Type
Solution Manual
Book Title
N/A
ISBN 13
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978-0078025754 Chapter 5 Solution Manual Part 5

March 26, 2020
Problem 5-10BB (25 minutes)
OTINGO EQUIPMENT CO.
Estimated Inventory at March 31
At Cost
At Retail
Goods available for sale
Inventory, January 1 .......................................
$ 802,880
SERIAL PROBLEM SP 5
Serial Problem SP 5, Business Solutions (20 minutes)
Part A
1.
Per Unit
Total
Total
Inventory Items
Units
Cost
Market
Cost
Market
Office productivity ...........
3
$ 76
$ 74
$228
$222
2.
Per Unit
Total
Total
LCM Applied
Inventory Items
Units
Cost
Market
Cost
Market
To Items
Assuming LCM is applied to the “items of inventory,” the $692 market
Part B
1. Ratio computations for the three months ended March 31, 2016:
Inventory Turnover = Cost of Goods Sold / Average Inventory
2. Business Solutions outperforms its competitors on both ratios. Its
Reporting in Action BTN 5-1
($ millions for all parts)
2. September 28, 2013: $1,764 / $207,000 = 0.0085 or 0.85%
3. Apple’s inventories are its second smallest asset at September 28,
2013. Goodwill has a slightly smaller balance, but every other asset
4. Reviewing notes to its financial statements, we see from Note 1 under
5. a. Inventory turnover =
b. Days’ sales in inventory = x 365
6. Solution depends on the financial statement information obtained.
Cost of sales
Average inventory
Ending inventory
Cost of sales
Comparative Analysis BTN 5-2
($ thousands)
1. Inventory turnover =
Cost of sales
Average inventory
Comparative Analysis (Concluded)
2. Days’ sales in inventory = x 365
Current year Apple’s days’ sales in inventory
Current year Google’s days’ sales in inventory
= ($426/$25,858) x 365 = 6.01 days
3. For the most recent year, Apple manages its inventory more efficiently
than does Google. Apple’s inventory turnover is higher, and its days’
sales in inventory is only slightly longer. For the prior year, Apple also
Ending Inventory
Costs of Goods Sold
Ethics Challenge BTN 5-3
1. Profit Margin: In an economic environment of rising costs, the use of
FIFO results in a lower cost of goods sold than LIFO. If cost of goods
sold is lower, then net income will be higher. A higher net income will
2. First, it is true that managers have discretion in choosing an inventory
costing method. It appears, however, that Golf Challenge’s owner does
not understand that changing methods can only be done very
selectively over time. A change in method must be justified by
management for improving the financial reporting of the company.
Communicating in Practice BTN 5-4
[Note: An acceptable memorandum format should be used.]
The body of the memo would likely recommend use of the LIFO method for
this start-up business. The memo should explain that this would allow for
the matching of the most recent (higher) costs against revenue through
cost of goods sold. It should further explain that this would result in a
lower net income (and taxable income) and, therefore, lower tax (cash)
payments. The justification for this method is a better matching of current
costs against revenue to more fairly reflect the results of operation. A
statement could be made that the actual physical flow of goods does not
dictate the inventory method a business uses.
Taking It to the Net BTN 5-5
1. Apple designs, manufactures, and markets mobile communication and
media devices, personal computers, and portable digital music players.
3. Its gross margin for fiscal 2013 is ($ millions)
Sales .....................................................................
$ 170,910
* $ millions
Teamwork in Action BTN 5-6
Concepts and procedures to illustrate in expert presentation:
Specific Identification Expert:
(a) and (b) Concept:
Purchases are always recorded at the actual specific costs. The specific
(a) and (b) Procedures:
Date
Goods Purchased
Cost of Goods Sold
Inventory Balance
Jan. 1
50 @ $100 = $ 5,000
Jan.10
30 @ $ 100 = $ 3,000
20 @ $100 = $ 2,000
Jan.14
150 @ $120 = $18,000
20 @ $100 = $ 2,000
150 @ $120 = 18,000
$20,000
Teamwork in Action (Continued)
LIFO Expert:
(a) and (b) Concept:
Purchases are always recorded at actual costs. The LIFO cost flow
assumption requires (i) units sold be assigned the most recent costtotal
(a) and (b) Procedures:
Date
Goods Purchased
Cost of Goods Sold
Inventory Balance
Jan. 1
50 @ $100 = $ 5,000
Jan.10
30 @ $100 = $ 3,000
20 @ $100 = $ 2,000
Jan.14
150 @ $120 = $18,000
20 @ $100 = $ 2,000
150 @ $120 = 18,000
50 @ $120 = 6,000
200 @ $150 = 30,000
$38,000
Teamwork in Action (Continued)
FIFO Expert:
(a) and (b) Concept:
(a) and (b) Procedures:
Date
Goods Purchased
Cost of Goods Sold
Inventory Balance
Jan. 1
50 @ $100 = $ 5,000
Jan.10
30 @ $100 = $ 3,000
20 @ $100 = $ 2,000
Jan.14
150 @ $120 = $18,000
20 @ $100 = $ 2,000
Apr.30
200 @ $150 = $30,000
70 @ $120 = $ 8,400
200 @ $150 = 30,000
$38,400
Teamwork in Action (Continued)
Weighted Average Expert:
(a) and (b) Concept:
assignments. The new inventory balance is perpetually determined to be
the residual amount after goods sold are deducted using this weighted
average cost.
(a) and (b) Procedures:
Date
Goods Purchased
Cost of Goods Sold
Inventory Balance
Jan. 1
50 @ $100 = $ 5,000
Jan.10
30 @ $100 = $ 3,000
20 @ $100 = $ 2,000
* rounded ** adjusted for rounding
Teamwork in Action (Concluded)
(c) Cost Flow versus Actual Physical Flow
Typical comments experts may express in response to (c):
Physical flow of goods can be affected by the type of products in
Specific Identification--Always reflects the actual cost flow. Electronic
scanning has increased the ability to use this method in businesses that sell
homogeneous goods.
FIFO--Most businesses try to move their older or earlier acquired inventory
first, particularly if they sell perishable goods. Therefore, FIFO will frequently
require the mixing or combining of units on hand. This is possible for
inventory such as oil but it still unlikely that the actual blending would be as
complete as the averaging of costs.
(d) Impact of Methods
Typical comments experts may express in response to (d):
Weighted Average will usually result in a reported net income and tax
consequences somewhere in between LIFO and FIFO.
Specific Identification will result in a cost of goods sold, net income and tax
expense dependent on whether the actual cost of units sold were the higher
or lower priced items.
remaining in inventory have costs similar to current replacement costs.
Entrepreneurial Decision BTN 5-7
Part 1
(a) Current inventory turnover = $120,000 / $30,000 = 4 times
(b) Proposed inventory turnover = $120,000 / $15,000 = 8 times
Part 2
The owners’ proposal for their company would yield a much improved
inventory turnover of 8 vis-à-vis the current turnover of 4. On the
downside, its days’ sales in inventory would dramatically decline from
Hitting the Road BTN 5-8
There is no formal solution for this field activity. The required solution
does allow students to see the relevance of studying merchandise
activities and inventory accounting.
Global Decision BTN 5-9
1. Inventory turnover =
Current year Samsung (in millions of Korean won):
One year prior Samsung (in millions of Korean won):
Days’ sales in inventory = x 365
Current year —Samsung days’ sales in inventory (in mil. of Korean won):
Current year —Samsung days’ sales in inventory (in mil. of Korean won):
Inventory Turnover
Days’ Sales in Inventory
Company
Current
Prior Year
Current
Prior Year
Note: Computations for Apple and Google are in BTN #2.
2. For the current year, Apple has the highest inventory turnover and
Google has the lowest days’ sales in inventory. For the prior year,
Cost of sales
Average inventory
Ending Inventory
Costs of Goods Sold

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