Solution manual financial accounting 4e by wild chapter05

To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Chapter Reporting and Analyzing Inventories QUESTIONS (a) FIFO: The cost of the first (earliest) items purchased in inventory flow to cost of goods sold first (b) LIFO: The cost of the last (most recent) items purchased in inventory flow to cost of goods sold first Merchandise inventory is disclosed on the balance sheet as a current asset It is also sometimes reported in the income statement as part of the calculation of cost of goods sold Incidental costs sometimes are ignored in computing the cost of inventory because the expense of tracking such costs on a precise basis can outweigh the benefits gained from the increased accuracy The principle of materiality permits such practices when the effects on the financial statements are not significant (that is, when such practices not impact business decisions) LIFO will result in the lower cost of goods sold when costs are declining because it assigns the most recent, lower cost purchases to cost of goods sold The full-disclosure principle requires that the nature of the accounting change, the justification for the change, and the effect of the change on net income be disclosed in the notes or in the body of a company's financial statements No; changing the inventory method each period would violate the accounting principle of consistency No; the consistency principle does not preclude changes in accounting methods from ever being made Instead, a change from one acceptable method to another is allowed if the company justifies the change as an improvement in financial reporting Many people make important business decisions based on period-to-period fluctuations in a company's financial numbers, including gross profit and net income As such, inventory errors—which can substantially impact gross profit, net income, current assets, and cost of sales—should not be permitted to cause such fluctuations and impair business decisions (Note: Since such errors are ―selfcorrecting,‖ they will distort net income in only two consecutive accounting periods—the period of the error and the next period.) ©McGraw-Hill Companies, 2008 Solutions Manual, Chapter 291 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com An inventory error that causes an understatement (or overstatement) for net income in one accounting period, if not corrected, will cause an overstatement (or understatement) in the next Since an understatement (overstatement) of one period offsets the overstatement (understatement) in the next, such errors are said to correct themselves 10 Market usually means replacement cost of inventory when applied in the LCM 11 The principle of conservatism guides preparers of accounting reports to select the less optimistic estimate in uncertain situations where two estimates of amounts are about equally likely Users of information must also be cognizant of the potential conservatism in accounting reports when making business decisions 12 Factors that contribute to inventory shrinkage are breakage, loss, deterioration, decay, and theft 13.A Accounts that are used only in a periodic inventory system include Purchases, Purchase Discounts, Purchase Returns and Allowances, and Transportation-In 14.B For interim reporting, companies can estimate costs of goods sold and ending inventory by either the retail inventory method or the gross profit method 15 Inventory as a percent of current assets on February 26, 2005 is ($ in millions): $2,851 / $6,903 = 41.3% 16 Cost of goods available for sale equals ending inventory plus cost of sales As of February 28, 2005, this is computed as ($ thousands): Ending Inventory of $1,459,520 + Cost of Sales of $7,903,641 = $9,363,161 17 Merchandise inventory ($ millions) comprises 1.4% ($101 / $7,055) of Apple’s current assets as of September 25, 2004, and 1.0% ($56 / $5,887) of its current assets as of September 25, 2003 QUICK STUDIES Quick Study 5-1 (25 minutes) a FIFO Date 1/1 1/9 1/25 Goods Purchased Cost of Goods Sold 85 @ $3.20 } } 110 @ $3.30 1/26 Inventory Balance 320 @ $3.00 = $ 960 320 @ $3.00 = $1,232 85 @ $3.20 320 @ $3.00 85 @ $3.20 = $1,595 110 @ $3.30 50 @ $3.20 = $ 523 110 @ $3.30 320 @ $3.00 = $ 960 35 @ $3.20 = 112 $1,072 } ©McGraw-Hill Companies, 2008 292 Financial Accounting, 4th Edition To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Quick Study 5-1—concluded b LIFO Date 1/1 1/9 Goods Purchased Cost of Goods Sold 85 @ $3.20 1/25 } } 110 @ $3.30 1/26 Inventory Balance 320 @ $3.00 = $ 960 320 @ $3.00 = $1,232 85 @ $3.20 320 @ $3.00 85 @ $3.20 = $1,595 110 @ $3.30 160 @ $3.00 = $ 480 110 @ $3.30 = $ 363 85 @ $3.20 = 272 160 @ $3.00 = 480 $1,115 c Weighted Average Date 1/1 1/9 Goods Purchased Cost of Goods Sold 85 @ $3.20 1/25 } } 110 @ $3.30 1/26 Inventory Balance 320 @ $3.00 = $ 960 320 @ $3.00 85 @ $3.20 = $1,232 (avg cost is $3.04) 320 @ $3.00 85 @ $3.20 = $1,595 110 @ $3.30 (avg cost is $3.10) 355 @ $3.10 = $1,100.5* 160 @ $3.10 = $ 496* *rounded Alternate solution format (a) FIFO: 110 @ $3.30 = 50 @ $3.20 = 160 $ 363 160 $ 523 Ending inventory cost (b) LIFO: 160 @ $3.00 = $ 480 Ending inventory cost (c) Weighted average: 320 @ $3.00 = 85 @ $3.20 = 110 @ $3.30 = 515 $ 960 272 363 $1,595 Cost of goods available for sale $1,595/515 = $3.10 (rounded) weighted average cost per unit 160 units @ $3.10 = $ 496 Ending inventory cost ©McGraw-Hill Companies, 2008 Solutions Manual, Chapter 293 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Quick Study 5-2 (10 minutes) Beginning inventory Plus 1st week purchase 2nd week purchase 3rd week purchase 4th week purchase Units Available for sale Cost of Goods Available for Sale 10 units @ $60 $ 600 10 units @ $61 10 units @ $62 10 units @ $65 10 units @ $70 50 units 610 620 650 700 $3,180 Quick Study 5-3 (25 minutes) a FIFO Date Goods Purchased 12/ 10 @ $ = $ 70 10 @ $ = $ 70 12/14 20 @ $ = $160 10 @ $ 20 @ $ = $230 15 @ $ = $120 15 @ $ 15 @ $10 = $270 12/15 12/21 Cost of Goods Sold 10 @ $7 = $110 @ $8 15 @ $10 = $150 $110 Inventory Balance b LIFO Date Goods Purchased Cost of Goods Sold Inventory Balance 12/7 10 @ $ = $ 70 10 @ $ = $ 70 12/14 20 @ $ = $160 10 @ $ 20 @ $ = $230 10 @ $ 5@$8 = $110 10 @ $ 5@$8 15 @ $10 = $260 12/15 12/21 15 @ $8 = $120 15 @ $10 = $150 $120 ©McGraw-Hill Companies, 2008 294 Financial Accounting, 4th Edition To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Quick Study 5-3 (concluded) c Weighted Average Date Goods Purchased Cost of Goods Sold Inventory Balance 12/7 10 @ $ = $70 10 @ $ 12/14 20 @ $ = $160 10 @ $ 20 @ $ = $ 70 } = $230 (avg cost is $7.67) 12/15 12/21 15 @ $7.67 =$115 15 @ $10 = $150 $115 15 @ $7.67 15 @ $7.67 15 @ $ 10 = $115 } = $265 (avg cost is $8.83) d Specific identification (2 units x $7) + (13 units x $8) + (15 units x $10) = $268 Quick Study 5-4 (10 minutes) LIFO LIFO FIFO LIFO Specific Identification Quick Study 5-5 (10 minutes) Title will pass at ―destination‖ which is Kwon Company’s receiving dock Liu should show the $750 in its inventory at year-end as Liu retains title until the goods reach Kwon Company The consignor is Jabar Company The consignee is Chi Company The consignor, Jabar Company, should include any unsold and consigned goods in its inventory ©McGraw-Hill Companies, 2008 Solutions Manual, Chapter 295 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Quick Study 5-6 (10 minutes) Units in ending inventory Units stored in basement 1,300 units Less damaged (unsalable) units (20) Plus units in transit 350 Plus units on consignment 80 Total units in ending inventory 1,710 units Quick Study 5-7 (5 minutes) Cost $14,000 Plus Transportation-in 250 Import duties 900 Insurance 300 Inventory Cost $15,450 The $150 advertising cost and the $1,250 cost for sales staff salaries are included in operating expenses—not part of inventory costs Those two costs are not necessary to get the vehicle in a place and condition for sale Quick Study 5-8 (10 minutes) Cost of inventory (estate’s contents) Price $38,500 Transportation-in 2,100 Insurance on shipment 250 Cleaning and refurbishing 800 Total cost of inventory $41,650 Quick Study 5-9 (20 minutes) Total Per Unit Inventory Items Units Cost Market Cost Mountain bikes 11 $600 $550 $ 6,600 Skateboards 13 350 425 4,550 Gliders 26 800 700 20,800 $31,950 Total Market $ 6,050 5,525 18,200 $29,775 LCM applied to Items Whole $ 6,050 4,550 18,200 $28,800 $29,775 a LCM for inventory as a whole $29,775 b LCM applied to each product $28,800 ©McGraw-Hill Companies, 2008 296 Financial Accounting, 4th Edition To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Quick Study 5-10 (15 minutes) a b c d e Overstates 2008 cost of goods sold Understates 2008 gross profit Understates 2008 net income Overstates 2009 net income The understated 2008 net income and the overstated 2009 net income combine to yield a correct total income for the two-year period f The 2008 error will not affect years after 2009 Quick Study 5-11 (10 minutes) Inventory turnover = Cost of goods sold/Average merchandise inventory = $1,200,000 / [($150,000 + $180,000)/2 ] = 7.27 times Days’ sales in inventory = Ending Inventory/Costs of goods sold x 365 = ($180,000 / $1,200,000) x 365 = 54.75 days Quick Study 5-12A (15 minutes) Ending Inventory Cost of Goods Sold a FIFO (50 x $3.20) + (110 x $3.30) $523 (320 x $3.00) + (35 x $3.20) $1,072 b LIFO (160 x $3.00) $480 (110 x $3.30) + (85 x $3.20) + (160 x $3.00) $1,115 c Weighted Average ($1,595/ 515 = $3.097* cost per unit) (160 x $3.097) $495* (355 x $3.097) $1,100* *rounded ©McGraw-Hill Companies, 2008 Solutions Manual, Chapter 297 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Quick Study 5-13A (15 minutes) Ending Inventory a FIFO (15 x $8) + (15 X $10) (10 x $7) + (5 x $8) $270 b LIFO (10 x $7) + (20 x $8) (15 x $10) $230 c Weighted Average ($380/ 45 = $8.44 cost per unit)* (30 x $8.44) (15 x $8.44) $253* Cost of Goods Sold $110 $150 $127* *rounded d Specific Identification (2 x $7) + (13 x $8) + (15 x $10) (8 x $7) + (7 x $8) $268 $112 Quick Study 5-14B (15 minutes) Goods available for sale Inventory, January $190,000 Cost of goods purchased (net) 352,000 Goods available for sale (at cost) 542,000 Net sales at retail Estimated cost of goods sold [$685,000 x (1 - 44%)] (383,600) Estimated September inventory destroyed $158,400 $685,000 ©McGraw-Hill Companies, 2008 298 Financial Accounting, 4th Edition To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com EXERCISES Exercise 5-1 (30 minutes) a Specific identification Ending inventory—100 units from January 30, 70 units from January 20, and 20 units from beginning inventory Ending Inventory Computations Cost of Goods Sold (100 x $5.00) + (70 x $5.60) + (20 x $6.00) $1,012 $3,020 - $1,012 $2,008 b Weighted average perpetual Date Goods Purchased Cost of Goods Sold 1/1 1/10 100 @ $ 6.00 = $ 600 1/20 300 @ $5.60 1/25 140 @ $6.00 = $ 840 40 @ $6.00 = $ 240 40 @ $6.00 300 @ $5.60 (avg cost is $5.65) 250 @ $5.65 = $1,412* 1/30 Inventory Balance 100 @ $5.00 $2,012 90 @ $5.65 90 @ $5.65 100 @ $5.00 (avg cost is $5.31) = $1,920 = $ 508* = $1,008 *rounded c FIFO Perpetual Date Goods Purchased Cost of Goods Sold 1/1 1/10 1/20 1/30 140 @ $6.00 = $ 840 40 @ $6.00 = $ 240 40 @ $6.00 300 @ $5.60 = $1,920 40 @ $6.00 = $1,416 210 @ $5.60 90 @ $5.60 = $ 504 $2,016 90 @ $5.60 100 @ $5.00 = $1,004 100 @ $6.00 = $ 600 300 @ $5.60 1/25 Inventory Balance 100 @ $5.00 ©McGraw-Hill Companies, 2008 Solutions Manual, Chapter 299 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Exercise 5-1 (Continued) d LIFO Perpetual Date Goods Purchased Cost of Goods Sold Inventory Balance 1/1 1/10 1/20 100 @ $6.00 300 @ $5.60 1/25 1/30 = $ 600 250 @ $5.60 = $1,400 100 @ $5.00 $2,000 140 @ $6.00 = $ 840 40 @ $6.00 = $ 240 40 @ $6.00 300 @ $5.60 = $1,920 40 @ $6.00 50 @ $5.60 = $ 520 40 @ $6.00 50 @ $5.60 100 @ $5.00 = $1,020 Alternate Solution Format for FIFO and LIFO Perpetual Computations c FIFO (90 x $5.60) + (100 x $5.00) Ending Inventory Cost of Goods Sold $1,004 (100 x $6.00) + (40 x $6.00) + (210 x $5.60) d LIFO (40 x $6.00) + (50 x $5.60) + (100 x $5.00) $2,016 $1,020 (100 x $6.00) + (250 x $5.60) $2,000 Exercise 5-2 (20 minutes) LAKER COMPANY Income Statements For Month Ended January 31 Specific Identification Sales $5,250 Weighted Average FIFO LIFO $5,250 $5,250 $5,250 2,012 3,238 1,250 1,988 596* $1,392 2,016 3,234 1,250 1,984 595* $1,389 2,000 3,250 1,250 2,000 600 $1,400 (350 units x $15 price) Cost of goods sold Gross profit Expenses Income before taxes 2,008 3,242 1,250 1,992 Income tax expense (30%) 598* Net income $1,394 * Rounded to nearest dollar ©McGraw-Hill Companies, 2008 300 Financial Accounting, 4th Edition To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Problem 5-7BB (25 minutes) OTINGO EQUIPMENT CO Estimated Inventory at March 31 At Cost Goods available for sale Inventory, January Cost of goods purchased Goods available for sale Less estimated cost of goods sold Sales Less sales returns Net sales Estimated cost of goods sold [$3,680,950 x (1 - 35%)] Estimated March 31 inventory At Retail $ 802,880 2,209,630 3,012,510 $3,760,250 (79,300) $3,680,950 (2,392,618) * $ 619,892 *rounded to the nearest dollar SERIAL PROBLEM — SP Serial Problem — SP 5, Success Systems (20 minutes) Part A Inventory Items Units Office productivity Desktop publishing Accounting Totals Per Unit Cost Market $75 $73 100 98 85 90 Total Cost $225 200 255 $680 Total Market $219 196 270 $685 Assuming LCM is applied to the ―whole of inventory,‖ the $680 total cost of inventory is less than the $685 total market value Thus, Lopez would not adjust the currently reported inventory value of $680 ©McGraw-Hill Companies, 2008 334 Financial Accounting, 4th Edition To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Serial Problem — SP 5, Success Systems (concluded) Inventory Items Units Office productivity Desktop publishing Accounting Per Unit Cost Market $75 $73 100 98 85 90 Total Cost $225 200 255 $680 Total Market $219 196 270 $685 LCM Applied To Items $219 196 255 $670 Assuming LCM is applied to the ―items of inventory,‖ the $670 market value (per items) is less than the $680 total cost of inventory Thus, Lopez must adjust the currently reported inventory value from $680 to the LCM value of $670 Part B Ratio computations for the three months ended March 31, 2008: Inventory Turnover = Cost of Goods Sold / Average Inventory = $14,272 / [($0 + $680)/2] = 42 times (Since this is the first period of carrying inventory, it is acceptable to substitute ending inventory for average inventory This would yield a turnover of 21 times.) Days’ Sales in Inventory = (Ending Inventory/Cost of Goods Sold) x 365 = ($680 / $14,272) x 365 = 17.4 days Success Systems outperforms its competitors on both ratios Its inventory turnover is 42 (or 21) times versus the competitors’ 10 times Also, its days’ sales in inventory is 17.4 days versus competitors’ 29 days Thus, Success Systems appears to be successfully managing its inventory ©McGraw-Hill Companies, 2008 Solutions Manual, Chapter 335 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Reporting in Action — BTN 5-1 ($ millions) Ending inventories at February 26, 2005, were $2,851 Ending inventories at February 28, 2004, were $2,607 2/26/05 $2,851 $10,294 = 0.277 or 27.7% 2/28/04 $2,607 $8,652 = 0.301 or 30.1% Best Buy’s inventories are the second largest asset as of February 26, 2005 (after Short-term investments), and are the largest asset as of February 28, 2004 Thus, merchandise inventories are a significant item for Best Buy and should command management’s attention From the notes to the financial statements, we see under ―Merchandise inventories‖ that Best Buy’s inventories are carried at the lower of average cost or market a Inventory turnover = Average inventory = Cost of sales Average inventory $2,607 + $2,851 = $2,729 $20,938 Inventory turnover = $ 2,729 = 7.7 times b Days’ sales in inventory = = Ending inventory Cost of sales $2,851 $20,938 x 365 x 365 = 49.7 days Solution depends on the financial statement information obtained ©McGraw-Hill Companies, 2008 336 Financial Accounting, 4th Edition To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Comparative Analysis — BTN 5-2 ($ millions) Inventory turnover = Cost of sales Average inventory Best Buy — current year Inventory turnover = $20,938 ($2,607 + $2,851)/2 = 7.7 times $18,677 ($2,077 + $2,607)/2 = 8.0 times $7,904 ($1,517 + $1,460)/2 = 5.3 times $7,573 ($1,410 + $1,517)/2 = 5.2 times Best Buy — one year prior Inventory turnover = Circuit City — current year Inventory turnover = Circuit City — one year prior Inventory turnover = Days’ sales in inventory = Ending Inventory x 365 Costs of Goods Sold Current year — Best Buy’s days’ sales in inventory $2,851 $20,938 x 365 = 49.7 days One year prior —Best Buy’s days’ sales in inventory $2,607 x 365 $18,677 = 50.9 days Two years prior—Best Buy’s days’ sales in inventory $2,077 x 365 $15,998 = 47.4 days ©McGraw-Hill Companies, 2008 Solutions Manual, Chapter 337 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Comparative Analysis (Concluded) Continued Current year — Circuit City’s days’ sales in inventory $1,460 $7,904 x 365 = 67.4 days One year prior —Circuit City’s days’ sales in inventory $1,517 $7,573 x 365 = 73.1 days Two years prior—Circuit City’s days’ sales in inventory $1,410 $7,648 x 365 = 67.3 days For all three years, Best Buy manages its inventory more efficiently than Circuit City Its inventory turnover is higher, and its days’ sales in inventory is shorter Best Buy compares favorably to (exceeds) the industry average of a 5.5 inventory turnover; Circuit City’s inventory turnover is slightly below the industry average ©McGraw-Hill Companies, 2008 338 Financial Accounting, 4th Edition To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Ethics Challenge — BTN 5-3 Profit Margin: In an economic environment of rising costs, the use of FIFO results in a lower cost of goods sold than LIFO If cost of goods sold is lower, then net income will be higher A higher net income will improve the profit margin ratio, which is calculated as net income divided by net sales Current Ratio: With rising costs, FIFO results in the most recent, higher costs being reflected in ending inventory This means that the balance sheet FIFO inventory figure will be larger than under LIFO In the numerator of the current ratio, inventory is included as part of the current asset total A larger inventory from FIFO results in a larger numerator and, therefore, a larger current ratio than under LIFO First, it is true that managers have discretion in choosing an inventory costing method It appears, however, that Golf Challenge’s owner does not understand that changing methods can only be done very selectively over time A change in method must be justified by management for improving the financial reporting of the company Second, the consistency principle does not allow frequent changes in inventory costing methods by management If Golf Challenge’s owner can justify the method change as improving the financial reports of the company, then the owner’s action is ethical However, the owner must realize that changing methods can only be an infrequent occurrence given that consistency in financial reporting is required Third, the full disclosure principle requires the owner to disclose to the bank that the company has implemented a change in inventory costing method from LIFO to FIFO Finally, if LIFO is currently being used for tax reporting, then the tax reporting method must also change due to the LIFO Conformity Rule— which demands that if LIFO is used for tax reporting, it must be used for financial reporting ©McGraw-Hill Companies, 2008 Solutions Manual, Chapter 339 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Communicating in Practice — BTN 5-4 [Note: An acceptable memorandum format should be used.] The body of the memo should recommend use of the LIFO method The memo should explain that this would allow for the matching of the most recent (higher) costs against revenue through cost of goods sold It should further explain that this would result in a lower net income (and taxable income) and, therefore, lower tax (cash) payments The justification for this method is a better matching of current costs against revenue to more fairly reflect the results of operation A statement could be made that the actual physical flow of goods does not dictate the inventory method a business uses Taking It to the Net — BTN 5-5 One especially popular product with college students that Oakley sells is Oakley sunglasses The summary of significant accounting policies reports that Oakley reports its inventory at the lower of cost to purchase and/or manufacture or the current estimated market value Oakley’s gross margin for 2004 is ($ in thousands) Sales $585,468 Cost of sales (265,104) Gross margin $320,364 Gross margin ratio is: $320,364 / $585,468 = 0.547 or 54.7% Comment: Oakley’s gross margin ratio substantially exceeds the industry average gross margin ratio of 35% 2004 Inventory turnover* = $265,104 / [($98,691+$115,061)/2] = 2.5 times 2004 Days’ sales in inventory* = ($115,061 / $265,104) x 365 = 158.4 days * $ thousands Comment: Oakley’s inventory turnover is lower than the industry average turnover of 3.9 ©McGraw-Hill Companies, 2008 340 Financial Accounting, 4th Edition To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Teamwork in Action — BTN 5-6 Concepts and procedures to illustrate in expert presentation Specific Identification Expert (a) and (b) Concept Purchases are always recorded at the actual specific costs The specific identification cost flow assumption requires units sold be assigned their actual cost Total cost of goods sold is tallied based on these individual cost assignments The new inventory balance is perpetually determined to be the amount after sales at actual cost is deducted (a) and (b) Procedures Date Goods Purchased Cost of Goods Sold Jan 50 @ $100 = $ 5,000 Jan.10 Jan.14 Inventory Balance 30 @ $ 100 = $ 3,000 150 @ $120 = $18,000 Feb.15 20 @ $100 = $ 2,000 20 @ $100 = $ 2,000 150 @ $120 = 18,000 $20,000 100 @ $ 120 = $12,000 20 @ $100 = $ 2,000 50 @ $120 = 6,000 $ 8,000 Apr.30 200 @ $150 = $30,000 20 @ $100 = $ 2,000 50 @ $120 = 6,000 200 @ $150 = 30,000 $38,000 Sept 26 300 @ $200 = $60,000 20 50 200 300 @ $100 = $ 2,000 @ $120 = 6,000 @ $150 = 30,000 @ $200 = 60,000 $98,000 20 50 100 50 @ $100 = $ 2,000 @ $120 = 6,000 @ $150 = 15,000 @ $200 = 10,000 Oct 100 @ $ 150 = $15,000 250 @ $ 200 = $50,000 $80,000 $33,000 ©McGraw-Hill Companies, 2008 Solutions Manual, Chapter 341 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Teamwork in Action (Continued) LIFO Expert (a) and (b) Concept Purchases are always recorded at actual costs The LIFO cost flow assumption requires (i) units sold be assigned the most recent cost—total cost of goods sold is tallied based on these individual cost assignments, and (ii) that the inventory balance be perpetually determined to be the amount after goods sold (using the most recent costs) are deducted (a) and (b) Procedures Date Goods Purchased Cost of Goods Sold Jan 50 @ $100 = $ 5,000 Jan.10 Jan.14 Inventory Balance 30 @ $100 = $ 3,000 150 @ $120 = $18,000 Feb.15 20 @ $100 = $ 2,000 20 @ $100 = $ 2,000 150 @ $120 = 18,000 $20,000 100 @ $120 = $12,000 20 @ $100 = $ 2,000 50 @ $120 = 6,000 $ 8,000 Apr.30 200 @ $150 =$30,000 20 @ $100 = $ 2,000 50 @ $120 = 6,000 200 @ $150 = 30,000 $38,000 Sept 26 300 @ $200 = $60,000 20 50 200 300 Oct @ @ @ @ $100 = $ 2,000 $120 = 6,000 $150 = 30,000 $200 = 60,000 $98,000 300 @ $200 = $60,000 50 @ $150 = $ 7,500 20 @ $100 = $ 2,000 50 @ $120 = 6,000 150 @ $150 = 22,500 $82,500 $30,500 ©McGraw-Hill Companies, 2008 342 Financial Accounting, 4th Edition To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Teamwork in Action (Continued) FIFO Expert (a) and (b) Concept Purchases are always recorded at actual costs The FIFO cost flow assumption requires units sold be assigned the first (earliest) cost of purchases Total cost of goods sold is tallied based on these individual cost assignments The inventory balance is perpetually determined to be the amount after deducting goods sold using the earliest costs (a) and (b) Procedures Date Goods Purchased Cost of Goods Sold Jan 50 @ $100 = $ 5,000 Jan.10 Jan.14 Inventory Balance 30 @ $100 = $ 3,000 150 @ $120 = $18,000 Feb.15 20 @ $100 = $ 2,000 20 @ $100 = $ 2,000 150 @ $120 = 18,000 $20,000 20 @ $ 100= $ 2,000 80 @ $ 120= 9,600 70 @ $120 = $ 8,400 Apr.30 200 @ $150 = $30,000 70 @ $120 = $ 8,400 200 @ $150 = 30,000 $38,400 Sept 26 300 @ $200 = $60,000 70 @ $120 = $ 8,400 200 @ $150 = 30,000 300 @ $200 = 60,000 $98,400 Oct 70 @ $120 = $ 8,400 200 @ 150 = 30,000 80 @ 200 = 16,000 $69,000 220 @ $200 = $44,000 $44,000 ©McGraw-Hill Companies, 2008 Solutions Manual, Chapter 343 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Teamwork in Action (Continued) Weighted Average Expert (a) and (b) Concept Purchases are always recorded at actual costs The Weighted Average cost flow assumption requires units sold be assigned a cost based on running weighted average cost per unit in the inventory balance This requires the computation of a new weighted average cost per unit after each purchase The total cost of goods sold is tallied based on cost assignments The new inventory balance is perpetually determined to be the residual amount after goods sold are deducted using this weighted average cost (a) and (b) Procedures Date Goods Purchased Cost of Goods Sold Jan Jan.10 Jan.14 30 @ $100 = $ 3,000 150 @ $120 = $18,000 Feb.15 Inventory Balance 50 @ $100 = $ 5,000 20 @ $100 = $ 2,000 170 @ $117.647 = $20,000 (2,000 +18,000)/ (20+150) 100 @ $117.647 = $11,765* 70 @ $117.647 = $ 8,235* Apr.30 200 @ $150 = $30,000 270 @ $141.611*= $38,235* (8,235+30,000)/ (70 +200) Sept 26 300 @ $200 = $60,000 570 @ $172.342* = $98,235* (38,235 +60,000)/ (270 +300) Oct 350 @ $172.342 = $60,320 $75,085 * rounded 220 @ $172.342* = $37,915** ** adjusted for rounding ©McGraw-Hill Companies, 2008 344 Financial Accounting, 4th Edition To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Teamwork in Action (Concluded) (c) Cost Flow versus Actual Physical Flow Typical comments experts may express in response to (c) Physical flow of goods can be affected by the type of products in inventory and/or the way inventory is stored and/or displayed Actual physical flow of goods is not relevant in selecting an acceptable method of accounting for inventory Any one of the four methods is acceptable The method chosen should be consistently applied More Specific Expert Comments to (c) Specific Identification Always reflects the actual cost flow Electronic scanning has increased the ability to use this method in businesses that sell homogeneous goods FIFO Most businesses try to move their older or earlier acquired inventory first, particularly if they sell perishable goods Therefore, FIFO will frequently reflect the physical flow of goods LIFO Few actually sell their most recently acquired inventory first This could follow actual physical flow if inventory is stocked in a manner that requires accessing most recent cost first (examples: piles of coal, salt, etc.) Weighted Average This cost is rarely the actual cost flow This would require the mixing or combining of units on hand This is possible for inventory such as oil but it still unlikely that the actual blending would be as complete as the averaging of costs (d) Impact of Methods Typical comments experts may express in response to (d) In a period of rising prices, LIFO will generally result in the highest cost of goods sold and, therefore, the lowest net income and lowest tax However, LIFO must be used for financial reporting if it is used for tax purposes In a period of rising prices, FIFO will generally result in the lowest cost of goods sold and, therefore, the highest net income and highest tax Weighted Average will usually result in a reported net income and tax consequences somewhere in between LIFO and FIFO Specific Identification will result in a cost of goods sold, net income and tax expense dependent on whether the actual cost of units sold were the higher or lower priced items (e) Valuation Typical comments experts may express in response to (e) FIFO tends to value ending inventory closest to replacement cost whereas LIFO does not Weighted average tends to value inventory between old and new market values, and specific identification depends on whether the items remaining in inventory have costs similar to current replacement costs ©McGraw-Hill Companies, 2008 Solutions Manual, Chapter 345 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com BusinessWeek Activity — BTN 5-7 The inventory turnover ratio is a measure of how quickly a company sells its inventory A high turnover means that inventory moves quickly through the company This reduces the risk of obsolescence and ties up less cash in inventory Both of these are desirable for a company We can better interpret the inventory turnover ratio by using it to calculate days’ sales in inventory Office Depot’s inventory turnover is 7.5, which means the company is holding its inventory about 49 days on average Its main competitor, Staples, has a 6.3 inventory turnover, which means that Staples holds its inventory about 53 days, or days longer than Office Depot It is true that a retailer must have inventory on the shelves to sell to its customers The problem with the inventory turnover ratio and the days’ sales in inventory is that these measures are computed using average inventory values A typical inventory includes all of the product lines and items the company carries; therefore, a company must not only manage its turnover on average inventory, but it must also monitor all of its product lines and specific items A high inventory turnover cannot measure whether a company has the right combination or mix of items in its inventory to meet customers’ demands Entrepreneurial Decision — BTN 5-8 Part (a) Current inventory turnover Current days’ sales in inventory (b) Proposed inventory turnover = $1,200,000 / $300,000 = times = ($300,000/$1,200,000 x 365 = 91.25 days = $1,200,000 / $150,000 = times Proposed days’ sales in inventory = ($150,000 / $1,200,000) x 365 = 45.63 days *Ratio definitions: Inventory turnover = Cost of goods sold Average inventory Days’ sales in inventory = Ending inventory Cost of goods sold x 365 ©McGraw-Hill Companies, 2008 346 Financial Accounting, 4th Edition To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Entrepreneurial Decision (Concluded) Part The Tihanyi sisters’ proposal would yield a much improved inventory turnover of vis-à-vis the current turnover of On the downside, its days’ sales in inventory would dramatically decline from 91 days to 46 days Assuming an inventory buffer of 46 days is sufficient, then the proposal should be implemented We need to recognize that the major concern with this proposal is with the company’s confidence in both maintaining its current sales level and with not losing or alienating its current and future customers due to delays in acquiring merchandise Assuming the company’s predictions are reasonable, we need to focus on the customer concern That is, we need to be certain that Surf Diva can continue to satisfactorily serve customers with a 46-day buffer in inventory If not, then current and future sales could suffer to an extent that would outweigh the benefit of slashing inventory Hitting the Road — BTN 5-9 There is no formal solution for this field activity The required solution does allow students to see the relevance of studying merchandise activities and inventory accounting ©McGraw-Hill Companies, 2008 Solutions Manual, Chapter 347 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Global Decision Inventory turnover = — BTN 5-10 Cost of sales Average inventory Current year — Dixons (₤ millions): Inventory turnover = ₤5,777.0 (₤699.9 + ₤777.1) / = 7.8 times One year prior — Dixons (₤ millions): ₤5,108.6 Inventory turnover = (₤615.7 + ₤699.9) / Days’ sales in inventory = = 7.8 times Ending Inventory x 365 Costs of Goods Sold Current year —Dixons days’ sales in inventory (₤ millions): ₤777.1 ₤5,777.0 x 365 = 49.1 days One year prior—Dixons days’ sales in inventory (₤ millions): ₤699.9 x 365 ₤5,108.6 Company = 50.0 days Inventory Turnover Current Prior Year Days’ Sales in Inventory Current Prior Year Dixons 7.8 7.8 49.1 50.0 Best Buy 7.7 8.0 49.7 50.9 Circuit City 5.3 5.2 67.4 73.1 Note: Computations for Best Buy and Circuit City are in BTN 5-2 For both years, Dixons and Best Buy have comparable inventory turnover and days’ sales in inventory Circuit City manages its inventory less efficiently than both Dixons and Best Buy for both years ©McGraw-Hill Companies, 2008 348 Financial Accounting, 4th Edition ... Lower of cost or market of inventory by product = $7,394 $7,490 ©McGraw-Hill Companies, 2008 Solutions Manual, Chapter 303 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com... turnover increased by 2.3 times (7.0 - 4.7) from 2007 to 2008 In addition, days' sales in inventory decreased by 19.9 days (75.1 - 55.2) ©McGraw-Hill Companies, 2008 304 Financial Accounting, 4th... equity figure is understated by the amount of the inventory understatement ©McGraw-Hill Companies, 2008 316 Financial Accounting, 4th Edition To download more slides, ebook, solutions and test bank,