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.