financial accounting tools for business decision making solutions 7e chapter 06

Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley Financial Accounting, Seventh Canadian Edition CHAPTER REPORTING AND ANALYZING INVENTORY LEARNING OBJECTIVES Describe the steps in determining inventory quantities Apply the cost formulas using specific identification, FIFO, and average cost under a perpetual inventory system Explain the effects on the financial statements of choosing each of the inventory cost formulas Identify the effects of inventory errors on the financial statements Demonstrate the presentation and analysis of inventory 6.* Apply the FIFO and average cost inventory cost formulas under a periodic inventory system (Appendix 6A) Solutions Manual 6-1 Chapter Copyright © 2017 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley Financial Accounting, Seventh Canadian Edition SUMMARY OF QUESTIONS BY LEARNING OBJECTIVES AND BLOOM’S TAXONOMY Item LO BT Item LO BT Item LO BT Questions Item LO BT Item LO BT 1 C C 11 C 16 C 21 2,6 C C K 12 C 17 K 22 2,6 C C 13 C 18 C C 14 C 19 2,6 C C 15 C 20 C C 10 AP 13 AP K C C 10 Brief Exercises 1 K AN AP AN C 11 AP 14 2,6 AN AP AP AN 12 AN 15 2,6 AP AN 13 3,6 AP Exercises C AN AN 2,3 AN 10 AP 14 AN 2,3 AN 2,3 AN 11 AN 15 2,6 AP 2,3 AN AN 12 3,5 AN 16 2,6 AP 1 AP 2,3 AN AN 13 AP 2 AP 2,5 AP 10 AP 14 5,6 AP 2,3 AP 4,5 AN 11 AP 15 2,6 AN 2,4 AN 4,5 AN 12 AN 16 2,6 AN 2,3 AN Problems: Set A and B Accounting Cycle Review AN AN 1,2,3,6 E 2,3 AN AN 4,5 E 1,2 E Cases Solutions Manual 6-2 Chapter Copyright © 2017 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley Financial Accounting, Seventh Canadian Edition Legend: The following abbreviations will appear throughout the solutions manual file LO Learning objective BT Bloom's Taxonomy K Knowledge C Comprehension AP Application AN Analysis S Synthesis E Evaluation Level of difficulty S Simple M Moderate C Complex Estimated time to prepare in minutes Difficulty: Time: AACSB CPA CM cpa-e001 cpa-e002 cpa-e003 cpa-e004 cpa-e005 cpa-t001 cpa-t002 cpa-t003 cpa-t004 cpa-t005 cpa-t006 Association to Advance Collegiate Schools of Business Communication Communication Ethics Ethics Analytic Analytic Technology Tech Diversity Diversity Reflective Thinking Reflec Thinking CPA Canada Competency Ethics Professional and Ethical Behaviour PS and DM Problem-Solving and Decision-Making Comm Communication Self-Mgt Self-Management Team & Lead Teamwork and Leadership Reporting Financial Reporting Stat & Gov Strategy and Governance Mgt Accounting Management Accounting Audit Audit and Assurance Finance Finance Tax Taxation Solutions Manual 6-3 Chapter Copyright © 2017 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley Financial Accounting, Seventh Canadian Edition ANSWERS TO QUESTIONS 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 to minimize errors due to the movement of merchandise Tom will probably count items and mark the quantity, description, and inventory number on pre-numbered inventory tags (unless the company has more advanced technology that can read bar codes on inventory products – we will assume that they not) He should only include items in the inventory that are in saleable condition Ideally, strong internal control should be exerted over the physical inventory count For example, Tom should not have responsibility for the custody or record-keeping for the inventory He should also count in teams of two, or there should be a second counter checking the accuracy of the count Adjustments may also have to be made to the physical inventory count for any goods in transit For example, inventory purchased FOB shipping point that is still in transit will have to be included in inventory Inventory that has been shipped by Kikujiro to customers FOB destination and not received by the customer before year-end will also have to be included in the count Finally, any of Kikujiro’s inventory held by other retailers on consignment will have to be included in the count as well LO BT: C Difficulty: M Time: 20 AACSB: None CPA: cpa-t001 CM: Reporting In a consignment agreement, the consignor is the business that owns the goods, and the consignee is the business that will sell the goods, without having to purchase and own the goods before they are sold The consignee will sell the goods for the consignor for a fee or a percentage of the sales price Only the owner of goods, the consignor, includes the goods in its inventory even though the goods are physically located on the consignee’s premises LO BT: C Difficulty: M Time: AACSB: None CPA: cpa-t001 CM: Reporting (a) The goods will be included in Janine Ltd.’s (the seller’s) inventory if the terms of sale are FOB destination (b) The goods will be included in Fastrak Corporation’s (the buyer’s) inventory if the terms of sale are FOB shipping point LO BT: K Difficulty: S Time: AACSB: None CPA: cpa-t001 CM: Reporting Solutions Manual 6-4 Chapter Copyright © 2017 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley Financial Accounting, Seventh Canadian Edition (a) Include: the inventory items belong to Kingsway as Kingsway is the consignor (b) Include: the inventory items belong to Kingsway while in transit because the terms are FOB shipping point (c) Exclude: the customer has purchased the inventory item and legal ownership has passed to the customer LO BT: C Difficulty: M Time: AACSB: None CPA: cpa-t001 CM: Reporting (a) The unit cost of an inventory item is needed for the entry to record the cost of goods sold and remove the cost of the items sold from inventory Because units of the same inventory item are typically purchased at different prices, it is necessary to determine which unit costs to use in the calculation of the cost of the goods sold (b) When using the perpetual system, an entry to record the cost of goods sold and remove the cost of the items sold from inventory is recorded at the same time as the sales transaction The information from the perpetual system is updated, using the cost formula adopted by the business The cost formula is also used in the detailed perpetual records for every increase in inventory caused by purchases, freightin, etc transactions On the other hand, since a record is not kept of the individual inventory item transactions under the periodic system, the entry to record the cost of goods sold and remove the cost of the items sold from inventory can only be made at the end of a reporting period, when ending inventory is determined by a physical count LO BT: C Difficulty: M Time: 10 AACSB: None CPA: cpa-t001 CM: Reporting Solutions Manual 6-5 Chapter Copyright © 2017 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley (a) (b) Financial Accounting, Seventh Canadian Edition The specific identification formula tracks the physical flow of individual inventory items, matching the cost of the actual item sold against the revenue from that item The FIFO inventory cost formula assumes the first inventory purchased is the first inventory sold The most recent purchases are assumed to remain in ending inventory The average cost formula assumes that all goods available for sale are indistinguishable or homogeneous An example of inventory where the specific identification would be appropriate would be for goods that are not ordinarily interchangeable, such as automobiles with unique vehicle identification numbers Inventory such as groceries could be accounted for using the FIFO cost formula as older items are normally sold first Inventory such as hardware could be accounted for using an average cost formula LO BT: C Difficulty: M Time: 10 AACSB: None CPA: cpa-t001 CM: Reporting (a) Average cost or FIFO can be used if the goods available for sale are identical Specific identification cannot be used if the goods are not specifically identifiable (b) FIFO assumes that the first goods purchased are the first to be sold (c) Specific identification merchandise matches the actual physical flow of LO BT: K Difficulty: S Time: AACSB: None CPA: cpa-t001 CM: Reporting A new weighted average unit cost must be calculated after each purchase because a new cost amount is added to the “cost pool” This changes the total dollars in the cost pool and the quantity of units on hand in the cost pool A sale withdraws units and total dollars from the cost pool at the weighted average cost This does not affect the weighted average cost of the remaining units That is, the weighted average cost of the remaining units is unchanged after a sale LO BT: C Difficulty: M Time: AACSB: None CPA: cpa-t001 CM: Reporting Solutions Manual 6-6 Chapter Copyright © 2017 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley Financial Accounting, Seventh Canadian Edition A company should consider: • Whether the goods are interchangeable or not, or whether they are produced or segregated for specific projects; • Whether the formula corresponds most closely to the physical flow of goods; • Whether the formula reports inventory on the statement of financial position that is close to the inventory’s most recent cost; and • Whether the formula is used for other inventories with a similar nature and usage LO BT: C Difficulty: M Time: AACSB: None CPA: cpa-t001 CM: Reporting 10 Average cost produces the better income statement valuation because the cost of goods sold is determined using more recent inventory prices This better matches current costs with current revenues FIFO produces the better valuation on the statement of financial position because the ending inventory is determined using the most recent prices Since the normal intent is to replace the inventory after it is sold, the most recent prices are more relevant for decision-making LO BT: C Difficulty: M Time: AACSB: None CPA: cpa-t001 CM: Reporting Solutions Manual 6-7 Chapter Copyright © 2017 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley 11 Financial Accounting, Seventh Canadian Edition (a) No effect – cash is not affected by the choice of inventory cost formulas (b) In a period of declining prices, FIFO will produce a lower ending inventory as inventory is determined using the most recent (lower) prices Average cost will produce a higher ending inventory as ending inventory incorporates the higher older prices (c) 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 the average cost formula (d) Because of the effect on the cost of goods sold as outlined in (c), net income will be lower under FIFO and higher under average cost (e) The impact on retained earnings will be the same as the impact on net income and ending inventory—lower in a period of declining prices using FIFO and higher using average cost LO BT: C Difficulty: C Time: 10 AACSB: None CPA: cpa-t001 CM: Reporting 12 The error should be corrected if it will change the figures presented on the financial statements While retained earnings may not change, other financial statement items and comparative figures may change This information may impact a user’s decision LO BT: C Difficulty: C Time: AACSB: None CPA: cpa-t001 CM: Reporting Solutions Manual 6-8 Chapter Copyright © 2017 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley 13 (a) (b) (c) (d) (e) (f) Financial Accounting, Seventh Canadian Edition Mila Ltd.’s 2018 income before tax will be understated by $43,000 This is because an understatement of ending inventory will result in an overstatement of cost of goods sold If cost of goods sold is overstated, then income before tax will be understated 2018 retained earnings will be understated by $43,000 because net income is understated (see (1) above) 2018 total shareholders’ equity will be understated by $43,000 because the retained earnings balance is understated (see (b) above) 2019 net income will be overstated $43,000 This is because beginning inventory is understated by $43,000, which will result in an understatement of cost of goods sold (recognizing that 2018 ending inventory is 2019 beginning inventory) If cost of goods sold is understated, then income before tax will be overstated 2019 retained earnings will be correct because the understatement in net income in 2018 and overstatement in 2019 will cancel each other 2019 total shareholders’ equity will be correct because the retained earnings balance is correct LO BT: C Difficulty: C Time: 15 AACSB: Analytic CPA: cpa-t001 CM: Reporting Solutions Manual 6-9 Chapter Copyright © 2017 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley 14 Financial Accounting, Seventh Canadian Edition (a) At the end of the fiscal year, before the inventory is adjusted to the inventory count, Shediac’s assets (Inventory) would be overstated and its liabilities would be overstated (Accounts Payable) There would be no effect on shareholders’ equity (b) Since the merchandise is not on hand at the time of the inventory count, the shipment from Bathurst would not be counted This in turn would cause the inventory count to be lower than the perpetual inventory record Normally when such a discrepancy arises, the Inventory account will be adjusted downward with a credit to reflect the amount of merchandise actually on hand The corresponding debit in this adjusting entry would be to Cost of Goods Sold The summary effect of the initial error and the count adjustment would be an overstatement in Cost of Goods Sold and Accounts Payable Because Cost of Goods Sold is overstated, gross profit and net income are understated as well as Retained Earnings At the end of Shediac’s current year, after the adjustment is made for the results of the inventory count, the overall impact on the accounting equation is no effect on assets, an overstatement of liabilities (Accounts Payable), and an understatement of shareholders’ equity (Retained Earnings) LO BT: C Difficulty: C Time: 15 AACSB: None CPA: cpa-t001 CM: Reporting 15 (a) Cost refers to the original cost of inventory as determined by using specific identification, FIFO, or average cost formulas Net realizable value is the selling price less any costs required to make the goods ready for sale (b) The lower of cost and net realizable value rule should be applied at the end of the accounting period, before financial statements are prepared LO BT: C Difficulty: M Time: AACSB: None CPA: cpa-t001 CM: Reporting Solutions Manual 6-10 Chapter Copyright © 2017 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley Financial Accounting, Seventh Canadian Edition CT6-3 (CONTINUED) (c) Yes, the use of the different cost formulas would affect the comparison of the financial statements This effect is greater in periods where inventory costs are changing Global Lumber measures its inventory using the FIFO cost formula and therefore its inventory is valued at the most current price Gibson uses the average cost formula and therefore its inventory is valued at the average cost of all inventory purchased or produced during the period Therefore, in a period of rising (or declining) prices Global Lumber's would be recorded at a higher (or lower) per unit value than that of Gibson LO 1,2,3,6 BT: E Difficulty: C Time: 40 AACSB: Reflec Thinking CPA: cpa-t001 CM: Reporting Solutions Manual 6-115 Chapter Copyright © 2017 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley CT6-4 (a) PROFESSIONAL JUDGEMENT CASE The cost of goods available for sale in December can be calculated as follows (notice that the goods in transit are not included as title has not yet passed because terms were FOB destination): December – purchase from DDI Second purchase Third purchase (b) Financial Accounting, Seventh Canadian Edition Doors Cost 2,600 800 600 4,000 310 240 190 Total $ 806,000 192,000 114,000 $1,112,000 The cost of ending inventory at the end at December 31 can be calculated as follows: The average cost, or carrying amount, of a door is $1,112,000 ÷ 4,000 = $278 per door The number of units in ending inventory is the 800 doors counted The 100 doors in transit should not be included in inventory because title did not pass while in transit Title passes at destination and the doors have not yet reached their destination Consequently, ending inventory is 800  $278 = $222,400 (c) Because there is an error in the ending inventory balance, the Inventory account will have to be adjusted along with a corresponding adjustment to Cost of Goods Sold The error can be calculated as follows: Inventory balance per Kevin 900 × $310 Inventory correct balance (see above) Difference $279,000 222,400 $ 56,600 As this will directly affect operating income for the month of December, Kevin’s bonus should be reduced by $5,660 (10% of $56,600) Solutions Manual 6-116 Chapter Copyright © 2017 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley Financial Accounting, Seventh Canadian Edition CT6-4 (CONTINUED) (d) The error in ending inventory has an impact on the bank loan The loan limit is 80% of the carrying amount of inventory Since the correct inventory balance is $222,400 and 80% of this amount is $177,920 that is the maximum loan balance that the bank will now allow Since the loan outstanding is currently at $200,000, the bank will want ABS to pay down the loan by $22,080 ($200,000 − $177,920) Had Kevin’s amounts for ending inventory been used, there would have been enough security for the loan (e) Kevin’s actions may be considered unethical for two major reasons First of all, he apparently increased the number of doors in ending inventory by the 100 doors that were in transit even though title had not passed Secondly, he did not apply the average cost formula appropriately It is also interesting to note that the motivation for doing this was probably to maximize his bonus but it could also have been done to maintain the level of current funding from the bank One can also wonder why ABS purchased the inventory when it acquired DDI at an average cost per door of $310 when the cost of doors appeared to be falling dramatically (f) If the selling price, which is the net realizable value of a door, fell to $240 each, then the carrying amount of $278 each would be higher Since inventory is valued at the lower of cost or net realizable value, the amount per door should be reduced from $278 to $240 each, representing a writedown of $800  ($278 − $240) = $30,400 Cost of goods sold will be increased by $30,400 and this will decrease gross profit by the same amount This would further reduce Kevin’s bonus by $3,040 and would mean that the bank loan balance would also have to be reduced by $24,320 (80%  $30,400) LO 4,5 BT: E Difficulty: M Time: 45 AACSB: Ethics and Communication CPA: cpa-t001, cpa-e001, cpa-e003 CM: Reporting, Ethics, and Comm Solutions Manual 6-117 Chapter Copyright © 2017 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley CT6-5 (a) Financial Accounting, Seventh Canadian Edition ETHICS CASE Specific Identification (1) Maximize Gross Profit Sales Cost of goods sold Gross profit $561,0001 366,1002 $194,900 (2) Minimize Gross Profit “$561,0001 366,8003 “$194,200 Sales = (170  $800) + (500  $850) = $561,000 Goods Available for Sale Date Units Cost Total Mar 140 $500 $ 70,000 200 540 108,000 10 340 570 193,800 $371,800 Specific Identification–Maximize gross profit (minimize cost of sales by deciding to sell the handbags purchased at the lowest cost) Cost of Goods Sold Date Units Mar 140 30 25 170 330 Cost 0$500 ,,,,540 …540 570 Total $ 70,000 16,200 91,800 188,100 $366,100 Ending Inventory Date Units Mar 25 10 Cost $570 Total $5,700 Solutions Manual 6-118 Chapter Copyright © 2017 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley Financial Accounting, Seventh Canadian Edition CT6-5 (CONTINUED) Specific Identification–Minimize gross profit (maximize cost of sales by selling the handbags purchased at the highest cost) Cost of Goods Sold Date Units Mar 170 25 340 30 130 Cost ,,$540 570 540 500 Total $ 91,800 193,800 16,200 65,000 $366,800 Ending Inventory Date Units Mar 10 Cost $500 (b) The stakeholders are the shareholders, customers, and staff of Swag Bags There is not really anything unethical in selecting which handbag to sell, unless it is done solely on a desire to manipulate profits (c) Average Cost Sales Cost of goods sold Gross profit March Beginning inventory Purchase Sale 10 Purchase 25 Sale 31 Balance 140 200 340 (170) 170 340 510 (500) 10 Total $5,000 $561,000 366,255 $194,745 $500.00 540.00 523.53 523.53 523.53 570.00 554.51 554.51 $ 70,000 108,000 178,000 (89,000) 89,000 193,800 282,800 (277,255) $ 5,545 Cost of Goods Sold = (170 × $523.53) + (500 × $554.51) = $366,255 Solutions Manual 6-119 Chapter Copyright © 2017 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley Financial Accounting, Seventh Canadian Edition CT6-5 (CONTINUED) (d) Swag Bags should select the average cost method, given that the inventory is homogeneous and not individually distinguishable The specific identification formula is not a permissible choice for the company, given the type and physical flow of inventory it carried The average cost formula also has the advantage of not being subject to manipulation LO 2,3 BT: AN Difficulty: M Time: 45 AACSB: Ethics and Communication CPA: cpa-t001, cpa-e001, cpa-e003 CM: Reporting, Ethics, and Comm Solutions Manual 6-120 Chapter Copyright © 2017 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley CT6-6 Financial Accounting, Seventh Canadian Edition PROFESSIONAL JUDGEMENT CASE (a) Internal control measures should be in place to help ensure: • All goods received are placed into inventory and the perpetual record is updated promptly to ensure that items are not taken by the receiving clerk • Put control tags on each inventory item so that customers not leave the store without paying for them • Have staff watch for suspicious conduct by customers or other staff members • Establish clear policies concerning the handling on inventory and monitor the adherence to these policies by staff members • Have small merchandise in locked display cases that can be accessed only by staff For larger items such as laptops, use locking devises so that they cannot be stolen (b) The inventory should be counted more frequently than once a year, particularly for high-end products Through visual inspection and counting of items on hand when compared to the perpetual record, one can quickly establish if there are issues concerning the accuracy of the perpetual record or if theft and pilferage is occurring If there is high activity (purchase and/or sale) of a particular product, a sample count of that product can be done as frequently as deemed reasonable and prudent to establish proper internal control over the inventory Assuming the physical count is less than the count on the books, the loss would increase the Cost of Goods Sold account on the income statement and decrease the Inventory account on the statement of financial position The opposite would be true if there proved to be an overage established by the inventory count The adjusting entry would affect net income and Retained Earnings Solutions Manual 6-121 Chapter Copyright © 2017 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley Financial Accounting, Seventh Canadian Edition CT6-6 (CONTINUED) (c) The tablets and laptops are unique and identifiable through their serial number Specific identification formula of costing inventory is recommended for this type of inventory Using this formula will better track the items on an individual basis, helping narrow down errors in recording or pinpointing the pilferage of specific inventory items This formula will also allow for better management of the selling price of items and the tracking of gross profit on the sale of specific items For items that are of lesser value and interchangeable, such as the cases and bags, FIFO or average cost would be a better choice, as there is no need to have as stringent control over these less expensive items LO 1,2 BT: E Difficulty: C Time: 35 AACSB: Communication CPA: cpa-t001, cpa-e003 CM: Reporting and Comm Solutions Manual 6-122 Chapter Copyright © 2017 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley Financial Accounting, Seventh Canadian Edition CT6-7 SERIAL CASE Note to instructors: All of the material supplementing this group activity, including a suggested solution, can be found in the Collaborative Learning section of the Instructor Resource site accompanying this textbook as well as in the Prepare and Present section of WileyPLUS (a) Time Management Software Inventory - FIFO 2017 Purchases Date July Units 10 Cost of Goods Sold Cost Total $550.00 $5,500.00 14 Aug 10 550.00 10 539.00 3,300.00 550.00 4,950.00 550.00 539.00 4,367.00 Units Cost Total 10 $550.00 $5,500.00 550.00 2,200.00 14 550.00 7,700.00 550.00 2,750.00 550.00 10 539.00 8,140.00 539.00 3,773.00 10 539.00 5,390.00 539.00 10 528.22 5,282.20 10 539.00 10 528.22 10 539.00 10 528.22 27 Total 550.00 Total 5,390.00 27 Oct Cost 5,500.00 28 Sept Units Balance 50 $27,062.20 30 539.00 3,773.00 $16,390.00 20 14,445.20 10,672.20 $10,672.20 Solutions Manual 6-123 Chapter Copyright © 2017 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley Financial Accounting, Seventh Canadian Edition CT6-7 (CONTINUED) (b) July 14 14 25 Aug 28 29 Sept 27 29 Inventory (10 × $550) Accounts Payable 5,500.00 Cash (6 × $995) Sales 5,970.00 Cost of Goods Sold (6 × $550) Inventory 3,300.00 Accounts Payable Cash 5,500.00 Inventory (10 × $550) Accounts Payable 5,500.00 Cash (9 × $995) Sales 8,955.00 Cost of Goods Sold (9 × $550) Inventory 4,950.00 Accounts Payable Cash 5,500.00 Inventory (10 × $539) Accounts Payable 5,390.00 Accounts Receivable (8 × $995) Sales 7,960.00 Cost of Goods Sold [(5 × $550) + (3 × $539)] Inventory 4,367.00 Accounts Payable Cash 5,390.00 5,500.00 5,970.00 3,300.00 5,500.00 5,500.00 8,955.00 4,950.00 5,500.00 5,390.00 7,960.00 4,367.00 5,390.00 Solutions Manual 6-124 Chapter Copyright © 2017 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley Financial Accounting, Seventh Canadian Edition CT6-7 (CONTINUED) (b) (continued) Oct 27 Inventory [(10 × $539) + (10 × $528.22)] Accounts Payable 10,672.20 Cash (7 × $995) Sales 6,965.00 Cost of Goods Sold (7 × $539) Inventory 3,773.00 10,672.20 6,965.00 3,773.00 (c) Time Management Software Inventory – Average Cost Purchases Cost of Goods Sold 2017 Date Units July 10 Cost $550.00 Total 10 550.00 10 539.00 3,300.00 550.00 4,950.00 542.67 4,341.33 Units Cost Total 10 $550.00 $5,500.00 550.00 2,200.00 14 550.00 7,700.00 550.00 2,750.00 15 542.67 8,140.00 542.67 3,798.67 10 539.00 5,390.00 17 540.51 9,188.67 10 528.22 5,282.20 27 535.96 14,470.87 3,751.71 20 535.96 10,719.16 $16,343.04 20 27 Total 550.00 5,390.00 27 Oct Total 5,500.00 28 Sept Cost $5,500.00 14 Aug Units Balance 50 $27,062.20 30 535.96 $10,719.16 Solutions Manual 6-125 Chapter Copyright © 2017 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley Financial Accounting, Seventh Canadian Edition CT6-7 (CONTINUED) (d) July 14 25 Aug 28 29 Sept 27 Inventory (10 × $550) Accounts Payable 5,550.00 Cash ($995 x 6) Sales 5,970.00 Cost of Goods Sold (6 × $550) Inventory 3,300.00 Accounts Payable Cash 5,500.00 Inventory (10 × $550) Accounts Payable 5,500.00 Cash (9 × $995) Sales 8,955.00 Cost of Goods Sold (9 × $550) Inventory 4,950.00 Accounts Payable Cash 5,500.00 Inventory (10 × $539) Accounts Payable 5,390.00 Accounts Receivable (8 × $995) Sales 7,960.00 Cost of Goods Sold (8 × $542.67) Inventory 4,341.33 5,550.00 5,970.00 3,300.00 5,500.00 5,500.00 8,955.00 4,950.00 5,500.00 5,390.00 7,960.00 4,341.33 Solutions Manual 6-126 Chapter Copyright © 2017 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley Financial Accounting, Seventh Canadian Edition CT6-7 (CONTINUED) (d) (continued) Aug 29 Oct 25 Accounts Payable Cash 5,390.00 Inventory [(10 × $539) + (10 × $528.22)] Accounts Payable 10,672.20 Cash (7 × $995) Sales 6,965.00 Cost of Goods Sold (7 × $535.96) Inventory 3,751.71 5,390.00 10,672.20 6,965.00 3,751.71 (e) Sales Cost of goods sold Gross profit FIFO $29,850 16,390 13,460 Gross profit margin 45.1% (1) (1) Average Cost $29,850 16,343 13,507 45.2% Sales = $5,970 + $8,955 + $7,960 + $6,965 = $29,850 Solutions Manual 6-127 Chapter Copyright © 2017 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley Financial Accounting, Seventh Canadian Edition CT6-7 (CONTINUED) (f) Emily should consider: • Whether the goods are interchangeable or not, or whether they are produced or segregated for specific projects; • Whether the formula corresponds most closely to the physical flow of goods; • Whether the formula reports inventory on the statement of financial position at an amount close to the inventory’s most recent cost; and • Whether the formula is used for other inventories with a similar nature and usage For Emily, the inventory of time management software consists of goods that are interchangeable As such, ABC cannot use specific identification The nature of the items is not subject to a particular flow of goods or deterioration over time Under the FIFO cost formula, the cost of the ending inventory is determined using the most recent costs and is closer to replacement cost However, since the software is identical and there is no issue of obsolescence, the average cost formula may better suit this type of inventory In addition, it is the same method used for ABC’s other inventories, LO 2,3 BT: Difficulty: M Time: 60 AACSB: Analytic CPA CM: Reporting Solutions Manual 6-128 Chapter Copyright © 2017 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley Financial Accounting, Seventh Canadian Edition Legal Notice Copyright © 2017 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 (MMXVII vi F2) Solutions Manual 6-129 Chapter Copyright © 2017 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited ... and Decision- Making Comm Communication Self-Mgt Self-Management Team & Lead Teamwork and Leadership Reporting Financial Reporting Stat & Gov Strategy and Governance Mgt Accounting Management Accounting. .. transaction The information from the perpetual system is updated, using the cost formula adopted by the business The cost formula is also used in the detailed perpetual records for every increase... the most recent prices are more relevant for decision- making LO BT: C Difficulty: M Time: AACSB: None CPA: cpa-t001 CM: Reporting Solutions Manual 6-7 Chapter Copyright © 2017 John Wiley & Sons