Serial Problem — SP 5, Business Solutions (concluded)
2.
Per Unit
Total
Total
LCM Applied
Inventory Items
Units
Cost
Market
Cost
Market
To Items
Office productivity ……..
3
$ 76
$ 74
$228
$222
$222
Desktop publishing ……
2
103
100
206
200
200
Accounting ………………..
3
90
96
270
288
270
$704
$710
$692
Assuming LCM is applied to the “items of inventory,” the $692 market
value (per items) is less than the $704 total cost of inventory. Thus, the
company must adjust the currently reported inventory value from $704 to
the LCM value of $692.
Part B
1. Ratio computations for the three months ended March 31, 2016:
Inventory Turnover = Cost of Goods Sold / Average Inventory
2. Business Solutions outperforms its competitors on both ratios. Its
inventory turnover is 40 (or 20) times versus the competitors’ 15 times.
Reporting in Action — BTN 5-1
($ millions for all parts)
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
the subheading “inventories” that Apple’s inventories are stated at the
5. a. Inventory turnover =
Average inventory = ($1,764 + $791) / 2
6. Solution depends on the financial statement information obtained.
Cost of sales
Average inventory
1. Inventory turnover =
Apple — current year
Cost of sales
Average inventory
$106,606
($505 + $35) / 2
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Financial and Managerial Accounting, 6th Edition
370
Comparative Analysis (Concluded)
2. Days’ sales in inventory = x 365
Current year — Apple’s days’ sales in inventory
= ($1,764/$106,606) x 365 = 6.04 days
3. For the most recent year, Apple manages its inventory more efficiently
than does Google. Apple’s inventory turnover is higher, and its days’
sales in inventory is only slightly longer. For the prior year, Apple also
Ending Inventory
Costs of Goods Sold
Ethics Challenge — BTN 5-3
1. Profit Margin: In an economic environment of rising costs, the use of
FIFO results in a lower cost of goods sold than LIFO. If cost of goods
sold is lower, then net income will be higher. A higher net income will
2. First, it is true that managers have discretion in choosing an inventory
costing method. It appears, however, that Golf Challenge’s owner does
not understand that changing methods can only be done very
selectively over time. A change in method must be justified by
management for improving the financial reporting of the company.
reporting method must also change due to the LIFO Conformity Rule—
which demands that if LIFO is used for tax reporting, it must be used
for financial reporting.
Communicating in Practice — BTN 5-4
[Note: An acceptable memorandum format should be used.]
The body of the memo would likely recommend use of the LIFO method for
this start-up business. The memo should explain that this would allow for
the matching of the most recent (higher) costs against revenue through
Taking It to the Net — BTN 5-5
1. Apple designs, manufactures, and markets mobile communication and
2. Its summary of significant accounting policies (Note 1) reports:
3. Its gross margin for fiscal 2013 is ($ millions)
Sales ……………………………………………………………
$ 170,910
Cost of sales ………………………………………………..
(106,606)
Gross margin ……………………………………………….
$ 64,304
Gross margin ratio is: $64,304 / $170,910 = 0.376 or 37.6%
Comment: Its gross margin ratio is slightly lower than the industry
average gross margin ratio of 40%.
4. 2013 Inventory turnover* =
$106,606/ [($1,764 + $791)/2] = 83.4 times
Teamwork in Action — BTN 5-6
Concepts and procedures to illustrate in expert presentation:
Specific Identification 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
150 @ $120 = 18,000
$20,000
Feb.15
100 @ $ 120 = $12,000
20 @ $100 = $ 2,000
50 @ $120 = 6,000
$ 8,000
Apr.30
200 @ $150 = $30,000
20 @ $100 = $ 2,000
50 @ $120 = 6,000
200 @ $150 = 30,000
$38,000
Sept 26
300 @ $200 = $60,000
20 @ $100 = $ 2,000
50 @ $120 = 6,000
200 @ $150 = 30,000
300 @ $200 = 60,000
$98,000
Oct. 5
100 @ $ 150 = $15,000
250 @ $ 200 = $50,000
20 @ $100 = $ 2,000
50 @ $120 = 6,000
100 @ $150 = 15,000
50 @ $200 = 10,000
$80,000
$33,000