accounting

Ex. 221 Condensed income statements for Swift Corporation are shown below for two years. 2013 2014 Sales $75,000 $90,000 Cost of Goods Sold 45,000 54,000 Gross Profit $30,000 $36,000 Operating Expense 15,000 15,000 Net Income $15,000 $21,000 Compute the corrected net income for 2013 and 2014 assuming that the inventory as of the end of 2013 was mistakenly understated by $7,000. 2013 $ __________ _ 2014 $________

*Solution 221 (5 min.) 2013 = $22,000 2014 = $14,000

Ex. 222 Condensed income statements for Werly Corporation are shown below for two years. 2013 2014 Sales $75,000 $90,000 Cost of Goods Sold 45,000 54,000 Gross Profit $30,000 $36,000 Operating Expense 15,000 15,000 Net Income $15,000 $21,000 Compute the corrected net income for 2013 and 2014 assuming that the inventory as of the end of 2013 was mistakenly overstated by $5,000. 2013 $ __________ _ 2014 $__________

*Solution 222 (5 min.) 2013 = $10,000 2014 = $26,000

Ex. 223 Arnold Pharmacy reported cost of goods sold as follows: 2013 2014 Beginning inventory $ 54,000 $ 64,000 Cost of goods purchased 847,000 891,000 Cost of goods available for sale 901,000 955,000 Ending inventory 64,000 55,000 Cost of goods sold $837,000 $900,000 Arnold made two errors: (1) 2013 ending inventory was overstated by $6,000. (2) 2014 ending inventory was understated by $11,000. *Ex. 223 (Cont.) Instructions Assuming the errors had not been corrected, indicate the dollar effect that the errors had on the items appearing on the financial statements listed below. Also indicate if the amounts are overstated (O) or understated (U). 2013 2014 Overstated/ Overstated/ Amount Understated Amount Understated Total assets $_________ _______ $_________ _______ Stockholders' equity $_________ _______ $_________ _______ Cost of goods sold $_________ _______ $_________ _______ Net income $_________ _______ $_________ _______

*Solution 223 (20 min.) 2013 2014 Overstated/ Overstated/ Amount Understated Amount Understated Total assets $6,000 O $11,000 U Stockholders' equity $6,000 O $11,000 U Cost of goods sold $6,000 U $17,000 O Net income $6,000 O $17,000 U Correct cost of goods sold: 2013 2014 Beginning inventory $ 54,000 $ 58,000 Cost of goods purchased 847,000 891,000 Cost of goods available for sale 901,000 949,000 Ending inventory 58,000 66,000 Cost of goods sold $843,000 $883,000

Identify whether each of the following items would be added to the book balance, or deducted from the book balance in a bank reconciliation. . 1. EFT transfer to a supplier. 2.Bank service charge. 3.Check printing charge. 4. Error recording check # 214 which was written for $230 but recorded for $320. 5. Collection of note and interest by bank on company's behalf.

1. deducted from the book balance 2. deducted from the book balance 3. deducted from the book balance 4. Added from the book balance 5. Added from the book balance

The management of Otto Corp. is considering the effects of various inventory costing methods on its financial statements and its income tax expense. Assuming that the price the company pays for inventory is increasing. 1. Which method will result in the lowest income tax expense? 2. Which method will provide the highest net income? 3. Which method will provide the highest ending inventory? 4. Which method will result in the most stable earnings over a number of years?

1.LIFO 2. FIFO 3.FIFO 4.Average Cost Method

The Entertainment Center accumulates the following cost and market data at December 31. Cost Data (Camera 11,000; Camcorders 8,000; DVDs 14,000) Market data (camera 10,200; Camcorders 8,500; DVDs 12,600). What is the lower-of-cost-or-market value of the inventory?

10200+8000+12600=30800

Match the items below by entering the appropriate code letter in the space provided. 1. The difference between inventory reported using LIFO and inventory using FIFO. 2. Tracks the actual physical flow for each inventory item available for sale. 3. Goods that are only partially completed in a manufacturing company. 4. Cost of goods sold consists of the most recent inventory purchases. 5. Goods ready for sale to customers by retailers and wholesalers. 6. Title to the goods transfers when the public carrier accepts the goods from the seller. 7. Ending inventory valuation consists of the most recent inventory purchases. 8. The same unit cost is used to value ending inventory and cost of goods sold. 9. Title to goods transfers when the goods are delivered to the buyer. 10. Measures the number of times the inventory sold during the period.

5-Merchandise Inventory 3- Work in process 6- FOB shipping point 9- FOB destination 2- Specific identification method 7- First-in, first-out (FIFO) method 4- Last-in, first-out (LIFO) method 8- Average cost method 1- LIFO reserve 10- Inventory turnover ratio

direct write-off method

A method of accounting for bad debts that involves charging receivable balances to Bad Debt Expense at the time receivables from a particular company are determined to be uncollectible.

Shellan Kamp Company identifies the following items for possible inclusion in the physical inventory. Indicate whether each item should be included or excluded from the inventory taking. 1. Goods shipped on consignment by Shellan Kamp to another company. 2. Goods in transit from a supplier shipped FOB destination. 3. Goods shipped via common carrier to a customer with terms FOB shipping point. 4. Goods held on consignment from another company.

Solution 192 1. Included 2. Excluded 3. Excluded 4. Excluded

Ex. 199 The Cain Company has just completed a physical inventory count at year end, December 31, 2014. Only the items on the shelves, in storage, and in the receiving area were counted and costed on the FIFO basis. The inventory amounted to $80,000. During the audit, the independent CPA discovered the following additional information: (a) There were goods in transit on December 31, 2014, from a supplier with terms FOB destination, costing $10,000. Because the goods had not arrived, they were excluded from the physical inventory count. (b) On December 27, 2014, a regular customer purchased goods for cash amounting to $1,000 and had them shipped to a bonded warehouse for temporary storage on December 28, 2014. The goods were shipped via common carrier with terms FOB shipping point. The customer picked the goods up from the warehouse on January 4, 2015. Cain Company had paid $500 for the goods and, because they were in storage, Cain included them in the physical inventory count. (c) Cain Company, on the date of the inventory, received notice from a supplier that goods ordered earlier, at a cost of $4,000, had been delivered to the transportation company on December 28, 2014; the terms were FOB shipping point. Because the shipment had not arrived on December 31, 2014, it was excluded from the physical inventory. (d) On December 31, 2014, there were goods in transit to customers, with terms FOB shipping point, amounting to $800 (expected delivery on January 8, 2015). Because the goods had been shipped, they were excluded from the physical inventory count. (e) On December 31, 2014, Cain Company shipped $2,500 worth of goods to a customer, FOB destination. The goods arrived on January 5, 2014. Because the goods were not on hand, they were not included in the physical inventory count. (f) Cain Company, as the consignee, had goods on consignment that cost $3,000. Because these goods were on hand as of December 31, 2014, they were included in the physical inventory count. Instructions Analyze the above information and calculate a corrected amount for the ending inventory. Explain the basis for your treatment of each item.

Solution 199 Start with $80,000 Item (a) - (Because the goods were shipped FOB destination title will pass to Cain upon arrival. Properly excluded.) Item (b) - 500 (Goods should be excluded. The customer accepted title when the goods left Cain FOB shipping point.) Item (c) + 4,000 (Goods belong to Cain. Title passed when supplier delivered the goods to the transportation company.) Item (d) - (Because the goods were shipped FOB shipping point Cain no longer has title to these goods. Properly excluded.) Item (e) + 2,500 (Goods were shipped FOB destination. Cain retains title until the customer receives them.) Item (f) - 3,000 (These goods are owned by the consignor, not the consignee, and should not be included in Cain's inventory.) Corrected inventory $83,000

Dalton Company was undergoing an end of year audit of its financial records. The auditors were in the process of reviewing Dalton's inventory for year end, December 31, 2014. They completed an end of year inventory. The value of the ending inventory prior to any adjustments was $185,000, but before finishing up they had a few questions. Discussion with Dalton's accountant revealed the following: (a) Dalton sold goods costing $60,000 to Summey Company FOB shipping point on December 28. The goods are not expected to reach Summey until January 12. The goods were not included in the physical inventory because they were not in the warehouse. (b) The physical count of the inventory did not include goods costing $95,000 that were shipped to Dalton FOB destination on December 27 and were still in transit at year-end. (c) Dalton received goods costing $25,000 on January 2. The goods were shipped FOB shipping point on December 26 by Strong Company. The goods were not included in the physical count. (d) Dalton sold goods costing $40,000 to Hampton Company FOB destination on December 30. The goods were received by Hampton Company on January 8. Because the goods had been shipped, they were excluded from the physical inventory count. (e) Dalton received goods costing $42,000 on January 2 that were shipped FOB destination on December 29. The shipment was a rush order that was suppose to arrive December 31. This purchase was included in the ending inventory of $192,000. (f) Dalton Company, as the consignee, had goods on consignment that cost $3,000. Because these goods were on hand as of December 31, they were included in the physical inventory count.

Solution 200 Start with $185,000 Item (a) - (Because the goods were shipped FOB shipping point title passed to Button upon shipping. Properly excluded.) Item (b) - (Goods should be excluded. Title does not pass to Dalton until goods are received). Item (c) +25,000 (Goods belong to Dalton. Title passed when supplier delivered the goods to the transportation company.) Item (d) +40,000 (Because the goods were shipped FOB destination point Dalton has title to these goods.) Item (e) -42,000 (Goods were shipped FOB destination. Dalton does not take title until they receive them no matter when expected.) Item (f) - 3,000 (These goods are owned by the consignor, not the consignee, and should not be included in Dalton's inventory.) Corrected inventory $205,000

Dennis Lee, an auditor with Knapp CPAs, is performing a review of Dobson Company's inventory account. Dobson did not have a good year, and top management is under pressure to boost reported income. According to its records, the inventory balance at year-end was $640,000. However, the following information was not considered when determining that amount. 1. Included in the company's count were goods with a cost of $200,000 that the company is holding on consignment. The goods belong to Agler Corporation. 2. The physical count did not include goods purchased by Dobson with a cost of $40,000 that were shipped FOB shipping point on December 28 and did not arrive at Dobson's warehouse until January 3. 3. Included in the inventory account was $22,000 of office supplies that were stored in the warehouse and were to be used by the company's supervisors and managers during the coming year. 4. The company received an order on December 29 that was boxed and was sitting on the loading dock awaiting pick-up on December 31. The shipper picked up the goods on January 1 and delivered them on January 6. The shipping terms were FOB shipping point. The goods had a selling price of $40,000 and a cost of $30,000. The goods were not included in the count because they were sitting on the dock. 5. On December 29, Dobson shipped goods with a selling price of $90,000 and a cost of $70,000 to Central Sales Corporation FOB shipping point. The goods arrived on January 3. Central Sales had only ordered goods with a selling price of $10,000 and a cost of $8,000. However, a sales manager at Dobson had authorized the shipment and said that if Central wanted to ship the goods back next week, it could. 6. Included in the count was $50,000 of goods that were parts for a machine that the company no longer made. Given the high-tech nature of Dobson's products, it was unlikely that these obsolete parts had any other use. However, management would prefer to keep them on the books at cost, "since that is what we paid for them, after all

Solution 201 (20 min.) Ending inventory-as reported $640,000 1. Subtract from inventory: The goods belong to Agler Corporation. Dobson is merely holding them as a consignee. (200,000) 2. Add to inventory: The goods belong to Dobson as soon as they are shipped (December 28). 40,000 3. Subtract from inventory: Office supplies should be carried in a separate account. They are not considered inventory held for resale. (22,000) 4. Add to inventory: The goods belong to Dobson until they are shipped (Jan. 1). 30,000 5. Add to inventory: Central Sales ordered goods with a cost of $7,000. Dobson should record the corresponding sales revenue of $10,000. Dobson's decision to ship extra "unordered" goods does not constitute a sale. The manager's statement that Central could ship the goods back indicates that Dobson knows this over-shipment is not a legitimate sale. The manager acted unethically in an attempt to improve Dobson's reported income by over-shipping. 62,000* 6. Subtract from inventory: GAAP requires that inventory be valued at the lower of cost or market. Obsolete parts should be adjusted from cost to zero if they have no other use. (50,000) Correct inventory $500,000 *($70,000-$8,000)

Ex. 202 Grother Company uses the periodic inventory method and had the following inventory information available: Units Unit Cost Total Cost 1/1 Beginning Inventory 100 $4 $ 400 1/20 Purchase 500 $5 2,500 7/25 Purchase 100 $7 700 10/20 Purchase 300 $8 2,400 1,000 $6,000 A physical count of inventory on December 31 revealed that there were 350 units on hand. Instructions Answer the following independent questions and show computations supporting your answers. 1. Assume that the company uses the FIFO method. The value of the ending inventory at December 31 is $__________. 2. Assume that the company uses the average cost method. The value of the ending inventory on December 31 is $__________. 3. Assume that the company uses the LIFO method. The value of the ending inventory on December 31 is $__________. 4. Determine the difference in the amount of income that the company would have reported if it had used the FIFO method instead of the LIFO method. Would income have been greater or less?

Solution 202 1. FIFO: Ending inventory $2,750 300 units @$8 = $2,400 50 units @$7 = 350 350 units $2,750 2. Average Cost: Ending inventory $2,100 $6,000 ÷ 1,000 = $6.00 per unit × 350 units = $2,100 3. LIFO: Ending Inventory $1,650 100 units @$4 = $ 400 250 units @$5 = 1,250 350 units $1,650 4. FIFO: Cost of goods sold $3,250 100 units @$4 = $ 400 500 units @$5 = 2,500 50 units @$7 = 350 650 units $3,250 LIFO: Cost of goods sold $4,475 300 units @$8 $2,400 100 units @$7 700 250 units @$5 1,250 650 units $4,350

Ex. 203 Hansen Company uses the periodic inventory method and had the following inventory information available: Units Unit Cost Total Cost 1/1 Beginning Inventory 100 $3 $ 300 1/20 Purchase 500 $4 2,000 7/25 Purchase 100 $5 500 10/20 Purchase 300 $6 1,800 1,000 $4,600 A physical count of inventory on December 31 revealed that there were 380 units on hand. Instructions Answer the following independent questions and show computations supporting your answers. 1. Assume that the company uses the FIFO method. The value of the ending inventory at December 31 is $__________. 2. Assume that the company uses the average cost method. The value of the ending inventory on December 31 is $__________. 3. Assume that the company uses the LIFO method. The value of the ending inventory on December 31 is $__________. 4. Determine the difference in the amount of income that the company would have reported if it had used the FIFO method instead of the LIFO method. Would income have been greater or less?

Solution 203 1. FIFO: Ending inventory $2,200 300 units @$6 = $1,800 80 units @$5 = 400 380 units $2,200 2. Average Cost: Ending inventory $1,748 $4,600 ÷ 1,000 = $4.60 per unit × 380 units = $1,748 3. LIFO: Ending Inventory $1,420 100 units @$3 = $ 300 280 units @$4 = 1,120 380 units $1,420 4. FIFO: Cost of goods sold $2,400 100 units @$3 = $ 300 500 units @$4 = 2,000 20 units @$5 = 100 620 units $2,400 LIFO: Cost of goods sold $3,180 300 units @$6 $1,800 100 units @$5 500 220 units @$4 880 620 units $3,180 Solution 203 (Cont.) Income would have been $780; ($3,180 vs. $2,400) greater if the company used FIFO instead of LIFO.

exa 204 Faster Company uses the periodic inventory method and had the following inventory information available: Units Unit Cost Total Cost 1/1 Beginning Inventory 15 $8.00 $ 120 1/20 Purchase 60 $8.80 528 7/25 Purchase 30 $8.40 252 10/20 Purchase 45 $9.60 432 150 $1,332 A physical count of inventory on December 31 revealed that there were 55 units on hand. Instructions Answer the following independent questions and show computations supporting your answers. 1. Assume that the company uses the FIFO method. The value of the ending inventory at December 31 is $__________. 2. Assume that the company uses the Average Cost method. The value of the ending inventory on December 31 is $__________. 3. Assume that the company uses the LIFO method. The value of the ending inventory on December 31 is $__________. 4. Assume that the company uses the FIFO method. The value of the cost of goods sold at December 31 is $__________.

Solution 204 1. FIFO: Ending inventory $516 45 units @$9.60 = 432 10 units @$8.40 = 84 55 units $516 2. Average Cost: Ending inventory $488 $1,332 ÷ 150 = $8.88 per unit × 55 units = $488 3. LIFO: Ending Inventory $472 15 units @$8.00 = $ 120 40 units @$8.80 = 352 55 units $472 4. FIFO: Cost of goods sold $816 15 units @$8.00 = $ 120 60 units @$8.80 = 528 20 units @$8.40 = 168 95 units $ 816

Ex. 205 Compute the cost to be assigned to ending inventory for each of the methods indicated given the following information about purchases and sales during the year. January 1 Beginning Inventory 150 items @ $4 = $ 600 May 1 Purchases 450 items @ $6 = 2,700 Total Available 600 items $3,300 Total Sales 430 items December 31 Ending Inventory 170 Cost assigned on an average cost basis $__________ Cost assigned on a FIFO basis $__________ Costs assigned on a LIFO basis $__________

Solution 205 (5 min.) $935 [($3,300/600) x 170] $1,020 (170 x $6) $ 720 [(150 x $4)+(20 x $6)]

Ex. 206 Compute the cost to be assigned to ending inventory for each of the methods indicated given the following information about purchases and sales during the year. January 1 Beginning Inventory 100 items @ $7 = $ 700 May 1 Purchases 400 items @ $8 = 3,200 Total Available 500 items $3,900 Total Sales 360 items December 31 Ending Inventory 140 Cost assigned on an average cost basis $__________ Cost assigned on a FIFO basis $__________ Costs assigned on a LIFO basis $__________

Solution 206 (5 min.) $1,092 [($3,900/500) x 140)] $1,120 (140 x $8) $1,020 [(100 x $7)+(40 x $8)]

Wooderson Company sells many products. Gizmo is one of its popular items. Below is an analysis of the inventory purchases and sales of Gizmo for the month of March. Wooderson Company uses the periodic inventory system. Purchases Sales Units Unit Cost Units Selling Price/Unit 3/1 Beginning inventory 100 $40 3/3 Purchase 60 $50 3/4 Sales 60 $80 3/10 Purchase 200 $55 3/16 Sales 70 $90 3/19 Sales 90 $90 3/25 Sales 60 $90 3/30 Purchase 40 $60 Instructions (a) Using the FIFO assumption, calculate the amount charged to cost of goods sold for March. (Show computations) (b) Using the weighted-average method, calculate the amount assigned to the inventory on hand on March 31. (Show computations) Using the LIFO assumption, calculate the amount assigned to the inventory on hand on March 31. (Show computations)

Solution 207 (20 min.) Purchases Sales Units Unit Cost Units Selling Price/Unit 3/1 Beginning inventory 100 $40 3/3 Purchase 60 $50 3/4 Sales 60 $80 3/10 Purchase 200 $55 3/16 Sales 70 $90 3/19 Sales 90 $90 3/25 Sales 60 $90 3/30 Purchase 40 $60 400 280 (a) Using FIFO - the earliest units purchased were the first sold. 3/1 100 @ $40 = $ 4,000 3/3 60 @ 50 = 3,000 3/10 120 @ 55 = 6,600 280 units $13,600 = the cost of goods sold (b) Calculate the weighted average unit cost: $20,400 ÷ 400 = $51 $51 × units in ending inventory (400 available less 280 sold = 120) $51 × 120 = $6,120 Solution 207 (Cont.) (c) There are 120 units in ending inventory. They are comprised of the first units purchased when LIFO is assumed. 3/1 100 @ $40 = $4,000 3/3 20 @ $50 = 1,000 120 units $5,000 = Ending inventory

Ex. 209 Hanlin Company uses the periodic inventory system to account for inventories. Information related to Hanlin Company's inventory at January 31 is given below: January 1 Beginning inventory 400 units @ $12.00 = $ 4,800 8 Purchase 800 units @ $12.40 = 9,920 16 Purchase 600 units @ $12.80 = 7,680 24 Purchase 200 units @ $13.20 = 2,640 Total units and cost 2,000 units $25,040 Instructions 1. Show computations to value the ending inventory using the FIFO cost assumption if 600 units remain on hand at January 31. 2. Show computations to value the ending inventory using the weighted-average cost method if 600 units remain on hand at January 31. 3. Show computations to value the ending inventory using the LIFO cost assumption if 600 units remain on hand at January 31.

Solution 209 1. 600 units in ending inventory. Under FIFO, the units remaining in inventory are the ones purchased most recently. 1/24 200 units @ $13.20 = $2,640 1/16 400 units @ $12.80 = 5,120 600 units $7,760 2. 600 units in ending inventory. Under average cost method, the weighted-average cost per unit must be computed. $25,040 ÷ 2,000 units = $12.52 600 units × $12.52 = $7,512 3. 600 units in ending inventory. Under LIFO, the units remaining are the ones purchased earliest. 1/1 400 units @ 12.00 = $4,800 1/8 200 units @ 12.40 = 2,480 600 units $7,280

Ex. 210 Johnson Company reports the following for the month of June. Date _ Explanation Units Unit Cost Total Cost June 1 Inventory 225 $5 $1,125 12 Purchase 525 6 3,150 23 Purchase 750 7 5,250 30 Inventory 280 (a) Compute the cost of the ending inventory and the cost of goods sold under (1) FIFO, (2) LIFO, and (3) average cost. (b) Which costing method gives the highest ending inventory? The highest cost of goods sold? Why? (c) How do the average-cost values for ending inventory and cost of goods sold relate to ending inventory and cost of goods sold for FIFO and LIFO?

Solution 210 (20 min.) (a) (1) FIFO Beginning inventory (225 × $5) $1,125 Purchases June 12 (525 × $6) $3,150 June 23 (750 × $7) 5,250 8,400 Cost of goods available for sale 9,525 Less: Ending inventory (280 × $7) 1,960 Cost of goods sold $7,565 (2) LIFO Cost of goods available for sale $9,525 Less: Ending inventory (225 × $5) + (55 × $6) 1,455 Cost of goods sold $8,070 (3) AVERAGE COST Cost of Goods Total Units Weighted Average Available for Sale ÷ Available for Sale = Unit Cost $9,525 1,500 $6.35 Ending inventory (280 × $6.35) $1,778 Cost of goods sold (1,220 × $6.35) $7,747 or $9,525 - $1,778 = $7,747 (b) The FIFO method will produce the highest ending inventory because costs have been rising. Under this method, the earliest costs are assigned to cost of goods sold, and the latest costs remain in ending inventory. The LIFO method will produce the highest cost of goods sold for Plato Company. Under LIFO the most recent costs are charged to cost of goods sold and the earliest costs are included in the ending inventory. Solution 210 (Cont.) (c) The average cost ending inventory ($1,778) is higher than LIFO ($1,455) but lower than FIFO ($1,960). For cost of goods sold, average cost ($7,747) is higher than FIFO ($7,565) but lower than LIFO ($8,070).

Ex. 212 This information is available for Groneman, Inc. for 2013 and 2014. (in millions) 2013 _ 2014 _ Beginning inventory $ 2,290 $ 2,522 Ending inventory 2,522 2,618 Cost of goods sold 24,351 23,099 Sales 43,251 43,232 Instructions Calculate the inventory turnover, days in inventory, and gross profit rate for Groneman., Inc. for 2013 and 2014. Comment on any trends.

Solution 212 (15 min.) 2013 _ 2014 _ Inventory $24,351 _ $23,099 _ turnover ($2,290 + $2,522) ÷ 2 ($2,522 + $2,618) ÷ 2 ratio $24,351 = 10.1 times $23,099 = 9.0 times $2,406 $2,570 Days in 365 = 36.1 days 365 = 40.6 days inventory 10.1 9.0 Gross $43,251-$24,351 = .44 $43,232-$23,099 = .47 profit rate $43,251 $43,232 The inventory turnover decreased by approximately 11% from 2013 to 2014 while the days in inventory increased by a similar amount (12%) over the same period. Both of these changes would be considered unfavorable since it's better to have a higher inventory turnover ratio with a corresponding lower days in inventory. Groneman., Inc.'s gross profit rate increased by 6.8% from 2013 to 2014.

Burnham Company reported the following summarized annual data at the end of 2014: Sales revenue $1,600,000 Cost of goods sold* 900,000 Gross margin 700,000 Operating expenses 400,000 Income before income taxes $ 300,000 *Based on an ending FIFO inventory of $250,000. The income tax rate is 30%. The controller of the company is considering a switch from FIFO to LIFO. He has determined that on a LIFO basis, the ending inventory would have been $205,000. Instructions (a) Restate the summary information on a LIFO basis. (b) What effect, if any, would the proposed change have on Burnham's income tax expense, net income, and cash flows? (c) If you were an owner of this business, what would your reaction be to this proposed change?

Solution 213 (a) Restate to a LIFO basis: Sales revenue $1,600,000 Cost of goods sold* 945,000 Gross margin 655,000 Operating expenses 400,000 Income before income taxes $ 255,000 *Ending inventory would be $45,000 less ($250,000 - $205,000 = $45,000) under LIFO, thereby increasing cost of goods by $45,000. Solution 213 (Cont.) (b) The taxes on the FIFO basis would be: $300,000 × .30 = $90,000 Leaving net income of $210,000; ($300,000 - $90,000 = $210,000). The taxes on the LIFO basis would be: $255,000 × .30 = $76,500 Leaving Net Income of $178,500; ($255,000 - $76,500= $178,500). Switching to the LIFO basis will result in $13,500 less income tax expense and less net income of $31,500. The cash effect is $13,500; ($90,000 - $76,500 = $13,500) saved in taxes if LIFO were used. (c) Owners of the business may favor the LIFO basis since more cash will be available for use in the business. LIFO results in more cash being retained in the business since less is paid out for income taxes.

Ex. 214 The following information is available from the annual reports of Young and Olde: (Amounts in millions) Young Olde 2014 ending Inventory $ 6,031 $ 4,816 2013 ending inventory 6,162 5,044 Cost of goods sold 25,937 31,983 Sales revenue 29,656 36,704 2014 LIFO reserve 227 — 2013 LIFO reserve 225 — Instructions (a) Calculate the inventory turnover and days in inventory for both companies. (b) Calculate Young's inventory turnover after adjusting for the LIFO reserve. Young uses the LIFO inventory method. (c) What conclusion concerning the management of inventory can be drawn from these data?

Solution 214 (a) Young _ Olde _ $25,937 $31,983 _ Inventory turnover ($6,031 + $6,162) ÷ 2 ($4,816 + $5,044) ÷ 2 $25,937 $31,983 ———— = 4.25 times ——— = 6.49 times $6,096.5 $4,930 Days in inventory 365 ÷ 4.25 = 85.9 days 365 ÷ 6.49 = 56.2 days Solution 214 (Cont.) (b) 2014 2013 LIFO inventory $6,031 $6,162 LIFO reserve 227 225 FIFO inventory $6,258 $6,387 LIFO cost of goods sold $25,937 Less: increase in LIFO reserve ($227 - $225) (2) FIFO cost of goods sold $25,935 Inventory turnover = $25,935 ÷ [($6,258 + $6,387) ÷ 2] = $25,935 ÷ $6,322.5 = 4.10 (c) Olde's inventory turnover ratio is approximately 53% [(6.49 - 4.25) ÷ 4.25)] higher than Young's ratio. In addition, Olde's days in inventory is 35% [85.9 - 56.2) ÷ 85.9] lower than Young's. Generally, a firm prefers to maintain as high an inventory turnover as possible. It can be concluded that Olde is more effective in managing inventory than Young.

Ex. 215 The following information is available for Wallace Company for 2014. Wallace uses the LIFO inventory method. Beginning inventory $ 600,000 Ending inventory 700,000 Beginning LIFO reserve 200,000 Ending LIFO reserve 300,000 Cost of goods sold 5,980,000 Sales 8,000,000 Instructions (a) Calculate the inventory turnover and days in inventory for Wallace Company based on LIFO. (b) Calculate the inventory turnover and days in inventory after adjusting for the LIFO reserve.

Solution 215 (15 min.) (a) Inventory turnover = $5,980,000 ÷ [($600,000 + $700,000) ÷ 2] = $5,980,000 ÷ $650,000 = 9.2 times Days in inventory = 365 days ÷ 9.2 = 39.7 days Solution 215 (Cont.) (b) Beginning Ending LIFO inventory $600,000 $ 700,000 LIFO reserve 200,000 300,000 FIFO inventory $800,000 $1,000,000 LIFO cost of goods sold $5,980,000 Less: increase in LIFO reserve ($300,000 - $200,000) (100,000) FIFO cost of goods sold $5,880,000 Inventory turnover = $5,880,000 ÷ [($800,000 + $1,000,000) ÷ 2] = $5,880,000 ÷ $900,000 = 6.5 times Days in inventory = 365 days ÷ 6.5 = 56.2 days

Ex. 216 Woodson Company sells many products. Gizmo is one of its popular items. Below is an analysis of the inventory purchases and sales of Gizmo for the month of March. Woodson Company uses the perpetual inventory system. Purchases Sales Units Unit Cost Units Selling Price/Unit 3/1 Beginning inventory 100 $40 3/3 Purchase 60 $50 3/4 Sales 60 $80 3/10 Purchase 200 $55 3/16 Sales 90 $90 3/19 Sales 70 $90 3/25 Sales 60 $90 3/30 Purchase 40 $60 Instructions (a) Using the FIFO assumption, calculate the amount charged to cost of goods sold for March. (Show computations) (b) Using the LIFO assumption, calculate the amount assigned to the inventory on hand on March 31. (Show computations)

Solution 216 (20 min.) Purchases Sales Units Unit Cost Units Selling Price/Unit 3/1 Beginning inventory 100 $40 3/3 Purchase 60 $50 3/4 Sales 60 $80 3/10 Purchase 200 $55 3/16 Sales 90 $90 3/19 Sales 70 $90 3/25 Sales 60 $90 3/30 Purchase 40 $60 400 280 Solution 216 (Cont.) (a) Using FIFO - the earliest units purchased were the first sold. 3/1 100 @ $40 = $ 4,000 3/3 60 @ 50 = 3,000 3/10 120 @ 55 = 6,600 280 units $13,600 = The cost of goods sold (b) There are 120 units in ending inventory. The beginning inventory layer was reduced by 20 units and the first two purchases were consumed. The last purchase was made after all sales occurred. 3/1 80 @ $40 = $3,200 3/30 40 @ $60 = 2,400 120 units $5,600 = Ending inventory

Ex. 219 Carter Company reported these income statement data for a 2-year period. 2014 2013 Sales $250,000 $210,000 Beginning inventory 40,000 30,000 Cost of goods purchased 202,000 173,000 Cost of goods available for sale 242,000 203,000 Ending inventory 50,000 40,000 Cost of goods sold 192,000 163,000 Gross profit $ 58,000 $ 47,000 Carter Company uses a periodic inventory system. The inventories at January 1, 2013, and December 31, 2014, are correct. However, the ending inventory at December 31, 2013, is overstated by $4,000. Instructions (a) Prepare correct income statement data for the 2 years. (b) What is the cumulative effect of the inventory error on total gross profit for the 2 years?

Solution 219 (15 min.) (a) 2013 2014 Sales $210,000 $250,000 Cost of goods sold Beginning inventory 30,000 36,000 Cost of goods purchased 173,000 202,000 Cost of goods available for sale 203,000 238,000 Ending inventory ($40,000 - $4,000) 36,000 50,000 Cost of goods sold 167,000 188,000 Gross profit $ 43,000 $ 62,000 (b) The cumulative effect on total gross profit for the two years is zero as shown below: Incorrect gross profits: $47,000 + $58,000 = $105,000 Correct gross profits: $43,000 + $62,000 = 105,000 Difference $ 0

Ex. 220 For each of the independent events listed below, analyze the impact on the indicated items at the end of the current year by placing the appropriate code letter in the box under each item. Code: O = item is overstated U = item is understated NA = item is not affected Items Stockholders' Cost of Net Events Assets Equity Goods Sold Income 1. The ending inventory in the previous period was overstated. 2. A physical count of goods on hand at the end of the current year resulted in some goods being counted twice. 3. Goods purchased on account in December of the current year and shipped FOB shipping point were recorded as purchases, but were not included in the count of goods on hand on December 31 because they had not arrived by December 31. 4. Goods purchased on account in December of the current year and shipped FOB destination were recorded as purchases, but were not included in the count of goods on hand on December 31 because they had not arrived by December 31. *Ex. 220 (Cont.) 5. The internal auditors discovered that the ending inventory in the previous period was understated $15,000 and that the ending inventory in the current period was overstated $25,000.

Solution 220 (20 min.) Items Stockholders' Cost of Net Events Assets Equity Goods Sold Income 1. NA NA O U 2. O O U O 3. U U O U 4. NA U O U 5. O O U O

LIFO reserve

The difference between inventory reported using LIFO and inventory using FIFO.

debit memorandum

a form prepared by the customer showing the price deduction taken by the customer for returns and allowances

The following reconciling items are applicable to the bank reconciliation for the G Company. Indicate how each item should be shown on a bank reconciliation. a.Outstanding checks. b. Bank credit memorandum for collecting a note for the depositor. c. Bank debit memorandum for service charge. d. Deposit in transit.

a.deducted b. added c. deducted d. added

Ex. 217 Grayson Company sells many products. Gizmo is one of its popular items. Below is an analysis of the inventory purchases and sales of Gizmo for the month of March. Grayson Company uses the perpetual inventory system. Purchases Sales Units Unit Cost Units Selling Price/Unit 3/1 Beginning inventory 100 $55 3/3 Purchase 60 $60 3/4 Sales 60 $120 3/10 Purchase 200 $65 3/16 Sales 90 $130 3/19 Sales 70 $130 3/25 Sales 50 $130 3/30 Purchase 40 $75 Instructions (a) Using the FIFO assumption, calculate the amount charged to cost of goods sold for March. (Show computations) (b) Using the FIFO assumption, calculate the value of ending inventory for March. (c) Using the moving average cost method, calculate the amount assigned to the inventory on hand on March 31. (Show computations) (d) Using the LIFO assumption, calculate the amount assigned to the inventory on hand on March 31. (Show computations) (e) Using the LIFO assumption, calculate the amount charged to cost of goods sold for March. (Show computations)

olution 217 (20 min.) Purchases Sales Units Unit Cost Units Selling Price/Unit 3/1 Beginning inventory 100 $55 3/3 Purchase 60 $60 3/4 Sales 60 $120 3/10 Purchase 200 $65 3/16 Sales 90 $130 3/19 Sales 70 $130 3/25 Sales 50 $130 3/30 Purchase 40 $75 400 270 (a) Using FIFO - the earliest units purchased were the first sold. 3/1 100 @ $55 = $ 5,500 3/3 60 @ 60 = 3,600 3/10 110 @ 65 = 7,150 270 units $16,250 = The cost of goods sold (b) Using FIFO - the latest purchased units were left in inventory. 3/30 40 @ $ 75 = $ 3,000 3/10 90 @ $ 65 = 5,850 130 $8,850 (c) Calculate the value of ending inventory using the weighted average cost: Date Purchases Cost of Goods Sold _ Balance 3/1 Beginning Inventory (100 @ 55) $ 5,500.00 3/3 (60 @ 60) $ 3,600 (160 @ 56.875) 9,100.00 3/4 (60 @ 56.875) (100 @ 56.875) 5,687.50 3/10 (200 @ 65) $13,000 (300 @ 62.292) 18,687.50 3/16 (90 @ 62.292) (210 @ 62.292) 13,081.32 3/19 (70 @ 62.292) (140 @ 62.292) 8,720.88 3/25 (50 @ 62.292) (90 @ 62.292) 5,606.28 3/30 (40 @ 75) $ 3,000 (130 @ 66.202) 8,606.28 (d) There are 130 units in ending inventory. They are comprised of the first units purchased prior to each sale when LIFO is assumed. 3/1 90 @ $55 = $4,950 3/3 40 @ $75 = 3,000 120 units $7,950 = Ending inventory (e) Using LIFO - the latest purchased units purchased prior to the sale were the first sold. 3/3 60 @ $60 = $ 3,600 3/10 90 @ $65 = 5,850 3/10 80 @ $65 = 5,200 3/10 30 @ $65 = 1,950 3/1 10 @ $55 = 1,550 270 units $17,150

Ex. 208 Torrey Company uses the periodic inventory system to account for inventories. Information related to Torrey Company's inventory at October 31 is given below: October 1 Beginning inventory 400 units @ $10.00 = $ 4,000 8 Purchase 800 units @ $10.40 = 8,320 16 Purchase 600 units @ $10.80 = 6,480 24 Purchase 200 units @ $11.60 = 2,320 Total units and cost 2,000 units $21,120 Instructions 1. Show computations to value the ending inventory using the FIFO cost assumption if 500 units remain on hand at October 31. 2. Show computations to value the ending inventory using the weighted-average cost method if 500 units remain on hand at October 31. 3. Show computations to value the ending inventory using the LIFO cost assumption if 500 units remain on hand at October 31.

solution 208 1. 500 units in ending inventory. Under FIFO, the units remaining in inventory are the ones purchased most recently. 10/24 200 units @ $11.60 = $2,320 10/16 300 units @ $10.80 = 3,240 500 units $5,560 2. 500 units in ending inventory. Under average cost method, the weighted-average cost per unit must be computed. $21,120 ÷ 2,000 units = $10.56 500 units × $10.56 = $5,280 3. 500 units in ending inventory. Under LIFO, the units remaining are the ones purchased earliest. 10/1 400 units @ $10.00 = $4,000 10/8 100 units @ $10.40 = 1,040 $5,040