, has the following information as of December 31, 2012: Sales Revenue. This raises an important accounting dilemma. There are television sets, computers, cameras, and appli-ances. If the goods are identical, but have different costs, how does the business know which costs to remove from the Inventory account and transfer to Cost of Goods Sold at the time merchandise is sold? According to Generally Accepted Accounting Principles (GAAP), a business can assign costs using one of four different inventory costing methods. Under LIFO, the cost flow of the goods through the accounting records will be nearly opposite of the physical flow of the goods through the business. 50$2,258. Raw materials Inventory items used in the production of goods. Describe the four different inventory costing methods 1 Finished goods Inventory of goods ready to sell. There are computer games, movies, cell phones, MP3 players, and much more. What happened? The inven-tory changed. 50$1,319. 10$9. Use the gross profit method to estimate the amount of Sounds on Wheels’ inventory loss. Specific-identification method—Assumes that the cost assigned to an inven-tory item when it is sold is the actual cost paid for that item. 50$2,258. 22$2,957. Specific-identification Inventory costing method in which a business uses the specific cost of each unit of inventory; also called the specific-unit-cost method. 90325145245$9. Average cost Inventory costing method where, after each purchase of inventory, a new weighted average cost per unit is computed and is used to value ending inventory and cost of goods sold. It did not make sense to her that any company would want to use LIFO. 25$9. The total cost of inventory equals $2,259. 10 $1,638. Look at all the products. 90325145245$9. The four costing methods allowed by GAAP are as follows: 1. Under specific-identification, the cost flow of the goods through the accounting records will exactly match the physical flow of the goods through the business. Therefore, the Cost of Goods Sold represents the actual cost of the items that were sold. Both the Cost of Goods Sold and the Ending Inventory represent an average of the cost incurred to purchase inventory items. 00180$9. 50 ($1,319. Also, the Ending Inventory represents the actual cost of the goods remaining in inventory. Net Purchases . Purchase. Requirement 1. Under the average cost method, the Cost of Goods Sold and the Ending Inventory will fall between the amounts arrived at using FIFO and LIFO assuming that costs are steadily rising or falling. 4. 50 June 7 remaining inventory + $940. LIFO leaves in ending inventory the first, the oldest, costs incurred. This method is also called the specific-unit-cost method. 40$1,156. Inventory 297 E5-27A. 2. There are thousands of items of inventory. Inventory turnover ( Learning Objective 8 ) 10–15 min. , completed the following perpetual inventory transactions for a line of tires. First-in, first-out (FIFO) method—Assumes that the earliest inventory costs are assigned to items as they are sold. Average cost method—Assumes that a weighted-average cost per item of the entire inventory purchased is assigned to items as they are sold. If this does not occur, the business incurs a net loss. The Cost of Goods Sold represents the oldest costs incurred to purchase inventory items. White Water Kayak, Inc. 10 $1,638. Inventory is important and at the center of creating a return by taking risks. Work in process Inventory of partially completed goods. The Ending Inventory rep-resents the most recent costs incurred to purchase inventory items. Cost of Goods Sold: Beginning Inventory . 250251 Inventory 5 Business, Accounting, and You Walk down the aisles of a Best Buy. Cost of Goods Available . Inventory 253 Accounting in Your World Does this taste funny to you? Jill was at the grocery store the other day picking up a gallon of milk when she started thinking about LIFO, which she had been learning about in her accounting class. Under FIFO, the cost flow of the goods through the accounting records will closely match the physical flow of the goods through the business. Ending Inventory . Jill wonders how she can be sure that the gallon of milk she took off the shelf is fresh and not one that has been on the shelf for weeks, or even months. 34 tires @ $ 8829 tires @ $ 9038 tires @ $160Beginning Inventory. 22 $1,060. 25$ 940. Businesses like Best Buy purchase inventory hop-ing that customers will buy it at a price above what it cost the business. After all she rea-soned, if the grocery store used LIFO, it would be selling milk that it just purchased first which would leave older milk on the shelves. Now blink your eyes. Customers are constantly buying and remov-ing inventory from Best Buy. Now ask yourself: How does Best Buy keep up with its inventory? Who counts the inventory? How does Best Buy gure out the cost of the items it sold? How does Best Buy determine the cost of the items that it owns and hopes to sell in the future? These concerns are complicated when prices constantly change. Assume that Performance Tire, Inc. Best Buy must have a method to account for the quantity and cost of the thousands of items it buys, owns, and sells. FIFO leaves in ending inventory the last, most recent, costs incurred. Net Income . Gross Profit. Inventory is at the heart of operating a merchandise business. Business is about earning net income. Last-in, first-out (LIFO) Inventory costing method in which the last inventory costs incurred are the first costs to be assigned to cost of goods sold. Operating Expenses . Employees are constantly restocking inventory with new items. If this occurs, the business earns net income if they can cover operating expenses. Net income is revenues less costs. $1,752,300736,9001,015,40066,000$ 949,400$ 35,000750,600785,60048,700 Requirements 1. Sale. 00125100Inventory on HandCost of Goods SoldPurchases On June 18, 115 units are sold. As an accoun-tant or manager, you need to understand how merchandising businesses recognize, measure, record, and report the cost of inventory. , for the year ended December 31, 2012. How a business accounts for the cost of the items it buys and sells is very important. First-in, first-out (FIFO) Inventory costing method in which the first inventory costs incurred are the first costs to be assigned to cost of goods sold. Compute the rate of inventory turnover for White Water Kayak, Inc. 00180$9. 3. It’s all about the scorecard of business and guring out whether the merchandise business is winning or losing; that is, if the business is making a pro t or loss. A manufacturer also has goods it holds for sale to its customers. 30115$9. 25$9. These goods are called finished goods inventory. The Ending Inventory represents the earliest costs incurred to purchase inventory. 00 purchased on June 13). Last-in, first-out (LIFO) method—Assumes that the most recent inventory costs are assigned to items as they are sold. Cost of Goods Sold . The total quantity of inventory on hand equals the 145 units remaining in inventory on June 7 plus the 100 units purchased for a total of 245 units. The rate of inventory turnover for White Water Kayak, Inc. Compute cost of goods sold and gross profit under FIFO. Learning Objectives 1 Describe the four different inven-tory costing methods 2 Compute inventory costs using first-in, first-out (FIFO); last-in, first-out (LIFO); and average cost methods and journalize inventory transactions 3 Compare the effects of the different costing methods on the financial statements 4 Value inventory using the lower-of-cost-or-market (LCM) rule 5 Illustrate the reporting of inventory in the financial statements 6 Determine the effect of inventory errors on the financial statements 7 Use the gross profit method to estimate ending inventory 8 Compute the inventory turnover and days-sales-in-inventory 252 Chapter 5 What Inventory Costing Methods Are Allowed? As discussed in Chapter 4 , merchandise inventory represents the goods that a mer-chandiser has available to sell to its customers. In addition, a manufacturer maintains two other types of inventory: raw materials inventory, which it uses to produce the goods it sells, and work in process inven-tory, which represents partially completed goods. In other words, work in process inventory represents goods that are in the process of becoming finished goods. A more detailed discussion of the inventory accounts of a manufacturer will be left to a managerial or cost accounting course. The Cost of Goods Sold represents the latest costs incurred to purchase inventory items. In this chapter, we focus on managing and accounting for inventory in merchandise businesses. Inventory represents a key asset for a merchandiser and is probably the business’s largest current asset. Round the result to two decimal places. Recall from Chapter 4 that most companies utilize a perpetual inventory system. 2. Under a perpetual system, the cost of goods purchased is added to the Inventory account in the general ledger when goods are purchased. 22 each, so the units sold are assigned a cost of $9. Most merchandisers purchase large quantities of identical items. When the goods are sold, the cost of the goods is removed from the Inventory account and added to the Cost of Goods Sold account. Due to inflation and other market forces, the cost the merchandiser pays for the items often differs from one purchase to the next. The Inventory account also reflects purchase dis-counts, purchase returns and allowances, and shipping costs related to the purchase of goods: InventoryBalPurchasesShipping CostsBalXXXXXXXXPurchase DiscountsPurchase Returns and AllowancesSalesXXXXXX The cost of the inventory flows through the Inventory account as items are pur-chased and sold. The physical flow of the goods through the business will depend on how the goods are stocked and in what order customers, or employees, remove the goods from the shelves when they are sold. Jill is confusing the flow of costs through the accounting records with the physical flow of inventory through a store. 254 Chapter 5 Imagine that every inventory item that is purchased has a “yellow sticky note” attached to it with the price that was paid for the item written on the “sticky note”. The average cost per unit is calculated as follows: $2,259. The cost of the units on hand in inventory at the beginning of the period is added to the net cost of units purchased for the period to determine the cost of goods available for sale . , was 16. How Are the Four Inventory Costing Methods Applied? Inventory Cost Flows Recall from Chapter 4 that, in a perpetual inventory system, purchases of goods for resale increase the balance of the Inventory account, while sales of goods to customers decrease the account. 40$1,156. FIFO ( Learning Objective 2 ) 10–15 min. Next, assume that when the business receives a shipment of inventory items, the “sticky notes” reflecting the cost of the items are removed from each item and given to the Accounting Department. The quantity purchased of each item along with the purchase price is tracked as an inventory layer for every separate purchase. Cost Flow Versus Physical Flow of Inventory The inventory costing method (FIFO, LIFO, etc. The objective of tracking the inventory cost is to allocate the cost of the goods available for sale between the following: Units sold, which is recorded as Cost of Goods Sold and is subtracted from net sales revenue on the income statement to arrive at gross profit Units on hand, or unsold, which is reflected as Ending Inventory, a current asset on the balance sheet Compute inventory costs using first-in, first-out (FIFO); last-in, first-out (LIFO); and average cost methods and journalize inventory transactions 2 Cost of goods available for sale The cost of inventory on hand at the beginning of the period plus the net cost of inventory purchased during the period. LIFO refers to the flow of costs through the accounting records and not to the physical flow of goods. The units in inventory have an average cost of $9. 93 in 2011. Purchased six parkas for $45 each. The flow of costs through the accounting records can match, or be exactly opposite of, the physical flow of goods through a store. 2. The Accounting Department will keep track of the “sticky notes” for each separate purchase in what is referred to as an inventory layer . 22 for a total of $1,060. Has the rate improved or deteriorated? Exercises (Group B) E5-28B. , assuming the following: Sep 1515263030One parka costing $40 is on hand, unsold from the previous month. Requirements 1. The physical inventory will most likely be managed in a manner that causes the oldest inventory to be sold first followed by more recent purchases and so on. Underwater World carries a line of waterproof watches. Underwater World uses the FIFO method and a perpetual inventory system. 25$ 940. ) refers to the flow of costs through a merchandiser’s accounting records rather than to the physical flow of the goods through the business. Jill can rest assured that even if the store uses LIFO, her milk is likely to be fresh. The physical flow of the inventory is maintained in this manner to prevent inventory items from spoiling if they are perishable, or to prevent having items that look outdated should the manufacturer choose to change the packaging of the items. 256 Chapter 5 Let’s follow the September inventory activity for ski parkas sold by Northwest Outfitters, Inc. The Accounting Department calculates the cost flow of the inventory without any consideration of the actual physical flow of the merchandise (unless the specific-identification inventory method is used). The flow of the costs through the accounting records will depend upon which inventory costing method the business chooses. The Accounting Department only needs to know how many units were sold, not which units were sold. The sales price of each watch is $185. Sold four parkas for $80 each. The Accounting Department then applies the cost flow method (FIFO, LIFO, etc. Purchased seven parkas for $50 each. Compute cost of goods sold and gross profit using average cost. ) to the inventory layers that it has recorded. Layer OneLayer Two1. In other words, the inventory costs are assigned based on the layers of “sticky notes”. Exhibit 5-1 demonstrates the difference between cost flow and physical flow. 75 1. 75 1. 751. Compute cost of goods sold and gross profit using LIFO. 751. What would be the cost of the goods sold for the month and the ending inventory balance for that month? The answer depends on which inventory costing method Northwest Outfitters elects to use. Company records indicate the following activity for waterproof watches for the month of March: Mar 17111928BalancePurchaseSalePurchaseSale6810139$100$108$112Date QuantityItem Unit Cost Requirements 1. Prepare a perpetual inventory record for the waterproof watches to determine the amount Underwater World should report for ending inventory and cost of goods sold using the FIFO method. Purchase #1Six Gallons at $1. 75 1. Exhibit 5-2 illustrates the objective of calculating inventory costs for Northwest Outfitters. 752. 00 2. 30. 00 2. 001. 00 2. Sold eight parkas for $80 each. 751. 75 1. 00125100Inventory on HandCost of Goods SoldPurchases This transaction leaves 130 units (245 – 115) in inventory at $9. This information is now entered in the inventory on hand columns of the record. 751. 00 $1,800. 22 each. Jun 1Jun 3Jun 7Jun 13Jun 18$9. 752. 00 2. 75Dairy Department sells the oldest milk first to ensure fresh product for customers. 00 2. 2. Inventory 299 3. Round average cost per unit to the nearest cent and all other amounts to the nearest dollar. Accounting Department assigns costs to the gallons sold based on inventory costing method chosen using the inventory layers. 4. 75 1. 001. 00 2. James Washington has decided to open a produce business named Prime Produce, Inc. 50245 $9. 00 eachAccounting DepartmentGallons of milk are placed in dairy caseSticky notes go to Accounting DepartmentSticky notes go to Accounting DepartmentGallons of milk are placed in dairy case Exhibit 5-1 Inventory layer A record of the quantity of and the cost of inventory items made in a single purchase. 00 $1,800. Journalize Underwater World’s inventory transactions using the FIFO method. Purchases6 $457 $50Cost of GoodsAvailable forSale $660EndingInventory2 ? ?Assign Costs Exhibit 5-2 As we shall see, the various inventory costing methods produce different values for ending inventory and cost of goods sold. Inventory 283 Jun 1Jun 3Jun 7Jun 13Jun 18$9. Two parkas are on hand, unsold. Inventory 255 Concept Check. 75 eachPurchase #2Four Gallons at $2. BeginningInventory1 $40Cost ofGoods Sold12 ? ?Sum of Cost ofGoods Sold andEnding Inventorymust equalCost of GoodsAvailable for Sale. This information is entered into the cost of goods sold columns of the record. Remember that the inventory costing method refers to the ow of the inventory costs through the company’s accounting records, not to the physical ow of the inven-tory items through the business. 10$9. Assume that all purchases and sales are on account. Lower of cost or market ( Learning Objective 4 ) 10–15 min. Inventory 257 Specific-Identification Method The specific-identification method is also called the specific-unit-cost method. Because produce spoils quickly, James wants to sell the oldest produce rst so that it doesn’t spoil while sitting on the shelves. 00DateTotalCostTotalCostQuantity Quantity QuantityUnitCostUnitCostTotalCostUnitCost200$9. Does Prime Produce, Inc. The ow of costs through the accounting records may be the same as, closely follow, or be totally opposite of the physical ow of the inven-tory items through the business. , have to use FIFO as its inventory costing method? Answer No. During September, Northwest Outfitters had 14 parkas available for sale: 1 unit on hand in beginning inventory plus 13 units purchased during the month. The cost of goods available for sale for Northwest Outfitters would be calculated as follows: (1 @ $40)(6 @ $45)(7 @ $50) $270 350 $ 40620$660 Purchases Cost of Goods Available for SaleBeginning Inventory Of the 14 parkas available for sale, Northwest sold 12 parkas and still had 2 parkas on hand in ending inventory at the end of the month. This method values inventory according to the specific cost of each item of inventory. Some examples are businesses that sell automobiles, houses, and artwork. 10$9. 10$9. This method is used predominately by businesses that sell unique items with very different costs. LIFO is simply a method of assigning costs to the physical units that were sold. 00DateTotalCostTotalCostQuantity Quantity QuantityUnitCostUnitCostTotalCostUnitCost200$9. For instance, an automobile dealer may have two vehicles on its car lot, a “basic” model that costs $22,000 and a “fully-equipped” model that costs $29,000. Sales Revenue [(4 8) $80]Cost of Goods SoldGross Profit$960575$385$960563$397AverageCost$960560$400FIFO LIFOInventory Costing Method DescriptionFirst-In, First-Out (FIFO) Cost of goods sold has older, lowercosts. 22* per unit*Rounded to the nearest cent The inventory on hand consists of 245 units at $9. Compare the effects of the different costing methods on the financial statements 3 Exhibit 5-8 262 Chapter 5 Exhibit 5-10 summarizes the results of the three inventory methods as used for Northwest Outfitters. Accordingly, the sales price of the basic model would be less than the sales price for the fully-equipped model. This would cause gross profit to be inaccurately stated because the higher cost of the fully-equipped model would be subtracted from the lower selling price of the basic model. 22 each. It would not make sense for the dealer to assign the cost of the fully-equipped model to the basic model when the basic model is sold. Exhibit 5-7 Inventory 261 Journalizing Inventory Transactions The journal entries to record the inventory transactions for Northwest Outfitters for the month of September are presented in Exhibit 5-8 using the following information: All purchases and sales in September were made on account. The dealer would want to specifically identify which model it sold and assign the actual cost of that model to the cost of goods sold. 00DateTotalCostTotalCostQuantity Quantity QuantityUnitCostUnitCostTotalCostUnitCost200$9. Remember, LIFO costing does not follow the actual physical flow of goods for most companies. The sales price of a parka charged to a customer was $80. The LIFO method perpetual inventory record for Northwest Outfitters is presented in Exhibit 5-5 . DATEInventory Accounts PayableAccounts Receivable Sales RevenueCost of Goods Sold InventoryInventory Accounts PayableAccounts Receivable Sales RevenueCost of Goods Sold InventoryACCOUNTSSep 5152630AVERAGE COSTLIFO270320180350640395FIFODR. Exhibit 5-6 illustrates the assignment of costs using LIFO. Let’s see how to compute inventory amounts using the FIFO, LIFO, and average cost methods for Northwest Outfitters. In order to utilize the specific-identification method, each inventory item must be able to be distinguished from other items with some iden-tifying mark such as a serial number. After the pur-chase on September 5, Northwest holds seven units of inventory: one at $40 plus To Cost ofGoods SoldEnding Inventory $100Sep 15 Sales1 $40 3 $45 Sep 30 Sales3 $45 5 $50 Total$ 40135$135250$175385$560$45 $45 $45$45$50 $50 $50$50 $50 $50$50$45 $45$40 Exhibit 5-4 Sep 1515263030Date6713Quantity133512Quantity11633722PurchasesParkas$45$50UnitCost$270$350$620TotalCostCost of Goods Sold$40$45$45$50UnitCost$ 40$135$135$250$560TotalCost QuantityInventory on Hand$40$40$45$45$45$50$50UnitCostTotalCost$ 40$ 40$270$135$135$350$100$100 Exhibit 5-3 Inventory 259Sep 1515263030Date6713Quantity47112Quantity11612127112Purchases$45$50UnitCost$270$350$620TotalCostCost of Goods Sold$45$50$45UnitCost$180$350$ 45$575TotalCost QuantityInventory on Hand$40$45$40$45$40$45$50$40$45UnitCost$ 40$ 40$270$ 40$ 90$ 40$ 90$350$ 40$ 45$ 85TotalCostParkas$40Note: The seven parkas @ $50 were not available for sale until after the September 26 purchase. Ending inventory has thenewer, higher costs. Because the specific-identification method of inventory valuation is not widely used, we will focus on the more popular inventory costing methods. First-In, First-Out (FIFO) Method Assume that Northwest Outfitters uses the FIFO method to account for its inventory. Under FIFO, the first inventory costs incurred by Northwest each period are the first costs to be assigned to cost of goods sold. Again, Northwest had one parka at the beginning of September. Northwest then sells four units on September 15. As you can see, different methods have different benefits. In order to efficiently track inventory costs, a perpetual inventory record is often utilized. 10$9. 22$2,957. Simply put, FIFO assumes that the first inventory items Northwest purchased are the first inventory items it sold. The perpetual inventory record maintains the detail supporting the quantity of, and costs assigned to, the inventory items as they are purchased and sold. 00 $1,800. It also maintains a running balance of the inventory on hand. To Cost ofGoods SoldEnding Inventory $85Sep 15 Sales4 $45 $180Sep 30 Sales7 $50 $3501 $45 45 $395Total $575$45 $45 $45$45$50 $50 $50$50 $50 $50$50$45 $45$40 Exhibit 5-6 six at $45. An inventory layer consists of the quantity of inventory and its purchase cost. E5-29B. Exhibit 5-3 (on the next page) illustrates the FIFO perpetual inventory record for Northwest Outfitters, while Exhibit 5-4 (on the next page) illustrates the flow of costs using FIFO. Most closely matches actual flow ofgoods in most cases. When preparing the perpetual inventory record, it is critical that the inventory “layers” are kept in the proper order. 50$1,319. Northwest began September with one parka that cost $40. 22$9. This information is entered into the inventory on hand columns of the inventory record. Jun 1Jun 3Jun 7Jun 13$9. On September 15, Northwest sold four units. FIFO is the most popular inventory cost-ing method, followed by LIFO, and then by average cost. CR. LIFO ( Learning Objective 2 ) 10–15 min. Maximizes netincome. After the September 5 purchase, the inventory on hand consists of seven units: one at $40 plus six at $45. 10$9. 50$1,319. The next three units sold come from the layer that cost $45 per unit. 50$2,258. The differences occur in the second part of the sales entries that removes the cost of the parkas sold from the inventory account and transfers it to cost of goods sold . 22$2,957. 90$1,198. 60325145245130$9. Eagle Resources has the following account balances at January 31, 2012. 10 $1,638. CR. Refer to the data for E5-28B. Which method results in the largest gross profit and why? E5-34B. DR. 00180$9. Under FIFO, the cost of the first unit sold is the oldest cost, $40 per unit. That leaves three units in inventory on hand, and these units cost $45 each. The inven-tory balance was determined using FIFO. Requirements 1. It shows Sales Revenue, Cost of Goods Sold, and Gross Profit for FIFO, LIFO, and average cost. Use method to attract investorsor borrow money. 22 $1,060. However, instead of the FIFO method, assume Underwater World uses the LIFO method. The remainder of the perpetual inventory record is completed in the same manner. Requirements 1. 30115$9. 25$9. If Northwest uses the FIFO method, it will use these amounts for the cost of goods sold and ending inventory in its financial state-ments. 25$ 940. BenefitLast-In, First-Out (LIFO) Cost of goods sold has newer,higher costs. If Northwest uses the LIFO method, it will use these amounts for the cost of goods sold and ending inventory in its financial state-ments. DR. Then the sale of eight units on September 30 removes units from inventory in LIFO order. 40$1,156. CR. The Cost of Goods Sold data comes from Exhibits 5-3 , 5-5 , and 5-7 . Use method to reduce income taxesand cash needed to pay taxes. 00125100Inventory on HandCost of Goods SoldPurchases The last transaction on June 25 was for the sale of 65 units. Exhibit 5-5 260 Chapter 5 Average Cost Method Suppose Northwest Outfitters uses the average cost method to account for its inventory of parkas. The LIFO monthly summary on September 30 is as follows: Cost of Goods Sold: 12 units that cost a total of $575 Ending Inventory: 2 units that cost a total of $85 These amounts can be seen in the last row of the perpetual inventory record in Exhibit 5-5 as well as in Exhibit 5-6 . 270320175350640385270320180350640395270320177350640386270320177350640386270320175350640385Accounts PayablSep 272727272727Purchase inventory on account(six parkas @ $45 each)Sold four parkas for $80 eachSold eight parkas for $80 eachAccounts Payabl 3535 35Purchased inventory on account(seven parkas @ $50 each) Notice that the journal entries to record the purchases of inventory on account are the same, regardless of the costing method chosen. What Effect Do the Different Costing Methods Have on Net Income? The choice of inventory costing method often has an effect on the amount of net income a company reports on its income statement. Exhibit 5-9 compares the FIFO, LIFO, and average cost methods of costing inventory assuming that, over time, inventory costs are increasing . The FIFO monthly summary on September 30 is as follows: Cost of Goods Sold: 12 units that cost a total of $560 Ending Inventory: 2 units that cost a total of $100 Look for these amounts in the last row of the perpetual inventory record in Exhibit 5-3 as well as in Exhibit 5-4 . Ending inventoryhas the older, lower costs. Minimizes net income and incometaxes and minimizes ending inventory. Prepare a perpetual inventory record for the watches on the LIFO basis to deter-mine the cost of ending inventory and cost of goods sold for the month. Many companies choose this method when they want to report high income in order to attract investors and borrow on attractive terms. Average Cost Averages costs in ending inventoryand cost of goods sold. Notice that the sum of the cost of goods sold plus ending inventory equals the cost of goods available for sale, $660 ($560 + $100). Perpetual inventory record A record that tracks the quantity of, and cost assigned to, inventory items as they are purchased and sold. Exhibit 5-10 shows that FIFO produces the lowest cost of goods sold and the highest gross profit. With this method, the business computes a new, weighted-average cost per unit after each purchase based on the number of items purchased at each price. The average cost method generates gross profit, net income, and income tax amounts that fall between the extremes of FIFO and LIFO. 258 Chapter 5 Last-In, First-Out (LIFO) Method Now, imagine that Northwest uses the LIFO method instead of FIFO. Because there have been no purchases since the last transaction, there is no need to recalculate the average cost per unit. LIFO results in the highest cost of goods sold and, therefore, the lowest gross profit when inventory costs are increasing. E5-35B. InventoryBeg BalEnd Bal 17,50035,500Cost of Goods SoldBal 85,500Sales RevenueBal 192,000 Eagle Resources has determined that the replacement cost (current market value) of the January 31, 2012, ending inventory is $36,500. Reporting inventory on the balance sheet ( Learning Objective 5 ) 5–10 min. 2. A “middle-ground solution” for reportingnet income and ending inventory and paying income taxes. Net income is also the highest under FIFO when inventory costs are rising. Assume that all purchases and sales are on account. Lower gross profit results in lower net income and lower income taxes. Accordingly, LIFO assumes that the last inventory items purchased are the first inventory items sold. Under the LIFO method, the last, most recent costs incurred are the first costs assigned to the cost of goods sold. Journalize Underwater World’s inventory transactions using the perpetual LIFO method. 298 Chapter 5 E5-30B. A drawback to using LIFO when inventory costs are rising is that the company reports lower net income. Analyze A company should choose: Specific-identification method when it sells unique items with varying costs. However, instead of the FIFO method, assume that Underwater World uses the average cost method. Notice that the sum of cost of goods sold and ending inventory still equals the cost of goods available for sale, $660 ($575 + $85). So, the cost assigned to the 65 units will be $9. Average cost ( Learning Objective 2 ) 10–15 min. Refer to the data for E5-28B. The ending inventory’s cost comes from the oldest, earliest purchases of the inventory. , should choose LIFO. Requirements 1. Prepare a perpetual inventory record for the watches on the average cost basis to determine the cost of ending inventory and cost of goods sold for the month. The purchase of seven units on September 26 adds a new $50 layer to inventory. This information is entered into the cost of goods sold columns of the record. That leaves three parkas in inventory on September 15: one at $40 plus two at $45. Under LIFO, the cost of goods sold always comes from the latest purchase. 30UnitCost$177$386$563TotalCost QuantityInventory on Hand$40. We round average unit cost to the nearest cent and total cost to the nearest dollar. Ending inventory and cost of goods sold are then based on the average cost per unit. Therefore, companies that seek a “middle-ground” solution choose the average cost method for valuing inventory. The consistency principle states that businesses should use the same accounting methods and procedures from period to period. 22 each. What value would Eagle Resources report on the balance sheet at January 31, 2012, for inventory assuming the company uses the lower-of-cost-or-market rule? 2. 29$48. The average unit cost on September 5 is based on the cost of the unit on hand at the beginning of September plus the cost of the six units purchased on September 5 as follows: Sep 1515263030Date6713Quantity4812Quantity1731022Purchases$45$50UnitCost$270$350$620TotalCostCost of Goods Sold$44. Jun 1Jun 3Jun 7Jun 13Jun 18Jun 25$9. Exhibit 5-7 shows a perpetual inventory record for the average cost method. 2. 00DateTotalCostTotalCostQuantity Quantity QuantityUnitCostUnitCostTotalCostUnitCost200$9. 00 $1,620. 00 $1,800. Based upon the previous information, it appears that a business could “manage its income” by switching back and forth between costing methods depending upon the circumstances. They would like to pay the least amount of income taxes possible. Sunglass Bungalow had the following FIFO perpetual inventory record at April 30, the end of the fiscal year. Prepare any adjusting journal entry required from the information given. 29$48. 00$44. Round average cost per unit to the nearest cent and all other amounts to the nearest dollar. Journalize Underwater World’s inventory transactions using the perpetual average cost method. Assume that all purchases and sales are on account. 29$44. Northwest $310 7 Units $44. 10$9. 30UnitCost$ 40$310$133$483$ 97$ 97TotalCostParkas Sep 15TotalBeginning InventoryPurchase167Numberof Units$40$45UnitCost$ 40$270$310TotalCost The four items sold on September 15 are assigned a cost of $44. 30$48. 10$9. Apr 1Apr 3Apr 7Apr 13Apr 18Apr 25Apr 30$9. 50$1,319. This is not the case due to the consistency principle mandated by GAAP. Which inventory method will allow Anderson’s Outdoor Equipment, Inc. 29 per unit and the remaining three units are carried forward at a cost of $44. The consistency prin-ciple does not mean that a company can never change its accounting methods, for instance changing from the LIFO to FIFO inventory valuation method, but that it can only do so if it can justify the change. Also, any changes in accounting methods must be disclosed to the financial statement users. 29 each. 00$9. Suppose you are analyzing a company’s net income pattern over a two-year period and costs are rising. , to pay the least amount of taxes? Answer It depends on whether the cost of inventory is expected to increase or decrease during the period. The choice of inventory method depends on the type of inventory being sold, whether inventory costs are rising or declining, and whether you want to report higher or lower net income. 00DateTotalCostTotalCostQuantity Quantity QuantityUnitCostUnitCostTotalCostUnitCost180$9. Yet again, the sum of the cost of goods sold and ending inventory equals the cost of goods available for sale, $660 ($563 + $97). 29Average Cost per Unit Total Cost of Inventory on Hand Number of Units on Handthen computes a new average cost after the September 26 purchase in the same manner. E5-31B. 10 $1,638. The average cost monthly summary on September 30 is as follows: Cost of Goods Sold: 12 units that cost a total of $563 Ending Inventory: 2 units that cost a total of $97 Once again, these amounts can be seen in the last row of the perpetual inven-tory record presented in Exhibit 5-7 . If Northwest uses the average cost method, it will use these amounts to prepare its financial statements. If the company switched from LIFO to FIFO during that time, its net income likely increased significantly. Exhibit 5-9 Exhibit 5-10 Inventory 263all, of the increase in income could be the result of the change in inventory method. The problem is that much, if not Consistency principle Accounting principle that states that a business should use the same accounting methods and procedures from period to period. If inventory costs are expected to increase, Anderson’s Outdoor Equipment, Inc. However, if inventory costs are expected to decrease, Anderson’s Outdoor Equipment, Inc. FIFO versus LIFO ( Learning Objective 2 ) 10–15 min. If you were unaware of the change, you might believe that the company’s income increased because of improved operations. Therefore, companies must report any changes in the accounting methods they use and they generally must retrospectively apply the impact of the change as an adjustment to beginning retained earnings, unless it is impractical to do so. Assume that North Country Bike World bought and sold a line of mountain bikes during August as follows: Aug 15122130BalanceSalePurchaseSaleSale171116107$267$271Date QuantityItem Unit Cost North Country Bike World uses the perpetual inventory system. 10$9. , should choose FIFO. Consistency helps investors compare a company’s financial statements from one period to the next and make better decisions. Requirements 1. 22$9. Concept Check. , has recently opened for business. If inventory costs are expected to remain constant, the choice of inventory costing method will have no effect on the net income for the period. 00180$9. 2. FIFO if inventory costs are rising and the company wants to report higher net income. Compute the cost of ending inventory under FIFO. FIFO if inventory costs are declining and the company wants to report the lowest net income. Anderson’s Outdoor Equipment, Inc. 22$2,957. The owners are trying to determine which inventory costing method to choose. 90$1,198. Decision Which inventory costing method should a company choose? Decision Guidelines Guideline The physical and cost flow of the inventory can differ. 60325145245130$9. LIFO if inventory costs are rising and the company wants to report the lowest net income. LIFO if inventory costs are declining and the company wants to report the highest net income. Another important accounting principle is the principle of conservatism . 50$2,258. Average cost method if costs are continually fluctuating and the company wants to stabilize net income. Compute the cost of ending inventory under LIFO. 00$9. Conservatism in accounting means reporting items in the financial statements at amounts that lead to the most cautious immediate results. In this way, net income is decreased in the period in which the decrease in the market value of the inventory occurred. Businesses will record inventory transactions, assigning a cost to each inventory item sold using the specific-identification, FIFO, LIFO, or average cost method. The total net income, $90,000, from Panel B for the two periods combined when there is an error is the same as it is in Panel A for the two periods when there are no errors. 00$9. 22 $1,060. 30115$9. The effects of inventory errors are summarized in Exhibit 5-13 . 22 $ 599. In other words, the activity for both years is exactly the same. Let’s look at the process of valuing inventory according to the lower-of-cost-or-market rule for the inventory in Exhibit 5-11 . 10$9. The application of LCM is actually more complex than is demonstrated in Exhibit 5-11 ; however, more in depth coverage will be left to a more advanced accounting course. Sales RevenueCost of Goods Sold: Beginning Inventory Purchases Cost of Goods Available for Sale Ending Inventory Cost of Goods SoldGross ProfitOperating ExpensesNet Income$160,00075,00085,00040,000$45,000Panel A—Ending Inventory correctly stated Year 2$20,00075,00095,00020,000$160,00075,00085,00040,000$45,000$ 20,00075,00095,00020,000Year 1Panel B—Ending Inventory overstated by $5,000Sales RevenueCost of Goods Sold: Beginning Inventory Purchases Cost of Goods Available for Sale Ending Inventory Cost of Goods SoldGross ProfitOperating ExpensesNet Income$20,00075,00095,00025,000$160,00070,00090,00040,000$ 50,000$ 25,00075,000100,00020,000$160,00080,00080,00040,000$ 40,000Year 2Year 1Period 1 Ending Inventory OverstatedPeriod 1 Ending Inventory UnderstatedOverstatedUnderstatedUnderstatedOverstatedGross Profitand Net IncomeCost ofGoods SoldInventory ErrorCost ofGoods SoldUnderstatedOverstatedOverstatedUnderstatedGross Profitand Net IncomePeriod 2Period 1 Exhibit 5-12 Exhibit 5-13 268 Chapter 5 Is It Possible to Estimate the Value of Inventory If the Inventory Is Accidentally Destroyed? Often a business must estimate the value of its inventory. Exhibit 5-12 , Panel A, illustrates the income statements for both years assuming that inventory was properly counted. Now, let’s assume that the ending inventory in year 1 was incorrectly valued at $25,000 (instead of the correct amount of $20,000) due to an error in the physical count. Calculate the total cost and total market value for each item. The total cost is $14,800 and the total LCM amount is $14,425, so a jour-nal entry is made to reduce the inventory amount by the difference of $375 ($14,800 – $14,425). Gross Profit is overstated by $5,000. Lower-of-cost-or-market (LCM) rule The rule that a business must report inventory in the financial statements at whichever is lower, the historical cost or the market value, of each inventory item. 3065$9. 3. Prepare a table listing each inventory item, its quantity, unit cost, and unit market value. Retained Earnings will be overstated because Net Income is closed into Retained Earnings. A conservative approach will mean that, when there are two reasonable options present, the option should be chosen that causes assets and income to be understated, rather than overstated. The LCM rule may be applied to inventory on an item-by-item basis as in Exhibit 5-11 , to broad categories of items, or to the entire inventory taken as a whole. Exhibit 5-12 , Panel B, illustrates the income statements for both years assum-ing that ending inventory in year 1 was overstated by $5,000. 25$9. Net Income is overstated by $5,000. Application of the LCM rule is a continuation of the process of valuing inventory. A comparison of the statements in Panel A and Panel B of Exhibit 5-12 reveals the following for year 1: Cost of Goods Sold is understated by $5,000. 264 Chapter 5 Merchandisers are often faced with a situation where the cost of replacing an inventory item is lower than what was originally paid for the item. Which method results in a higher cost of ending inventory? E5-32B. 122A1587L394CZ$ 2,0006,0006,800$14,800$ 2,0805,6256,868$14,573$ 2,0005,6256,800$14,425Lower ofCost or MarketInventoryItemInventoryQuantityUnitCost407568$ 50$ 80$100$ 52$ 75$101Unit MarketValue Cost MarketTotal Materiality Accounting principle that states that a company must perform strictly proper accounting only for items that are significant for the business’s financial statements. 25$ 940. Information is significant, or material, when its presentation in the financial statements would cause someone to change a decision. Add the amounts in each column to obtain the total cost, total market value, and total lower-of-cost-or-market amounts. 00125100Inventory on HandCost of Goods SoldPurchases This transaction leaves 65 units (130 – 65) in inventory at $9. Most businesses will report inventory on the balance sheet at the lower-of-cost-or-market value; however, others will use the concept of materiality to decide whether inventory needs to be written down to its current replacement cost. In this way, businesses report conservative values for inventory and net income. Place the lower of the cost or market value for each item in the “Lower of Cost or Market” column. 40$1,156. 22 each. Determine the effect of inventory errors on the financial statements 6 Inventory 267 Recall from Chapter 3 that Inventory, as an asset, is a permanent account that carries its balance over to the next period. This information is now entered in the inventory on hand columns of the record. A comparison of the statements in Panel A and Panel B of Exhibit 5-12 reveals the following for year 2: Cost of Goods Available for Sale is overstated by $5,000. 00 $1,800. FIFO versus LIFO ( Learning Objective 2 ) 10–15 min. Refer to the data for North Country Bike World in E5-31B. Jun 1Jun 3Jun 7Jun 13Jun 18Jun 25$9. Thus, the error in ending inven-tory in year 1 carries over as an error in the beginning inventory in year 2. 10$9. Then, at the end of the accounting period, they will apply the LCM rule to the ending inventory. So, one period’s ending inventory becomes the next period’s beginning inventory. In addition to showing the inventory amount, a business must dis-close the costing method used to value inventory (specific-identification, FIFO, LIFO, or average cost) and the application of LCM. The materiality concept states that a company must perform strictly proper accounting only for items that have a material effect on the company’s financial statements. Retained Earnings will now be correctly stated because the understatement in Net Income in year 2 will offset the overstatement from year 1 when the Net Income from year 2 is closed into Retained Earnings. Cost of Goods Sold is overstated by $5,000. 00DateTotalCostTotalCostQuantity Quantity QuantityUnitCostUnitCostTotalCostUnitCost200$9. Net Income is understated by $5,000. Suppose the company suffers a fire loss. Gross Profit is understated by $5,000. As you can see, the error cancels out after two periods. For example, if the lower-of-cost-or-mar-ket comparison in Exhibit 5-11 resulted in a difference between total cost and total LCM of $3, the company would have been appropriate in ignoring any adjustment to inventory for the $3. To collect insurance, it must estimate the cost of the inventory destroyed, that is, it must estimate the ending inventory. An item is considered to have a material effect when it would cause someone to change a Exhibit 5-11 Inventory 265decision; stated differently, a material amount is one large enough to make a differ-ence to a user of the financial statements. Let’s look at an example. The gross profit method estimates ending inventory by using the format for the Cost of Goods Sold: Beginning InventoryPurchases (Net of Discounts and Returns and Allowances,Plus Shipping Costs)Cost of Goods Available for SaleEnding InventoryCost of Goods Sold Rearranging ending inventory and cost of goods sold helps to estimate ending inventory. Requirements 1. 10$9. In order to take a conservative approach when these situations arise, businesses will apply the lower-of-cost-or-market (LCM) rule . We can estimate ending inventory through the following steps and amounts, as shown in Exhibits 5-14 and 5-15 : Use the gross profit method to estimate ending inventory 7 Gross profit method A way to estimate ending inventory by using the gross profit percentage. Compute the cost of goods sold under FIFO. 10$9. 22$9. Step 1 Purchases (net) Cost of Goods Available for SaleStep 2 Net Sales Revenue Estimated Gross Profit of 40% ($100,000 40%) Estimated Cost of Goods SoldStep 3 $100,000(40,000)$ 14,00066,00080,000(60,000)$ 20,000Beginning InventoryEstimated Cost of Goods Sold:Estimated Ending Inventory Step 1 Calculate the cost of goods available for sale. 22$9. 2. How Is Inventory Reported on the Balance Sheet? Inventory is reported as a current asset and is often listed after receivables on the balance sheet. Do you remember calculating the gross profit percentage in Chapter 4 ? The historical gross profit percentage of a business can be used to estimate the current period’s gross profit. 25$9. Add the beginning balance of inventory and the net cost of purchases for the accounting period ($14,000 + $66,000 = $80,000). 10$9. If the replacement cost of inventory is less than its historical cost, a company writes down the inventory value by decreasing inventory and increasing cost of goods sold. Step 2 Estimate the cost of goods sold. Item 122A would have a value of $2,000. Calculate the estimated gross profit by multiplying the net sales revenue by the historical gross profit percentage ($100,000 40% = $40,000). 22$2,957. Subtract the estimated gross profit from the net sales revenue to get the estimated cost of goods sold ($100,000 – $40,000 = $60,000). Hence, the materiality concept frees accountants from having to report every account in strict accordance with GAAP, yet still report items properly. The LCM rule requires businesses to report inventory in the financial statements at whichever is lower, the amount originally paid (the historical cost) or the replacement cost (the current market value) of each inventory item. A conservative approach will also mean that liabilities and expenses are overstated, rather than understated. The goal is for financial statements to report figures that minimize the risk of overstating the company’s assets and understating liabilities. What Else Determines How Inventory Is Valued? Value inventory using the lower-of-cost-or-market (LCM) rule 4 Conservatism Accounting principle that states that a business must report all items in the financial statements at amounts that lead to the most cautious immediate results. Step 3 Estimate the ending inventory. 50$1,319. Inventory is the most important asset in a merchandise business. Inventory Item 122A, for example, has a total cost of $2,000 (40 units $50 cost per unit) and a total market value of $2,080 (40 units $52 market value per unit). Subtract estimated cost of goods sold from the cost of goods available for sale ($80,000 – $60,000 = $20,000). Exhibit 5-14 Inventory 269 FOCUS ON DECISION MAKING “How Much Inventory Does a Business Need?” What do you think about when you think of a merchandise business like Best Buy? Most likely, it’s the things you buy; in other words, inventory. Net Sales Revenue $100,000Estimated Gross Profit of 40% (40,000)Estimated Cost of Goods Sold $ 60,000 Exhibit 5-15 Inventory turnover The ratio of cost of goods sold to average inventory. Adjust the inventory balance to reflect the lower-of-cost-or-market amount. Footnotes Disclosures that accompany the financial statements. 90$1,198. To provide this information, accoun-tants typically include a set of footnotes that accompany the financial statements. 25$9. When inventory costs are rising, the company using the FIFO inventory costing method reports higher net income, but only because it uses FIFO. The full-disclosure principle requires that a company’s financial statements report enough information for outsiders to make knowledgeable decisions about the company. Cellular Connect’s rate of inventory turnover is calculated as follows: 90,300(13,900* 15,700)/2Inventory Turnover 6. If the entity has its financial statements audited, a rep-resentative of the audit firm will usually be present at the count to take test counts and determine whether inventory instructions are being adequately followed. The bottom line is merchan-dise businesses want enough inventory to meet future sales, but not too much inventory that it incurs excessive costs to maintain it. Individuals assigned to the count can use maps of inventory loca-tions, pre-numbered count sheets, ink pens, and may count in pairs. This disclosure helps a business adhere to the full-disclosure principle. 60$ 599. It takes up space and it ties up money. Remember that balance sheet accounts, such as Inventory, carry their balances from one Compute the inventory turnover and days-sales-in-inventory 8 270 Chapter 5period to the next. Inventory Shrinkage The perpetual inventory method keeps a continuous record of the inventory on hand at all times. 10 Times Per Year (rounded)*The $13,900 beginning inventory balance is the ending inventory balance for the prior period and is not shown in Exhibit 4-6. 00$1,001. 3065$9. 50$2,258. 22 $ 599. Footnote disclosures help ensure that companies report relevant, reliable, and com-parable financial information. Without knowledge of the accounting methods the companies are using, the banker could lend money to the wrong business, or lend the wrong amount of money to each. 3032514524513065$9. 22 $1,060. 10 $1,638. Cellular Connect’s days-sales-in-inventory is calculated as follows: (13,900 15,700)/2(90,300/365)Days-Sales-in-Inventory 60 days (rounded) Cellular Connect’s inventory turnover shows that it is selling its merchandise inventory a little more than six times a year. However, the actual amount of inventory on hand may differ from the amount on hand according to the accounting records due to errors in recording inventory related transactions or due to inventory shrinkage . This Illustrate the reporting of inventory in the financial statements 5 Full-disclosure principle Accounting principle that states that a company’s financial statements should report enough information for users to make knowledgeable decisions about the company. Cost of Goods SoldAverage InventoryCost of Goods Sold(Beginning Inventory Ending Inventory)/2Inventory Turnover Inventory turnover is usually computed for an annual period, so the cost of goods sold gure is the amount for the entire year. Inventory shrinkage represents a loss of inventory. Cellular Connect’s days-sales-in-inventory shows it had enough inventory, during 2012, for 60 days of sales. 00180$9. A number of commonly used procedures help ensure the accuracy of the count. 30115$9. 40$1,156. Inventory shrinkage is most often the result of employee theft, customer theft, and the damage, spillage, or spoilage of inventory items. 25$ 940. A physical inventory count is used to determine the amount of inventory actu-ally on hand at the end of the accounting period. 266 Chapter 5allows the auditor to evaluate whether inventory and cost of goods sold are fairly presented in the statements. 00125100Inventory on HandCost of Goods SoldPurchases As we did with FIFO and LIFO, the perpetual inventory record is completed by calculating the total quantity and total cost for the purchases and cost of goods sold columns and entering the results in the last row. Jun 1Jun 3Jun 7Jun 13Jun 18Jun 25Jun 30$9. Cellular Connect could operate for 60 days without buying any more inventory. Average inventory is computed by adding the beginning inventory balance to the ending inventory balance, and dividing the total by two. A common footnote related to inventory would look like this: NOTE 2: Statement of Signi cant Accounting Policies: Inventory . Cost is determined using the rst-in, rst-out method. Notice that the amounts in the last row of the inventory on hand columns only reflect the amounts that existed after the last transaction. 00 $1,800. Compute the cost of goods sold under LIFO. A count usually occurs when the store is closed. The ending inventory for one year becomes the beginning inventory for the next year. Suppose a banker is comparing two companies, one using LIFO and the other FIFO. Inventory is carried at the lower of cost or market . Inventory shrinkage The loss of inventory. To save time and increase objectivity for the count, an outside inventory-taking firm may be used to take counts instead of, or in addition to, employees. The inventory value derived from the physical inventory count is used as the inventory account balance on the balance sheet. 3. FIFO versus LIFO versus average cost ( Learning Objectives 2 & 3 ) 15–20 min. The count may also involve pre-written inventory instructions and tags to identify merchandise to be counted, and is typically supervised. Days-sales-in-inventory looks at the same issue with a slightly different measure. 25$9. The accounting records are adjusted for any difference between the inventory value determined by the count and the value according to the perpetual records. The Inventory account is debited or credited as necessary with a corresponding credit or debit to the Cost of Goods Sold account. Likewise, inventory may become obsolete and lose value. However, errors in the inventory count can and do occur such as the following: Inaccurately counting inventory Double counting inventory; for example, counting it in one location and then moving it to another location where it is counted again Not counting one section of the storeroom or excluding incoming goods shipped FOB shipping point Failure to recognize obsolete or damaged goods, resulting in failure to write down their value accordingly What is the impact of a counting error? Remember that in a perpetual inven-tory system, the inventory account balance is adjusted to reflect the value arrived at by the physical count. How Do Inventory Errors Affect the Financial Statements? A correct count of the inventory items on hand is necessary to ensure the accurate reporting of the inventory’s value. In order to keep the example simple, we will assume that the com-pany has a $20,000 balance in both beginning inventory and ending inventory for the first year. We will also assume that it has a $20,000 balance in ending inventory in the second year (remember that the beginning balance in the inventory account in year 2 is the ending inventory balance from year 1). Days-sales-in-inventory measures how much inventory a business sells in a day and compares that amount with how much inventory a business owned on average during the year. 00DateTotalCostTotalCostQuantity Quantity QuantityUnitCostUnitCostTotalCostUnitCost200$9. 10$9. To demonstrate, let’s look at the income statements for a company for two con-secutive years. A wrong count, a count that disagrees with the account-ing records of inventory, will result in making a journal entry that causes both the Inventory balance and the Cost of Goods Sold to be incorrect. In addition, assume that the company made purchases of $75,000 and that it had sales of $160,000 and operat-ing expenses of $40,000 in both years. , from Exhibit 4-6 in Chapter 4 . Days-sales-in-inventory is computed as: Days-Sales-In-Inventory Average Inventory/ (Cost of Goods Sold/365 Days) To demonstrate inventory turnover and days-sales-in-inventory, we will use the nancial statements for Cellular Connect, Inc. Inventory turnover is the ratio of cost of goods sold to the average inventory. A high turnover rate and low days-sales-in-inventory is desirable because it indi-cates that the inventory is turning over, or being sold, quickly. However, they also need to avoid purchasing too much inventory. Inventory turnover tells the manager how many times in a year the average inventory sold. 10$9. Which method results in a higher cost of goods sold? E5-33B. An increase in the turn-over rate usually means increasing pro ts will result from increasing sales. The Rate of Inventory Turnover and Days-Sales-in-Inventory So how do managers determine the right amount of inventory? Often they look at inventory turnover and days-sales-in-inventory. Regardless of the turnover rate, merchandisers need to keep suf cient levels of inventory on hand to meet sales demand. But how much inventory does a business need? A business does not want too little or too much inventory. If it has too little, the business will lose sales and pro t. 22$9. 25$1,620. 22$9. 00$ 647. Inventory turnover is computed as: Assigning CostsCost of GoodsAvailable forSale $80,000Purchases$66,000Beginning Inventory$14,000Step 1. 00$ 180. Calculate cost ofgoods available for sale. Remember that the money used to nance assets (liabilities or shareholders’ equity) comes at a cost. 22$2,957. But having too much inventory is also a problem. Inventory is expensive to maintain. Step 3. Estimate the ending inventory. 50$2,258. 50$1,319. 00$1,001. 50$3,268. Cost of Goods Available for Sale $80,000Estimated Cost of Goods Sold (60,000) Estimated Ending Inventory $20,000–EstimatedCost ofGoods Sold$60,000EstimatedEnding Inventory$20,000Step 2. 90$1,198. 25$1,440. 00$ 180. 30$ 599. Estimate the cost of goods sold. Tiffany operates with a high net income percentage and a low inventory turnover. Remember how some businesses have small net income percentages and some businesses have large net income percentages? If a business has a small net income percentage, it needs to sell a lot of items to earn a large net income. 10$9. Tiffany has few sales, but makes a lot of pro t on each sale. Kroger makes a little pro t on each sale, but has a lot of sales. How They Do It: A Look At Business Go back to Chapter 4 and look at Focus on Decision Making . 00$ 180. 60$ 599. 5016020902070360$9. Inventory management is about meeting customer demand with the least amount of inventory. Although they operate differently, both Kroger and Tiffany are successful businesses. Days-sales-in-inventory The average number of days that it took to sell the average inventory held during the year. 00$ 819. 25$1,001. 00$ 182. Learning Objective 2 Part 1 Part 2 Demo Doc Complete In order to determine whether the FIFO or LIFO costing method would result in the highest income, we must first look to see if the cost of inventory is increasing or decreasing. To do this, the business must have a high inventory turnover and low days-sales-in-inventory. Now once again think about Kroger and Tiffany & Co. If a business has a large net income percentage, it does not need to sell a lot of items to earn a large net income. 00$1,001. 00$1,741. 303251452451306565$9. 10 $1,638. 00$ 740. 00$ 182. A review of the data indicates that the cost of inventory has steadily increased from $9. 00180$9. 00 to $9. In Chapter 4 , we saw Kroger had a low net income percentage and Tiffany had a high net income percent-age. It can have a low inventory turnover and a high days-sales-in-inventory. How did they do it? As of January 29, 2011, Kroger had an inventory turnover of 10. 22 $ 599. 22 $1,060. 40 per unit during the month. The LIFO method is exactly opposite. 4 times a year. However, both businesses earned substantial net income. As of January 29, 2011, Kroger had an average of 35. 1 days-sales-in-inventory. In order to have the highest income possible, we must choose the inventory costing method that results in the lowest cost of goods sold. 83 times a year. 30115$9. 30$3,297. 00$ 740. • Speci c-identi cation assigns the actual cost of each item to the units sold. • FIFO assigns the oldest costs to the units sold. 252) Perpetual inventory record (p. The FIFO costing method assumes that the earliest inventory costs become part of cost of goods sold, which leaves the most recent costs in ending inventory. 00$ 740. It assumes that the most recent costs become part of cost of goods sold, which leaves the earliest costs in ending inventory. At the end of scal year 2010, Tiffany had an average of 440 days-sales-in-inventory. As of January 31, 2011, Tiffany had an inventory turnover of 0. Kroger operates with a low net income percentage but a high inventory turnover. , as it will result in the lowest cost of goods sold. Because the inventory costs for Mackay Specialty Products, Inc. 00$ 92. Therefore, choosing the FIFO costing method will result in the highest income for Mackay Specialty Products, Inc. 50$ 92. Demo Doc Complete Part 1 Part 2 Demo Doc Complete 284 Chapter 5Inventory 285 SummaryHere is what you should know after reading this chapter. Requirement Calculate the cost of goods sold and the value of ending inventory for Mackay Specialty Products, Inc. 00$9. , have steadily increased, the earliest inventory costs are lower than the most recent purchases. Average cost (round average cost per unit to the nearest cent. Purchased 125 units at $9. Jun 1Jun 3$9. 00 per unit. 25 $1,156. 65) between this amount and the cost of goods sold found on our perpetual inventory record ($3,297. Inventory272 Chapter 5 a. 5018011020110201108020801010$9. 25125Inventory on HandCost of Goods SoldPurchases The inventory on hand columns are completed by carrying down the original layer of inven-tory (200 units at $9. , for the month of June 2012 under the following costing methods: Part 1 Part 2 Demo Doc Complete 271 Demo Doc Inventory Costing Mackay Specialty Products, Inc. , which uses the perpetual inventory method, had the following inventory information for the month of June, 2012: Jun 137131825Beginning inventory was 200 units costing $9. 6065360$9. 00DateTotalCostTotalCostQuantity Quantity QuantityUnitCostUnitCostTotalCostUnitCost200Inventory on HandCost of Goods SoldPurchases Next, we enter the June 3 purchase of 125 units costing $9. 00DateTotalCostTotalCostQuantity Quantity QuantityUnitCostUnitCostTotalCostUnitCost200$9. 00 $1,800. 25$9. 10$9. 25 each for a total of $1,156. 00$9. Key Points Key Accounting Terms Inventory costing methods • Determine the ow of costs through the accounting records. MyAccountingLab will help you identify what you know, and where to go when you need practice. Purchased 100 units at $9. 25 per unit. 00) and then adding the new layer (125 units at $9. 25 in the purchases columns of the record. ) Demo Doc Solutions Requirement Without resorting to calculations, determine which costing method, FIFO or LIFO, will result in the highest reported income for Mackay Specialty Products, Inc. 40 per unit. 40$1,156. 25$ 940. Sold 180 units. 00$2,096. • LIFO assigns the most recent costs to the units sold. FIFO An easy way to determine the cost of goods sold and the value of ending inventory is to prepare a perpetual inventory record. Sold 115 units. 00. The first entry necessary in the record records the beginning inventory of 200 units at $9. Requirements: 1. Without resorting to calculations, determine which costing method, FIFO or LIFO, will result in the highest reported income for Mackay Specialty Products, Inc. 25125100225Inventory on HandCost of Goods SoldPurchases Once again, we can double-check our calculations by calculating the cost of goods sold using the same formula that we used in steps a and b. 254) Last-in, rst-out (LIFO) (p. Using this formula, the cost of goods sold is $3,296. Sold 65 units. 10$9. • Average cost assigns a weighted average cost of the inventory on hand to the units sold. 00 each for a total of $1,800. 25 – $599. 2. 252) Cost of goods available for sale (p. Average cost (p. This information is entered in the inventory on hand columns of the record as follows: Jun 1 $9. Calculate the cost of goods sold and the value of ending inventory for Mackay Specialty Products, Inc. 00 $1,800. , for the month of June 2012 under the following costing methods: a. 75 of inventory on hand. LIFO c. 0011080190Inventory on HandCost of Goods SoldPurchases A physical count of the inventory performed at year end revealed $64. FIFO b. 25). Jun 1Jun 3$9. 00 $1,800. 00DateTotalCostTotalCostQuantity Quantity QuantityUnitCostUnitCostTotalCostUnitCost200$9. 00 $1,800. 00$1,156. 95 ($1,800. 25 $1,156. 60) is due to rounding when calculating the average unit costs and is immaterial. 00200$9. 00180$9. 257) Raw materials (p. Requirements 1. 25 $1,156. 25125Inventory on HandCost of Goods SoldPurchases The June 13 purchase of 100 units at $9. 25125$9. Under FIFO, costs are assigned to cost of goods sold based on the oldest units on hand (the first units in). 25 $1,156. 255) First-in, rst-out (FIFO) (p. 25125Inventory on HandCost of Goods SoldPurchases Next, we will enter the June 7 sale transaction. The oldest units we have are the units in beginning inventory (200 units at $9. 00 each). 252) Finished goods (p. The 180 units sold are, therefore, assigned a cost of $9. 00 $1,620. 252) Inventory layer (p. Journalize the adjusting entry for inventory, if any is required. 00 each for a total of $1,620. 00$1,800. 00. This information is entered into the cost of goods sold columns of the record. 40 each is entered into the purchases columns of the record. 00DateTotalCostTotalCostQuantity Quantity QuantityUnitCostUnitCostTotalCostUnitCost200$9. 25$ 180. 2. Jun 1Jun 3Jun 7DateTotalCostTotalCostQuantity Quantity QuantityUnitCostUnitCostTotalCostUnitCost20020012520125$9. What could have caused the value of the ending inventory based on the physical count to be lower than the amount based on the perpetual inventory record? 300 Chapter 5 E5-36B. 00 + $2,096. The difference ($0. Jun 1Jun 3Jun 7$9. Inventory errors ( Learning Objective 6 ) 10–15 min. Prepare any adjusting journal entry required from the information given. 25$9. Jun 1Jun 3Jun 7Jun 13DateTotalCostTotalCostQuantity Quantity QuantityUnitCostUnitCostTotalCostUnitCost20020012520125$9. 00$9. 00$9. 00$9. 25$9. 30). 252) Speci c-identi cation (p. 25125Inventory on HandCost of Goods SoldPurchases Inventory 273 The inventory on hand columns are now completed. 25$1,800. 252) Work in process (p. Of the original 200 units in begin-ning inventory, only 20 (200 – 180) are left. 252) The choice of inventory costing method can impact net income • In times of rising prices, FIFO will result in the high-est net income and LIFO will result in the lowest net income. 00$9. 00$1,156. We also still have the 125 units purchased on June 3 for $9. 25$1,800. 252) Speci c-unit-cost (p. 00$1,156. 00$1,800. Use the gross profit method to estimate the amount of Auto Audio’s inventory loss. 25$ 180. 00 $1,800. 25$9. 25 each. 00 $1,800. 00 $1,620. • In times of declining prices, FIFO will result in the lowest net income and LIFO will result in the highest net income. 00$1,156. 00180$9. 00200$9. 00$9. 25$9. 40$1,156. What was the effect of the error on net income for the two years combined? Explain your answer. Consistency principle (p. 00 $1,620. • The ending inventory balance is always adjusted to equal the value according to a physical count taken at year end. 25 $1,156. 00$9. 262) Describe the four different inventory costing methods 1 2 Compute inventory costs using first-in, first-out (FIFO); last-in, first-out (LIFO); and average cost methods and journalize inventory transactions 3 Compare the effects of the different costing methods on the financial statements286 Chapter 5 Key Points Key Accounting Terms Reporting inventory in the nancial statements • The lower-of-cost-or-market (LCM) rule is used in inventory valuation. LCM requires that inventory be valued at current market value if lower than historical cost. 00$9. 00125100Inventory on HandCost of Goods SoldPurchases The inventory on hand columns are now completed by carrying down the layers of inventory from June 7 and adding a layer consisting of the 100 units purchased on June 13. 25125$9. • The full-disclosure principle requires that the methods used to value inventory be disclosed in the nancial statements. 00180$9. This is usually done in footnotes added to the nancial statements. 25$9. • A misstatement in ending inventory will cause net income on the income statement to be incorrect in the year of the misstatement as well as in the following year. Hudson River Trucks reported sales revenue of $157,000 and cost of goods sold of $90,000. The assets and retained earnings on the balance sheet will be incorrect in the year of the misstatement but will be correctly reported in the year following the misstatement. 25$ 940. • The value of ending inventory can be estimated using the gross pro t method in cases where the inventory has been lost or destroyed. FIFO, LIFO, and average cost ( Learning Objectives 2 & 3 ) 15–20 min. Jun 1Jun 3Jun 7Jun 13DateTotalCostTotalCostQuantity Quantity QuantityUnitCostUnitCostTotalCostUnitCost2002001252012520125100$9. 25 $1,156. Requirements 1. 00$9. 25$9. 25$9. 00$9. 263) Footnotes (p. 00$1,156. 00$9. 00$9. 265) Full-disclosure principle (p. Conservatism (p. Compute Hudson River Trucks’ correct gross profit assuming the company’s end-ing inventory is overstated by $1,700. 00$1,800. 25$9. 265) Gross pro t method (p. 25$ 180. 00$1,156. 264) Materiality (p. 25$9. 268) Inventory shrinkage (p. 40$1,800. E5-38B. 25$9. • Days-sales-in-inventory measures how many days worth of sales is held in inventory Days-sales-in-inventory (p. 265) Lower-of-cost-or-market (LCM) rule (p. 00$9. 264) Ratios often used to help make decisions • Inventory turnover measures how quickly a business sells its inventory. 270) Inventory turnover (p. 25$ 180. Show your work. The introduction to this chapter suggests that the chapter will explore the answers to some questions about inventory. 2. 00$9. P5-42A. 00$1,156. Compute Hudson River Trucks’ correct gross profit assuming the company’s end-ing inventory is understated by $2,600. E5-37B. 269) 5 Illustrate the reporting of inventory in the financial statements 6 Determine the effect of inventory errors on the financial statements 7 Use the gross profit method to estimate ending inventory 8 Compute the inventory turnover and days-sales-in-inventory 4 Value inventory using the lower-of-cost-or-market (LCM) ruleInventory 287 Accounting Practice Discussion Questions 1. 00 $1,620. 25$ 940. 00180$9. Did you get the answers to those questions? Specifically, a. 25$9. why does inventory need to be counted? b. what would happen if the count was done incorrectly? c. what do the terms FIFO and LIFO have to do with inventory? 2. What is a cost-flow assumption? Why is a cost-flow assumption necessary in accounting for inventory? 4. 40$1,156. 00125100Inventory on HandCost of Goods SoldPurchases 274 Chapter 5 On June 18, 115 units are sold. How are the financial statements of a manufacturer different from those of a merchandiser with respect to inventory? 3. LIFO c. 25$ 940. FIFO b. Lower of cost or market ( Learning Objective 4 ) 10–15 min. Comp America completed the following inventory transactions during the month of March: Mar 14122231BalancePurchaseSalePurchaseSale1050524840$100$ 95$ 92Date QuantityItem Unit Cost Requirements 1. What value would Raleigh Golf Pros report on the balance sheet at December 31, 2012, for inventory? 3. The oldest cost of inventory on hand is the 20 units at $9. Remember that under FIFO we must assign the oldest cost to cost of goods sold first. Auto Audio sells and installs audio equipment. In a period of rising inventory costs, which cost-flow assumption would produce the highest net income? Why? 7. 00 each. Inventory 303 P5-44A. LIFO c. Because we sold more than 20 units, we must look to the next inventory layer for the cost to assign to the remaining 95 units (115 – 20). These 95 units are assigned a cost of $9. 00$9. 00$1,800. It is now October 31, 2012, and the $163,300 that Liquidation Universe paid for its ending inventory is $15,900 higher than current replacement cost. FIFO b. 25 each. Average cost 6. 00$9. 25$9. 40$1,800. Average cost 5. 00$1,156. The sale is entered into the cost of goods sold columns of the record as follows: Jun 1Jun 3Jun 7Jun 13Jun 18DateTotalCostTotalCostQuantity Quantity QuantityUnitCostUnitCostTotalCostUnitCost2002001252012520125100$9. 00$9. If a company had two units that cost $1 each in its beginning inventory and purchased two more units for $2 each, what would be the cost of goods sold associated with a sale of three units under each of the following assumptions? a. If a company had two units that cost $1 each in its beginning inventory and purchased two more units for $2 each, what would be the gross profit reported on the income statement under each of the following assumptions if three units were sold for $3 each? a. 00$1,156. Without resorting to calculations, determine which inventory method will result in Comp America paying the lowest income taxes. Estimating ending inventory ( Learning Objective 7 ) 5–10 min. 2. Let’s say that two companies, identical in every way except that one used FIFO and one used LIFO, went into a bank on the same day to get a loan to deal with the rising cost of acquiring inventory. 25$ 180. Despite the fact that they both engaged in the same transactions at the same dollar values, one company reported higher net income and higher total assets on the financial statements. 25$ 180. 25$ 940. 00$9. Which one was it? If the banker made the decision based on the company that would have higher cash flow associated with the inventory costing method choice, which company would have received the loan? 8. 00$1,156. Gross Profit Rate . Describe some business and economic conditions that might make the lower-of-cost-or-market rule more likely to result in a write-down of inventory. 00$9. 25$1,620. 751802095$9. 00$ 180. 9. 00$ 878. 25$9. 40$1,156. 00125100Inventory on HandCost of Goods SoldPurchases After this sale, all of the beginning inventory items are assumed to be sold as well as 95 of the units costing $9. 25$ 940. 25. Under which of the inventory methods, periodic or perpetual, would a company be better equipped to detect inventory shrinkage? Why? 10. Therefore, the remaining inventory is made up of 30 units (125 – 95) at $9. 00$9. 25$9. 25 and 100 units at $9. 25$9. 40$9. 40. If a company is having a harder time selling its products, even at discounted prices com-pared to last year, would this year’s inventory turnover rate be higher or lower than last year’s rate? What about the gross profit rate? Self Check 1. 40$1,800. These amounts are entered into the inventory on hand columns of the record. During April, Bargain Hardware made sales of $42,300 and ended the month with inven-tories totaling $5,400. 00$1,800. Which inventory costing method assigns the newest, most recent costs incurred during the period to ending inventory? a. $9,600 d. $15,000 288 Chapter 5 2. Total operating expenses were $10,800. 25$9. Jun 1Jun 3Jun 7Jun 13Jun 18DateTotalCostTotalCostQuantity Quantity QuantityUnitCostUnitCostTotalCostUnitCost200200125201252012510030100$9. 00$9. Show your work. 25$9. 00$9. 00$1,156. Cost of Goods Sold was $21,900. Due to a nationwide recession, Liquidation Universe’s merchandise inventory is gathering dust. Inventory errors ( Learning Objective 6 ) 10–15 min. Last-in, first-out (LIFO) b. $4,200 b. 00$9. 25$ 180. 25$9. How much net income did Bargain Hardware earn for the month? a. 25$ 180. Requirement 1. $20,400 c. 00$1,156. Specific-unit cost c. Average cost d. First-in, first-out (FIFO) 3. 00$1,156. 2. 40$1,800. Which inventory costing method results in the lowest net income during a period of declin-ing inventory costs? a. During March, BAL, Inc. Gomez Auto Parts, Inc. Auto Audio’s accounting records reflect the following information. 00$1,156. 00$1,800. , began March with 95 units of inventory that cost a total of $1,710. , purchased and sold goods as follows: Mar 6152230Purchased 120 units @ $16 eachSold 135 units @ $30 eachPurchased 135 units @ $14Sold 95 units @ $29 each BAL, Inc. 25$ 940. 00$ 277. 50$ 940. 00$9. 25$ 180. 00$9. 00$ 180. 00$9. , uses perpetual inventory. 75$ 277. 00$ 878. 25$1,620. Last-in, first-out (LIFO) b. Specific-unit cost c. Under the FIFO inventory method, how much is BAL’s cost of goods sold for the sale on March 15? a. Average cost d. $ 60,000255,000440,00040%Beginning Inventory. 00$ 878. 751802095$9. Comparative Income StatementsFor the Years Ended April 30, 2012 and 2011Sales RevenueCost of Goods Sold: Beginning Inventory Net Purchases Cost of Goods Available Ending Inventory Cost of Goods SoldGross ProfitOperating ExpensesNet Income$119,00071,50047,50023,000$ 24,5002011$143,00073,00070,00029,000$ 41,000$12,00079,00091,00018,000$12,50071,00083,50012,0002012 During 2012, Gomez Auto Parts, Inc. Net Purchases. 00$1,156. 00$1,156. $2,190 b. Gomez Auto Parts, Inc. First-in, first-out (FIFO) 4. 25$9. 25$ 940. , discovered that the 2011 ending inventory, as previously reported, was overstated by $3,000. , reported the following comparative income statement for the years ended April 30, 2012 and 2011. 25$ 180. 00$ 277. 40$1,156. 00125100Inventory on HandCost of Goods SoldPurchases In the last transaction on June 25, 65 units were sold. Requirements 1. Prepare the corrected comparative income statement for the two-year period, complete with a heading for the statement. Assume BAL, Inc. 40. $2,430 c. Of these 65 units, 30 are assumed to cost $9. 25 and the remaining 35 (65 – 30) are assumed to cost $9. Inventory 275 After this sale, all units costing $9. $2,350 d. $1,280 5. Assume BAL, Inc. , uses perpetual inventory. , purchased and sold goods as follows: Mar 6152230Purchased 120 units @ $16 eachSold 135 units @ $30 eachPurchased 135 units @ $14 eachSold 95 units @ $29 each BAL, Inc. 25$ 940. 25 are assumed to be sold as well as 35 of the units costing $9. , began March with 95 units of inventory that cost a total of $1,710. During March, BAL, Inc. 40. Under the LIFO inventory method, how much is BAL’s cost of inventory on hand after the sale on March 30? a. 50$ 940. 40. Therefore, the remaining inventory is made up of 65 units (100 – 35) at $9. These amounts are entered into the inventory on hand columns of the record. $1,920 b. Jun 1Jun 3Jun 7Jun 13DateTotalCostTotalCostQuantity Quantity QuantityUnitCostUnitCostTotalCostUnitCost200200125201252012510030100$9. Inventory 301 E5-39B. 00$9. 00$9. 00$9. $2,160 c. Cost of Goods Available . Net Sales. $1,680 d. 00$9. $2,000 6. 00$9. 25$9. 00$9. During a recent fire that occurred at its warehouse, Auto Audio’s entire inventory was destroyed. 00$9. 25$9. 25$9. 40$9. 25$9. Assume BAL, Inc. 25$9. , began March with 95 units of inventory that cost a total of $1,710. Pete’s Plants has the following information as of July 31, 2012: $ 44,300257,000301,30021,200$980,000280,100699,90070,000$629,900Sales Revenue. Net Purchases . 40$1,620. 50$ 329. 00$ 180. 0018020953035$9. During March, BAL, Inc. , purchased and sold goods as follows: Mar 6152230Purchased 120 units @ $16 eachSold 135 units @ $30 eachPurchased 135 units @ $14 eachSold 95 units @ $29 each BAL, Inc. 40$1,156. 25$9. 25$ 940. 00125100Inventory on HandCost of Goods SoldPurchasesJun 18Jun 25 Jun 1Jun 3Jun 7Jun 13Jun 18Jun 25DateTotalCostTotalCostQuantity Quantity QuantityUnitCostUnitCostTotalCostUnitCost20020012520125201251003010065$9. Inventory turnover ( Learning Objective 8 ) 10–15 min. Cost of Goods Sold: Beginning Inventory . 00$9. 25$9. 00$9. 25$9. Ending Inventory . 00$9. Operating expenses for the month were $13,500, with two-thirds paid in cash and the rest accrued as Accounts Payable. , uses perpetual inventory. 25$9. Under the average cost inventory method, how much is BAL’s cost of goods sold for the sale on March 15? Round unit cost to the nearest cent. 00$9. Inventory 289 a. 40$9. 25$9. 40$9. $2,295. Net Income . 00 d. Cost of Goods Sold . Before any adjustments at the end of the period, Liquidation Universe’s Cost of Goods Sold account has a balance of $614,000. 00$9. 40$1,620. 00$ 180. Requirements 1. Which of the following prevents a company from switching its inventory costing method to a different method each year? a. 75$ 277. 40$9. Gross Profit. $2,000. $2,278. 00 7. 00$ 878. 50$ 329. $1,800. 40$1,800. 80 c. 0018020953035$9. 90 b. Operating Expenses . Consistency principle b. 25$9. 40$1,156. Prepare a perpetual inventory record using FIFO. Materiality concept c. 00$ 611. 25$ 940. LIFO In order to calculate the cost of goods sold and the value of ending inventory using LIFO, we need to prepare another perpetual inventory record. Prepare a perpetual inventory record using LIFO. Matching principle d. Disclosure principle 8. 25$ 940. Which of the following is most closely linked to the accounting principle of conservatism? a. This information is entered in the inventory on hand columns of the record as follows: Jun 1Jun 3Jun 7Jun 13Jun 18Jun 25Jun 30DateTotalCostTotalCostQuantity Quantity QuantityUnitCostUnitCostTotalCostUnitCost2002001252012520125100301006565$9. Disclosure principle c. 00125100Inventory on HandCost of Goods SoldPurchases The perpetual inventory record is completed by calculating the total quantity and total cost for the purchases and cost of goods sold columns and entering the results in the last row. Notice that the amounts in the last row of the inventory on hand columns only reflect the amounts that existed after the last transaction. 50$ 940. 00$9. Consistency principle b. Lower-of-cost-or-market rule d. 00$1,156. 276 Chapter 5 We can double-check our calculations using the following formula: Cost of Goods Sold (Beginning Inventory Purchases Ending Inventory) Using this formula, the cost of goods sold is $3,285. Materiality concept 9. 00$9. Cash payments on account totaled $17,500. Leaves both cost of goods sold and net income correct because the errors cancel each other c. 00$1,800. Harrington Auto would like to assign the oldest costs of inventory items to its ending inventory. During the month, Kinser Equipment purchased and sold merchandise on account as follows: Apr 613192529Purchased 65 units @ $160Sold 50 units @ $300Purchased 90 units @ $164Sold 50 units @ $300Sold 105 units @ $300 Kinser Equipment uses the LIFO method. Requirements 1. 25$9. Inventory methods ( Learning Objective 1 ) 5 min. 25$9. Prepare a perpetual inventory record for the average cost method. On December 28, Keira’s Sports sold 11 helmets. Which inventory costing method should Harrington Auto choose? S5-2. 00$ 277. Overstates cost of goods sold and understates net income d. Understates costs of goods sold and overstates net income b. 00 each for a total of $1,800. Keira’s Sports started December with 9 helmets that cost $56 each. 25 ($1,800. 25$9. Keira’s Sports started December with 9 helmets that cost $56 each. 00$9. 00 + $2,096. 00. 00$9. The first entry necessary in the record is for the amount of the beginning inventory of 200 units at $9. 25 – $611. S5-5. 00). Compute the rate of inventory turnover for Pete’s Plants for the year ended July 31, 2012. How does this error affect cost of goods sold and net income for 2012? a. On December 19, Keira’s Sports bought 16 helmets at $51 each. This agrees with the cost of goods sold total on the perpetual inventory record so our cal-culations are correct. 25$9. Harper Furniture doesn’t expect prices to change dramatically and wants to use a method that averages price changes. At December 31, 2012, Island Equipment understated ending inventory by $2,500. Rocky Mountain’s normal gross profit percentage is 42%. Overstates both cost of goods sold and net income 10. 40$9. 00$1,156. Requirements 1. Liquidation Universe uses lower of cost or market to value its ending inventory. Record the payments on account and the operating expenses on April 30. Suppose Rocky Mountain, Inc. Which inventory method (excluding specific-unit) most likely mimics the physical flow of Kinser Equipment’s inventory? 2. 00$9. 00$9. Round average cost per unit to the nearest cent and all other amounts to the nearest dollar. , lost all of its inventory in a hurricane. 00$1,156. 40$1,800. Beginning inven-tory was $49,000, net purchases totaled $530,000, and sales came to $880,000. Use the gross profit method to estimate the cost of the inventory lost in the hurricane. Keira’s Sports uses the (perpetual) LIFO inventory method. b. a. 25$9. Keira’s Sports uses the average cost inventory method. 25$ 180. Average cost ( Learning Objective 2 ) 5–10 min. S5-6. Prepare a perpetual inventory record, using LIFO cost, for this merchandise. 00$1,800. 25$ 180. 25$9. Recording inventory transactions ( Learning Objective 2 ) 5–10 min. What amount should Liquidation Universe report for cost of goods sold? 3. 25$ 180. On December 19, Keira’s Sports bought 16 helmets at $51 each. 00$1,156. 00$1,156. 25$ 180. 00$1,156. 00$ 277. 50$ 940. $301,000 b. Prepare a perpetual inventory record for Keira’s Sports. 25$ 940. 00$ 611. On December 28, Keira’s Sports sold 11 helmets. Inventory methods ( Learning Objective 1 ) 5–10 min. 1. $19,600 c. 00$9. 00$9. 40$1,620. 00$ 611. $209,400 Answers are given after Written Communication. 00$9. On December 19, Keira’s Sports bought 16 helmets at $51 each. 25$9. 00$ 180. 25$9. 00$ 878. 00$3,285. 25125100225Inventory on HandCost of Goods SoldPurchases Jun 1 $9. Which inventory method would best meet Harper Furniture’s goal? 2. 00DateTotalCostTotalCostQuantity Quantity QuantityUnitCostUnitCostTotalCostUnitCost200Inventory on HandCost of Goods SoldPurchases Next, we enter the June 3 purchase of 125 units costing $9. Journalize any required entries. Short Exercises S5-1. What if Harper Furniture wanted to expense out the newer purchases of goods instead? Which inventory would best meet that need? S5-3. P5-45A. 50$ 329. $68,600 d. 75$ 277. Keira’s Sports started December with 9 helmets that cost $56 each. LIFO ( Learning Objective 2 ) 5–10 min. 25 each for a total of $1,156. 2518020953035360$9. The December 28 sale of inventory was on account. 3. On December 28, Keira’s Sports sold 11 helmets. 290 Chapter 5 S5-4. 1. 00 $1,800. 25$9. 40$1,156. 2. 25 in the purchases columns of the record. 00 $1,800. Keira’s Sports uses the LIFO inventory method. 00DateTotalCostTotalCostQuantity Quantity QuantityUnitCostUnitCostTotalCostUnitCost200$9. 00$2,096. Journalize all transactions using LIFO. 25$ 940. 25 $1,156. Prepare a perpetual inventory record for Keira’s Sports. Jun 1Jun 3$9. Keira’s Sports sold each helmet for $100. 25125Inventory on HandCost of Goods SoldPurchases The inventory on hand columns are completed by carrying down the original layer of inven-tory (200 units at $9. On December 28, Keira’s Sports sold 11 helmets. 3. Prepare a perpetual inventory record using average cost. 4. Inventory 277 Next, we will enter the June 7 sale transaction. 00) and then adding the new layer (125 units at $9. 25). Under LIFO, costs are assigned to cost of goods sold based on the most recently purchased units on hand (the last units in). Refer to the data for Kinser Equipment in P5-40A. What amount should Liquidation Universe report for inventory on the balance sheet? 2. 25 each. The December 19 purchase of inventory was on account. The most recently purchased units are the 125 units at $9. FIFO versus LIFO ( Learning Objective 3 ) 5–10 min. Because we sold more than 125 units, we must look to the next inventory layer for the cost to assign to the remaining 55 units (180 – 125). Prepare the required journal entries for the purchase and sale of inventory. These 55 units are assigned a cost of $9. 00 each. 00 $1,800. Keira’s Sports uses the FIFO inventory method. S5-7. Answer the fol-lowing questions assuming that inventory costs are increasing: 1. Consider the FIFO, LIFO, and average cost inventory costing methods. Which method of inventory costing will produce the lowest cost of goods sold? 2. 00DateTotalCostTotalCostQuantity Quantity QuantityUnitCostUnitCostTotalCostUnitCost200$9. The ending inventory at December 31, 2011, was correct. The sale is entered into the cost of goods sold columns of the record as follows: Jun 1Jun 3$9. Round the result to two decimal places. FIFO ( Learning Objective 2 ) 5–10 min. com Problems (Group A) P5-40A. Which method of inventory costing will produce the highest cost of goods sold? 3. 00 $1,800. If prices had been declining instead of rising, which inventory method will pro-duce the highest cost of goods sold? S5-8. Keira’s Sports started December with 9 helmets that cost $56 each. Kinser Equipment sells hand-held engine analyzers to automotive service shops. 2. 00200$9. Inventory terms ( Learning Objectives 4 & 5 ) 5–10 min. 25125$9. a. Match the terms with the definitions. Full-disclosure b. 25 $1,156. On December 19, Keira’s Sports bought 16 helmets at $51 each. Materiality c. d. 25 $1,156. P5-43A. 25125Inventory on HandCost of Goods SoldPurchases Jun 1Jun 3Jun 7DateTotalCostTotalCostQuantity Quantity QuantityUnitCostUnitCostTotalCostUnitCost200200125$9. Principle that prevents a company from using a different inventory costing method each year. 00$1,156. 00$9. 00$9. 25$1,800. 25$ 495. 00$1,800. Consistency d. The rate of inventory turnover for Pete’s Plants was 10. 00$1,156. 25 $1,156. myaccountinglab. Conservatism ____ 1. 25$9. 0012555$9. 25$9. 25125Inventory on HandCost of Goods SoldPurchases The inventory on hand columns are now completed. The 125 units at $9. 25 are assumed to be sold as well as 55 of the beginning inventory units costing $9. e. 00. Therefore, the remaining inventory is made up of 145 units (200 – 55) at $9. 00. These amounts are entered into the inventory on hand columns of the record. Jun 1Jun 3Jun 7DateTotalCostTotalCostQuantity Quantity QuantityUnitCostUnitCostTotalCostUnitCost200200125145$9. 00$9. 25$9. 00$9. A business should use the same accounting methods and procedures from period to period. 00$1,800. Inventory 291 S5-9. A company must perform strictly proper accounting only for items that are signi cant to the business’s nancial statements. 00$1,156. 00$1,800. 25$ 495. 00$9. 25$1,305. ____ 2. Computing LIFO and journalizing inventory transactions ( Learning Objectives 1 & 2 ) 15–20 min. 25$9. 0012555$9. Kinser Equipment started April with an inventory of 125 units that cost a total of $19,250. 00$1,156. Inventory errors ( Learning Objective 6 ) 20–25 min. Evergreen Supply, Co. 24 in 2011. 25 $1,156. 25125Inventory on HandCost of Goods SoldPurchases The June 13 purchase of 100 units at $9. 40 each is entered into the purchases columns of the record. Identifies exactly which inventory item was sold. 00$9. 278 Chapter 5 Jun 1Jun 3Jun 7Jun 13DateTotalCostTotalCostQuantity Quantity QuantityUnitCostUnitCostTotalCostUnitCost200200125145$9. 00$1,800. Usually used for unique inventory items. Has the rate improved or deteriorated? Exercises (Alternates 1, 2, and 3) These alternative exercise sets are available for your practice benefit at www. f. Lower-of-cost-or-market ( Learning Objective 4 ) 5–10 min. 00$9. Make any adjusting entry needed to apply the lower-of-cost-or-market rule. Computing LIFO and journalizing inventory transactions ( Learning Objectives 2 & 5 ) 15–20 min. 00$1,800. 25$9. 00$1,156. Round average cost per unit to the nearest cent and all other amounts to the nearest dollar. However, assume Kinser Equipment uses the average cost method. g. 25$1,305. 25$9. 25$9. 40$1,156. Reporting the least favorable gures in the nancial statements. 00$9. ____ 3. Requires that a company report enough information for outsiders to make decisions. 25$9. Assume that Dog Town Boards has the following LIFO perpetual inventory record for snowboards for the month of March: Mar 181930DateInventoryon HandPurchasesCost ofGoods Sold$1,470$ 9,280$10,890$ 9,420$11,080$1,610$1,660Snowboards At March 31, the accountant for Dog Town Boards determines that the current replacement cost of the ending inventory is $10,730. 00$1,156. , shows the following financial statement data for 2010, 2011, and 2012. 25$ 495. ____ 4. 302 Chapter 5 P5-41A. Inventory would be reported on the balance sheet at what value on March 31? S5-10. What are the correct amounts for cost of goods sold and gross profit? S5-13. Prepare a perpetual inventory record using average cost. Reporting inventory on the balance sheet ( Learning Objective 5 ) 5–10 min. 25$ 940. At the end of the current year, Coffee Cafe’s inventory account balance was $13,500. 0012555$9. 00125100Inventory on HandCost of Goods SoldPurchases The inventory on hand columns are now completed by carrying down the layer of inventory from June 7 and adding a layer consisting of the 100 units purchased on June 13. 40$1,156. Inventory errors ( Learning Objective 6 ) 10–15 min. $241,500147,800$ 93,700Sales RevenueCost of Goods SoldGross Profit Assume that the ending inventory was accidentally overstated by $5,900. Round the average unit cost to the nearest cent and all other amounts to the nearest dollar. A business’s nancial statements must report enough information for users to make knowledgeable decisions about the company. Treats the most recent/newest purchases as the first units sold. h. 25$9. 00$9. Tropical Tanning Supply’s income statement data for the year ended October 31, 2012, follow. 00$9. 292 Chapter 5 S5-12. Raleigh Golf Pros uses the LIFO inventory method and values its inventory using the lower-of-cost-or-market (LCM) rule. Inventory errors ( Learning Objective 6 ) 5–10 min. Requirements 1. 00$9. Principle that states significant items must conform to GAAP. A physical count of the inventory revealed that inventory on hand totaled $12,900. 2. 25$ 940. Jun 1Jun 3Jun 7Jun 13DateTotalCostTotalCostQuantity Quantity QuantityUnitCostUnitCostTotalCostUnitCost200200125145145100$9. 00125100Inventory on HandCost of Goods SoldPurchases On June 18, 115 units are sold. 00$9. What amount should Coffee Cafe report on its balance sheet for inventory? S5-11. LIFO _____ 4. 40$1,800. 00$1,800. 25$1,305. 00$1,156. The most recent cost of inventory on hand is the 100 units at $9. Match the accounting terms on the left with the corresponding definitions on the right. 00$ 940. Prepare a multi-step income statement for Kinser Equipment for the month of April. 00$1,305. Remember that under LIFO we must assign the most recent cost to cost of goods sold first. 00$1,156. 00$9. 25$9. 25$ 495. Requirements 1. 0012555$9. 40. 40 each, so 100 units will be assigned a cost of $9. Prior to issuing the 2012 statements, auditors found that the ending inven-tory for 2010 was understated by $5,000 and that the ending inventory for 2012 was overstated by $8,000. Lower of cost or market ( Learning Objective 4 ) 10–15 min. Estimating ending inventory ( Learning Objective 7 ) 10–15 min. _____1. These 15 units are assigned a cost of $9. Because we sold more than 100 units, we must look to the next inventory layer for the cost to assign to the remaining 15 units (115 – 100). 00 each. The sale is entered into the cost of goods sold columns of the record as follows: Jun 1Jun 3Jun 7Jun 13Jun 18DateTotalCostTotalCostQuantity Quantity QuantityUnitCostUnitCostTotalCostUnitCost200200125145145100$9. Which accounting principle or concept is most relevant to Raleigh Golf Pros’ decision to utilize LCM? 2. 00$9. 00$9. Raleigh Golf Pros has the following account bal-ances at December 31, 2012, prior to releasing the financial statements for the year: InventoryBeg BalEnd Bal 39,00063,300Cost of Goods SoldBal 231,000Sales RevenueBal 325,000 The accountant for Raleigh Golf Pros has determined that the replacement cost (current market value) of the ending inventory as of December 31, 2012, is $61,700. Compute Wholesale Granite’s estimated cost of ending inventory using the gross profit method. $241,500147,800$ 93,700Sales RevenueCost of Goods SoldGross Profit Assume that the ending inventory was accidentally overstated by $3,500. 25$9. How would the inventory error affect Tropical Tanning Supply’s cost of goods sold and gross profit for the year ended December 31, 2013, if the error is not corrected in 2012? S5-14. 00$9. State whether each year’s net income before corrections is understated or over-stated and indicate the amount of the understatement or overstatement. Tropical Tanning Supply’s income statement data for the year ended December 31, 2012, follow. 00$9. 40$1,800. 25$1,305. 00$1,800. 00$1,156. Sales for the year are $504,100, and Wholesale Granite’s gross profit percentage is 41% of sales. 00$1,305. 00$ 940. 25$9. 2. 00$9. Wholesale Granite began the year with inventory of $52,800 and made purchases of $318,000 during the year. S5-15. Inventory turnover ( Learning Objective 8 ) 5–10 min. Beginning inventory was $56,000 and ending inventory was $72,000. 00$9. 40$9. 00$1,156. 25$ 495. Maryland Industries’ sales for the year ended March 31, 2012, were $1,315,000 and cost of goods sold amounted to $736,000. Inventory principles and terminology ( Learning Objectives 1, 4, & 5 ) 5–10 min. Compute Maryland Industries’ rate of inventory turnover for the year ended March 31, 2012. Sales RevenueCost of Goods Sold: Beginning Inventory Net Purchases Cost of Goods Available Ending Inventory Cost of Goods SoldGross ProfitOperating ExpensesNet Income(In thousands)$1931207335$ 38$1821226036$ 24$ 3212515720$ 2312915232$ 2512014523$2061376937$ 322011 20102012 Requirements 1. Conservatism _____ 2. 00$940. 00$135. Prepare corrected income statements for the three years. What is the impact on the 2012 income statement if the 2010 inventory error is left uncorrected? P5-46A. 001255510015$9. Estimating ending inventory ( Learning Objective 7 ) 15–20 min. 25$9. Round answer to the nearest tenth. Inventory 293 Exercises (Group A) E5-16A. Full-disclosure _____ 3. 3. 40$1,156. FIFO ( Learning Objective 2 ) 10–15 min. 25$ 940. Average cost _____5. Jameson’s Sports Shop carries a line of waterproof watches. Materiality _____ 8. Consistency _____ 7. 40 are assumed to be sold as well as 15 of the units costing $9. FIFO _____ 6. 00125100Inventory on HandCost of Goods SoldPurchases Inventory 279 After this sale, all of the inventory items costing $9. Amtran Enterprises lost its entire inventory in a hurricane that occurred on October 31, 2012. Jameson’s Sports Shop uses the FIFO method and a perpetual inventory system. Therefore, the remaining inventory is made up of 130 units (145 – 15) at $9. 00. 00. The sales price of each watch is $188. These amounts are entered into the inventory on hand columns of the record. 00$9. Over the past five years, gross profit has averaged 30% of net sales. Jun 1Jun 3Jun 7Jun 13Jun 18DateTotalCostTotalCostQuantity Quantity QuantityUnitCostUnitCostTotalCostUnitCost200200125145145100130$9. 25$9. Specific-Identification a. 00$9. 00$9. 00$9. 40$9. 00$1,800. 00$1,156. Assigns the most recent inventory costs to ending inventory. 25$1,305. 00$1,800. 00$1,305. 00$1,170. The company’s records reveal the following data for the month of October: $ 36,500370,200555,50060,7002,600Beginning Inventory. Sales . 00$ 940. 00$ 940. 00$9. 00$ 135. 001255510015$9. c. 25$9. 25$9. 00$9. 40$9. 25$ 495. 00$1,156. Net Purchases. b. 40$1,156. 00125100Inventory on HandCost of Goods SoldPurchases In the last transaction on June 25, 65 units were sold. Results in cost of goods sold that falls between what FIFO and LIFO produce assuming rising prices. This principle is the basis for using the lower-of-cost-or-market rule. 25$ 940. These 65 units are assigned a cost of $9. 00 because the only layer of inventory left is the 130 units at $9. 15$6. 05$6. Jun 1Jun 3Jun 7Jun 13Jun 18Jun 25DateTotalCostTotalCostQuantity Quantity QuantityUnitCostUnitCostTotalCostUnitCost200200125145145100130$9. 00. Sales Returns and Allowances . Sales Discounts . 00$9. 00$9. 25$9. 00$9. 2. 40$9. Company records indicate the following activity for waterproof watches for the month of August: Aug 17111928Date Unit CostItem Quantity$104$108$116BalancePurchaseSalePurchaseSale1012141110 Requirements 1. 00$9. 00$847. 00$1,156. 00$1,800. 00$1,305. 00$ 940. 15$900. 00$1,800. Compute the cost of goods sold under LIFO. 00$6. 25$1,305. 25$9. 00$120. FIFO versus LIFO versus average cost ( Learning Objectives 2 & 3 ) 15–20 min. Requirements 1. 00$1,170. 00$120. Compute the cost of goods sold under FIFO. Prepare a perpetual inventory record for the waterproof watches to determine the amount Jameson’s Sports Shop should report for ending inventory and cost of goods sold using the FIFO method. 00$9. 00$9. 40$9. Requirements 1. 00$1,156. 00$9. 00$6. 25$ 495. 05$6. 00$ 940. 00$847. 00$ 135. Estimate the October 31 inventory, using the gross profit method. 2. 3. 00125551001565$9. 00$553. Prepare the October income statement through gross profit for Amtran Enterprises. 00$ 585. Quick solution: 1. October 31 estimated inven-tory = $62,160; 2. 40$1,156. 25$9. 25$ 940. Gross Profit = $147,660. Compute the rate of inventory turnover for Sanchez Wholesale, Inc. 00125100Inventory on HandCost of Goods SoldPurchases After this sale, the remaining inventory is made up of 65 units (130 – 65) at $9. Round the result to two decimal places. These amounts are entered into the inventory on hand columns of the record. 280 Chapter 5 Jun 1Jun 3Jun 7Jun 18Jun 25$9. , for the years ended May 31, 2012 and 2011. Inventory turnover and days-sales-in-inventory ( Learning Objective 8 ) 10–15 min. 00. 00 $1,800. 00DateTotalCostTotalCostQuantity Quantity QuantityUnitCostUnitCostTotalCostUnitCost200$9. 304 Chapter 5 P5-47A. 00 $1,800. 50$332. 00$847. 25 $1,156. 25125$9. 00200$9. 00 $1,305. 00145$9. Which method results in the higher cost of goods sold? E5-21A. 00145$9. 15$6. , has the following information for the years ending May 31, 2012 and 2011: Sales RevenueCost of Goods Sold: Beginning Inventory Net Purchases Cost of Goods Available Ending Inventory Cost of Goods SoldGross ProfitOperating ExpensesNet Income(In thousands)$2261438341$ 42$ 3213917125$ 3514017532$2281468239$ 4320112012 Requirements 1. 05$6. 00 $1,305. 40 $ 940. 00100$9. 05$6. 00$9. Compute the days-sales-in-inventory for Sanchez Wholesale, Inc. 2. 00$6. Assume that a B R Tire Store completed the following perpetual inventory transactions for a line of tires. 00$1,170. Sanchez Wholesale, Inc. 0013065$9. 5015014020140201409055903030$6. 00$ 585. 40 $ 940. 00100$9. 00$9. 00$9. 00$ 495. Computing LIFO and journalizing inventory transactions ( Learning Objectives 1 & 2 ) 15–20 min. 40$9. 00$ 940. 00551001565$9. 00$ 135. Journalize Jameson’s Sports Shop’s inventory transactions using the FIFO method. 00$ 585. 25 $1,156. 25125$9. 25 $1,156. Notice that the amounts in the last row of the inventory on hand columns only reflect the amounts that existed after the last transaction. 25125Inventory on HandCost of Goods SoldPurchasesJun 13 The perpetual inventory record is completed by calculating the total quantity and total cost for the purchases and cost of goods sold columns and entering the results in the last row. Jun 1Jun 3Jun 7Jun 13Jun 18Jun 25Jun 30$9. 50$184. However, instead of the FIFO method, assume Jameson’s Sports Shop uses the average cost method. 00 $1,800. 00DateTotalCostTotalCostQuantity Quantity QuantityUnitCostUnitCostTotalCostUnitCost200$9. 00 $1,800. 00200$9. 25 $1,156. 00 $1,305. 2. 25125$9. 75$553. Assume that all purchases and sales are on account. 00 $1,305. 00145$9. 00145$9. 50$184. 40 $ 940. 00$6. 00$9. 00100$9. 00$1,170. E5-17A. , for the years ended May 31, 2012 and 2011. 05$6. Refer to the data for E5-16A. 00$ 585. 3. 00$6. 00$ 585. 001306565$9. 00$2,096. LIFO ( Learning Objective 2 ) 10–15 min. 40 $ 940. 25100225$9. However, instead of the FIFO method, assume Jameson’s Sports Shop uses the LIFO method. What is a likely cause for the change in the rate of inventory turnover from 2011 to 2012? Problems (Group B) P5-48B. 00$9. 40$9. 05$6. 00$ 135. 25 tires @ $ 6734 tires @ $ 6339 tires @ $160Beginning Inventory. 00$ 940. Purchase. Top Line Equipment sells hand held engine analyzers to automotive service shops. Sale. 15$ 780. 00$ 495. Requirements 1. 00$ 585. 00$3,311. Which inventory method (excluding specific-unit) most likely mimics the physical flow of Top Line Equipment’s inventory? 2. 00$9. 25551001565360$9. 25 $1,156. 25125$9. 25 – $585. 00 + $2,096. Top Line Equipment started November with an inventory of 95 units that cost a total of $11,400. 25 $1,156. Using this formula, the cost of goods sold is $3,311. 25125Inventory on HandCost of Goods SoldPurchases We can double-check our calculations by calculating the cost of goods sold using the same formula that we used in step a. 25 ($1,800. 00). c. This agrees with the cost of goods sold total on the perpetual inventory record so our calculations are correct. Which accounting principle or concept is most relevant to Richmond Sporting Goods’ decision to utilize LCM? 2. 00 each. 00DateTotalCostTotalCostQuantity Quantity QuantityUnitCostUnitCostTotalCostUnitCost200$9. Average cost We will now complete a perpetual inventory record using average cost. During the month, Top Line Equipment purchased and sold merchandise on account as follows: Nov 613192529Purchased 105 units @ $134Sold 100 units @ $280Purchased 150 units @ $136Sold 110 units @ $280Sold 105 units @ $280 Top Line Equipment uses the LIFO method. 00 $1,800. As we did for the FIFO and LIFO inventory records, the first entry is to record the beginning inventory of 200 units costing $9. , paid for its ending inventory is $11,200 higher than current replacement cost. 2. Requirements 1. Inventory 281 Jun 1 $9. Prepare a perpetual inventory record for the watches on the LIFO basis to deter-mine the cost of ending inventory and cost of goods sold for the month. 00DateTotalCostTotalCostQuantity Quantity QuantityUnitCostUnitCostTotalCostUnitCost200Inventory on HandCost of Goods SoldPurchases The entry for the first purchase of 125 units on June 3 is the same as for the FIFO and LIFO inventory records. 25$ 332. The average cost per unit is calculated as follows: $2,956. What value would Richmond Sporting Goods report on the balance sheet at December 31, 2012, for inventory? 3. 10 $1,638. 50325$9. Prepare any adjusting journal entry required from the information given. Requirements 1. Journalize Jameson’s Sports Shop’s inventory transactions using the perpetual LIFO method. 00 $1,800. Look at Target’s balance sheet. Jun 1Jun 3$9. 10 2,957. 00180$9. 00 $1,800. 25 $1,156. 00DateTotalCostTotalCostQuantity Quantity QuantityUnitCostUnitCostTotalCostUnitCost200$9. Assume that all purchases and sales are on account. 25325 $9. 25125Inventory on HandCost of Goods SoldPurchases 282 Chapter 5 This transaction leaves 145 units (325 – 180) in inventory at $9. 10* per unit*Rounded to nearest cent The inventory on hand consists of 325 units at $9. 10 each. Average cost ( Learning Objective 2 ) 10–15 min. 25 $1,156. 25125Inventory on HandCost of Goods SoldPurchases Once a purchase is made, the average cost per unit must be calculated. 306 Chapter 5 P5-52B. 00$ 120. Compute cost of goods sold and gross pro t using LIFO. This information is now entered in the inventory on hand columns of the record. 2. The average cost per unit is calculated by dividing the total cost of inventory on hand by the total quantity of inventory on hand. E5-18A. The total cost of inventory equals $2,956. 10$9. 4. Lakeside Industries completed the following inventory transactions during the month of August: Aug 14122231BalancePurchaseSalePurchaseSale3570815644$90$92$95Date QuantityItem Unit Cost Requirements 1. Prepare a perpetual inventory record for the watches on the average cost basis to determine the cost of ending inventory and cost of goods sold for the month. 25 ($1,800. 00 beginning inven-tory + $1,156. 310 Chapter 5 Know Your Business Financial Analysis Purpose: To help familiarize you with the financial reporting of a real company in order to fur-ther your understanding of the chapter material you are learning. Compute cost of goods sold and gross profit under FIFO. 00 $1,800. Jun 1Jun 3Jun 7$9. Refer to the data for E5-16A. What inventory method (such as FIFO and LIFO) does Target use? 2. Round average cost per unit to the nearest cent and all other amounts to the nearest dollar. 25 purchased on June 3). 00DateTotalCostTotalCostQuantity Quantity QuantityUnitCostUnitCostTotalCostUnitCost200$9. 10$2,957. 2. 3. 50$1,319. 50325145$9. 25 $1,156. 00180$9. 50325145$9. Compute cost of goods sold and gross pro t using average cost. How much has Target invested in inventory as of January 29, 2011, and January 30, 2010? 3. 40 each is now entered into the purchases columns of the inventory record. 10$2,957. Before any adjustments at the end of the period, Freeze It Corp. Round average cost per unit to the nearest cent and all other amounts to the nearest dollar. Jun 1Jun 3Jun 7Jun 13$9. 4. Freeze It Corp. Journalize Jameson’s Sports Shop’s inventory transactions using the perpetual average cost method. FIFO cost of goods sold = $5,150; 2. 10 $1,638. 25125Inventory on HandCost of Goods SoldPurchases The June 13 purchase of 100 units at $9. 10 $1,638. Which method results in the largest gross profit and why? Quick solution: 1. 10 each. 00DateTotalCostTotalCostQuantity Quantity QuantityUnitCostUnitCostTotalCostUnitCost200$9. 00$ 514. 00$9. Assume that all purchases and sales are on account. 00 $1,800. Explanations are not required. The total quantity of inventory on hand equals the 200 units in beginning inventory plus the 125 units purchased for a total of 325 units. Lower of cost or market ( Learning Objective 4 ) 10–15 min. 10$1,800. 10$9. 50$1,319. d 3. 25$ 940. 00180$9. 294 Chapter 5 E5-19A. Requirements 1. 25$9. This information is entered into the inventory on hand columns of the inventory record. 40$1,156. 75$ 369. LIFO cost of goods sold = $5,120 Inventory 295 E5-22A. Lower of cost or market ( Learning Objective 4 ) 10–15 min. In addition to the income statement (statement of operations) and the balance sheet of Columbia Sportswear in Appendix A , you will also be investigating the notes to the financial statements. Jun 1Jun 3$9. Operating expenses for the month were $9,000, with two-thirds paid in cash and the rest accrued as Accounts Payable. 00125100Inventory on HandCost of Goods SoldPurchases Because another purchase has been made, the average cost per unit must be recalculated. 00$2,116. 00$2,957. FIFO versus LIFO ( Learning Objective 2 ) 10–15 min. 50DateTotalCostTotalCostQuantity Quantity QuantityUnitCostUnitCostTotalCostUnitCost200325$9. The units in inventory have an average cost of $9. Assume that Western Sporting Goods bought and sold a line of mountain bikes during May as follows: May 15122130Date Unit CostItem Quantity$250$240BalanceSalePurchaseSaleSale1181794 Western Sporting Goods uses the perpetual inventory system. c 2. 25125Inventory on HandCost of Goods SoldPurchases On June 7, 180 units are sold. 25 $1,156. What value would Vermont Resources report on the balance sheet at March 31, 2012, for inventory assuming the company uses the lower-of-cost–or-market rule? 2. 0013020855560350$6. 10 each, so the units sold are assigned a cost of $9. 10 for a total of $1,638. E5-23A. 15$847. Due to a nationwide recession, Freeze It Corp. Vermont Resources has the following account balances at March 31, 2012. 00. This information is entered into the cost of goods sold columns of the record. Jun 1Jun 3Jun 7$9. ’s merchandise inventory is gathering dust. 00$ 553. Prepare a multi-step income statement for Top Line Equipment for the month of November. 05$6. The inven-tory balance was determined using FIFO. Prepare a perpetual inventory record using LIFO. Cash payments on account totaled $16,300. InventoryBeg BalEnd Bal 10,00021,000Cost of Goods SoldBal 101,000Sales RevenueBal 186,000 Vermont Resources has determined that the replacement cost (current market value) of the March 31, 2012, ending inventory is $20,200. Old Time Bakery reported sales revenue of $134,000 and cost of goods sold of $89,000. Respond to your client either with a memo, a letter, or an e-mail. Compute Old Time Bakery’s correct gross profit assuming the company’s ending inventory is overstated by $1,100. Prepare any adjusting journal entry required from the information given. Requirements 1. Compute the cost of ending inventory under FIFO. 50$1,400. Requirements 1. Requirements 1. 2. This case continues our examination of the financial statements of Columbia Sportswear. Self Check Answers 1. Compute the cost of ending inventory under LIFO. Round average cost per unit to the nearest cent and all other amounts to the nearest dollar. Show your work. Look at Target’s balance sheet. 20 of inventory on hand. 5014090230Inventory on HandCost of Goods SoldPurchases A physical count of the inventory performed at year end revealed $172. 3. Prepare a perpetual inventory record using average cost. 3. Requirements 1. It is now July 31, 2012, and the $160,500 that Freeze It Corp. Which method results in higher cost of ending inventory? E5-20A. FIFO versus LIFO ( Learning Objective 2 ) 10–15 min. 2. 2. Lower of cost or market ( Learning Objective 4) 10–15 min. What could have caused the value of the ending inventory based on the physical count to be lower than the amount based on the perpetual inventory record? 296 Chapter 5 E5-24A. 2. Journalize all transactions using LIFO. Refer to the data for Western Sporting Goods in E5-19A. Reporting inventory on the balance sheet ( Learning Objective 5 ) 5–10 min. Sport Sunglasses had the following FIFO perpetual inventory record at November 30, the end of the fiscal year. Show your work. Prepare a perpetual inventory record, using LIFO cost, for this merchandise. Requirements 1. P5-51B. Nov 1Nov 3Nov 7Nov 13Nov 18Nov 25Nov 30$6. Richmond Sporting Goods uses the LIFO inventory method and values its inventory using the lower-of-cost-or-market (LCM) rule. Look at Target’s balance sheet and income statement. Without resorting to calculations, determine which inventory method will result in Lakeside Industries paying the lowest income taxes. 00 $900. Inventory 305 P5-49B. Record the payments on account and the operating expenses on November 30. 00DateTotalCostTotalCostQuantity Quantity QuantityUnitCostUnitCostTotalCostUnitCost150$6. Compute Old Time Bakery’s correct gross profit assuming the company’s ending inventory is understated by $2,200. Journalize the adjusting entry for inventory, if any is required. Computing LIFO and journalizing inventory transactions ( Learning Objectives 2 & 5 ) 15–20 min. E5-25A. Inventory errors ( Learning Objective 6 ) 10–15 min. Inventory errors ( Learning Objective 6 ) 10–15 min. 2. Sales RevenueCost of Goods Sold: Beginning Inventory Net Purchases Cost of Goods Available Ending Inventory Cost of Goods SoldGross ProfitOperating ExpensesNet Income$124,00060,50063,50017,000$ 46,500$19,00072,00091,00018,500$10,50069,00079,50019,000$135,00072,50062,50024,000$ 38,50020112012Sinclair Auto Parts, Inc. Look at Target’s balance sheet and income statement. However, assume Top Line Equipment uses the average cost method. Paid for the supplies purchased on December 12. Refer to the data for Top Line Equipment in P5-48B. Requirements 1. , discovered that the 2011 ending inventory, as previously reported, was understated by $4,500. Prepare the corrected comparative income statement for the two-year period, complete with a heading for the statement. What was the effect of the error on net income for the two years combined? Explain your answer. Sinclair Auto Parts, Inc. Prepare a perpetual inventory record using average cost. , reported the following comparative income statement for the years ended September 30, 2012 and 2011. Requirements 1. Comparative Income StatementsFor the Years Ended September 31, 2012 and 2011 During 2012, Sinclair Auto Parts, Inc. ’s Cost of Goods Sold account has a balance of $671,000. E5-26A. d 6. uses lower of cost or market to value its ending inventory. Estimating ending inventory ( Learning Objective 7 ) 5–10 min. Richmond Sporting Goods has the following account balances at December 31, 2012, prior to releasing the financial statements for the year: InventoryBeg BalEnd Bal 47,90068,900Cost of Goods SoldBal 220,600Sales RevenueBal 334,000 The accountant for Richmond Sporting Goods has determined that the replacement cost (current market value) of the ending inventory as of December 31, 2012, is $67,750. Sounds on Wheels’ accounting records reflect the following information. During a recent fire that occurred at its warehouse, Sounds on Wheels’ entire inventory was destroyed. $ 54,000280,400425,00035%Beginning Inventory. How much inventory does Target have per store as of January 29, 2011, and January 30, 2010? (Divide total inventory by the num-ber of stores Target operated in each of these years [1,750 at January 29, 2011, and 1,740 at January 30, 2010]. ) Is inventory per store increasing or decreasing? 4. Sounds on Wheels sells and installs audio equipment. Net Purchases. c 5. Paid sales commissions, $875. Paid current month’s rent, $500. Gross Profit Rate . Net Sales. 2. What is Target’s days-sales-in-inventory ratio for the year ending January 29, 2011? What does this tell you? 6. b 7. 3. d 4. Requirements 1. , report for inventory on the balance sheet? 2. Round the average unit cost to the nearest cent and all other amounts to the nearest dollar. , wholesales a line of custom mountain bikes. Prepare a perpetual inventory record using FIFO. c Comprehensive Problem The Accounting Cycle for a Merchandiser, Including Inventory Valuation Wild Wheels, Inc. c 10. Inventory 313 Requirements 1. Wild Wheels’ inventory, as of November 30, 2012, consisted of 20 mountain bikes costing $550 each. c 9. P5-50B. FIFO, LIFO, and average cost ( Learning Objectives 2 & 3 ) 15–20 min. What is Target’s inventory turnover rate for the year ending January 29, 2011? What does this tell you? 5. What amount should Freeze It Corp. , had the following transactions: Dec 468101214161819202230Purchased 10 mountain bikes for $575 each fromSlickrock Bicycle, Co. What amount should Freeze It Corp. a 8. Requirements 1. , report for cost of goods sold? 3. Using the transactions previously listed, prepare a perpetual inventory record for Wild Wheels, Inc. Looking back over your answers to questions 1 through 5, how do you think Target is performing? Apply Your Knowledge Ethics in Action Case 1. Julie Robertson recently went to work for K & K Enterprises as the accounting manager. Requirements 1. The ending inventory at December 31, 2011, was correct. , shows the following financial statement data for 2010, 2011, and 2012. , for the month of December. Inventory errors ( Learning Objective 6 ) 20–25 min. Journalize any required entries. P5-53B. Martinez Supply, Co. Net Sales RevenueCost of Goods Sold: Beginning Inventory Net Purchases Cost of Goods Available Ending Inventory Cost of Goods SoldGross ProfitOperating ExpensesNet Income$1751156036$ 24$1831196446$ 18$ 1614516123$ 1911213116$ 613213819$2041386640$ 262011 20102012(In thousands) Prior to issuing the 2012 statements, auditors found that the ending inventory for 2010 was understated by $7,000 and that the ending inventory for 2012 was over-stated by $10,000. , uses the FIFO inventory costing method. Prepare corrected income statements for the three years. State whether each year’s net income before corrections is understated or over-stated and indicate the amount of the understatement or overstatement. 2. 3. Inland Empire Supply, Inc. Wild Wheels’ trial bal-ance as of November 30 appears as follows: 312 Chapter 5 Wild Wheels, Inc. What is the impact on the 2012 income statement if the 2010 inventory error is left uncorrected? P5-54B. Over the past five years, gross profit has averaged 39% of net sales. , lost its entire inventory in a hurricane that occurred on July 31, 2012. Mr. Which footnote discusses the inventory costing method used by Columbia Sportswear? 2. Estimating ending inventory ( Learning Objective 7 ) 15–20 min. The company’s records reveal the following data for the month of July: $ 43,400287,300488,40081,5005,900Beginning Inventory. Post the journal entries to the general ledger, creating new ledger accounts as neces-sary. At the end of the year, Jeffrey Baker, the CEO, called Julie into his office for a meeting. Net Purchases. Baker explained to Julie that K & K Enterprises was in the midst of obtaining a substantial investment of cash by a major investor. Sales Returns and Allowances . Round the result to two decimal places. Mr. Baker explained that he was concerned that the investor would decide not to invest in K & K Enterprises when it saw the current year’s results of operations. What inventory method does Columbia Sportswear use to value its inventory? 3. Baker then asked Julie to revise the current year’s financial statements by increasing the value of the ending inventory in order to decrease cost of goods sold and increase net income. Wild Wheels, Inc. 2. Mr. Mr. Assuming that Pure Water, Inc. Sales . Has the rate of inventory turnover improved or deteriorated? Industry Analysis Purpose: To help you understand and compare the performance of two companies in the same industry. Omit posting references. Calculate the new account balances. Sales Discounts . Requirements 1. 4. Requirements 1. Calculate the rate of inventory turnover for Columbia Sportswear for 2010 and 2009 (the 2008 ending balance in inventory was $256,312,000). 2. Compute the rate of inventory turnover for Anderson Electronics, Inc. , for the years ended January 31, 2012 and 2011. Inventory 307 P5-55B. Baker tried to reassure Julie by explaining that the company is undertaking a new advertising campaign that will result in a significant improvement in the company’s income in the following year. Requirements 1. Find the Columbia Sportswear Company annual report located in Appendix A and go to the financial statements starting on page 740. Trial BalanceNovember 30, 2012CashAccounts ReceivableInventorySuppliesOffice EquipmentAccumulated Depreciation, Office EquipmentAccounts PayableNote Payable, Long-TermCommon StockRetained EarningsDividendsSales RevenueSales Returns and AllowancesSales DiscountsCost of Goods SoldSales Commissions ExpenseOffice Salaries ExpenseOffice Rent ExpenseShipping ExpenseTotal3,0001,3255,0008,50021,42593,500$132,750CREDIT$ 9,15012,30011,00090018,0004,2501,7001,27546,75011,3007,4255,5003,200$132,750DEBITACCOUNT During the month of December 2012 Wild Wheels, Inc. Now access the 2010 annual report for Under Armour, Inc. What would you do if you were in Julie’s position? 2. Estimate the July 31 inventory using the gross profit method. , on account. Prepare the July income statement through gross profit for Inland Empire Supply, Inc. , has the following information for the years ending January 31, 2012 and 2011: Sales RevenueCost of Goods Sold: Beginning Inventory Net Purchases Cost of Goods Available Ending Inventory Cost of Goods SoldGross ProfitOperating ExpensesNet Income$2241547049$ 21$ 2415217620$ 3114717824$2281567248$ 2420112012(In thousands) Requirements 1. Terms, 2/15, n/45,FOB destination. Compute the days-sales-in-inventory for Anderson Electronics, Inc. Terms, 3/10, n/30, FOB destination. Inventory turnover and days-sales-in-inventory ( Learning Objective 8) 10–15 min Anderson Electronics, Inc. Use the ending balances in T-accounts at April 30. , from the Internet. For instructions on how to access the report online, see the Industry Analysis in Chapter 1. 3. , from the Continuing Exercise in Chapter 3 . Purchased 120 plants on account for inventory, $307, plus freight-in of $5. Sold 30 plants on account, $300. The company’s financial statements start on page 45. For this problem, we will focus on the purchase and sales of spas during the month of September. Julie is concerned about the future of her job, as well as others within the company, if the company does not receive the investment of cash. , for the years ended January 31, 2012 and 2011. Prepare perpetual inventory records for Plant Inventory for May for Lydon’s Yard Care, Inc. Assuming that Pure Water, Inc. Sold 14 mountain bikes for $1,100 each on account toAllsport, Inc. Prove the equality of debits and credits by preparing a post closing trial balance. What is a likely cause for the change in the rate of inventory turnover from 2011 to 2012? Problems (Alternates 1, 2, and 3) These alternative problem sets are available for your practice benefit at www. Freight-in was added to invoice by seller. Inland Standard Equipment, which sells industrial handling equipment, values its inven-tory using LIFO. If Julie increases the value of the current year’s ending inventory, what will be the effect on the following year’s net income? Case 2. Although the net income for the current year has been fairly good, Roberta Hill, the company president, wishes it was higher because the company has been considering borrowing money to purchase a new building. Paid $175 freight charges to deliver goods to Allsport, Inc. Credit terms were n/30. Journalize and post the May transactions using the perpetual inventory record cre-ated in Requirement 1. 2. myaccountinglab. com Continuing Exercise This exercise continues the Lydon’s Yard Care, Inc. (Cost data has been removed from the sale transactions. Received $6,200 from Cyclemart as payment on aNovember 17 sale. Compute each account’s ending balance and denote the balance as Bal. , uses the LIFO inventory cost flow assumption, what is the September 30 ending spa inventory balance and September cost of goods sold for spas? 3. , exercise begun in Chapter 1 . Sold 120 plants for cash, $840. Consulted with a client on landscaping design for a fee of $150 on account. Purchased 110 plants on account for inventory, $374. Hill has heard that a company’s choice of inventory valuation method can impact the net income of the company. Consider the May transactions for Lydon’s Yard Care that were presented in Chapter 4 . ) May 25151720212531Completed lawn service and received cash of $400. Paid on account, $1,300. Recorded the following adjusting entries:Accrued salaries for the month of May equal $200Depreciation on equipment $25Physical count of plant inventory, 75 plants 308 Chapter 5 Refer to the T-accounts for Lydon’s Yard Care, Inc. Requirement 1. During the recent year, Inland Standard Equipment has experienced a significant increase in the cost of its inventory items. , began selling pools and spas in August. Continuing Problem This continues our accounting for Pure Water, Inc. Open four-column general ledger accounts and enter the balances from the November 30 trial balance. Mrs. Hill has asked the controller, Vicki Simpson, to explore the possibility of changing the company’s inventory valuation method. As stated in the continuing problem in Chapter 4 , Pure Water, Inc. , using the FIFO method. Who has the high-est inventory turnover? Is that good or bad? Is it better to have a high inventory turnover or a low inventory turnover? Small Business Analysis Purpose: To help you understand the importance of cash flows in the operation of a small business. 2. , uses the average cost inventory cost flow assump-tion, what is the September 30 ending spa inventory balance and September cost of goods sold for spas? Continuing Financial Statement Analysis Problem Look again at Target’s 2010 financial statements contained in its 2010 annual report. For instruc-tions on how to access the report online, see the Continuing Financial Statement Analysis Problem in Chapter 2. Terms were n/30. It’s the end of the year and your warehouse manager just finished taking a physical count of the inventory on hand. If you were in Vicki’s position how would you respond to Mrs. Requirement 1. Hill? Address potential ethical implications and applicable accounting principles in your answer. 3. On page 34 you’ll find Target’s balance sheet as of January 29, 2011 (called the Consolidated Statement of Financial Position). Record each transaction in the general journal. Use the adjusted trial balance to prepare Wild Wheels, Inc. Omit explanations. The purchases and sales of spa inventory for the month of September are as follows: August 31 balanceSeptember 5 purchaseSeptember 11 saleSeptember 17 purchaseSeptember 21 saleSeptember 25 purchaseSeptember 29 saleSpa Inventory3 units @ $3,000 each5 units @ $2,900 each4 units6 units @ $2,800 each5 units5 units @ $2,700 each4 unitsUnit @ Cost$ 9,000$14,500$16,800$13,500Total Cost Requirements 1. Terms, 2/10, n/30, FOB destination. Purchased $350 of supplies on account from OfficeMart. Mrs. Calculate the inventory turnover for both companies for 2010. 3. Because you are utilizing the perpetual inventory method with a relatively sophisticated inventory software program, you expect that the ending inventory balance will be fairly close to the balance on your general ledger. This year’s financial statements are very important to your banker because of the loan renewal coming up early next year. On page 33 of the annual report you’ll find Target’s income statement for the year Inventory 309ending January 29, 2011 (called the Consolidated Statement of Operations). Now answer the following questions: 1. In the past, you’ve had to make some pretty large adjustments for inventory shrinkage, but with the new security measures you’ve installed to safeguard your inventory, you’re hoping that any shrinkage adjustment this year will be minimal. Assuming that Pure Water, Inc. Key all items by date. Compute each account balance, and denote the balance as Bal . Journalize and post the adjusting entries. What makes up Target’s inventory? Look at footnote 11 of the financial state-ments (page 44 of the financial statements found in Target’s 2010 annual report). At least you hope that’s the case, because your net income can’t take many more adjustments. You look at the amount from the final inventory count and it reads $467,450. You remember that the banker said that he really wanted to see a net income of at least $100,000 this year. Compute each account’s ending balance and denote the balance as Bal. 4. Journalize and post closing entries. Denote each adjusting amount as Adj. Denote each closing amount as Clo. , uses the FIFO inventory cost flow assumption, what is the September 30 ending spa inventory balance and September cost of goods sold for spas? 2. You go to the general ledger Merchandise Inventory account and it reads $498,500. You look at the preliminary income statement, which doesn’t reflect any of these adjustments yet, and the net income is $128,400. Requirements 1. Received payment in full from Allsport, Inc. If the adjustment you made for inventory shrinkage last year was only about $10,000, should that cause you any concern for the amount of adjustment you have to make this year? 3. Would your banker be happy or not so happy when you pre-sented the financial statements to him after these adjustments? Inventory 311 2. Calculate the effect that the required inventory adjustments will have on the net income for the year. Terms, 2/15, n/45, FOB destination. Purchased 15 mountain bikes for $600 each from Slickrock Bicycle, Co. , for the Dec 6 sale. In addition to the impact that the inventory adjustment might have on your loan renewal, what effect did it have on your cash flow during the year? Written Communication You just got off the telephone with one of your clients who has decided to expand her business by beginning to offer some merchandise for sale. ’s multi-step income statement and statement of retained earnings for the year ending December 31, 2012. , on account. Which inventory cost-ing method should the client use that will give the highest amount of net income? Because the consulting part of the business has not been doing very well lately, the company wants to have a lot of net income from this new side of the business so that the income statement will look good at the end of the year. Paid Slickrock Bicycle, Co. , the amount due from the December 4 purchase in full. Terms, 2/15, n/45, FOB shipping point. Previously the company had only been a con-sulting business, but now it has an opportunity to sell some product from a new line offered by one of its clients. The client’s question to you seems rather simple, at least in her eyes. Plus, the company definitely plans to always sell the oldest merchandise first, so will this have any impact on which method it chooses? The question does seem simple, but is the answer simple? Requirement 1. Sold 18 mountain bikes for $1,125 each on account to Bikeworld, Inc. Prepare an adjusted trial balance as of December 31, 2012. Prepare an unadjusted trial balance as of December 31, 2012. The company has heard that either the LIFO or FIFO inventory method will result in higher net income, but it is not certain which one it is. Journalize and post the adjusting journal entries based on the following informa-tion, creating new ledger accounts as necessary: a. Also, prepare the balance sheet at December 31, 2012. 5. 8. b. Journalize and post the closing entries. Depreciation expense on of ce equipment, $1,650. Supplies on hand, $125. c. Accrued salary expense for the of ce receptionist, $675. 6. 7. . Prepare a post-closing trial balance at December 31, 2012
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