOB destination means that Shippers owns the items until they reach the customer.

(d)Do not include in inventory - Because the shipping terms are FOB shipping point, ownership has transferred to the customer. Shippers Ltd should record this amount as a sale on the statement of earnings.

(e)Do not include in inventory Because the shipping terms are FOB destination, Shippers does not own the supplies until they arrive at Shippers premises.

(f) Include in inventory Shipping terms FOB shipping point means that ownership transferred at the time of shipping and therefore, Shippers Ltd. owns the goods in transit.

(g) Record as supplies inventory on the balance sheet.

EXERCISE 6-2

Ending inventory(Physical count.$295,000

1.No effect(Title passes to purchaser upon shipment when terms are FOB shipping point..0

2.No effect(Title does not transfer to Novotna untilgoods are received0

3.Add to inventory: Title passed to Novotna when

goods were shipped.25,000

4.Add to inventory: Title remains with Novotna until purchaser receives goods 40,000Correct inventory..,$360,000EXERCISE 6-3

(a)FIFO Cost of Goods Sold

(#1012) $500 + (#1045) $450 = $950

(b)It could choose to sell specific units purchased at specific costs if it wished to impact earnings selectively. If it wished to minimize earnings it would choose to sell the units purchased at higher costsin which case the Cost of Goods Sold would be $950. If it wished to maximize earnings it would choose to sell the units purchased at lower costsin which case the cost of goods sold would be $850.

(c)I recommend they use the FIFO cost flow assumption because it provides a more appropriate balance sheet valuation and reduces the opportunity to manipulate earnings.

(The answer may vary depending on the assumption the student chooses.)

EXERCISE 6-4

(a)

FIFO

Beginning inventory (30 X $8)

$240

Purchases

May 15 (25 X $10)

$250

May 24 (35 X $12)

420 670Cost of goods available for sale (90 units)

910

Less: Ending inventory [(90 - 70) X $12]

240Cost of goods sold

$670(b)

Weighted Average


$240

Purchases

May 15 (25 X $10)

$250

May 24 (35 X $12)


910

Less: Ending inventory [(90 - 70) X $10.11*]


$708*$910.00 90 units = $10.11/unit

(c)

LIFO


$240

Purchases

May 15 (25 X $10)

$250

May 24 (35 X $12)


910

Less: Ending inventory [(90 - 70) X $8]


$750EXERCISE 6-5

(a)

(1) FIFOBeginning inventory (200 X $5)

$1,000

Purchases

June 12 (300 X $6)

$1,800

June 23 (500 X $7)

3,500 5,300Cost of goods available for sale

6,300

Less: Ending inventory (160 X $7)

1,120Cost of goods sold

$5,180(2) Average Cost

Cost of Goods

Total Units

Weighted Average

Available for Sale

(

Available for Sale

=

Unit Cost

$6,300

1,000

$6.30

Ending inventory

160 X $6.30 = $1,008

Cost of goods sold

840 X $6.30 = $5,292 or

$6,300 $1,008 = $5,292

(3) LIFO

Cost of goods available for sale

$6,300

Less: Ending inventory (160 X $5)

800

Cost of goods sold

$5,500(b)The FIFO cost flow assumption will produce the highest ending inventory because costs have been rising. Under this assumption, the earliest costs are assigned to cost of goods sold, and the latest costs remain in ending inventory.

(c)The LIFO cost flow assumption will produce the highest cost of goods sold for Lakshmi Ltd. Under LIFO the most recent costs are charged to cost of goods sold and the earliest costs are included in the ending inventory.

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

EXERCISE 6-6(a)

2004

2005

Beginning inventory

$ 20,000$ 26,000

Cost of goods purchased

160,000 175,000Cost of goods available for sale

180,000 201,000

Corrected ending inventory

26,000a 38,000bCost of goods sold

$154,000$163,000a $30,000 - $4,000 = $26,000

b $35,000 + $3,000 = $38,000

(b)

Inventory error for 2004 will cause 2004 cost of goods sold to be understated by $4,000, which will cause the 2004 net earnings and retained earnings to be overstated by the same amount. When the error reverses in 2005, cost of goods sold will be overstated and 2005 net earnings will be understated. Over the two years the error will reverse and therefore the 2005 retained earnings balance will be correct.

The $3,000 understatement of inventory in 2005 will cause the 2005 cost of goods sold to be overstated and the 2005 net earnings and retained earnings to be understated by $3,000.

EXERCISE 6-7(a)

20042005

Sales

$210,000$250,000

Cost of goods sold

Beginning inventory

32,00036,000


173,000 202,000


205,000238,000

Ending inventory ($40,000 - $4,000)

36,000 52,000

Cost of goods sold

169,000 186,000

Gross profit

$ 41,000$ 64,000(b)The cumulative effect on total gross profit for the two years is zero as shown below:

Incorrect gross profits:$45,000 + $60,000 = $105,000

Correct gross profits:$41,000 + $64,000 = 105,000

Difference

$ 0EXERCISE 6-7 (Continued)

(c)

Gross Profit Margin

2004

2005

Before correction

$45,000 $210,000

$60,000 $250,000

= 21.4%

= 24.0%

After correction

$41,000 $210,000

$64,000 $250,000

=19.5%= 25.6%

(d)Dear Mr./Ms. President:

Because your ending inventory of December 31, 2004 was overstated by $4,000, your net earnings for 2004 were overstated and net earnings for 2005 were understated by $4,000.

In a periodic system, the cost of goods sold is calculated by deducting the cost of ending inventory from the total cost of goods you have available for sale in the period. Therefore, if this ending inventory figure is overstated, as it was in December 2004, the cost of goods sold is understated and therefore net earnings will be overstated by that amount. Consequently, this overstated ending inventory figure goes on to become the next periods beginning inventory amount and is a part of the total cost of goods available for sale. Therefore, the mistake repeats itself in the reverse.

The effect on the gross profit margin is significant. Before correction the margin was 21.4% in 2004 and increased 2.6% to 24.0% in 2005. After the error is corrected the margin for 2004 is19.5% and the increase is 6.1% to 25.6% in 2005.

Thank you for allowing me to bring this to your attention. If you have any questions, please contact me at your convenience.

Sincerely,

EXERCISE 6-8

UnitsCost/UnitTotal Cost

(a)Market Value/UnitTotal Market

Value (b)

Cameras:

Minolta5$175$ 875$160$ 800

Canon7 1501,050 1521,064

Light Meters:

Vivitar12 1251,500 1191,428

Kodak10 1151,150 1351,350

Total$4,575$4,642

(c)

Cody Camera Shop should report its inventory at the lower of cost or market. In this case, the total cost of $4,575 is lower than the market of $4,642 and therefore the inventory should be reported on Codys financial statements at $4,575.

EXERCISE 6-9

Inventory Turnover

2002

=

2001

=

Days in Inventory

2002

=

2001

=

EXERCISE 6-9 (Continued)

Gross Profit Margin

2002

=

2001

=

The inventory turnover ratio decreased by approximately 10% [(7.4-8.2) 8.2] from 2002 to 2001. The days in inventory increased by approximately the same amount over the same time period. Both of these changes would be considered negative since it appears it is taking the company longer to turn over its inventory.

Best Buys gross profit margin increased slightly from 21.1% to 24.2%. This means that Best Buys selling prices increased faster than their cost of sales.

EXERCISE 6-10

(a)There was probably an insignificant difference between the two cost flow assumptions on the total inventory because overall, prices may not have changed significantly. Inventory cost flow assumptions assume that prices are rising or falling, with such a variety of inventory items, price increases on some items may be offset by decreases on other items causing the inventory changes between the two assumptions to be minimal.

(b)Inventory Turnover

FIFO: $191,808 $23,902

=

8.03

LIFO:

$191,838 $23,752

= 8.08

(c)

LIFO gives the higher inventory turnover

(d)The choice of inventory cost flow assumption is a way of matching the cost of inventory to revenue. The actual physical movement of inventory will be the same regardless of which cost flow assumption is adopted. Therefore, Wal-Marts inventory will turn over at the same rate regardless which cost flow assumption is used by the company.

*EXERCISE 6-11

(a) (1) FIFO


June 1BI 200 @ $5 = $1,000200 @ $5 = $1,000

June 12P 300 @ $6 = $1,800200 @ $5

300 @ $6 =$2,800

June 15200 @ $5

200 @ $6 = $2,200100 @ $6 =

$600

June 23P 500 @ $7 = $3,500100 @ $6

500 @ $7 = $4,100

June 27100 @ $6

340 @ $7 = $2,980160 @ $7 = $1,120

TotalGAS $6,300CGS $5,180EI $1,120

(a) (2) Average Cost


June 1BI 200 @ $5 = $1,000200 @ $5 = $1,000

June 12P 300 @ $6 = $1,800500 @ $5.60 = $2,800

June 15400 @ $5.60 = $2,240100 @ $5.60 = $560

June 23P 500 @ $7

= $3,500600 @ $6.77*=

$4,060

June 27440 @ $6.77 = $2,978160 @ $6.77 =

$1,082

TotalGAS $6,300CGS $5,218EI $1,082

* $6.766666 rounded to $6.77

(a) (3) LIFO


June 1BI 200 @ $5 = $1,000200 @ $5 = $1,000

June 12P 300 @ $6 = $1,800200 @ $5

300 @ $6 = $2,800

June 15300 @ $6

100 @ $5 = $2,300100 @ $5 = $500

June 23P 500 @ $7

= $3,500100 @ $5

500 @ $7 = $4,000

June 27440 @ $7 = $3,080100 @ $5

60 @ $7 = $920

TotalGAS $6,300CGS $5,380EI

$920

*EXERCISE 6-11 (Continued)

(b)

Cost of Goods SoldEnding Inventory

FIFOPeriodic$5,180$1,120

FIFOPerpetual05,18001,120

Weighted AveragePeriodic05,29201,008

Moving AveragePerpetual05,21801,082

LIFOPeriodic05,500800

LIFOPerpetual 05,3800920

FIFO: The results do not change.

Average cost: Cost of goods sold is $74 lower and ending inventory $74 higher using a perpetual system.

LIFO: Cost of goods sold is $120 lower and ending inventory $120 higher using a perpetual system.

(c)The average cost is not the simple average or a weighted average because average cost under the perpetual inventory system is referred to as a moving weighted average, which means that the inventory cost is recalculated each time inventory is purchased.*EXERCISE 6-12 (a)

FIFO

DatePurchasesSalesBalanceSept. 1(26 @ $97)

$2,522

Sept. 5

(12 @ $97)=$1,164(14 @ $97) = $1,358

Sept. 12(45 @ $102) = $4,590

(14 @ $97) +

(45 @ $102) =$5,948

Sept. 16

(14 @ $97) +

(36 @ $102)=$5,030(9 @ $102) = $918

Sept. 19(28 @ $104) = $2,912

(9 @ $102) +

(28 @ $104) =$3,830

Cost of Goods Sold: $1,164 + $5,030 = $6,194

Ending Inventory: $3,830

AVERAGE COST


$2,522

Sept. 5

(12 @ $97) = $1,164(14 @ $97)=$1,358

Sept. 12(45 @ $102) = $4,590

(59@$100.81) a = $5,948

Sept. 16

(50 @ $100.81) =$5,041*(9@ $100.81) = $907

Sept. 19(28 @ $104) $2,912

(37@$103.22) b=$3,819

*Rounded

a $5,948 59 = $100.81

b $3,819 37 = $103.22



*EXERCISE 6-12 (Continued)

(a) (Continued)

LIFO


$2,522

Sept. 5

(12 @ $97)=$1,164(14 @ $97) = $1,358

Sept. 12(45 @ $102) =$4,590

(14 @ $97) +

(45 @ $102) = $5,948

Sept. 16

(5 @ $97) +

(45 @ $102) =$5,075(9 @ $97) = $873

Sept. 19(28 @ $104) = $2,912

(9@ $97)+

(28 @ $104) =$3,785



(b)

FIFO


$2,522

Purchases

Sept. 12 (45 X $102)

$4,590

Sept. 19 (28 X $104)

2,912

7,502Cost of goods available for sale

10,024

Less: Ending inventory (9 @$102) + (28 @ $104)

3,830Cost of goods sold

$6,194AVERAGE COST


$10,024

Less: Ending inventory (37 X $101.251) 3,746Cost of goods sold

$ 6,2781$10,024 99 = $101.25

LIFO


$10,024

Less: Ending inventory (26 @ $97) + (11@ $102) 3,644Cost of goods sold

$ 6,380*EXERCISE 6-12 (Continued)

(b) (Continued)

PeriodicPerpetual

Ending

InventoryCost of Goods SoldEnding

InventoryCost of Goods Sold

FIFO$3,830$6,194$3,830$6,194

Average cost$3,746$6,278$3,819$6,205

LIFO$3,644$6,380$3,785$6,239

*EXERCISE 6-13

(a)

FIFOMoving AverageLIFO

Dr.Cr.Dr.Cr.Dr.Cr.

Sept. 5Cash

Sales02,38802,38802,38802,38802,38802,388

5Cost of Goods Sold

Inventory01,16401,16401,16401,16401,16401,164

12Inventory

Accounts Payable04,59004,59004,59004,59004,59004,590

16Cash

Sales09,95009,95009,95009,95009,95009,950

16Cost of Goods Sold

Inventory05,03005,03005,04105,04105,07505,075

19Inventory


(b)

FIFOWeighted AverageLIFO

Dr.Cr.Dr.Cr.Dr.Cr.

Sept. 5Cash

Sales02,38802,38802,38802,38802,38802,388

12Purchases


16Cash

Sales09,95009,9509,95009,95009,95009,950

19Purchases


SOLUTIONS TO PROBLEMS

(a)The goods should not be included in inventory as they were shipped FOB shipping point and shipped February 26. Title to the goods transfers to the customer February 26. Banff should have recorded the transaction in the Sales and Accounts Receivable accounts.

(b)The amount should not be included in inventory as they were shipped FOB destination and not received until March 1. The seller still owns the inventory. No entry is recorded.

(c)Include $500 in inventory.

(d)Include $400 in inventory.

(e)$750 should be included in inventory as the goods were shipped FOB shipping point. (They were received March 1assume they were shipped at least one day prior.)

(f)The sale will be recorded on March 2. The goods should be included in inventory at the end of February at their cost of $320.

(g)The damaged goods should not be included in inventory. They should be recorded in a cost of goods sold (loss) account since they are not able to be sold.

(a)COST OF GOODS AVAILABLE FOR SALE

Date Explanation

UnitsUnit Cost

Total Cost

Feb. 1Beginning inventory400$8$ 3,200

Feb.20Purchase

70096,300

May5Purchase

500105,000

Aug.12Purchase

300113,300

Dec.8Purchase

10012 1,200

Total

2,000$19,000(b)FIFO

Step 1: Cost of Goods Sold Step 2: Ending Inventory

UnitTotal

UnitsCostCostDate

UnitsUnit CostTotal Cost

400$ 8$ 3,200Aug. 12300

$11$3,300

70096,300Dec. 8100

12 1,200

500

10 5,000

400

$4,500

1,600

$14,500

Average Cost

Step1:Cost of Goods SoldStep 2:Ending Inventory

Weighted Average Total

Weighted Average

Total

UnitsUnit CostCostUnitsUnit CostCost

1,600$9.50*= $15,200400$9.50 =$3,800*$19,000 ( 2,000 = $9.50

PROBLEM 6-2A (Continued)

(b) Continued

LIFO


UnitTotal

UnitsCostCostDate


100$ 12$ 1,200Beg.400

$ 8$3,200

300113,300

500

10 5,000

700

9 6,300

1,600

$15,800

(c)LIFO results in the lowest inventory amount for the balance sheet, $3,200.

FIFO results in the lowest cost of goods sold for the statement of earnings, $14,500.

Cash flow is not affected by the inventory cost flow assumption; therefore cash flow will be the same under all three assumptions.

(a)

COST OF GOODS AVAILABLE FOR SALE

Quarter Explanation


Beg. Inventory

15,000$2.25$ 33,750

1

Purchase

60,0002.30138,000

2

Purchase

50,0002.50125,000

3

Purchase

50,0002.60130,000

4

Purchase

70,0002.65 185,500

Total

245,000$612,250

FIFO: Cost of Goods Sold:

UnitTotal

UnitsCostCost

15,000$ 2.25$ 33,750

60,0002.30138,000

50,0002.50125,000

50,000

2.60 130,000

50,000

2.65 132,500

225,000

$559,250

Average Cost: Cost of Goods Sold


UnitsUnit CostCost

225,000$2.50*=$562,500

*$612,250 ( 245,000 = $2.50 (rounded)

LIFO: Cost of Goods Sold

UnitTotal

UnitsCostCost

70,000$ 2.65$185,500

50,0002.60130,000

50,000

2.50 125,000

55,000 2.30 126,500

225,000

$567,000


(b)

REAL NOVELTY INC.

Condensed Statements of Earnings

Year Ended December 31, 2004

FIFOAVERAGE

LIFO

Sales

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

Beginning inventory

33,75033,75033,750


578,500 578,500 578,50


612,250612,250612,250

Ending inventory

53,000a 49,750b 45,250c

Cost of goods sold

559,250 562,500 567,000

Gross profit

340,750337,500333,000

Operating expenses

147,000 147,000 147,000

Earnings before income taxes

193,750190,500186,000

Income tax expense

60,000 60,000 60,000Net earnings

$133,750$130,500$126,000a20,000 x $2.65 = $53,000

b 20,000 x $2.50 = $49,750 (adjusted for rounding errors)

c(15,000 x $2.25) + (5,000 x $2.30) = $45,250


(c)Dear Real Novelty Inc.

After preparing the comparative condensed statement of earnings for the year ended December 31, 2004 under the FIFO, average cost, and LIFO cost flow assumptions, we have found the following:

1. The FIFO cost flow assumption produces the most meaningful inventory amount for the balance sheet because the units are costed at the most recent purchases. This assumption is most likely to approximate actual physical flow because the oldest goods are usually sold first to minimize spoilage and obsolescence.

2. The LIFO cost flow assumption produces the most meaningful net earnings because the costs of the most recent purchases are matched against sales.

3. The LIFO cost flow assumption produces the most meaningful gross profit figure because it values the cost of goods sold at the most current prices.

4. The FIFO cost flow assumption is most likely to approximate actual physical flow because the oldest goods are usually sold first to minimize spoilage and obsolescence.

5. None of the cost flow assumptions have an impact on cash flow. Therefore cash available to management should be the same under all assumptions.

Sincerely,

Purchaser Schwinghamer Inc.General Journal

Date

Account Titles and ExplanationDebitCreditOct.1No entry required

9Purchases

1,680

Accounts Payable

1,680


5,250

Sales

5,250

13Sales Returns and Allowances

875

Accounts Receivable

875

17Purchases

910

Accounts Payable

910

22Accounts Payable

65

Purchase Returns and Allowances

65


2,250

Sales

2,250

(b)

Seller Pataki Inc.General Journal

Date

Account Titles and ExplanationDebitCreditOct.9Accounts Receivable

1,680

Sales

1,680


910

Sales

910


65

Accounts receivable

65


(c)

Ending Inventory

Unit Total

DateUnitsCost Cost

Oct. 17

45*$13 $585

*60 + 120 150 + 25 + 70 5 75 = 45

(d) The inventory should be valued at $540, 45 units @ $12. This is the lower of cost and market.

(e)Inventory turnover is calculated by dividing cost of goods sold by average inventory. Reducing the value of the inventory will increase the inventory turnover ratio.

(a)(INCORRECT)

PELLETIER INC.

Statement of Earnings

Year Ended July 31

20042005Sales $300,000$320,000Cost of goods sold

Beginning inventory30,00022,000

Purchases 200,000 240,000

Cost of goods available for sale230,000262,000

Ending inventory 22,000 31,000

Cost of goods sold 208,000 231,000

Gross profit92,000 89,000

Operating expenses 60,000 64,000Earnings before taxes 32,00025,000

Income tax expense 12,000 0

Net earnings$ 20,000$ 25,000(CORRECT)PELLETIER INC.


For the Year Ended July 31

20042005Sales $300,000$320,000Cost of goods sold

Beginning inventory30,00025,000

Purchases 200,000 265,000

Cost of goods available for sale230,000290,000

Ending inventory 25,000 31,000

Cost of goods sold 205,000 259,000

Gross profit95,000 61,000

Operating expenses 60,000 64,000Earnings (loss) before taxes35,000(3,000)

Income tax expense 12,000 0

Net earnings (loss)$ 23,000$ (3,000)

PROBLEM 6-5A

(Continued)

(b)Inventory turnover

(INCORRECT)

2004:

2005:

(CORRECT)

2004:

2005:

(a)

Cost of Goods Sold(b)

Net

Earnings(c)

Retained Earnings(d)

Ending

Inventory(e)

Inventory Turnover

2004UnderstatedOverstatedOverstatedOverstatedUnderstated

2005OverstatedUnderstatedNo effectNo effectUnderstated

(a)

Inventory TurnoverDays In InventoryCurrent Ratio

2002

2001

PepsiCos liquidity appears to be low. Its current ratio is just over 1:1. This means that its current assets are just sufficient to cover its current liabilities. It has 42 days sales in inventory, which seems reasonable and is likely normal for the industry. The problem may be in its immediate liquidity, or its receivables.

(b)

Raw Materials as % of Total InventoryWork in Progress as % of Total InventoryFinished Goods as % of Total Inventory

2002$525 $1,342

= 39%$214 $1,342

= 16%$603 $1,342

= 45%

2001$535 $1,310

= 40.8%$205 $1,310

= 15.6%$570 $1,310

= 43.6%

2000$503 $1,192

= 42.2%$160 $1,192

= 13.4%$529 $1,192

= 44.4%

Pepsi Cos total inventory has increased over the past three years. However, the company seems to be carrying a higher level of work in progress and finished goods and fewer raw materials. It would seem that the company is taking steps to minimize the amount of resources tied up in raw materials while having more finished goods on hand.

(c)Slightly higher inventories would result in a small decrease in then inventory turnover ratio. In this case however, the inventory turnover ratio increased slightly meaning that cost of goods sold increased at a greater percentage than the inventory.

SALES

Units

Unit CostTotal CostOct. 11150$35

$5,250

29 80$40

3,200Total

230

$8,450


Date Explanation

00UnitsUnit CostTotal CostOct. 1Beginning inventory60$25$1,500

9Purchase

120263,120

22Purchase

7027 1,890

Total

250

$6,510(a) 1. Average Cost Periodic

Ending Inventory

Cost of Goods Sold

UnitTotalCost of goods

DateUnitsCostCost available $6,510

Oct.3120$26.04*$521Less: Ending inventory 521

Cost of goods sold $5,989

* $6,510 ( 250 = $26.04

Sales$8,450

Less: Cost of goods sold 5,989

Gross profit$ 2,461*PROBLEM 6-8A (Continued)

(a) (Continued)

2. Average Cost - Perpetual

UnitTotalAverageCost of

Date

UnitsCostCost CostGoods Sold

Oct. 160$25.00$1,500$25.00

9 12026.003,120

180

4,62025.67

11(150)25.67 (3,851)

$3,851

30

769

22 7027.001,890

100

2,65926.59

29 (80)26.59 (2,127)

2,127

20

$ 532

$5,978

Sales$8,450

Less: Cost of goods sold 5,978

Gross profit$ 2,472 (b)

Average Cost

PeriodicPerpetual

Gross profit$2,461$2,472

Ending inventory$ 521$ 532

The results for the average cost flow assumption differ depending on whether a perpetual or periodic system is used. This is because using a perpetual system the average cost is recalculated after each purchase.

(a)(1)FIFO:

DateDescriptionPurchasesCGSEnding Inventory

May 1Purchase

05$90$450 5 $90 0$$450

6Sale

03$90 $270 02 900180

11Purchase

040$99 396 2

0490

99 0576

14Sale2

0390

99 477 01 99 099

21Purchase

030103 309 1

0399

103 0$408

27Sale1

199

1032022103206

29Purchase21062122

02103

106 418

30Balance

14$1,367 10$949 44,$418

*PROBLEM 6-9A (Continued)

(a) (Continued)

(2)Average


May 1Purchase

05$90$450 5 $90 0$$$450

6Sale

03$90 $270 02 900180

11Purchase

040$99 396 06 96* 0576

14Sale0596 480 01 96 096

21Purchase

030103 309 04 101.25** 0$405

27Sale2101.25202.502101.25202.50

29Purchase210621204 103.63*** 414.50

30Balance

14$1,367 10$952.50 40,$414.50

* $576 ( 6 = $96

** $405 ( 4 = $101.25

***$414.50 ( 4 = $103.63

*PROBLEM 6-9A (Continued)

(a) (Continued)

(3) LIFO


May 1Purchase

05$90$450 5 $90 0$$$450

6Sale

03$90 $270 02 900180

11Purchase

040$99 396 2

0490

99 0576

14Sale1

0490

99 48601 90090

21Purchase

030103 309 1

0390

103 0$399

27Sale21032061

0190

103 193

29Purchase21062121

01

290

103

106405

30Balance

14$1,367 10$96240,$405

*PROBLEM 6-9A (Continued)(b)Because prices are rising, FIFO will produce the highest gross profit and net earnings.

(c)Because the ending inventory is valued using the most recent prices, the FIFO cost flow assumption produces the highest ending inventory.

(a)

Moving

FIFO Average Cost

Jan. 1No entry required

(150 @ $17 = $2,550)

2Inventory

2,100

2,100

00000

Cash

2,100

2,100

00

(100 @ $21 = $2,100)

6Cash

7,000

7,000

Sales

7,000

7,000

00

(175 @ $40 = $7,000)

Cost of Goods Sold

3,075

3,255

Inventory

3,075

3,255

00

9Inventory

1,200

1,200

Cash

1,200

1,200

00

(50 @ $24 = $1,200)

*PROBLEM 6-10A (Continued)(a) (Continued)

Jan.15Cash

3,375

3,375

Sales

3,375

3,375

(75 @ $45 = $3,375)

Cost of Goods Sold

1,575

1,557

Inventory

1,575

1,557

23

Inventory

2,800

2,800

Cash

2,800

2,800

0

(100 @ $28 = $2,800)

(b)FIFO produces the higher ending inventory balance because inventory is valued at the most recent costs.

Net cash flow will be the same under either assumption, as cash flow is not affected by the inventory cost flow assumption used.

Gross profit will be higher under the FIFO assumption as it produces a lower cost of goods sold because CGS is valued at the oldest (lowest) prices.

(a)Title to the goods does not transfer to the customer until March 2. Include the $800 in ending inventory.

(b)Kananaskis owns the goods once they are shipped on February 26. Include inventory of $375.

(c)Include $500 in inventory.

(d)Exclude the items from Kananaskis inventory. Craft Producers Ltd. still owns the inventory.

(e)Title of the goods does not transfer to Kananaskis until March 2. Exclude this amount from the February 28 inventory.

(f)The sale will be recorded on February 26. The goods (cost, $280) should be excluded from Kananaskis inventory at the end of February.

(a) COST OF GOODS AVAILABLE FOR SALE

Date Explanation

UnitsUnit Cost

Total Cost

Jan. 1Beginning inventory100$20$ 2,000

Mar.15Purchase

300247,200

July20Purchase

200255,000

Sept.4Purchase

300288,400

Dec.2Purchase

10030 3,000

Total

1,000$25,600(b)FIFO


UnitTotal

UnitsCostCostDate


100$ 20$ 2,000Sept. 4100

$28$2,800

300247,200Dec. 2100

30 3,000

200

25 5,000

200

$5,800

200

28 5,600

800

$19,800

AVERAGE COST

Step1:Cost of Goods SoldStep 2:Ending Inventory


Weighted Average

Total

UnitsUnit CostCostUnitsUnit CostCost

800

$25.60* = $20,480200

$25.60 =$5,120

*$25,600 ( 1,000 = $25.60

PROBLEM 6-2B (Continued)

(b) (Continued)

LIFO


UnitTotal

UnitsCostCostDate


100$ 30$ 3,000Beg.100

$20$ 2,000

300288,400Mar.15100

24 2,400

200

25 5,000

200

$ 4,400

200

24 4,800

800

$21,200

(c)FIFO results in the highest inventory amount for the balance sheet, $5,800.

LIFO results in the highest cost of goods sold for the statement of earnings, $21,200.

Cash flow is not affected by the inventory cost flow assumption; therefore cash flow will be the same under all assumptions.

(a)


Date Explanation


Beg. Inventory

10,000$3.50$ 35,000

May 10

Purchase40,0004.00160,000

Aug. 15

Purchase50,0004.25212,500

Nov. 20

Purchase 20,0004.50 90,000

Total

120,000$497,500

FIFO: Cost of Goods Sold:

UnitTotal

UnitsCostCost

10,000$3.50$ 35,000

40,0004.00160,000

45,0004.25 191,250

95,000

$386,250

Average Cost: Cost of Goods Sold


UnitsUnit CostCost

95,000

$4.15*=$393,854

*$497,500 ( 120,000 = $4.15 (rounded)

LIFO: Cost of Goods Sold

UnitTotal

UnitsCostCost

20,000$4.50$ 90,000

50,0004.25212,500

25,000

4.00 100,000

95,000

$402,500PROBLEM 6-3B (Continued)

(b)

TUMATOE INC.

Condensed Statement of Earnings

Year Ended December 31, 2004

FIFOAVERAGELIFO

Sales

$665,000$665,000$665,000Cost of goods sold

Beginning inventory

35,00035,00035,000


462,500 462,500 462,500


497,500497,500497,500

Ending inventory

111,250a 103,646b

95,000c

Cost of goods sold

386,250 393,854 402,500Gross profit

278,750271,146262,500

Operating expenses

120,000 120,000 120,000Income before income taxes

158,750151,146142,500

Income tax expense

50,000 50,000 50,000Net earnings

$108,750$101,146$ 92,500a (20,000 @ $4.50) + (5,000 @ $4.25) = $111,250

b (25,000 @ $497,500 ( 120,000) = $103,646c (10,000 @ $3.50) + (15,000 @ $4.00) = $95,000


(c)Dear Tumatoe Inc.

After preparing the comparative condensed statement of earnings for the year ended December 31, 2004 under the FIFO, average cost, and LIFO cost flow assumptions, we have found the following:

1. The FIFO cost flow assumption produces the most meaningful inventory amount for the balance sheet because the units are costed at the most recent purchases.

2. The LIFO cost flow assumption produces the most meaningful net earnings because the costs of the most recent purchases are matched against sales.

3. The FIFO cost flow assumption is most likely to approximate actual physical flow because the oldest goods are usually sold first to minimize spoilage and obsolescence.

4. None of the cost flow assumptions have an impact on cash flow.

5. The factors that management should consider when choosing an inventory cost flow assumption is which assumption results in the fairest matching of costs to revenues.

You should choose the cost flow assumption that best fits the nature of your inventory items and your pattern of selling.

Sincerely,

(a) Purchaser

AMELIA INC.

General Journal

Date

Account Titles and ExplanationDebitCredit

July5Purchases

540

Cash

540

8Cash

715

Sales

715


110

Cash

110

25Purchases

200

Cash

200

26Cash

40

Purchase Returns and Allowances

40

(b) Seller

KARINA INC.

General Journal

Date

Account Titles and ExplanationDebitCreditJuly5Cash

540

Sales

540

July25Cash

200

Sales

200

July26Sales Returns and Allowances

40

Cash

40


(c)Average Cost = $950 ( 105 = $9.05

Ending Inventory = 501 @ $9.05 = $452.50

1 25 + 60 65 + 10 + 25 - 5 = 50

(d)Ending inventory should be valued at $350 (50 units @ $7.00) which is the lower of cost or market.

(e)The decline in the inventory would cause the inventory turnover ratio to increase and therefore cause the days in inventory ratio to decrease.

(a)(INCORRECT)

ALYSSA INC.


Year Ended July 31

20042005Sales

$300,000$320,000

Cost of goods sold

Beginning inventory

30,00022,000

Purchases

200,000 240,000


230,000262,000

Ending inventory

22,000 31,000

Cost of goods sold

208,000 231,000

Gross profit

92,000 89,000

Operating expenses

60,000 64,000

Earnings before taxes

32,00025,000

Income tax expense

12,000 10,000Net earnings

$ 20,000$ 15,000

(CORRECT)

ALYSSA INC.


Year Ended July 31

20042005Sales

$300,000$320,000

Cost of goods sold

Beginning inventory

30,00027,000

Purchases

200,000 240,000


230,000267,000

Ending inventory

27,000 31,000

Cost of goods sold

203,000 236,000

Gross profit

97,000 84,000

Operating expenses

60,000 64,000

Earnings before taxes

37,00020,000

Income tax expense

12,000 10,000Net earnings

$ 25,000$ 10,000


(b) The impact of this error on retained earnings at July 31, 2005 is zero. The error in the 2004 ending inventory is offset by the error in the 2005 beginning inventory. The total earnings for the two years is $35,000 in both the incorrect and correct Statement of Earnings.

(a)

Cost of Goods Sold(b)

Net

Earnings(c)

Retained Earnings(d)

Ending

Inventory(e)

Days in

Inventory

2004OverstatedUnderstatedUnderstatedUnderstatedOverstated

2005UnderstatedOverstatedNo effectNo effectOverstated

(a)

Inventory TurnoverDays In InventoryCurrent Ratio

2002

2001

CoolBrands current ratio declined slightly in 2002 but is still above the industry average of 1.42:1. This indicates that CoolBrands appears to have sufficient current assets to cover its current liabilities. However, this may not be the case because there is a very slow moving inventory included in this figure. In 2002 Cool Brands inventory turnover declined to levels below that experienced by the rest of the industry. This may indicate that the company is having trouble selling its inventory, which could have an impact on future liquidity.

(b)If CoolBrands were to switch to LIFO and prices are rising it would be expected that inventory levels would be lower since inventory would now be carried at the earlier lower costs versus the most recent costs (as is the case under FIFO). The inventory turnover ratio should increase since the denominator (average inventory) would be lower and the days in inventory should decrease. The current ratio would also decrease because current assets would be lower.

(a) (1) Perpetual Inventory System

DateDescriptionPurchasesSalesCGSEnding Inventory

June1Beginning

inventory 025 $60.00 $1,500

4Purchase

085$64$5,440 25

8560.00

64.00 06,940

10Sale

090$90 $8,100 25

065$60.00

64.00 $5,660 020 64.00 01,280

18Purchase

035068 2,380 20

03564.00

68.00 03,660

25Sale0500$95 4,750 20

03064.00

68.00 3,320 05 68 0340

28Purchase

020072 1,440 5

02068.00

72.00 01,780

30Balance

140$9,260 140$12,850 140$8,980 25,$1,780

Cost of Goods Sold:

$8,980

Ending Inventory:

$1,780

*PROBLEM 6-8B (Continued)

(a) (Continued)

(2)Periodic Inventory System


Date Explanation

UnitsUnit Cost

Total Cost

June 1Beginning inventory25$60$ 1,500

June 4Purchase

85645,440

June 18Purchase

35682,380

June 28Purchase

2072 1,440

Total

165$10,760

FIFO

Units Sold = 90+50 = 140

Units in Ending inventory = 165 140 = 25


UnitTotal

UnitsCostCostUnitsUnit Cost Total Cost

25$ 60$1,500

5$68

$ 340

85645,440

2072

1,440

30

68 2,04025

$1,780

140$8,980(b)The results under FIFO in a perpetual system as the same as in a periodic system. Under both inventory systems, the first costs in inventory are the ones assigned to the cost of goods sold.

(a)(1)FIFO


July 1Purchase

06$90$540 6 $90 0$$$540

6Sale

03$90 $270 03 900270

11Purchase

040$99 396 3

0490

99 0666

14Sale3

02 90

99 468 02 99 0198

21Purchase

050106 530 2

0599

106 0$728

30Balance

15$1,466 8$738 7,$728


(a) (Continued)

(2)Average


July 1Purchase

06$90$540 6 $90 0$$$540

6Sale

03$90.00$270 03 900270

11Purchase

040$99 396 07 95.14 0666

14Sale0595.14 47602 95.140190

21Purchase

050106 530 07102.860$720

30Balance

15$1,466 8$7467,$720


(a) (Continued)

(3) LIFO


July 1Purchase

06$90$540 6 $90 0$$$540

6Sale

03$90 $270 03 900270

11Purchase

040$99 396 3

0490

99 0666

14Sale4

0199

90 48602 900180

21Purchase

050106 530 2

0590

106 0$710

30Balance

15$1,466 8$7567,$710

(b) FIFO produces the highest gross profit and net earnings, because it has the lowest cost of goods sold.

(c)FIFO produces the highest ending inventory valuation.

(a)

Moving

FIFO Average Cost

Jan. 1No entry required

(50 @ $12= $600)

5Inventory

1,400

1,400

00000

Accounts Payable

1,400

1,400

00

(100 @ $14= $1,400)


2,750

2,750

Sales

2,750

2,750

00

(110 @ $25 = $7,000)

Cost of Goods Sold

1,440

1,466

Inventory

1,440

1,466

00

14

Inventory

480

480

Accounts Payable

480

480

00

(30 @ $16 = $480)

*PROBLEM 6-10B (Continued)(a) (Continued)

Jan. 20Accounts Receivable

1,500

1,500

Sales

1,500

1,500

(60 @ $25 = $1,500)

Cost of Goods Sold

880

869

Inventory

880

869

25

Inventory

360

360

Accounts Payable

360

360

0

(20 @ $18 = $360)

(b)

1.Net cash flow will be the same under either assumption, as cash flow is not affected by the inventory cost assumption used.

2.Gross profit will be higher under the FIFO cost flow assumption as it produces a lower cost of goods sold because cost of goods sold is valued at the oldest (lowest) prices.

3.FIFO produces the higher ending inventory balance because inventory is valued at the most recent costs.

(Note: All dollar amounts are in millions)

(a) Inventories were $1,702 in 2002 and $1,512 in 2001.

(b) Inventories increased $190 in 2002. Using 2001 as the base year, the increase was approximately 12.6% ($190 ( $1,512). In 2002, inventories were 48.3% of current assets ($1,702 ( $3,526). In 2001 they were 49% ($1,512 ( $3,086).

(c)Cost of sales is not reported separately in Loblaws statement of earnings. Cost of sales are reported with selling and administrative expenses. Loblaw may not report it separately because it feels it would provide competitors with valuable information.

(a)

Loblaw

Sobeys

1.Inventory turnover

2002= 12.6 times2003= 22.4 times

2001= 13.3 times2002

= 23.7 times

2. Days in inventory

2002= 29 days

2003= 16.3 days

2001= 27.4 days

2002= 15.4 days

(b)Generally, companies that are able to keep their inventory at lower levels and higher turnovers and still satisfy customer needs are the most successful. Both companies inventory ratios have deteriorated in the most recent year. Sobeys inventory ratios are better than Loblaws.

(a) If the inventory is no longer needed then its market value will decline. If the companies have entered into long-term supply contracts they may be forced to purchase the inventory at the higher contract price and then immediately write it down because of the decline in the market price due to excess supply.

(b) Nortels inventory write-off in 2001 was $1.1 billion.

(c) Nortels inventory turnover in 2001 was 11.1 and 7.3 in 2000. The turnover ratio increased in 2001 because the large inventory write down decreased the carrying value of the inventory on the balance sheet. This caused the denominator of the inventory turnover ratio to be less, leading to a higher inventory turnover ratio.

(d)A danger sign to watch for concerning the carrying values of inventory is when the inventory value is growing faster than the value of sales.

(a) By not valuating its inventory in excess of market Cooper is using the lower of cost or market to value its inventory.

(b)The company may be taking steps to better manage its inventories and reduce the amount of working capital tied up in inventory by introducing inventory management techniques such as reducing the need for raw materials though improving supplier relationships or by reducing finished goods inventory by implementing better customer ordering systems.

(c)The company probably uses FIFO to value its nondomestic inventories due to the fact that many countries do not permit the use of LIFO as a means of inventory valuation. Therefore for foreign reporting it is easier to value the nondomestic inventories initially using FIFO rather then having to convert LIFO based numbers to FIFO after the fact.

(d)

Inventory TurnoverDays In Inventory

2002

2001

The companys inventory turnover improved slightly in 2002. This companys inventory is also turning over faster than the industry average of 6.8 times per year. This may indicate that the company is better managing its inventory costs when compared to other companies in the industry.

(e) If the company had used FIFO the 2002 ending inventory would have been ($280,641+ $52,336 = $332,977). This would be an immaterial difference from the perspective of the analyst as it causes very little change in the companys inventory turnover ratios.

FIFO is a better measure of ending inventory as it values ending inventory at the most recent purchase costs.

(a) One reason Fuji makes adjustments is that by reporting using U.S. accounting standards it makes it easier for U.S. investors to evaluate the company. This increases the chances that it will attract U.S. investors. The U.S. financial markets are the largest in the world, and thus represent a huge source of potential capital. The second reason it might adjust its figures to comply with U.S. standards is that the United States represents a huge market for its product. In recent years Fuji has taken a large share of the U.S. film market away from Kodak. If it attracts U.S. citizens to invest in its shares, these people are also more likely to buy its products.

(b) Fuji uses the perpetual inventory system to account for most of its inventory. The note on Inventories state that it uses moving average cost flow assumption, which is consistent with a perpetual inventory system.

(c) They may use different cost flow assumptions because the cost of using moving average for some inventories may be greater than the benefit it provides.

BYP 6-5 (Continued)

(d) FujiKodak

(millions of dollars)(millions of dollars)

Inventory turnover

FIFO/Average

LIFO

Average days in inventory

FIFO/Average

LIFO

The comparison with both inventories at FIFO/Average is the more relevant for decision-making purposes. This comparison is more relevant because it uses the same measurement.

BYP 6-5 (Continued)

(e) FujiKodak

000(millions of dollars) 00%(millions of dollars) %

Finished goods$1,673.162.1%$ 85153.8%

Work in progress494.118.3 31820.1

Raw materials 528.3 19.6 412 26.1Total$2,695.5100.0%$1,581100.0% Fuji is holding a higher percentage of finished goods, while Kodak is holding a higher percentage of work-in-process and raw materials. This difference could be explained by a difference in their respective forecasts of the future. For example, maybe Fuji predicted an upturn in demand before Kodak did. Or, it could be a reflection of their different manufacturing practices. Perhaps Kodak holds items in finished goods for a shorter period of time. The difference also might be due to differences in the amount of work that they outsource. That is, it may be that one buys some of its product at least partially manufactured.

Due to the frequency of change with regard to information available on the world wide web, the Accounting on the Web cases are updated as required. Their suggested solutions are also updated whenever necessary, and can be found online in the Instructor Resources section of our home page .

(a) 1.Items were shipped FOB destination title had not transferred at year-end so exclude from the inventory of office supplies.

2. Goods were shipped FOB shipping ownership passed to JIT Auto Parts on July 31 and should therefore be included in the ending inventory. Increase inventory.

3. Items were shipped FOB Shipping before year-end items should not be included in ending inventory.

4. This transaction involves the purchase of property, plant and equipment and therefore does not affect inventory.

5. Goods were shipped FOB shipping ownership passed to JIT Auto Parts on July 30 and should therefore be included in the ending inventory. Increase inventory.

6. This is not an inventory transaction.

7. This purchase represents a cost of the building not inventory.

8. Items were shipped FOB destination title had not transferred at year-end so include in JIT Auto Parts inventory. Increase inventory.

(b)1.Office Max till owns the office supplies, as the shipping terms were FOB Destination.

4.Nadeau Furniture still owns the office furniture, as the shipping terms were FOB Destination.

6.JIT Auto Parts does not own the cars at year-end, as the shipping terms were FOB Destination.

7.The steel was shipped FOB shipping point and is therefore owned by JIT Auto Parts at year-end. It should be reported as a cost of the building.

MEMO

To:

Joy Small, President

From:

Student

Date:Today

Subject:

2003 Ending Inventory Error

The combined gross profit and net earnings for 2003 and 2004 are correct. However, the gross profit and net earnings for each year are incorrect.

As you know, 2003 ending inventory was overstated by $1 million. This error will cause 2003 net earnings to be incorrect because the ending inventory is used to calculate 2003 cost of goods sold. Since the ending inventory is subtracted in the calculation of cost of goods sold, an overstatement of ending inventory results in an understatement of cost of goods sold and therefore and overstatement of net earnings.

Unless corrected, this error will also affect 2004 net earnings. The 2003 ending inventory is also the 2004 beginning inventory. Therefore, 2004 beginning inventory is also overstated, which causes an overstatement of cost of goods sold and an understatement of 2004 net earnings.

If the error is not corrected the gross profit and net earnings for 2003 and 2004 will be incorrect. Because the error one year reverses in the next year the trend will be misleading.

(a)

Specific Identification Maximize 00Minimize

Gross Profit

Gross Profit

Sales

$433,000$433,000

Cost of goods sold

238,750 240,250

Gross profit $194,250$192,750

Goods Available for Sale

Date

Units

0Cost Total

Mar.1150

$300$ 45,000

320035070,000

10350

0375 131,250

$246,250

Specific IdentificationMaximize gross profit (minimize cost of sales by deciding to sell the diamonds purchased at the lowest cost)

Cost of Goods Sold

Ending Inventory

Date

Units

0Cost Total Date

0Units

Cost 0

Total

Mar. 5 1500$300$ 45,000Mar. 25 20 $375$7,500

30 ,,,,35010,500

2517035059,500

330375 123,750

$238,750

Specific IdentificationMinimize gross profit (maximize cost of sales by selling the diamonds purchased at the highest cost)

Cost of Goods Sold

Ending Inventory

Date

Units

0Cost Total Date

0Units 00Cost 0Total

Mar. 5 180,,$350$ 63,000Mar. 25 20 $300$6,000

Mar.25350375131,250

203507,000

130300 39,000

$240,250BYP 6-9 (Continued)

(b)FIFO

Sales

$433,000

Cost of goods sold

238,750

Gross profit $194,250

Goods Available for Sale

Date

Units

0Cost Total

Mar.1150$300$ 45,000

320035070,000

10350375 131,250

$246,250

Cost of Goods Sold

Ending Inventory

Date

Units

0Cost Total Date

0Units 0Cost 00Total

Mar. 5 150$300 $ 45,000Mar. 25 20 $375$7,500

30

35010,500

25170

35059,500

330

375 123,750

$238,750

(c)The stakeholders are the shareholders, customers, and staff of Discount Diamonds. The practice is unethical if management selects which diamonds to sell based solely on a desire to manipulate profits.

(d)Discount Diamonds should select FIFO. This cost flow assumption provides the best balance sheet valuation and is not subject to manipulation.

Legal Notice

Copyright

Copyright 2004 by John Wiley & Sons Canada, Ltd. or related companies. All rights reserved.

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

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

PROBLEM 6-1B

PROBLEM 6-2A

EMBED Equation.3

EMBED Equation.3

BYP 6-1 FINANCIAL REPORTING PROBLEM

PROBLEM 6-7A

PROBLEM 6-6A

EMBED Equation.3

EMBED Equation.3

EMBED Equation.3

EMBED Equation.3

EMBED Equation.3

EMBED Equation.3

EMBED Equation.3

PROBLEM 6-5A

PROBLEM 6-1A

PROBLEM 6-3A

EMBED Equation.3

EMBED Equation.3

EMBED Equation.3

EMBED Equation.3

EMBED Equation.3

EMBED Equation.3

EMBED Equation.3

EMBED Equation.3

EMBED Equation.3

EMBED Equation.3

*PROBLEM 6-10B

*PROBLEM 6-9B

EMBED Equation.3

PROBLEM 6-4A

EMBED Equation.3

EMBED Equation.3

EMBED Equation.3

BYP 6-9 ETHICS CASE

PROBLEM 6-3B

PROBLEM 6-5B

PROBLEM 6-6B

EMBED Equation.3

BYP 6-8COMMUNICATION ACTIVITY

BYP 6-7 COLLABORATIVE LEARNING ACTIVITY

EMBED Equation.3

PROBLEM 6-2B

EMBED Equation.3

EMBED Equation.3

EMBED Equation.3

EMBED Equation.3

EMBED Equation.3

EMBED Equation.3

EMBED Equation.3

EMBED Equation.3

PROBLEM 6-7B

PROBLEM 6-4B

*PROBLEM 6-8B

FIFO:(75 @ $21) = $1,575; Balance 50 @ $24 = $1200

Average Cost: ($1,395 + $1,200) ( (75 +50) = $20.76

75 @ $20.76 = $1,557; Balance 50 @ $20.76 = $1,038

FIFO: (150 @ $17) +(25 @ $21)= $3,075; Balance 75 @ $21 = $1,575

Average Cost: ($2,550 + $2,100) / (150 + 100) = $18.60

175 @ $18.60 = $3,255; Balance 75 @ $18.60 = $1,395

*PROBLEM 6-10A

*PROBLEM 6-9A

*PROBLEM 6-8A

BYP 6-6FINANCIAL ANALYSIS ON THE WEB

EMBED Equation.3

BYP 6-4INTERPRETING FINANCIAL STATEMENTS

BYP 6-3 RESEARCH CASE

BYP 6-2 COMPARATIVE ANALYSIS PROBLEM

FIFO:(40 @ $14) + (20 @ $16) = $880; Balance 10 @ $16 = $160

Average Cost: ($534 + $480) ( (40 +30) = $14.49

60 @ $14.49 = $869; Balance 10 @ $14.49 = $145

BYP 6-5A GLOBAL FOCUS

FIFO: (50 @ $12) + (60 @ $14)= $1,440; Balance 40 @ $14 = $560

Average Cost: ($600 + $1,400) (50 + 100) = $13.33

110 @ $13.33 = $1,466; Balance 40 @ $13.33 = $534

Solutions Manual6-1Chapter 6Copyright 2004 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited

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2100 Solutions - CH6

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