Pr 7 1a fifo perpetual inventory midnight supplies

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?