Chap 006
Chap 006
Chap 006
(a) FIFO: The first (earliest) items purchased in inventory are assumed to be the first
items sold. (b) LIFO: The last (most recent) items purchased in inventory are
assumed to be the first items sold.
2.
3.
Incidental costs sometimes are ignored in computing the cost of inventory because
the expense of tracking such costs on a precise basis can outweigh the benefits
gained from the increased accuracy. The principle of materiality permits such
practices when the effects on the financial statements are not significant (that is,
when such practices do not impact business decisions).
4.
LIFO will result in the lower cost of goods sold when costs are declining.
5.
The full-disclosure principle requires that the nature of the accounting change, the
justification for the change, and the effect of the change on net income be disclosed
in the notes or in the body of a company's financial statements.
6.
No; changing the inventory method each period would violate the accounting
principle of consistency.
7.
No; the consistency principle does not preclude changes in accounting methods
from ever being made. Instead, a change from one acceptable method to another is
allowed if the company justifies the change as an improvement in financial
reporting.
8.
9.
An inventory error that causes an understatement (or overstatement) for net income
in one accounting period, if not corrected, will cause an overstatement (or
understatement) in the next. Since an understatement (overstatement) of one period
offsets the overstatement (understatement) in the next, such errors are said to
correct themselves.
10. Market usually means replacement cost of inventory when applied in the LCM.
11. The principle of conservatism guides preparers of accounting reports to select the
less optimistic estimate in uncertain situations where two estimates of amounts are
about equally likely. Users of information must also be cognizant of the potential
conservatism in accounting reports when making business decisions.
12. Factors that contribute to inventory shrinkage are breakage, loss, deterioration,
decay, and theft.
13.A Accounts that are used only in a periodic inventory system include Purchases,
Purchase Discounts, Purchase Returns and Allowances, and Transportation-In.
14.B For interim reporting, companies can estimate costs of goods sold and ending
inventory by either the retail inventory method or the gross profit method.
15. Inventory as a percent of current assets on February 2, 2003 is ($ in thousands):
$24,365 / $141,128 = 17.3%.
16. Cost of goods available for sale equals ending inventory plus cost of sales. As of
December 28, 2002 this is computed as:
Ending Inventory of $6,777,152 + Cost of Sales of $111,187,357 = $117,964,509
17. Merchandise inventory comprises 10.6% ($218,156 / $2,066,586) of HarleyDavidsons current assets as of December 31, 2002, and 10.9% ($181,115 /
$1,665,264) of its current assets as of December 31, 2001. ($ in thousands)
QUICK STUDIES
Quick Study 6-1 (25 minutes)
(a) FIFO
Date
Goods Purchased
Inventory Balance
12/ 7
10 @ $ 6 = $ 60
10 @ $ 6
= $ 60
12/14
20 @ $12 = $240
10 @ $ 6
20 @ $12
= $300
15 @ $12
= $180
15 @ $12
15 @ $14
= $390
12/15
12/21
10 @ $ 6 = $120
5 @ $12
15 @ $14 = $210
____
$120
Goods Purchased
Inventory Balance
12/7
10 @ $ 6 = $ 60
10 @ $ 6
= $ 60
12/14
20 @ $12 = $240
10 @ $ 6
20 @ $12
= $300
10 @ $ 6
5 @ $12
= $120
10 @ $ 6
5 @ $12
15 @ $14
= $330
12/15
12/21
15 @ $12 = $180
15 @ $14 = $210
____
$180
Goods Purchased
12/7
10 @ $6 = $60
12/14
20 @ $12 = $240
12/15
12/21
Inventory Balance
10 @ $6
= $ 60
10 @ $6
20 @ $12
(avg cost is $10)
15 @ $10 =$150
15 @ $10
____
$150
15 @ $10
15 @ $14
(avg cost is $12)
15 @ $14 = $210
= $300
= $150
= $360
10 units @ $50
$ 500
10 units @ $51
10 units @ $52
10 units @ $55
10 units @ $60
50 units
510
520
550
600
$2,680
Goods Purchased
75 @ $3.20
100 @ $3.35
1/26
Inventory Balance
310 @ $3.00
=
310 @ $3.00
=
75 @ $3.20
310 @ $3.00
75 @ $3.20
=
100 @ $3.35
40 @ $3.20
=
100 @ $3.35
$ 930
$1,170
$1,505
$ 463
(b) LIFO
Date
1/1
1/9
1/25
Goods Purchased
75 @ $3.20
100 @ $3.35
1/26
Inventory Balance
310 @ $3.00
= $ 930
310 @ $3.00
= $1,170
75 @ $3.20
310 @ $3.00
75 @ $3.20
= $1,505
100 @ $3.35
140 @ $3.00
= $ 420
Goods Purchased
75 @ $3.20
100 @ $3.35
1/26
Inventory Balance
310 @ $3.00
= $ 930
310 @ $3.00
75 @ $3.20
= $1,170
(avg. cost is $3.04)
310 @ $3.00
75 @ $3.20
= $1,505
100 @ $3.35
(avg. cost is $3.10)
140 @ $3.10
= $ 434
100 @ $3.35 =
40 @ $3.20 =
140
$ 335
128
$ 463 Ending inventory cost
(b) LIFO:
140 @ $3.00 =
$ 930
240
335
$1,505 Cost of goods available for sale
Specific identification
LIFO
LIFO
LIFO
FIFO
1,500 units
(30)
250
70
1,790 units
$3,000
150
200
50
$3,400
The $25 advertising cost and the $250 cost for sales staff salaries are
included in operating expensesnot part of inventory costs. Those two
costs are not necessary to get the vehicle in a place and condition for sale.
Total
Market
$ 2,970
3,240
10,500
$16,710
$16,710
$15,990
a. FIFO
(15 x $12) + (15 X $14)...................................
(10 x $6) + (5 x $12).........................................
$390
b. LIFO
(10 x $6) + (20 x $12).......................................
(15 x $14) ........................................................
$300
$340
d. Specific Identification
(2 x $6) + (13 x $12) + (15 x $14)....................
(8 x $6) + (7 x $12)...........................................
$378
Cost of
Goods Sold
$120
$210
$170
$132
$463
b. LIFO
(140 x $3.00).......................................................
(100 x $3.35) + (75 x $3.20) + (170 x $3.00).....
$420
Cost of
Goods Sold
$1,042
$1,085
$1,071*
*rounded
EXERCISES
Exercise 6-1 (30 minutes)
a. Specific identification
Ending inventory: 400 units from July 28 plus 100 units from
December 19.
Computations:
Ending
Inventory
$2,410
Cost of
Goods Sold
$3,970
Goods Purchased
Inventory Balance
1/1
1/10
3/7
70 @ $ 6.00 = $ 420
200 @ $5.50
3/15
120 @ $6.00
= $ 720
50 @ $6.00
= $ 300
50 @ $6.00
200 @ $5.50
(avg. cost is $5.60)
125 @ $5.60 = $ 700
125 @ $5.60
7/28
500 @ $5.00
125 @ $5.60
500 @ $5.00
(avg. cost is $5.12)
10/3
375 @ $4.40
125 @ $5.60
500 @ $5.00
375 @ $4.40
(avg. cost is $4.85)
10/5
12/19
400 @ $4.85
400 @ $4.85
100 @ $4.10
(avg. cost is $4.70)
= $1,400
= $ 700
= $3,200
= $4,850
= $1,940
= $2,350
Goods Purchased
1/1
1/10
3/7
70 @ $6.00
= $ 420
200 @ $5.50
3/15
50 @ $6.00
75 @ $5.50
= $ 712*
Inventory Balance
120 @ $6.00
= $ 720
50 @ $6.00
= $ 300
50 @ $6.00
200 @ $5.50
= $1,400
125 @ $5.50
= $ 688*
7/28
500 @ $5.00
125 @ $5.50
500 @ $5.00
= $3,188
10/3
375 @ $4.40
125 @ $5.50
500 @ $5.00
375 @ $4.40
= $4,838
10/5
12/19
125 @ $5.50
475 @ $5.00
= $3,063*
100 @ $4.10
_____
$4.195
25 @ $5.00
375 @ $4.40
25 @ $5.00
375 @ $4.40
100 @ $4.10
= $1,775
= $2,185
Goods Purchased
1/1
1/10
3/7
70 @ $6.00
10/3
125 @ $5.50
=$
687*
500 @ $5.00
375 @ $4.40
10/5
12/19
420
200 @ $5.50
3/15
7/28
=$
Inventory Balance
120 @ $6.00
= $ 720
50 @ $6.00
= $ 300
50 @ $6.00
200 @ $5.50
= $1,400
50 @ $6.00
75 @ $5.50
= $ 713*
50 @ $6.00
75 @ $5.50
500 @ $5.00
= $3,213*
50 @ $6.00
75 @ $5.50
500 @ $5.00
375 @ $4.40
= $4,863*
50 @ $6.00
75 @ $5.50
275 @ $5.00
= $2,088*
50 @ $6.00
75 @ $5.50
275 @ $5.00
100 @ $4.10
$2,498
Cost of
Goods Sold
$4,195
$2,498
$3,882
Sales......................................$11,925
Weighted
Average
FIFO
LIFO
$11,925
$11,925
$11,925
4,030
7,895
1,250
6,645
1,994*
$ 4,651
4,195
7,730
1,250
6,480
1,944
$ 4,536
3,882
8,043
1,250
6,793
2,038*
$ 4,755
3,940
7,985
1,250
6,735
Income tax expense (30%)......... 2,021*
Net income............................$ 4,714
* Rounded to the nearest dollar.
Goods Purchased
1/1
100 @ $10
1/10
3/14
90 @ $10 = $ 900
250 @ $15 = $ 3,750
3/15
7/30
10 @ $10
130 @ $15 = $2,050
400 @ $20 = $ 8,000
10/5
10/26
Inventory Balance
120 @ $15
180 @ $20 = $5,400
600 @ $25 = $15,000
_____
$8,350
10 @ $10
= $ 1,000
=$
100
10 @ $10
250 @ $15
= $ 3,850
120 @ $15
= $ 1,800
120 @ $15
400 @ $20
= $ 9,800
220 @ $20
= $ 4,400
220 @ $20
600 @ $25
= $19,400
b. LIFO Perpetual
Date
Goods Purchased
1/1
100 @ $10
1/10
3/14
90 @ $10 = $ 900
250 @ $15 = $ 3,750
3/15
140 @ $15 = $2,100
7/30
10/5
300 @ $20 = $6,000
10/26
Inventory Balance
10 @ $10
= $ 1,000
= $
100
10 @ $10
250 @ $15
= $ 3,850
10 @ $10
110 @ $15
= $ 1,750
10 @ $10
110 @ $15
400 @ $20
= $ 9,750
10 @ $10
110 @ $15
100 @ $20
= $ 3,750
10 @ $10
110 @ $15
100 @ $20
600 @ $25
= $ 18,750
Cost of
Goods Sold
$19,400
$8,350
$18,750
$9,000
$21,200
8,350
$12,850
$21,200
9,000
$12,200
$27,750
18,400
$ 9,350
$21,200
9,350
$11,850
Unit
Helmets........... 22
Bats.................. 15
Shoes............... 36
Uniforms.......... 40
Per Unit
Cost Market
$50
78
95
36
$54
72
91
36
Total
Cost
$1,100
1,170
3,420
1,440
$7,130
Total
Market
$1,188
1,080
3,276
1,440
$6,984
$1,100
1,080
3,276
1,440
$6,896
a.
b.
$6,984
Year 2005
$900,000
Year 2006
$900,000
Sales..............................
Cost of goods sold
Beginning inventory..... $200,000
$180,000
$200,000
Cost of purchases........ 500,000
500,000
500,000
Good available for sale..... 700,000
680,000
700,000
Ending inventory.......... 180,000
200,000
200,000
Cost of goods sold.......
520,000
480,000
500,000
Gross profit....................
$380,000
$420,000
$400,000
$426,650/[($91,500 + $86,750)/2]
= 4.8 times
$643,825/[($86,750 + $96,400)/2]
= 7.0 times
Cost of
Goods Sold
a. Specific Identification
(400 x $5.00) + (100 x $4.10)...................................... $2,410
$6,380 - $2,410 ..........................................................
$3,970
b. Weighted Average
($6,380 / 1295 units = $4.927* average cost per unit)
$3,917*
c. FIFO
(100 x $4.10) + (375 x $4.40 )+ (25 x $5.00).............. $2,185
(70 x $6.00) + (50 x $6.00) + (75 x $5.50) +
(125 x $5.50)+ (475 x $5.00).....................................
$4,195
d. LIFO
(120 x $6.00) + (200 x $5.50) + (180 x $5.00)............ $2,720
(100 x $4.10) +(375 x $4.40) + (125 x $5.00) +
(125 x $5.00) + (70 x $5.00).....................................
$3,660
*rounded
$8,350
b. LIFO
(100 x $10) + (250 x $15) + (400 x $20) + (70 x $25).... $14,500
530 x $25....................................................................
$13,250
c.
FIFO Gross Margin
Sales revenue (530 units sold x $40 selling price)................. $21,200
Less: FIFO cost of goods sold................................................
8,350
Gross margin............................................................................. $12,850
LIFO Gross Margin
Sales revenue (530 units sold x $40 selling price)................. $21,200
Less: LIFO cost of goods sold................................................ 13,250
Gross margin............................................................................. $ 7,950
a. Specific identification
(100 x $2.90) + (100 x$2.80) + (100 x $2.50)........
$7,706 - $820..........................................................
b. Weighted average ($7,706/3,000 = $2.57*)
$2.57 x 300.............................................................
$7,706 - $771..........................................................
c. FIFO
(300 x $2.90) ..........................................................
(200 x $2.00) + (440 x $2.25) + (1,080 x $2.50) +
(960 x $2.80) + (20 x 2.90)...............................
d. LIFO
(200 x $2.00) + (100 x $2.25).................................
(320 x $2.90) + (960 x $2.80) + (1,080 x $2.50) +
(340 x $2.25)......................................................
Cost of
Goods Sold
$820
$6,886
771
6,935
870
6,836
625
7,081
*rounded
Income effect: FIFO provides the lowest cost of goods sold, the highest
gross profit, and the highest net income.
Exercise 6-12A (20 minutes)
Ending
Inventory
a. Specific identification
(100 x $2.00) + (100 x $2.30) + (100 x $2.50).......
$7,550 - $680..........................................................
b. Weighted average ($7,550/3,030 = $2.49*)
$2.49 x 300.............................................................
$7,550 - $747..........................................................
c. FIFO
(250 x $2.00) + (50 x $2.30)...................................
(280 x $3.00) + (600 x $2.80) + (800 x $2.50) +
(1,050 x $2.30)..................................................
d. LIFO
(280 x $3.00) + (20 x $2.80)...................................
(250 x $2.00) + (1,100 x $2.30) + (800 x $2.50) +
(580 x $2.80).....................................................
Cost of
Goods Sold
$680
$6,870
747
6,803
615
6,935
896
6,654
*rounded
Income effect: FIFO provides the highest cost of goods sold, the lowest
gross profit, and the lowest net income.
At Retail
$ 64,200
98,400
162,600
130,000
$ 32,600
PROBLEM SET A
Problem 6-1A (40 minutes)
1. Calculate cost of goods available for sale and units available for sale
Beginning inventory............................ 600 units @ $44
Feb. 10
200 units @ $40
Mar. 13.................................................. 100 units @ $20
Aug. 21.................................................. 160 units @ $60
Sept. 5.................................................. 280 units @ $48
Units available......................................1,340 units
Cost of goods available for sale
$26,400
8,000
2,000
9,600
13,440
$59,440
Goods Purchased
1/1
2/10
3/13
9/5
600 @ $44
= $26,400
600 @ $44
200 @ $40
= $34,400
600 @ $44
200 @ $40
100 @ $20
3/15
8/21
Inventory Balance
200 @ $44
200 @ $40
100 @ $20
200 @ $44
200 @ $40
100 @ $20
160 @ $60
200 @ $44
200 @ $40
100 @ $20
160 @ $60
280 @ $48
9/10
$17,600
200 @ $44
8,800
200 @ $40
100 @ $20
160 @ $60
280 @ $48
= $36,400
= $18,800
= $28,400
= $41,840
= $33,040
$59,440
26,400
$33,040
@ $40
@ 20
@ 60
@ 48
units
$ 8,000
2,000
9,600
13,440
$33,040
Goods Purchased
Inventory Balance
1/1
2/10
3/13
3/15
8/21
9/5
100 @ $20
200 @ $40
100 @ $44
200 @ $48
= $26,400
600 @ $44
200 @ $40
= $34,400
600 @ $44
200 @ $40
100 @ $20
= $36,400
500 @ $44
= $22,000
500 @ $44
160 @ $60
= $31,600
= $14,400
9/10
600 @ $44
= $ 9,600
______
$24,000
500 @ $44
160 @ $60
280 @ $48
= $45,040
500 @ $44
160 @ $60
80 @ $48
= $35,440
$59,440
$ 2,000
8,000
4,400
9,600
24,000
$35,440
Ending Inventory
500 @ $44
160 @ 60
80 @ 48
740 units
$22,000
9,600
3,840
$35,440
$59,440
24,000
$35.440
Ending Inventory.
100 @ $44
200 @
40
160 @
60
280 @
48
740 units
$ 4,400
8,000
9,600
13,440
$35,440
Goods Purchased
1/1
Inventory Balance
600 @ $44.00
= $26,400
2/10
600 @ $44.00
= $34,400
200 @ $40.00
(avg. cost is $43.00)
3/13
600 @ $44.00
200 @ $40.00
= $36,400
100 @ $20.00
(avg. cost is $40.44*)
3/15
500 @ $40.44
= $20,220
8/21
500 @ $40.44
= $29,820
160 @ $60.00
(avg. cost is $45.18)
9/5
660 @ $45.18
280 @ $48.00
= $43,259**
(avg. cost is $46.02)
9/10
740 @ $46.02
= $34,055***
LIFO
Specific
Identification
Weighted
Average
$45,000
24,000
$21,000
$45,000
24,000
$21,000
$45,000
25,380
$19,620
5. Parkers manager would likely prefer the LIFO method or the Specific
Identification method since these methods gross profit is the largest at
$21,000. This would give the manager his/her highest bonus based on
gross profit. It is only by coincidence that the LIFO and Specific
Identification method have the same cost of goods sold and gross
profit. This would not necessarily be the case.
2004
$ 715,000
- 66,000
12/31/2005 error.......
Corrected.....................................
$ 649,000
(b)
Net income:
Reported.......................................
Adjustments: 12/31/2004 error.......
2004
$ 220,000
+ 66,000
12/31/2005 error.......
Corrected.....................................
$ 286,000
(c)
Total current assets:
Reported.......................................
Adjustments: 12/31/2004 error.......
2004
$1,155,000
+ 66,000
12/31/2005 error.......
Corrected.....................................
(d)
Equity:
Reported
Adjustments: 12/31/2004 error.......
12/31/2005 error.......
Corrected.....................................
$1,221,000
2004
$1,287,000
+ 66,000
_________
$1,353,000
2005
$ 847,000
+ 66,000
+ 30,000
$ 943,000
2006
$ 770,000
2005
$ 275,000
- 66,000
- 30,000
$ 179,000
2006
$ 231,000
2005
$1,265,000
2006
$1,100,000
- 30,000
$1,235,000
$1,100,000
2005
$1,430,000
2006
$1,232,000
- 30,000
$1,400,000
$1,232,000
- 30,000
$ 740,000
+ 30,000
$ 261,000
Part 2
Total net income for the combined three-year period is not affected by the
errors. This is because these errors are "self-correcting"that is, each
overstatement (or understatement) of net income is offset by a matching
understatement (or overstatement) in the following year.
Part 3
The understatement of inventory by $66,000 results in an overstatement of cost of
goods sold by that same amount. The $66,000 overstatement of cost of goods
sold results in an understatement of gross profit by the same amount. This
understatement of gross profit carries through to an understatement of net
income. Since the understated net income is closed to equity, the final equity
figure is understated by the amount of the inventory understatement.
Unit
s
Audio equipment
Receivers...............335
CD players.............250
DVD players...........316
Speakers................194
Subtotal.................
Video equipment
Televisions.............470
VCRs.....................281
Video cameras.......202
Subtotal.................
Per Unit
Cost Market
Total
Cost
$ 90
111
86
52
$ 98 $ 30,150
100
27,750
95
27,176
41
10,088
95,164
150
93
310
125
84
322
70,500
26,133
62,620
159,253
Total
Market
$ 32,830 $ 30,150
25,000
25,000
30,020
27,176
7,954
7,954
95,804
$ 95,164
58,750
23,604
65,044
147,398
58,750
23,604
62,620
147,398
70
97
Subtotal.................
Total........................
84
105
12,250
14,700
12,250
15,520
16,800
15,520
27,770
31,500 _______
27,770
$282,187 $274,702 $263,024 $270,332 $274,702
= $274,702
= $263,024
$2,835,000
939,000
$1,896,000
b. LIFO periodic
Total cost of 131,000 units available for sale........................
Less ending inventory on a LIFO basis
20,000 beginning inventory units @ $15.............................
$300,000
15,000 units @ $18................................................................
270,000
Cost of units sold.....................................................................
$2,835,000
570,000
$2,265,000
$2,835,000
757,443
$2,077,557
*
*
Weighted
Average
Sales
$247,500
Cost of goods sold
Inventory, Dec. 31, 2004.............................. 10,800
Cost of purchases....................................... 123,500
Cost of goods available for sale................ 134,300
Inventory, Dec. 31, 2005................................ 22,000
Cost of goods sold...................................... 112,300
Gross profit.................................................... 135,200
$247,500
$247,500
10,800
123,500
134,300
18,400
115,900
131,600
10,800
123,500
134,300
20,662 *
113,638 *
133,862 *
Expenses........................................................ 33,000
Income before taxes...................................... 102,200
Income taxes expense.................................. 30,660
Net income.....................................................$ 71,540
33,000
98,600
29,580
$ 69,020
33,000
100,862 *
30,259 *
$ 70,603 *
FIFO
$ 10,800
LIFO
$ 10,800
Weighted
Average
$ 10,800
123,500
123,500
123,500
FIFO
Supporting calculations:
Dec. 31, 2004, inventory (600 x $18)...................
Purchases
1,500 x $19 = $28,500
700 x $20 = 14,000
400 x $21 = 8,400
3,300 x $22 = 72,600
22,000
18,400
20,662*
At Cost
At Retail
$ 471,350
3,276,030
$3,747,380
$ 927,150
6,279,350
$7,206,500
Sales.......................................................................
Less: Sales returns...............................................
Net sales.................................................................
$5,495,700
(44,600)
$5,451,100
$1,755,400
Part 2
NILSON COMPANY
Inventory Shortage
December 31
At Cost
Estimated inventory (from part 1).............................
$ 912,808
Physical inventory:.................................................... 871,416 *
Inventory shortage.....................................................
$ 41,392
At Retail
$ 1,755,400
1,675,800
$
79,600
$1,191,150
(9,450)
$1,181.700
PROBLEM SET B
Problem 6-1B (40 minutes)
1. Calculate cost of goods available for sale and units available for sale:
Beginning inventory............................ 600 units @ $55 =
Jan. 10................................................... 450 units @ $56 =
Feb. 13................................................... 200 units @ $57 =
July 21................................................... 230 units @ $58 =
Aug. 5................................................... 345 units @ $59 =
Units available......................................1,825 units
Cost of goods available for sale.........
$ 33,000
25,200
11,400
13,340
20,355
$103,295
Goods Purchased
Inventory Balance
1/1
600 @ $55
= $33,000
1/10
600 @ $55
450 @ $56
2/13
600 @ $55
450 @ $56
200 @ $57
= $69,600
170 @ $55
450 @ $56
200 @ $57
= $45,950
2/15
7/21
8/5
170 @ $55
450 @ $56
200 @ $57
230 @ $58
170 @ $55
450 @ $56
200 @ $57
230 @ $58
345 @ $59
8/10
170 @ $55
165 @ $56 = $18,590
285 @ $56
200 @ $57
230 @ $58
345 @ $59
______
$42,240
= $58,200
= $59,290
= $79,645
= $61,055
$103,295
42,240
$ 61,055
Ending Inventory
285 @ $56
200 @ 57
230 @ 58
345 @ 59
1,060 units
$ 15,960
11,400
13,340
20,355
$ 61,055
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Goods Purchased
1/1
Inventory Balance
600 @ $55
1/10
600 @ $55
450 @ $56
2/13
600 @ $55
450 @ $56
200 @ $57
2/15
7/21
8/5
200 @ $57
230 @ $56 = $24,280
230 @ $58 = $13,340
600 @ $55
220 @ $56
230 @ $58
8/10
600 @ $55
220 @ $56
600 @ $55
220 @ $56
230 @ $58
345 @ $59
335 @ $59 = $19,765
______
$44,045
600 @ $55
220 @ $56
230 @ $58
10 @ $59
= $33,000
= $58,200
= $69,600
= $45,320
= $58,660
= $79,015
= $59,250
$103,295
44,045
$ 59,250
Ending inventory...
600 @ $55
220 @ 56
230 @ 58
10 @ 59
1,060 units
$ 33,000
12,320
13,340
590
$ 59,250
$103,295
42,405
$ 60,890
$25,200
1,995
13,340
20,355
$60,890
Goods Purchased
1/1
Inventory Balance
600 @ $55.00
= $33,000
1/10
600 @ $55.00
= $58,200
450 @ $56.00
(avg. cost is $55.43*)
2/13
600 @ $55.00
450 @ $56.00
= $69,600
200 @ $57.00
(avg. cost is $55.68)
2/15
820 @ $55.68
= $45,658**
7/21
820 @ $55.68
= $58,998**
230 @ $58.00
(avg. cost is $56.19*)
8/5
820 @ $55.68
230 @ $58.00
= $79,353**
345 @ $59.00
(avg. cost is $56.88*)
8/10
1,060@ $56.88
= $60,293**
Note: Total cost of goods sold plus ending inventory = $42,997 + $60,293 = $103,290. The
$5 difference from the cost of goods available for sale of $103,295 is due to rounding.
Specific
Identification
LIFO
$68,850 $68,850
Sales (765 x $90)..........................
Less: Cost of goods sold............ 42,240 44,045
Gross profit...................................
$26,610 $24,805
Weighted
Average
$68,850
$68,850
42,405
$26,445
42,997
$25,853
5. The manager of Venus Company likely will prefer the FIFO method
because it would yield the largest gross profit. This would give the
manager his/her highest bonus based on gross profit.
Corrected..................................
(b)
Net income:
Reported....................................
Adjustments: 12/31/2004 error
12/31/2005 error
Corrected..................................
(c)
Total current assets:
Reported....................................
Adjustments: 12/31/2004 error
12/31/2005 error
Corrected..................................
2004
$ 205,200
+ 17,000
________
$ 222,200
2005
$ 212,800
- 17,000
- 25,000
$ 170,800
2006
$ 196,030
2004
$ 174,800
- 17,000
________
$ 157,800
2005
$ 211,270
+ 17,000
+ 25,000
$ 253,270
2006
$ 183,910
2004
$ 266,000
- 17,000
________
$ 249,000
2005
$ 276,500
2006
$ 262,950
+ 25,000
$ 301,500
________
$ 262,950
2005
$ 316,000
2006
$ 336,000
+ 25,000
$ 341,000
________
$ 336,000
(d)
Equity:
2004
Reported............................................ $ 304,000
Adjustments: 12/31/2004 error
- 17,000
12/31/2005 error
________
Corrected.......................................... $ 287,000
+ 25,000
$ 221,030
- 25,000
$ 158,910
Part 2
Total net income for the combined three-year period is not affected by the errors.
This is because these errors are "self-correcting"that is, each overstatement (or
understatement) of net income is offset by a matching understatement (or
overstatement) in the following year.
Part 3
The overstatement of inventory by $17,000 results in an understatement of cost of
goods sold by that same amount. The $17,000 understatement of cost of goods
sold results in an overstatement of gross profit by the same amount. This
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Unit
s
Per Unit
Cost Market
Total
Cost
Total
Market
Items
Office furniture
Desks....................436
$261
Credenzas..............295
227
Chairs....................587
49
Bookshelves..........321
93
$305
256
43
82
Subtotal.................
$113,796 $132,980
66,965
75,520
28,763
25,241
29,853
26,322
239,377
260,063
$113,796
66,965
25,241
26,322
$239,377
Filing cabinets
Two-drawer............214
Four-drawer...........398
Lateral....................175
Subtotal.................
81
135
104
70
122
118
17,334
53,730
18,200
89,264
14,980
48,556
20,650
84,186
14,980
48,556
18,200
84,186
Office equipment
Fax machine..........430
Copiers..................545
Telephones............352
168
317
125
Subtotal.................
Total........................
200
288
117
72,240
86,000
72,240
172,765
156,960
156,960
44,000
41,184
41,184
289,005
284,144 _______
284,144 _______
$617,646 $628,393 $584,444 $607,707 $617,646
= $617,646
= $584,444
$ 220,500
346,500
416,000
348,000
403,000
$1,734,000
0
Part 2
a. FIFO periodic
Total cost of 57,300 units available for sale.......
Less ending inventory on a FIFO basis
15,500 units @ $26.............................................
1,000 units @ $29.............................................
Cost of units sold.................................................
$1,734,000
$403,000
29,000
432,000
$1,302,000
b. LIFO periodic
Total cost of 57,300 units available for sale.......
Less ending inventory on a LIFO basis
6,300 beg. inv. units @ $35...............................
10,200 units @ $33...............................................
Cost of units sold.................................................
$1,734,000
$220,500
336,600
557,100
$1,176,900
$1,734,000
499,319*
$1,234,681*
LIFO
Weighted
Average
Sales
$245,000 $245,000
Cost of goods sold
Inventory, Dec. 31, 2004..............................
42,920
42,920
Cost of purchases....................................... 161,900
161,900
Cost of goods available for sale................ 204,820
204,820
Inventory, Dec. 31, 2005..............................
54,560
48,820
Cost of goods sold...................................... 150,260
156,000
Gross profit....................................................
94,740
89,000
$245,000
Expenses........................................................
35,000
Income before taxes......................................
59,740
Income taxes expense..................................
14,935
Net income..................................................... $ 44,805 $
35,000
56,692 *
14,173 *
$ 42,519 *
35,000
54,000
13,500
40,500
42,920
161,900
204,820
51,512 *
153,308 *
91,692 *
Supporting calculations:
Dec. 31, 2004, inventory (740 x $58)...................
Purchases
700 x $59 = $41,300
600 x $61 = 36,600
500 x $64 = 32,000
800 x $65 = 52,000
Dec. 31, 2005, inventory
FIFO:
800 x $65 = $52,000
40 x $64 =
2,560
LIFO:
W.A.:
FIFO
$ 42,920
LIFO
$ 42,920
Weighted
Average
$ 42,920
$161,900
$161,900
$161,900
$ 54,560
$ 48,820
($204,820/3,340) x 840
$ 51,512*
At Cost
At Retail
$ 81,670
492,250
$573,920
$114,610
751,730
$866,340
Sales
Less: Sales returns..................................................
Net sales...................................................................
$786,120
(4,480)
$781,640
$ 84,700
At Retail
$84,700
78,550
$ 6,150
At Cost
Goods available for sale
Inventory, January 1........................................
Cost of goods purchased...............................
Goods available for sale.................................
Less estimated cost of goods sold
Sales.................................................................
Less sales returns...........................................
Net sales...........................................................
Estimated cost of goods sold
[$3,636,050 x (1 - 30%)]..............................
Estimated March 31 inventory..........................
At Retail
$ 752,880
2,159,630
2,912,510
$3,710,250
(74,200)
$3,636,050
(2,545,235)
$ 367,275
SERIAL PROBLEM
Serial Problem, Success Systems (20 minutes)
1. Ratio computations for the three months ended March 31, 2005:
Inventory Turnover
6-1
($ thousands)
$24,365
$410,487
= 0.059 or 5.9%
2002:
$16,159
$255,376
= 0.063 or 6.3%
Cost of sales
Average inventory
$16,159 + 24,365
2
Average inventory =
= $20,262
$ 381,489
Inventory turnover = $ 20,262
= 18.8 times
b. Days sales in inventory =
=
Ending inventory
Cost of sales
$24,365
$381,489
x 365
Comparative Analysis
BTN 6-2
($ thousands)
1. Inventory turnover =
Cost of sales
Average inventory
Inventory turnover =
= 18.8 times
$316,946
($16,159 + $12,031)/2
= 22.5 times
$111,187
($6,777 + $8,412)/2
= 14.6 times
$103,297
($8,412 + $5,930)/2
= 14.4 times
= 23.3 days
= 18.6 days
= 17.5 days
x 365
= 22.2 days
x 365
= 29.7 days
x 365
= 20.6 days
3. For two of the three years Krispy Kreme manages its inventory more
efficiently than Tastykake. For the current (prior) year(s), Krispy Kreme
holds 23.3 (18.6 and 17.5) days of sales in inventory and turns its
inventory 18.8 (22.5) times. For the current (prior) year(s), Tastykake
holds 22.2 (29.7 and 20.6) days of sales in inventory and only turns its
inventory 14.6 (14.4) times.
Ethics Challenge
BTN 6-3
Communicating in Practice
BTN 6-4
The body of the memo should recommend use of the LIFO method. The
memo should explain that this would allow for the matching of the most
recent (higher) costs against revenue through cost of goods sold. It
should further explain that this would result in a lower net income and,
therefore, lower tax. The justification for this method is a better matching
of current costs against revenue to more fairly reflect the results of
operation. A statement could be made that the actual physical flow of
goods does not dictate the inventory method a business uses.
BTN 6-5
1. One especially popular product with college students that Oakley sells
is Oakley sunglasses.
2. The summary of significant accounting policies states that Oakley
reports inventory at the lower of cost to purchase and/or manufacture
or the current estimated market value.
3. Oakleys gross margin for 2002 is ($ in thousands)
Sales
Cost of sales......................................
Gross margin.....................................
$489,552
(211,962)
$277,590
Teamwork in Action
BTN 6-6
Goods Purchased
Jan. 1
50 @ $10 = $ 500
Jan.10
Jan.14
Inventory Balance
30 @ $10 = $ 300
150 @ $12 = $1,800
Feb.15
20 @ $10 =
20 @ $10 =
150 @ $12 =
100 @ $ 12 = $1,200
$ 200
$
200
1,800
$2,000
20 @ $10 = $
200
50 @ $12 =
600
$ 800
Apr.30
20 @ $10 =
50 @ $12 =
200 @ $15 =
Sept 26
20
50
200
300
@
@
@
@
$10 = $
$12 =
$15 =
$20 =
$9,800
20
50
100
50
@
@
@
@
$10=
$12 =
$15 =
$20 =
Oct. 5
100 @ $ 15 = $1,500
250 @ $ 20 = $5,000
_____
$8,000
200
600
3,000
$3,800
200
600
3,000
6,000
200
600
1,500
1,000
$3,300
Goods Purchased
Jan. 1
Jan.10
Jan.14
30 @ $10 = $
300
Feb.15
Inventory Balance
50 @ $10 =
500
20 @ $10 =
200
20 @ $10 =
150 @ $12 =
100 @ $12 = $ 1,200
20 @ $10 =
50 @ $12 =
$ 200
1,800
$ 2,000
$
$
Apr.30
20 @ $10 =
50 @ $12 =
200 @ $15 =
Sept 26
20
50
200
300
$10 =
$12 =
$15 =
$20 =
$
20 @ $10 =
50 @ $12 =
150 @ $15 =
Oct. 5
@
@
@
@
200
600
800
200
600
3,000
$ 3,800
200
600
3,000
6,000
9,800
200
600
2,250
$ 3,050
Goods Purchased
Inventory Balance
Jan. 1
Jan.10
Jan.14
30 @ $10 = $
300
Feb.15
50 @ $10 = $
500
20 @ $10 = $
200
20 @ $10 = $ 200
150 @ $12 = 1,800
$ 2,000
20 @ $ 10 = $ 200
80 @ $ 12 =
960
70 @ $12 = $
840
Apr.30
70 @ $12 = $ 840
200 @ $15 = 3,000
$ 3,840
Sept 26
70 @ $12 = $ 840
200 @ $15 = 3,000
300 @ $20 = 6,000
$ 9,840
Oct. 5
70 @ $12 = $ 840
200 @ 15 = 3,000
80 @ 20 = 1,600
______
$ 6,900
Goods Purchased
Jan. 1
Jan.10
Jan.14
30 @ $10
= $ 300
Inventory Balance
50 @ $10
= $ 500
20 @ $10
= $ 200
Feb.15
Apr.30
70 @ $11.7647 = $ 824*
270 @ $14.163* = $3,824*
(824+3,000) / (70 +200)
Sept 26
570 @ $17.24*
= $9,824*
Oct. 5
* rounded
350 @ $17.24
= $6,034
_____
$7,510
220 @ $17.24*
=
$3,790**
BTN 6-7
1. Apple has a 2.5% share of the U.S. market for digital music players.
2. Toshiba with Mobilphile, and SONICblue.
3. Toshibas Mobilphile has a removable hard drive. Toshiba could
choose to ship players and different size removable drives separately
to stores. The separate shipment would allow retailers to meet
customer demand for product specifications quite efficiently onsite.
This flexibility will hold down inventory costs as retailers will not be
stocking players with drives of certain sizes that consumers do not
demand. In contrast, iPods hard drives are not removable and a
retailer might not be fortunate enough to stock the size iPod that is
most in demand by consumers.
4. Unit sales of the iPod are forecast to grow from 1 million in 2002 to 9
million in 2006.
Entrepreneurial Decision
BTN 6-8
Part 1
(a) Under current conditions, the inventory turnover is 2.1. This is
computed as its cost of sales of $1,050,000 divided by its average
merchandise inventory of $500,000. Also, days sales in inventory is 174
days. This is computed as its ending inventory of $500,000 divided by
its cost of sales of $1,050,000, and then this result is multiplied by 365.*
*Ratio definitions:
Inventory turnover =
(b) Under the proposal, its inventory turnover would be 8.4. This is
computed as its cost of sales of $1,050,000 divided by its average
proposed merchandise inventory of $125,000. Also, its days sales in
inventory under the proposal is 43 days. This is computed as its
proposed ending inventory of $125,000 divided by its cost of sales of
$1,050,000, and then this result is multiplied by 365.
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BTN 6-9
There is no formal solution for this field activity. The required solution
does allow students to see the relevance of studying merchandise
activities and inventory accounting.
Global Decision
1. Inventory turnover =
BTN 6-10
Cost of sales
Average inventory
Inventory turnover =
= 22.9 times
= 21.1 times
= 17.2 days
Company
= 17.8 days
Inventory Turnover
Current Prior Year
Grupo Bimbo......................................22.9
21.1
17.2
17.8
Krispy Kreme......................................18.8
22.5
23.3
18.6
Tastykake............................................14.6
14.4
22.2
29.7
Note: Computations for Krispy Kreme and Tastykake are in BTN 6-2.
2. In the current year Grupo Bimbo manages its inventory more efficiently
than Krispy Kreme or Tastykake. Its inventory turnover is higher and
its days sales in inventory are less than both Krispy Kreme and
Tastykake.
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