Good Stuff Manufacturing
Income Statement
For the Month Ending April 30, Year 1
Sales
$10,000
Less: Operating expenses
Cost of Goods Sold
$6,500
Sales Salaries Expense
1,000
Rent Expense
2,000
Utilities Expense
200
9,700
Net Income
$ 300
123. Inventory flows for Toy Elmo Company for the month of January are as follows:
# of units
Unit cost
Beginning inventory*
250
$1.00
Purchases:
January 3
100
1.10
January 15
150
1.15
January 17
300
1.05
Sales:
January 5
200
January 18
100
January 24
150
*Assume the same for FIFO, LIFO, and weighted average cost flow assumptions.
Required:
Compute the cost of goods sold and ending inventory for the Toy Elmo Company using the following
assumptions:
a.
FIFO cost flow assumption and a periodic inventory system
b.
LIFO cost flow assumption and a periodic inventory system
c.
Weighted average cost flow assumption and a periodic inventory system
Method
Cost of Goods Sold
Inventory
a.
FIFO
$475.00
$372.50
b.
LIFO
487.50
360.00
c.
Weighted average
476.72
370.78
124.
A.
Discuss the effect on current-year net income
each of the following inventory-related errors will
have.
1. An overstatement of beginning inventory
2. An overstatement of ending inventory
3. An overstatement of purchases
B.
Discuss the effect on current-year ending
inventory each of the following inventory-related
errors will have. Assume that no physical
inventory is taken to determine ending inventory
and that the ending inventory amount is
determined by the inventory equation.
1. An understatement of beginning inventory
2. An overstatement of purchases
3. An understatement of cost of goods sold
1.
Decrease
2.
Increase
3.
Decrease
1.
Understatement
2.
Overstatement
3.
Overstatement
Raw Materials Inventory
$ 47,570
$ 58,640
128,910
117,390
Finished Goods Inventory
36,250
47,220
Raw Materials Purchased
$475,900
Labor Services Used
287,600
Other Factory Costs Incurred
129,200
Sales
$1,360,000
Selling and Administrative Expenses
$ 289,400
The income tax rate is 40 percent.
Required:
a.
Compute the cost of raw materials used during Year 8.
b.
Compute the cost of units completed during Year 8 and transferred to the finished goods storeroom.
c.
Compute net income for Year 8.
a.
$47,570 + $475,900 – $58,640 = X; X = $464,830.
b.
$128,910 + $464,830 + $287,600 + $129,200 – $117,390 = X; X = $893,150.
c.
Cost of Good Sold = $36,250 + $893,150 – $47,220, or $882,180.
Net Income = (1 – .4)($1,360,000 – $882,180 – $289,400), or $113,052.
126. Dexter’s Fine Jewelry uses the LIFO cost flow assumption and has a beginning inventory which includes
four LIFO layers as follows:
Beginning inventory
# of units
Unit cost
Year 1 layer
150
$50.00
Year 2 layer
100
60.00
Year 3 layer
50
65.00
Year 4 layer
200
75.00
During Year 5, Dexter purchased 4,000 units and sold 4,250. Dexter has to decide whether to purchase 250
additional units now at a price of $140 per unit or wait until February and pay $120 per unit due to an
off-season discount promotion by the supplier.
What is the cash cost to Dexter’s Fine Jewelry under each alternative? Assume that the tax rate is a flat 30%.
127. Given the following inventory and inventory related accounts, solve for the unknown amounts.
Case A
Cas
e B
Beginning raw materials
(a)
$50
Raw materials purchases
$100
(f)
Ending raw materials
20
30
Raw materials transfers
80
90
Beginning work-in-process
(b)
40
Direct labor
30
(g)
Direct material
(c)
90
Manufacturing overhead
40
20
Ending work-in-process
50
40
Work-in-process transfers
160
130
Beginning finished goods
40
(h)
Transfers in
(d)
(i)
Ending finished goods
30
20
Cost of goods sold
(e)
120
a.
$ 0
f.
$ 70
b.
60
g.
20
c.
80
h.
10
d.
160
i.
130
e.
170
128. ABC Inc. uses the periodic LIFO cost flow assumption. During the period 23 units were sold at a price of
$30 per unit. Transportation costs on the purchases totaled $252.
# of units
Unit cost
Beginning balance
10
$25
Purchase 1
15
22
Purchase 2
9
20
Purchase 3
12
25
Required:
Prepare the journal entries to record the purchases and any adjusting entries for the end of the period.
a.
Inventory
330
Accounts Payable or Cash
330
b.
Inventory
180
Accounts Payable or Cash
180
c.
Inventory
300
Accounts Payable or Cash
300
d.
Cash or Accounts Receivable
690
Sales
690
e.
Inventory
252
Accounts Payable or Cash
252
f.
Cost of Goods Sold
685
Inventory
685
129. Given the following inventory and inventory-related accounts, solve for the unknown amounts:
Case A
Case B
Beginning raw materials
$ 10
$ 30
Raw materials purchases
100
70
Ending raw materials
70
50
Raw materials transfers
(a)
(e)
Beginning work-in-process
50
(f)
Direct labor
50
40
Direct material
(b)
(g)
Manufacturing overhead
10
10
Ending work-in-process
40
10
Work-in-process transfers
(c)
100
Beginning finished goods
10
20
Transfers in
(d)
100
Ending finished goods
20
30
Cost of goods sold
100
(h)
a.
$ 40
e.
$50
b.
40
f.
10
c.
110
g.
50
d.
110
h
90
130. Given the following information, compute cost of goods sold and ending inventory for months 1 through 4
using both the FIFO and LIFO cost flow assumptions. Assume that a periodic inventory method is used and that
the books are closed monthly.
# of units
Unit cost
Beginning inventory
0
Purchases:
Month 1
5
$1.00
Month 1
15
1.10
Month 1
3
1.05
Withdrawals:
Month 1
13
Purchases:
Month 2
10
1.10
Month 2
15
1.05
Withdrawals:
Month 2
20
Purchases:
Month 3
10
1.05
Month 3
5
1.10
Month 3
2
1.15
Withdrawals:
Month 3
25
Purchases:
Month 4
15
1.05
Month 4
5
1.10
Withdrawals:
Month 4
20
FIFO
LIFO
Cost of goods sold – month 1
$13.80
$14.15
Ending inventory – month 1
10.85
10.50
Cost of goods sold – month 2
$21.85
$21.25
Ending inventory – month 2
15.75
16.00
FIFO
LIFO
Cost of goods sold – month 3
$26.25
$27.10
Ending inventory – month 3
7.80
7.20
Cost of goods sold – month 4
$21.45
$21.25
Ending inventory – month 4
7.60
7.20
131. The following items appear in the post-closing trial balance for March 1 and on the adjusted, preclosing
trial balance at March 31 of EeeDee Company. EeeDee Company prepares financial statements monthly.
March 1
March 31
Raw materials
$10,000
$ 8,000
Work in process
15,000
25,000
Finished goods inventory
10,000
14,000
Sales (Cr balance)
–
600,000
Allowance for uncollectible accounts (Cr balance)
6,000
10,000
During the month of March, EeeDee Company incurred the following costs:
Raw materials used in production
$130,000
Labor costs used in production
80,000
Labor costs used in administration and marketing
10,000
Factory overhead costs for production
60,000
Office administration costs, other than labor
12,000
Accounts receivable written off as uncollectible
9,000
Required:
a.
What was the acquisition cost of raw materials purchased during the month of March?
b.
What was the total cost of goods completed during the month of March?
c.
What was the Cost of Goods Sold during the month of March?
d.
What was the Uncollectible account expense for the month of March?
e.
What was the Income (before taxes) for the month of March?
f.
Explain briefly why no amount for sales appears in the March 1 trial balance.
132. For the following six items, assume that Talbot Company, a growing profitable company, has large and
growing inventories. Assume that Talbot Company has been using a FIFO cost flow assumption and plans to
switch to LIFO for both financial reporting and tax reporting. Assume that Talbot pays all income taxes
currently, as accrued, in cash.
Required:
Fill in each of the blanks below with one of these: larger, smaller, unchanged, or insufficient (information given
to answer question). Several years after the switch from FIFO to LIFO:
1.
Working capital will be __________.
2.
Accounts payable will be __________.
3.
On the statement of cash flows, cash provided by operating activities will be __________.
4.
Total shareholders’ equity will be __________.
5.
Deferred tax balance on the balance sheet will be __________.
6.
Inventory turnover will be __________.
133. Describe the concept of working capital.
UNDERLYING CONCEPTS AND TERMINOLOGY
There is a distinction between current assets and liabilities and noncurrent assets and liabilities. The
current–noncurrent distinction refers to whether a firm will convert an asset to cash, or consume it, or sell it
within one operating cycle and whether a firm will pay or otherwise settle a liability within one operating cycle.
Because the operating cycle for most firms is one year or less, one year is the conventional cutoff for
distinguishing a current and a noncurrent asset or liability.
Working capital is the difference between a firm’s current assets and its current liabilities. The current ratio,
also called the working capital ratio, is current assets divided by current liabilities. Both working capital and the
134. Describe cash and cash equivalents.
CASH AND CASH EQUIVALENTS
135. Discuss inventory accounting concepts and issues.
INVENTORY
Inventory refers to goods and other items that a firm owns and holds for sale or for further processing as part of
its operations. Inventory is also called “stock” in some countries; do not confuse this usage with common stock,
problems in inventory accounting arise because the per-unit acquisition costs of inventory items change over
time.
There are three issues in inventory accounting:
136. What costs are included in inventory of manufacturing and merchandising firms?
COSTS INCLUDED IN INVENTORY
The principle for cost inclusion is that the balance sheet amount for inventory should include all costs incurred
to acquire goods and prepare them for sale.
Manufacturing firms do not acquire inventory items in a physical form ready for sale. Instead, such firms
transform raw materials, purchased parts, and components into finished products in their factories. The
acquisition cost of manufactured inventories includes three categories of costs:
The U.S. SEC requires firms with significant amounts of inventory whose shares are publicly traded in the U.S.
to disclose this information in their financial reports, usually in a note. IFRS notes that information about
inventory components “is useful to financial statement users.”
A manufacturing firm, like a merchandising firm, also incurs marketing costs (for example, sales commissions,
depreciation, insurance and taxes on the sales staff’s automobiles) and administrative costs (for example, salary
of the chief executive officer, depreciation on computers used in human resources). Both merchandising and
manufacturing firms treat selling and administrative costs as period expenses. Period expenses are not assets
warehouse.
137. How are inventories valued subsequent to acquisition?
VALUATION SUBSEQUENT TO ACQUISITION
Both U.S. GAAP and IFRS require firms to initially record inventories at acquisition cost The market value of
declines below acquisition cost. Accountants refer to the inventory as impaired and to this valuation as the
lower-of-cost-or-market basis. The journal entry to record the inventory impairment results in a loss and a new
balance sheet carrying value that is the lower of cost or market value. U.S. GAAP does not permit firms to
recognizes losses from decreases in market value before a sale occurs, but recognizes gains from increases in
market value above original acquisition cost only when a sale occurs, and (2) it reports inventories on the
balance sheet at amounts that are never greater, but may be less, than acquisition cost.
Subsequent Sale of Inventory Adjusted to Lower-of-Cost-or-Market
If the inventory that the firm has written down (or marked down) remains salable, the firm will record revenues
138. What are the cost-flow assumptions used in inventory measurement? COST-FLOW ASSUMPTIONS
The accounting records typically contain information on the cost of the beginning inventory for a period, which
was the ending inventory of last period, and information on purchases made or production costs incurred during
automatically
When a firm computes the cost of goods sold each time it sells an inventory item, it uses a perpetual inventory
system. When a firm computes the cost of goods sold at the end of each period by taking a physical inventory
and assumes that it sold any items not in ending inventory, it uses a periodic inventory system.
Comparison of Cost-Flow Assumptions Historical Cost Basis
Neither U.S. GAAP nor IFRS requires firms to use specific identification; both allow firms to select a cost-flow
assumption.That cost-flow assumption need not match the actual physical flow of units within the firm.
Typical cost-flow assumptions are as follows:
139. Compare and contrast the effect on net income, cost of goods sold, and inventory of the FIFO, LIFO, and
weighted-average cost flow assumptions.
COMPARISON OF AND CHOICE AMONG COST-FLOW ASSUMPTIONS
When purchase prices change, no cost-flow assumption places up-to-date costs on both the income statement
and the balance sheet. For example, consider a period of rising prices. If cost of goods sold for the income
The weighted-average cost-flow assumption falls between the other two in its effects, but it resembles FIFO
more than LIFO in its effects on the financial statements. When inventory turns over rapidly, the
weighted-average inventory cost-flow assumption provides amounts virtually identical to FIFO’s amounts.
Differences in cost of goods sold and inventories under different cost-flow assumptions relate in part to the rate