Spiceland SM 7eCh08

7/25/2019 Spiceland SM 7eCh08

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The McGraw-Hill Companies,Inc., 2013

Solutions Manual, Vol.1, Chapter 8 81

AACSB assurance of learning standards in accounting and business education require

documentation of outcomes assessment. Although schools, departments, and faculty may approachassessment and its documentation differently, one approach is to provide specific questions onexams that become the basis for assessment. To aid faculty in this endeavor, we have labeled eachquestion, exercise, and problem inIntermediate Accounting, 7e, with the following AACSB learningskills:

Questions AACSB Tags Exercises (cont.) AACSB Tags81 Reflective thinking 85 Analytic82 Reflective thinking 86 Analytic83 Reflective thinking 87 Analytic84 Reflective thinking 88 Analytic

85 Reflective thinking 89 Analytic

86 Reflective thinking 810 Analytic87 Reflective thinking 811 Analytic88 Reflective thinking 812 Communications89 Reflective thinking 813 Analytic

810 Reflective thinking 814 Analytic811 Reflective thinking 815 Analytic812 Reflective thinking 816 Analytic813 Reflective thinking 817 Analytic

814 Reflective thinking 818 Analytic815 Reflective thinking 819 Analytic816 Reflective thinking 820 Communications

Brief Exercises 821 Analytic

81 Analytic 822 Analytic

82 Analytic 823 Analytic83 Analytic 824 Reflective thinking84 Analytic CPA/CMA85 Analytic 1 Analytic86 Analytic 2 Analytic87 Analytic 3 Analytic88 Analytic 4 Analytic

89 Analytic 5 Analytic810 Analytic 6 Analytic811 Analytic 7 Analytic812 Analytic 8 Reflective thinking

813 Analytic 1 Analytic

Exercises 2 Analytic81 Analytic 3 Analytic82 Analytic Problems83 Analytic 81 Analytic84 Analytic 82 Analytic

Chapter 8 Inventories: Measurement
http://www.downloadslide.com/


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82 Intermediate Accounting, 7/e

Problems cont. AACSB Tags83 Analytic84 Analytic85 Analytic

86 Analytic87 Analytic

88 Analytic89 Analytic810 Analytic811 Analytic812 Analytic

813 Analytic814 Analytic

815 Analytic

816 Analytic


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Question 81

Question 82

Question 83Perpetual System Periodic System

(1) Purchase of merchandise debit inventory debitpurchases

(2) Sale of merchandise debit cost of goods sold;

credit inventory no entry

(3) Return of merchandise credit inventory creditpurchase returns

Question 84

QUESTIONS FOR REVIEW OF KEY TOPICS

Inventory for a manufacturing company consists of (1) raw materials, (2) work in process, and(3) finished goods. Raw materialsrepresent the cost, primarily purchase price plus freight chargesof goods purchased from other manufacturers, that will become part of the finished product. Work-in-processinventory represents the products that are not yet complete. The cost of work in processincludes the cost of raw materials used in production, the cost of labor that can be directly traced tothe goods in process, and an allocated portion of other manufacturing costs, called manufacturingoverhead. When the manufacturing process is completed, these costs that have been accumulated inwork in process are transferred tofinished goods.

Beginning inventory plus net purchases for the period equals cost of goods available for sale

The main difference between a perpetual and a periodic system is that the periodic system allocatescost of goods available for sale to ending inventory and cost of goods sold only at the end of theperiod. The perpetual system accomplishes this allocation by decreasing inventory and increasingcost of goods sold each time goods are sold.

(4) Payment of freight debit inventory debitfreight-in

Inventory shipped f.o.b. shipping point is included in the inventory of the purchaser when themerchandise reaches the common carrier. Laetner Corporation records the purchase in 2013 andincludes the shipment in its ending inventory. Bockner Company records the sale in 2013Inventory shipped f.o.b. destination is included in the inventory of the seller until it reaches the

purchasers location. Bockner would include the merchandise in its 2013 ending inventory and thesale/purchase would be recorded in 2014.


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Answers to Questions (continued)

Question 85

Question 86

Question 87

Question 88

Question 89

A consignment is an arrangement under which goods are physically transferred to another

company (the consignee), but the transferor (consignor) retains legal title. If the consignee cantfind a buyer, the goods are returned to the consignor. Goods held on consignmentare included inthe inventory of the consignor until sold by the consignee.

By the gross method, purchase discounts not taken are viewed as part of inventory cost. By thenet method, purchase discounts not taken are considered interest expense because they are viewed ascompensation to the seller for providing financing to the buyer.

1. Beginning inventory increase

2. Purchases increase3. Ending inventory decrease4. Purchase returns decrease5. Freight-in increase

Four methods of assigning cost to ending inventory and cost of goods sold are (1) specificidentification, (2) first-in, first-out (FIFO), (3) last-in, first-out (LIFO), and (4) average cost. Thespecific identification method requires each unit sold during the period or each unit on hand at theend of the period to be traced through the system and matched with its actual cost. First-in, first-out(FIFO) assumes that units sold are the first units acquired. The last-in, first-out (LIFO) method

assumes that the units sold are the most recent units purchased. The average cost method assumesthat cost of goods sold and ending inventory consist of a mixture of all the goods available for sale.The average unit cost applied to goods sold or ending inventory is an average unit cost weighted bythe number of units acquired at the various unit prices.

When costs are declining, LIFO will result in a lowercost of goods sold and higher incomethan FIFO. This is because LIFO will include in cost of goods sold the most recently purchasedlower-cost merchandise. LIFO also will provide a higherending inventory in the balance sheet.


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Answers to Questions (continued)

Question 810

Question 811

Question 812

Question 813

Question 814

Proponents of LIFO argue that it provides a better match of revenues and expenses because

cost of goods sold includes the costs of the most recent purchases. These are matched with sales thareflect a current selling price. On the other hand, inventory costs in the balance sheet generally areout of date because they are derived from old purchase transactions. It is conceivable that acompanys LIFO inventory balance could be based on unit costs actually incurred several yearsearlier. When inventory quantity declinesduring a period, then these out-of-date inventory layerswill be liquidated and cost of goods sold will match noncurrent costs with current selling prices.

Many companies choose the LIFO inventory method to reduce income taxes in periods whenprices are rising. In periods of rising prices, LIFO results in a higher cost of goods sold andtherefore a lower net income than the other methods. The companies income tax returns will repor

lower taxable incomes using LIFO and lower taxes will be paid currently. If a company uses LIFOto measure its taxable income, IRS regulations require that LIFO also be used to measure incomereported to investors and creditors.

The gross profit, inventory turnover, and average days in inventory ratios are designed tomonitor inventories. The gross profit ratio is calculated by dividing gross profit (net sales minuscost of goods sold) by net sales. Inventory turnover is calculated by dividing cost of goods sold byaverage inventory, and we compute average days in inventory by dividing the number of days in theperiod by the inventory turnover ratio.

A LIFO inventory pool groups inventory units into pools based on physical similarities of theindividual units. The average cost for all of a pools beginning inventory and for all of a poolspurchases during the period is used instead of individual unit costs. If the quantity of endinginventory for the pool increases, then ending inventory will consist of the beginning inventory plus alayer added during the period at the average acquisition cost for the pool.

The dollar-value LIFO method has important advantages. First, it simplifies the recordkeepingprocedures compared to unit LIFO because no information is needed about unit flows. Second, itminimizes the probability of the liquidation of LIFO inventory layers, even more so than the use o

pools alone, through the aggregation of many types of inventory into larger pools. In addition, firmsthat do not replace units sold with new units of the same kind can use the method.


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Answers to Questions (concluded)

Question 815

Question 816

After determining ending inventory at year-end cost, the following steps remain:

1. Convert ending inventory valued at year-end cost to base year cost.2. Identify the layers in ending inventory with the years they were created.3. Convert each layers base year cost measurement to layer year cost measurement using the

layer years cost index and then sum the layers.

The primary difference between U.S. GAAP and IFRS in the methods allowed to valueinventory is that IFRS does not allow the use of the LIFO method.


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Brief Exercise 81

Beginning inventory $186,000Plus: Purchases 945,000Less: Cost of goods sold (982,000)

Ending inventory $149,000

Brief Exercise 82

To record the purchase of inventory on account.

Inventory ......................................................................... 845,000Accounts payable ........................................................ 845,000

To record sales on account and cost of goods sold.

Accounts receivable ........................................................ 1,420,000Sales revenue .............................................................. 1,420,000

Cost of goods sold .......................................................... 902,000Inventory ..................................................................... 902,000

BRIEFEXERCISES


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Brief Exercise 83

Both shipments should be included in inventory. The goods shipped to acustomer f.o.b. destination did not arrive at the customers location until after the

fiscal year-end. They belong to Kelly until they arrive at the customers location.Title to the goods shipped from a supplier to Kelly on December 30, f.o.b. shipping

point, changed hands on December 30.

Brief Exercise 84

Purchase price = 10 units x $25,000 = $250,000

December 28, 2013Inventory ......................................................................... 250,000

Accounts payable ........................................................ 250,000

January 6, 2014Accounts payable ............................................................ 250,000Cash (99% x $250,000)................................................... 247,500Inventory (1% x $250,000)............................................. 2,500


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Brief Exercise 85

December 28, 2013Inventory (99% x $250,000)............................................... 247,500Accounts payable ....................................................... 247,500

January 6, 2014Accounts payable ............................................................ 247,500

Cash ............................................................................ 247,500


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Brief Exercise 86Cost of goods available for sale:Beginning inventory (200 x $25) $5,000Purchases:

100 x $28 $2,800200 x $30 6,000 8,800

Cost of goods available (500 units) $13,800

First-in, first-out (FIFO)

Cost of goods available for sale (500 units) $13,800Less: Ending inventory (determined below) (8,100)

Cost of goods sold $5,700

Cost of ending inventory:

Date of

purchase Units Unit cost Total cost

January 8 75 $28 $2,100January 19 200 30 6,000

Total $8,100

Average cost

Cost of goods available for sale (500 units) $13,800Less: Ending inventory(determined below) (7,590)

Cost of goods sold $6,210 *


$13,800Weighted-average unit cost = = $27.60

500 units

275 units x $27.60 = $7,590

*Alternatively, could be determined by multiplying the units sold by the averagecost: 225 units x $27.60 = $6,210


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Brief Exercise 87


Cost of goods sold:

Date of Cost of

Sale Units Sold Units Sold Total Cost

January 10 125(from Beg. Inv.) $25 $3,125January 25 75 (from Beg. Inv.) 25 1,875

25(from 1/8 purchase) 28 700Total 225 $5,700

Ending inventory:

Date of

Purchase Units Unit Cost Total Cost

January 8 75 $28 $2,100January 19 200 30 6,000

Total $8,100


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Brief Exercise 87 (concluded)

Average cost

Date Purchased Sold Balance

Beginninginventory

200 @ $25 = $5,000 200 @ $25 $5,000

January 8

Available

100 @ $28 = $2,800

$7,800

= $26/unit300 units

January 10 125 @ $26 = $3,250 175 @ $26 $4,550

January 19

Available

200 @ $30 = $6,000

$10,550= $28.133/unit

375 units

January 25 100 @ $28.133 = $2,813

275 @ $28.133 $7,737Ending

inventory

Total cost of goods sold = $6,063


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Brief Exercise 88

Cost of goods available for sale:Beginning inventory (20,000 x $25) $ 500,000Purchases:

80,000 x $30 2,400,000Cost of goods available (100,000 units) 2,900,000Less: Ending inventory (15,000 units) 375,000*

Cost of goods sold $2,525,000

*15,000 units x $25 each = $375,000

Brief Exercise 8964,000 units were sold.

Cost of goods sold without year-end purchase:

Units purchased during the year: 60,000 x $18 $1,080,000Plus units from beginning inventory: 4,000 x $15 60,000

Cost of goods sold 1,140,000

Cost of goods sold with year-end purchase:64,000 units x $18 1,152,000

Difference $ 12,000

Cost of goods sold would be $12,000 higher and income before income taxes

$12,000 lower if the year-end purchase is made.

If FIFO were used instead of LIFO, the year-end purchase would have no effecton income before income taxes. FIFO cost of goods sold with or without the purchasewould consist of the 10,000 units from beginning inventory and 54,000 units

purchased during the year at $18:

10,000 units x $15 $ 150,000Plus: 54,000 units x $18 972,000

Cost of goods sold $1,122,000


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Brief Exercise 810

Units liquidated 5,000Difference in cost ($30 25) x $5Before-tax LIFO liquidation profit $25,000

Tax effect ($25,000 x 40%) (10,000)

LIFO liquidation profit $15,000

Brief Exercise 811

Cost of goods sold for the fiscal year ended February 26, 2011, would have been

$18 million lower had SuperValue used FIFO for its LIFO inventory. Whilebeginning inventory would have been $264 million higher, ending inventory alsowould have been higher by $282 million. An increase in beginning inventory causes

an increase in cost of goods sold, but an increase in ending inventory causes adecrease in cost of goods sold. Purchases for the year are the same regardless of theinventory valuation method used.

Cost of goods sold as reported $29,124 millionDecrease if FIFO (18) million

Cost of goods sold, FIFO instead of LIFO $29,106 million


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Brief Exercise 812

Average inventory = ($60,000 + 48,000)

2 = $54,000

Cost of goods sold Average inventory = Inventory turnover

Cost of goods sold $54,000 = 5Cost of goods sold = $54,000 x 5Cost of goods sold = $270,000

Gross profit ratio = 40%, therefore cost percentage = 60%

Sales x .60 = $270,000

Sales = $270,000 .60 = $450,000

Brief Exercise 813

Ending Inventory Inventory Layers Inventory Layers Inventory

Date at Base Year Cost at Base Year Cost Converted to Cost DVL Cost

1/1/13 $1,400,000= $1,400,000 $1,400,000 (base) $1,400,000 x 1.00 =$1,400,000 $1,400,000

1.00

12/31/13 $1,664,000

= $1,600,000 $1,400,000 (base) $1,400,000 x 1.00 = $1,400,000

1.04 200,000 (2013) 200,000 x 1.04 = 208,000 $1,608,000


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Exercise 811. To record the purchase of inventory on account and the payment of freight

charges.

Inventory ......................................................................... 5,000Accounts payable ........................................................ 5,000

Inventory ......................................................................... 300Cash ............................................................................. 300

2. To record purchase returns.

Accounts payable ............................................................ 600Inventory ..................................................................... 600

3. To record cash sales and cost of goods sold.

Cash ................................................................................. 5,200Sales revenue ............................................................... 5,200

Cost of goods sold ........................................................... 2,800Inventory ..................................................................... 2,800

EXERCISES


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Exercise 821. To record the purchase of inventory on account and the payment of freight

charges.

Purchases ........................................................................ 5,000Accounts payable ........................................................ 5,000

Freight-in ........................................................................ 300Cash ............................................................................ 300

2. To record purchase returns.

Accounts payable ............................................................ 600Purchase returns .......................................................... 600

3. To record cash sales.

Cash ................................................................................ 5,200

Sales revenue .............................................................. 5,200

NO ENTRY IS MADE FOR THE COST OF GOODS SOLD.


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Exercise 83

Requirement 1

Beginning inventory $ 32,000

Plus net purchases:Purchases $240,000Less: Purchase discounts (6,000)Less: Purchases returns (10,000)Plus: Freight-in 17,000 241,000

Cost of goods available for sale 273,000Less: Ending inventory (40,000)Cost of goods sold $233,000

Requirement 2

Cost of goods sold (above)............................................... 233,000Inventory (ending)............................................................ 40,000Purchase discounts .......................................................... 6,000Purchase returns .............................................................. 10,000

Inventory (beginning)................................................... 32,000Purchases ..................................................................... 240,000Freight-in ..................................................................... 17,000


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Exercise 84

PERPETUAL SYSTEM PERIODIC SYSTEM($ in 000s)

PurchasesInventory 155 Purchases 155

Accounts payable 155 Accounts payable 155

Freight

Inventory 10 Freight-in 10Cash 10 Cash 10

Returns

Accounts payable 12 Accounts payable 12Inventory 12 Purchase returns 12

Sales

Accounts receivable 250 Accounts receivable 250Sales revenue 250 Sales revenue 250

Cost of goods sold 148 No entryInventory 148

End of period

No entry Cost of goods sold (below) 148Inventory (ending) 30

Purchase returns 12Inventory (beginning) 25Purchases 155Freight-in 10

Cost of goods sold:Beginning inventory $25Purchases $155Less: Returns (12)Plus: Freight-in 10Net purchases 153

Cost of goods available 178Less: Ending inventory (30)Cost of goods sold $148


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Exercise 852013 2014 2015

Beginning inventory 275 (1) 249 (3) 225

Cost of goods sold 627 621 584 (6)Ending inventory 249 (2) 225 216

Cost of goods available for sale 876 846 (4) 800

Purchases (gross) 630 610 (5) 585

Purchase discounts 18 15 12 (7)Purchase returns 24 30 14Freight-in 13 32 16

Net purchases = Purchases (gross) Purchase returns Purchase discounts + Freight-inBeginning inventory + Net purchases = Cost of goods available for sale

Cost of goods available for sale Ending inventory = Cost of goods sold

2013:

(1)Cost of goods available for sale Net purchases = Beginning inventory

876 (630 18 24 + 13) = 275 = Beginning inventory

(2)Cost of goods available for sale Cost of goods sold = Ending inventory

876 627 = 249 = Ending inventory

2014:

(3)2014 beginning inventory = 2013 ending inventory = 249

(4)Cost of goods sold + Ending inventory = Cost of goods available for sale

621 + 225 = 846 = Cost of goods available for sale

(5)Cost of goods available for sale Beginning inventory = Net purchases846 249 = 597 = Net purchases

Net purchases + Purchases discounts + Purchase returns Freight-in = Purchases(gross)

597 + 15 + 30 32 = 610 = Purchases (gross)

2015:(6)Cost of goods available for sale Ending inventory = Cost of goods sold

800 216 = 584 = Cost of goods sold


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Exercise 85 (concluded)

(7)Cost of goods available for sale Beginning inventory = Net purchases800 225 = 575 = Net purchases

Purchases (gross) Purchase returns + Freight-in Net purchases = Purchase discounts585 14 + 16 575 = 12 = Purchase discounts


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Exercise 86Inventory balance before additional transactions $165,000Add:

Goods shipped to Kwok f.o.b. shipping point on Dec. 28 17,000Goods shipped to customer f.o.b. destination on December 27 22,000Correct inventory balance $204,000

Exercise 87Inventory balance before additional transactions $210,000Add:Merchandise on consignment with Joclyn Corp. 15,000

Deduct:

Merchandise shipped to Raymond f.o.b. destination on December 26 (30,000)Merchandise held on consignment from the Harrison Company (14,000)

Correct inventory balance $181,000

Exercise 881. Excluded2. Included3. Included

4.

Excluded5. Included6. Excluded7. Included


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Exercise 89

Requirement 1

Purchase price = 1,000 units x $50 = $50,000

July 15, 2013Purchases ........................................................................ 50,000


July 23, 2013

Accounts payable ............................................................ 50,000Cash (98% x $50,000).................................................... 49,000Purchase discounts (2% x $50,000)............................... 1,000

Requirement 2

August 15, 2013Accounts payable ............................................................ 50,000Cash ............................................................................ 50,000

Requirement 3

The July 15 entry would include a debit to the inventory account instead of topurchases, and the July 23 entry would include a credit to the inventory accountinstead of topurchase discounts.


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Exercise 811

Requirement 1

Purchases: $500 x 70% = $350 per unit.

100 units x $350 = $35,000

November 17, 2013Purchases ........................................................................ 35,000


November 26, 2013Accounts payable ........................................................... 35,000

Purchase discounts (2% x $35,000)............................... 700Cash (98% x $35,000).................................................... 34,300

Requirement 2

December 15, 2013Accounts payable ............................................................ 35,000

Cash ............................................................................ 35,000


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Requirement 3

Requirement 1:

November 17, 2013Purchases (98% x $35,000)................................................ 34,300


November 26, 2013Accounts payable ............................................................ 34,300

Cash ............................................................................. 34,300

Requirement 2:

December 15, 2013Accounts payable ............................................................ 34,300

Interest expense (2% x $35,000)........................................ 700Cash ............................................................................. 35,000


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Exercise 812

TheFASB Accounting Standards Codification represents the single source of

authoritative U.S. generally accepted accounting principles. The specific

citation for each of the following items is:

1. Define the meaning of cost as it applies to the initial measurement of

inventory.

FASB ASC 33010301: InventoryOverallInitial Measurement.

The primary basis of accounting for inventories is cost, which has beendefined generally as the price paid or consideration given to acquire anasset. As applied to inventories, cost means in principle the sum of the

applicable expenditures and charges directly or indirectly incurred inbringing an article to its existing condition and location. It is understoodto mean acquisition and production cost, and its determination involvesmany considerations.

2. Indicate the circumstances when it is appropriate to initially measure

agricultural inventory at fair value.

FASB ASC 905330301: AgricultureInventoryInitial

Measurement.Exceptional cases exist in which it is not practicable to determine anappropriate cost basis for products. A market basis is acceptable if the

products meet all of the following criteria:

a. They have immediate marketability at quoted market prices thatcannot be influenced by the producer.

b. They have characteristics of unit interchangeability.

c. They have relatively insignificant costs of disposal.

The accounting basis of those kinds of inventories shall be theirrealizable value, calculated on the basis of quoted market prices lessestimated direct costs of disposal. An example is freshly dressed meats

produced in meat packing operations.


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3. What is a major objective of accounting for inventory?

FASB ASC 33010101: InventoryOverallObjectives.

A major objective of accounting for inventories is the properdetermination of income through the process of matching appropriatecosts against revenues.

4. Are abnormal freight charges included in the cost of inventory?

FASB ASC 33010307: InventoryOverallInitial Measurement.

Unallocated overheads shall be recognized as an expense in the period inwhich they are incurred. Other items such as abnormal freight, handlingcosts, and amounts of wasted materials (spoilage) require treatment ascurrent period charges rather than as a portion of the inventory cost.


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Exercise 813Cost of goods available for sale:Beginning inventory (2,000 x $6.10) $12,200

Purchases:10,000 x $5.50 $55,0006,000 x $5.00 30,000 85,000

Cost of goods available (18,000 units) $97,200


Cost of goods available for sale (18,000 units) $97,200Less: Ending inventory (determined below) (15,000)



Date of


August 18 3,000 $5.00 $15,000

Last-in, first-out (LIFO)

Cost of goods available for sale (18,000 units) $97,200Less: Ending inventory(determined below) (17,700)



Date of


Beg. Inv. 2,000 $6.10 $12,200

August 8 1,000 5.50 5,500Total $17,700


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Average cost


Cost of goods sold $81,000 *



18,000 units

3,000 units x $5.40 = $16,200

*Alternatively, could be determined by multiplying the units sold by the averagecost: 15,000 units x $5.40 = $81,000


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Exercise 814First-in, first-out (FIFO)

Cost of goods sold:

Date of Cost of

Sale Units Sold Units Sold Total Cost

Aug. 14 2,000(from Beg. Inv.) $6.10 $12,2006,000 (from 8/8 purchase) 5.50 33,000

Aug. 25 4,000 (from 8/8 purchase) 5.50 22,0003,000(from 8/18 purchase) 5.00 15,000

Total 15,000 $82,200

Ending inventory = 3,000 units x $5.00 = $15,000

Last-in, first-out (LIFO)Date Purchased Sold Balance

Beginninginventory

2,000 @ $6.10 = $12,200 2,000 @ $6.10 $12,200

August 8 10,000 @ $5.50 = $55,000 2,000 @ $6.1010,000 @ $5.50 $67,200

August 14 8,000 @ $ 5.50 = $44,000 2,000 @ $6.102,000 @ $5.50 $23,200

August 18 6,000 @ $5.00 = $30,000 2,000 @ $6.102,000 @ $5.50 $53,2006,000 @ $5.00

August 25 6,000 @ $5.00 = $30,000

1,000 @ $5.50 = $5,500

2,000 @ $6.10

1,000 @ $5.50 $17,700Endinginventory



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(Note: the perpetual inventory LIFO results in this exercise are the same asperiodic LIFO results, due to the timing of sales and purchases. The same LIFO

layers are on hand at the end of the period under each method. This is unusual. LIFOperpetual and LIFO periodic normally produce different results for ending inventoryand cost of goods sold.)

Average costDate Purchased Sold Balance

Beginninginventory

2,000 @ $6.10 = $12,200 2,000 @ $6.10 $12,200

August 8

Available

10,000 @ $5.50 = $55,000

$67,200= $5.60/unit

12,000 units

August 14 8,000 @ $5.60 = $44,800 4,000 @ $5.60 $22,400

August 18

Available

6,000 @ $5.00 = $30,000

$52,400 = $5.24/unit10,000 units

August 25 7,000 @ $5.24 = $36,680

3,000 @ $5.24 $15,720Ending

inventory



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Exercise 815

Requirement 1

LIFO will result in the highest cost of goods sold figure because both the cost ofmerchandise and the quantity of merchandise rose during the period. FIFO will result

in the highest ending inventory balance for the same reasons.

Requirement 2

Cost of goods available for sale:Beginning inventory (600 x $80) $ 48,000Purchases:

1,000 x $ 95 $95,000800 x $100 80,000 175,000

Cost of goods available(2,400 units) $223,000


Cost of goods available for sale (2,400 units) $223,000Less: Ending inventory(below) (80,000)



Date of


January 21 800 $100 $80,000

Last-in, first-out (LIFO)




Date ofpurchase Units Unit cost Total cost

Beg. Inv. 600 $80 $48,000January 15 200 95 19,000

Total $67,000


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Requirement 2

Date Purchased Sold Balance

Beginninginventory

5,000 @ $10.00 = $50,000 5,000 @ $10.00 $50,000

September 7

Available

3,000 @ $10.40 = $31,200

$81,200= $10.15/unit

8,000 units

September 10 4,000 @ $10.15 = $40,600 4,000 @ $10.15 $40,600

September 25

Available

8,000 @ $10.75 = $86,000

$126,600= $10.55/unit

12,000 units

September 29 5,000 @ $10.55 = $52,750

7,000 @ $10.55 $73,850Ending

inventory Total cost of goods sold = $93,350


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Exercise 817

Requirement 1

FIFO cost of goods sold:

10,000 units @ $5.00 = $50,000+ 10,000 units @ $6.00 (determined below) = 60,000

$110,000

Requirement 2

LIFO cost of goods sold:

20,000 units @ $6.00 (determined below) = $120,000

Calculations to determine cost per unit of year 2013 purchases:

Cost of goods sold= Weighted-average cost per unit

Number of units sold

$115,000= $5.75 per unit

20,000 units

$5.75 x 40,000 units = $230,000 = Cost of goods available for sale

$230,000 50,000 (beginning inventory)= $180,000 = Cost of purchases

$180,000= $6 = Cost per unit of year 2013 purchases

30,000 units purchased

Cost of goods available for sale:

Beginning inventory (10,000 x $5.00) $ 50,000Purchases (30,000 x $6.00) 180,000Cost of goods available(40,000 units) $230,000


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Exercise 818

Requirement 1

February 25, 2011 ($ in millions)

LIFO reserve ($21.3 20.9).............................................. .4Cost of goods sold ...................................................... .4

Requirement 2

$1,693.8 + .4 = $1,694.2 million cost of goods sold under FIFO.

Requirement 3

$20.9 x 35% = $7.315 millionin tax savings.


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Exercise 819

Requirement 1

Cost of goods sold:

50,000 units x $8.50 = $425,0004,000 units x $7.00 = 28,000

$453,000

Requirement 2

When inventory quantity declines during a reporting period, liquidation of LIFOinventory layers carried at different costs prevailing in prior years results innoncurrent costs being matched with current selling prices. If the resulting effect onincome is material, it must be disclosed. In this case, the effect of the LIFO layer

liquidation is to increase income (ignoring taxes) by $6,000 [4,000 units liquidated x$1.50 ($8.50 current year cost per unit $7 LIFO layer cost per unit)].

Exercise 820

Requirement 2

The specific citation thatdescribes the disclosure requirements that must be madeby publicly traded companies for a LIFO liquidation is FASB ASC 33010S993:

InventoryOverallSEC MaterialsLIFO Liquidations.

Requirement 3

When a company using LIFO liquidates a substantial portion of its LIFOinventory and as a result includes a material amount of income in its income statementthat otherwise would not have been recorded, it must disclose the amount of incomerealized as a result of the inventory liquidation.

Such disclosure would be required in order to make the financial statements notmisleading. Disclosure may be made either in a footnote or parenthetically on the faceof the income statement.


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Exercise 821

($ in millions)

HOME DEPOT LOWES

Gross profit ratio = 23,304 =34.3% 17,152 = 35.1%67,997 48,815

Inventory turnover = 44,693 =4.29 times 31,663 =3.82 times10,406.5 8,285

Average days = 365 =85 days 365 = 96 daysin inventory 4.29 3.82

The gross profit ratios for the two companies are similar and both exceed theindustry average of 27%. On average, Lowes turns over its inventory eleven daysslower than does Home Depot and both companies turn over their inventories muchfaster than the industry average.

Exercise 822Ending



1/1/13 $660,000

= $660,000 $660,000 (base) $660,000 x 1.00 = $660,000 $660,0001.00

12/31/13 $690,000= $663,462 $660,000 (base) $660,000 x 1.00 = $660,000

1.04 3,462 (2013) 3,462 x 1.04 = 3,600 663,600

12/31/14 $760,000

= $703,704 $660,000 (base) $660,000 x 1.00 = $660,0001.08 3,462 (2013) 3,462 x 1.04 = 3,600

40,242 (2014) 40,242 x 1.08 = 43,461 707,061


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Exercise 823Ending



12/31/13 $200,000

= $200,000 $200,000 (base) $200,000 x 1.00 = $200,000 $200,0001.00

12/31/14 $231,000= $220,000 Index = 1.05

Index$200,000 (base) $200,000 x 1.00 = $200,000

20,000 (2014) 20,000 x 1.05 = 21,000 221,000

12/31/15 $299,000= $260,000 Index = 1.15

Index$200,000 (base) $200,000 x 1.00 = $200,000

20,000 (2014) 20,000 x 1.05 = 21,000

40,000 (2015) 40,000 x 1.15 = 46,000 267,000

12/31/16 $300,000= $250,000 Index = 1.20

Index$200,000 (base) $200,000 x 1.00 = $200,000

20,000 (2014) 20,000 x 1.05 = 21,000

30,000 (2015) 30,000 x 1.15 = 34,500 255,500


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Exercise 824

List A List B

i 1. Perpetual inventory a. Legal title passes when goods aresystem delivered to common carrier.

l 2. Periodic inventory system b. Goods are transferred to another companybut title remains with transferor.

a 3. F.o.b. shipping point c. Purchase discounts not taken are includedin inventory cost.

c 4. Gross method d. If LIFO is used for taxes, it must be usedfor financial reporting.

g 5. Net method e. Items sold are those acquired first.

h 6. Cost index f. Items sold are those acquired last.k 7. F.o.b. destination g. Purchase discounts not taken areconsidered interest expense.

e 8. FIFO h. Used to convert ending inventory at year-end cost to base year cost.

f 9. LIFO i. Continuously records changes ininventory.

b 10. Consignment j. Items sold come from a mixture of goodsacquired during the period.

j 11. Average cost k. Legal title passes when goods arrive atlocation.

d 12. IRS conformity rule l. Adjusts inventory at the end of the period.


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CPA / CMA REVIEW QUESTIONS

CPA Exam Questions

1. d.

2. c. Under the net method, purchases are recorded net of the discount:$3,600 x 98% = $3,528

3. b. Average Cost = $4,950 / 140 units = $35.36 per unit

Ending Inventory = $35.36 x 5 = $176.79

4. a. 5 units x $30 = $150

5. c. 5 units x $50 = $250

6. b. If the inventory balance was lower using FIFO than LIFO, then prices duringthe period were moving downward. By using FIFO during such a period, thehigher priced items are sold first with lower-priced goods remaining in theending inventory.

7. b.

Inventory Layer Layerat Base at Base Cost at Current Ending

Date Year Cost Year Cost Index Year Cost Inventory1/1/13 $100,000 1.00 $100,00012/31/13 120,000 $20,000 1.05 $21,000 121,000

12/31/14 128,000 8,000 1.10 8,800 129,800

8. a. IAS No. 2does not permit the use ofLIFO.


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Problem 81 (continued)

d. To record sales on account.

October 2013Accounts receivable ........................................................ 28,000

Sales revenue .............................................................. 28,000No entry is made for the cost of goods sold.

Cost of goods sold:

Beginning inventory $15,000Plus net purchases:

Purchases $21,560Less: Purchases returns (3,000)Plus: Freight-in 500 19,060Cost of goods available for sale 34,060

Less: Ending inventory (16,060)Cost of goods sold $18,000

Adjusting entry:

October 31, 2013Cost of goods sold (above)............................................... 18,000Inventory (ending)............................................................ 16,060Purchase returns .............................................................. 3,000

Inventory (beginning).................................................... 15,000Purchases .................................................................... 21,560Freight-in .................................................................... 500


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Problem 81 (concluded)

Requirement 2

a. To record the purchase of inventory on account and the payment of freightcharges.

October 12, 2013Inventory (98% x $22,000)................................................. 21,560

Accounts payable ....................................................... 21,560

Inventory ......................................................................... 500Cash ............................................................................. 500

b. To record purchase returns.

October 18, 2013Accounts payable ............................................................ 3,000

Inventory ..................................................................... 3,000

c. To record payment of accounts payable.

October 31, 2013

Accounts payable ............................................................ 21,560Interest expense ............................................................... 440

Cash ............................................................................. 22,000

d. To record sales on account.

October 2013Accounts receivable ........................................................ 28,000

Sales revenue ............................................................... 28,000

Cost of goods sold ........................................................... 18,000Inventory ..................................................................... 18,000


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Problem 821. The transaction is not correctly accounted for. Inventory held on consignment by

another company should be included in the inventory of the consignor. Rasul

should include this merchandise in its 2013 ending inventory.2. The transaction is not correctly accounted for. Legal title to merchandise shippedf.o.b. shipping point changes hands when the goods are shipped. Rasul shouldrecord the purchase and corresponding account payable in 2013 and include themerchandise in its 2013 ending inventory.

3. The transaction is not correctly accounted for. Since the merchandise was shippedf.o.b. destination and did not arrive at the customer's location until 2014, it should

be included in Rasuls 2013 ending inventory. The sale should be recorded in2014.

4. The transaction iscorrectly accounted for. Merchandise held on consignment from

another company belongs to the consignor and should be excluded from theinventory of the consignee.

5. The transaction is correctly accounted for. Since the merchandise was shippedf.o.b. destination and did not arrive at Rasuls location until 2014, it should not beincluded in Rasuls 2013 ending inventory. The purchase is correctly recorded in2014.

Problem 83Accounts

Inventory Payable SalesInitial amounts $1,250,000 $1,000,000 $9,000,000Adjustments - increase (decrease):1. (155,000) (155,000) NONE2. (22,000) NONE NONE3. NONE NONE 40,0004. 210,000 NONE NONE5. 25,000 25,000 NONE6. 2,000 2,000 NONE7. (5,300) (5,300) NONE

Total adjustments 54,700 (133,300) 40,000Adjusted amounts $1,304,700 $ 866,700 $9,040,000


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Problem 84

Requirement 1

Beginning inventory (10,000 x $8.00) $ 80,000

Net purchases:Purchases (50,000*units x $10.00) $500,000Less: Returns (1,000 units x $10.50) (10,500)Less: Purchase discounts

($490,000 x 2%) (9,800)Plus: Freight-in (50,000 units x $.50) 25,000 504,700

Cost of goods available (59,000 units) 584,700Less: Ending inventory(below) (121,200)Cost of goods sold $463,500

* The 5,000 units purchased on December 28 are not included. Themerchandise was shipped f.o.b. destination and did not arrive at Johnsonswarehouse until 2014.


Date of


Beg. Inv. 10,000 $ 8.00 $ 80,000

2013 4,000 10.30** 41,200Total 14,000 $121,200

**$10 x 98% = $9.80 + .50 in freight charges = $10.30

Requirement 2

Sales (45,000 units x $18.00) $810,000Less:Cost of goods sold (above) $463,500

Other operating expenses 150,000 (613,500)Income before income taxes $196,500


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Problem 85Cost of goods available for sale for periodic system:

Beginning inventory (6,000 x $8.00) $ 48,000Purchases:

5,000 x $ 9.00 $45,0006,000 x $10.00 60,000 105,000


1. FIFO, periodic system


Cost of goods sold $ 75,000


Date of


Jan. 10 2,000 $ 9.00 $18,000Jan. 18 6,000 10.00 60,000

Totals 8,000 $78,000

Alternatively, cost of goods sold can be determined by adding the cost of the 6,000units in beginning inventory ($48,000) and the 3,000 units from the January 10

purchase ($27,000) = $75,000.


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2. LIFO, periodic system




Date of


Beg. Inv. 6,000 $8.00 $48,000Jan. 10 2,000 9.00 18,000

Totals 8,000 $66,000

Alternatively, cost of goods sold can be determined by adding the cost of the 6,000units from the January 18 purchase ($60,000) and the 3,000 units from the January10 purchase ($27,000) = $87,000.


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3. LIFO, perpetual systemDate Purchased Sold Balance

Beginninginventory

6,000 @ $8.00 = $48,000 6,000 @ $8.00 $48,000

January 5 3,000 @ $8.00 = $24,000 3,000 @ $8.00 $24,000

January 10 5,000 @ $9.00 = $45,000 3,000 @ $8.005,000 @ $9.00 $69,000

January 12 2,000 @ $9.00 = $18,000 3,000 @ $8.003,000 @ $9.00 $51,000

January 18 6,000 @ $10.00 = $60,000 3,000 @ $8.003,000 @ $9.00 $111,0006,000 @ $10.00

January 20 4,000 @ $10.00 = $40,000

3,000 @ $8.003,000 @ $9.00

2,000 @ $10.00 $71,000

Ending

inventory


4. Average cost, periodic system





17,000 units

8,000 units x $9.00 = $72,000

Alternatively, cost of goods sold could be determined by multiplying the unitssold by the average cost: 9,000 units x $9.00 = $81,000.


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5. Average cost, perpetual systemDate Purchased Sold Balance

Beginninginventory

6,000 @ $8.00 = $48,000 6,000 @ $8.00 $48,000

January 5 3,000 @ $8.00 = $24,000 3,000 @ $8.00 $24,000

January 10

Available

5,000 @ $9.00 = $45,000

$69,000

= $8.625/unit8,000 units

January 12 2,000 @ $8.625 = $17,250 6,000 @ $8.625 $51,750

January 18

Available

6,000 @ $10.00 = $60,000

$111,750

= $9.3125/unit12,000 units

January 20 4,000 @ $9.3125 = $37,250 8,000 @ $9.3125 $74,500Ending

inventory



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Problem 86

Requirement 1

Cost of goods available for sale for periodic system:

Purchases:5,000 x $4.00 $20,00012,000 x $4.50 54,00017,000 x $5.00 85,000


a. FIFO




Date of


March 22 14,000 5.00 70,000

b. LIFO




Date of

purchase Units Unit cost Total costJan. 7 5,000 $4.00 $20,000Feb. 16 9,000 4.50 40,500

Totals 14,000 $60,500


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c. Average cost


Cost of goods sold $ 93,529*



34,000 units

14,000 units x $4.6765 = $65,471*Alternatively, could be determined by multiplying the units sold by the averagecost: 20,000 units x $4.6765 = $93,530 (rounding)

Gross Profit ratio:

FIFO: $51,000* $140,000**= 36%

LIFO: $41,500* $140,000**= 30%

Average: $46,471* $140,000**= 33%

*Sales less cost of goods sold**20,000 units x $7 sales price = sales

Requirement 2

In situations when costs are rising, LIFO results in a higher cost of goods soldand, therefore, a lower gross profit ratio than FIFO.


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Problem 87

Requirement 1

Beginning inventory ($60,000 + 60,000 + 63,000) $183,000

Purchases:211 $63,000212 63,000213 64,500214 66,000215 69,000216 70,500217 72,000218 72,300

219 75,000 615,300Cost of goods available 798,300

Ending inventory:213 $64,500216 70,500219 75,000 (210,000)


Requirement 2

Cost of goods available for sale $798,300Less: Ending inventory(below) (219,300)


Cost of ending inventory (3 autos):

Car ID Cost

219 $ 75,000218 72,300217 72,000

Total $219,300


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Requirement 3

Cost of goods available for sale $798,300Less: Ending inventory(below) (183,000)


Cost of ending inventory (3 autos):

Car ID Cost203 $ 60,000207 60,000210 63,000

Total $183,000

Requirement 4

Cost of goods available for sale (12 units) $798,300

Less: Ending inventory(below) (199,575)Cost of goods sold $598,725*


$798,300Weighted-average unit cost = = $66,525

12 units

3 units x $66,525 = $199,575

*Alternatively, could be determined by multiplying the units sold by the averagecost: 9 units x $66,525 = $598,725


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Problem 88

Requirement 1

The note indicates that if the company had used FIFO, inventory would have

been higher by $2,575 million and $3,022 million at the end of 2010 and 2009respectively. Therefore, 2010 cost of goods sold would have been higher (and income

before tax lower) by $447 million ($3,022 2,575).The information provided also states that net income for 2010 would have been

lower by $331 million if FIFO had been used. This means that the tax effect of thedifference between LIFO and FIFO was $116 million ($447 331). The effective tax

rate is therefore approximately 26%($116 $447).

Requirement 2

The information might be useful to a financial analyst interested in comparingCaterpillars performance with another company using the FIFO inventory methodexclusively.

Requirement 3

Retained earnings would have been higher by approximately $1,906 million[$2,575 million x (1 .26)]. This analysis assumes a constant 26% income tax ratethroughout Caterpillars corporate life.


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Problem 89

Requirement 1

Beginning inventory $ 450,000

Purchases:30,000 units @ $25 750,000

Cost of goods available for sale 1,200,000Less: Ending inventory (below) (250,000)Cost of goods sold $ 950,000


Date of

purchase Units Unit cost Total costBeg. Inv. 10,000 $15 $150,000Beg. Inv. 5,000 20 100,000

Totals 15,000 $250,000

Requirement 2

Cost of goods sold assuming all units purchased at the year 2013 price:40,000 units x $25.00 = $1,000,000Less: LIFO cost of goods sold (950,000)

LIFO liquidation profit before tax 50,000

Multiplied by 1 .40 x .60LIFO liquidation profit $ 30,000

Requirement 3

$50,000 x 40% = $20,000


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Problem 810

Requirement 1

Cost of goods sold:

2013: 1,000 x $16 = $ 16,00010,000 x $18 = 180,000

11,000 $196,000

2014: 1,500 x $16 = $ 24,00013,000 x $18 = 234,000

14,500 $258,000

2015: 1,000 x $12 = $ 12,00012,000 x $18 = 216,000

13,000 $228,000

Requirement 2

LIFO liquidation before-tax profit or loss:

2013: 1,000 units x $2 ($18 16) = $2,000 profit2014: 1,500 units x $2 ($18 16) = $3,000 profit2015: 1,000 units x $6 ($18 12) = $6,000 profit

Requirement 3

Disclosure note:

During fiscal 2015, 2014, and 2013, inventory quantities in certain LIFO layers werereduced. These reductions resulted in a liquidation of LIFO inventory quantities

carried at lower costs prevailing in prior years as compared with the cost of fiscal2015, 2014, and 2013 purchases. As a result, cost of goods sold decreased by $6,000,$3,000, and $2,000 in fiscal 2015, 2014, and 2013, respectively, and net incomeincreased by approximately $3,600, $1,800, and $1,200, respectively.


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Problem 811

Requirement 1

Sales (27,000 units x $2,000) $54,000,000

Less: Cost of goods sold (27,000 units x $1,000) (27,000,000)Gross profit $27,000,000

Gross profit ratio = $27,000,000 $54,000,000 = 50%

Requirement 2

Sales (27,000 units x $2,000) $54,000,000Less: Cost of goods sold* (25,000,000)

Gross profit $29,000,000

Gross profit ratio = $29,000,000 $54,000,000 = 53.7%

*Cost of goods sold:15,000 units x $1,000 = $15,000,000

6,000 units x $ 900 = 5,400,0004,000 units x $ 800 = 3,200,000

2,000 units x $ 700 = 1,400,00027,000 units $25,000,000


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Requirement 3

The gross profit and gross profit ratio are higher applying the requirement 2assumption of 15,000 units purchased because of the LIFO liquidation profit that

results. When inventory quantity declines during a reporting period, LIFO inventorylayers carried at costs prevailing in prior years are liquidated or assumed sold in thecost of goods sold calculation. This results in noncurrent costs being matched withcurrent selling prices. If the company had purchased at least 27,000 units during2014, there would be no LIFO liquidation.

The profit difference ($2,000,000 in this case), if material, must be disclosed in anote. The difference can be arrived at by comparing the current replacement cost of$1,000 with each inventory layer from prior years that was included in this years costof goods sold, as follows:

6,000 units x $100 ($1,000 900) $ 600,0004,000 units x $200 ($1,000 800) 800,0002,000 units x $300 ($1,000 700) 600,000Total LIFO liquidation profit $2,000,000

Requirement 4

Sales (27,000 units x $2,000) $54,000,000Cost of goods sold:

5,000 units x $700 $ 3,500,0004,000 units x $800 3,200,000

6,000 units x $900 5,400,00012,000 units x $1,000 12,000,000 24,100,00027,000 units

Gross profit = $29,900,000

Gross profit ratio = $29,900,000 $54,000,000 = 55.4%

If only 15,000 units are purchased, cost of goods sold, gross profit, and the grossprofit ratio would be exactly the same as when 28,000 units are purchased.

Requirement 5

The number of units purchased has no effect on FIFO cost of goods sold. Whenapplying the first-in, first-out approach, beginning inventory costs are included in costof goods sold first, regardless of the quantities of inventory purchased in the newreporting period.


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Problem 812

Requirement 1

Allowance for uncollectible accounts

Balance, beginning of year $7Add: Bad debt expense for 2013 8Less: End-of-year balance (10)

Accounts receivable written off $ 5

Requirement 2

Accounts receivable analysis:

Balance, beginning of year ($583 + 7) $ 590

Add: Credit sales 6,255Less: write-offs (from Requirement 1) (5)Less: Balance end of year ($703 + 10) (713)

Cash collections $6,127

Requirement 3

Cost of goods sold for 2013 would have been $130 million lowerhad Invernessused the average cost method for its entire inventory. While beginning inventorywould have been $350 million higher, ending inventory also would have been higher

by $480 million. An increase in beginning inventory causes an increase in cost ofgoods sold, but an increase in ending inventory causes a decrease in cost of goodssold. Purchases for the year are the same regardless of the inventory valuation method

used. Therefore, cost of goods sold would have been $5,060($5,190 130).

Requirement 4

a. Receivables turnover ratio = $6,255 = 9.73 times($703 + 583)/2

b. Inventory turnover ratio = $5,190 = 6.15 times($880 + 808)/2

c. Gross profit ratio = ($6,255 5,190) = 17%$6,255


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Requirement 5

If inventory costs are increasing, when inventory quantity declines during aperiod, liquidation of LIFO inventory layers carried at lower costs prevailing in prior

years results in noncurrent costs being matched with current selling prices. Theincome generated by this liquidation is known as LIFO liquidation profit.

The liquidation caused 2013 cost of goods sold to be lower by $9.23 million [$6

million (1 .35)]


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Problem 813Ending



1/1/13 $400,000

= $400,000 $400,000 (base) $400,000 x 1.00 = $400,000 $400,0001.00

12/31/13 $441,000= $420,000 $400,000 (base) $400,000 x 1.00 = $400,000

1.05 20,000 (2013) 20,000 x 1.05 = 21,000 421,000

12/31/14 $487,200= $435,000 $400,000 (base) $400,000 x 1.00 = $400,000

1.12 20,000 (2013) 20,000 x 1.05 = 21,000

15,000 (2014) 15,000 x 1.12 = 16,800 437,800

12/31/15 $510,000= $425,000 $400,000 (base) $400,000 x 1.00 = $400,000

1.20 20,000 (2013) 20,000 x 1.05 = 21,000

5,000 (2014) 5,000 x 1.12 = 5,600 426,600

Problem 814Ending



1/1/13 $150,000

= $150,000 $150,000 (base) $150,000 x 1.00 = $150,000 $150,0001.00

12/31/13 $200,000= $185,185 $150,000 (base) $150,000 x 1.00 = $150,000

1.08 35,185 (2013) 35,185 x 1.08 = 38,000 188,000

12/31/14 $245,700

= $210,000 $150,000 (base) $150,000 x 1.00 = $150,0001.17 35,185 (2013) 35,185 x 1.08 = 38,000

24,815 (2014) 24,815 x 1.17 = 29,034 217,034

12/31/15 $235,980

= $207,000 $150,000 (base) $150,000 x 1.00 = $150,0001.14 35,185 (2013) 35,185 x 1.08 = 38,000

21,815 (2014) 21,815 x 1.17 = 25,524 213,524

12/31/16 $228,800= $208,000 $150,000 (base) $150,000 x 1.00 = $150,000

1.10 35,185 (2013) 35,185 x 1.08 = 38,00021,815 (2014) 21,815 x 1.17 = 25,524

1,000 (2016) 1,000 x 1.10 = 1,100 214,624


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Problem 815Ending



1/1/13 $260,000

= $260,000 $260,000 (base) $260,000 x 1.00 = $260,000 $260,0001.00

12/31/13 $340,000= $333,333 $260,000 (base) $260,000 x 1.00 = $260,000

1.02 73,333 (2013) 73,333 x 1.02 = 74,800 334,800

12/31/14 $350,000= $330,189 $260,000 (base) $260,000 x 1.00 = $260,000

1.06 70,189 (2013) 70,189 x 1.02 = 71,593 331,593

12/31/15 $400,000

= $373,832 $260,000 (base) $260,000 x 1.00 = $260,0001.07 70,189 (2013) 70,189 x 1.02 = 71,593

43,643 (2015) 43,643 x 1.07 = 46,698 378,291

12/31/16 $430,000

= $390,909 $260,000 (base) $260,000 x 1.00 = $260,0001.10 70,189 (2013) 70,189 x 1.02 = 71,593

43,643 (2015) 43,643 x 1.07 = 46,698

17,077 (2016) 17,077 x 1.10 = 18,785 397,076


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Problem 816Ending



1/1/13 $84,000= $84,000 $84,000 (base) $84,000 x 1.00 = $84,000 $84,000

1.00

12/31/13 $100,800= $96,000 $84,000 (base) $84,000 x 1.00 = $84,000

1.05 12,000 (2013) 12,000 x 1.05 = 12,600 96,600

12/31/14 $136,800

= $120,000 $84,000 (base) $84,000 x 1.00 = 84,000

1.14 12,000 (2013) 12,000 x 1.05 = 12,600

24,000 (2014) 24,000 x 1.14 = 27,360 123,960

12/31/15 $150,000= $125,000 $84,000 (base) $84,000 x 1.00 = $84,000

1.20(1) 12,000 (2013) 12,000 x 1.05 = 12,60024,000 (2014) 24,000 x 1.14 = 27,360

5,000 (2015) 5,000 x 1.20 = 6,000 129,960

12/31/16 $160,000(5)

= $128,000(4) $84,000 (base) $84,000 x 1.00 = 84,000

1.25 12,000 (2013) 12,000 x 1.05 = 12,60024,000 (2014) 24,000 x 1.14 = 27,360

5,000 (2015) 5,000 x 1.20 = 6,000

3,000 (2016) 3,000(3) x 1.25 = 3,750(2) 133,710

(1)$150,000 $125,000 = 1.20 (2015 cost index)

(2)$133,710 129,960 = $3,750

(3)$3,750 1.25 = $3,000

(4)$125,000 + 3,000 = $128,000 (2016 inventory at base-year cost)

(5)$128,000 x 1.25 = $160,000 (2016 inventory at year-end costs)


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Judgment Case 81

Advance warning of the company's impending bankruptcy existed at the date ofthe financial statements. As a rule, inventories should rise in tandem with sales. Ifinventories rise faster, it may be because the goods simply aren't selling. This is

particularly true of companies in faddish or seasonal businessesMerry-Go-Round'sworld.

The company's report showed that inventories on January 30 were $82.2 million,up 37 percent from $60 million a year earlier. That's well above the 15 percent salesgrowth in the same period, to $877.5 million from $761.2 million. This alone shouldhave been a major cause for concern. It indicated the company's goods simply weren't

selling as rapidly as it expected, causing its inventories to bulge. The increase inreceivables from $6,195 to over $6 million should also have been cause for concern.

CASES


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Real World Case 82

Requirement 1

Identifying items that should be included in inventory is difficult due to goods in

transit, goods on consignment, and sales returns.Goods in transit. Inventory shipped f.o.b. shipping point is included in the

purchasers inventory as soon as the merchandise is shipped. On the other hand,inventory shipped f.o.b. destination is included in the purchasers inventory only afterit reaches the purchasers location.

Goods on consignment. Goods held on consignment are included in theinventory of the consignor until sold by the consignee.

Sales returns. When the right of return exists, a seller must be able to estimatethose returns. As a result, a company includes in inventory the cost of merchandise it

anticipates will be returned.

Requirement 2

In addition to the direct acquisition costs such as the price paid and transportationcosts to obtain inventory, the costs of unloading, unpacking, and preparing inventoryfor sale or raw materials for use, if material in amount, also should be included in thecost of inventory.

Requirement 3

Sport Chalet considers cost to include the direct cost of merchandise and inbound

freight, plus internal costs associated with merchandise procurement, storage, andhandling.


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Judgment Case 831. a. The specific identification method requires each unit to be clearly

distinguished from similar units either by description, identification number, location

or other characteristic. Costs are accumulated for specific units and expensed as theunits are sold. Thus, the specific identification method results in recognized cosflows being identical to actual physical flows. Ideally, each unit is relativelyexpensive and the number of units relatively few so that recording costs is not

burdensome. Under the specific identification method, if similar items have differentcosts, cost of goods sold is influenced by the specific units sold.

b. It is appropriate for Happlia to use the specific identification methodbecause each appliance is expensive, and easily identified by number and descriptionThe specific identification method is feasible because Happlia already maintainsrecords of its units held by individual retailers. Managements ability to manipulate

cost of goods sold is minimized because once the inventory is in the retailers hands,Happlias management cannot influence the units selected for sale.

2. a.Happlia should include in inventory carrying amounts all necessary andreasonable costs to get an appliance into a useful condition and place for saleCommon (or joint) costs should be allocated to individual units. Such costs excludethe excess costs incurred in transporting refrigerators to Minneapolis and theirreshipment to Kansas City. These unit costs should only include normal freight costsfrom Des Moines to Kansas City. In addition, costs incurred to provide time utility tothe goods, that is, ensuring that they are available when required, will also be included

in inventory carrying amounts.b.Examples of inventoriable costs include the unit invoice price, plus an

allocated proportion of the port handling fees, import duties, freight costs to DesMoines and to retailers, insurance costs, repackaging, and warehousing costs.

3. The 2013 income statement should report in cost of goods sold allinventory costs related to units sold in 2013, regardless of when cash is received fromretailers. Excess freight costs incurred for shipping the refrigerators from Minneapolisto Kansas City should be included in determining operating income.


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Communication Case 84Suggested Grading Concepts and Grading Scheme:

Content (70%)_______ 20 Describes the differential effect on ending inventory

and cost of goods sold of using FIFO versus LIFOwhen_____ Prices are increasing._____ Prices are decreasing.

_______ 25 Discusses the various motivating factors thatmight influence the choice of inventory method.

______ The actual physical flow of product.______ The better match of expenses with revenues

provided by LIFO.

______ The effect on the balance sheet.______ The effect on reported income and income

taxes.______ The cost of implementation of LIFO._______ 10 Discusses briefly the methods available to

simplify LIFO._______ 15 Discusses the IRS conformity rule with respect to

LIFO and the relaxation of the rule that allows aa company using LIFO to present supplementalnon-LIFO disclosures.

_____________ 70 points

Writing (30%)_______ 6 Terminology and tone appropriate to the audience ofa company president.

_______ 12 Organization permits ease of understanding._____ Introduction that states purpose._____ Paragraphs that separate main points.

_______ 12 English_____ Sentences grammatically clear and well organized,

concise._____ Word selection.

_____ Spelling._____ Grammar and punctuation.

_____________ 30 points


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Communication Case 85LIFO produces a higher cost of goods sold, lower taxable income, and therefore

lower income taxes currently payable than FIFO only in periods when the costs of thecompanys products are rising. When costs are decreasing, LIFO results in lower cost

of goods sold, higher taxable income, and a higher current tax liability than FIFO. Inthe case of the electronics client, you would explain this to the intern concluding thatthe costs of the client's products must be decreasing, as frequently occurs in thisindustry.

Judgment Case 86At the end of a reporting period it is important to ensure that a proper inventory

cutoff is made. A proper cutoff involves the determination of the ownership of goodsthat are in transit between the company and its customers as well as the company andits suppliers. If the shipment is made f.o.b. shipping point, then ownership istransferred to the buyer when the goods reach the common carrier. If the shipment ismade f.o.b. destination, then ownership is transferred to the buyer when the goodsarrive at the buyers location.

In this case, John is incorrect if the goods were shipped f.o.b. destination. If soeven though the company is not in physical possession of the goods, they should beincluded in ending inventory because the shipment had not reached the buyer'slocation by the end of the reporting period.


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Ethics Case 87

Requirement 1

Without purchase of the additional units:

Sales (35,000 @ $60) $2,100,000Cost of goods sold (35,000 x $30) (1,050,000)Gross profit $1,050,000

Due Jim Lester($1,050,000 x 20%) = $210,000

With purchase of the additional units:Sales $2,100,000Cost of goods sold:20,000 x $40 $800,000

15,000 x $30 450,000 (1,250,000)Gross profit $ 850,000

Due Jim Lester($850,000 x 20%) = $170,000

Requirement 2

Discussion should include these elements.

Facts:

If Moncrief purchases the additional units at the end of the year under a periodic

LIFO inventory system, the transaction results in a reduced payment to Jim Lester,reduced profits to shareholders, and reduced income tax payments to governmententities. By purchasing the additional units of Zelenex, Moncrief reduces Jim Lester's

payment by $40,000 ($210,000 170,000) and decreases gross profit by $200,000($1,050,000 850,000). The net effect on before-tax income is a decrease of$160,000 ($200,000 40,000). Since Moncrief does not intend to sell the units until2014, the only logical reason for purchasing more costly inventory at year-end is

profit manipulation.

Ethical Dilemma:Should Moncrief exercise its right to purchase inventory at will, resulting in areduction in net income, or recognize the rights of Jim Lester to receive profit for thesale of his product, shareholders' rights to have their investment appreciate through

positive earnings, and government entities' rights to collect tax on economic netincome?


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Real World Case 88

Requirement 1

The LIFO conformity rule permits LIFO users to present designated

supplemental disclosures. These disclosures allow a company using LIFO to reportin a note, the difference between inventories valued using LIFO and inventory valuedas if another method had been used. Kroger's note provides this supplementainformation.

Requirement 2

1/29/11

Ending Beginning

Inventory Inventory

($ in millions)Inventory as stated $4,966 $4,935Add: Increase in LIFO inventory 827 770FIFO inventory balances $5,793 $5,705

Requirement 3

Cost of goods sold for the fiscal year ended January 29, 2011, would have been

$57 million lower had Kroger used FIFO for its entire inventory. While beginninginventory would have been $770 million higher, ending inventory also would have

been higher by $827 million. An increase in beginning inventory causes an increasein cost of goods sold, but an increase in ending inventory causes a decrease in cost ofgoods sold. Purchases for the year are the same regardless of the inventory valuationmethod used.


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Real World Case 89

Requirement 3

The following is based on Whole Foods 2010 financial statements. Answers

will vary depending on the financial statement dates chosen.

a. Whole Foods uses the last-in, first-out (LIFO) method for approximately 93.9%of its inventories at the end of 2010 and 93.6% of its inventories at the end of2009 and FIFO for the remainder.

b. Assuming that current cost approximates FIFO cost, the inventory disclosurenote indicates that, if FIFO had been used to value LIFO inventories,inventories would have been higher than reported by $19.4 million at the end of2010 and $27.1 million at the end of 2009. Cost of goods sold for 2010 would

have been $7.7 million higher ($27.1 19.4) had Whole Foods used FIFO.

Beginning inventory would have been $27.1 million higher and endinginventory also would have been higher by $19.4 million. An increase in

beginning inventory causes an increase in cost of goods sold, while an increasein ending inventory causes a decrease in cost of goods sold. Purchases for 2010are the same regardless of the inventory valuation method used.

c. Inventory turnover = cost of goods sold divided by average inventory

($ rounded to millions)Inventory turnover = $5,870 = 18.52 times

$317 *

*($323 + 311) 2


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Communication Case 810The dollar-value LIFO inventory estimation technique begins with the

determination of the current years ending inventory valued in terms of year-end costs

It is not necessary for a company using DVL to track the cost of purchases during theyear. All that is needed is to take the physical quantities of goods on hand at the endof the year and apply year-end costs.

The next step is to convert the ending inventory from year-end costs to base yearcosts. This usually is accomplished by dividing the ending inventory at year-end costs

by the years cost index. The cost index reflects the change in cost from a base year tothe current year. The ending inventory has been deflated for cost changes from the

base year to the end of the current year.The next step in the procedure is to identify the layers in ending inventory with

the years they were created by comparing ending inventory at base year cost to the

beginning inventory at base year cost. Applying the LIFO concept, if inventory hasincreased, ending inventory at base year cost consists of the beginning inventory layer

plus a current year layer.The final step converts the layers identified to cost by multiplying the layers at

base year cost by the layers cost index. The costs are totaled to obtain endinginventory at DVL cost.


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Research Case 811

Requirement 1

The FASBs codification citation that provides guidance for determining whether

an arrangement involving the sale of inventory is in substance a financingarrangement is FASB ASC 47040052: DebtProduct Financing ArrangementsOverview and Background.

Requirement 2

The FASBs codification citation that addresses the recognition of a productfinancing arrangement is FASB ASC 47040251: DebtProduct FinancingArrangementsRecognition.

Requirement 3

The appropriate accounting treatment for this type of arrangement is for thesponsor to record a liability at the time the proceeds are received from the other entity.The sponsor does not record the transaction as a sale and does not remove the productfrom its inventory. The cost of the repurchase amount in excess of the originallyrecorded liability represents financing and holding costs. These costs are accountedfor in accordance with the sponsors accounting policies applicable to other financingand holding costs. Notice that this is an example of substance (a loan) over form (asale).

Requirement 4

Journal entry to record the sale (cash receipt):

Cash ................................................................................. 160,000Liabilityproduct financing arrangement ................. 160,000

Journal entry to record the repurchase:

Liabilityproduct financing arrangement .................... 160,000Holding and financing costs* ......................................... 4,000

Cash ............................................................................. 164,000


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Research Case 811 (concluded)

*The treatment of these costs depends on the accounting policies of the sponsor. Forexample, if these costs normally are expensed as period costs, then the debit in this

case would be to an expense account (or accounts).


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Analysis Case 812

Requirement 1

($ in millions)

SAKS DILLARDS

Gross profit ratio = 1,098 =39% 2,145 = 35%2,786 6,121

Inventory turnover = 1,688 =2.56 times 3,976 = 3.07 times660 1,295.5

Average days = 365 =143 days 365 = 119daysin inventory 2.56 3.07

The gross profit ratios for the two companies are similar, and both are higher thanthe industry average. The inventory turnover ratios for the two companies reveal that,on average, it takes Saks 24 more days to sell its inventory than Dillards. This could

be a reflection of more higher-end merchandise sold at Saks, which would alsoexplain the slightly higher gross profit ratio of 39% compared to 35% for Dillards.

Saks turns its inventory over 14 days slower than the industry average, Dillards 10d

Spiceland SM 7eCh08

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