Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition CHAPTER Reporting and Analyzing Inventory ASSIGNMENT CLASSIFICATION TABLE Study Objectives Questions Brief Exercises Exercises Describe the steps in determining inventory quantities 1, 2, 3, 1, 1, 2 Apply the methods of cost determination using specific identification, FIFO, and average under a perpetual inventory system 5, 6, 7, *18, *20, *21 3, 4, 5, 6, *14, *15 Explain the effects on financial statement of choosing each of the inventory cost determination methods 8, 9, 10 Identify the effects of inventory errors on the financial statements A Problems 1A B Problems BYP 1B 3, 3, 4, 5, 6, 2A, 3A, 7, *15, *16 4A, 5A, 6A, *15A, *16A 2B, 3B, 4B, 5B, 6B, *15B, *16B 3, 5, 6, 7 3, 6, 7, 12 3A, 5A 3B, 5B 1, 3, 5, 11, 12, 13 8, 8, 4A, 7A, 8A 4B, 7B, 8B Demonstrate the presentation and analysis of inventory 14, 15, 16, 17 10, 11, 12 10, 11, 12 6A, 7A, 8A, 9A, 10A, 11A, 12A, *14A *6 Apply the FIFO and average cost inventory cost determination methods under a periodic inventory system (Appendix 6A) *18, *19, *20, *21 *13, *14, *15 *13, *14, *15, *16 *13A, *13B, *14A, *14B, *15A, *16A *15B, *16B 6B, 7B, 8B, 9B, 10B, 11B, 12B, *14B 1, 2, *Note: All asterisked Questions, Exercises, and Problems relate to material contained in the appendices to each chapter Solutions Manual 6-1 Chapter Copyright © 2014 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition ASSIGNMENT CHARACTERISTICS TABLE Problem Number Description Difficulty Level Time Allotted (min.) Simple 30-40 1A Identify items in inventory 2A Apply specific identification Moderate 30-40 3A Apply perpetual FIFO and answer questions about effects Moderate 30-40 4A Apply perpetual average cost and discuss errors Moderate 30-40 5A Apply perpetual FIFO and average cost; compare effects Moderate 35-45 6A Record transactions using perpetual average cost; apply LCNRV Moderate 30-40 7A Determine effects of inventory error for two years Moderate 20-25 8A Determine effects of inventory errors for multiple years Moderate 25-30 9A Determine and record LCNRV Moderate 15-25 10A Record and present LCNRV valuation for multiple periods Moderate 15-25 11A Calculate ratios and comment on liquidity Moderate 25-30 12A Compare ratios; comment on liquidity and profitability Moderate 25-30 *13A Apply periodic FIFO and average cost Moderate 25-35 *14A Prepare partial financial statements and assess effects Moderate 20-30 *15A Apply perpetual and periodic FIFO Moderate 25-35 *16A Apply perpetual and periodic average cost Moderate 25-35 Simple 30-40 1B Identify items in inventory Solutions Manual 6-2 Chapter Copyright © 2014 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition ASSIGNMENT CHARACTERISTICS TABLE (Continued) Problem Number 2B Description Apply specific identification Difficulty Level Moderate Time Allotted (min.) 25-35 3B Apply perpetual FIFO and answer questions about effects Moderate 30-40 4B Apply perpetual average cost and discuss errors Moderate 30-40 5B Apply perpetual FIFO and average cost; compare effects Moderate 30-40 6B Record transactions using perpetual FIFO; apply LCNRV Moderate 30-40 7B Determine effects of inventory error for two years Moderate 25-35 8B Determine effects of inventory errors for multiple years Moderate 25-35 9B Determine and record LCNRV Moderate 15-25 10B Record and present LCNRV valuation for multiple periods Moderate 15-25 11B Calculate ratios and comment on liquidity Moderate 25-30 12B Compare ratios; comment on liquidity and profitability Moderate 25-30 *13B Apply periodic FIFO and average cost Moderate 25-35 *14B Prepare partial financial statements and assess effects Moderate 20-30 *15B Apply perpetual and periodic FIFO Moderate 25-35 *16B Apply perpetual and periodic average cost Moderate 25-35 Solutions Manual 6-3 Chapter Copyright © 2014 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth 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 Internal control consists of all the related methods and measures adopted within an organization to help it achieve reliable financial reporting, effective and efficient operations, and compliance with relevant laws and regulations The use of internal control procedures will result in a more accurate and reliable inventory count For example, the counting should be done by employees who not have responsibility for the custody or record-keeping for the inventory Each counter should verify the validity of each inventory item by checking that the items actually exist, how many there are and what condition they are in To ensure accuracy, counting should be completed in teams of two and all inventory counts should be rechecked Finally pre-numbered inventory tags should be used to ensure that all inventory is counted and none is counted twice The pre-numbering of the tags will assist in the retracing of the count back to the physical inventory on hand and will also assist in establishing to the completeness of the count, when the inventory is compiled from the tags (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 Solutions Manual 6-4 Chapter Copyright © 2014 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition Answers to Questions (Continued) (a) Include: the inventory items belong to Kingsway (b) Include: the inventory items belong to Kingsway (c) Exclude: the customer has purchased the inventory item and legal ownership has passed to the customer The specific identification method tracks the physical flow of individual inventory items, matching the cost of the actual item sold against the revenue from that item 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 serial numbers The FIFO inventory cost method assumes the first inventory purchased is the first inventory sold The most recent purchases are assumed to remain in ending inventory Inventory such as groceries could be accounted for using the FIFO cost method since older items should be sold first The average cost method assumes that all goods available for sale are indistinguishable or homogeneous Inventory such as hardware could be accounted for using an average cost method Average assumes that the goods available for sale are identical FIFO assumes that the first goods purchased are the first to be sold Specific identification matches the actual physical flow of merchandise 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 A company should consider: • Whether the goods are interchangeable or not, or whether they are produced or segregated for specific projects; • Whether the method corresponds most closely to the physical flow of goods; • Whether the method reports inventory on the statement of financial position that is close to the inventory’s most recent cost; and • Whether the method is used for other inventories with a similar nature and usage Average 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 Solutions Manual 6-5 Chapter Copyright © 2014 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition Answers to Questions (Continued) 10 (a) No effect – cash is not affected by the choice of inventory cost methods (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 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 method (d) Because of the effect on the cost of goods sold as outlined in (c), profit will be lower under FIFO and higher under average (e) The impact on retained earnings will be the same as the impact on profit and ending inventory—lower in a period of declining prices using FIFO and higher using average cost 11 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 12 (a) Mila Ltd.’s 2014 profit will be understated by $5,000 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 profit will be understated (b) 2014 retained earnings will be understated by $5,000 because profit is understated (see (a) above) (c) 2014 total shareholders’ equity will be understated by $5,000 because the retained earnings balance is understated (see (b) above) (d) 2015 profit will be overstated $5,000 This is because beginning inventory is understated by $5,000, which will result in an understatement of cost of goods sold (recognizing that 2014 ending inventory is 2015 beginning inventory) If cost of goods sold is understated, then profit will be overstated (e) 2015 retained earnings will be correct because the understatement in profit in 2014 and overstatement in 2015 will cancel each other (f) 2015 total shareholders’ equity will be correct because the retained earnings balance is correct Solutions Manual 6-6 Chapter Copyright © 2014 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition Answers to Questions (Continued) 13 (a) At the end of the fiscal year, before the inventory is adjusted to the inventory count, Shediac’s assets (Merchandise 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 profit 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) 14 (a) Cost refers to the original cost of inventory as determined by using specific identification, or the FIFO or average cost methods (b) Net realizable value is the selling price less any costs required to make the goods ready for sale (c) The lower of cost and net realizable value rule should be applied at the end of the accounting period, before financial statements are prepared 15 Cost of Goods Sold is debited when recording a decline in inventory value under the lower of cost and net realizable value rule because a decline in the value of inventory is considered to be a cost of buying and selling merchandise These declines are usually considered part of the risk associated with carrying inventory and part of the costs of carrying a variety and quantity of goods on hand 16 An increase in the days in inventory ratio from one year to the next would be seen as deterioration in the company’s efficiency in managing inventory It means that the inventory is being held for a longer period of time, which increases the risk of spoilage and obsolescence Solutions Manual 6-7 Chapter Copyright © 2014 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition Answers to Questions (Continued) 17 (a) An inventory turnover ratio that is too high may indicate that the company is losing sales opportunities because of inventory shortages Inventory shortages may also cause customer ill will and result in lost future sales (b) If the inventory turnover is too low, it may indicate that the company is having difficulty selling its inventory and the inventory may become obsolete *18 Periodic and perpetual inventory systems differ in the accounting treatment for inventories Under a perpetual inventory system inventory records are updated for every purchase and sale transaction The cost of goods sold is recorded each time a sale is made Under a periodic system, the inventory is only updated at the end of the period when a physical inventory count is performed Inventory purchases throughout the year are debited to a Purchases account in a periodic inventory system rather than a Merchandise Inventory account When a sale is recorded in a periodic inventory system, no entry is made to record the cost of the sale Cost of goods sold is calculated separately after the physical inventory count is performed *19 Ending inventory is known as a result of the physical inventory count To determine cost of goods sold, the total amount of inventory available for sale needs to be determined first in order to determine what inventory has been sold (goods available for sale – ending inventory = cost of goods sold) Goods sold are not tracked separately in a periodic inventory system *20 In both systems, the first costs in are the costs assigned to the goods sold so no matter what system is used, the cost of goods sold will always consist of the oldest units and these would are assumed to be on hand when using either method *21 In a perpetual system, the average cost per item is recalculated every time a purchase transaction takes place In a periodic system, the average is determined based on the total goods available for sale during the period If there are cost changes during the period, the average cost per item will differ in a perpetual and periodic inventory system Solutions Manual 6-8 Chapter Copyright © 2014 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 6-1 (a) Ownership of the goods belongs to the consignor (Helgeson) Thus, these goods should be included in Helgeson’s inventory (b) Goods held on consignment belong to the other company and should not be included in Helgeson’s inventory (c) The goods in transit belong to the customer as the terms of shipment are FOB shipping point They should not be included in Helgeson’s inventory because title transferred to the customer as soon as the goods were shipped (d) The goods in transit should not be included in the inventory count because ownership by Helgeson does not occur until the goods reach the buyer (e) The goods in transit belong to Helgeson because ownership does not transfer until the customer receives the goods They should be included in Helgeson’s inventory (f) The goods purchased belong to the buyer, Helgeson as the terms of shipment are FOB shipping point Title transferred to Helgeson as soon as the goods were shipped so even though they have not been received they should be included in Helgeson’s inventory BRIEF EXERCISE 6-2 $66,000 (6,000) (1,000) 4,000 $63,000 Count Held on consignment Sold August 28 shipment plus freight, FOB shipping point ($3,750 + $250) Correct inventory cost Solutions Manual 6-9 Chapter Copyright © 2014 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition BRIEF EXERCISE 6-3 Cost of Goods Available for Sale electric pianos @ $600 = electric pianos @ $475 = $1,800 950 $2,750 Ending Inventory (a) Specific Identification pianos @ $600 = piano @ $475 = $1,200 475 $1,675 Cost of Goods Sold $2,750 – $1,675 = $1,075 (Proof: piano @ $600 + piano @ $475 = $1,075) (b) If management wished higher profit, it could have sold two pianos from the last shipment that had a lower cost If it wished lower profit, it could have sold the first two pianos purchased BRIEF EXERCISE 6-4 [1] [2] [3] [4] [5] [6] [7] [8] [9] [10] [11] [12] [13] [14] [15] [16] [17] [18] $450 ÷ 30 = $15 15 (from April 1) $18 (from April 1) 30 (from April 6) $15 (from April 6) (15 @ $18) + (30 @ $15) = $720 $18 (from April 1) $15 (from April 6) (15 @ $18) + (10 @ $15) = $420 15 + 30 – 15 – 10 = 20 $15 20 @ $15 = $300 $144 ÷ 12 = $12 20 $15 12 $12 (20 @ $15) + (12 @ $12) = $444 Solutions Manual 6-10 Chapter Copyright © 2014 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition *PROBLEM 6-16B (Continued) (a) (Continued) (2) Average – Periodic Cost of Goods Available for Sale Date Oct Explanation Beginning inventory Purchase Purchase 22 Units 50 125 70 245 Total Ending Inventory Date Oct 31 Units 40 Unit Total Cost Cost $25.88* $1,035.10 Unit Cost $24 26 27 Total Cost $1,200 3,250 1,890 $6,340 Cost of Goods Sold Cost of goods available for sale $6,340.00 Less: Ending inventory 1,035.10 Cost of goods sold $5,304.90 $6,340 ÷ 245 = $25.88 * Proof: Cost of Goods Sold 205 ì ($6,340 ữ 245) = $5,304.90 (b) Average Perpetual Periodic Cost of goods sold $5,276.54 $5,304.90 Ending inventory Cost of goods available for sale 1,063.46 $6,340.00 1,035.10 $6,340.00 The results for the average cost method differ depending on whether a perpetual or periodic system is used This is because using a perpetual system, the average cost is recalculated (changes) after each purchase In a periodic system, it is calculated only once at the end of the period Solutions Manual 6-80 Chapter Copyright © 2014 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition BYP 6-1 FINANCIAL REPORTING (Note: All amounts are in thousands) (a) Inventories were $2,148,484 in 2012 and $2,042,302 in 2011 (b) Inventory Current assets Inventory as a % of current assets 2012 2011 Increase As a Percentage $2,148,484 $2,042,302 $106,182 5.2% 2,764,997 2,695,647 77.7% 75.8% Inventory has increased at a modest pace from 2011 to 2012 There was also a modest increase in inventory as a percentage of current assets (c) When choosing the cost method of FIFO, Shoppers, whose product is interchangeable, considered the flowing guidelines: Choose a method that corresponds as closely as possible to the physical flow of goods Report an inventory cost on the statement of financial position that is close to the inventory’s recent cost Use the same method for all inventories having a similar nature and usage in the company Due to the nature of the product sold, particularly the food items, which have a high turnover, Shoppers has attempted to fulfill the guidelines above and has chosen FIFO (d) Shoppers wrote down its inventory to net realizable value in both the 2011 and 2012 fiscal years The journal entry for 2012 in thousands of dollars was as follows: Cost of Goods Sold Merchandise Inventory 44,334 44,334 The amount of the write down in 2011 of $39,943 thousand was slightly lower than in 2012 Solutions Manual 6-81 Chapter Copyright © 2014 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition BYP 6-2 COMPARATIVE ANALYSIS (a) Current ratio Shoppers (in thousands) Jean Coutu (in millions) $2,764,997 = 1.2 : 2,334,917 $421.9 = 1.6 : $265.3 (b) Shoppers (in millions) Inventory turnover Days in inventory (c) Jean Coutu (in millions) $6,609.2 ($2,148.5 + $2,042.3) ÷ $2,169.0 ($190.1 + $166.2) ÷ = 3.2 times = 12.2 times 365 = 114 days 3.2 times 365 = 30 days 12.2 times Jean Coutu has the better ratios of the two companies and its ratios are better than that of the industry, while Shoppers is worse than the industry While the ratios might be affected by the product mix of the inventory of both companies, Shoppers’ liquidity is poor as demonstrated by its current ratio and the movement of inventory is more three times slower than that of Jean Coutu Solutions Manual 6-82 Chapter Copyright © 2014 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition BYP 6-3 COMPARING IFRS AND ASPE (a) There are no significant differences in the accounting standards relating to the management of inventory for ASPE and IFRS Although not discussed in this introductory course, analysts should be aware that there are differences in the standards when accounting for specific types of inventory Examples of types of inventory which have differences are construction in progress and biological assets at the point of harvest (b) Yes, the use of the two different inventory systems could affect the comparison of the financial statements of each company For example, when the perpetual inventory system is used, any costs related to inventory shrinkage are identified The company can then record the shrinkage in cost of goods sold as is normally done but if the amount is significant a company could record the shrinkage in a separate account With the periodic system, these costs are not separately identified and would ultimately be buried in cost of goods sold when the inventory count is performed The use of the FIFO cost method, used by Global Lumber, will not result in any financial differences between a periodic and perpetual inventory system The use of the average cost method, used by Gibson Lumber, will normally result in different financial results between a periodic and perpetual inventory system because the average unit cost is determined only at the end of a period in the periodic system compared to continually adjusting it in a perpetual inventory system That said, these differences are likely minor if costs are changing by small amounts (c) Yes, the use of the different cost methods 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 method and therefore its inventory is valued at the most current price Gibson uses the average cost method and therefore its inventory is valued at the average cost of all inventory purchased 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 Solutions Manual 6-83 Chapter Copyright © 2014 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition BYP 6-4 CRITICAL THINKING CASE (a) 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 Doors Cost 2,600 800 600 4,000 310 240 190 Total $ 806,000 192,000 114,000 $1,112,000 (b) 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 Merchandise Inventory account will have to be adjusted along with a corresponding adjustment to Cost of Goods Sold The error can be calculated as follows: Merchandise Inventory balance per Kevin 900 × $310 Merchandise Inventory correct balance (see above) Difference $279,000 222,400 $ 56,600 As this will directly affect operating profit for the month of December, Kevin’s bonus should be reduced by $5,660 (10% of $56,600) (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 amount that the bank will now allow the loan balance to be 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 Solutions Manual 6-84 Chapter Copyright © 2014 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition BYP 6-4 (Continued) (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 method 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 as calculated in (b) above would be above this amount at $278 each 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 write-down 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) Solutions Manual 6-85 Chapter Copyright © 2014 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition BYP 6-5 ETHICS CASE (a) Specific Identification Sales Cost of goods sold Gross profit (1) Maximize Gross Profit (2) Minimize Gross Profit $561,0001 366,100 $194,900 “$561,0001 366,800 “$194,200 Sales = ( 170 × $800) + (500 × $850) = $561,000 Goods Available for Sale Date Units Cost Mar 140 “$500 200 540 10 340 570 Total $ 70,000 108,000 193,800 $371,800 Specific Identification–Maximize gross profit (minimize cost of sales by deciding to sell the diamonds 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 Specific Identification–Minimize gross profit (maximize cost of sales by selling the diamonds 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 Total $5,000 Solutions Manual 6-86 Chapter Copyright © 2014 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition BYP 6-5 (Continued) (b) The stakeholders are the shareholders, customers, and staff of Swag Diamonds There is not really anything unethical in selecting which diamonds to sell, unless it is done solely on a desire to manipulate profits (c) Average Sales Cost of goods sold Gross profit March Beginning inventory Purchase Sale 10 Purchase 25 Sale 31 Balance (d) 140 200 340 (170) 170 340 510 (500) 10 $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 Swag Diamonds should select the average cost method given that the inventory is homogeneous and not individually distinguishable The specific identification method is not a permissible choice for the company given the type and physical flow of inventory it carried The average cost method also has the advantage of not being subject to manipulation Solutions Manual 6-87 Chapter Copyright © 2014 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition BYP 6-6 “ALL ABOUT YOU” ACTIVITY (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 merchandise in locked display cases that can be accessed only by staff (b) The inventory should be counted more frequently than once a year, particularly for highend product 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 both the Merchandise Inventory and Retained Earnings accounts on the statement of financial position The opposite would be true if there proved to be an overage established by the inventory count (c) If the cameras and photographic equipment are unique and identifiable, I would recommend the specific identification method of costing inventory Using this method will better track the items on an individual basis, helping narrow down errors in recording or pinpointing the pilferage of specific inventory items This method 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 picture frames, FIFO or average would be a better choice as there are no need to have as stringent control over these items, due to their minimal value Solutions Manual 6-88 Chapter Copyright © 2014 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition BYP 6-7 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) Mixer Inventory - FIFO 2014 Purchases Cost of Goods Sold Balance Date Units Cost Total Units Cost Total Units Cost Total July $550 $1,650 $550 $1,650 14 $550 $ 550 550 1,100 Aug 1 568 568 550 568 1,668 27 550 1,100 568 568 Sept 564 1,692 568 564 2,260 12 568 564 1,696 564 564 Oct 3 574 1,722 564 574 2,286 27 564 564 574 1,722 Total 10 $5,632 $3,910 $1,722 (b) July 14 25 Merchandise Inventory (3 × $550) Accounts Payable 1,650 Cash Sales 995 Cost of Goods Sold Merchandise Inventory 550 Accounts Payable Cash 1,650 1,650 995 550 1,650 Solutions Manual 6-89 Chapter Copyright © 2014 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition BYP 6-7 (Continued) (b) (Continued) Aug 27 29 Sept 12 29 Oct 27 Merchandise Inventory Accounts Payable 568 Cash Sales 1,990 Cost of Goods Sold (2 × $550) Merchandise Inventory 1,100 Accounts Payable Cash 568 Merchandise Inventory (3 × $564) Accounts Payable 1,692 Accounts Receivable Sales 2,985 Cost of Goods Sold [(1 × $568) + (2 × $564)] Merchandise Inventory 1,696 Accounts Payable Cash 1,692 Merchandise Inventory Accounts Payable 1,722 Cash Sales 995 Cost of Goods Sold (1 × $564) Merchandise Inventory 564 568 1,990 1,100 568 1,692 2,985 1, 696 1,692 1,722 995 564 Solutions Manual 6-90 Chapter Copyright © 2014 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition BYP 6-7 (Continued) (c) 2011 Date July 14 Aug 27 Sept 12 Oct 27 Total Mixer Inventory - Average Purchases Cost of Goods Sold Balance Units Cost Total Units Cost Total Units Cost Total $550 $1,650 $550 $1,650 $550 $ 550 550 1,100 568 568 556 1,668 556 1,112 556 556 564 1,692 562 2,248 562 1,686 562 562 574 1,722 571 2,284 571 571 571 1,713 10 $5,632 $3,919 $1,713 (d) July 14 25 Aug 27 29 Merchandise Inventory (3 × $550) Accounts Payable 1,650 Cash Sales 995 Cost of Goods Sold Merchandise Inventory 550 Accounts Payable Cash 1,650 Merchandise Inventory Accounts Payable 568 Cash Sales 1,990 Cost of Goods Sold (2 × $556) Merchandise Inventory 1,112 Accounts Payable Cash 568 1,650 995 550 1,650 568 1,990 1,112 568 Solutions Manual 6-91 Chapter Copyright © 2014 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition BYP 6-7 (Continued) (d) (Continued) Sept 12 29 Oct 25 Merchandise Inventory (3 × $564) Accounts Payable 1,692 Accounts Receivable Sales 2,985 Cost of Goods Sold (3 × $562) Merchandise Inventory 1,686 Accounts Payable Cash 1,692 Merchandise Inventory Accounts Payable 1,722 Cash Sales 995 Cost of Goods Sold Merchandise Inventory 571 1,692 2,985 1, 686 1,692 1,722 995 571 (e) Sales Cost of goods sold Gross profit FIFO $6,965 3,910 3,055 Gross profit margin 43.9% (1) (1) Average $6,965 3,919 3,046 43.7% Sales = $995 + $1,990 + $2,985 + $995 = $6,965 Solutions Manual 6-92 Chapter Copyright © 2014 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition BYP 6-7 (Continued) (f) Natalie should consider: • Whether the goods are interchangeable or not, or whether they are produced or segregated for specific projects; • Whether the method corresponds most closely to the physical flow of goods; • Whether the method reports inventory on the statement of financial position that is close to the inventory’s most recent cost; and • Whether the method is used for other inventories with a similar nature and usage For Natalie, the inventory of mixers consists of goods that are interchangeable The nature of the items is not subject to a particular flow of goods so older mixers not need to be sold first Under the FIFO cost method, the cost of the ending inventory is determined using the most recent costs and is closer to replacement cost This may not necessarily be the case for the mixers because they are subject to currency fluctuations The ending inventory cost may not match the replacement cost Because of the currency fluctuations, it is also not possible to know if the cost will increase or decrease over time and what the impact of using FIFO will be on cost of goods sold Under the average cost method, the cost of the mixers will be averaged out and will smooth out the impact of the currency fluctuations Since the mixers are identical and there is no issue of obsolescence, the average cost method may better suit the type of inventory Solutions Manual 6-93 Chapter Copyright © 2014 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition Legal Notice Copyright Copyright © 2014 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 (MMXV vii F3) Solutions Manual 6-94 Chapter Copyright © 2014 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited ... $5.00 = $ 750.00 380 @ $5 .61 = 2,130.00 130 @ $5 .61 = 728 .68 580 @ $6. 69 = 3,878 .68 730 @ $6. 96 = 5,078 .68 160 @ $6. 96 = 1,113.14 $1,113.14 Check: $5, 366 . 86 + $1,113.14 = $6, 480 ($750 + $5,730) (b)... margin $ 56, 000 + $60 ,000 = $64 ,000 + $52,000 = 2015 $1 16, 000 1 16, 000 $ 2014 Before correction $60 ,000 ÷ $ 265 ,000 = 22 .6% $ 56, 000 ÷ $250,000 = 22.4% After correction $52,000 ÷ $ 265 ,000 = 19 .6% $64 ,000... LCNRV $175 150 $ 700 1,200 $ 160 152 $ 64 0 1,2 16 $ 64 0 1,200 12 10 135 115 1 ,62 0 1,150 $4 ,67 0 139 110 1 ,66 8 1,100 $4 ,62 4 1 ,62 0 1,100 $4, 560 Cost of Goods Sold ($4 ,67 0 – $4, 560 ) Merchandise Inventory