Porter SM Ch. 05_2pp

8/10/2019 Porter SM Ch. 05_2pp

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5-2 FINANCIAL ACCOUNTING SOLUTIONS MANUAL

Inventories andCost of Goods Sold

OVERVIEW OF EERCISES! PRO"#E$S! A%& CASESEsti'ated

Ti'e in#earnin( O)t*o'es E+er*ises $in)tes #evel

1, Identify the forms of inventory held by different types of 1 10 !syb"sinesses !nd the types of #osts in#"rred$ % 10 Mod

2, Sho& th!t yo" "nderst!nd ho& &holes!lers !nd ret!ilers ' %( Mod!##o"nt for s!les of mer#h!ndise$ ) 10 !sy

%0* %( Mod%1* 1( Mod

, Sho& th!t yo" "nderst!nd ho& &holes!lers !nd ret!ilers ( 1( !sy

!##o"nt for #ost of +oods sold$ , %0 Mod- %( Mod. %0 Mod/ 1( Mod

%0* %( Mod%1* 1( Mod

., Use the +ross profit r!tio to !n!lye ! #omp!nys !bilityto #over its oper!tin+ e2penses !nd e!rn ! profit$

5, 2pl!in the rel!tionship bet&een the v!l"!tion of inventory 10 1( Mod!nd the me!s"rement of in#ome$ %'* %0 Mod

/, Apply the inventory #ostin+ methods of spe#ifi# identifi#!tion3 11 %0 !sy&ei+hted !ver!+e3 FIFO3 !nd LIFO "sin+ ! periodi# system$ %%* %( Mod

0, An!lye the effe#ts of the different #ostin+ methods on 1% 1( Modinventory3 net in#ome3 in#ome t!2es3 !nd #!sh flo&$ %%* %( Mod

%)* )0 Mod

, An!lye the effe#ts of !n inventory error on v!rio"s fin!n#i!l 1' %( Modst!tement items$ 1) %0 Mod

, Apply the lo&er4of4#ost4or4m!r5et r"le to the v!l"!tion of %'* %0 Modinventory$

13, 2pl!in &hy !nd ho& the #ost of inventory is estim!ted in 1( %0 Mod#ert!in sit"!tions$


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C6A7T8 ( 9 IN:NTO8IS AN; COST OF GOO;S SOL; 5-

Esti'atedTi'e in

#earnin( O)t*o'es 4Con*l)ded E+er*ises $in)tes #evel

11, An!lye the m!n!+ement of inventory$ 1, %0 Mod

12, 2pl!in the effe#ts th!t inventory tr!ns!#tions h!ve on the 1- 10 !sy

st!tement of #!sh flo&s$ 1. 1( Mod1/ 1( Mod

1, 2pl!in the differen#es in the !##o"ntin+ for periodi# !nd %)* )0 Modperpet"!l inventory systems !nd !pply the inventory#ostin+ methods "sin+ ! perpet"!l system


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5/74

C6A7T8 ( 9 IN:NTO8IS AN; COST OF GOO;S SOL; 5-5

Esti'atedTi'e in

#earnin( O)t*o'es Cases $in)tes #evel

1, Identify the forms of inventory held by different types of 1* '0 Modb"sinesses !nd the types of #osts in#"rred$ '* %( Mod

2, Sho& th!t yo" "nderst!nd ho& &holes!lers !nd ret!ilers )* %0 Mod!##o"nt for s!les of mer#h!ndise$ (* %0 Mod/ '0 Mod

, Sho& th!t yo" "nderst!nd ho& &holes!lers !nd ret!ilers 1* '0 Mod!##o"nt for #ost of +oods sold$ )* %0

Mod(* %0 Mod, %( Mod

., Use the +ross profit r!tio to !n!lye ! #omp!nys !bility )* %0 Modto #over its oper!tin+ e2penses !nd e!rn ! profit$ (* %0 Mod

5, 2pl!in the rel!tionship bet&een the v!l"!tion of inventory!nd the me!s"rement of in#ome$

/, Apply the inventory #ostin+ methods of spe#ifi# identifi#!tion3 '* %( Mod&ei+hted !ver!+e3 FIFO3 !nd LIFO "sin+ ! periodi# system$ -* )0 Mod

0, An!lye the effe#ts of the different #ostin+ methods on % %( Modinventory3 net in#ome3 in#ome t!2es3 !nd #!sh flo&$ -* )0 Mod

10 '0 Mod

, An!lye the effe#ts of !n inventory error on v!rio"s fin!n#i!l . '0 Modst!tement items$

, Apply the lo&er4of4#ost4or4m!r5et r"le to the v!l"!tion of '* %( Mod

inventory$ 11 '0 Mod

13, 2pl!in &hy !nd ho& the #ost of inventory is estim!ted in#ert!in sit"!tions$

11, An!lye the m!n!+ement of inventory$

12, 2pl!in the effe#ts th!t inventory tr!ns!#tions h!ve on thest!tement of #!sh flo&s$

1, 2pl!in the differen#es in the !##o"ntin+ for periodi# !ndperpet"!l inventory systems !nd !pply the inventory#ostin+ methods "sin+ ! perpet"!l system


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5-/ FINANCIAL ACCOUNTING SOLUTIONS MANUAL

7 8 E S T I O % S

1, The three distin#t types of #osts in#"rred by ! m!n"f!#t"rer !re dire#t m!teri!ls3dire#t l!bor3 !nd m!n"f!#t"rin+ overhe!d$ ;ire#t3 or r!&3 m!teri!ls !re the

in+redients "sed in m!5in+ ! prod"#t$ ;ire#t l!bor #onsists of the !mo"nts p!id tof!#tory &or5ers to m!n"f!#t"re the prod"#t$ M!n"f!#t"rin+ overhe!d in#l"des !ll theother #osts th!t !re rel!ted to the m!n"f!#t"rin+ pro#ess b"t #!nnot be dire#tlym!t#hed to spe#ifi# "nits of o"tp"t$

2, The "se of ! contra4reven"e !##o"nt to re#ord #!sh ref"nds !nd other types of!llo&!n#es !llo&s ! #omp!ny to monitor the sie !nd fre"en#y of theseo##"rren#es$ For e2!mple3 ! rel!tively l!r+e !mo"nt of ret"rns in !ny one periodm!y be !n indi#!tion th!t the "!lity of the prod"#t h!s slipped$ The inform!tionprovided by the "se of these contra4reven"e !##o"nts &o"ld be lost if !ll ret"rns !nd!llo&!n#es &ere re#orded !s red"#tions of the S!les 8even"e !##o"nt$ Also3 if thispr!#ti#e &ere follo&ed3 the !#t"!l !mo"nt of s!les &o"ld be "nderst!ted for theperiod to the e2tent of !ny ret"rns !nd !llo&!n#es$

, Terms of 'B%03 nB,0 me!n th!t the #"stomer m!y ded"#t ' from the sellin+ pri#e ifthe bill is p!id &ithin %0 d!ys$ Other&ise3 the f"ll !mo"nt is d"e &ithin ,0 d!ys of thed!te of the invoi#e$ Ass"min+ ! s!le for D130003 ! ' dis#o"nt &o"ld s!ve the#"stomer D'03 res"ltin+ in ! net !mo"nt d"e of D/-0$ The !mo"nt s!ved is the res"ltof p!yin+ )0 d!ys e!rlier th!n is re"ired by the ,04d!y term$ Ass"min+ ',0 d!ys in! ye!r3 there !re ',0B)03 or / periods of )0 d!ys e!#h3 in ! ye!r$ Th"s3 ! s!vin+s ofD'0 for )0 d!ys is e"iv!lent to ! s!vin+s of D'0 E /3 or D%-0 for the ye!r$ This ise"iv!lent to !n !nn"!l ret"rn of D%-0BD/-03 or %-$.$

., The t&o inventory systems differ &ith respe#t to ho& often the inventory !##o"nt is"pd!ted$ Under the perpet"!l system3 the !##o"nt is "pd!ted e!#h time ! s!le orp"r#h!se is m!de$ ith the periodi# system3 the inventory !##o"nt is "pd!ted only!t the end of the period$ A tempor!ry !##o"nt3 #!lled 7"r#h!ses3 is "sed to 5eeptr!#5 of the !#"isitions of inventory d"rin+ the period$ The periodi# method relies on! #o"nt of the inventory on h!nd !t the end of the period to determine the !mo"nt to!ssi+n to endin+ inventory on the b!l!n#e sheet !nd to #ost of +oods sold e2penseon the in#ome st!tement$

5, A point4of4s!le termin!l +ives the mer#h!ndiser the !bility to "pd!te the inventoryre#ords e!#h time ! s!le is m!de$ As !n item is r"n over the sensin+ +l!ss3 ! b!r#ode on the prod"#t is re!d by the #omp"ter$ In this &!y3 the "nit #!n be removed

from the inventory !t the point of s!le$ In some inst!n#es3 ho&ever3 mer#h!ndisers"se the termin!ls only to "pd!te the "!ntity of "nits on h!nd3 not ne#ess!rily thedoll!r !mo"nt$

/, The 7"r#h!ses !##o"nt is neither !n !sset nor !n e2pense !##o"nt$ It is simply !tempor!ry holdin+ !##o"nt for the p"r#h!ses of mer#h!ndise3 &hi#h is #losed !t theend of the period$ The effe#t of p"r#h!ses m!de d"rin+ the period is to in#re!se the#ost of +oods sold e2pense$


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0, For inventory in tr!nsit !t the end of the ye!r3 the terms of shipment di#t!te &hetherthe b"yer sho"ld re#ord the p"r#h!se of the inventory$ FO shippin+ point me!nsth!t the +oods belon+ to the b"yer !s soon !s they !re shipped3 !nd the p"r#h!sessho"ld be re#orded !t this point in time$ Altern!tively3 FO destin!tion point me!nsth!t the +oods do not belon+ to the b"yer "ntil they !re re#eived !nd therefore

sho"ld not be re#orded if they !re in tr!nsit !t ye!r4end$, Tr!nsport!tion4in represents the frei+ht #osts in#"rred on p"r#h!ses of mer#h!ndise

!nd is therefore !dded to the p"r#h!ses of the period in determinin+ #ost of +oodssold e2pense$ Altern!tively3 tr!nsport!tion4o"t indi#!tes the frei+ht #osts in#"rred insellin+ mer#h!ndise !nd is therefore reported !s ! sellin+ e2pense on the in#omest!tement in the period of s!le$

, Gross profit is #omp"ted by ded"#tin+ #ost of +oods sold from net s!les$ The +rossprofit r!tio indi#!tes ho& &ell the #omp!ny #ontrolled its prod"#t #osts d"rin+ theye!r$ For e2!mple3 ! '0 +ross profit r!tio indi#!tes th!t for every doll!r of s!les the#omp!ny h!s ! +ross profit of '0 #ents$ Th!t is3 !fter ded"#tin+ -0 #ents on every

doll!r for the #ost of the inventory th!t is sold3 the #omp!ny h!s '0 #ents to #over itsoper!tin+ #osts !nd e!rn ! profit$

13, A##ordin+ to the #ost of +oods sold model3 be+innin+ inventory pl"s p"r#h!sesmin"s endin+ inventory e"!ls #ost of +oods sold$ Therefore3 the !mo"nt !ssi+nedto inventory on the b!l!n#e sheet h!s ! dire#t effe#t on the me!s"rement of #ost of+oods sold on the in#ome st!tement$ Any errors in v!l"in+ inventory &ill flo& thro"+hto #ost of +oods sold !nd th"s h!ve !n imp!#t on the me!s"rement of net in#ome$

11, The H"stifi#!tion for tre!tin+ frei+ht #osts on in#omin+ inventory !s ! #ost in#"rred in!#"irin+ the !sset3 r!ther th!n !s !n e2pense of the period3 is the m!t#hin+prin#iple$ Frei+ht #osts !re ne#ess!ry to p"t the inventory into ! position to be sold

!nd sho"ld therefore be in#l"ded in the #ost of the !sset$ This is ! si+nifi#!ntde#ision3 sin#e the #ost &ill be#ome !n e2pense only !t the time the inventory issold$ If frei+ht #osts !re not in#l"ded in the #ost of the inventory3 they !re e2pensedimmedi!tely !s they !re in#"rred$ Th"s3 if the inventory is not sold !t the end of theperiod3 the de#ision to tre!t frei+ht #osts !s ! #ost of the inventory &ill res"lt inhi+her net in#ome th!n if the #osts h!d been in#l"ded !s !n e2pense of the period$

12, The spe#ifi# identifi#!tion method is !ppropri!te only for #ert!in types of inventory$ Itis norm!lly "sed for sit"!tions in &hi#h the inventory is rel!tively hi+h4pri#ed !nds"bHe#t to ! lo& !mo"nt of t"rnover$ Altho"+h it is not ! ne#ess!ry #ondition3 e!#h"nit of inventory is often "ni"e$ For e2!mple3 !n !"tomobile de!ler "ses the

spe#ifi# identifi#!tion method3 !s &o"ld ! He&elry #omp!ny$


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5- FINANCIAL ACCOUNTING SOLUTIONS MANUAL

1, hen "sed on !n inventory of identi#!l "nits3 the spe#ifi# identifi#!tion #!n le!d tothe m!nip"l!tion of in#ome$ e#!"se !ll "nits !re identi#!l3 m!n!+ement #!n sele#t&hi#h "nits to sell b!sed on the rel!tive hi+h or lo& #ost of the "nits on h!nd$ Fore2!mple3 in ! b!d ye!r ! #omp!ny mi+ht be tempted to sele#t for s!le !ll "nits th!th!d ! rel!tively lo& "nit #ost3 re+!rdless of &hen they &ere !#"ired$ The "se of !

#ost flo& !ss"mption3 s"#h !s &ei+hted !ver!+e3 FIFO3 or LIFO3 elimin!tes the!bility of m!n!+ement to sele#t "nits for s!le b!sed solely on the effe#t this de#ision&ill h!ve on the in#ome of the period$

1., The &ei+hted !ver!+e #ost method does not rely on ! simple !rithmeti# !ver!+e ofthe "nit #ost for the v!rio"s p"r#h!ses of the period$ Inste!d3 more &ei+ht is!ssi+ned to "nit #osts for &hi#h more "nits &ere p"r#h!sed$ For e2!mple3 !ss"meth!t be+innin+ inventory #onsists of 100 "nits &ith ! "nit #ost of D10 per "nit$

Ass"me th!t d"rin+ the period3 100 "nits &ere p"r#h!sed !t D1( per "nit3 !nd %00"nits &ere p"r#h!sed !t D%0 per "nit$ The !rithmeti# !ver!+e "nit #ost for the period&o"ld be


9/74


1, A LIFO li"id!tion o##"rs &hen ! #omp!ny "sin+ the LIFO inventory method sellsmore "nits d"rin+ the period th!n it p"r#h!ses$ A li"id!tion of some or !ll of theolder3 rel!tively lo&er4pri#ed "nits

&ill improve3 b"t hi+her t!2es &ill h!ve to be p!id$ To !void f!#in+ this sit"!tion3 !#omp!ny mi+ht b"y inventory !t the end of the ye!r to !void these #onse"en#es of! li"id!tion$ Unfort"n!tely3 the some&h!t for#ed p"r#h!se of inventory to !void theli"id!tion m!y not be in the best interests of the #omp!ny$

23, In ! period of risin+ pri#es3 FIFO #!n res"lt in si+nifi#!nt inventory profits$ In#omp!rison &ith LIFO3 the "se of FIFO #h!r+es less to #ost of +oods sold be#!"se itis the older3 lo&er4pri#ed "nits th!t !re !ss"med to be sold$ 6o&ever3 in ! period ofsi+nifi#!nt infl!tion3 there m!y be ! l!r+e differen#e bet&een the +ross m!r+in th!tres"lts from "sin+ FIFO !nd the m"#h sm!ller !mo"nt th!t &o"ld res"lt from "sin+the #"rrent #ost of the inventory


10/74


2/, A ret!iler #!n s!ve time !nd money !t the end of the ye!r by simply #o"ntin+ then"mber of "nits of e!#h item of inventory !nd m"ltiplyin+ e!#h of these #o"nts bythe pri#e m!r5ed on the "nits

E E R C I S E S

LO 1 EERCISE 5-1 C#ASSIFICATIO% OF I%VE%TOR9 COSTS

Classifi*ationRa: Wor; in Finis


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LO 1 EERCISE 5-2 I%VE%TORIA"#E COSTS

List pri#e? D100 %00 "nits D%03000Less? 10 vol"me dis#o"nt


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EERCISE 5-5 4Con*l)ded

Case >

4e Gross p"r#h!ses?

1, Cost of +oods p"r#h!sed > #ost of +oods !v!il!ble for s!le be+innin+ inventory> D.3-/0 D13./0 > D,3/00

2, Gross p"r#h!ses p"r#h!se ret"rns !nd !llo&!n#es p"r#h!se dis#o"nts tr!nsport!tion4in > #ost of +oods p"r#h!sed@ +ross p"r#h!ses D((0 D'10 D)%0 > D,3/00@ +ross p"r#h!ses > D,3/00 D((0 D'10 D)%0 > D-3')0

4f Cost of +oods sold > #ost of +oods !v!il!ble for s!le endin+ inventory > D.3-/0 D13%00 > D-3(/0

LO ' EERCISE 5-/ P8RCHASE &ISCO8%TS

"A#A%CESHEET I%CO$ESTATE$E%T

Assets ? #ia6ilities @ Sto*;


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5-1. FINANCIAL ACCOUNTING SOLUTIONS MANUAL

LO ' EERCISE 5-0 P8RCHASESPERIO&IC S9STE$




15/74


LO ' EERCISE 5- SHIPPI%G TER$S A%& TRA%SFER OF TIT#E

1, The seller p!ys shippin+ #osts &hen mer#h!ndise is shipped FO destin!tion point$Miller holes!lers p!ys the frei+ht bill !nd is responsible for the mer#h!ndise "ntil it

+ets to Mi#h!els &!reho"se$2, The inventory sho"ld not be in#l"ded !s !n !sset on Mi#h!els ;e#ember '13 %00-3

b!l!n#e sheet be#!"se the terms of shipment indi#!te th!t the mer#h!ndise doesnot le+!lly belon+ to Mi#h!el "ntil it !rrives3 !nd this is !fter the end of the ye!r$Li5e&ise3 Miller sho"ld not in#l"de the s!le on its %00- in#ome st!tement3 sin#e the+oods !re not #onsidered sold "ntil they re!#h the b"yers b"siness$

, If the terms of shipment &ere FO shippin+ point3 the !ns&ers to both "estions inp!rt


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5-1/ FINANCIAL ACCOUNTING SOLUTIONS MANUAL

P

LO , EERCISE 5-11 I%VE%TOR9 COSTI%G $ETHO&S

1, ndin+ inventory? D %00

')( /,0

.0 "nits D13.'(

Cost of +oods sold?(( D%0 > D13100

'( D%% > --0

)( D%' > 130'(

( D%) > 1%01)0 "nits D'30%(

2, ndin+ inventory?)( D%) > D130.0

'( D%' > .0(.0 "nits D13..(

Cost of +oods sold?,( D%0 > D13'00

(0 D%% > 13100

%( D%' > (-(1)0 "nits D%3/-(

, ndin+ inventory?,( D%0 > D13'00

1( D%% > ''0.0 "nits D13,'0

Cost of +oods sold?)( D%) > D130.0

,0 D%' > 13'.0

'( D%% > --01)0 "nits D'3%'0


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., Cost of +oods !v!il!ble for s!le !nd "nits !v!il!ble?,( D%0 > D13'00

(0 D%% > 13100

,0

D%' > 13'.0)( D%) > 130.0%%0 "nits D)3.,0

ei+hted !ver!+e #ost > D)3.,0B%%0 > D%%$0/B"nit

ndin+ inventory? .0 D%%$0/ > D13-,-$%0

Cost of +oods sold? 1)0 D%%$0/ > D'30/%$,0

%ote>;oes not tot!l D)3.,0 be#!"se of ro"ndin+ of !ver!+e #ost$

LO - EERCISE 5-12 EVA#8ATIO% OF I%VE%TOR9 COSTI%G $ETHO&S

1, ! 5, b

2, d /, !

, # 0, b

., # , #

LO . EERCISE 5-1 I%VE%TOR9 ERRORS

"alan*e S


18/74


LO 10 EERCISE 5-15 GROSS PROFIT $ETHO&

41 Net s!les D10(3'00stim!ted +ross profit r!tio 0$%(stim!ted +ross profit D %,3'%(

42 Net s!les D10(3'00 stim!ted +ross profit %,3'%(stim!ted #ost of +oods sold D -.3/-(

4 e+innin+ inventory D 1(3)00Add? 7"r#h!ses .)3%'0Cost of +oods !v!il!ble for s!le D //3,'0stim!ted #ost of +oods sold -.3/-(stim!te of inventory destroyed D %03,((



prod"#ts3 !nd other relev!nt f!#tors$


19/74


LO 1% EERCISE 5-10 I$PACT OF TRA%SACTIO%S I%VO#VI%G I%VE%TORIES O%STATE$E%T OF CASH F#OWS

In#re!se in !##o"nts p!y!ble? Added to net in#ome;e#re!se in !##o"nts p!y!ble? ;ed"#ted from net in#ome

In#re!se in inventories? ;ed"#ted from net in#ome;e#re!se in inventories? Added to net in#ome

LO 1% EERCISE 5-1 EFFECTS OF TRA%SACTIO%S I%VO#VI%G I%VE%TORIES O% THESTATE$E%T OF CASH F#OWS&IRECT $ETHO&

C!sh p!yments for inventory to be reported in the oper!tin+ !#tivities of M!sthe!ds%00- st!tement of #!sh flo&s D%)13%00 > D13%,03.00

A##o"nts p!y!ble3 ;e#ember '13 %00, D .(3)007l"s? 7"r#h!ses d"rin+ %00-


20/74


$ 8 # T I - C O % C E P T E E R C I S E S

LO %3' EERCISE 5-23 I%CO$E STATE$E%T FOR A $ERCHA%&ISER

a, S!les Net s!les > S!les ret"rns !nd !llo&!n#es

D1%(3,00 D1%%30)0 > D'3(,0

6, ;o #$ first$ Net p"r#h!ses 7"r#h!se dis#o"nts > 7"r#h!ses

D-)3,00 D13'00 > D-(3/00

*, Cost of +oods p"r#h!sed Tr!nsport!tion4in > Net p"r#h!ses

D.131(0 D,3((0 > D-)3,00

d, Net s!les Gross m!r+in > Cost of +oods sold

D1%%30)0 D'.3,00 > D.'3))0

e, Cost of +oods !v!il!ble for s!le Cost of +oods sold > ndin+ inventory

D10)3((0 D.'3))0 > D%13110

f, Gross m!r+in In#ome before t!2 > Oper!tin+ e2penses

D'.3,00 D%,3'00 > D1%3'00

(, In#ome before t!2 In#ome t!2 e2pense > Net in#ome

D%,3'00 D103'00 > D1,3000


21/74


LO %3' EERCISE 5-21 PARTIA# I%CO$E STATE$E%TPERIO&IC S9STE$

#API%E CO$PA%9I%CO$E STATE$E%T

FOR THE 9EAR E%&E& &ECE$"ER 1! 2330S!les D.03000Less? S!les ret"rns !nd !llo&!n#es D (00

S!les dis#o"nts 13%00 13-00Net s!les D-.3'00Less #ost of +oods sold?

e+innin+ inventory D )30007"r#h!ses D'03000Less? 7"r#h!se ret"rns !nd !llo&!n#es )00

7"r#h!se dis#o"nts .00Net p"r#h!ses D%.3.00

Add? Tr!nsport!tion4in 13000Cost of +oods p"r#h!sed %/3.00Cost of +oods !v!il!ble for s!le D''3.00Less? ndin+ inventory '3.00Cost of +oods sold '03000

Gross m!r+in D).3'00

The +ross profit r!tio is ,1$-$ '00 D'3,00Cost of +oods sold > 13000 D1%3000


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6, FIFO method?

Endin( inventor= *ost>

1(0 D1( > D%3%(0

1(0 D1' > 13/(0'00 D)3%00

Cost of (oods sold>

%00 D10 > D %3000

'00 D11 > '3'00

)00 D1% > )3.00

100 D1' > 13'0013000 D113)00

D1(3,00 D)3%00 > D113)00=

*, LIFO method?

Endin( inventor= *ost>

%00 D10 > D%3000

100 D11 > 13100'00 D'3100

Cost of (oods sold>

1(0 D1( > D %3%(0

%(0 D1' > '3%(0

)00 D1% > )3.00

%00 D11 > %3%0013000 D1%3(00

D1(3,00 D'3100 > D1%3(00=

2, LIFO #ost of +oods sold D1%3(00FIFO #ost of +oods sold 113)00;ifferen#e in e2penses D 13100T!2 r!te 0$'0;ifferen#e in t!2es D ''0

Con*l)sion>e#!"se FIFO res"lts in less #ost of +oods sold3 ! hi+her in#ome !ndth"s more t!2es3 D''03 &ill be reported &ith this method th!n if LIFO &ere "sed$


23/74


LO (3/ EERCISE 5-2 #OWER-OF-COST-OR-$ARET R8#E

Conserv!tism is the r!tion!le for #!rryin+ inventory on the b!l!n#e sheet !t !n !mo"ntless th!n its #ost$ It is ! dep!rt"re from the histori#!l #ost prin#iple !nd is "sed &hen the"tility of the inventory3 !s me!s"red by the #ost to repl!#e it3 is less th!n ori+in!l #ost$

T&o !##o"nts !re !ffe#ted by the !ppli#!tion of the lo&er4of4#ost4or4m!r5et r"le$ Anin#ome st!tement !##o"nt3 s"#h !s Loss on ;e#line in :!l"e of Inventory3 is debited3!nd the Inventory !##o"nt on the b!l!n#e sheet is #redited or red"#ed$

The effe#t of &ritin+ do&n inventory is to red"#e the in#ome of the #"rrent ye!r bythe !mo"nt debited to the loss !##o"nt$ In f"t"re ye!rs3 ho&ever3 in#ome &ill be hi+herbe#!"se of the &rite4do&n$ This o##"rs be#!"se #ost of +oods sold &ill be lo&er in thef"t"re &hen the inventory th!t &!s &ritten do&n to ! lo&er !mo"nt is event"!lly sold$

LO -31' EERCISE 5-2. I%VE%TOR9 COSTI%G $ETHO&SPERPET8A# S9STE$4ADDendi+

1, a, Movin+ !ver!+e?

P)r* D (00'00

11 > '3'00

'(0 D'3.00@ D'3.00B'(0 > D10$.(-

2, 1(0 D10$.(- > D13,%/

)00

1% > )3.00

((0 D,3)%/@ D,3)%/B((0 > D11$,./


24/74


EERCISE 5-2. 4Contin)ed

, '(0

D11$,./ > D)30/1

%(0

1' > '3%(0

,00 D-3')1@ D-3')1B,00 > D1%$%'(

., '00 E D1%$%'( > D'3,-1

1(0 E 1( > %3%(0

)(0 D(3/%1@ D(3/%1B)(0 > D1'$1(.

1, 6, FIFO?

P)r*


25/74


EERCISE 5-2. 4Contin)ed

1, *, LIFO?

P)r* EERCISE 5-2.>EI CGS EI CGS

Aver!+e #ost D'3,00 D1%3000 D'3/)- D113,(' ;ifferentFIFO )3%00 113)00 )3%00 113)00 S!meLIFO '3100 1%3(00 '3)00 1%3%00 ;ifferent


26/74


27/74


LO ) PRO"#E$ 5-2 CA#C8#ATIO% OF GROSS PROFIT FOR WA#-$ART A%& TARGET

1, Gross profit r!tios


28/74


LO . PRO"#E$ 5-. I%VE%TOR9 ERROR

1, Revised in*o'e state'ents> 2330 233/8even"es D%03000 D1(3000

Cost of +oods sold* 1'3,00 /3)00Gross profit D ,3)00 D (3,00Oper!tin+ e2penses '3000 %3000

Net in#ome D '3)00 D '3,00

*e#!"se endin+ inventory in %00, &!s "nderst!ted3 #ost of +oods sold &!soverst!ted$ e#!"se be+innin+ inventory in %00- &!s "nderst!ted3 #ost of +oodssold &!s "nderst!ted$

Revised 6alan*e s 12130 1213/C!sh D 13-00 D 13(00Inventory )3%00 )3100

Other #"rrent !ssets %3(00 %3000Lon+4term !ssets 1(3000 1)3000Tot!l !ssets D%'3)00 D%13,00

Li!bilities D .3(00 D -3000C!pit!l sto#5 (3000 (30008et!ined e!rnin+s /3/00 /3,00

Tot!l li!bilities !nd sto#5holders e"ity D%'3)00 D%13,00

2, Net in#ome for t&o ye!rs3 before revision? D'3000 D)3000 > D-3000Net in#ome for t&o ye!rs3 !fter revision? D'3,00 D'3)00 > D-3000Th"s3 there is no net over4 or "nderst!tement$

8et!ined e!rnin+s !t ;e#ember '13 %00-3 before the revision? D/3/008et!ined e!rnin+s !t ;e#ember '13 %00-3 !fter the revision? D/3/00Th"s3 there is no over4 or "nderst!tement$

, ven tho"+h the error #o"nterb!l!n#es over the t&o4ye!r period3 it is still import!ntto rest!te the st!tements for the t&o ye!rs$ It is import!nt for #omp!r!tive p"rposesth!t the #orre#t !mo"nt of net in#ome be 5no&n for e!#h of the t&o ye!rs$ The#omp!ny needs to rest!te the in#ome st!tements for e!#h of the t&o ye!rs !ndrest!te the b!l!n#e sheets !t the end of e!#h ye!r$


29/74


LO 10 PRO"#E$ 5-5 GROSS PROFIT $ETHO& OF ESTI$ATI%G I%VE%TOR9 #OSSES

1,41 Net s!les D11'3(00stim!ted +ross profit r!tio 0$)0

stim!ted +ross profit D )(3)0042 Net s!les D11'3(00

stim!ted +ross profit )(3)00stim!ted #ost of +oods sold D ,.3100

4 e+innin+ inventory D '3%00Add? 7"r#h!ses 1,)3000Cost of +oods !v!il!ble for s!le D1,-3%00stim!ted #ost of +oods sold ,.3100stim!te of inventory !t time of e2plosion D //3100Inventory s!ved )3(00stim!te of inventory destroyed D /)3,00

2, To record insuance settlement from explosion.




30/74


31/74


32/74


$ 8 # T I - C O % C E P T P R O " # E $ S

LO %3'31% PRO"#E$ 5- P8RCHASES A%& SA#ES OF $ERCHA%&ISE! CASH F#OWS

1, ffe#t of tr!ns!#tions on the !##o"ntin+ e"!tion?




33/74


PRO"#E$ 5- 4Con*l)ded

OR>Net in#ome D %(/;ed"#t? In#re!se in inventory b!l!n#e

1, App!rently3 G!p In#$ does not sell its mer#h!ndise on !##o"nt$ If #"stomers &!nt top!y on #redit for their p"r#h!ses3 they &o"ld "se one of the v!rio"s #redit #!rds th!tG!p !##epts$

2, ffe#t of s!les on the !##o"ntin+ e"!tion?




34/74

5-. FINANCIAL ACCOUNTING SOLUTIONS MANUAL

PRO"#E$ 5- 4Con*l)ded

5, Gross profit r!tios?

4'illions of dollars 233. 233S!les D 1,3%,- D 1(3.()

Less #ost of s!les /3.., /3..(Gross profit D ,3'.1 D (3/,/;ivided by s!les Q D1,3%,- Q D1(3.()Gross m!r+in r!tio '/$% '-$,

G!p In#$s +ross profit r!tio in#re!sed by 1$, from %00' to %00)$ F!#tors !ffe#tin+ G!p In#$s +ross profit r!tio mi+ht in#l"de #h!n+es in the sellin+ pri#es ofmer#h!ndise3 #h!n+es in the #ost of +oods p"r#h!sed3 !ndBor #h!n+es in the mi2 ofmer#h!ndise sold


35/74


PRO"#E$ 5-13 4Con*l)ded

, $AP#E I%C,"A#A%CE SHEET

AT &ECE$"ER 1! 2330

AssetsC"rrent !ssets?

C!sh D (/0A##o"nts re#eiv!ble %3'(/Inventory -3(00Interest re#eiv!ble 100

Tot!l #"rrent !ssets D103()/7roperty3 pl!nt3 !nd e"ipment?

L!nd D%03000"ildin+ !nd e"ipment3 net ((3((0

Tot!l property3 pl!nt3 !nd e"ipment -(3((0

Tot!l !ssets D.,30//

#ia6ilitiesC"rrent li!bilities?

S!l!ries p!y!ble D ,(0In#ome t!2 p!y!ble '3%00

Tot!l li!bilities D '3.(0

Sto*;


36/74


LO (3,3- PRO"#E$ 5-11 CO$PARISO% OF I%VE%TOR9 COSTI%G $ETHO&SPERIO&IC S9STE$

1, Cost of Endin(Goods Sold Inventor= Total

a, ei+hted !ver!+e D1130.) D)3/.. D1,30-%6, FIFO 103--, (3%/, 1,30-%*, LIFO 113)(% )3,%0 1,30-%

C!l#"l!tions?

a, e+innin+ inventory ,00 D($00 > D '3000

O#t$ . .00 ($)0 > )3'%0

O#t$ 1. -00 ($-, > )30'%

O#t$ %/ .00 ($/0 > )3-%0%3/00 D1,30-%

ei+hted !ver!+e #ost > D1,30-%B%3/00 > D($()%

Units sold? (00 -00 .00 > %3000 "nits

Units !v!il!ble "nits sold > endin+ inventory

%3/00 %3000 > /00 "nits

ndin+ inventory > /00 D($()% > D)3/..

Cost of +oods sold > %3000 D($()% > D1130.)

6, ndin+ inventoryFIFO?.00 D($/0 > D)3-%0

100 ($-, > (-,/00 D(3%/,

Cost of +oods soldFIFO?,00 D($-, > D '3)(,

.00 ($)0 > )3'%0

,00 ($00 > '3000%3000 D103--,

*, ndin+ inventoryLIFO?,00 D($00 > D'3000

'00 ($)0 > 13,%0/00 D)3,%0

Cost of +oods soldLIFO?(00 D($)0 > D %3-00

-00 ($-, > )30'%

.00 ($/0 > )3-%0%3000 D113)(%


37/74



38/74

5- FINANCIAL ACCOUNTING SOLUTIONS MANUAL


2, The Tot!l #ol"mn represents the pool of #osts


39/74


PRO"#E$ 5-12 4Contin)ed

a, Movin+ !ver!+e?

P)r* D($'(,

2, %00 E D($'(, > D130-1

-00 E ($-, > )30'%

/00 D(310'@ D(310'B/00 > D($,-

, 100 E D($,- > D (,-

.00 E ($/0 > )3-%0

/00 D(3%.-@ D(3%.-B/00 > D($.-)

6, FIFO?

P)r*


40/74

5-.3 FINANCIAL ACCOUNTING SOLUTIONS MANUAL

*, LIFO?

P)r*


41/74

C6A7T8 ( 9 IN:NTO8IS AN; COST OF GOO;S SOL; 5-.1

LO (3,3- PRO"#E$ 5-1 I%VE%TOR9 COSTI%G $ETHO&SPERIO&IC S9STE$

1, Units in be+innin+ inventory %00Add? Units p"r#h!sed


42/74

5-.2 FINANCIAL ACCOUNTING SOLUTIONS MANUAL

Cost of +oods sold > -/0 D1.$,// > D1)3--%


43/74

C6A7T8 ( 9 IN:NTO8IS AN; COST OF GOO;S SOL; 5-.


2, Wei( %-3000

April 1% )3000 . > '%3000

Sept$ 10 %3000 - > 1)3000

;e#$ ( 13000 , > ,30001(3000 D1%/3000

ei+hted !ver!+e #ost > D1%/3000B1(3000 > D.$,0

Units !v!il!ble for s!le 1(3000Units sold 1%3(00ndin+ inventory %3(00 D.$,0 > D%13(00

Cost of +oods sold 1%3(00 D.$,0 > D10-3(00

6, FIFO?

ndin+ inventory 13000 D , > D ,300013(00 - > 103(00

%3(00 D 1,3(00

Cost of +oods sold (00 D - > D '3(00

)3000 . > '%3000

'3000 / > %-3000

(3000 10 > (03000


44/74

5-.. FINANCIAL ACCOUNTING SOLUTIONS MANUAL

1%3(00 D11%3(00


45/74


PRO"#E$ 5-1. 4Con*l)ded

*, LIFO?

ndin+ inventory %3(00 D10 > D %(3000

Cost of +oods sold %3(00

D10 > D %(3000'3000 / > %-3000

)3000 . > '%3000

%3000 - > 1)3000

13000 , > ,30001%3(00 D10)3000

2, In#ome st!tements for the ye!r ended ;e#ember '13 %00-?

Wei( 1%3(00 D1% > D1(03000

, e!ver #!n minimie its t!2 bill by "sin+ FIFO$ In ! period of de#linin+ pri#es3 FIFO

res"lts in the hi+hest !mo"nt of #ost of +oods sold3 the le!st !mo"nt of in#omebefore t!2es3 !nd th"s the le!st !mo"nt of in#ome t!2 e2pense$

., A #omp!ny is not free to #h!n+e inventory methods from ye!r to ye!r to t!5e!dv!nt!+e of #h!n+in+ p!tterns in the level of pri#es$ It m"st be !ble to H"stify !ny#h!n+e in the method "sed on some b!sis other th!n s!vin+ t!2es3 s"#h !s ! betterm!t#hin+ of #osts &ith reven"es$

LO 13-3/ PRO"#E$ 5-15 I%TERPRETI%G TRI"8%E CO$PA%9S I%VE%TOR9ACCO8%TI%G PO#IC9

1, Ne&sprint #osts !re #omp!r!ble to r!& m!teri!ls in ! m!n"f!#t"rin+ #omp!ny$ Ane&sp!per #omp!ny3 ho&ever3 does not 5eep !n inventory of finished +oods$ Itsne&sp!pers either !re sold &ithin ho"rs !fter bein+ printed or be#ome &orthless ifnot sold$

2, Some #omp!nies "se more th!n one method to v!l"e different types of inventory$The methods sho"ld be #hosen be#!"se they provide the most !##"r!te m!t#hin+ of


46/74

5-./ FINANCIAL ACCOUNTING SOLUTIONS MANUAL

#osts &ith the reven"es +ener!ted$ App!rently3 LIFO provides the most !##"r!tem!t#hin+ of #osts &ith reven"e for Trib"ne Comp!nys ne&sprint$


47/74


LO -3/ PRO"#E$ 5-1/ I%TERPRETI%G SEARS I%VE%TOR9 ACCO8%TI%G PO#IC9

1, No3 the "se of the l!st4in3 first4o"t method for its domesti# mer#h!ndise inventoriesdoes not me!n th!t Se!rs !l&!ys sells its ne&est mer#h!ndise first in the United

St!tes$ A#t"!lly3 the physi#!l flo& of mer#h!ndise in most stores li5e Se!rs isnorm!lly on ! first4in3 first4o"t b!sis$ 6o&ever3 the "se of ! #ost flo& !ss"mptions"#h !s LIFO or FIFO for !##o"ntin+ p"rposes is independent of the !#t"!l physi#!lflo& of prod"#ts$

2, No3 Se!rs "ses the ret!il method to !##o"nt for inventories in its stores$ This is !method th!t !llo&s the #omp!ny to #onvert its inventory from ! ret!il v!l"e to ! #ostb!sis for fin!n#i!l st!tement p"rposes$

A # TE R % A T E P R O " # E $ S

LO 1 PRO"#E$ 5-1A I%VE%TOR9 COSTS I% VARIO8S "8SI%ESSES

1, Cl!ssifi#!tion of !n item !s inventory depends on the #omp!nys intent$ ;:;soffered by the #omp!ny for res!le sho"ld be #l!ssified !s p!rt of inventory !nd#h!r+ed to #ost of +oods sold !t the time they !re sold$ Altern!tively3 rent!l ;:;s!re in#ome4prod"#in+ !ssets !nd sho"ld not be #l!ssified !s inventory$ They sho"ldbe #l!ssified !s #"rrent !ssets be#!"se it is "nli5ely th!t !ny ;:;s &ill be 5ept !srent!ls for more th!n one ye!r$

2, hen ;:;s !re tr!nsferred be#!"se they &ill be offered for res!le3 the !sset!##o"nt ;:; 8ent!ls &o"ld be #redited3 !nd the !sset !##o"nt ;:; Inventory&o"ld be debited$

LO ) PRO"#E$ 5-2A CA#C8#ATIO% OF GROSS PROFIT FOR "EST "89 A%& CIRC8ITCIT9

1, Gross profit r!tios %'$/

Cir#"it City? %00(? D%3(,.BD103)-% > %)$(%00)?


48/74

5-. FINANCIAL ACCOUNTING SOLUTIONS MANUAL

LO - PRO"#E$ 5-A EVA#8ATIO% OF I%VE%TOR9 COSTI%G $ETHO&S

1, No3 the three #omp!nies &ill not be e"!lly ple!sed &ith the de#line in pri#es$ If thede#line #ontin"es3 Comp!ny R


49/74


50/74


LO 10 PRO"#E$ 5-5A GROSS PROFIT $ETHO& OF ESTI$ATI%G I%VE%TOR9 #OSSES

1,41 Net s!les D/'3(00stim!ted +ross profit r!tio 0$-0

stim!ted +ross profit D,(3)(042 Net s!les D/'3(00

stim!ted +ross profit ,(3)(0stim!ted #ost of +oods sold D%.30(0

4 e+innin+ inventory D1)3%00Add? 7"r#h!ses --3000Cost of +oods !v!il!ble for s!le D/13%00stim!ted #ost of +oods sold %.30(0stim!te of inventory !t time of e2plosion D,'31(0Inventory s!ved )3(00stim!te of inventory destroyed D(.3,(0

2, To re#ord ins"r!n#e settlement from e2plosion$




51/74


LO 11 PRO"#E$ 5-/A I%VE%TOR9 T8R%OVER FOR WA#-$ART A%& TARGET

1, Inventory t"rnover r!tios?

Wal-$art>

D%1/3-/'BJ D%1/3-/'BD%.30%/$( > -$.) times

Tar(et>D'13))(BJ D'13))(BD)3/(-$( > ,$') times

2, !l4M!rts inventory t"rnover is hi+her th!n T!r+ets d"rin+ the most re#ent fis#!lye!r3 -$.) vers"s ,$')$ Another f!#tor to #onsider is the n"mber of d!ys s!les ininventory?

Wal-$art>',0B-$.) > )($/ d!ys

Tar(et>

',0B,$') > (,$. d!ys

It t!5es !l4M!rt !n !ver!+e of ), d!ys to sell !n item of inventory@ T!r+et re"ires!n !ver!+e of (- d!ys$ On the b!sis of inventory t"rnover !nd d!ys s!les ininventory3 !l4M!rt !ppe!rs to be performin+ sli+htly better$

It &o"ld be helpf"l to me!s"re these st!tisti#sinventory t"rnover !nd d!yss!les in inventory3 !lon+ &ith the #omp!nies +ross profit r!tios&ith the s!meme!s"res for prior ye!rs$ It &o"ld !lso be helpf"l to #omp!re these me!s"res &iththe ind"stry !ver!+es$


52/74


53/74


A # TE R % A T E $ 8 # T I - C O % C E P T P R O " # E $ S

LO %3'31% PRO"#E$ 5-A P8RCHASES A%& SA#ES OF $ERCHA%&ISE! CASH F#OWS

1, To re#ord p"r#h!se of mer#h!ndise on !##o"nt$




54/74



55/74


PRO"#E$ 5-A 4Con*l)ded

2, Units on h!nd on O#tober '1?O#tober 1 p"r#h!se ' "nitsO#tober 1( s!le

A##o"nts 8e#eiv!ble '-3(0.$% S!les '-3(0.$%

C!sh '-3'(,$/*A##o"nts 8e#eiv!ble


56/74


57/74


PRO"#E$ 5-13A 4Con*l)ded

2, Net in#ome for %00-?S!les D11%3-,.Less? S!les ret"rns 1300.

Net s!les D1113-,0Cost of +oods sold Jfrom p!rt


58/74


LO (3,3- PRO"#E$ 5-11A CO$PARISO% OF I%VE%TOR9 COSTI%G $ETHO&SPERIO&IC S9STE$

1, Cost of Endin(Goods Sold Inventor= Total

a, ei+hted !ver!+e D(31%0 D)3,(( D/3--(6, FIFO )3.-( )3/00 /3--(*, LIFO (3'-( )3)00 /3--(

C!l#"l!tions?

a, e+innin+ inventory '00 D)$00 > D13%00

Nov$ . (00 )$(0 > %3%(0

Nov$ 1. -00 )$-( > '3'%(

Nov$ %/ ,00 ($00 > '3000%3100 D/3--(

ei+hted !ver!+e #ost > D/3--(B%3100 > D)$,((Units sold? %00 (00 )00 > 13100 "nits

Units !v!il!ble "nits sold > endin+ inventory

%3100 13100 > 13000 "nits

ndin+ inventory > 13000 D)$,(( > D)3,((

Cost of +oods sold > 13100 D)$,(( > D(31%0*

*8o"nded to !+ree &ith tot!l #ost$

6, ndin+ inventoryFIFO?,00 D($00 > D'3000

)00 )$-( > 13/0013000 D)3/00

Cost of +oods soldFIFO?'00 D)$00 > D13%00

(00 )$(0 > %3%(0

'00 )$-( > 13)%(13100 D)3.-(

*, ndin+ inventoryLIFO?

'00 D)$00 > D13%00(00 )$(0 > %3%(0

%00 )$-( > /(013000 D)3)00

Cost of +oods soldLIFO?,00 D($00 > D'3000

(00 )$-( > %3'-(


59/74


13100 D(3'-(


60/74

5-/3 FINANCIAL ACCOUNTING SOLUTIONS MANUAL


2, The Tot!l #ol"mn represents the pool of #osts


61/74

C6A7T8 ( 9 IN:NTO8IS AN; COST OF GOO;S SOL; 5-/1

PRO"#E$ 5-12A 4Contin)ed

a, Movin+ !ver!+e?

P)r* '300013000 D)3..'@ D)3..'B13000 > D)$..'

6, FIFO?

P)r*


62/74

5-/2 FINANCIAL ACCOUNTING SOLUTIONS MANUAL


*, LIFO?

P)r*


63/74

C6A7T8 ( 9 IN:NTO8IS AN; COST OF GOO;S SOL; 5-/

LO (3,3- PRO"#E$ 5-1A I%VE%TOR9 COSTI%G $ETHO&SPERIO&IC S9STE$

1, Units in be+innin+ inventory '00Add? Units p"r#h!sed D-3(00 )( %($)0 > 131)'')( D.3,)'

Cost of +oods soldFIFO?'00 D%-$00 > D .3100

'-( %,$(0 > /3/'.

''0 %,$00 > .3(.0

1.0 %($)0 > )3(-%131.( D'131/0

6, ndin+ inventoryLIFO?'00 D%-$00 > D.3100

)( %,$(0 > 131/'')( D/3%/'

Cost of +oods soldLIFO?'00 D%($00 > D -3(00

%%( %($)0 > (3-1(

''0 %,$00 > .3(.0

''0 %,$(0 > .3-)(131.( D'03()0


64/74

5-/. FINANCIAL ACCOUNTING SOLUTIONS MANUAL


*, e+innin+ inventory '00 D%-$00 > D .3100

Nov$ ) '-( %,$(0 > /3/'.

Nov$ 1' ''0 %,$00 > .3(.0

Nov$ 1. %%( %($)0 > (3-1(Nov$ %) '00 %($00 > -3(00

13('0 D'/3.''

ei+hted !ver!+e #ost > D'/3.''B13('0 > D%,$0'(

ndin+ inventory > "nits in endin+ inventory !ver!+e #ost > ')( E D%,$0'( >D.3/.%

Cost of +oods sold > "nits sold !ver!+e #ost > 131.( D%,$0'( > D'03.(1

2, Wei( D%0.3000B1%3(00 > D1,$,)

Units !v!il!ble for s!le 1%3(00Units sold 113000ndin+ inventory 13(00 D1,$,) > D %)3/,0


65/74


Cost of +oods sold 113000 D1,$,) > D1.'30)0


66/74


67/74


LO 13-3/ PRO"#E$ 5-15A I%TERPRETI%G THE %EW 9OR TI$ES CO$PA%9SFI%A%CIA# STATE$E%TS

1, The #omp!ny #!rries t&o types of inventory? ne&sprint !nd other$ These #osts !re#omp!r!ble to r!& m!teri!ls in ! m!n"f!#t"rin+ #omp!ny$ A ne&sp!per #omp!ny3

ho&ever3 does not 5eep !n inventory of finished +oods$ Its ne&sp!pers either !resold &ithin ho"rs !fter bein+ printed or be#ome &orthless if not sold$

2, Some #omp!nies "se different methods to v!l"e different types of inventory$ Themethods sho"ld be #hosen be#!"se they provide the most !##"r!te m!t#hin+ of#osts &ith the reven"es +ener!ted$ App!rently3 LIFO provides the most !##"r!tem!t#hin+ of #osts &ith reven"e for the #omp!nys ne&sprint$

LO -3/ PRO"#E$ 5-1/A I%TERPRETI%G HO$E &EPOTS FI%A%CIA# STATE$E%TS

1, No3 the "se of the first4in3 first4o"t inventory method does not me!n th!t ! #omp!ny!l&!ys sells its oldest mer#h!ndise first$ Altho"+h the physi#!l flo& in m!nyb"sinesses is on ! first4in first4o"t b!sis3 the "se of ! #ost flo& !ss"mption s"#h !sFIFO for !##o"ntin+ p"rposes is independent of the !#t"!l physi#!l flo& of prod"#ts$In f!#t3 some b"sinesses do "se ! LIFO


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&ECISIO% CASE 5-1 4Con*l)ded

, A##ordin+ to Note 13 Finish Line "ses the &ei+hted !ver!+e #ost method to v!l"einventories$ The #omp!ny indi#!tes th!t this !ppro2im!tes the first4in3 first4o"tmethod$ The &ei+hted !ver!+e method is rel!tively e!sy to "se$

., A##ordin+ to Note 13 Foot Lo#5er "ses LIFO for domesti# inventories !nd FIFO forintern!tion!l inventories$ The inventories of the #omp!nys ;ire#t4to4C"stomersb"siness !re v!l"ed "sin+ the &ei+hted !ver!+e method3 &hi#h !ppro2im!tesFIFO$ It is not "n"s"!l for #omp!nies in the s!me ind"stry to "se different methods3!nd it is helpf"l in tryin+ to #omp!re the #omp!nies to be !&!re of this f!#t$

5, e#!"se #omp!nies "s"!lly do not dis#lose in their !nn"!l report &hi#h inventorysystem they "se3 it is not possible to 5no& for #ert!in &hether they "se periodi# orperpet"!l$ The !bility of mer#h!ndisers to "se the perpet"!l system h!s #ert!inlyimproved &ith !dv!n#es in te#hnolo+y3 s"#h !s the !dvent of point4of4s!le

termin!ls$

LO - &ECISIO% CASE 5-2 REA&I%G A%& I%TERPRETI%G ,C,PE%%E9S FI%A%CIA#STATE$E%TS

1, $C$7enney "ses LIFO$ A b"siness sho"ld employ the method th!t most !##"r!telym!t#hes inventory #osts &ith the reven"es of the period$ $C$7enney m!y "se LIFObe#!"se pri#es #h!n+e fre"ently3 !nd it &!nts to m!t#h the most re#ent #osts &ithreven"es +ener!ted in the #"rrent period$

2, The LIFO reserve is D%( million !t ye!r4end %00) !nd D)' million !t ye!r4end %00'$

, The LIFO reserve de#re!sed d"rin+ %00)3 from D)' million to D%( million3 or D1.million$ The reserve de#re!ses be#!"se inventory #osts !re de#re!sin+ !nd #ost of+oods sold on ! LIFO b!sis is less th!n #ost of +oods sold on ! FIFO b!sis$ Th"s3 !de#re!se in the reserve d"rin+ ! period indi#!tes th!t pri#es !re f!llin+$

LO 13,3/ &ECISIO% CASE 5- REA&I%G A%& I%TERPRETI%G CIRC8IT CIT9SI%VE%TOR9 %OTE

1, Cir#"it City "ses the !ver!+e #ost method$ Given the l!r+e vol"me of #ons"merele#troni#s prod"#ts sold by Cir#"it City3 the !ver!+e #ost method seems!ppropri!te$

2, The #omp!ny defines m!r5et !s estim!ted re!li!ble v!l"e$ In estim!tin+ m!r5etv!l"e3 the #omp!ny #onsiders s"#h f!#tors !s fore#!sted #ons"mer dem!nd3 m!r5et#onditions3 !nd obsoles#en#e$


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2, Sellin+ pri#e D($./ > )0 D/$.%

, efore de#idin+ &hether this is ! s"ffi#ient profit3 C!rolines C!ndy sho"ld #he#5ind"stry !ver!+es !nd the pri#e its lo#!l #ompetition is #h!r+in+$ If the pri#e #h!r+edis too m"#h hi+her th!n th!t of the #ompetition3 even if its prod"#t is s"perior3C!rolines m!y not +ener!te !s m!ny s!les !s it needs to #over other #osts3 s"#h !s&!+es !nd #ommissions for employees3 rent3 "tilities3 ins"r!n#e3 !dvertisin+3 !nd !ret"rn on o&ners investment$ If its pri#es !re m"#h lo&er th!n th!t of the#ompetition3 it m!y not be +ener!tin+ !s m"#h profit !s it re!son!bly #o"ld$

LO ' &ECISIO% CASE 5-/ 8SE OF A PERPET8A# I%VE%TOR9 S9STE$

1, $e'o to &arrell>

The p"rpose of this memo is to #l!rify for yo" the #osts !nd benefits of ! perpet"!linventory system$ The p"rpose of ! perpet"!l system is to provide ! #ontin"o"sly"pd!ted re#ord of the n"mber of "nits !nd #ost of !ll inventory items$ A perpet"!lsystem is more #ostly to m!int!in be#!"se of the need to "pd!te the re#ords e!#htime p"r#h!ses !nd s!les !re m!de$ It is li5ely th!t yo" &ill &!nt to #onsider !#omp"teried inventory system$ N"mero"s soft&!re p!#5!+es !re !v!il!ble3 !ndone sho"ld be #hosen th!t is p!rti#"l!rly s"it!ble to yo"r b"siness$

As mentioned e!rlier3 ! perpet"!l inventory system is #onsider!bly more #ostly toimplement !nd m!int!in th!n ! periodi# system$ A perpet"!l system &o"ld involve!n investment in ! s#!nnin+ devi#e !nd the other ne#ess!ry h!rd&!re !nd soft&!re$The ne2t step &o"ld be to e2plore the options !v!il!ble to "s !nd the #ost of e!#h$7le!se #!ll me !t yo"r #onvenien#e to set "p !n !ppointment to dis#"ss thesem!tters f"rther$

2, The s"it!bility of ! perpet"!l inventory system is #ert!inly dependent on the type ofprod"#ts ! #omp!ny sells$ The system is ide!lly s"ited to ! prod"#t s"#h !s!"tomobiles3 sin#e there is ! rel!tively lo& vol"me of s!les$ On the other h!nd3 itmi+ht not be &ell s"ited to the needs of ! l!nds#!per sellin+ trees3 shr"bs3 !ndpl!nts$ The t"rnover of prod"#ts is very hi+h3 !nd it m!y not be pr!#ti#!l to "pd!te

the re#ords e!#h time ! s!le t!5es pl!#e$


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LO ,3- &ECISIO% CASE 5-0 I%VE%TOR9 COSTI%G $ETHO&S

1, Geor+eto&n m"st "se the periodic inventory system !t le!st for the first ye!rbe#!"se it did not 5eep ! re#ord of the #ost of the "nits sold !s e!#h s!le &!s m!de$

2, Units on h!nd !t the end of the ye!r?!n"!ry 13000M!r#h 13%00O#tober 13(00

Av!il!ble '3-00Sold '3000On h!nd -00

, Unless ! #omp!ny spe#ifi#!lly identifies the #ost of e!#h "nit sold3 it m"st !dopt !n!ss"mption !bo"t &hi#h p!rti#"l!r "nits &ere sold$ !#h of the inventory #ostin+methods t!5es the pool of #osts D,3'00

LIFO -00 D. > D(3,00

Cost of +oods sold?FIFO D'13100 D,3'00 > D%)3.00

LIFO D'13100 D(3,00 > D%(3(00Con*l)sion>All e2penses other th!n #ost of +oods sold !re not !ffe#ted by the "seof one inventory method r!ther th!n !nother$ Th"s3 the lo&er +ross profit &ith the"se of the LIFO method &ill res"lt in in#ome before t!2es th!t is D%03%00 D1/3(003 or D-00 less th!n if FIFO &!s "sed$ e#!"se the e2pe#ted t!2 r!te is'(3 the #omp!ny &ill s!ve D-00 E 0$'(3 or D%)(3 by "sin+ LIFO$


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LO . &ECISIO% CASE 5- I%VE%TOR9 ERRORS

The first error res"lted in !n overst!tement of the endin+ inventory in %00( by D)(3,00$Th"s3 #ost of +oods sold in %00( &!s "nderst!ted3 !nd +ross profit &!s overst!ted bythe s!me !mo"nt$ The effe#t on net in#ome &o"ld be less th!n the !mo"nt of

overst!tement of +ross profit be#!"se of the effe#t of t!2es$The se#ond error &!s the res"lt of not !pplyin+ the lo&er4of4#ost4or4m!r5et r"le to

the inventory !t the end of %00,$ If the #ost of #ert!in inventory &!s D,3000 hi+her th!nits repl!#ement #ost3 the inventory sho"ld h!ve been &ritten do&n !nd ! lossre#o+nied$

The error th!t &!s m!de in the se#ond "!rter of the #"rrent ye!r #!n be #orre#tedbefore the rele!se of the %00- fin!n#i!l st!tements$ The #omp!ny sho"ld e2pl!in then!t"re of the error in the !nn"!l report? th!t !n "nderst!tement of inventory !t the endof the se#ond "!rter led to !n "nderst!tement of the in#ome reported in th!t "!rter$The first t&o errors3 if m!teri!l in !mo"nt3 re"ire ! rest!tement of the fin!n#i!lst!tements of the ye!rs involved$

ETHICA# &ECISIO% $AI%G

LO % &ECISIO% CASE 5- SA#ES RET8R%S A%& A##OWA%CES

1, The s!les m!n!+er is interested in reportin+ the m!2im"m !mo"nt of s!les$Altho"+h the net !mo"nt of s!les &ill be the s!me re+!rdless of &hether ret"rns !rere#orded sep!r!tely or simply netted !+!inst s!les reven"e3 the m!n!+er &o"ldprefer not to #!ll !ttention to the level of ret"rns$ It is "nli5ely th!t the m!n!+er tr"ly

feels the present pr!#ti#e is ! &!ste of time$2, The s!les m!n!+ers re#ommend!tion mi+ht s!ve ! sm!ll !mo"nt of boo55eepin+

time3 b"t !t the s!me time it &o"ld s!#rifi#e #ert!in inform!tion$ M!n!+ement needsto be !&!re of "nre!son!bly hi+h levels of ret"rns of mer#h!ndise so th!t it #!nm!5e &h!tever !dH"stments !re ne#ess!ry$ If S!les 8even"e is simply red"#ed forthe !mo"nt of ret"rns3 this inform!tion &ill not be !v!il!ble$

, $e'o to t


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LO - &ECISIO% CASE 5-13 SE#ECTIO% OF A% I%VE%TOR9 $ETHO&

1, The CO is prim!rily #on#erned &ith reportin+ the hi+hest !mo"nt of in#omepossible$ Th"s3 the CO &ill be s!tisfied if the #omp!ny "ses the FIFO method$ Thismethod re#o+nies !s #ost of +oods sold the oldest #osts3 !nd be#!"se pri#es !rerisin+3 the #osts #h!r+ed to #ost of +oods sold &ill be less th!n if LIFO is "sed$

2, It &o"ld be diffi#"lt to st!te definitively &hi#h method is tr"ly in the best interests ofthe sto#5holders$ The LIFO method minimies the !mo"nt of in#ome t!2es p!id inthe first ye!r3 sin#e this method &o"ld report the hi+hest #ost of +oods sold !nd th"sthe lo&est in#ome before t!2es$ From ! #!sh flo& perspe#tive3 LIFO is the most!dv!nt!+eo"s method in ! period of risin+ pri#es$

, $e'o to t

TO? CO

F8OM? St"dents n!me

;AT? 1%B'1B

SUCT? Inventory methods

As &e end o"r first ye!r of oper!tions3 I !m !&!re of the need to present ! f!vor!bleimpression to o"r sto#5holders$ In this re+!rd3 I &o"ld li5e to !ddress the sele#tion of!n inventory v!l"!tion method$

I #!n !ppre#i!te yo"r interest in m!2imiin+ in#ome &henever possible$6o&ever3 ! method of inventory v!l"!tion th!t !ddresses this obHe#tive &ill notne#ess!rily s!tisfy o"r other #on#erns$ Cert!inly3 one of o"r prim!ry #on#erns sho"ldbe to minimie the p!yment of t!2es &henever possible$

e#!"se o"r inventory p"r#h!se #osts !re risin+3 FIFO &ill res"lt in the lo&est!mo"nt reported !s #ost of +oods sold !nd th"s !n in#ome n"mber th!t is hi+herth!n if LIFO &!s "sed$ For this re!son3 ho&ever3 the "se of FIFO &ill res"lt in !hi+her !mo"nt of t!2es p!y!ble th!n if LIFO &!s "sed$ It is my opinion th!t &esho"ld !ttempt to #onserve #!sh &henever possible3 !nd th"s I believe &e sho"ld!dopt the LIFO method of inventory v!l"!tion$

Th!n5 yo" for the opport"nity to present my vie&s on this import!nt m!tter$7le!se #!ll if I #!n be of !ny f"rther !ssist!n#e$

LO / &ECISIO% CASE 5-11 WRITE-&OW% OF O"SO#ETE I%VE%TOR9

1, The &rite4off of the inventory th!t h!s be#ome obsolete &o"ld red"#e the #"rrentye!rs in#ome$ The !mo"nt of the red"#tion depends on the e2tent of the &rite4off$ Ifthe inventory is &ritten off #ompletely3 the red"#tion in in#ome &ill be e"!l to theboo5 v!l"e of the inventory$ If the inventory is &ritten do&n to ! lo&er !mo"nt3 netin#ome &ill be red"#ed by the !mo"nt of the &rite4do&n$ This !n!lysis i+nores theeffe#t of t!2es$


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2, If the inventory is not !dH"sted3 tot!l !ssets on the ye!r4end b!l!n#e sheet &ill beoverst!ted$

, The m!teri!lity of the obsolete inventory sho"ld be ! m!Hor f!#tor in ! de#ision to

persist in the !r+"ment th!t the inventory be &ritten do&n$ If the inventory in"estion is not m!teri!l rel!tive to the tot!l !ssets of the #omp!ny3 the &rite4do&nm!y be "nne#ess!ry$ The m!teri!lity of the loss th!t &o"ld be re#o+nied from the&rite4do&n3 rel!tive to the in#ome of the period3 sho"ld !lso be #onsidered$

., If the inventory is not &ritten do&n3 re!ders do not h!ve reli!ble inform!tion$ Underthe lo&er4of4#ost4or4m!r5et r"le3 re!ders !ss"me th!t if inventory is &orth less th!nits #ost3 the inventory h!s in f!#t been &ritten do&n to this lo&er !mo"nt$

REA# WOR#& PRACTICE 5,1

e#!"se #omp!nies "s"!lly do not dis#lose in their !nn"!l report &hi#h inventorysystem they "se3 it is not possible to 5no& for #ert!in &hether Finish Line "ses periodi#or perpet"!l$ The !bility of mer#h!ndisers to "se the perpet"!l system h!s #ert!inlyimproved &ith !dv!n#es in te#hnolo+y3 s"#h !s the !dvent of point4of4s!le termin!ls$

REA# WOR#& PRACTICE 5,2

Finish Line is ! l!r+e mer#h!ndiser of !thleti# foot&e!r !nd other !pp!rel$ The n!t"re of

this b"siness re"ires the #omp!ny to #ontin"!lly monitor its inventory for obsoleteprod"#ts$ If m!r5et is less th!n #ost3 the #omp!ny sho"ld &rite do&n the inventory torefle#t m!r5et v!l"e$ The #omp!ny "ses the &ei+hted !ver!+e method for determinin+#ost$

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Porter SM Ch. 05_2pp