Solution manual accounting 25th editon warren chapter 07

CHAPTER INVENTORIES DISCUSSION QUESTIONS The receiving report should be reconciled to the initial purchase order and the vendor’s invoice before recording or paying for inventory purchases This procedure will verify that the inventory received matches the type and quantity of inventory ordered It also verifies that the vendor’s invoice is charging the company for the actual quantity of inventory received at the agreed-upon price A physical inventory should be taken periodically to test the accuracy of the perpetual records In addition, a physical inventory will identify inventory shortages or shrinkage No, they are not techniques for determining physical quantities The terms refer to cost flow assumptions, which affect the determination of the cost prices assigned to items in the inventory a b FIFO LIFO In periods of rising prices, the use of LIFO will result in the lowest net income and thus the LIFO FIFO c d LIFO FIFO lowest income tax expense Net realizable value (estimated selling price less any direct cost of disposition, such as sales commissions) a Gross profit for the year was understated by $14,750 b Merchandise inventory and owner’s equity were understated by $14,750 10 Bibbins Company Since the merchandise was shipped FOB shipping point, title passed to Bibbins Company when it was shipped and should be reported in Bibbins Company’s financial statements at May 31, the end of the fiscal year Manufacturer’s The manufacturer retains title until the goods are sold Thus, any unsold merchandise at the end of the year is part of the manufacturer’s (consignor’s) inventory, even though the merchandise is in the hands of the retailer (consignee) 7-1 © 2014 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part CHAPTER Inventories PRACTICE EXERCISES PE 7–1A a b c Gross Profit February $35 ($75 – $40) $31 ($75 – $44) $33 ($75 – $42) First-in, first-out (FIFO) Last-in, first-out (LIFO) Weighted average cost PE 7–1B a b c PE 7–2A a Cost of merchandise sold (May 28): 15 units @ $120 units @ $130 18 $1,800 390 $2,190 b Inventory, May 31: $7,410 = 57 units × $130 PE 7–2B a Cost of merchandise sold (July 24): units @ $15 34 units @ $18 40 $ 90 612 $702 b Inventory, July 31: $1,008 = 56 units × $18 $86 ($42 + $44) $82 ($40 + $42) $84 ($42 × 2) Gross Profit Ending Inventory June June 30 $60 ($110 – $50) $40 ($110 – $70) $50 ($110 – $60) First-in, first-out (FIFO) Last-in, first-out (LIFO) Weighted average cost Ending Inventory February 28 $130 ($60 + $70) $110 ($50 + $60) $120 ($60 × 2) PE 7–3A a Cost of merchandise sold (June 26): $5,400 = (90 units × $60) b Inventory, June 30: 20 units @ $50 35 units @ $60 55 $1,000 2,100 $3,100 PE 7–3B a Cost of merchandise sold (March 27): $4,800 = (240 units × $20) b Inventory, March 31: 45 units @ $18 135 units @ $20 180 $ 810 2,700 $3,510 PE 7–4A a Weighted average unit cost: $71.25 Inventory total cost after purchase on July 15: 40 units @ $60 120 units @ $75 160 $ 2,400 9,000 $11,400 Weighted average unit cost = $71.25 ($11,400 ÷ 160 units) b Cost of merchandise sold (July 27): $5,985 (84 units × $71.25) c Inventory, July 31: $5,415 (76 units × $71.25) PE 7–4B a Weighted average unit cost: $9.50 Inventory total cost after purchase on October 22: 125 units @ $8 375 units @ $10 500 $1,000 3,750 $4,750 Weighted average unit cost = $9.50 ($4,750 ÷ 500 units) b Cost of merchandise sold (October 29): $2,660 (280 units × $9.50) c Inventory, October 31: $2,090 (220 units × $9.50) PE 7–5A a First-in, first-out (FIFO) method: $3,726 = 23 units × $162 b Last-in, first-out (LIFO) method: $3,105 = 23 units × $135 c Weighted average cost method: $3,450 (23 units × $150), where average cost = $150 = $13,500 ÷ 90 units PE 7–5B a First-in, first-out (FIFO) method: $20,094 = (40 units × $357) + (17 units × $342) b Last-in, first-out (LIFO) method: $19,854 = (20 units × $360) + (37 units × $342) c Weighted average cost method: $19,665 (57 units × $345), where average cost = $345 = $110,400 ÷ 320 units PE 7–6A Commodity 1107B 1110M Inventory Quantity 450 75 Unit Unit Cost Price Market Price $80 60 $78 64 Unit Unit Cost Price Market Price $10 36 $11 34 Total Total Cost Market $36,000 4,500 $40,500 $35,100 4,800 $39,900 Lower of C or M $35,100 4,500 $39,600 PE 7–6B Commodity JFW1 SAW9 Total Inventory Quantity 6,330 1,140 Total Cost $ 63,300 41,040 $104,340 Market $ 69,630 38,760 $108,390 Lower of C or M $ 63,300 38,760 $102,060 PE 7–7A Amount of Misstatement Overstatement (Understatement) Balance Sheet: Merchandise inventory understated*………………… Current assets understated……………………………… Total assets understated……………………………… Owner’s equity understated…………………………… $(4,450) (4,450) (4,450) (4,450) Income Statement: Cost of merchandise sold overstated………………… Gross profit understated……………………………… Net income understated………………………………… $ 4,450 (4,450) (4,450) * $118,350 – $113,900 = $4,450 PE 7–7B Amount of Misstatement Overstatement (Understatement) Balance Sheet: Merchandise inventory overstated*…………………… Current assets overstated……………………………… Total assets overstated………………………………… Owner’s equity overstated……………………………… $8,780 8,780 8,780 8,780 Income Statement: Cost of merchandise sold understated……………… Gross profit overstated…………………………………… Net income overstated………………………………… $(8,780) 8,780 8,780 * $728,660 – $719,880 = $8,780 PE 7–8A a Inventory Turnover Cost of merchandise sold Inventories: Beginning of year End of year Average inventory Inventory turnover 2014 2013 $1,452,500 $1,120,000 $380,000 $450,000 $415,000 $320,000 $380,000 $350,000 [($380,000 + $450,000) ÷ 2] [($320,000 + $380,000) ÷ 2] 3.5 3.2 ($1,452,500 ÷ $415,000) ($1,120,000 ÷ $350,000) 2014 2013 $1,452,500 $1,120,000 Number of Days’ Sales b in Inventory Cost of merchandise sold Average daily cost of merchandise sold Average inventory Number of days’ sales in inventory $3,979.5 $3,068.5 ($1,452,500 ÷ 365 days) ($1,120,000 ÷ 365 days) $415,000 $350,000 [($380,000 + $450,000) ÷ 2] [($320,000 + $380,000) ÷ 2] 104.3 days 114.1 days ($415,000 ÷ $3,979.5) ($350,000 ÷ $3,068.5) c The increase in the inventory turnover from 3.2 to 3.5 and the decrease in the number of days’ sales in inventory from 114.1 days to 104.3 days indicate favorable trends in managing inventory CHAPTER Inventories PE 7–8B a Inventory Turnover Cost of merchandise sold Inventories: Beginning of year End of year Average inventory Inventory turnover 2014 2013 $3,864,000 $4,001,500 $770,000 $840,000 $805,000 $740,000 $770,000 $755,000 [($770,000 + $840,000) ÷ 2] [($740,000 + $770,000) ÷ 2] 4.8 5.3 ($3,864,000 ÷ $805,000) ($4,001,500 ÷ $755,000) 2014 2013 $3,864,000 $4,001,500 Number of Days’ Sales b in Inventory Cost of merchandise sold Average daily cost of merchandise sold Average inventory Number of days’ sales in inventory c $10,586.3 $10,963.0 ($3,864,000 ÷ 365 days) ($4,001,500 ÷ 365 days) $805,000 $755,000 [($770,000 + $840,000) ÷ 2] [($740,000 + $770,000) ÷ 2] 76.0 days 68.9 days ($805,000 ÷ $10,586.3) ($755,000 ÷ $10,963.0) The decrease in the inventory turnover from 5.3 to 4.8 and the increase in the number of days’ sales in inventory from 68.9 days to 76.0 days indicate unfavorable trends in managing inventory EXERCISES Ex 7–1 Switching to a perpetual inventory system will strengthen Triple Creek Hardware’s internal controls over inventory, since the store managers will be able to keep track of how much of each item is on hand This should minimize shortages of goodselling items and excess inventories of poor-selling items On the other hand, switching to a perpetual inventory system will not eliminate the need to take a physical inventory count A physical inventory must be taken to verify the accuracy of the inventory records in a perpetual inventory system In addition, a physical inventory count is needed to detect shortages of inventory due to damage or theft Ex 7–2 a Appropriate The inventory tags will protect the inventory from customer theft b Inappropriate The control of using security measures to protect the inventory is violated if the stockroom is not locked c Inappropriate Good controls include a receiving report, prepared after all inventory items received have been counted and inspected Inventory purchased should only be recorded and paid for after reconciling the receiving report, the initial purchase order, and the vendor’s invoice CHAPTER Inventories Ex 7–3 a Portable DVD Players Purchases Date Apr Quantity 14 140 Unit Cost Total Cost 40 30 b 160 43 Inventory Unit Cost Unit Cost Quantity Total Cost 90 39 3,510 30 80 45 39 40 40 1,170 3,200 1,800 Quantity 5,600 19 25 30 Cost of Merchandise Sold 6,880 Balances Total Cost 120 30 30 140 60 39 39 39 40 40 4,680 1,170 1,170 5,600 2,400 15 15 160 40 40 43 600 600 6,880 7,480 9,680 Since the prices rose from $39 for the April inventory to $43 for the purchase on April 30, we would expect that under last-in, first-out the inventory would be lower Note to Instructors: Exercise 7–4 shows that the inventory is $7,465 under LIFO 7-9 © 2014 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part Ex 7–4 Portable DVD Players Purchases Date Apr Quantity 14 Unit Cost Total Cost Cost of Merchandise Sold Inventory Unit Cost Unit Cost Quantity Total Cost 90 39 3,510 19 110 40 4,400 25 30 15 40 39 1,200 585 30 30 140 160 Balances 40 43 5,600 6,880 9,695 Quantity Total Cost 120 30 30 140 30 30 15 39 39 39 40 39 40 39 4,680 1,170 1,170 5,600 1,170 1,200 585 15 160 39 43 585 6,880 7,465 Prob 7–4B First-In, First-Out Method Merchandise inventory, June 30, 2014…………………………………… Cost of merchandise sold……………………………………… …………… $ 32,864 310,776 Supporting computations Merchandise inventory: 26 units @ $1,264…………………………………………… ……… $ 32,864 Cost of merchandise sold: Beginning inventory, April 1, 2014………………………………………… Purchases……………………………………………………………….……… $ 30,000 313,640 Merchandise available for sale……………………………………….…… Less ending inventory, June 30, 2014…………………………………… $343,640 32,864 Cost of merchandise sold………………………………………………… $310,776 Last-In, First-Out Method Merchandise inventory, June 30, 2014…………………………………… Cost of merchandise sold…………………………………….…………… $ 31,240 312,400 Supporting computations Merchandise inventory: 25 units @ $1,200………………………………………………………… unit @ $1,240………………………………………………………… 26 units…………………………………………………………………… $30,000 1,240 $31,240 Cost of merchandise sold: Beginning inventory, April 1, 2014………………………………………… Purchases………………………………………………………………… … $ 30,000 313,640 Merchandise available for sale…………………………………………… Less ending inventory, June 30, 2014…………………………………… $343,640 31,240 Cost of merchandise sold…………………………………………………… $312,400 7-41 © 2014 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part Prob 7–4B (Continued) Weighted Average Cost Method Merchandise inventory, June 30, 2014……………………… Cost of merchandise sold…………………………………… $ 32,500 311,140 Supporting computations Weighted Average Unit Cost = = Total Cost of Merchandise Available for Sale Units Available for Sale $343,640 = $1,250 per unit (rounded) 275 units Merchandise inventory: 26 units × $1,250 = $32,500 Cost of merchandise sold: Beginning inventory, April 1, 2014………………………… Purchases………………………………………………………… Merchandise available for sale……………………………… Less ending inventory, June 30, 2014……………………… Cost of merchandise sold……………………………………… $ 30,000 313,640 $343,640 32,500 $311,140 Prob 7–4B (Concluded) FIFO LIFO Weighted Average Sales Cost of merchandise sold $525,250 310,776 $525,250 312,400 $525,250 311,140 Gross profit $214,474 $212,850 $214,110 Inventory, June 30, 2014 $ 32,864 $ 31,240 $ 32,500 Prob 7–5B First-In, First-Out Method Model C55 D11 F32 H29 K47 S33 X74 Quantity 1 2 Unit Cost Total Cost $1,070 1,060 675 666 280 260 317 542 549 232 39 $ 3,210 1,060 4,050 3,330 280 260 1,268 3,252 1,098 464 273 $18,545 Unit Cost Total Cost $1,040 1,054 639 645 240 305 520 531 222 35 36 $ 3,120 1,054 5,751 1,290 480 1,220 3,120 1,062 444 140 108 $17,789 Total Last-In, First-Out Method Model C55 D11 F32 H29 K47 S33 X74 Total Quantity 2 2 Prob 7–5B (Concluded) Weighted Average Cost Method Model C55 D11 F32 H29 K47 S33 X74 Total Quantity 11 Unit Cost* Total Cost $1,056 654 252 311 534 227 37 $ 4,224 7,194 504 1,244 4,272 454 259 $18,151 * Computations of unit costs: C55: $1,056 = [(3 × $1,040) + (3 × $1,054) + (3 × $1,060) + (3 × $1,070)] ÷ (3 + + + 3) D11: $654 = [(9 × $639) + (7 × $645) + (6 × $666) + (6 × $675)] ÷ (9 + + + 6) F32: $252 = [(5 × $240) + (3 × $260) + (1 ì $260) + (1 ì $280)] ữ (5 + + + 1) H29: $311 = [(6 × $305) + (3 × $310) + (3 × $316) + (4 ì $317)] ữ (6 + + + 4) K47: $534 = [(6 × $520) + (8 × $531) + (4 × $549) + (6 × $542)] ÷ (6 + + + 6) S33: $227 = [(4 ì $222) + (4 ì $232)] ữ (4 + 4) X74: $37 = [(4 × $35) + (6 × $36) + (8 × $37) + (7 × $39)] ÷ (4 + + + 7) a During periods of rising prices, the LIFO method will result in a lower cost of inventory, a greater amount of cost of merchandise sold, and a lesser amount of net income than the other two methods For Pappa’s Appliances, the LIFO method would be preferred for the current year, since it would result in a lesser amount of income tax b During periods of declining prices, the FIFO method will result in a lesser amount of net income and would be preferred for income tax purposes Prob 7–6B Inventory Sheet December 31, 2014 Inventory Commodity A54 Quantity 37 C77 24 F66 30 H83 21 K12 375 Q58 90 S36 V97 Y88 Total 140 17 30 20 10 15 75 15 100 40 10 Unit Unit Cost Price Market Price $ 60 58 $ 56 56 174 178 130 128 132 132 547 540 545 545 25 26 18 18 256 260 17 16 750 740 235 235 20 20 744 744 Total Lower of C or M Cost Market $ 1,800 406 2,206 4,176 $ 1,680 392 2,072 4,272 $ 2,072 4,176 2,600 1,280 3,880 2,640 1,320 3,960 3,880 3,282 8,100 11,382 2,250 3,270 8,175 11,445 1,875 11,382 1,875 1,875 390 2,265 1,350 270 1,620 1,620 1,280 780 2,060 1,175 705 1,880 1,880 1,700 640 2,340 2,000 800 2,800 2,340 7,500 5,180 12,680 $43,239 7,440 5,208 12,648 $42,572 12,648 $41,873 Appendix Prob 7–7B JAFFE CO Cost Merchandise inventory, February Net purchases $ 400,000 4,055,000 $4,455,000 Merchandise available for sale Ratio of cost to retail price: $4,455,000 $5,940,000 Retail $ 615,000 5,325,000 $5,940,000 = 75% $5,220,000 120,000 Sales Less sales returns and allowances Net sales Merchandise inventory, February 28, at retail 5,100,000 $ 840,000 Merchandise inventory, at estimated cost ($840,000 × 75%) $ 630,000 CORONADO CO Cost a Merchandise inventory, May Net purchases Merchandise available for sale Sales Less sales returns and allowances Net sales Less estimated gross profit ($4,750,000 × 35%) Estimated cost of merchandise sold Estimated merchandise inventory, October 31 b $ 400,000 3,150,000 $3,550,000 $4,850,000 100,000 $4,750,000 1,662,500 3,087,500 $ 462,500 Estimated merchandise inventory, October 31 Physical inventory count, October 31 $ 462,500 366,500 Estimated loss due to theft or damage, May 1–October 31 $ 96,000 CASES & PROJECTS CP 7–1 Since the title to merchandise shipped FOB shipping point passes to the buyer when the merchandise is shipped, the shipments made before midnight, October 31, 2014, should properly be recorded as sales for the fiscal year ending October 31, 2014 Hence, Ryan Frazier is behaving in a professional manner However, Ryan should realize that recording these sales in 2014 precludes them from being recognized as sales in 2015 Thus, accelerating the shipment of orders to increase sales of one period will have the effect of decreasing sales of the next period CP 7–2 In developing a response to Paula’s concerns, you should probably first emphasize the practical need for an assumption concerning the flow of cost of goods purchased and sold That is, when identical goods are frequently purchased, it may not be practical to specifically identify each item of inventory If all the identical goods were purchased at the same price, it wouldn’t make any difference for financial reporting purposes which goods we assumed were sold first, second, etc However, in most cases, goods are purchased over time at different prices, and hence, a need arises to determine which goods are sold so that the price (cost) of those goods can be matched against the revenues to determine operating income Next, you should emphasize that accounting principles allow for the fact that the physical flow of the goods may differ from the flow of costs Specifically, accounting principles allow for three cost flow assumptions: first-in, first-out; last-in, first-out; and weighted average Each of these methods has advantages and disadvantages One primary advantage of the last-in, first-out method is that it better matches current costs (the cost of goods purchased last) with current revenues Therefore, the reported operating income is more reflective of current operations and what might be expected in the future Another reason that the last-in, first-out method is often used is that it tends to minimize taxes during periods of price increases Since for most businesses prices tend to increase, the LIFO method will generate lower taxes than will the alternative cost flow methods The preceding explanation should help Paula better understand LIFO and its impact on the financial statements and taxes CP 7–3 a First-in, first-out method: 8,000 units at $48.00…………………………………………………… 8,000 units at $44.85………………………………………………… 12,800 units at $43.50…………………………………………………… 3,200 units at $42.75…………………………………………………… 32,000 units…………………………………………………………… $ 384,000 358,800 556,800 136,800 $1,436,400 b Last-in, first-out method: 31,000 units at $36.60………………………………………………… 1,000 units at $39.00………………………………………………… $1,134,600 39,000 32,000 units……………………………………………………………… $1,173,600 c Weighted average cost method: 32,000 units at $40.74*………………………………………………… * ($8,148,000 ÷ 200,000) = $40.74 $1,303,680 Weighted Average FIFO LIFO Cost Sales………………………………………… Cost of merchandise sold*……………… Gross profit………………………………… $10,000,000 6,711,600 $10,000,000 6,974,400 $10,000,000 6,844,320 $ 3,288,400 $ 3,025,600 $ 3,155,680 * Cost of merchandise available for sale…… Less ending inventory………………………… $8,148,000 1,436,400 $8,148,000 1,173,600 $8,148,000 1,303,680 Cost of merchandise sold…………………… $6,711,600 $6,974,400 $6,844,320 a The LIFO method is often viewed as the best basis for reflecting income from operations This is because the LIFO method matches the most current cost of merchandise purchases against current sales The matching of current costs with current sales results in a gross profit amount that many consider to best reflect the results of current operations For Golden Eagle Company, the gross profit of $3,025,600 reflects the matching of the most current costs of the product of $6,974,400 against the current period sales of $10,000,000 This matching of current costs with current sales also tends to minimize the effects of price trends on the results of operations The LIFO method will not match current sales and the current cost of merchandise sold if the current-period quantity of sales exceeds the currentperiod quantity of purchases In this case, the cost of merchandise sold will include a portion of the cost of the beginning inventory, which may have a unit cost from purchases made several years prior to the current period The results of operations may then be distorted in the sense of the current matching concept This situation occurs rarely in most businesses because of consistently increasing quantities of year-end inventory from year to year CP 7–3 (Continued) While the LIFO method is often viewed as the best method for matching revenues and expenses, the FIFO method is often consistent with the physical movement of merchandise in a business, since most businesses tend to dispose of commodities in the order of their acquisition To the extent that this is the case, the FIFO method approximates the results that will be attained by a specific identification of costs The weighted average cost method is, in a sense, a compromise between LIFO and FIFO The effect of price trends is averaged, both in determining net income and in determining inventory cost Which inventory costing method best reflects the results of operations for Golden Eagle Company depends upon whether one emphasizes the importance of matching revenues and expenses (the LIFO method) or whether one emphasizes the physical flow of merchandise (the FIFO method) The average cost method might be considered best if one emphasizes the matching and physical flow of goods concepts equally b The FIFO method provides the best reflection of the replacement cost of the ending inventory for the balance sheet This is because the amount reported on the balance sheet for merchandise inventory will be assigned costs from the most recent purchases For most businesses, these costs will reflect purchases made near the end of the period For example, Golden Eagle Company’s ending inventory on December 31, 2014, is assigned costs totaling $1,436,400 under the FIFO method These costs represent purchases made during the period of August through December This FIFO inventory amount ($1,436,400) more closely approximates the replacement cost of the ending inventory than either the LIFO ($1,173,600) or the average cost ($1,303,680) figures c During periods of rising prices, such as shown for Golden Eagle Company, the LIFO method will result in a lesser amount of net income than the other two methods Hence, for Golden Eagle Company, the LIFO method would be preferred for the current year, since it would result in a lesser amount of income tax During periods of declining prices, the FIFO method will result in a lesser amount of net income and would be preferred for income tax purposes CP 7–3 (Concluded) d The advantages of the perpetual inventory system include the following: (1) A perpetual inventory system provides an effective means of control over inventory A comparison of the amount of inventory on hand with the balance of the subsidiary account can be used to determine the existence and seriousness of any inventory shortages (2) A perpetual inventory system provides an accurate method for determining inventories used in the preparation of interim statements (3) A perpetual inventory system provides an aid for maintaining inventories at optimum levels Frequent review of the perpetual inventory records helps management in the timely reordering of merchandise, so that loss of sales and excessive accumulation of inventory are avoided An analysis of Golden Eagle Company’s purchases and sales, as shown below, indicates that the company may have accumulated excess inventory from May through August because the amount of month-end inventory increased materially, while sales remained relatively constant for the period Month Purchases Sales Increase (Decrease) in Inventory Inventory at Next Month’s End of Month Sales April 31,000 units 16,000 units 15,000 units 15,000 units 16,000 units May 33,000 16,000 17,000 32,000 20,000 June 40,000 20,000 20,000 52,000 24,000 July 40,000 24,000 16,000 68,000 28,000 August September 27,200 28,000 (800) 67,200 28,000 12,800 8,000 8,000 28,000 (28,000) 39,200 18,000 18,000 (5,200) 34,000 10,000 10,000 8,000 (2,000) 32,000 8,000 32,000 October November December It appears that during April through July, the company ordered inventory without regard to the accumulation of excess inventory A perpetual inventory system might have prevented this excess accumulation from occurring The primary disadvantage of the perpetual inventory system is the cost of maintaining the necessary inventory records However, computers may be used to reduce this cost CP 7–4 Inventory Turnover = a Number of Days’ = Sales in Inventory Dell Inventory Turnover = Cost of Goods Sold Average Inventory Average Inventory Cost of Goods Sold ÷ 365 $50,098 = ($1,051 + $1,301) ÷ Days’ Sales in = Inventory ($1,051 + $1,301) ÷ $96,089 Inventory Turnover = = Inventory = ($6,128 + $6,466) ÷ $96,089 ÷ 365 $1,176.0 = 8.6 days $137.3 = ($6,128 + $6,466) ÷ Days’ Sales in = 42.6 $1,176.0 $50,098 ÷ 365 Hewlett-Packard $50,098 $96,089 = 15.3 $6,297.0 = $6,297.0 = 23.9 days $263.3 b Dell builds its computers primarily to a customer order, called a build-to-order strategy Customers place their orders on the Internet Dell then builds and delivers the computer, usually in a matter of days HP, in contrast, builds computers before actual orders are received This is called a build-to-stock strategy HP must forecast the type of computers customers want before it receives the orders This strategy results in greater inventory for HP, since the computers are built before there is a sale HP has significant finished goods inventory, while Dell has less finished goods It also explains the difference in their inventory efficiency ratios Note to Instructors: While Dell sells most of its computers online, it has also begun selling its computers through Best Buy As a result, Dell’s inventory turnover has decreased and its days’ sales in inventory has increased from prior years CP 7–5 Inventory Turnover a Number of Days’ Sales in Inventory 441.15 36.92 0.83 9.89 Tiffany Co Amazon.com Computations: Tiffany Co Inventory Turnover = Cost of Goods Sold Average Inventory Inventory Turnover = $1,263 ($1,428 + $1,625) ÷ Number of Days’ Average Inventory = Cost of Goods Sold ÷ 365 Sales in Inventory Number of Days’ = Sales in Inventory Amazon.com ($1,428 + $1,625) ÷ $1,263 ÷ 365 Inventory Turnover = Cost of Goods Sold Average Inventory Inventory Turnover = $26,561 ($2,171 + $3,202) ÷ Number of Days’ = 0.83 = 441.19 days or 441 days (rounded) = 9.89 Average Inventory = Sales in Inventory Number of Days’ = Sales in Inventory Cost of Goods Sold ÷ 365 ($2,171 + $3,202) ÷ $26,561 ÷ 365 = 36.92 days or 37 days (rounded) b Amazon.com has a smaller investment in inventory for its volume than does Tiffany Amazon.com’s inventory turnover is faster (larger), and the number of days’ sales in inventory is shorter (smaller) This is due to the fact that Amazon.com uses a different business model than Tiffany That is, Amazon.com sells through the Internet, while Tiffany uses the traditional retail store model, which requires it to stock more inventory CP 7–6 Costco Walmart JCPenney Cost of merchandise sold………………… $67,995 $315,287 $10,799 Merchandise inventory, beginning……… Merchandise inventory, ending………… Total……………………………………… $ 5,405 5,638 $ 32,713 36,318 $ 3,024 3,213 $11,043 $ 69,031 $ 6,237 $5,521.5 $34,515.5 $3,118.5 12.3 9.1 3.5 a Average merchandise inventory (Total ÷ 2)…………………………………… Inventory turnover………………………… b c Average merchandise inventory [from part (a)]……………………………… Cost of merchandise sold………………… Average daily cost of merchandise sold (COMS ÷ 365)………………………… Number of day’s sales in inventory……… Costco Walmart JCPenney $5,521.5 $ 67,995 $34,515.5 $ 315,287 $3,118.5 $ 10,799 $ 186.3 $ $ 29.6 863.8 40.0 29.6 105.4 Both the inventory turnover ratio and the number of day’s sales in inventory reflect the merchandising approaches of the three companies Costco is a club warehouse Its approach is to hold only mass appeal items that are sold quickly off the shelf Most items are sold in bulk quantities at very attractive prices Costco couples thin margins with very fast inventory turnover Walmart has a traditional discounter approach It has attractive pricing, but the inventory moves slower than would be the case at a club warehouse For example, many purchases made at Walmart would not be packaged in the same bulk as would be the case at Costco JCPenney is a traditional department store with a wider assortment of goods that will not necessarily appeal to the mass market That is, some of the merchandise items will be more specialized and unique As such, its inventory moves slower, but at a higher price (and margin) ... 2,361,500 $ 275,000 3,800,000 Merchandise available for sale $2,526,500 $4 ,075 ,000 Ratio of cost to retail price: $2,526,500 $4 ,075 ,000 = 62% Sales for June (net) 3,550,000 $ 525,000 Merchandise inventory,... $19,665 (57 units × $345), where average cost = $345 = $110,400 ÷ 320 units PE 7–6A Commodity 1107B 1110M Inventory Quantity 450 75 Unit Unit Cost Price Market Price $80 60 $78 64 Unit Unit Cost... sales in inventory from 114.1 days to 104.3 days indicate favorable trends in managing inventory CHAPTER Inventories PE 7–8B a Inventory Turnover Cost of merchandise sold Inventories: Beginning