Finance Chapter 5 Learning Tree Inc The Moving Average Method Used What The Amount Assigned

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Chapter 5: Inventories and Cost of Goods Sold
223. Presented below is a partially completed income statement of Lake, Inc. for 2016.
Net Sales
$ A
Cost of Sales:
Beginning Inventory
B
Net Purchases
138,193
Available for Sale
149,315
Less: Ending Inventory
C
Cost of Sales
136,225
Gross Profit
72,978
Selling, General and Administrative Expenses
D
Operating Income
$ 9,083
Using the partially completed income statement for Lake, Inc., determine each of the following for 2016.
A) Net Sales
B) Beginning Inventory
C) Ending Inventory
D) Selling, General and Administrative Expenses
ANSWER:
A) $209,203 ($136,225 + $72,978)
B) $11,122 ($149,315 $138,193)
C) $13,090 ($149,315 $136,225)
D) $63,895 ($72,978 $9,083)
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.05-02 - LO: 05-02
FACC.PONO.13.05-03 - LO: 05-03
KEYWORDS:
Bloom's: Analyzing
224. The cost of goods sold for Johnnie, Inc. totaled $1,305,000. Sales returns and purchase returns were $3,000 and
$4,000, respectively. Purchases totaled $1,300,000. Discounts taken by Johnnie totaled $7,000, while discounts taken by
customers totaled $5,000. Beginning inventory was $90,000. Determine the amount of ending inventory to be reported on
Johnnie, Inc.'s balance sheet.
ANSWER:
$74,000
$90,000 (Beginning Inventory) + $1,300,000 (Purchases) $4,000 (Purchase returns)
$7,000 (Discounts) $1,305,000 (Cost of goods sold) = $74,000
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.05-03 - LO: 05-03
KEYWORDS:
Bloom's: Analyzing
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© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
225. Gently Used Cars is a dealer that uses the periodic inventory system. The data presented below is from the
accounting records of Gently for the year ended December 31, 2016.
Sales
Sales Discounts
Purchases
Purchase Returns
Inventory (January 1)
Inventory (December 31)
Operating Expenses
Transportation-in
Retained Earnings (January 1)
Using the amounts provided above, calculate the cost of goods sold for 2016.
ANSWER:
$421,000
$33,000 (Inventory at January 1) + $420,000 (Purchases) + $10,000 (Transportation-in)
$5,000 (Purchase Returns) $37,000 (Inventory at December 31) = $421,000
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.05-03 - LO: 05-03
KEYWORDS:
Bloom's: Analyzing
Grappa, Inc.
Grappa, Inc. reported the following information for 2017 and 2016:
2017
2016
Sales
$951,200
$890,000
Sales discounts
12,000
23,000
Purchases
580,000
600,000
Inventory, December 31
46,000
40,000
Transportation-in
18,000
19,000
Purchase discounts
4,000
5,000
226. Refer to the information for Grappa, Inc.
How much is the cost of purchases for 2017?
ANSWER:
$580,000 (Purchases) + $18,000 (Transportation-in) $4,000 (Purchase discounts) =
$594,000
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.05-03 - LO: 05-03
KEYWORDS:
Bloom's: Analyzing
227. Refer to the information for Grappa, Inc.
What amount is cost of goods available for sale for 2017?
ANSWER:
$580,000 (Purchases) + $18,000 (Transportation-in) $4,000 (Purchase discounts) +
$40,000 (Inventory Dec. 31, 2016) = $634,000
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.05-03 - LO: 05-03
KEYWORDS:
Bloom's: Analyzing
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© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
228. Refer to the information for Grappa, Inc.
How much is cost of goods sold for 2017?
ANSWER:
$580,000 (Purchases) + $18,000 (Transportation-in) $4,000 (Purchase discounts) +
$40,000 (Inventory, December 31, 2016) $46,000 (Inventory, December 31, 2017) =
$588,000
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.05-03 - LO: 05-03
KEYWORDS:
Bloom's: Analyzing
229. Refer to the information for Grappa, Inc.
How much is net sales for 2017? What other components that Grappa did not report could be included in this
computation?
ANSWER:
$951,200 (Sales) $12,000 (Sales discounts) = $939,200
Sales returns and allowances
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.05-02 - LO: 05-02
KEYWORDS:
Bloom's: Analyzing
230. Refer to the information for Grappa, Inc.
How much of every dollar is gross profit for 2017?
ANSWER:
($939,200 $588,000)/$939,200 = 37.4%, or about 37 1/2 cents per dollar
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.05-04 - LO: 05-04
KEYWORDS:
Bloom's: Analyzing
Cooking Corner
Cooking Corner reported inventory on its balance sheet at December 31, 2015 at $32,000. During 2016, Cooking Corner
purchased goods totaling $634,000 on account with terms of 2/10, n/30, FOB shipping point. Total charges paid by
Cooking Corner directly to the freight company were $1,000. At the end of 2016, inventory on hand totaled to $45,000.
Net sales for 2016 totaled $1,300,000. Cooking Corner employs a periodic inventory system.
231. Refer to the information about Cooking Corner.
How much would Cooking Corner pay its supplier if Cooking Corner paid for one-half of the goods acquired within the
discount period, and the other half after the expiration of the discount period?
ANSWER:
Payment within discount period: ($634,000 × 1/2) × 98% = $310,660
Payment after discount period: ($634,000 × 1/2) = $317,000
Total paid = $310,660 + $317,000 = $627,660
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.05-03 - LO: 05-03
KEYWORDS:
Bloom's: Analyzing
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© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
232. Refer to the information about Cooking Corner.
How much is cost of goods available for sale for 2016 assuming Cooking Corner takes advantage of one-half of the cash
discounts?
ANSWER:
$32,000 (Beginning Inventory) + $627,660 (Purchases) + $1,000 (Transportation-in) =
$660,660
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.05-03 - LO: 05-03
KEYWORDS:
Bloom's: Analyzing
233. Refer to the information about Cooking Corner.
How much is Cooking Corner’s cost of goods sold assuming that Cooking Corner takes advantage of one-half of the cash
discount?
ANSWER:
$32,000 (Beginning Inventory) + $627,660 (Purchases) + $1,000 (Transportation-in)
$45,000 (Ending Inventory) = $615,660
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.05-03 - LO: 05-03
KEYWORDS:
Bloom's: Analyzing
Digital Forces
Selected data from the financial statements for Digital Forces is presented below.
Net Sales2017
$200,000
Cost of Sales2017
136,000
Selling, General & Administrative Expenses2017
63,000
Other Operating Expenses2017
600
Income Taxes2017
3,000
InventoriesDec. 31, 2016
11,000
InventoriesDec. 31, 2017
13,000
Retained EarningsDec. 31, 2017
39,000
234. Refer to the financial statement information for Digital Forces.
Determine the dollar amount of cost of goods purchased for Digital Forces for 2017.
ANSWER:
$136,000 (Cost of Sales 2018) + $13,000 (Inventories Dec. 31, 2017)
$11,000 (Inventories Dec. 31, 2016) = $138,000
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.05-03 - LO: 05-03
KEYWORDS:
Bloom's: Analyzing
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© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
235. Refer to the financial statement information for Digital Forces.
What portion of every dollar is available to cover operating costs and to contribute to profits for 2017?
ANSWER:
($200,000 $136,000)/$200,000 = 32%, or 32 cents out of every dollar of sales
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.05-04 - LO: 05-04
KEYWORDS:
Bloom's: Analyzing
236. The following data is available for one of the products sold by Wild Optics Company, which uses the periodic
inventory system:
Dec. 1
On hand, 10 units at $8.00 each
$ 80
5
Purchased 30 units at $7.80 each
234
18
Purchased 40 units at $8.15 each
326
24
Purchased 20 units at $8.25 each
165
Available for sale during December100 units
$805
At the end of December, Wild Optics had 25 units on hand. The 75 units sold created revenue of $13 each. Determine the
amounts for the December 31 ending inventory, the cost of goods sold for December, and the gross margin for December
for each of the inventory costing methods listed below.
Ending Inventory
Cost of Goods Sold
Gross Profit
a. Weighted average
b. FIFO
c. LIFO
ANSWER:
Ending Inventory
Cost of Goods Sold
Gross Profit
a. Weighted
average
($805/100) × 25
= $201.25
($805/100) × 75
= $603.75
(75 × $13) $603.75 =
$371.25
b. FIFO
(20 × $8.25) +
(5 × $8.15)
= $205.75
(10 × $8.00) +
(30 × $7.80) +
(35 × $8.15) =
$599.25
(75 × $13 ) $599.25 =
$375.75
c. LIFO
(10 × $8.00) +
(15 × $7.80)
= $197.00
(20 × $8.25) +
(40 × $8.15) +
(15 × $7.80) = $608.00
(75 × $13 ) $608.00 =
$367.00
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.05-06 - LO: 05-06
KEYWORDS:
Bloom's: Analyzing
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© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
237. School Time Corp. completed a physical inventory at the end of 2016. A review of the physical inventory procedures
and records uncovered several errors that are described below. In the columns provided, indicate the effect, if any, on the
four financial statement items listed. Use the following codes for your answers:
O Overstatement
U Understatement
NE No Effect
Balance Sheet
Income Statement
Ending
Inventory
Retained
Earnings
Cost of
Goods Sold
Net Income
a.
One batch of goods was
counted twice.
b.
One page of items was
misplaced when the inventory
was calculated.
c.
Goods sold FOB shipping
point were included in School
Time’s inventory.
d.
Goods in transit from a
supplier, FOB shipping point,
were not included in
inventory.
ANSWER:
Balance Sheet
Income Statement
Ending
Inventory
Retained
Earnings
Cost of
Goods Sold
Net
Income
a.
One batch of goods
was counted twice.
O
O
U
O
b.
One page of items was
misplaced when the
inventory was
calculated.
U
U
O
U
c.
Goods sold FOB
shipping points were
included in School
Time’s inventory.
O
O
U
O
d.
Goods in transit from a
supplier, FOB shipping
point, were not
included in inventory.
U
U
O
U
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.05-08 - LO: 05-08
KEYWORDS:
Bloom's: Analyzing
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© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
238. The cost of Garmin Corp.’s inventory at the end of the year was $85,000; however, due to obsolescence, the cost to
replace the inventory was only $65,000. Prepare the journal entry needed at the end of the year.
ANSWER:
Dec. 31
Loss on Decline in Value of Inventory
20,000
Inventory
20,000
To record decline in value of inventory.
Balance Sheet
Income Statement
Assets
=
Liabilities
+
Stockholders'
Equity
Revenues
Expenses
=
Net
Income
Inventory
20,000
(20,000)
Loss on
Decline in
Value of
Inventory
20,000
(20,000)
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.05-09 - LO: 05-09
KEYWORDS:
Bloom's: Analyzing
239. Carrington, Inc. began the year with $130,000 in merchandise inventory and ended the year with $190,000. Sales and
cost of goods sold for the year were $900,000 and $640,000, respectively. (Use a 360 day year in your calculations.)
Required:
1. Compute Carrington's inventory turnover ratio.
2. Compute the number of days’ sales in inventory.
ANSWER:
1. Inventory Turnover Ratio = Cost of Goods Sold / Average Inventory = $640,000 /
($130,000 + $90,000) / 2 = $640,000 /$160,000 = 4 times
2. Number of Days’ Sales in Inventory = Number of Days in the Period / Inventory Turnover
Ratio = 360 / 4 = 90 days
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.05-10 - LO: 05-10
KEYWORDS:
Bloom's: Analyzing
Learning Tree, Inc.
The following data is available for one of the products sold by Learning Tree, Inc., which uses the perpetual inventory
system:
May 1
On hand, 1,000 units at $2.00 each
$2,000
5
Purchased 2,000 units at $2.75 each
5,500
10
Sold 2,500 units at $16 each
18
Purchased 2,000 units at $4.00 each
8,000
24
Sold 1,500 units at $12 each
31
On hand, 1,000 units
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© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
240. Refer to the data for Learning Tree, Inc.
If the moving average method is used, what is the amount assigned to cost of goods sold for the 2,500 units sold on May
10?
ANSWER:
$6,250
($2,000 + $5,500)/3,000 × 2,500 = $6,250
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.05-12 - LO: 05-12
KEYWORDS:
Bloom's: Analyzing
241. Refer to the data for Learning Tree, Inc.
If the moving average method is used, what is the amount assigned to the ending inventory on May 30?
ANSWER:
$3,700
Ending inventory on May 10: ($7,500/3,000) × (3,000 2,500) = $1,250
or 500 units @ $2.50 each
Ending inventory on May 30:[ [(500 × $2.50) + (2,000 × $4.00)]/2,500] × 1,000 = $3,700
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.05-12 - LO: 05-12
KEYWORDS:
Bloom's: Analyzing
242. Refer to the data for Learning Tree, Inc.
If the LIFO method is used, what is the amount assigned to cost of goods sold for the 2,500 units sold on May 10?
ANSWER:
$6,500
(2,000 × $2.75) + (500 × $2.00) = $6,500
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.05-12 - LO: 05-12
KEYWORDS:
Bloom's: Analyzing
243. Refer to the data for Learning Tree, Inc.
If the LIFO method is used, what is the amount assigned to the ending inventory on May 30?
ANSWER:
$3,000
(500 × $2.00) + (500 × $4.00) = $3,000
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.05-12 - LO: 05-12
KEYWORDS:
Bloom's: Analyzing
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© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
244. Refer to the data for Learning Tree, Inc.
Explain why the amounts for ending inventory are different under the two average cost methodsweighted average
(periodic) and moving average (perpetual).
ANSWER:
The amounts for ending inventory and cost of goods sold are different because a new
(moving) average cost must be calculated after each purchase and assigned to cost of goods
sold for sales prior to the next purchase under the perpetual system. Under the periodic
system, a single (weighted) average cost is calculated for the entire period and assigned to all
units regardless of when they were sold.
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.05-12 - LO: 05-12
KEYWORDS:
Bloom's: Applying
245. Refer to the data for Learning Tree, Inc.
Explain why the amounts are different for LIFO under periodic and perpetual inventory systems.
ANSWER:
The amounts for ending inventory and cost of goods sold are different because under the
perpetual system, costs must be assigned to cost of goods sold as units are sold during the
period using the LIFO flow assumption. Thus, some of the units on hand early in the period
are assigned to cost of goods sold when the perpetual system is used. Under the periodic
system, costs are assigned to units only at the end of the period. Thus, it is assumed that the
earliest units are still on hand under the periodic system.
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.05-12 - LO: 05-12
KEYWORDS:
Bloom's: Applying
Share, Inc.
The following data is available for one of the products sold by Share, Inc., which uses a perpetual inventory system.
May 1
On hand, 10 units at $2 each
8
Sold 6 units at $10 each
14
Purchased 30 units at $3 each
23
Sold 24 units at $10 each
246. Refer to the data for Share, Inc.
If the moving average method is used, how much is cost of goods sold for May?
ANSWER:
May 8
Sale (6 units × $2)
$12.00
May 23
[Sale (4 units × $2) + (30 units × $3)]/34 × 24
69.12
Total
$81.12
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.05-12 - LO: 05-12
KEYWORDS:
Bloom's: Analyzing
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© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
247. Refer to the data for Share, Inc.
If the moving average method is used, how much is ending inventory on May 30?
ANSWER:
$28.80
($98/34 ×10) = $28.80 (possible difference due to rounding)
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.05-12 - LO: 05-12
KEYWORDS:
Bloom's: Analyzing
248. Refer to the data for Share, Inc.
Required:
1. If the FIFO method is used, how much is ending inventory on May 30?
2. How does this differ from the amount calculated using a periodic system and FIFO?
ANSWER:
1. 10 × $3.00 = $30
2. There is no difference. The FIFO amounts are the same under both a periodic and a
perpetual assumption.
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.05-12 - LO: 05-12
KEYWORDS:
Bloom's: Analyzing
249. Refer to the data for Share, Inc.
If the LIFO method is used, how much is cost of goods sold for May?
ANSWER:
$84.00
(6 × $2.00) + (24 × $3.00) = $84.00
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.05-12 - LO: 05-12
KEYWORDS:
Bloom's: Analyzing
Essay
250. Describe how the inventories of manufacturers differ from the inventories of retailers.
ANSWER:
Manufacturers have to produce the products they sell whereas retailers purchase products
which are ready to sell (i.e., the retailers purchase finished goods from manufacturers).
Inventories of manufacturers, therefore, will consist of raw materials, work in process, and
finished goods.
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.05-01 - LO: 05-01
KEYWORDS:
Bloom's: Applying
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251. Several transactions of sales and purchase activities for Genoa Department Store are described below.
A)
Genoa purchases shoes from Nike on credit.
B)
Genoa returns defective shoes to Nike before payment is made to Nike for the shoes
purchased in transaction A.
C)
Genoa pays for the shoes purchased from Nike.
D)
Genoa sells shoes to its customers for cash and on credit.
E)
Credit customers return shoes to Genoa for a refund.
F)
Credit customers pay their account balances to Genoa.
Required: For each transaction described above, describe the economic effects of the transaction on the company under a
periodic inventory system.
ANSWER:
A) Liabilities increase and stockholders’ equity decreases (through an increase in expenses)
B) Liabilities decrease and equity increases (through a decrease in expenses)
C) Assets and liabilities decrease.
D) Assets increase and stockholders’ equity (revenue) increases.
E) Assets decrease and stockholders’ equity decreases.
F) Assets increase and decrease by the same amount
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.05-03 - LO: 05-03
KEYWORDS:
Bloom's: Applying
252. Flores Department Store currently uses the periodic inventory system.
Required: Explain what the advantages would be to Flores if it uses the perpetual inventory system. Assume that Flores
can use a computer system which is linked to its cash registers and that all products have bar codes that can be read by bar
code readers attached to the cash registers.
ANSWER:
If Flores uses the perpetual system, it will have better control of its inventory. Losses due to
theft, shrinkage, etc. can be identified at the end of the accounting period when a physical
inventory count is taken. Also, information will be available on inventory balances and cost
of goods sold for interim financial statements; these items must be estimated under a periodic
system. The perpetual system would also allow Flores to determine which items sell well and
to keep sufficient quantities on hand to meet customer demands. When the perpetual
inventory system is linked to the computer, the cost of maintaining a perpetual inventory can
be decreased and the efficiency of the system can be improved. Flores will have information
that is more current and will obtain that information more quickly with the computer system.
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.05-03 - LO: 05-03
KEYWORDS:
Bloom's: Applying
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© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
253. Giant-Mart purchased a big shipment of shoes from Right Balance, Inc. on credit near the end of its accounting
period. Right Balance shipped the shoes in January and Giant-Mart received the shoes in February. Assume that Giant-
Mart's accounting period ends on January 31, while Right Balance’s accounting period ends on May 31.
Required: If the shoes are shipped FOB destination, who will pay the freight costs? If the shoes are shipped FOB
shipping point, who will pay the freight costs?
ANSWER:
If the shoes are shipped FOB destination by Right Balance, Right Balance should pay the
freight charges. If the shoes are shipped FOB shipping point, Giant-Mart should pay the
freight charges.
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.05-03 - LO: 05-03
KEYWORDS:
Bloom's: Applying
254. Giant-Mart purchased a large shipment of shoes from Primus, Inc. on credit near the end of its accounting period.
Primus shipped the shoes in January and Giant-Mart received the shoes in February. Assume that Giant-Mart's accounting
period ends on January 31, while Primus’ accounting period ends on May 31. Answer each independent question in the set
that follows.
Required: If the shoes are shipped FOB destination, when should Giant-Mart record the purchase? If the shoes are
shipped FOB shipping point, when should Giant-Mart record the purchase?
ANSWER:
If the shoes are shipped FOB destination, Giant-Mart should not record the purchase until the
shoes are received in February; title passes when the shoes are received. If the shoes are
shipped FOB shipping point, Giant-Mart should record the purchase when the shoes are
shipped in January; title passes when the shoes are shipped.
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.05-03 - LO: 05-03
KEYWORDS:
Bloom's: Applying
255. Giant-Mart purchased a large shipment of shoes from Primus, Inc. on credit near the end of its accounting period.
Primus shipped the shoes in January and Giant-Mart received the shoes in February. Assume that Giant-Mart's accounting
period ends on January 31, while Giant’s accounting period ends on May 31. Answer each independent question in the set
that follows.
Required: Under what shipping terms would Giant-Mart include the shoes as part of inventory on its January 31 balance
sheet?
ANSWER:
Giant-Mart will include the shoes in its January 31 balance sheet only if title to the shoes has
been passed from Primus to Giant-Mart. This occurs if the shoes are shipped FOB shipping
point.
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.05-03 - LO: 05-03
KEYWORDS:
Bloom's: Applying
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256. Explain the relationship between the valuation of inventory and income measurement as it relates to the balance sheet
and the income statement.
ANSWER:
Cost or other values must be assigned to merchandise that makes up a company's inventory.
As the merchandise is sold, these costs are assigned to cost of goods sold (expense). Since
expenses are deducted from revenues to determine the net income or net loss for the period,
inventory valuation affects the amount of income or loss measured.
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.05-05 - LO: 05-05
KEYWORDS:
Bloom's: Applying
257. In the following information from the 2017 annual reports of Focal Point Industries all figures have been rounded to
millions of dollars.
Balance Sheet Data
May 31, 2017
May 31, 2016
Raw materials
$ 25.8
$ 52.1
Work in process
44.8
34.7
Finished goods
1,132.7
1,303.8
Inventories at FIFO
1,203.3
1,390.6
Adjustment to LIFO
5.6
21.9
Cash Flow Data (Operating Activities)
Net income
$451.4
$399.9
Additions to net income:
Depreciation
198.2
100.2
Amortization
30.6
49.0
Changes in assets and liabilities:
Inventories
197.3
(58.0)
Accounts payable and other
(170.4)
(70.1)
Required:
(1) Describe what costs are included in each of the three types of inventories listed above for Focal Point Industries.
(2) Even though the footnote describing the inventory costing method(s) used by Focal Point Industries is not provided
above, what can you conclude about the inventory costing method(s) used by the company?
ANSWER:
(1) "Raw materials" consists of materials and supplies which have not yet been placed into
process to produce the company's products. "Work in process" includes materials and
supplies, direct labor, and manufacturing overhead costs for products started but not
completed during the period. "Finished goods" includes raw materials and supplies, direct
labor, and manufacturing overhead used to produce products that were completed but not
sold during the period.
(2) Control Industries must be using the LIFO inventory method for at least some, if not all,
of its inventories because the company has disclosed the amount of the adjustment that
converts its inventories at FIFO to LIFO. There is a significant difference in the "adjustment
page-pfe
258. In the following information from the 2017 annual reports of Focal Point Industries all figures have been rounded to
millions of dollars.
Balance Sheet Data
May 31, 2017
May 31, 2016
Raw materials
$ 25.8
$ 52.1
Work in process
44.8
34.7
Finished goods
1,132.7
1,303.8
Inventories at FIFO
1,203.3
1,390.6
Adjustment to LIFO
5.6
21.9
Cash Flow Data (Operating Activities)
Net income
$451.4
$399.9
Additions to net income:
Depreciation
198.2
100.2
Amortization
30.6
49.0
Changes in assets and liabilities:
Inventories
187.3
(58.0)
Accounts payable and other
(170.4)
(70.1)
Required:
(1) Explain what the amount "adjustment to LIFO" represents. What effects has this "adjustment" had on Focal Point
Industries’ net earnings in 2016 and 2017?
(2) What method of determining cash flows from operating activities has Focal Point Industries used in preparing its
statement of cash flows? Explain your answer.
(3) From 2016 to 2017, what change in the inventory balance (increase or decrease) occurred in each year as a result of
operating activities? What was the effect on the company's cash flow each year as a result of the inventory change?
ANSWER:
(1) The "adjustment to LIFO" of inventories is the amount by which current replacement cost
of inventories exceeds the actual cost assigned to inventory under the LIFO method. Through
the use of the LIFO method, Focal Point Industries has been able to assign recent, higher
costs to the cost of products sold and retain older, lower costs in its asset balances for
inventories. Thus, Focal Point Industries has reported lower amounts for net income than it
would if the FIFO method had been used. It also benefits from the lower taxable income
reported to the IRS. Focal Point Industries believes that this has not had a material effect on
their operating results. It has switched to a FIFO valuation method at the end of fiscal 2017.
(2) Since Focal Point Industries has added back depreciation and amortization to net income,
page-pff
259. What is LIFO inventory liquidation? Why is it important to disclose the effects of a LIFO inventory liquidation
ANSWER:
A LIFO liquidation means that some of the inventory items included in inventory under the
LIFO method have been sold, i.e., the company sold more units of merchandise than it
purchased during the year. If the units sold in the LIFO liquidation had been carried in
inventory at older, lower prices, these lower prices will have been assigned to cost of goods
sold. Thus, income will be higher than it would have been if the company had purchased
enough units at current prices to maintain its inventory at the lower prices. If the effects of
this unexpected LIFO liquidation are material, the information may be relevant to some of
the users of the financial statements.
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.05-07 - LO: 05-07
KEYWORDS:
Bloom's: Applying
260. Carrington Inc. manufactures digital cameras and has experienced noticeable declines in the purchase price of many
of the components it uses, including memory components. Which inventory costing method should Carrington use if it
wants to maximize net income? Explain your answer.
ANSWER:
For Carrington, the use of LIFO will have the effect of maximizing net income if a company
is experiencing a decline in the unit cost of inventory. Last-in, first-out charges the most
recent purchases to cost of goods sold. If prices are declining, the amounts charged to cost of
goods sold will be less than if either the weighted average method or FIFO is used. Because
less is charged to cost of goods sold, net income will be higher.
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.05-07 - LO: 05-07
KEYWORDS:
Bloom's: Applying
261. If an entity overstates its ending inventory for the current year, what are the effects on assets, cost of goods sold,
income before taxes, and retained earnings for the current year?
ANSWER:
An overstatement of ending inventory for the current period results in an understatement of
cost of goods sold and an overstatement of income before taxes for the same period. Cost of
goods sold is understated because the overstated ending inventory figure is deducted from the
cost of goods available for sale to determine cost of goods sold. Thus, a larger portion of the
cost of goods available for sale is assigned to inventory and a smaller portion is assigned to
cost of goods sold than should be. The overstated inventory figure also overstates the amount
reported as an asset on the balance sheet. The overstatement of income results in an
overstatement of retained earnings when net income is transferred to retained earnings
through a closing entry.
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.05-08 - LO: 05-08
KEYWORDS:
Bloom's: Applying
page-pf10
262. Assume that a company is experiencing increasing inventory prices and prepares its financial statements in
accordance with IFRS. Which costing method should it use to pay the least amount of taxes? Explain your answer.
ANSWER:
If a company prepares its financial statements in accordance with IFRS, it is not allowed to
use LIFO which would result in the lowest amount of taxes as inventory costs are increasing.
Under IFRS, LIFO cannot be used; so the weighted average method will result in the largest
cost of goods sold, the lowest income, and consequently the lowest income tax for the
company.
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.05-09 - LO: 05-09
KEYWORDS:
Bloom's: Applying
263. Bower Corp.’s cost of sales has remained steady over the last two years. During this same time period, however, its
inventory has increased considerably. What does this information tell you about the company’s inventory turnover?
Explain your answer.
ANSWER:
Inventory turnover equals cost of goods sold (cost of sales) divided by average inventory. If
the cost of sales remains constant while the denominator (average inventory) increases,
inventory turnover will decrease. This indicates that inventory is staying on the shelf for a
longer time. The company should probably evaluate the salability of its inventory.
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.05-10 - LO: 05-10
KEYWORDS:
Bloom's: Applying

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