Perpetual inventory system lifo example

Chapter Review

7-8ePractice Exercises

PE 7-1A

Cost flow methods

1. Obj. 2

Example Exercise 7-1

The following three identical units of Item A are purchased during April:

Assume that one unit is sold on April 30 for $118.

Determine the gross profit for April and ending inventory on April 30 using the (a) first-in, first-out (FIFO); (b) last-in, first-out (LIFO); and (c) weighted average cost methods.

PE 7-1B

Cost flow methods

1. Obj. 2

Example Exercise 7-1

The following three identical units of Item Beta are purchased during June:

Assume that one unit is sold on June 27 for $110.

Determine the gross profit for June and ending inventory on June 30 using the (a) first-in, first-out (FIFO); (b) last-in, first-out (LIFO); and (c) weighted average cost methods.

PE 7-2A

Perpetual inventory using FIFO

1. Obj. 3

Example Exercise 7-2

Beginning inventory, purchases, and sales for Item Widget are as follows:

Assuming a perpetual inventory system and using the first-in, first-out (FIFO) method, determine (a) the cost of merchandise sold on March 25 and (b) the inventory on March 31.

PE 7-2B

Perpetual inventory using FIFO

1. Obj. 3

Example Exercise 7-2

Beginning inventory, purchases, and sales for Item Delta are as follows:

Assuming a perpetual inventory system and using the first-in, first-out (FIFO) method, determine (a) the cost of merchandise sold on July 24 and (b) the inventory on July 31.

PE 7-3A

Perpetual inventory using LIFO

1. Obj. 3

Example Exercise 7-3

Beginning inventory, purchases, and sales for Item Gidget are as follows:

Assuming a perpetual inventory system and using the last-in, first-out (LIFO) method, determine (a) the cost of merchandise sold on September 27 and (b) the inventory on September 30.

PE 7-3B

Perpetual inventory using LIFO

1. Obj. 3

Example Exercise 7-3

Beginning inventory, purchases, and sales for Item Foxtrot are as follows:

Assuming a perpetual inventory system and using the last-in, first-out (LIFO) method, determine (a) the cost of merchandise sold on March 27 and (b) the inventory on March 31.

PE 7-4A

Perpetual inventory using weighted average

1. Obj. 3

Example Exercise 7-4

Beginning inventory, purchases, and sales for Meta-B1 are as follows:

Assuming a perpetual inventory system and using the weighted average method, determine (a) the weighted average unit cost after the July 23 purchase, (b) the cost of the merchandise sold on July 26, and (c) the inventory on July 31.

PE 7-4B

Perpetual inventory using weighted average

1. Obj. 3

Example Exercise 7-4

Beginning inventory, purchases, and sales for WCS12 are as follows:

Assuming a perpetual inventory system and using the weighted average method, determine (a) the weighted average unit cost after the October 22 purchase, (b) the cost of the merchandise sold on October 29, and (c) the inventory on October 31.

PE 7-5A

Periodic inventory using FIFO, LIFO, and weighted average cost methods

1. Obj. 4

Example Exercise 7-5

The units of an item available for sale during the year were as follows:

There are 14 units of the item in the physical inventory at December 31. The periodic inventory system is used. Determine the inventory cost using (a) the first-in, first-out (FIFO) method; (b) the last-in, first-out (LIFO) method; and (c) the weighted average cost method.

PE 7-5B

Periodic inventory using FIFO, LIFO, and weighted average cost methods

1. Obj. 4

Example Exercise 7-5

The units of an item available for sale during the year were as follows:

There are 57 units of the item in the physical inventory at December 31. The periodic inventory system is used. Determine the inventory cost using (a) the first-in, first-out (FIFO) method; (b) the last-in, first-out (LIFO) method; and (c) the weighted average cost method.

PE 7-6A

Lower-of-cost-or-market method

1. Obj. 6

Example Exercise 7-6

On the basis of the following data, determine the value of the inventory at the lower of cost or market. Apply lower of cost or market to each inventory item, as shown in Exhibit 9 .

PE 7-6B

Lower-of-cost-or-market method

1. Obj. 6

Example Exercise 7-6

On the basis of the following data, determine the value of the inventory at the lower of cost or market. Apply lower of cost or market to each inventory item, as shown in Exhibit 9 .

PE 7-7A

Effect of inventory errors

1. Obj. 6

Example Exercise 7-7

During the taking of its physical inventory on August 31, 2019, Kate Interiors Company incorrectly counted its inventory as $366,900 instead of the correct amount of $378,500. Indicate the effect of the misstatement on Kate Interiors’ August 31, 2019, balance sheet and income statement for the year ended August 31, 2019.

PE 7-7B

Effect of inventory errors

1. Obj. 6

Example Exercise 7-7

During the taking of its physical inventory on December 31, 2019, Waterjet Bath Company incorrectly counted its inventory as $728,660 instead of the correct amount of $719,880. Indicate the effect of the misstatement on Waterjet Bath’s December 31, 2019, balance sheet and income statement for the year ended December 31, 2019.

PE 7-8A

Inventory turnover and days’ sales in inventory

1. Obj. 7

Example Exercise 7-8

Financial statement data for years ending December 31 for Holland Company follow:

1. Determine the inventory turnover for 20Y4 and 20Y3.

2. Determine the days’ sales in inventory for 20Y4 and 20Y3. Use 365 days and round to one decimal place.

3. Does the change in inventory turnover and the days’ sales in inventory from 20Y3 to 20Y4 indicate a favorable or an unfavorable trend?

PE 7-8B

Inventory turnover and days’ sales in inventory

1. Obj. 7

Example Exercise 7-8

Financial statement data for years ending December 31 for Tango Company follow:

1. Determine the inventory turnover for 20Y7 and 20Y6.

2. Determine the days’ sales in inventory for 20Y7 and 20Y6. Use 365 days and round to one decimal place.

3. Does the change in inventory turnover and the days’ sales in inventory from 20Y6 to 20Y7 indicate a favorable or an unfavorable trend?

Chapter Review

7-8fExercises

EX 7-1

Control of inventories

1. Obj. 1

Triple Creek Hardware Store currently uses a periodic inventory system. Kevin Carlton, the owner, is considering the purchase of a computer system that would make it feasible to switch to a perpetual inventory system.

Kevin is unhappy with the periodic inventory system because it does not provide timely information on inventory levels. Kevin has noticed on several occasions that the store runs out of good-selling items, while too many poor-selling items are on hand.

Kevin is also concerned about lost sales while a physical inventory is being taken. Triple Creek Hardware currently takes a physical inventory twice a year. To minimize distractions, the store is closed on the day inventory is taken. Kevin believes that closing the store is the only way to get an accurate inventory count.

Will switching to a perpetual inventory system strengthen Triple Creek Hardware’s control over inventory items? Will switching to a perpetual inventory system eliminate the need for a physical inventory count? Explain.

EX 7-2

Control of inventories

1. Obj. 1

Hardcase Luggage Shop is a small retail establishment located in a large shopping mall. This shop has implemented the following procedures regarding inventory items:

1. Because the shop carries mostly high-quality, designer luggage, all inventory items are tagged with a control device that activates an alarm if a tagged item is removed from the store.

2. Because the display area of the store is limited, only a sample of each piece of luggage is kept on the selling floor. Whenever a customer selects a piece of luggage, the salesclerk gets the appropriate piece from the store’s stockroom. Because all salesclerks need access to the stockroom, it is not locked. The stockroom is adjacent to the break room used by all mall employees.

3. Whenever Hardcase Luggage Shop receives a shipment of new inventory, the items are taken directly to the stockroom. Hardcase’s accountant uses the vendor’s invoice to record the amount of inventory received.

State whether each of these procedures is appropriate or inappropriate. If it is inappropriate, explain why.

EX 7-3

Perpetual inventory using FIFO

1. Obj. 2, 3

Beginning inventory, purchases, and sales data for portable game players are as follows:

The business maintains a perpetual inventory system, costing by the first-in, first-out method.

1. Determine the cost of the merchandise sold for each sale and the inventory balance after each sale, presenting the data in the form illustrated in Exhibit 3 .

2. Based upon the preceding data, would you expect the inventory to be higher or lower using the last-in, first-out method?

Answer

Check Figure: Inventory balance, April 30, $5,360

EX 7-4

Perpetual inventory using LIFO

1. Obj. 2, 3

Assume that the business in Exercise 7-3 maintains a perpetual inventory system, costing by the last-in, first-out method. Determine the cost of merchandise sold for each sale and the inventory balance after each sale, presenting the data in the form illustrated in Exhibit 4 .

Answer

Check Figure: Inventory balance, April 30, $5,320

EX 7-5

Perpetual inventory using LIFO

1. Obj. 2, 3

Beginning inventory, purchases, and sales data for prepaid cell phones for May are as follows:

1. Assuming that the perpetual inventory system is used, costing by the LIFO method, determine the cost of merchandise sold for each sale and the inventory balance after each sale, presenting the data in the form illustrated in Exhibit 4 .

2. Based upon the preceding data, would you expect the inventory to be higher or lower using the first-in, first-out method?

Answer

Check Figure: Inventory balance, May 31, $20,160

EX 7-6

Perpetual inventory using FIFO

1. Obj. 2, 3

Assume that the business in Exercise 7-5 maintains a perpetual inventory system, costing by the first-in, first-out method. Determine the cost of merchandise sold for each sale and the inventory balance after each sale, presenting the data in the form illustrated in Exhibit 3 .

Answer

Check Figure: Inventory balance, May 31, $21,120

EX 7-7

FIFO and LIFO costs under perpetual inventory system

1. Obj. 2, 3

The following units of an item were available for sale during the year:

The firm uses the perpetual inventory system, and there are 31,200 units of the item on hand at the end of the year. What is the total cost of the ending inventory according to (a) FIFO, (b) LIFO?

Answer

Check Figure: b. $763,200

EX 7-8

Weighted average cost flow method under perpetual inventory system

1. Obj. 3

The following units of a particular item were available for sale during the calendar year:

The firm uses the weighted average cost method with a perpetual inventory system. Determine the cost of merchandise sold for each sale and the inventory balance after each sale. Present the data in the form illustrated in Exhibit 5 .

Answer

Check Figure: Total Cost of Merchandise Sold, $2,110,500

EX 7-9

Weighted average cost flow method under perpetual inventory system

1. Obj. 3

The following units of a particular item were available for sale during the calendar year:

The firm uses the weighted average cost method with a perpetual inventory system. Determine the cost of merchandise sold for each sale and the inventory balance after each sale. Present the data in the form illustrated in Exhibit 5 .

Answer

Check Figure: Total Cost of Merchandise Sold, $154,400

EX 7-10

Perpetual inventory using FIFO

1. Obj. 3

Assume that the business in Exercise 7-9 maintains a perpetual inventory system. Determine the cost of merchandise sold for each sale and the inventory balance after each sale, assuming the first-in, first-out method. Present the data in the form illustrated in Exhibit 3 .

Answer

Check Figure: Total Cost of Merchandise Sold, $152,000

EX 7-11

Perpetual inventory using LIFO

1. Obj. 3

Assume that the business in Exercise 7-9 maintains a perpetual inventory system. Determine the cost of merchandise sold for each sale and the inventory balance after each sale, assuming the last-in, first-out method. Present the data in the form illustrated in Exhibit 4 .

Answer

Check Figure: Total Cost of Merchandise Sold, $158,000

EX 7-12

Periodic inventory by three methods

1. Obj. 2, 4

The units of an item available for sale during the year were as follows:

There are 1,200 units of the item in the physical inventory at December 31. The periodic inventory system is used. Determine the inventory cost by (a) the first-in, first-out method; (b) the last-in, first-out method; and (c) the weighted average cost method.

Answer

Check Figure: b. $167,700

EX 7-13

Periodic inventory by three methods; cost of merchandise sold

1. Obj. 2, 4

The units of an item available for sale during the year were as follows:

There are 2,000 units of the item in the physical inventory at December 31. The periodic inventory system is used. Determine the inventory cost and the cost of merchandise sold by three methods, presenting your answers in the following form:

Answer

Check Figure: a. Inventory, $239,840

EX 7-14

Comparing inventory methods

1. Obj. 5

Assume that a firm separately determined inventory under FIFO and LIFO and then compared the results.

1. In each space that follows, place the correct sign [less than (<), greater than (>), or equal (=)] for each comparison, assuming periods of rising prices.

2. Why would management prefer to use LIFO over FIFO in periods of rising prices?

EX 7-15

Lower-of-cost-or-market inventory

1. Obj. 6

On the basis of the following data, determine the value of the inventory at the lower of cost or market. Assemble the data in the form illustrated in Exhibit 9 .

Answer

Check Figure: LCM: $41,880

EX 7-16

Merchandise inventory on the balance sheet

1. Obj. 6

Based on the data in Exercise 7-15 and assuming that cost was determined by the FIFO method, show how the merchandise inventory would appear on the balance sheet.

EX 7-17

Effect of errors in physical inventory

1. Obj. 6

Missouri River Supply Co. sells canoes, kayaks, whitewater rafts, and other boating supplies. During the taking of its physical inventory on December 31, 20Y2, Missouri River Supply incorrectly counted its inventory as $233,400 instead of the correct amount of $238,600.

1. State the effect of the error on the December 31, 20Y2, balance sheet of Missouri River Supply.

2. State the effect of the error on the income statement of Missouri River Supply for the year ended December 31, 20Y2.

3. If uncorrected, what would be the effect of the error on the 20Y3 income statement?

4. If uncorrected, what would be the effect of the error on the December 31, 20Y3, balance sheet?

EX 7-18

Effect of errors in physical inventory

1. Obj. 6

Fonda Motorcycle Shop sells motorcycles, ATVs, and other related supplies and accessories. During the taking of its physical inventory on December 31, 20Y8, Fonda Motorcycle Shop incorrectly counted its inventory as $337,500 instead of the correct amount of $328,850.

1. State the effect of the error on the December 31, 20Y8, balance sheet of Fonda Motor-cycle Shop.

2. State the effect of the error on the income statement of Fonda Motorcycle Shop for the year ended December 31, 20Y8.

3. If uncorrected, what would be the effect of the error on the 20Y9 income statement?

4. If uncorrected, what would be the effect of the error on the December 31, 20Y9, balance sheet?

EX 7-19

Error in inventory

1. Obj. 6

During 20Y5, the accountant discovered that the physical inventory at the end of 20Y4 had been understated by $42,750. Instead of correcting the error, however, the accountant assumed that the error would balance out (correct itself) in 20Y5.

Are there any flaws in the accountant’s assumption? Explain.

EX 7-20

Inventory turnover

1. Obj. 7

The following data (in millions) were taken from recent annual reports of Apple Inc., a manufacturer of personal computers and related products, and Mattel Inc., a manufacturer of toys, including Barbie®, Hot Wheels®, and Disney Classics:

1. Determine the inventory turnover for Apple and Mattel. Round to one decimal place.

2. Would you expect Mattel’s inventory turnover to be higher or lower than Apple’s? Why?

EX 7-21

Inventory turnover and days’ sales in inventory

1. Obj. 7

Kroger, Sprouts Farmers Market, Inc., and Whole Foods Markets, Inc. are three grocery chains in the United States. Inventory management is an important aspect of the grocery retail business. Recent balance sheets for these three companies indicated the following merchandise inventory (in millions) information:

1. Determine the inventory turnover. Round to two decimal places.

Answer

Check Figure: Kroger, inventory turnover, 15.08

2. Determine the days’ sales in inventory. Round to one decimal place.

3. Interpret your results in parts (a) and (b).

4. If Kroger had Whole Foods’ days’ sales in inventory, how much additional cash flow (rounded to nearest million) would have been generated from the smaller inventory relative to its actual average inventory position?

Appendix EX 7-22

Retail method

1. A business using the retail method of inventory costing determines that merchandise inventory at retail is $1,235,000. If the ratio of cost to retail price is 54%, what is the amount of inventory to be reported on the financial statements?

Appendix EX 7-23

Retail method

1. A business using the retail method of inventory costing determines that merchandise inventory at retail is $396,400. If the ratio of cost to retail price is 61%, what is the amount of inventory to be reported on the financial statements?

Appendix EX 7-24

Retail method

1. A business using the retail method of inventory costing determines that merchandise inventory at retail is $775,000. If the ratio of cost to retail price is 66%, what is the amount of inventory to be reported on the financial statements?

Appendix EX 7-25

Retail method

1. On the basis of the following data, estimate the cost of the merchandise inventory at June 30 by the retail method:

Appendix EX 7-26

Gross profit method

1. The merchandise inventory was destroyed by fire on December 13. The following data were obtained from the accounting records:

Chapter Review

7-8gProblems: Series A

PR 7-1A

FIFO perpetual inventory

Obj. 2, 3

The beginning inventory at Midnight Supplies and data on purchases and sales for a three-month period ending March 31, are as follows:

Instructions

1. Record the inventory, purchases, and cost of merchandise sold data in a perpetual inventory record similar to the one illustrated in Exhibit 3 , using the first-in, first-out method.

2. Determine the total sales and the total cost of merchandise sold for the period. Journalize the entries in the sales and cost of merchandise sold accounts. Assume that all sales were on account.

3. Determine the gross profit from sales for the period.

Answer

Check Figure: $8,983,125

4. Determine the ending inventory cost as of March 31.

5. Based upon the preceding data, would you expect the inventory using the last-in, first-out method to be higher or lower?

PR 7-2A

LIFO perpetual inventory

Obj. 2, 3

The beginning inventory at Midnight Supplies and data on purchases and sales for a three-month period are shown in Problem 7-1A .

Instructions

1. Record the inventory, purchases, and cost of merchandise sold data in a perpetual inventory record similar to the one illustrated in Exhibit 4 , using the last-in, first-out method.

2. Determine the total sales, the total cost of merchandise sold, and the gross profit from sales for the period.

Answer

Check Figure: Gross profit, $8,853,750

3. Determine the ending inventory cost as of March 31.

PR 7-3A

Weighted average cost method with perpetual inventory

Obj. 2, 3

The beginning inventory for Midnight Supplies and data on purchases and sales for a three-month period are shown in Problem 7-1A .

Instructions

1. Record the inventory, purchases, and cost of merchandise sold data in a perpetual inventory record similar to the one illustrated in Exhibit 5 , using the weighted average cost method.

2. Determine the total sales, the total cost of merchandise sold, and the gross profit from sales for the period.

Answer

Check Figure: Gross profit, $8,973,750

3. Determine the ending inventory cost as of March 31.

PR 7-4A

A Periodic inventory by three methods

Obj. 2, 3

The beginning inventory for Midnight Supplies and data on purchases and sales for a three-month period are shown in Problem 7-1A .

Instructions

1. Determine the inventory on March 31 and the cost of merchandise sold for the three-month period, using the first-in, first-out method and the periodic inventory system.

2. Determine the inventory on March 31 and the cost of merchandise sold for the three-month period, using the last-in, first-out method and the periodic inventory system.

Answer

Check Figure: Inventory, $881,250

3. Determine the inventory on March 31 and the cost of merchandise sold for the three-month period, using the weighted average cost method and the periodic inventory system. Round the weighted average unit cost to the nearest cent.

4. Compare the gross profit and the March 31 inventories, using the following column headings:

PR 7-5A

Periodic inventory by three methods

Obj. 2, 4

Dymac Appliances uses the periodic inventory system. Details regarding the inventory of appliances at January 1, purchases invoices during the next 12 months, and the inventory count at December 31 are summarized as follows:

Instructions

1. Determine the cost of the inventory on December 31 by the first-in, first-out method. Present data in columnar form, using the following headings:

If the inventory of a particular model comprises one entire purchase plus a portion of another purchase acquired at a different unit cost, use a separate line for each purchase.

Answer

Check Figure: $10,700

2. Determine the cost of the inventory on December 31 by the last-in, first-out method, following the procedures indicated in (1).

3. Determine the cost of the inventory on December 31 by the weighted average cost method, using the columnar headings indicated in (1).

4. Discuss which method (FIFO or LIFO) would be preferred for income tax purposes in periods of (a) rising prices and (b) declining prices.

PR 7-6A

Lower-of-cost-or-market inventory

Obj. 6

Data on the physical inventory of Ashwood Products Company as of December 31 follow:

Quantity and cost data from the last purchases invoice of the year and the next-to-the-last purchases invoice are summarized as follows:

Instructions

Determine the inventory at cost as well as at the lower of cost or market, using the first-in, first-out method. Record the appropriate unit costs on the inventory sheet and complete the pricing of the inventory. When there are two different unit costs applicable to an item, proceed as follows:

1. Draw a line through the quantity and insert the quantity and unit cost of the last purchase.

2. On the following line, insert the quantity and unit cost of the next-to-the-last purchase.

3. Total the cost and market columns and insert the lower of the two totals in the Lower of C or M column. The first item on the inventory sheet has been completed as an example.

Answer

Check Figure: Total LCM, $39,873

Appendix PR 7-7A

Retail method; gross profit method

Selected data on merchandise inventory, purchases, and sales for Celebrity Tan Co. and Ranchworks Co. are as follows:

Instructions

1. Determine the estimated cost of the merchandise inventory of Celebrity Tan Co. on August 31 by the retail method, presenting details of the computations.

Answer

Check Figure: $483,600

2.

1. Estimate the cost of the merchandise inventory of Ranchworks Co. on November 30 by the gross profit method, presenting details of the computations.

2. Assume that Ranchworks Co. took a physical inventory on November 30 and discovered that $369,750 of merchandise was on hand. What was the estimated loss of inventory due to theft or damage during March through November?

Chapter Review

7-8hProblems: Series B

PR 7-1B

FIFO perpetual inventory

Obj. 2, 3

The beginning inventory of merchandise at Dunne Co. and data on purchases and sales for a three-month period ending June 30 are as follows:

Instructions

1. Record the inventory, purchases, and cost of merchandise sold data in a perpetual inventory record similar to the one illustrated in Exhibit 3 , using the first-in, first-out method.

2. Determine the total sales and the total cost of merchandise sold for the period. Journalize the entries in the sales and cost of merchandise sold accounts. Assume that all sales were on account.

3. Determine the gross profit from sales for the period.

Answer

Check Figure: $214,474

4. Determine the ending inventory cost on June 30.

5. Based upon the preceding data, would you expect the inventory using the last-in, first-out method to be higher or lower?

PR 7-2B

LIFO perpetual inventory

Obj. 2, 3

The beginning inventory for Dunne Co. and data on purchases and sales for a three-month period are shown in Problem 7-1B .

Instructions

1. Record the inventory, purchases, and cost of merchandise sold data in a perpetual inventory record similar to the one illustrated in Exhibit 4 , using the last-in, first-out method.

2. Determine the total sales, the total cost of merchandise sold, and the gross profit from sales for the period.

Answer

Check Figure: Gross profit, $213,170

3. Determine the ending inventory cost on June 30.

PR 7-3B

Weighted average cost method with perpetual inventory

Obj. 2, 3

The beginning inventory for Dunne Co. and data on purchases and sales for a three-month period are shown in Problem 7-1B .

Instructions

1. Record the inventory, purchases, and cost of merchandise sold data in a perpetual inventory record similar to the one illustrated in Exhibit 5 , using the weighted average cost method.

2. Determine the total sales, the total cost of merchandise sold, and the gross profit from sales for the period.

Answer

Check Figure: Gross profit, $214,396

3. Determine the ending inventory cost on June 30.

PR 7-4B

Periodic inventory by three methods

Obj. 2, 3

The beginning inventory for Dunne Co. and data on purchases and sales for a three-month period are shown in Problem 7-1B .

Instructions

1. Determine the inventory on June 30 and the cost of merchandise sold for the three-month period, using the first-in, first-out method and the periodic inventory system.

2. Determine the inventory on June 30 and the cost of merchandise sold for the three-month period, using the last-in, first-out method and the periodic inventory system.

Answer

Check Figure: Inventory, $31,240

3. Determine the inventory on June 30 and the cost of merchandise sold for the three-month period, using the weighted average cost method and the periodic inventory system. Round the weighted average unit cost to the dollar.

4. Compare the gross profit and June 30 inventories using the following column headings:

PR 7-5B

Periodic inventory by three methods

Obj. 2, 4

Pappa’s Appliances uses the periodic inventory system. Details regarding the inventory of appliances at January 1, purchases invoices during the year, and the inventory count at December 31 are summarized as follows:

Instructions

1. Determine the cost of the inventory on December 31 by the first-in, first-out method. Present data in columnar form, using the following headings:

If the inventory of a particular model comprises one entire purchase plus a portion of another purchase acquired at a different unit cost, use a separate line for each purchase.

Answer

Check Figure: $18,545

2. Determine the cost of the inventory on December 31 by the last-in, first-out method, following the procedures indicated in (1).

3. Determine the cost of the inventory on December 31 by the weighted average cost method, using the columnar headings indicated in (1).

4. Discuss which method (FIFO or LIFO) would be preferred for income tax purposes in periods of (a) rising prices and (b) declining prices.

PR 7-6B

Lower-of-cost-or-market inventory

Obj. 6

Data on the physical inventory of Katus Products Co. as of December 31 follow:

Quantity and cost data from the last purchases invoice of the year and the next-to-the-last purchases invoice are summarized as follows:

Instructions

Determine the inventory at cost as well as at the lower of cost or market, using the first-in, first-out method. Record the appropriate unit costs on the inventory sheet and complete the pricing of the inventory. When there are two different unit costs applicable to an item:

1. Draw a line through the quantity and insert the quantity and unit cost of the last purchase.

2. On the following line, insert the quantity and unit cost of the next-to-the-last purchase.

3. Total the cost and market columns and insert the lower of the two totals in the LCM column. The first item on the inventory sheet has been completed as an example.

Answer

Check Figure: Total LCM, $41,873

Appendix PR 7-7B

Retail method; gross profit method

Selected data on merchandise inventory, purchases, and sales for Jaffe Co. and Coronado Co. are as follows:

Instructions

1. Determine the estimated cost of the merchandise inventory of Jaffe Co. on February 28 by the retail method, presenting details of the computations.

Answer

Check Figure: $630,000

2.

1. Estimate the cost of the merchandise inventory of Coronado Co. on October 31 by the gross profit method, presenting details of the computations.

2. Assume that Coronado Co. took a physical inventory on October 31 and discovered that $366,500 of merchandise was on hand. What was the estimated loss of inventory due to theft or damage during May through October?

Chapter Review

7-8iCases & Projects

CP 7-1

Ethics in Action

Sizemo Elektroniks sells semiconductors that are used in games and small toys. The company has been extremely successful in recent years, recording an increase in earnings each of the past six quarters. At the end of the current quarter, Jay Shulz, the company’s staff accountant, calculated the ending inventory for the semiconductors and was surprised to find that the quantity of the Hayden 537X model had not changed during the quarter. Jay confirmed his calculation with the inventory control manager, who indicated that sales of the Hayden 537X had stopped when the Hayden 637X semiconductor was released early in the quarter. Jay researched the issue further and found that the Hayden 637X semiconductor has the same applications as the Hayden 537X, but has more computing power and a lower cost than the 537X. Jay e-mailed this information to Tina Vereen, the chief financial officer, and recommended that the company apply the lower-of-cost-or-market method to the Hayden 537X semiconductors in inventory. Later that day, Tina e-mailed Jay back, instructing him not to apply the lower-of-cost-or-market method to the 537X inventory because “the company is under considerable pressure to maintain its track record of earnings growth, and a lower-of-cost-or-market adjustment would result in a significant decline in earnings this quarter.” Reluctantly, Jay followed Tina’s instructions.

Evaluate the decision not to apply the lower-of-cost-or-market method in the current quarter.

1. Who benefits from this decision?

2. Who is harmed by this decision?

3. Are Jay and Tina acting in an ethical manner? Explain.

CP 7-2

Ethics in Action

Anstead Co. is experiencing a decrease in sales and operating income for the fiscal year ending October 31. Ryan Frazier, controller of Anstead Co., has suggested that all orders received before the end of the fiscal year be shipped by midnight, October 31, even if the shipping department must work overtime. Because Anstead Co. ships all merchandise FOB shipping point, it would record all such shipments as sales for the year ending October 31, thereby offsetting some of the decreases in sales and operating income.

1. Discuss whether Ryan Frazier is behaving in a professional manner.

CP 7-3

Team Activity

In teams, select a public company in the merchandising industry that interests you. Obtain the company’s most recent annual report on Form 10-K. The Form 10-K is a company’s annually required filing with the Securities and Exchange Commission (SEC). It includes the company’s financial statements and accompanying notes. The Form 10-K can be obtained either (a) by referring to the investor relations section of the company’s website or (b) by using the company search feature of the SEC’s EDGAR database service found at www.sec.gov/edgar/searchedgar/companysearch.html.

1. Based on the information in the company’s most recent annual report, answer the following questions:

1. What types of items are included in the company’s inventory?

2. What inventory costing method or methods does the company use to determine the inventory amount reported on its balance sheet?

3. How much inventory does the company have at the end of the most recent year?

4. What percentage of total current assets is inventory during the three years presented? Has this percentage increased, decreased, or remained the same during this period?

5. How much cost of merchandise sold does the company report for the most recent year?

2. Using the information presented in the company’s annual report, calculate the company’s inventory turnover for the current and previous years. Based on this information, has the company’s performance improved? Briefly explain your answer.

CP 7-4

Communication

Golden Eagle Company began operations on April 1 by selling a single product. Data on purchases and sales for the year are as follows:

Purchases:

Sales:

The president of the company, Connie Kilmer, has asked for your advice on which inventory cost flow method should be used for the 32,000-unit physical inventory that was taken on December 31. The company plans to expand its product line in the future and uses the periodic inventory system.

1. Write a brief memo to Ms. Kilmer comparing and contrasting the LIFO and FIFO inventory cost flow methods and their potential impacts on the company’s financial statements.

CP 7-5

LIFO and inventory flow

The following is an excerpt from a conversation between Paula Marlo, the warehouse manager for Musick Foods Wholesale Co., and its accountant, Mike Hayes. Musick Foods operates a large regional warehouse that supplies produce and other grocery products to grocery stores in smaller communities.

Paula:

Mike, can you explain what’s going on here with these monthly statements?

Mike:

Sure, Paula. How can I help you?

Paula:

I don’t understand this last-in, first-out inventory procedure. It just doesn’t make sense.

Mike:

Well, what it means is that we assume that the last goods we receive are the first ones sold. So the inventory consists of the items we purchased first.

Paula:

Yes, but that’s my problem. It doesn’t work that way! We always distribute the oldest produce first. Some of that produce is perishable! We can’t keep any of it very long or it’ll spoil.

Mike:

Paula, you don’t understand. We only assume that the products we distribute are the last ones received. We don’t actually have to distribute the goods in this way.

Paula:

I always thought that accounting was supposed to show what really happened. It all sounds like “make believe” to me! Why not report what really happens?

1. Respond to Paula’s concerns.

CP 7-6

Comparing inventory ratios for two companies

Target Corp. sells merchandise primarily through its retail stores. On the other hand, Amazon.com uses its e-commerce services, features, and technologies to sell its products through the Internet. Recent balance sheet inventory disclosures for Target and Amazon.com (in millons) are as follows:

1. Determine the inventory turnover for Target and Amazon.com. Round to two decimal places.

2. Determine the days’ sales in inventory for Target and Amazon.com. Use 365 days and round to one decimal place.

3. Interpret your results.

CP 7-7

Comparing inventory ratios for three companies

The general merchandise retail industry has a number of segments represented by the following companies:

Company Name

Merchandise Concept

Costco Wholesale Corporation

Membership warehouse

Wal-Mart

Discount general merchandise

JCPenney Company

Department store

For a recent year, the following cost of merchandise sold and beginning and ending inventories have been provided from corporate annual reports (in millions) for these three companies:

1. Determine the inventory turnover ratio for all three companies. Round to two decimal places.

2. Determine the days’ sales in inventory for all three companies. Use 365 days and round to one decimal place.

3. Interpret these results based on each company’s merchandise concept.