1460T_c08.qxd01:10:200603:38 AM Page404 EQA 404.Chapter 8 Valuation of Inventories:A Cost-Basis Approach Instructions Indicate the effect of each of these errors on working capital,current ratio (assume that the current ratio is greater than 1),retained earnings,and net income for the current year and the subsequent year. (L0 3)E8-11 (Inventory Errors)At December 31,2006,Stacy McGill Corporation reported current assets of $370,000 and current liabilities of $200,000.The following items may have been recorded incorrectly. 1.Goods purchased costing $22,000 were shipped f.o.b.shipping point by a supplier on December 28.McGill received and recorded the invoice on December 29,2006,but the goods were not included in McGill's physical count of inventory because they were not received until January 4,2004. 2.Goods purchased costing $15,000 were shipped f.o.b.destination by a supplier on December 26. McGill received and recorded the invoice on December 31,but the goods were not included in McGill's 2006 physical count of inventory because they were not received until January 2,2007 3. Goods held on consignment from Claudia Kishi Company were included in McGill's December 31,2006,physical count of inventory at $13,000. 4.Freight-in of $3,000 was debited to advertising expense on December 28,2006. Instructions (a)Compute the current ratio based on McGill's balance sheet. (b)Recompute the current ratio after corrections are made. (c)By what amount will income (before taxes)be adjusted up or down as a result of the corrections? (L03) E8-12 (Inventory Errors)The net income per books of Linda Patrick Company was determined with- out knowledge of the errors indicated. Net Income Error in Ending Year per Books Inventory 2002 $50,000 Overstated $3,000 2003 52,000 Overstated 9,000 2004 54.000 Understated 11,000 2005 56,000 No error 2006 58,000 Understated 2,000 ⊕ 2007 60,000 Overstated 8,000 Instructions Prepare a work sheet to show the adjusted net income figure for each of the 6 years after taking into ac- count the inventory errors. (LO 2,E8-13 (FIFO and LIFO-Periodic and Perpetual)Inventory information for Part 311 of Monique Aaron 5) Corp.discloses the following information for the month of June. June 1 Balance 300 units $10 June 10 Sold 200 units $24 11 Purchased 800 units S12 15 Sold 500 units $25 20 Purchased 500 units $13 27 Sold 300 units S27 Instructions (a)Assuming that the periodic inventory method is used,compute the cost of goods sold and end- ing inventory under(1)LIFO and(2)FIFO. (b)Assuming that the perpetual inventory method is used and costs are computed at the time of each withdrawal,what is the value of the ending inventory at LIFO? (c) Assuming that the perpetual inventory method is used and costs are computed at the time of each withdrawal,what is the gross profit if the inventory is valued at FIFO? (d)Why is it stated that LIFO usually produces a lower gross profit than FIFO? (L0 5)E8-14 (FIFO,LIFO and Average Cost Determination)John Adams Company's record of transactions for the month of April was as follows. Purchases Sales April 1 (balance on hand) 600@$6.00 April 3 500@$10.00 4 1,500@6.08 9 1,400@10.00 8 800@6.40 11 600@11.00 13 1,200@6.50 3 1,200@11.00 2 700@6.60 2> 900@12.00 29 500@6.79 4,600 5,300
Instructions Indicate the effect of each of these errors on working capital, current ratio (assume that the current ratio is greater than 1), retained earnings, and net income for the current year and the subsequent year. E8-11 (Inventory Errors) At December 31, 2006, Stacy McGill Corporation reported current assets of $370,000 and current liabilities of $200,000. The following items may have been recorded incorrectly. 1. Goods purchased costing $22,000 were shipped f.o.b. shipping point by a supplier on December 28. McGill received and recorded the invoice on December 29, 2006, but the goods were not included in McGill’s physical count of inventory because they were not received until January 4, 2004. 2. Goods purchased costing $15,000 were shipped f.o.b. destination by a supplier on December 26. McGill received and recorded the invoice on December 31, but the goods were not included in McGill’s 2006 physical count of inventory because they were not received until January 2, 2007. 3. Goods held on consignment from Claudia Kishi Company were included in McGill’s December 31, 2006, physical count of inventory at $13,000. 4. Freight-in of $3,000 was debited to advertising expense on December 28, 2006. Instructions (a) Compute the current ratio based on McGill’s balance sheet. (b) Recompute the current ratio after corrections are made. (c) By what amount will income (before taxes) be adjusted up or down as a result of the corrections? E8-12 (Inventory Errors) The net income per books of Linda Patrick Company was determined without knowledge of the errors indicated. Net Income Error in Ending Year per Books Inventory 2002 $50,000 Overstated $ 3,000 2003 52,000 Overstated 9,000 2004 54,000 Understated 11,000 2005 56,000 No error 2006 58,000 Understated 2,000 2007 60,000 Overstated 8,000 Instructions Prepare a work sheet to show the adjusted net income figure for each of the 6 years after taking into account the inventory errors. E8-13 (FIFO and LIFO—Periodic and Perpetual) Inventory information for Part 311 of Monique Aaron Corp. discloses the following information for the month of June. June 1 Balance 300 units @ $10 June 10 Sold 200 units @ $24 11 Purchased 800 units @ $12 15 Sold 500 units @ $25 20 Purchased 500 units @ $13 27 Sold 300 units @ $27 Instructions (a) Assuming that the periodic inventory method is used, compute the cost of goods sold and ending inventory under (1) LIFO and (2) FIFO. (b) Assuming that the perpetual inventory method is used and costs are computed at the time of each withdrawal, what is the value of the ending inventory at LIFO? (c) Assuming that the perpetual inventory method is used and costs are computed at the time of each withdrawal, what is the gross profit if the inventory is valued at FIFO? (d) Why is it stated that LIFO usually produces a lower gross profit than FIFO? E8-14 (FIFO, LIFO and Average Cost Determination) John Adams Company’s record of transactions for the month of April was as follows. Purchases Sales April 1 (balance on hand) 600 @ $6.00 April 3 500 @ $10.00 4 1,500 @ 6.08 9 1,400 @ 10.00 8 800 @ 6.40 11 600 @ 11.00 13 1,200 @ 6.50 23 1,200 @ 11.00 21 700 @ 6.60 27 900 @ 12.00 29 500 @ 6.79 4,600 5,300 404 • Chapter 8 Valuation of Inventories: A Cost-Basis Approach (L0 3) (L0 3) (L0 2, 5) (L0 5) 1460T_c08.qxd 01:10:2006 03:38 AM Page 404
1460T_c08.qxd23/1/0604:34 PM Page405 EQA Exercises·405 Instructions (a)Assuming that periodic inventory records are kept in units only,compute the inventory at April 30 using (1)LIFO and(2)average cost. (b)Assuming that perpetual inventory records are kept in dollars,determine the inventory using(1) FIFO and (2)LIFO. (c)Compute cost of goods sold assuming periodic inventory procedures and inventory priced at FIFO. (d)In an inflationary period,which inventory method-FIFO,LIFO,average cost-will show the highest net income? (L0 5)E8-15 (FIFO,LIFO,Average Cost Inventory)Shania Twain Company was formed on December 1, 2006.The following information is available from Twain's inventory records for Product BAP. Units Unit Cost January 1,2007(beginning inventory) 600 $8.00 Purchases: January 5,2007 1,200 9.00 January 25,2007 1,300 10.00 February 16,2007 800 11.00 March 26,2007 600 12.00 A physical inventory on March 31,2007,shows 1,600 units on hand. Instructions Prepare schedules to compute the ending inventory at March 31,2007,under each of the following in- ventory methods (a)FIFO. (b)LIFO. (c)Weighted average. (L0 2,E8-16 (Compute FIFO,LIFO,Average Cost-Periodic)Presented below is information related to 5) Blowfish radios for the Hootie Company for the month of July. Units Unit Units Selling Date Transaction In Cost Total Sold Price Total July 1 Balance 100 $4.10 $410 6 Purchase 800 4.20 3,360 Sale 300 $7.00 $2.100 10 Sale 300 7.30 2,190 12 Purchase 400 4.50 1,800 15 Sale 200 7.40 1,480 1 Purchase 300 4.60 1,380 22 Sale 400 7.40 2,960 Purchase 500 4.58 2,290 30 Sale 200 7.50 1,500 Totals 2,100 $9,240 1,400 $10,230 Instructions (a) Assuming that the periodic inventory method is used,compute the inventory cost at July 31 un- der each of the following cost flow assumptions. (1)FIFO. (2)LIFO. (3)Weighted-average. (b)Answer the following questions. (1)Which of the methods used above will yield the lowest figure for gross profit for the income statement?Explain why. (2)Which of the methods used above will yield the lowest figure for ending inventory for the balance sheet?Explain why (L0 2,E8-17 (FIFO and LIFO-Periodic and Perpetual)The following is a record of Pervis Ellison Company's 5) transactions for Boston Teapots for the month of May 2007 May 1 Balance 400 units $20 May 10 Sale 300 units $38 12 Purchase 600 units $25 20 Sale 540 units $38 28 Purchase 400 units@$30
Instructions (a) Assuming that periodic inventory records are kept in units only, compute the inventory at April 30 using (1) LIFO and (2) average cost. (b) Assuming that perpetual inventory records are kept in dollars, determine the inventory using (1) FIFO and (2) LIFO. (c) Compute cost of goods sold assuming periodic inventory procedures and inventory priced at FIFO. (d) In an inflationary period, which inventory method—FIFO, LIFO, average cost—will show the highest net income? E8-15 (FIFO, LIFO, Average Cost Inventory) Shania Twain Company was formed on December 1, 2006. The following information is available from Twain’s inventory records for Product BAP. Units Unit Cost January 1, 2007 (beginning inventory) 600 $ 8.00 Purchases: January 5, 2007 1,200 9.00 January 25, 2007 1,300 10.00 February 16, 2007 800 11.00 March 26, 2007 600 12.00 A physical inventory on March 31, 2007, shows 1,600 units on hand. Instructions Prepare schedules to compute the ending inventory at March 31, 2007, under each of the following inventory methods. (a) FIFO. (b) LIFO. (c) Weighted average. E8-16 (Compute FIFO, LIFO, Average Cost—Periodic) Presented below is information related to Blowfish radios for the Hootie Company for the month of July. Units Unit Units Selling Date Transaction In Cost Total Sold Price Total July 1 Balance 100 $4.10 $ 410 6 Purchase 800 4.20 3,360 7 Sale 300 $7.00 $ 2,100 10 Sale 300 7.30 2,190 12 Purchase 400 4.50 1,800 15 Sale 200 7.40 1,480 18 Purchase 300 4.60 1,380 22 Sale 400 7.40 2,960 25 Purchase 500 4.58 2,290 30 Sale 200 7.50 1,500 Totals 2,100 $9,240 1,400 $10,230 Instructions (a) Assuming that the periodic inventory method is used, compute the inventory cost at July 31 under each of the following cost flow assumptions. (1) FIFO. (2) LIFO. (3) Weighted-average. (b) Answer the following questions. (1) Which of the methods used above will yield the lowest figure for gross profit for the income statement? Explain why. (2) Which of the methods used above will yield the lowest figure for ending inventory for the balance sheet? Explain why. E8-17 (FIFO and LIFO—Periodic and Perpetual) The following is a record of Pervis Ellison Company’s transactions for Boston Teapots for the month of May 2007. May 1 Balance 400 units @ $20 May 10 Sale 300 units @ $38 12 Purchase 600 units @ $25 20 Sale 540 units @ $38 28 Purchase 400 units @ $30 Exercises • 405 (L0 5) (L0 2, 5) (L0 2, 5) 1460T_c08.qxd 23/1/06 04:34 PM Page 405
1460T_c08.qxd1/6/0602:15 am Page406 EQA 406.Chapter 8 Valuation of Inventories:A Cost-Basis Approach Instructions (a)Assuming that perpetual inventories are not maintained and that a physical count at the end of the month shows 560 units on hand,what is the cost of the ending inventory using(1)FIFO and (2)LIFO? (b)Assuming that perpetual records are maintained and they tie into the general ledger,calculate the ending inventory using(1)FIFO and(2)LIFO. (L0 2,E8-18 (FIFO and LIFO;Income Statement Presentation)The board of directors of Ichiro Corporation 5) is considering whether or not it should instruct the accounting department to shift from a first-in,first- out (FIFO)basis of pricing inventories to a last-in,first-out (LIFO)basis.The following information is available. Sales 21,000 units@S50 Inventory,January 1 6,000 units@20 Purchases 6,000 units@22 10,000 units@25 7,000 units@30 Inventory,December 31 8,000 units@ Operating expenses $200.000 Instructions Prepare a condensed income statement for the year on both bases for comparative purposes (L0 5)E8-19 (FIFO and LIFO Effects)You are the vice-president of finance of Sandy Alomar Corporation,a retail company that prepared two different schedules of gross margin for the first quarter ended March 31,2007.These schedules appear below. Sales Cost of Gross ($5 per unit) Goods Sold Margin Schedule 1 $150,000 $124,900 $25,100 Schedule 2 150,000 129,400 20,600 The computation of cost of goods sold in each schedule is based on the following data. ⊕ Cost Total Units per Unit Cost Beginning inventory,January 1 10,000 $4.00 $40,000 Purchase,January 10 8,000 4.20 33.600 Purchase,January 30 6,000 4.25 25.500 Purchase,February 11 9,000 4.30 38.700 Purchase,March 17 11,000 4.40 48.400 Jane Torville,the president of the corporation,cannot understand how two different gross margins can be computed from the same set of data.As the vice-president of finance you have explained to Ms. Torville that the two schedules are based on different assumptions concerning the flow of inventory costs,i.e.,FIFO and LIFO.Schedules 1 and 2 were not necessarily prepared in this sequence of cost flow assumptions. Instructions Prepare two separate schedules computing cost of goods sold and supporting schedules showing the com- position of the ending inventory under both cost flow assumptions. (L02, E8-20 (FIFO and LIFO-Periodic)Howie Long Shop began operations on January 2,2007.The fol- 5) lowing stock record card for footballs was taken from the records at the end of the year. Units Unit Invoice Gross Invoice Date Voucher Terms Received Cost Amount 1/15 10624 Net 30 50 S20 $1,000 3/15 11437 1/5,net30 65 16 1.040 6/20 21332 1/10,net30 90 15 1,350 9/12 27644 1/10,net30 84 12 1.008 11/24 31269 1/10,net30 6 836 Totals 365 $5,234 A physical inventory on December 31,2007,reveals that 100 footballs were in stock.The bookkeeper in- forms you that all the discounts were taken.Assume that Howie Long Shop uses the invoice price less discount for recording purchases
Instructions (a) Assuming that perpetual inventories are not maintained and that a physical count at the end of the month shows 560 units on hand, what is the cost of the ending inventory using (1) FIFO and (2) LIFO? (b) Assuming that perpetual records are maintained and they tie into the general ledger, calculate the ending inventory using (1) FIFO and (2) LIFO. E8-18 (FIFO and LIFO; Income Statement Presentation) The board of directors of Ichiro Corporation is considering whether or not it should instruct the accounting department to shift from a first-in, firstout (FIFO) basis of pricing inventories to a last-in, first-out (LIFO) basis. The following information is available. Sales 21,000 units @ $50 Inventory, January 1 6,000 units @ 20 Purchases 6,000 units @ 22 10,000 units @ 25 7,000 units @ 30 Inventory, December 31 8,000 units @ ? Operating expenses $200,000 Instructions Prepare a condensed income statement for the year on both bases for comparative purposes. E8-19 (FIFO and LIFO Effects) You are the vice-president of finance of Sandy Alomar Corporation, a retail company that prepared two different schedules of gross margin for the first quarter ended March 31, 2007. These schedules appear below. Sales Cost of Gross ($5 per unit) Goods Sold Margin Schedule 1 $150,000 $124,900 $25,100 Schedule 2 150,000 129,400 20,600 The computation of cost of goods sold in each schedule is based on the following data. Cost Total Units per Unit Cost Beginning inventory, January 1 10,000 $4.00 $40,000 Purchase, January 10 8,000 4.20 33,600 Purchase, January 30 6,000 4.25 25,500 Purchase, February 11 9,000 4.30 38,700 Purchase, March 17 11,000 4.40 48,400 Jane Torville, the president of the corporation, cannot understand how two different gross margins can be computed from the same set of data. As the vice-president of finance you have explained to Ms. Torville that the two schedules are based on different assumptions concerning the flow of inventory costs, i.e., FIFO and LIFO. Schedules 1 and 2 were not necessarily prepared in this sequence of cost flow assumptions. Instructions Prepare two separate schedules computing cost of goods sold and supporting schedules showing the composition of the ending inventory under both cost flow assumptions. E8-20 (FIFO and LIFO—Periodic) Howie Long Shop began operations on January 2, 2007. The following stock record card for footballs was taken from the records at the end of the year. Units Unit Invoice Gross Invoice Date Voucher Terms Received Cost Amount 1/15 10624 Net 30 50 $20 $1,000 3/15 11437 1/5, net 30 65 16 1,040 6/20 21332 1/10, net 30 90 15 1,350 9/12 27644 1/10, net 30 84 12 1,008 11/24 31269 1/10, net 30 76 11 836 Totals 365 $5,234 A physical inventory on December 31, 2007, reveals that 100 footballs were in stock. The bookkeeper informs you that all the discounts were taken. Assume that Howie Long Shop uses the invoice price less discount for recording purchases. 406 • Chapter 8 Valuation of Inventories: A Cost-Basis Approach (L0 2, 5) (L0 2, 5) (L0 5) 1460T_c08.qxd 1/6/06 02:15 am Page 406