Financial accounting - international financial reporting standards (11/e): Part 1

Part 1 book “Financial accounting - international financial reporting standards” has contents: conceptual framework and financial statements, recording business transactions, accrual accounting, presentation of financial statements, internal control, cash, and receivables, inventory and merchandising operations.

www.downloadslide.com GLOBAL EDITION FINANCIAL ACCOUNTING INTERNATIONAL FINANCIAL REPORTING STANDARDS For these Global Editions, the editorial team at Pearson has collaborated with educators across the world to address a wide range of subjects and requirements, equipping students with the best possible learning tools This Global Edition preserves the cutting-edge approach and pedagogy of the original, but also features alterations, customization, and adaptation from the North American version GLOBAL EDITION  E LEVENTH EDITION Harrison Jr Horngren Thomas Tietz Suwardy International Financial Reporting Standards ELEVENTH EDITION Walter T Harrison Jr Charles T Horngren C William (Bill) Thomas Wendy M Tietz Themin Suwardy GLOBAL EDITION This is a special edition of an established title widely used by colleges and universities throughout the world Pearson published this exclusive edition for the benefit of students outside the United States and Canada If you purchased this book within the United States or Canada, you should be aware that it has been imported without the approval of the Publisher or Author FINANCIAL ACCOUNTING Pearson Global Edition Harrison_11_1292211148_Final.indd 31/10/17 5:26 PM www.downloadslide.com Financial GLOBAL EDITION Accounting ELEVENTH EDITION International Financial Reporting Standards A01_HARR1145_11_GE_FM.indd 20/10/17 5:20 PM www.downloadslide.com This page intentionally left blank www.downloadslide.com Financial GLOBAL EDITION Accounting ELEVENTH EDITION International Financial Reporting Standards Walter T Harrison Jr Baylor University Charles T Horngren Stanford University C William (Bill) Thomas Baylor University Wendy M Tietz Kent State University Themin Suwardy Singapore Management University Harlow, England • London • New York • Boston • San Francisco • Toronto • Sydney • Dubai • Singapore • Hong Kong Tokyo • Seoul • Taipei • New Delhi • Cape Town • Sao Paulo • Mexico City • Madrid • Amsterdam • Munich • Paris • Milan 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in accordance with the Copyright, Designs and Patents Act 1988 Authorized adaptation from the United States edition, entitled Financial Accounting, 11th Edition, ISBN 978-0-13-412762-0 by Walter T Harrison Jr., Charles T Horngren, C William (Bill) Thomas, and Wendy M Tietz, published by Pearson Education © 2017 All rights reserved No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without either the prior written permission of the publisher or a license permitting restricted copying in the United Kingdom issued by the Copyright Licensing Agency Ltd, Saffron House, 6–10 Kirby Street, London EC1N 8TS All trademarks used herein are the property of their respective owners The use of any trademark in this text does not vest in the author or publisher any trademark ownership rights in such trademarks, nor does the use of such trademarks imply any affiliation with or endorsement of this book by such owners For information regarding permissions, request forms, and the appropriate contacts within the Pearson Education Global Rights and Permissions department, please visit www.pearsoned.com/permissions/ ISBN 10: 1-292-21114-8 ISBN 13: 978-1-292-21114-5 British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library 10 Typeset in Helvetica Neue LT W G by Cenveo® Publisher Services Printed and bound by Vivar in Malaysia A01_HARR1145_11_GE_FM.indd 20/10/17 5:20 PM www.downloadslide.com For my wife, Mary Ann C William (Bill) Thomas To my husband, Russ, who steadfastly supports me in every endeavor Wendy M Tietz A01_HARR1145_11_GE_FM.indd 20/10/17 5:20 PM www.downloadslide.com This page intentionally left blank www.downloadslide.com ABOUT THE AUTHORS Walter T Harrison, Jr., is professor emeritus of accounting at the Hankamer School of Business, Baylor University He received his BBA from Baylor University, his MS from Oklahoma State University, and his PhD from Michigan State University Professor Harrison, recipient of numerous teaching awards from student groups as well as from university administrators, has also taught at Cleveland State Community College, Michigan State University, the University of Texas, and Stanford University A member of the American Accounting Association and the American Institute of Certified Public Accountants, Professor Harrison has served as chairman of the Financial Accounting Standards Committee of the American Accounting Association, on the Teaching/Curriculum Development Award Committee, on the Program Advisory Committee for Account­ing Educa­tion and Teaching, and on the Notable Contributions to Accounting Literature Committee Professor Harrison has lectured in several foreign countries and published articles in numerous journals, including Journal of Accounting Research, Journal of ­Accountancy, Journal of Accounting and Public Policy, Economic Consequences of Financial Accounting Standards, Accounting Horizons, Issues in Accounting E ­ ducation, and Journal of Law and Commerce Professor Harrison has received scholarships, fellowships, and research grants or awards from PricewaterhouseCoopers, Deloitte & Touche, the Ernst & Young Foundation, and the KPMG Foundation Charles T Horngren was the Edmund W Littlefield Professor of Accounting, emeritus, at Stanford University A graduate of Marquette University, he received his MBA from Harvard Univer­sity and his PhD from the University of Chicago He also received honorary doctorates from Marquette University and DePaul University A certified public accountant, Horngren served on the Accounting Principles Board, the Financial Accounting Standards Board Advisory Council, and the Council of the American Institute of Certified Public Accountants and served as a trustee of the Financial Accounting Foundation, which oversees the Financial Accounting Standards Board and the Government Accounting Standards Board Horngren is a member of the Accounting Hall of Fame As a member of the American Accounting Association, Horngren was its president and its director of research He received its first annual Outstanding Accounting Educator Award The California Certified Public Accountants Foundation gave Horngren its Faculty Excellence Award and its Distinguished Professor Award He was the first person to have received both awards The American Institute of Certified Public Accountants presented its first Outstanding Educator Award to Horngren Horngren was named Accountant of the Year, in Education, by the national professional accounting fraternity, Beta Alpha Psi Professor Horngren was also a member of the Institute of Management Accountants, from whom he received its Distinguished Service Award He was a member of the institute’s Board of Regents, which administers the certified management accountant examinations Horngren is an author of these other accounting books published by Pearson: Cost Accounting: A Managerial Emphasis, Fifteenth Edition, 2015 (with Srikant M Datar and Madhav V Rajan); Introduction to Financial Accounting, Eleventh Edition, 2014 (with Gary L Sundem, John A Elliott, and Donna Philbrick); Introduction to Management Accounting, Sixteenth Edition, 2014 (with Gary L Sundem, Jeff Schatzberg, and Dave Burgstahler); vii A01_HARR1145_11_GE_FM.indd 20/10/17 5:20 PM viii   About the Authors www.downloadslide.com Horngren’s Financial & Managerial Accounting, Fifth Edition, 2016 (with Tracie L MillerNobles, Brenda L Mattison, and Ella Mae Matsumura); and Horngren’s Accounting, Eleventh Edition, 2016 (with Tracie L Miller-Nobles, Brenda L Mattison, and Ella Mae Matsumura) Horngren was the consulting editor for Pearson’s Charles T Horngren Series in Accounting C William (Bill) Thomas is the J E Bush Professor of Accounting and a Master Teacher at Baylor University A Baylor University alumnus, he received both his BBA and MBA there and went on to earn his PhD from The University of Texas at Austin With primary interests in the areas of financial accounting and auditing, Bill Thomas has served as the J E Bush Professor of Accounting since 1995 He has been a member of the faculty of the Accounting and Business Law Department of the Hankamer School of Business since 1971, and served as chair of the department for 12 years He was recognized as an Outstanding Faculty Member of Baylor University as well as a Distinguished Professor for the Hankamer School of Business Dr Thomas has received several awards for outstanding teaching, including the Outstanding Professor in the Executive MBA Programs as well as the designation as Master Teacher Thomas is the author of textbooks in auditing and financial accounting, as well as many articles in auditing, financial accounting and reporting, taxation, ethics, and accounting education His scholarly work focuses on the subject of fraud prevention and detection, and ethical issues among accountants in public practice He presently serves as the accounting and auditing editor of Today’s CPA, the journal of the Texas Society of Certified Public Accountants, with a circulation of approximately 28,000 Thomas is a certified public accountant in Texas Prior to becoming a professor, Thomas was a practicing accountant with the firms of KPMG, LLP, and BDO Seidman, LLP He is a member of the American Accounting Association, the American Institute of Certified Public Accountants, and the Texas Society of Certified Public Accountants Wendy M Tietz is a professor in the Department of Accounting in the College of Business Administration at Kent State University, where she has taught since 2000 She teaches introductory financial and managerial accounting in a variety of formats, including large sections, small sections, and web-based sections She has received numerous college and university teaching awards while at Kent State University Most recently she was named the Beta Gamma Sigma Professor of the Year for the College of Business Administration Dr Tietz is a certified public accountant, a certified management accountant, and a chartered global management accountant She is a member of the American Accounting Association (AAA), the Institute of Management Accountants (IMA), and the American Institute of Certified Public Accountants (AICPA) She has published articles in such journals as Issues in Accounting Education, Accounting Education: An International Journal, and Journal of Accounting & Public Policy She received the 2014 Bea Sanders/AICPA Innovation in Teaching Award for her accounting educator blog entitled “Accounting in the Headlines.” She regularly presents at AAA regional and national meetings Dr Tietz is also the coauthor of a managerial accounting textbook, Managerial Accounting, with Dr Karen Braun Dr Tietz received her PhD from Kent State University She received both her MBA and BSA from the University of Akron She worked in industry for several years, both as a controller for a financial institution and as the operations manager and controller for a recycled plastics manufacturer A01_HARR1145_11_GE_FM.indd 20/10/17 5:20 PM www.downloadslide.com About the Authors    ix Themin Suwardy is the Associate Dean (Curriculum and Teaching) and MPA Programme Director at the School of Accountancy, Singapore Management University Prior to joining academia, Suwardy was an auditor with KPMG Peat Marwick He graduated with a Bachelor of Business (Accountancy) (Honours), a Bachelor of Computing (Information System), and a PhD from Monash University, Australia At SMU, he received numerous school/university awards, most recently the 2010 SMU Distinguished Teacher award and the 2009, 2010, and 2012 Best MBA Teacher award He was also a recipient of the Hewlett-Packard Mobile Technology for Teaching Grant award (2004) and the inaugural CEEMAN’s Champion Award for Management Teaching (2010) and was accorded Singapore’s Public Admin­istration Medal (Bronze) in 2011 for his contribution to education Suwardy has been an active member of the accounting profession through his involve­­ment in various professional bodies, including CPA Australia, Institute of Certified Public Accountants of Singapore (ICPAS), Institute of Internal Auditors Singapore (IIAS), and Interna­tional Association for Accounting Education and Research (IAAER) He served as a governor of IIAS (2009–2011) and vice president of IAAER (2009–2013) He is currently the elected president of CPA Australia— Singapore division Suwardy’s main research areas include financial reporting and analysis, corporate govern­ance, and accounting education with the emphasis on technologically enabled pedagogy He is an associate editor of Accounting Education: An International Journal His most recent research grant was to inform the International Accounting Education Standards Board (IAESB) on matters related to IES 7—Continuing Professional Development Suwardy has consulted and taught for many clients, including KPMG, DFS Galleria, Singapore Airlines, Singapore Institute of Directors, and the National Institute of Education A01_HARR1145_11_GE_FM.indd 20/10/17 5:20 PM www.downloadslide.com 374   Chapter LO P6-65A.  (Learning Objective 4: Using gross profit percentage and inventory turnover to evaluate two companies)  Sprinkle Top and Coffee Shop are both specialty food chains The two companies reported these figures, in millions: A1 A 31 42 13 24 10 35 11 46 12 57 10 13 68 11 14 79 12 10 15 13 11 16 14 12 17 10 15 13 18 11 16 14 19 12 17 15 20 13 18 31 16 21 14 19 42 17 22 15 20 18 23 13 16 21 19 24 24 17 22 20 10 25 18 35 23 21 11 26 19 46 24 12 22 27 20 57 10 25 13 23 28 21 68 11 26 14 24 29 79 12 22 27 10 15 25 30 13 23 28 11 16 26 31 14 24 29 12 17 27 32 10 15 25 30 13 18 28 33 11 16 26 31 14 19 29 34 12 17 27 32 61 15 20 30 13 42 18 28 33 16 21 31 14 19 29 34 17 22 32 13 15 20 30 18 23 33 24 16 21 31 10 19 24 34 35 17 22 32 11 20 25 18 23 33 12 21 26 10 19 24 34 18 13 22 27 11 20 25 29 14 23 28 12 21 26 10 15 24 29 13 22 27 11 16 25 30 14 23 28 12 17 26 31 10 15 24 29 13 18 27 32 11 16 42 25 30 14 19 28 33 12 17 26 31 15 20 29 34 13 13 18 27 32 16 21 30 24 14 19 28 33 17 31 15 35 20 29 34 18 32 16 46 21 30 19 33 17 57 31 20 34 18 68 32 21 19 79 33 20 34 21 M06_HARR1145_11_GE_C06.indd 374 Sprinkle Top, Inc A1 Income Statement A (Adapted, in millions of $) Sprinkle Top, Inc A1 Revenues: Income Statement A Net salesin millions of $) (Adapted, Sprinkle Top, Inc A1 Revenues: Income Statement Costs and Expenses: A Net sales (Adapted, in millions Cost of goods sold of $)Sprinkle Top, Inc Revenues: Selling, general, and administrative expenses Income Statement Costs and Expenses: Net sales (Adapted, in millions Cost of goods sold of $) Revenues: Selling, general, and administrative expenses Costs and Expenses: Net sales Cost of goods sold A1 Selling, general, and administrative expenses Costs and Expenses: B $ $ $ $ A Cost of goods sold Sprinkle Top, Inc A1 Selling, general, and administrative expenses Balance Sheet A (Adapted, in millions of $) Sprinkle Top, Inc A1 Assets BalanceA Sheet Current assets: (Adapted, in millions of $) Sprinkle Top, Inc Cash A1 and cash equivalents Assets Balance Sheet Receivables A Current assets: (Adapted, in millions of $)Sprinkle Top, Inc Inventories Cash and cash equivalents Assets Balance Sheet Receivables Current assets: (Adapted, in millions of $) Inventories Cash and cash equivalents Assets Receivables Current assets: A1 Inventories Cash and cash equivalents A Receivables Coffee Shop Corporation A1 Inventories Income Statement A (Adapted, in millions ofCoffee $) Shop Corporation NetA1 sales Income Statement A Cost of goods sold (Adapted, in millions ofCoffee $) Shop Corporation Selling, general, and administrative expenses NetA1sales Income Statement A Cost of goods sold (Adapted, in millions of $) Shop Corporation Coffee Selling, general, and administrative expenses Net sales Income Statement Cost of goods sold of $) (Adapted, in millions A1 general, Selling, and administrative expenses Net sales A Cost of goods sold Coffee Shop Corporation A1 Selling, general, and administrative expenses Balance Sheet A (Adapted, in millions ofCoffee $) Shop Corporation A1 Assets BalanceA Sheet Current assets: (Adapted, in millions ofCoffee $) Shop Corporation A1 and temporary investments Cash Assets Balance Sheet Receivables, net A Current assets: (Adapted, in millions of $) Shop Corporation Inventories Coffee Cash and temporary investments Assets Balance Sheet Receivables, net Current assets: (Adapted, in millions of $) Inventories Cash and temporary investments Assets Receivables, Current assets: net Inventories Cash and temporary investments Receivables, net Inventories C 12 Months Ended Dec 31C B 20X612 Months20X5 Ended Dec 31 B 554 $ C 20X612 20X5727 Months Ended Dec 31C B 554 $ 727 20X6 487 12 Months20X5598 63 Dec 31 59 Ended 554 $ 20X5 727 20X6487 598 59 63 554 $ 727 598 487 59 63 B C 598 487 December 31 59 63 B C B C B C B C B C 20X6 20X5 December 31 20X6 20X5 15 $ 31 29 December 42 31 B C 20X6 29 20X5 38 $ $ 15 December 31 29 42 31 20X6 29 20X5 38 29 $ 15 $ 42 31 38 29 $ 29 $ 15 B C 42 31 12 Months 29 Dec 31 38 Ended $ $ $ $ $ 20X612 Months20X5 7,720 Dec $ 31 6,310 Ended B C 3,170 2,614 20X6 20X5 12 Months 2,930 7,720 Dec $ 312,350 6,310 Ended B C 3,170 2,614 20X6 20X5 12 Months 2,350 2,930 7,720Dec $ 31 6,310 Ended 3,170 2,614 20X6 20X5 2,930 $ 2,350 7,720 6,310 B C 3,170 2,614 December 31 2,350 2,930 20X6 20X5 December 31 20X6 20X5 318 $ 31 173 December B 232 C 185 20X6629 20X5547 $ $ 318 December 31 173 185 232 20X6629 20X5547 173 $ 318 $ 185 232 547 629 $ 173 $ 318 185 232 547 629 $ 13/10/17 5:33 PM www.downloadslide.com Inventory and Merchandising Operations    375 Requirements Compute the gross profit percentage and the rate of inventory turnover for Sprinkle Top and Coffee Shop for 20X6 Based on these statistics, which company looks more profitable? Why? What other expense category should we consider in evaluating these two companies? P6-66A.  (Learning Objectives 1, 4: Estimating inventory by the gross profit method; preparing the Income Statement)  Assume Theon Company, a copy center, lost some inventory in a fire To file an insurance claim, Theon Company must estimate its inventory by the gross profit method Assume that for the past two years Theon Company’s gross profit has averaged 40% of net sales Suppose the Theon Company’s inventory records reveal the following data: Inventory, October Transactions during October: Purchases Purchase discounts Purchase returns Sales Sales returns LO ■ spreadsheet $ 57,200 490,400 11,100 70,800 668,000 11,500 Requirements Estimate the cost of the lost inventory, using the gross profit method Prepare the October Income Statement for this product through gross profit Show the detailed computations of cost of goods sold in a separate schedule P6-67A.  (Learning Objective 3: Determining the amount of inventory to purchase)  Grammy’s Convenience Store’s Income Statement and Balance Sheet reported the following: A1A1 LO A1A1 AA BB Grammy’s Grammy’s Convenience Convenience Stores Stores Income Income Statement Statement Year Ended Ended December December 31, 31, 20X5 20X5 1 Year 2 Sales Sales $ $957,000 957,000 720,000 720,000 Costofofsales sales 3 Cost 237,000 237,000 Grossprofit profit 4 Gross 114,000 114,000 Operatingexpenses expenses 5 Operating $ $123,000 123,000 Netincome income 6 Net 77 88 AA 11 22 33 44 55 66 77 88 BB CC DD Grammy’s Grammy’s Convenience Convenience Stores Stores Balance Balance Sheet Sheet December December 31, 31, 20X5 20X5 Assets Assets Liabilities Liabilities $ $ 31,000 31,000 Accounts payable payable Cash Cash $ $ 44,000 44,000Accounts 187,000 187,000 Note payable payable Inventories Inventories 68,000 68,000Note 218,000 218,000 Total liabilities liabilities Land Landand andbuildings, buildings,net net 273,000 273,000Total 167,000 167,000 Owner, Owner, capital capital 385,000 Total liabilities liabilities and and capital capital $ $385,000 Total Totalassets assets $ $385,000 385,000Total The business is organized as a proprietorship, so it pays no corporate income tax The owner is budgeting for 20X6 He expects sales and cost of goods sold to increase by 8% To meet customer demand, ending inventory will need to be $78,000 at December 31, 20X6 The owner hopes to earn a net income of $158,000 next year Requirements One of the most important decisions a manager makes is the amount of inventory to purchase Show how to determine the amount of inventory to purchase in 20X6 Prepare the store’s budgeted Income Statement for 20X6 to reach the target net income of $158,000 To reach this goal, operating expenses must decrease by $16,040 M06_HARR1145_11_GE_C06.indd 375 13/10/17 5:33 PM www.downloadslide.com 376   Chapter LO P6-68A.  (Learning Objective 5: Correcting inventory errors over a three-year period) The accounting records of R.B Video Sales show the data betow (in millions) The shareholders are very happy with R.B.’s steady increase in net income Auditors discovered that the ending inventory for 20X4 was understated by $3 million and that the ending inventory for 20X5 was also understated by $3 million The ending inventory at December 31, 20X6, was correct 20X6 Net sales revenue Cost of goods sold: Beginning inventory Net purchases Cost of goods available Less ending inventory Cost of goods sold Gross profit Operating expenses Net income 20X5 $37 $40 $43 $ 29 35 (7) 20X4 $ 27 32 (6) 28 15 $ $ 25 29 (5) 26 14 $ 24 13 $ Requirements Show corrected Income Statements for each of the three years How much did these assumed corrections add to or take away from R.B.’s total net income over the three-year period? How did the corrections affect the trend of net income? Will R.B.’s shareholders still be happy with the company’s trend of net income? Give the reason for your answer Group B LO P6-69B.  (Learning Objectives 1, 2: Accounting for inventory in a perpetual system using average costing method)  Best Guy purchases inventory in crates of merchandise; each crate of inventory is a unit The fiscal year of Best Guy ends each February 28 Assume you are dealing with a single Best Guy store in Paris, France The Paris store began 20X6 with an inventory of 18,000 units that cost a total of €990,000 During the year, the store purchased merchandise on account as follows: April (33,000 units at €60) August (53,000 units at €64) November (63,000 units at €70) Total purchases €1,980,000 3,392,000 4,410,000 €9,782,000 Cash payments on account totaled €9,492,000 During fiscal 20X6, the store sold 158,000 units of merchandise for €15,484,000, of which €5,400,000 was for cash and the balance was on ­account Best Guy uses the average cost method for inventories Operating expenses for the year were €2,860,000 Best Guy paid 70% in cash and accrued the rest as accrued liabilities The store accrued income tax at the rate of 35% M06_HARR1145_11_GE_C06.indd 376 13/10/17 5:33 PM www.downloadslide.com Inventory and Merchandising Operations    377 Requirements Make summary journal entries to record the store’s transactions for the year ended February 28, 20X6 Best Guy uses a perpetual inventory system Prepare a T-account to show the activity in the Inventory Account Prepare the store’s Income Statement for the year ended February 28, 20X6 Show totals for gross profit, income before tax, and net income P6-70B.  (Learning Objective 1, 2: Measuring cost of goods sold and ending inventory— perpetual system)  Assume a Championship Sports outlet store began March with 48 pairs of running shoes that cost the store $38 each The sale price of these shoes was $66 During March the store completed these inventory transactions: Mar 11 19 24 30 Sale Purchase Sale Sale Sale Purchase Units Unit Cost Unit Sale Price 18 77 30 12 37 17 $38 39 38 39 39 40 $66 LO 66 69 69 Requirements The preceding data are taken from the store’s perpetual inventory records Which cost method does the store use? Explain how you arrived at your answer Determine the store’s cost of goods sold for March Also compute gross profit for March What is the cost of the store’s March 31 inventory of running shoes? P6-71B.  (Learning Objectives 2, 3: Computing inventory by three methods—perpetual system)  SWAT Team Surplus began July with 69 tents that cost €24 each During the month, SWAT Team Surplus made the following purchases at cost: Jul 19 25 LO 108 tents @ €26 = €2,808 153 tents @ €28 = 4,284 38 tents @ €29 = 1,102 SWAT Team Surplus sold 316 tents, and at July 31 the ending inventory consists of 52 tents The sale price of each tent was €55 Requirements Determine the cost of goods sold and ending inventory amounts for July under the average cost, FIFO cost, and LIFO cost Round average cost per unit four decimal places, and round all other amounts to the nearest dollar Explain why cost of goods sold is highest under LIFO Be specific Prepare a SWAT Team Surplus Income Statement for July Report gross profit Operating expenses totaled €3,500 SWAT Team Surplus uses average costing for inventory The income tax rate is 32% P6-72B.  (Learning Objectives 2, 3: Applying the different inventory costing methods— perpetual system)  The records of Bryan Aviation include the following accounts for inventory of aviation fuel at December 31 of the current year: M06_HARR1145_11_GE_C06.indd 377 LO ■ writing assignment 13/10/17 5:33 PM www.downloadslide.com 378   Chapter Inventory Jan Mar Jun 22 Oct Balance 740 units @ €7.50 Purchase 320 units @ €7.80 Purchase 8,380 units @ €8.10 Purchase 530 units @ €9.10 € 5,550 2,496 67,878 4,823 Sales Revenue Dec 31 9,030 units €128,226 Requirements Prepare a partial Income Statement through gross profit under the average, FIFO, and LIFO methods Round average cost per unit to four decimal places and all other amounts to the nearest whole dollar Which inventory method would you use to minimize income tax? Explain why this method causes income tax to be the lowest LO ■ writing assignment LO P6-73B.  (Learning Objective 3: Applying the net realizable value to inventories—perpetual system)  Ariel Trade Mart has recently had lackluster sales The rate of inventory turnover has dropped, and the merchandise is gathering dust It is now December 31, 20X6, and the current NRV cost of Ariel’s ending inventory is €72,000 below what Ariel actually paid for the goods, which was €270,000 Before any adjustments at the end of the period, the Cost of Goods Sold account has a balance of €830,000 a What accounting action should Ariel take in this situation? b Give any journal entry required c At what amount should Ariel report Inventory on the Balance Sheet? d At what amount should the company report Cost of Goods Sold on the Income Statement? e Discuss the accounting principle or concept that is most relevant to this situation P6-74B.  (Learning Objective 4: Using gross profit percentage and inventory turnover to evaluate two companies)  Pastry People and Coffee Grind are both specialty food chains The two companies reported these figures, in millions: A1 A 10 11 12 13 14 15 16 17 18 19 20 21 22 23 M06_HARR1145_11_GE_C06.indd 378 Pastry People, Inc Income Statement (Adapted, in millions of $) Revenues: Net sales B C 12 Months Ended Dec 31 20X6 20X5 $ 558 $ 711 486 62 595 56 Costs and Expenses: Cost of goods sold Selling, general, and administrative expenses A1 A Pastry People, Inc Balance Sheet (Adapted, in millions of $) Assets Current assets: Cash and cash equivalents Receivables Inventories B C December 31 20X6 20X5 $ 18 23 18 $ 26 38 31 13/10/17 5:33 PM A 10 11 12 13 14 15 16 17 18 19 20 21 22 23 Pastry People, Inc Income Statement (Adapted, in millions of $) Revenues: Net sales B C 12 Months Ended Dec 31 20X6 20X5 $ 558 $ 711 www.downloadslide.com Costs and Expenses: Cost of goods sold Selling, general, and administrative expenses Inventory and Merchandising Operations    379 595 486 56 62 A1 A Pastry People, Inc Balance Sheet (Adapted, in millions of $) Assets Current assets: Cash and cash equivalents Receivables Inventories B C December 31 20X6 20X5 $ 18 23 18 $ 26 38 31 A1 A 10 11 12 13 10 14 11 15 12 16 13 17 14 18 15 19 16 20 17 21 18 19 20 21 Coffee Grind Corporation Income Statement A1 (Adapted, in millions of $) A Net sales Coffee Grind Corporation Cost of goods sold Income Statement Selling, general, and administrative expenses (Adapted, in millions of $) Net sales Cost of goods sold Selling, general, and administrative expenses A1 A Coffee Grind Corporation Balance Sheet A1 (Adapted, in millions of $) A Assets Coffee Grind Corporation Current assets: Balance Sheet Cash and temporary investments (Adapted, in millions Receivables, net of $) Assets Inventories Current assets: Cash and temporary investments Receivables, net Inventories B C 12 Months Ended Dec 31 20X6 20X5 B C $ 7,270 $ 6,460 12 Months 3,290 Dec 31 2,702 Ended 2,965 2,380 20X6 20X5 $ 7,270 $ 6,460 3,290 2,702 2,965 2,380 B C December 31 B 20X6 C 20X5 December 31 $ 311 $ 178 20X6 20X5 222 196 632 548 $ 311 222 632 $ 178 196 548 Requirements Compute the gross profit percentage and the rate of inventory turnover for Pastry People and Coffee Grind for 20X6 Based on these statistics, which company looks more profitable? Why? What other expense category should we consider in evaluating these two companies? P6-75B.  (Learning Objectives 1, 4: Estimating inventory by the gross profit method; preparing the Income Statement)  Assume Joey Company, a sporting goods store, lost some inventory in a fire To file an insurance claim, Joey Company must estimate its ending inventory by the gross profit method Assume that for the past two years, Joey Company’s gross profit has averaged 45% of net sales Suppose Joey Company’s inventory records reveal the following data: M06_HARR1145_11_GE_C06.indd 379 LO ■ spreadsheet 13/10/17 5:33 PM www.downloadslide.com 380   Chapter Inventory, January Transactions during January: Purchases Purchase discounts Purchase returns Sales Sales returns € 57,700 490,800 12,200 70,200 665,000 16,500 Requirements Estimate the cost of the lost inventory, using the gross profit method Prepare the January Income Statement for this product through gross profit Show the detailed computation of cost of goods sold in a separate schedule LO P6-76B.  (Learning Objective 3: Determining the amount of inventory to purchase) Chris’ Convenience Store’s Income Statement and Balance Sheet reported the following The business is organized as a proprietorship, so it pays no corporate income tax The owner is budgeting for 20X6 He expects sales and cost of goods sold to increase by 10% To meet customer demand, ending inventory will need to be €76,000 at December 31, 20X6 The owner hopes to earn a net income of €161,000 next year A1 A1 A1 A1 A A B B Chris’ Convenience Stores Chris’ Convenience Stores Income Statement Income Statement Year Ended December 20X5 Ended December 31,31, 20X5 1Year 2Sales Sales € Cost sales of of sales 3Cost Gross profit profit 4Gross Operating expenses expenses 5Operating € Net income income 6Net € 964,000 964,000 722,000 722,000 242,000 242,000 110,000 110,000 € 132,000 132,000 A A B B C C D D Chris’ Chris’ Convenience Convenience Stores Stores Balance Balance Sheet Sheet December December 31,31, 20X5 20X5 2Assets Assets Liabilities Liabilities € €28,000 28,000 Accounts payable payable Cash € €35,000 35,000Accounts 3Cash 193,000 193,000 Note payable payable Inventories 65,000 65,000Note 4Inventories 221,000 221,000 Total liabilities liabilities Land and and buildings, buildings, netnet 268,000 268,000Total 5Land 147,000 147,000 Owner, Owner, capital capital € 368,000 Total liabilities liabilities andand capital capital € 368,000 Total assets assets € 368,000 € 368,000Total 7Total Requirements One of the most important decisions a manager makes is the amount of inventory to purchase Show how to determine the amount of inventory to purchase in 20X6 Prepare the store’s budgeted Income Statement for 20X6 to reach the target net income of €161,000 To reach this goal, operating expenses must decrease by €4,800 LO M06_HARR1145_11_GE_C06.indd 380 P6-77B.  (Learning Objective 5: Correcting inventory errors over a three-year period) The accounting records of Waterville Video Sales show the data betow (in millions) The shareholders are very happy with Waterville’s steady increase in net income 13/10/17 5:33 PM www.downloadslide.com Inventory and Merchandising Operations    381 20X6 Net sales revenue Cost of goods sold: Beginning inventory Net purchases Cost of goods available Less ending inventory Cost of goods sold Gross profit Operating expenses Net income 20X5 €32 €35 €38 € 28 35 (8) € 30 38 (9) € 32 41 (10) 20X4 31 $ 29 $ 27 $ Auditors discovered that the ending inventory for 20X4 was understated by €2 million and that the ending inventory for 20X5 was also understated by €2 million The ending inventory at December 31, 20X6, was correct Requirements Show corrected Income Statements for each of the three years How much did these assumed corrections add to or take away from Waterville’s total net income over the three-year period? How did the corrections affect the trend of net income? Will Waterville’s shareholders still be happy with the company’s trend of net income? Give the reason for your answer APPLY YOUR KNOWLEDGE Decision Cases Case 1.  (Learning Objectives 1, 2: Assessing the impact of a year-end purchase of inventory)  Duracraft Corporation is nearing the end of its first year of operations Duracraft made inventory purchases of $745,000 during the year, as follows: January July November Totals 1,000 units @ $100.00 = 4,000 121.25 1,000 160.00 6,000 LO ■ writing assignment $100,000 485,000 160,000 $745,000 Sales for the year are 5,000 units for $1,200,000 of revenue Expenses other than cost of goods sold and income taxes total $200,000 The president of the company is undecided about whether to adopt the FIFO method or the LIFO method for inventories The income tax rate is 40% Requirements To aid company decision making, prepare Income Statements under FIFO and under LIFO Compare the net income under FIFO with net income under LIFO Which method produces the higher net income? What causes this difference? Be specific Case 2.  (Learning Objective 3: Assessing the impact of the inventory costing method on the financial statements)  The inventory costing method a company chooses can affect the financial statements and thus the decisions of the people who use those statements M06_HARR1145_11_GE_C06.indd 381 LO ■ writing assignment 13/10/17 5:33 PM www.downloadslide.com 382   Chapter Requirements Company A uses the LIFO inventory method and discloses its use of the LIFO method in notes to the financial statements Company B uses the FIFO method to account for its inventory ­Company B does not disclose which inventory method it uses Company B reports a higher net income than Company A In which company would you prefer to invest? Give your reason Conservatism is an accepted accounting concept Would you want management to be conservative in accounting for inventory if you were a shareholder or a creditor of a company? Give your reason Ethical Issue During 20X6, Vanguard, Inc., changed to the LIFO method of accounting for inventory Suppose that during 20X7, Vanguard changes back to the FIFO method and the following year Vanguard switches back to LIFO again Requirements What would you think of a company’s ethics if it changed accounting methods every year? What accounting principle would changing methods every year violate? Who can be harmed when a company changes its accounting methods too often? How? Focus on Financials: | Nestlé This case spans all 12 chapters and is based on the consolidated financial statements of Nestlé As you work with Nestlé throughout this course, you will develop the confidence and ability to use the financial statements of other companies as well Refer to Nestlé financial statements in Appendix A Alternatively, you may choose to obtain the full annual report from Nestlé’s website at www.nestle.com/investors You may find the information overwhelming for now, but try to spot the key principles that we have discussed in this chapter It will get progressively easier as you gain familiarity with the elements of the financial statements Requirements What method does Nestlé use to measure its inventories? What would be the effect of Nestlé adopting FIFO to measure the value of its sundry supplies (previously measured under weighted average method) assuming rising inventory prices? Three important pieces of inventory information are the cost of inventory on hand, (a) the cost of goods sold, and (b) the cost of inventory purchases Assume that the actual cost of inventory is equal to the fair value of the inventory, at CHF 8,401 million and CHF 8,153 million at December 31, 2016 and 2015, respectively Identify or compute items (a) and (b) for Nestlé for the year ended December 31, 2016 Did Nestlé’s gross profit margin percentage (use sales and cost of goods sold) on company sales improve or deteriorate in the year ended December 31, 2016, compared to the previous year? Calculate Nestlé’s inventory turnover for the years ended December 31, 2015, and December 31, 2016 Did inventory turnover rise or fall? How does this affect your analysis of Nestlé? What additional information would help you make a better judgment on Nestlé’s inventory management practices? (Assume that the value of inventory at December 31, 2014, is CHF 9,170 million.) Group Project LO ■ writing assignment M06_HARR1145_11_GE_C06.indd 382 ( Learning Objective 4: Comparing companies’ inventory turnover ratios) Obtain the annual reports of 10 companies, two from each of five different industries Most companies’ financial statements can be downloaded from their websites Compute each company’s gross profit percentage and rate of inventory turnover for the most recent two years If annual reports are unavailable or not provide enough data for multiple-year computations, you can gather financial statement data from Moody’s Industrial Manual 13/10/17 5:33 PM www.downloadslide.com Inventory and Merchandising Operations    383 How well does each of your companies compare to the other company in its industry? What insight about your companies can you glean from these ratios? Write a memo to summarize your findings, stating whether your group would invest in each of the companies it has analyzed Quick Check Answers  1. c            2. b            3. d  4. c [(15 × $6) + (25 × $7)]  5. b (15 × $6) + ($10 × $7)  6. c 25 × [($90 + $280 + $90) ÷ 65]  7. c            8. b            9. d 10.  b ($127,000 − $75,000) 11.  b ($148,000 + $28,000 − $16,000) 12.  c ($28,000 + $93,000 + $3,000 − $7,000 − $35,000) 13.  b ($184,000 − $82,000)/$184,000 14.  a [$82,000 ÷ ($28,000 + $35,000)/2] 15.  c $120,000 + $270,000 − [$460,000 × (1 − 0.40)] 16.  b For online homework, exercises, and problems that provide you with immediate feedback, please visit www.myaccountinglab.com APPENDIX 6A ACCOUNTING FOR INVENTORY IN THE PERIODIC SYSTEM In the periodic inventory system, the business keeps no running record of the merchandise Instead, at the end of the period, the business counts inventory on hand and applies the unit costs to determine the cost of ending inventory This inventory figure appears on the Balance Sheet and is used directly to calculate cost of goods sold Recording Transactions in the Periodic System In the periodic system, throughout the period, the Inventory Account carries the beginning balance left over from the preceding period During the period, the business records purchases of inventory in the Purchases account (an expense account) For inventory sales, only the revenue and considerations received (or receivable) are recorded At the end of the period, the purchases are added to the Inventory Account A stocktake is then performed to determine the ending inventory balance Any stock that is not present is assumed to be sold and charged to the cost of goods sold account These end-of-period entries can be made during the closing process (see Chapter 3) Exhibit 6A-1 illustrates the Inventory Accounting in a periodic system Let’s assume JeanLuc Products (JLP) started the period with a beginning inventory balance of $100,000 During the year, JLP made purchases on credit, totaling $560,000 JLP’s total sales for the year were $900,000, all on credit A stocktake at the end of the period revealed that JLP has an inventory ending balance of $120,000 M06_HARR1145_11_GE_C06.indd 383 13/10/17 5:33 PM www.downloadslide.com 384   Chapter Exhibit 6-A1 | Recording and Reporting Inventories: Periodic System PANEL A—Recording Transactions and the T-accounts A1 A B C D Purchases 560,000 Accounts Payable 560,000 Purchased inventory on account Accounts Receivable 900,000 Sales Revenue 900,000 Sold inventory on account End-of-period entries to update Inventory and record Cost of Goods Sold: 560,000 10 a Inventory Purchases 560,000 11 Transferred purchases to inventory 12 13 540,000 14 b Cost of Goods Sold 15 Inventory 540,000 16 Set up ending inventory based on physical count 17 18 The T-accounts show the following: 19 20 Purchases Inventory Cost of Goods Sold 21 Purchases 560,000 Inventory 560,000 Beg bal 100,000 Inventory 540,000 COGS 540,000 22 Purchases 560,000 23 End Bal End Bal 120,000 24 25 26 27 PANEL B—Reporting in the Financial Statements Income Statement (Partial) Ending Balance Sheet (Partial) Sales revenue Cost of goods sold: Beginning inventory Purchases Goods available Ending inventory Cost of goods sold Gross profit $900,000 $ 100,000 560,000 660,000 (120,000) Current assets: Cash Short-term investments Accounts receivable Inventory Prepaid expenses $ XXX XXX XXX 120,000 XXX 540,000 $360,000 APPENDIX ASSIGNMENTS Short Exercises S6A-1.  (Recording inventory transactions in the periodic system)  Paxton Technologies began the year with inventory of $460 During the year, Paxton purchased inventory costing $1,270 and sold goods for $3,400, with all transactions on account Paxton ended the year with inventory of $630 Journalize all the necessary transactions under the periodic inventory system S6A-2.  (Computing cost of goods sold and preparing the Income Statement—periodic system)  Use the data in Short Exercise 6A-1 to the following for Paxton Technologies: M06_HARR1145_11_GE_C06.indd 384 13/10/17 5:33 PM www.downloadslide.com Inventory and Merchandising Operations    385 ➤ Requirements Post to the Inventory and Cost of Goods Sold accounts Compute cost of goods sold by using the cost-of-goods-sold model Prepare the Income Statement of Paxton Technologies through gross profit Exercises  MyLab Accounting Select exercises can be found within MyLab Accounting, an online homework and practice environment Your instructor may ask you to complete select exercises using MyLab Accounting Group A E6A-3A.  (Computing amounts for various inventory methods—periodic system)  Suppose Haley Corporation’s inventory records for a particular computer chip indicate the following at July 31: Jul 15 26 Beginning inventory Purchase Purchase Purchase units @ $60 = $360 units @ $60 = 180 14 units @ $70 = 980 units @ $80 = 160 The physical count of inventory at July 31 indicates that seven units of inventory are on hand ➤ Requirements Compute ending inventory and cost of goods sold, using each of the following methods: Specific unit cost, assuming two $60 units and five $70 units are on hand Average cost (round average unit cost to the nearest cent) First-in, first-out Last-in, first-out E6A-4A.  (Journalizing inventory transactions in the periodic system; computing cost of goods sold)  Use the data in Exercise 6A-3A ➤ Requirements Journalize the following for the periodic system: Total July purchases in one summary entry All purchases were on credit Total July sales in a summary entry Assume that the selling price was $298 per unit and that all sales were on credit July 31 entries for inventory Haley uses LIFO Post to the Cost of Goods Sold T-account to show how this amount is determined Label each item in the account Show the computation of cost of goods sold by the cost-of-goods-sold model Group B E6A-5B.  (Computing amounts for various inventory methods—periodic system) Suppose Daxton Corporation’s inventory records for a particular computer chip indicate the following at December 31: Dec 15 26 Beginning inventory Purchase Purchase Purchase units @ €62 = € 434 units @ €62 = 310 14 units @ €72 = 1,008 units @ €82 = 246 The physical count of inventory at December 31 indicates that nine units of inventory are on hand M06_HARR1145_11_GE_C06.indd 385 13/10/17 5:33 PM www.downloadslide.com 386   Chapter ➤ Requirements Compute ending inventory and cost of goods sold, using each of the following methods: Specific unit cost, assuming four €62 units and five €72 units are on hand Average cost (round average unit cost to the nearest cent) First-in, first-out Last-in, first-out E6A-6B.  (Journalizing inventory transactions in the periodic system; computing cost of goods sold)  Use the data in Exercise 6A-5B ➤ Requirements Journalize the following for the periodic system: Total December purchases in one summary entry All purchases were on credit Total December sales in a summary entry Assume that the selling price was €318 per unit and that all sales were on credit December 31 entries for inventory Daxton uses LIFO Post to the Cost of Goods Sold Taccount to show how this amount is determined Label each item in the account Show the computation of cost of goods sold by the cost-of-goods-sold model Problems  MyLab Accounting Select problems can be found within MyLab Accounting, an online homework and practice environment Your instructor may ask you to complete select problems using MyLab Accounting Group A P6A-7A.  (Computing cost of goods sold and gross profit on sales—periodic system)  Assume a Watercrest outlet store began July 20X6 with 50 units of inventory that cost $16 each The sale price of these units was $70 During July, the store completed the following inventory transactions: Jul 11 19 24 30 31 Sale Purchase Sale Sale Sale Purchase Sale Units Unit Cost Unit Sale Price 18 80 32 36 21 $18 19 18 19 19 20 19 $70 71 70 72 72 72 72 ➤ Requirements Determine the store’s cost of goods sold for July under the periodic inventory system Assume the FIFO method Compute gross profit for July P6A-8A.  (Recording transactions in the periodic system; reporting inventory items in the financial statements)  Accounting records for Decadent Desserts, Inc., yield the following data for the year ended December 31, 20X6 (amounts in thousands): Inventory, December 31, 20X5 $ 580 Purchases of inventory (on account) 2,240 Sales of inventory—70% on account; 30% for cash 3,600 Inventory at the lower of FIFO cost or NRV, December 31, 20X6 700 M06_HARR1145_11_GE_C06.indd 386 13/10/17 5:33 PM www.downloadslide.com Inventory and Merchandising Operations    387 ➤ Requirements Journalize Decadent Desserts’ inventory transactions for the year under the periodic system Show all amounts in thousands Report ending inventory, sales, cost of goods sold, and gross profit on the appropriate financial statement (amounts in thousands) Show the computation of cost of goods sold Group B P6A-9B.  (Computing cost of goods sold and gross profit on sales—periodic system) Assume a Championship outlet store began January 20X6 with 52 units of inventory that cost €20 each The sale price of these units was €75 During January the store completed these inventory transactions: Jan 11 19 24 30 31 Sale Purchase Sale Sale Sale Purchase Sale Units Unit Cost Unit Sale Price 19 75 33 40 20 €20 21 20 21 21 22 21 €75 73 75 77 77 74 77 ➤  Requirements Determine the store’s cost of goods sold for January under the periodic inventory system Assume the FIFO method Compute gross profit for January P6A-10B.  (Recording transactions in the periodic system; reporting inventory items in the financial statements)  Accounting records for Sinful Desserts, Inc., yield the following data for the year ended December 31, 20X6 (amounts in thousands): Inventory, December 31, 20X5 € 520 Purchases of inventory (on account) 2,100 Sales of inventory—75% on account, 25% for cash 4,000 Inventory at the lower of FIFO cost or market, December 31, 20X6 680 ➤ Requirements Journalize Sinful Desserts’ inventory transactions for the year under the periodic system Show all amounts in thousands Report ending inventory, sales, cost of goods sold, and gross profit on the appropriate financial statement (amounts in thousands) Show the computation of cost of goods sold M06_HARR1145_11_GE_C06.indd 387 13/10/17 5:33 PM www.downloadslide.com This page intentionally left blank ... 4,569 5,345 1, 0 21 135 3,288 14 ,358 2,476 712 19 1 2,388 5,767 € 20 ,12 5 1, 526 211 2,098 3 61 4 ,19 6 379 503 882 5,078 334 12 ,11 1 2,602 15 ,047 € 20 ,12 5 Try It in Excel Describes line-by-line how to... Global Rights and Permissions department, please visit www.pearsoned.com/permissions/ ISBN 10 : 1- 2 9 2-2 11 1 4-8 ISBN 13 : 97 8 -1 -2 9 2-2 11 1 4-5 British Library Cataloguing-in-Publication Data A catalogue... ¥364 billion in 2 016 ● Chinese Yuan, ¥ Kaspars Grinvalds/Shutterstock M 01_ HARR 114 5 _11 _GE_C 01. indd 13 /10 /17 4:42 PM www.downloadslide.com 2   Chapter A1 A 10 11 12 13 14 15 16 17 B Alibaba Group