Lesson 7
Merchandise Inventories and Cost of Sales
Exercise
Calculation and Analyzing Problems
1,The perpetual inventory records of LIBY HOUSEHOLD show 150 units of a particular product on hand,acquired at the following dates and costs:
Purchase Date
Quantity
Unit Cost
Total Cost
May 1
50
$100
$ 5,000
May 4
100
115
11,500
Total on hand
150
$16,500
On May 6,Pace sold 125 units of this product.
Required:
Prepare a journal entry to record the cost of goods sold relating to the sale on May 6,assuming that LIBY uses:
a A LIFO flow assumption.
b A FIFO flow assumption.
c The average cost (or moving average) flow assumption.
2,Jesica Fashions had the following inventory transactions during the fiscal year ended December 31,2002:
Jan,1
Beginning inventory
120 units @ $24/unit
Apr,1
Purchase
150 units @ $29/unit
Apr,5
Sales
100 units @ $48/unit
Jul,7
Purchase
60 units @ $25/unit
Aug.12
Purchase
80 units @ $30/unit
Sept,2
Sales
130 units @ $48/unit
Jesica uses a perpetual inventory system,
Required,
(1) Compute both cost of goods available for sale and the number of units available for sale.
(2) Compute the number of units remaining in ending inventory.
(3) Compute the cost assigned to ending inventory using (a) FIFO,(b) LIFO,(c) specific identification (note,100 units from beginning inventory,100 units from the April 1,and 30 units from the August 12 purchase are sold),and (d) weighted average.
(4) Compute the gross profit earned by the company for each of the costing methods in part 3.
(5) If Jesica’s manager earns a bonus based on a percent of gross profit,which method of inventory costing will the manager likely prefer?
3,A-Mart’s prior financial statements report the following related to clothing sales:
For Year Ended December 31
Key Figures
2000
2001
2002
Cost of goods solds
$84,000
$117,000
$94,000
Net income
37,000
48,000
43,000
Now it was find that Inventory on December 31,2000,is overstated by $6,000,and inventory on December 31,2001,is understated by $9,000.
Required:
(1) For each key financial statement figure prepare a schedule similar to the following to show the adjustments necessary to correct the reported amounts.
Figure:
2000
2001
2002
Reported amount
Adjustments:
12/31/2000 error
12/31/2001 error
Corrected amount
(2) What is the error in total net income for the combined three-year period resulting from the inventory errors? Explain.
(3) Explain why the overstatement of inventory by $6,000 at the end of 2000 results in an overstatement of equity by the same amount in that year.
4,A physical count of Sky Music Company’s inventories taken at December 31 reveals the following:
Item
Units on hand
Cost Per Unit
Market Per Unit
CD’s
400
$5
$6
Cassettes Tapes
200
4
3
DVD’s
300
10
12
Video’s
100
8
6
Required
Calculate the lower of cost or market for the inventory (a) as a whole,(b) and applied separately to each item.
5,LuLu’s Shop was destroyed by a tidal wave Dec,25,2004,Fortunately her accountant was able to piece together the following information concerning purchases and sales:
At Cost
At Retail
January 1 beginning inventory
$93,120
$148,680
Cost of goods purchased
218,880
331,320
Sales
457,200
Sales returns
9,000
Required
(1) Use the retail inventory method to estimate the lost inventory,
(2) LuLu’s insurance company has offered to pay her $62,430 for her lost inventory,Should she accept their offer?
6,Mac Inc,needs to prepare interim financial statements for the first quarter of 2001,Mac’s gross profit rate averages 40%,The following information for the first quarter is available from its records:
January 1 beginning inventory
$140,720
Cost of goods purchased
694,080
Sales
1,164,800
Sales returns
8,640
Required:
Use the gross profit method to estimate the company’s first quarter ending inventory.
7,HiTec Corp,had the following invnetory transactions during the year 2002,The company incurred operating expenses of $3 per unit in selling the units,
Jan 1
Beg,inventory
750 units @ $12 per unit
Feb 15
Purchase
2,800 units @ $13 per unit
Mar 10
Sale
2,100 units @ $40 per unit
Apr,15
Purchase
400 units @ $14 per unit
Jun 10
Sale
2,200 units @ $41 per uni
Oct,15
Purchase
1,600 units @ $15 per unit
Nov 15
Sale
2,600 units @ $42 per uni
Dec,21
Purchase
2,300 units @ $16 per unit
Required:
(1) Prepare comparative income statements for the company for the three different inventory costing methods of FIFO,LIFO,and weighted average,Include a detailed cost of goods sold section as part of each statement,The company uses a perpetual inventory system,and its income tax rate is 30%.
(2) What advantages and disadvantages are offered by using (a) LIFO and (b) FIFO? Assume the continuing trend of increasing costs.
Merchandise Inventories and Cost of Sales
Exercise
Calculation and Analyzing Problems
1,The perpetual inventory records of LIBY HOUSEHOLD show 150 units of a particular product on hand,acquired at the following dates and costs:
Purchase Date
Quantity
Unit Cost
Total Cost
May 1
50
$100
$ 5,000
May 4
100
115
11,500
Total on hand
150
$16,500
On May 6,Pace sold 125 units of this product.
Required:
Prepare a journal entry to record the cost of goods sold relating to the sale on May 6,assuming that LIBY uses:
a A LIFO flow assumption.
b A FIFO flow assumption.
c The average cost (or moving average) flow assumption.
2,Jesica Fashions had the following inventory transactions during the fiscal year ended December 31,2002:
Jan,1
Beginning inventory
120 units @ $24/unit
Apr,1
Purchase
150 units @ $29/unit
Apr,5
Sales
100 units @ $48/unit
Jul,7
Purchase
60 units @ $25/unit
Aug.12
Purchase
80 units @ $30/unit
Sept,2
Sales
130 units @ $48/unit
Jesica uses a perpetual inventory system,
Required,
(1) Compute both cost of goods available for sale and the number of units available for sale.
(2) Compute the number of units remaining in ending inventory.
(3) Compute the cost assigned to ending inventory using (a) FIFO,(b) LIFO,(c) specific identification (note,100 units from beginning inventory,100 units from the April 1,and 30 units from the August 12 purchase are sold),and (d) weighted average.
(4) Compute the gross profit earned by the company for each of the costing methods in part 3.
(5) If Jesica’s manager earns a bonus based on a percent of gross profit,which method of inventory costing will the manager likely prefer?
3,A-Mart’s prior financial statements report the following related to clothing sales:
For Year Ended December 31
Key Figures
2000
2001
2002
Cost of goods solds
$84,000
$117,000
$94,000
Net income
37,000
48,000
43,000
Now it was find that Inventory on December 31,2000,is overstated by $6,000,and inventory on December 31,2001,is understated by $9,000.
Required:
(1) For each key financial statement figure prepare a schedule similar to the following to show the adjustments necessary to correct the reported amounts.
Figure:
2000
2001
2002
Reported amount
Adjustments:
12/31/2000 error
12/31/2001 error
Corrected amount
(2) What is the error in total net income for the combined three-year period resulting from the inventory errors? Explain.
(3) Explain why the overstatement of inventory by $6,000 at the end of 2000 results in an overstatement of equity by the same amount in that year.
4,A physical count of Sky Music Company’s inventories taken at December 31 reveals the following:
Item
Units on hand
Cost Per Unit
Market Per Unit
CD’s
400
$5
$6
Cassettes Tapes
200
4
3
DVD’s
300
10
12
Video’s
100
8
6
Required
Calculate the lower of cost or market for the inventory (a) as a whole,(b) and applied separately to each item.
5,LuLu’s Shop was destroyed by a tidal wave Dec,25,2004,Fortunately her accountant was able to piece together the following information concerning purchases and sales:
At Cost
At Retail
January 1 beginning inventory
$93,120
$148,680
Cost of goods purchased
218,880
331,320
Sales
457,200
Sales returns
9,000
Required
(1) Use the retail inventory method to estimate the lost inventory,
(2) LuLu’s insurance company has offered to pay her $62,430 for her lost inventory,Should she accept their offer?
6,Mac Inc,needs to prepare interim financial statements for the first quarter of 2001,Mac’s gross profit rate averages 40%,The following information for the first quarter is available from its records:
January 1 beginning inventory
$140,720
Cost of goods purchased
694,080
Sales
1,164,800
Sales returns
8,640
Required:
Use the gross profit method to estimate the company’s first quarter ending inventory.
7,HiTec Corp,had the following invnetory transactions during the year 2002,The company incurred operating expenses of $3 per unit in selling the units,
Jan 1
Beg,inventory
750 units @ $12 per unit
Feb 15
Purchase
2,800 units @ $13 per unit
Mar 10
Sale
2,100 units @ $40 per unit
Apr,15
Purchase
400 units @ $14 per unit
Jun 10
Sale
2,200 units @ $41 per uni
Oct,15
Purchase
1,600 units @ $15 per unit
Nov 15
Sale
2,600 units @ $42 per uni
Dec,21
Purchase
2,300 units @ $16 per unit
Required:
(1) Prepare comparative income statements for the company for the three different inventory costing methods of FIFO,LIFO,and weighted average,Include a detailed cost of goods sold section as part of each statement,The company uses a perpetual inventory system,and its income tax rate is 30%.
(2) What advantages and disadvantages are offered by using (a) LIFO and (b) FIFO? Assume the continuing trend of increasing costs.
