Solution manual accounting 25th editon warren chapter 07

Since the prices rose from $39 for the April 1 inventory to $43 for the purchase on April 30, we would expect that under last-in, first-out the inventory would be lower.. Since the price

CHAPTER 7 INVENTORIES

DISCUSSION QUESTIONS

1 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

2 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

3 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

4 a LIFO c LIFO

b FIFO d FIFO

5 FIFO

6 LIFO In periods of rising prices, the use of LIFO will result in the lowest net income and thus the

lowest income tax expense

7 Net realizable value (estimated selling price less any direct cost of disposition, such as sales

commissions)

8 a Gross profit for the year was understated by $14,750.

b Merchandise inventory and owner’s equity were understated by $14,750.

9 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

10 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)

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PRACTICE EXERCISES

PE 7–1A

a First-in, first-out (FIFO)

b Last-in, first-out (LIFO)

c Weighted average cost

Gross Profit February

$35 ($75 – $40)

$31 ($75 – $44)

$33 ($75 – $42)

Ending Inventory February 28

$86 ($42 + $44)

$82 ($40 + $42)

$84 ($42 × 2)

PE 7–1B

a First-in, first-out (FIFO)

b Last-in, first-out (LIFO)

c Weighted average cost

PE 7–2A

a Cost of merchandise sold (May 28):

a Weighted average unit cost: $71.25

Inventory total cost after purchase on July 15:

40 units @ $60 $ 2,400

120 units @ $75 9,000

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 $1,000

375 units @ $10 3,750

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

Inventory Quantity

Unit

Cost Price

Unit

Market Price

Unit

Cost Price

Unit

Market Price

PE 7–7A

Balance Sheet:

Merchandise inventory understated*………

Current assets understated………

Total assets understated………

Owner’s equity understated………

Income Statement: Cost of merchandise sold overstated………

Gross profit understated………

Net income understated………

* $118,350 – $113,900 = $4,450 PE 7–7B Balance Sheet: Merchandise inventory overstated*………

Current assets overstated………

Total assets overstated………

Owner’s equity overstated………

Income Statement: Cost of merchandise sold understated………

Gross profit overstated………

Net income overstated………

* $728,660 – $719,880 = $8,780

Amount of Misstatement

Overstatement (Understatement)

$(4,450) (4,450) (4,450) (4,450)

$ 4,450 (4,450) (4,450)

Amount of Misstatement Overstatement (Understatement)

$8,780 8,780 8,780 8,780

$(8,780) 8,780 8,780

Cost of merchandise sold

Average daily cost of

Cost of merchandise sold

Average daily cost of

c 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.

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.

Ex 7–3

a.

b Since the prices rose from $39 for the April 1 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.

Total Cost Quantity

Unit Cost

Total Cost Quantity

Unit Cost

Total Cost

1,170 5,600

80

39 40

1,170 3,200

600 6,880

Total Cost Quantity

Unit Cost

Total Cost Quantity

Unit Cost

Total Cost

1,170 5,600

30

39 40

1,170 1,200

15

40 39

1,200 585

160

39 43

585 6,880

Ex 7–5

a.

b Since the prices rose from $44 for the August 1 inventory to $48 for the purchase on August 20, we would

expect that under first-in, first-out the inventory would be higher.

Note to Instructors: Exercise 7–6 shows that the inventory is $10,560 under FIFO.

Prepaid Cell Phones

Date

Quantity

Unit Cost

Total Cost Quantity

Unit Cost

Total Cost Quantity

Unit Cost

Total Cost

360

44 45

34,100 16,200

240

45 44

16,200 10,560

5,280 28,800

100

44 48

5,280 4,800

Total Cost Quantity

Unit Cost

Total Cost Quantity

Unit Cost

Total Cost

360

44 45

34,100 16,200

360

44 45

7,700 16,200

240

44 45

5,400 28,800

380

45 48

5,400

Total Cost Quantity

Unit Cost

Total Cost Quantity Unit Cost

Total Cost

Total Cost Quantity

Unit Cost

Total Cost Quantity Unit Cost

Total Cost

Total Cost Quantity

Unit Cost

Total Cost Quantity Unit Cost

Total Cost

120,000 576,000

6,000

40.00 48.00

120,000 288,000

6,000 48.00 288,000

2,000

48.00 50.00

288,000 100,000

Total Cost Quantity

Unit Cost

Total Cost Quantity Unit Cost

Total Cost

120,000 576,000

3,000

40.00 48.00

120,000 144,000

3,000 2,000

40.00 48.00 50.00

120,000 144,000 100,000

Ex 7–12

a $62,496 (24 units at $1,980 plus 8 units at $1,872) = $47,520 + $14,976

b $49,104 (18 units at $1,440 plus 14 units at $1,656) = $25,920 + $23,184

Inventory Method

Cost

Merchandise Inventory

Merchandise Sold

Ex 7–14

a 1 FIFO inventory > (greater than) LIFO inventory

2 FIFO cost of goods sold < (less than) LIFO cost of goods sold

3 FIFO net income > (greater than) LIFO net income

4 FIFO income taxes > (greater than) LIFO income taxes

b In periods of rising prices, the income shown on the company’s tax return

would be lower if LIFO rather than FIFO were used; thus, there is a tax advantage of using LIFO.

Note to Instructors: The federal tax laws require that if LIFO is used for tax

purposes, LIFO must also be used for financial reporting purposes This is known

as the LIFO conformity rule Thus, selecting LIFO for tax purposes means that the

company’s reported income will also be lower than if FIFO had been used

Companies using LIFO believe the tax advantages from using LIFO outweigh any

negative impact of reporting a lower income to shareholders.

Ex 7–15

Commodity

Inventory Quantity

Unit

Cost Price

Unit

Market Price

Ex 7–17

Merchandise inventory*……… $13,850 understated Current assets……… $13,850 understated

* $13,850 = $338,500 – $324,650

Cost of merchandise sold……… $13,850 overstated

Cost of merchandise sold……… $13,850 understated

d The December 31, 2015, balance sheet would be correct, since the 2014

inventory error reverses itself in 2015.

Ex 7–18

Merchandise inventory*……… $21,600 overstated Current assets……… $21,600 overstated

* $21,600 = $640,500 – $618,900

Cost of merchandise sold……… $21,600 understated

Cost of merchandise sold……… $21,600 overstated

d The December 31, 2015, balance sheet would be correct, since the 2014

inventory error reverses itself in 2015.

Ex 7–19

When an error is discovered affecting the prior period, it should be corrected In this case, the merchandise inventory account should be debited and the owner’s capital account credited for $33,000.

Failure to correct the error for 2013 and purposely misstating the inventory and the cost of merchandise sold in 2014 would cause the income statements for the two years to not be comparable The balance sheet at the end of 2014 would be correct, however, since the 2013 inventory error reverses itself in 2014.

computer products can quickly become obsolete, so it cannot risk building large inventories.

Ex 7–21

a Number of Days’ Sales in Inventory =

Average Inventory Cost of Goods Sold ÷ 365

Kroger: ($4,966 + $4,935) ÷ 2

$63,927 ÷ 365 =

$4,950.5 175.1

$5,182 ÷ 365 Cost of Goods Sold Average Inventory

= $2,566.0 80.7

= $661.5 14.2

c If Winn-Dixie matched Kroger’s days’ sales in inventory, then its hypothetical ending inventory would be determined as follows,

Average Inventory Number of Days’ Sales in Inventory =

28 days =

Cost of Goods Sold ÷ 365

X ($5,182 ÷ 365)

X = 28 × ($5,182 ÷ 365) = 28 × $14.2

X = $397.6 Thus, the additional cash flow that would have been generated is the difference between the actual average inventory and the hypothetical average inventory, as follows:

Actual average inventory……… $661.5 million Hypothetical average inventory……… 397.6 million Positive cash flow potential……… $263.9 million

That is, a lower average inventory amount would have required less cash than actually was required.

$2,526,500 Ratio of cost to retail price:

$4,075,000 = 62%

Merchandise inventory, June 30, at retail price $ 525,000 Merchandise inventory, June 30,

Appendix Ex 7–26

a.

b The gross profit method is useful for estimating inventories for monthly or

quarterly financial statements It is also useful in estimating the cost of

merchandise destroyed by fire or other disasters.

Sales (net), January 1–December 31 $4,440,000

Less estimated gross profit ($4,440,000 × 35%) 1,554,000

Estimated merchandise inventory, December 31 $ 414,000

Appendix Ex 7–27

Merchandise available for sale……… $6,125,000 Less cost of merchandise sold [$9,250,000 × (100% – 36%)]……… 5,920,000 Estimated ending merchandise inventory……… $ 205,000

Appendix Ex 7–28

Merchandise available for sale……… $960,000 Less cost of merchandise sold [$1,450,000 × (100% – 42%)]……… 841,000 Estimated ending merchandise inventory……… $119,000

Total Cost Quantity

Unit Cost

Total Cost Quantity

Unit Cost

Total Cost

1,500

30.00 34.00

15,000 51,000

250

30.00 34.00

30,600 126,000

900

34.00 35.00

35,000 107,400

1,000

35.00 35.80

71,600 18,000

500

35.80 36.00

8,950 18,000

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Prob 7–1A (Concluded)

2.

*$483,800 = $37,500 + $13,000 + $5,500 + $100,800 + $102,000 + $120,000 + $105,000

3 $193,350 ($483,800 – $290,450)

4 $26,950 ($8,950 + $18,000)

5 Since the prices rose from $30 for the June 1 inventory to $36 for the purchase

on August 25, we would expect that under the last-in, first-out method the inventory would be lower.

Note to Instructors: Problem 7–2A shows that the inventory is $23,500 under LIFO.

Total Cost Quantity

Unit Cost

Total Cost Quantity

Unit Cost

Total Cost

1,500

30.00 34.00

15,000 51,000

750

30.00 34.00

15,000 25,500

500

30.00 34.00

15,000 17,000

400

30.00 34.00

15,000 13,600

400 3,600

30.00 34.00 35.00

15,000 13,600 126,000

400 1,800

30.00 34.00 35.00

15,000 13,600 63,000

400 100

30.00 34.00 35.00

15,000 13,600 3,500

400 100 3,000

30.00 34.00 35.00 35.80

15,000 13,600 3,500 107,400

400 100 1,000

30.00 34.00 35.00 35.80

15,000 13,600 3,500 35,800

400 100 1,000 500

30.00 34.00 35.00 35.80 36.00

15,000 13,600 3,500 35,800 18,000

1,000 100 150

36.00 35.80 35.00 34.00

18,000 35,800 3,500 5,100

500 250

30.00 34.00

15,000 8,500

Prob 7–2A (Concluded)

Total cost of merchandise sold………

$483,800 * 293,900

Total Cost Quantity Unit Cost

Total Cost Quantity Unit Cost

Total Cost

Prob 7–4A

1 First-In, First-Out Method

Merchandise inventory, August 31, 2014……… $ 26,950

Cost of merchandise sold:

Beginning inventory, June 1, 2014……… $ 15,000 Purchases……… 302,400 Merchandise available for sale……… $317,400 Less ending inventory, August 31, 2014……… 26,950

2 Last-In, First-Out Method

Merchandise inventory, August 31, 2014……… $ 23,500

Cost of merchandise sold:

Beginning inventory, June 1, 2014……… $ 15,000 Purchases……… 302,400 Merchandise available for sale……… $317,400 Less ending inventory, August 31, 2014……… 23,500

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Prob 7–4A (Continued)

3 Weighted Average Cost Method

Merchandise inventory, August 31, 2014……… $ 26,160 Cost of merchandise sold……… 291,240 Supporting computations

Weighted Average Unit Cost =

Total Cost of Merchandise Available for Sale

Units Available for Sale

= $317,400 9,100 units

= $34.88 per unit (rounded)

Merchandise inventory:

750 units × $34.88 = $26,160

Cost of merchandise sold:

Beginning inventory, June 1, 2014……… $ 15,000 Purchases……… 302,400 Merchandise available for sale……… $317,400 Less ending inventory, August 31, 2014……… 26,160 Cost of merchandise sold……… $291,240

Prob 7–4A (Concluded)

Prob 7–5A

1 First-In, First-Out Method

2

$ 76 70

$ 304 140

2

184 170

1,104 340

390 256

1

180 175

1,260 175

2 Last-In, First-Out Method

2

$ 64 70

$ 256 140

2

75 65

225 130

2

242 250

1,694 500

3

240 246

2,880 738

2 1

108 110 128

216 220 128

3

160 170

800 510

Prob 7–5A (Concluded)

3 Weighted Average Cost Method

4 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 Dymac 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.