Cost accounting chapter 6 homework solutions

CHAPTER 6

Inventories

ASSIGNMENT CLASSIFICATION TABLE

Learning Objectives

Questions

Brief

Exercises

Do It!

Exercises

A

Problems

B

Problems

1. Determine how to classify inventory and inventory quantities.

1, 2, 3, 4, 5, 6

1

1

1, 2

1A

1B

2. Explain the accounting for inventories and apply the inventory cost flow methods.

7, 8, 9, 10, 19

2, 3, 4

2

3, 4, 5, 6, 7, 8

2A, 3A, 4A, 5A, 6A, 7A

2B, 3B, 4B, 5B, 6B, 7B

3. Explain the financial effects of the inventory cost flow assumptions.

11, 12

5, 6

3, 6, 7, 8

2A, 3A, 4A, 5A, 6A, 7A

2B, 3B, 4B, 5B, 6B, 7B

4. Explain the lower-of- cost-or-market basis of accounting for inventories.

13, 14, 15

7

3

9, 10

5. Indicate the effects of inventory errors on the financial statements.

16

8

11, 12

6. Compute and interpret the inventory turnover.

17, 18

9

4

13, 14

*7. Apply the inventory cost flow methods to perpetual inventory records.

20, 21

10

15, 16, 17

8A, 9A

8B, 9B

*8. Describe the two methods of estimating inventories.

22, 23, 24, 25

11, 12

18, 19, 20

10A, 11A

10B, 11B

*Note: All asterisked Questions, Exercises, and Problems relate to material contained in the appendices to the chapter.

ASSIGNMENT CHARACTERISTICS TABLE

Problem

Number

Description

Difficulty

Level

Time Allotted (min.)

1A

Determine items and amounts to be recorded in inventory.

Moderate

15–20

2A

Determine cost of goods sold and ending inventory using FIFO, LIFO, and average-cost with analysis.

Simple

30–40

3A

Determine cost of goods sold and ending inventory using FIFO, LIFO, and average-cost with analysis.

Simple

30–40

4A

Compute ending inventory, prepare income statements, and answer questions using FIFO and LIFO.

Moderate

30–40

5A

Calculate ending inventory, cost of goods sold, gross profit, and gross profit rate under periodic method; compare results.

Moderate

30–40

6A

Compare specific identification, FIFO, and LIFO under periodic method; use cost flow assumption to justify price increase.

Moderate

20–30

7A

Compute ending inventory, prepare income statements, and answer questions using FIFO and LIFO.

Moderate

30–40

*8A

Calculate cost of goods sold and ending inventory for FIFO, moving-average cost, and LIFO, under the perpetual system; compare gross profit under each assumption.

Moderate

30–40

*9A

Determine ending inventory under a perpetual inventory system.

Moderate

40–50

*10A

Compute gross profit rate and inventory loss using gross profit method.

Moderate

30–40

*11A

Compute ending inventory using retail method.

Moderate

20–30

1B

Determine items and amounts to be recorded in inventory.

Moderate

15–20

2B

Determine cost of goods sold and ending inventory using FIFO, LIFO, and average-cost with analysis.

Simple

30–40

3B

Determine cost of goods sold and ending inventory using FIFO, LIFO, and average-cost with analysis.

Simple

30–40

4B

Compute ending inventory, prepare income statements, and answer questions using FIFO and LIFO.

Moderate

30–40

5B

Calculate ending inventory, cost of goods sold, gross profit, and gross profit rate under periodic method; compare results.

Moderate

30–40

6B

Compare specific identification, FIFO, and LIFO under periodic method; use cost flow assumption to influence earnings.

Moderate

20–30

ASSIGNMENT CHARACTERISTICS TABLE (Continued)

Problem

Number

Description

Difficulty

Level

Time Allotted (min.)

7B

Compute ending inventory, prepare income statements, and answer questions using FIFO and LIFO.

Moderate

30–40

*8B

Calculate cost of goods sold and ending inventory under LIFO, FIFO, and moving-average cost, under the perpetual system; compare gross profit under each assumption.

Moderate

30–40

*9B

Determine ending inventory under a perpetual inventory system.

Moderate

40–50

*10B

Compute gross profit rate and inventory loss using gross profit method.

Moderate

30–40

*11B

Compute ending inventory using retail method.

Moderate

20–30

WEYGANDT ACCOUNTING PRINCIPLES 11E

CHAPTER 6

INVENTORIES

Number

LO

BT

Difficulty

Time (min.)

BE1

1

C

Simple

4–6

BE2

2

K

Simple

2–4

BE3

2

AP

Simple

4–6

BE4

2

AP

Simple

2–4

BE5

3

AP

Simple

2–4

BE6

3

AP

Moderate

6–8

BE7

4

AP

Simple

4–6

BE8

5

AN

Simple

4–6

BE9

6

AP

Simple

4–6

BE10

7

AP

Simple

8–10

BE11

8

AP

Simple

4–6

BE12

8

AP

Simple

4–6

DI1

1

AN

Simple

4–6

DI2

2

AP

Simple

6–8

DI3

4

AP

Simple

6–8

DI4

6

AP

Simple

4–6

EX1

1

AN

Simple

4–6

EX2

1

AN

Simple

6–8

EX3

2, 3

AN, E

Moderate

6–8

EX4

2

AN, E

Simple

8–10

EX5

2

AP

Simple

6–8

EX6

2, 3

AP

Simple

8–10

EX7

2, 3

AP

Simple

8–10

EX8

2, 3

AP

Simple

6–8

EX9

4

AP

Simple

6–8

EX10

4

AP

Simple

4–6

EX11

5

AN

Simple

6–8

EX12

5

AN

Simple

10–12

EX13

6

AP

Simple

10–12

EX14

6

AP

Simple

8–10

EX15

7

AP

Simple

8–10

EX16

7

AP, E

Moderate

12–15

INVENTORIES (Continued)

Number

LO

BT

Difficulty

Time (min.)

EX17

7

AP, E

Moderate

12–15

EX18

8

AP

Simple

8–10

EX19

8

AP

Simple

10–12

EX20

8

AP

Moderate

10–12

P1A

1

AN

Moderate

15–20

P2A

2, 3

AP

Simple

30–40

P3A

2, 3

AP

Simple

30–40

P4A

2, 3

AN

Moderate

30–40

P5A

2, 3

AP, E

Moderate

30–40

P6A

2, 3

AP, E

Moderate

20–30

P7A

2, 3

AN

Moderate

30–40

P8A

7

AP, E

Moderate

30–40

P9A

7

AP

Moderate

40–50

P10A

8

AP

Moderate

30–40

P11A

8

AP

Moderate

20–30

P1B

1

AN

Moderate

15–20

P2B

2, 3

AP

Simple

30–40

P3B

2, 3

AP

Simple

30–40

P4B

2, 3

AN

Moderate

30–40

P5B

2, 3

AP, E

Moderate

30–40

P6B

2, 3

AP, E

Moderate

20–30

P7B

2, 3

AN

Moderate

30–40

P8B

7

AP, E

Moderate

30–40

P9B

7

AP

Moderate

40–50

P10B

8

AP

Moderate

30–40

P11B

8

AP

Moderate

20–30

BYP1

2, 6

AP

Simple

10–15

BYP2

6

E

Simple

10–15

BYP3

6

E

Simple

10–15

BYP4

2, 6

AN

Simple

10–15

BYP5

8

AP

Moderate

20–25

BYP6

5

AN

Simple

10–15

BYP7

3

E

Simple

10–15

BYP8

5

E

Simple

10–15

BYP9

3, 4

AP

Simple

10–15

ANSWERS TO QUESTIONS

1. Agree. Effective inventory management is frequently the key to successful business operations. Management attempts to maintain sufficient quantities and types of goods to meet expected customer demand. It also seeks to avoid the cost of carrying inventories that are clearly in excess of anticipated sales.

2. Inventory items for a merchandising company have two common characteristics: (1) they are owned by the company and (2) they are in a form ready for sale in the ordinary course of business.

3. Taking a physical inventory involves actually counting, weighing or measuring each kind of inventory on hand. Retailers, such as a hardware store, generally have thousands of different items to count. This is normally done when the store is closed.

4. (a) (1) The goods will be included in Rochelle Company’s inventory if the terms of sale are FOB destination.

(2) They will be included in Jay Company’s inventory if the terms of sale are FOB shipping point.

(b) Rochelle Company should include goods shipped to another company on consignment in its inventory. Goods held by Rochelle Company on consignment should not be included in inventory.

5. Inventoriable costs are $3,020 (invoice cost $3,000 + freight charges $50 – purchase discounts $30). The amount paid to negotiate the purchase is a buying cost that normally is not included in the cost of inventory because of the difficulty of allocating these costs. Buying costs are expensed in the year incurred.

6. FOB shipping point means that ownership of the goods in transit passes to the buyer when the public carrier accepts the goods from the seller. FOB destination means that ownership of the goods in transit remains with the seller until the goods reach the buyer.

7. Actual physical flow may be impractical because many items are indistinguishable from one another. Actual physical flow may be inappropriate because management may be able to manipulate net income through specific identification of items sold.

8. The major advantage of the specific identification method is that it tracks the actual physical flow of the goods available for sale. The major disadvantage is that management could manipulate net income.

9. No. Selection of an inventory costing method is a management decision. However, once a method has been chosen, it should be used consistently from one accounting period to another.

10. (a) FIFO.

(b) Average-cost.

(c) LIFO.

11. Gumby Company is using the FIFO method of inventory costing, and Pokey Company is using the LIFO method. Under FIFO, the latest goods purchased remain in inventory. Thus, the inventory on the balance sheet should be close to current costs. The reverse is true of the LIFO method. Gumby Company will have the higher gross profit because cost of goods sold will include a higher proportion of goods purchased at earlier (lower) costs.

Questions Chapter 6 (Continued)

12. Davey Company may experience severe cash shortages if this policy continues. All of its net income is being paid out as dividends, yet some of the earnings must be reinvested in inventory to maintain inventory levels. Some earnings must be reinvested because net income is computed with cost of goods sold based on older, lower costs while the inventory must be replaced at current, higher costs. Because of this factor, net income under FIFO is sometimes referred to as “phantom profits.”

13. Josh should know the following:

(a) A departure from the cost basis of accounting for inventories is justified when the value of the goods is lower than its cost. The writedown to market should be recognized in the period in which the price decline occurs.

(b) Market means current replacement cost, not selling price. For a merchandising company, market is the cost at the present time from the usual suppliers in the usual quantities.

14. Taylor Music Center should report the CD players at $380 each for a total of $1,900. $380 is the current replacement cost under the lower-of-cost-or-market basis of accounting for inventories. A decline in replacement cost usually leads to a decline in the selling price of the item. Valuation at LCM is conservative.

15. Bonnie Stores should report the toasters at $27 each for a total of $540. The $27 is the lower of cost or market. It is used because it is the lower of the inventory’s cost and current replacement cost.

16. (a) Kuzu Company’s 2013 net income will be understated $7,000; (b) 2014 net income will be overstated $7,000; and (c) the combined net income for the two years will be correct.

17. Ryder Company should disclose: (1) the major inventory classifications, (2) the basis of accounting (cost or lower of cost or market), and (3) the costing method (FIFO, LIFO, or average).

18. An inventory turnover that is too high may indicate that the company is losing sales opportunities because of inventory shortages. Inventory outages may also cause customer ill will and result in lost future sales.

19. Apple uses the first-in, first-out method for its inventories.

*20. Disagree. The results under the FIFO method are the same but the results under the LIFO method are different. The reason is that the pool of inventoriable costs (cost of goods available for sale) is not the same. Under a periodic system, the pool of costs is the goods available for sale for the entire period, whereas under a perpetual system, the pool is the goods available for sale up to the date of sale.

*21. In a periodic system, the average is a weighted average based on total goods available for sale for the period. In a perpetual system, the average is a moving average of goods available for sale after each purchase.

*22. Inventories must be estimated when: (1) management wants monthly or quarterly financial statements but a physical inventory is only taken annually and (2) a fire or other type of casualty makes it impossible to take a physical inventory.

Questions Chapter 6 (Continued)

*23. In the gross profit method, the average is the gross profit rate, which is gross profit divided by net sales. The rate is often based on last year’s actual rate. The gross profit rate is applied to net sales in using the gross profit method.

In the retail inventory method, the average is the cost-to-retail ratio, which is the goods available for sale at cost divided by the goods available for sale at retail. The ratio is based on current year data and is applied to the ending inventory at retail.

*24. The estimated cost of the ending inventory is $40,000:

Net sales $400,000

Less: Gross profit ($400,000 X 35%) 140,000

Estimated cost of goods sold $260,000

Cost of goods available for sale $300,000

Less: Cost of goods sold 260,000

Estimated cost of ending inventory $ 40,000

*25. The estimated cost of the ending inventory is $28,000:

Ending inventory at retail: $40,000 = ($120,000 – $80,000)

Cost-to-retail ratio: 70% =

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$

8

4

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0

0

0

$

1

2

0

,

0

0

0

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ø

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Ending inventory at cost: $28,000 = ($40,000 X 70%)

SOLUTIONS TO BRIEF EXERCISES

BRIEF EXERCISE 6-1

(a) Ownership of the goods belongs to Farley. Thus, these goods should be included in Farley’s inventory.

(b) The goods in transit should not be included in the inventory count because ownership by Farley does not occur until the goods reach the buyer.

(c) The goods being held belong to the customer. They should not be included in Farley’s inventory.

(d) Ownership of these goods rests with the other company. Thus, these goods should not be included in the physical inventory.

BRIEF EXERCISE 6-2

The items that should be included in goods available for sale are:

(a) Freight-In

(b) Purchase Returns and Allowances

(c) Purchases

(e) Purchase Discounts

BRIEF EXERCISE 6-3

(a) The ending inventory under FIFO consists of 200 units at $8 + 160 units at $7 for a total allocation of $2,720 or ($1,600 + $1,120).

(b) The ending inventory under LIFO consists of 300 units at $6 + 60 units at $7 for a total allocation of $2,220 or ($1,800 + $420).

BRIEF EXERCISE 6-4

Average unit cost is $6.89 computed as follows:

300 X $6 = $1,800

400 X $7 = 2,800

200 X $8 = 1,600

900 $6,200

$6,200 ÷ 900 = $6.89 (rounded).

The cost of the ending inventory is $2,480 or (360 X $6.89).

BRIEF EXERCISE 6-5

(a) FIFO would result in the highest net income.

(b) FIFO would result in the highest ending inventory.

(c) LIFO would result in the lowest income tax expense (because it would result in the lowest net income).

(d) Average-cost would result in the most stable income over a number of years because it averages out any big changes in the cost of inventory.

BRIEF EXERCISE 6-6

Cost of good sold under:

LIFO

FIFO

Purchases

$6 X 120

$6 X 120

$7 X 200

$7 X 200

$8 X 140

$8 X 140

Cost of goods available for sale

$ 3,240

$ 3,240

Less: Ending inventory

1,140

1,400

Cost of goods sold

$ 2,100

$ 1,840

Since the cost of goods sold is $260 less under FIFO ($2,100 – $1,840) that is the amount of the phantom profit. It is referred to as “phantom profit” because FIFO matches current selling prices with old inventory costs. To replace the units sold, the company will have to pay the current price of $8 per unit, rather than the $6 per unit which some of the units were priced at under FIFO. Therefore, profit under LIFO is more representative of what the company can expect to earn in future periods.

BRIEF EXERCISE 6-7

Inventory Categories

Cost

Market

LCM

Cameras

$12,000

$12,100

$12,000

Camcorders

9,500

9,700

9,500

DVD players

14,000

12,800

12,800

Total valuation

$34,300

BRIEF EXERCISE 6-8

The understatement of ending inventory caused cost of goods sold to be overstated $7,000 and net income to be understated $7,000. The correct net income for 2014 is $97,000 or ($90,000 + $7,000).

Total assets in the balance sheet will be understated by the amount that ending inventory is understated, $7,000.

BRIEF EXERCISE 6-9

Inventory turnover: