Solution manual financial accounting 4e by wild chapter05

LIFO will result in the lower cost of goods sold when costs are declining because it assigns the most recent, lower cost purchases to cost of goods sold.. B For interim reporting, compa

2 Merchandise inventory is disclosed on the balance sheet as a current asset It is also sometimes reported in the income statement as part of the calculation of cost

of goods sold

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 because it assigns the most recent, lower cost purchases to cost of goods sold

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 Many people make important business decisions based on period-to-period fluctuations in a company's financial numbers, including gross profit and net income As such, inventory errors—which can substantially impact gross profit, net income, current assets, and cost of sales—should not be permitted to cause such fluctuations and impair business decisions (Note: Since such errors are ―self- correcting,‖ they will distort net income in only two consecutive accounting periods—the period of the error and the next period.)

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 26, 2005 is ($ in millions):

$2,851 / $6,903 = 41.3%

16 Cost of goods available for sale equals ending inventory plus cost of sales As of February 28, 2005, this is computed as ($ thousands):

Ending Inventory of $1,459,520 + Cost of Sales of $7,903,641 = $9,363,161

17 Merchandise inventory ($ millions) comprises 1.4% ($101 / $7,055) of Apple’s current assets as of September 25, 2004, and 1.0% ($56 / $5,887) of its current assets as of September 25, 2003

QUICK STUDIES

Quick Study 5-1 (25 minutes)

a FIFO

©McGraw-Hill Companies, 2008

Quick Study 5-1—concluded

b LIFO

Date Goods Purchased Cost of Goods Sold Inventory Balance

1/1 320 @ $3.00 = $ 960 1/9 85 @ $3.20 320 @ $3.00

= $1,232

85 @ $3.20 1/25 110 @ $3.30 320 @ $3.00

85 @ $3.20 = $1,595

110 @ $3.30 1/26 110 @ $3.30 = $ 363 160 @ $3.00 = $ 480

85 @ $3.20 = $1,232 (avg cost is $3.04)

1/25 110 @ $3.30 320 @ $3.00

85 @ $3.20 = $1,595

110 @ $3.30 (avg cost is $3.10) 1/26 355 @ $3.10 = $1,100.5* 160 @ $3.10 = $ 496*

*rounded

Alternate solution format

(a) FIFO: 110 @ $3.30 = $ 363

50 @ $3.20 = 160

160 $ 523 Ending inventory cost

(b) LIFO: 160 @ $3.00 = $ 480 Ending inventory cost

(c) Weighted average:

320 @ $3.00 = $ 960

85 @ $3.20 = 272

110 @ $3.30 = 363

515 $1,595 Cost of goods available for sale

$1,595/515 = $3.10 (rounded) weighted average cost per unit

160 units @ $3.10 = $ 496 Ending inventory cost

}

}

} }

Quick Study 5-2 (10 minutes)

Beginning inventory 10 units @ $60 $ 600

Plus

1st week purchase 10 units @ $61 610

2nd week purchase 10 units @ $62 620

3rd week purchase 10 units @ $65 650

4th week purchase 10 units @ $70 700

Units Available for sale 50 units

Cost of Goods Available for Sale $3,180

Quick Study 5-3 (25 minutes)

a FIFO

Date Goods Purchased Cost of Goods Sold Inventory Balance

12/ 7 10 @ $ 7 = $ 70 10 @ $ 7 = $ 70 12/14 20 @ $ 8 = $160 10 @ $ 7

= $230

20 @ $ 8 12/15 10 @ $7 15 @ $ 8 = $120

5 @ $8 12/21 15 @ $10 = $150 15 @ $ 8

= $270 15 @ $10

= $230

20 @ $ 8 12/15 15 @ $8 = $120 10 @ $ 7

= $110

5 @ $ 8

= $110

©McGraw-Hill Companies, 2008

Quick Study 5-3 (concluded)

c Weighted Average

d Specific identification

(2 units x $7) + (13 units x $8) + (15 units x $10) = $268

Quick Study 5-4 (10 minutes)

Quick Study 5-5 (10 minutes)

1 Title will pass at ―destination‖ which is Kwon Company’s receiving dock Liu should show the $750 in its inventory at year-end as Liu retains title until the goods reach Kwon Company

2 The consignor is Jabar Company The consignee is Chi Company The consignor, Jabar Company, should include any unsold and consigned goods in its inventory

Date Goods Purchased Cost of Goods Sold Inventory Balance

$115 (avg cost is $8.83)

}

}

Quick Study 5-6 (10 minutes)

Units in ending inventory

Units stored in basement 1,300 units

Less damaged (unsalable) units (20)

Plus units in transit 350

Plus units on consignment 80

Total units in ending inventory 1,710 units

Quick Study 5-7 (5 minutes)

Quick Study 5-8 (10 minutes)

Cost of inventory (estate’s contents)

Price $38,500

Transportation-in 2,100

Insurance on shipment 250

Cleaning and refurbishing 800

Total cost of inventory $41,650

Quick Study 5-9 (20 minutes)

©McGraw-Hill Companies, 2008

Quick Study 5-10 (15 minutes)

a Overstates 2008 cost of goods sold

b Understates 2008 gross profit

c Understates 2008 net income

d Overstates 2009 net income

e The understated 2008 net income and the overstated 2009 net income

combine to yield a correct total income for the two-year period

f The 2008 error will not affect years after 2009

Quick Study 5-11 (10 minutes)

Inventory turnover = Cost of goods sold/Average merchandise inventory

= $1,200,000 / [($150,000 + $180,000)/2 ] = 7.27 times Days’ sales in inventory = Ending Inventory/Costs of goods sold x 365 = ($180,000 / $1,200,000) x 365 = 54.75 days

Quick Study 5-12 A (15 minutes)

Ending Cost of Inventory Goods Sold

Quick Study 5-13 A (15 minutes)

Ending Cost of Inventory Goods Sold

Quick Study 5-14 B (15 minutes)

Goods available for sale

Inventory, January 1 $190,000

Cost of goods purchased (net) 352,000

Goods available for sale (at cost) 542,000

Net sales at retail $685,000 Estimated cost of goods sold [$685,000 x (1 - 44%)] (383,600)

Estimated September 5 inventory destroyed $158,400

Ending inventory—100 units from January 30, 70 units from January 20, and

20 units from beginning inventory

(100 x $5.00) + (70 x $5.60) + (20 x $6.00) $1,012

$3,020 - $1,012 $2,008

b Weighted average perpetual

Date Goods Purchased Cost of Goods Sold Inventory Balance

1/1 140 @ $6.00 = $ 840 1/10 100 @ $ 6.00 = $ 600 40 @ $6.00 = $ 240 1/20 300 @ $5.60 40 @ $6.00

= $1,920

300 @ $5.60 (avg cost is $5.65) 1/25 250 @ $5.65 = $1,412* 90 @ $5.65 = $ 508* 1/30 100 @ $5.00 90 @ $5.65

= $1,920

300 @ $5.60 1/25 40 @ $6.00

210 @ $5.60 90 @ $5.60 = $ 504 1/30 100 @ $5.00 90 @ $5.60

= $1,004 $2,016 100 @ $5.00

= $1,416

Exercise 5-1 (Continued)

d LIFO Perpetual

Date Goods Purchased Cost of Goods Sold Inventory Balance

1/1 140 @ $6.00 = $ 840 1/10 100 @ $6.00 = $ 600 40 @ $6.00 = $ 240 1/20 300 @ $5.60 40 @ $6.00

= $1,920

300 @ $5.60 1/25 250 @ $5.60 = $1,400 40 @ $6.00

= $ 520

50 @ $5.60 1/30 100 @ $5.00 40 @ $6.00

$2,000 50 @ $5.60 = $1,020

100 @ $5.00

Alternate Solution Format for FIFO and LIFO Perpetual

Ending Cost of Computations Inventory Goods Sold

Specific Identification

Weighted Average FIFO LIFO

©McGraw-Hill Companies, 2008

Exercise 5-2 (Concluded)

1 LIFO method results in the highest net income of $1,400

2 Weighted average net income of $1,392 falls between the FIFO net income of $1,389 and the LIFO net income of $1,400

3 If costs were rising instead of falling, then the FIFO method would yield the highest net income

Exercise 5-3 (30 minutes)

a FIFO Perpetual

Date Goods Purchased Cost of Goods Sold Inventory Balance

1/1 200 @ $10 = $ 2,000 1/10 150 @ $10 = $ 1,500 50 @ $10 = $ 500

3/14 350 @ $15 = $5,250 50 @ $10

= $ 5,750

350 @ $15 3/15 50 @ $10 100 @ $15 = $ 1,500

250 @ $15 = $ 4,250

7/30 450 @ $20 = $9,000 100 @ $15

= $10,500

450 @ $20 10/5 100 @ $15

330 @ $20 = $ 8,100 120 @ $20 = $ 2,400 10/26 100 @ $25 = $2,500 120 @ $20

100 @ $25 = $ 4,900 $13,850

Exercise 5-3 (Concluded)

b LIFO Perpetual

Date Goods Purchased Cost of Goods Sold Inventory Balance 1/1 200 @ $10 = $ 2,000 1/10 150 @ $10 = $ 1,500 50 @ $10 = $ 500 3/14 350 @ $15 = $ 5,250 50 @ $10

50 @ $15

20 @ $20 = $ 4,150 _ 100 @ $25

$14,600

Alternate Solution Format

Ending Cost of Inventory Goods Sold

©McGraw-Hill Companies, 2008

Exercise 5-4 (15 minutes)

a Specific identification method—Cost of goods sold

Cost of goods available for sale $18,750 Ending inventory under specific identification

b Specific identification method—Gross margin

Sales revenue (880 units sold x $40 selling price) $35,200 Less: Specific identification cost of goods sold 14,075 Gross profit $21,125

Exercise 5-5 (15 minutes)

Per Unit Total Total LCM applied to

Inventory Items Units Cost Market Cost Market Products Whole

a Lower of cost or market of inventory as a whole = $7,490

b Lower of cost or market of inventory by product = $7,394

Exercise 5-6 (25 minutes)

1 Correct gross profit = $850,000 - $500,000 = $350,000 (for each year)

2 Reported income figures

Year 2007 Year 2008 Year 2009 Sales $850,000 $850,000 $850,000 Cost of goods sold

= 7.0 times $97,400/$643,825 x 365 days = 55.2 days

Analysis comment: It appears that during a period of increasing sales, Palmer

has been efficient in controlling its amount of inventory Specifically, inventory turnover increased by 2.3 times (7.0 - 4.7) from 2007 to 2008 In addition, days' sales in inventory decreased by 19.9 days (75.1 - 55.2)

©McGraw-Hill Companies, 2008

Exercise 5-8 (20 minutes)

1 a LIFO ratio computations

LIFO current ratio (2008) = $220/$200 = 1.1

LIFO inventory turnover (2008) = $740/ [($110+$160)/2] = 5.5

LIFO days’ sales in inventory (2008) = ($160/$740) x 365 = 78.9 days

b FIFO ratio computations

FIFO current ratio (2008) = $300*/$200 = 1.5

FIFO inventory turnover (2008) = $660/ [($145+$240)/2] = 3.4

FIFO days’ sales in inventory (2008) = ($240/$660) x 365 = 132.7 days

is understated Overall, users prefer the FIFO numbers for these ratios because they are considered more representative of current replacement costs for inventory

Exercise 5-9 A (20 minutes)

Ending Cost of Inventory Goods Sold

*rounded

FIFO Gross Margin

Sales revenue (880 units sold x $40 selling price) $35,200 Less: FIFO cost of goods sold 13,850 Gross margin $21,350

LIFO Gross Margin

Sales revenue (880 units sold x $40 selling price) $35,200 Less: LIFO cost of goods sold 16,450 Gross margin $18,750

Exercise 5-11 A (20 minutes)

Ending Inventory

Cost of Goods Sold

*Rounded **Some students will round to the nearest dollar, which is fine

Income effect: FIFO provides the lowest cost of goods sold, the

highest gross profit, and the highest net income

Exercise 5-12 A (20 minutes)

Ending Inventory

Cost of Goods Sold

©McGraw-Hill Companies, 2008

Exercise 5-13 B (20 minutes)

At Cost At Retail Goods available for sale

Beginning inventory $ 63,800 $128,400 Cost of goods purchased 115,060 196,800 Goods available for sale $178,860 325,200 Deduct net sales at retail 260,000 Ending inventory at retail $ 65,200 Cost ratio : ($178,860/$325,200) = 0.55

Ending inventory at cost ($65,200 x 55%) $ 35,860

Exercise 5-14 B (20 minutes)

Goods available for sale

Inventory, January 1 $ 225,000

Net cost of goods purchased * 802,250

Goods available for sale 1,027,250 Less estimated cost of goods sold

Net sales $1,000,000 Estimated cost of goods sold

[$1,000,000 x (1 – 30%)] (700,000)

Estimated March 31 inventory $ 327,250

*

$795,000 - $11,550 + $18,800 = $802,250

PROBLEM SET A

Problem 5-1A (40 minutes)

1 Compute cost of goods available for sale and units available for sale

Beginning inventory 600 units @ $45 $27,000

Feb 10 350 units @ $42 14,700

Mar 13 200 units @ $29 5,800

Aug 21 150 units @ $50 7,500

Sept 5 545 units @ $46 25,070

Units available 1,845 units

2 Units in ending inventory

Units available (from part 1) 1,845

Less: Units sold (600+650) 1,250

Ending Inventory (units) 595

©McGraw-Hill Companies, 2008

Problem 5-1A (Continued)

3a FIFO perpetual

Date Goods Purchasd Cost of Goods Sold Inventory Balance 1/1 600 @ $45 = $27,000 2/10 350 @ $42 = $14,700 600 @ $45

350 @ $42 = $41,700 3/13 200 @ $29 = $ 5,800 600 @ $45

350 @ $42 = $47,500

200 @ $29 3/15 600 @ $45 = $27,000 350 @ $42

200 @ $29 8/21 150 @ $50 = $ 7,500 350 @ $42

200 @ $29 = $28,000

150 @ $50 9/5 545 @ $46 = $25,070 350 @ $42

200 @ $29 = $53,070

150 @ $50

545 @ $46 9/10 350 @ $42

FIFO Alternate Solution Format

Cost of goods available for sale $80,070

Less: Cost of sales 600 @ $45 $27,000

350 @ $42 14,700

200 @ $29 5,800

100 @ $50 5,000 Total cost of goods sold 52,500

Ending Inventory $27,570

Proof of Ending Inventory

50 @ $50 $ 2,500

545 @ $46 25,070 Ending Inventory 595 units $27,570

= $20,500

Problem 5-1A (Continued)

3b LIFO perpetual

Date Goods Purchased Cost of Goods Sold Inventory Balance

1/1 600 @ $45 = $27,000 2/10 350 @ $42 = $14,700 600 @ $45

350 @ $42 = $41,700 3/13 200 @ $29 = $ 5,800 600 @ $45

350 @ $42 = $47,500

200 @ $29 3/15 200 @ $29

350 @ $42

50 @ $45 = $22,750

550 @ $45 = $24,750

8/21 150 @ $50 = $ 7,500 550 @ $45

150 @ $50 = $32,250 9/5 545 @ $46 = $25,070 550 @ $45

150 @ $50 = $57,320

545 @ $46 9/10 545 @ $46

LIFO alternate solution format

Cost of goods available for sale $80,070

Less: Cost of sales 200 @ $29 $ 5,800

350 @ 42 14,700

©McGraw-Hill Companies, 2008

Problem 5-1A (Continued)

3c Specific Identification

Cost of goods available for sale $80,070

Less: Cost of Goods Sold

Problem 5-1A (Continued)

3d Weighted Average

Date Goods Purchased Cost of Goods Sold Inventory Balance 1/1 600 @ $45.00 = $27,000 2/10 350 @ $42 = $14,700 600 @ $45.00

* rounded to nearest tenth of a cent

** rounded to nearest dollar

*** Total cost of goods sold plus ending inventory = $53,647 + $26,422 = $80,069 (the $1

difference from cost of goods available for sale of $80,070 is due to rounding)

= $41,700

= $30,217

©McGraw-Hill Companies, 2008

Problem 5-1A (Concluded)

4

FIFO LIFO

Specific Identifi- cation

Weighted Average

Sales (1,250 x $75) $93,750 $93,750 $93,750 $93,750 Less: Cost of goods sold 52,500 53,070 52,600 53,647 Gross profit $41,250 $40,680 $41,150 $40,103

5 Montoure’s manager would likely prefer the FIFO method since this methods’ gross profit is the largest at $41,250 This would give the manager the highest bonus based on gross profit

Problem 5-2A (35 minutes)

Part 1

(a)

Reported $ 615,000 $ 957,000 $ 780,000 Adjustments: 12/31/2007 error - 56,000 + 56,000

12/31/2008 error + 20,000 - 20,000 Corrected $ 559,000 $1,033,000 $ 760,000 (b)

Reported $ 230,000 $ 285,000 $ 241,000 Adjustments: 12/31/2007 error + 56,000 - 56,000

12/31/2008 error - 20,000 + 20,000 Corrected $ 286,000 $ 209,000 $ 261,000

(c)

Reported $1,255,000 $1,365,000 $1,200,000 Adjustments: 12/31/2007 error + 56,000

12/31/2008 error - 20,000

Corrected $1,311,000 $1,345,000 $1,200,000 (d)

Reported $1,387,000 $1,530,000 $1,242,000 Adjustments: 12/31/2007 error + 56,000

©McGraw-Hill Companies, 2008

Problem 5-3A (50 minutes)

Per Unit Total Total LCM applied to:

Inventory Items Units Cost Market Cost Market Items Categories Whole Audio equipment

a Lower of cost or market for the inventory as a whole = $285,242

b Lower of cost or market for the inventory by major category =

$98,554 + $152,708 + $29,440 = $280,702

c Lower of cost or market for inventory applied separately = $273,054

Problem 5-4A A (25 minutes)

Part 1

Number and total cost of units available for sale

25,000 units in beginning inventory @ $15 $ 375,000 30,000 units purchased @ $18 540,000 32,000 units purchased @ $22 704,000 22,000 units purchased @ $24 528,000 35,000 units purchased @ $27 945,000 144,000 units available for sale $3,092,000

c Weighted average periodic

©McGraw-Hill Companies, 2008

Problem 5-5A A (50 minutes)

Part 1

QP CORP

Income Statements Comparing FIFO, LIFO, and Weighted Average

For Year Ended December 31, 2008

FIFO LIFO

Weighted Average

Sales $325,000 $325,000 $325,000 Cost of goods sold

Inventory, Dec 31, 2007 12,600 12,600 12,600 Cost of purchases 133,900 133,900 133,900 Cost of goods available for sale 146,500 146,500 146,500

I nventory, Dec 31, 2008 13,200 10,800 12,380 * Cost of goods sold 133,300 135,700 134,120 * Gross profit 191,700 189,300 190,880 * Expenses 32,500 32,500 32,500 Income before taxes 159,200 156,800 158,380 * Income taxes expense 47,760 47,040 47,514 * Net income $111,440 $109,760 $110,866 *

*Amounts can slightly vary due to differences in rounding

Weighted Average Dec 31, 2007, inventory (700 x $18) $ 12,600 $ 12,600 $ 12,600 Purchases

1,600 x $19 = $30,400

800 x $20 = 16,000

500 x $21 = 10,500

3,500 x $22 = 77,000 $133,900 $133,900 $133,900 Dec 31, 2008, inventory (7,100 - 6,500 = 600 units)