137
272) At the beginning of November, Donkey Inc.’s inventory consists of 50 units with a cost per
unit of $100. The following transactions occur during the month of November.
Nov. 2
Purchase 80 units of inventory on account from Kong Inc. for $110 per
unit, terms 2/10, n/30.
Nov. 3
Pay freight charges related to the November 2 purchase, $240.
Nov. 9
Return 20 defective units from the November 2 purchase and receive
credit.
Nov. 11
Pay Kong Inc. in full.
Nov.16
Sell 100 units of inventory to customers on account, $14,000. [Hint:
The cost of units sold from the November 2 purchase includes $110 unit
cost plus $3 per unit for freight less $2.20 per unit for the purchase
discount, or $111.80 per unit.]
Nov. 20
Receive full payment from customers related to the sale on November
16.
Nov. 21
Purchase 70 units of inventory from Kong Inc. for $120 per unit, terms
1/10, n/30.
Nov. 24
Sell 50 units of inventory to customers for cash, $9,000.
Required:
1. Assuming that Donkey Inc. uses a FIFO perpetual inventory system to maintain its internal
inventory records, record the transactions.
2. Suppose by the end of November that the remaining inventory is estimated to have a net
realizable value per unit of $90, record any necessary adjustment for the lower of cost and net
realizable value.
3. Prepare the top section of the multiple-step income statement through gross profit for the month
of November after the adjustment for lower of cost and net realizable value.
140
273) Assume Party Store has the following account balances for the month of March 2021, and
that the company uses a perpetual inventory system.
Sales revenue $75,800 Cost of goods sold $38,500
Inventory (Mar. 31, 2021) 1,800
Advertising expense 5,200 Insurance expense 1,700
Rent expense 3,300 Sales discounts 2,900
Gain on sale of building 6,900 Salaries expense 8,200
Inventory (Mar. 1, 2021) 2,200 Income tax expense 6,100
Required:
1. Prepare a multiple-step income statement for the month ended March 31, 2021.
2. Calculate the inventory turnover ratio for the month of March.
Would you expect this ratio to be higher or lower in December 2021? Explain.
3. Calculate the gross profit ratio for the month of March.
274) Fancy Incorporated and Thrift Specialty both offer men’s formal footwear. Thrift offers
lower-to-middle priced footwear, whereas Fancy offers more specialized, higher-end footwear.
The average price for a pair of shoes in Thrift may be about $40, whereas the average price in
Fancy may be about $200. The types of shoes offered by Fancy are not sold by many other stores.
Suppose Thrift and Fancy report the following amounts for men’s shoes in the same year (company
names are disguised):
Company 1
Company 2
Net sales
$120,000
$120,000
Cost of goods sold
46,000
80,000
Gross profit
$74,000
$40,000
Average inventory
$23,000
$20,000
Required:
1. For Company 1 and Company 2, calculate the inventory turnover ratio.
2. For Company 1 and Company 2, calculate the gross profit ratio.
3. After comparing the inventory turnover ratios and gross profit ratios, which company do you
think is Thrift and which is Fancy? Explain.
275) At the beginning of June, Chow Company has a balance in inventory of $2,100. The
following transactions occur during the month of June.
June 2 Purchase radios on account from Air One for $2,400, terms 3/15, n/45.
June 4 Pay freight charges related to the June 2 purchase from Air One, $400.
June 8 Return defective radios to Air One and receive credit, $600.
June 10 Pay Air One in full.
June 11 Sell radios to customers on account, $5,000, that had a cost of $3,300.
June 18 Receive payment on account from customers, $3,100.
June 20 Purchase radios on account from Motion Unlimited for $3,300, terms 3/10, n/30.
June 23 Sell radios to customers for cash, $4,800, that had a cost of $3,200.
June 26 Return damaged radios to Motion Unlimited and receive credit of $300.
June 28 Pay Motion Unlimited in full.
Required:
1. Record the transactions, assuming Chow Company uses a periodic inventory system.
2. Record the month-end adjustment to inventory, assuming that a final count reveals ending
inventory with a cost of $656.
3. Prepare the top section of the multiple-step income statement through gross profit for the month
of June.
276) Fulkerson Metals maintains accurate records of the inventory purchased from its suppliers
and sold to customers. The records show the following purchases and sales during 2021.
Date
Transactions
Units
Cost per Unit
Total Cost
January 1
Beginning inventory
28
$33
$924
April 14
Purchase
72
35
2,520
August 22
Purchase
115
37
4,255
October 29
Purchase
90
39
3,510
305
$11,209
Jan. 1-Dec. 31
Sales ($60 each)
280
Fulkerson uses a periodic inventory system and believes there are 25 units of ending inventory.
However, Fulkerson neglects to make a final inventory count at the end of the year. An employee
accidentally threw out 4 units of inventory, leaving only 21 units. Fulkerson is not aware of the lost
inventory.
Required:
1. What amount will Fulkerson calculate for ending inventory and cost of goods sold using FIFO,
assuming it erroneously believes 25 units remain in ending inventory?
2. What amount would Fulkerson calculate for ending inventory and cost of goods sold using FIFO
if it correctly knows that only 21 units remain in ending inventory?
3. What effect will the inventory error have on reported amounts for (a) ending inventory, (b)
retained earnings, (c) cost of goods sold, and (d) net income (ignoring tax effects) in 2021?
4. Assuming that ending inventory is correctly counted at the end of 2022, what effect will the
inventory error in 2021 have on reported amounts for (a) ending inventory, (b) retained earnings,
(c) cost of goods sold, and (d) net income (ignoring tax effects) in 2022?
Date
Oct. 29
Purchase
25
$975
Date
Units
Jan. 1
Beginning inventory
28
$924
Apr. 14
Purchase
72
2,520
Aug. 22
Purchase
115
4,255
Oct. 29
Purchase
2,535
$10,234
150
277) Explain the difference in the type of inventory and the flow of inventory for a manufacturing
company versus a merchandising company.
278) What does the balance of cost of goods sold in the income statement represent? What does the
balance of inventory in the balance sheet represent?
151
279) What is a multiple-step income statement? What information does it provide beyond
“bottom-line” net income?
280) What are the three primary cost flow assumptions? How does the specific identification
method differ from these three primary cost flow assumptions?
281) What does it mean that FIFO has a balance-sheet focus and LIFO has an income-statement
focus?
152
282) What is meant by the assertion that the lower of cost and net realizable value for inventory is
an example of conservatism in accounting?