Accounting Chapter 5 which is also reported on the income statement

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Problem 5-8BA (30 minutes)

Part 1

SHEPARD COMPANY

Income Statements Comparing FIFO, LIFO, and Weighted Average

For Year Ended December 31

FIFO

LIFO

Weighted

Average

Sales ……………………………………………………..

$400,000

Cost of goods sold

Beginning inventory, Jan. 1 …………………..

48,720

Cost of purchases…………………………………

Cost of goods sold ……………………………….

88,160

92,000

Supporting calculations

FIFO

LIFO

Weighted

Average

Beginning inventory, Jan. 1 (840 x $58) …………

$ 48,720

Purchases

600 x $59 = $ 35,400

1,205 x $61 = 73,505

700 x $64 = 44,800

Ending inventory, Dec. 31

W.A.:

$ 62,000

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Problem 5-8BA (Concluded)

Part 2

If Shepard Company had been experiencing decreasing costs in the

acquisition of inventory, we would observe the opposite results in our

comparisons. Specifically:

Part 3

Advantages

LIFO: Assuming a trend of increasing costs, the advantage of using LIFO is

that the lower net income will result in a lower tax obligation (tax deferral).

Also, LIFO is likely to better match current costs against revenues.

Disadvantages

LIFO: Assuming a trend of increasing costs, the disadvantage of using

383

Problem 5-9BB (25 minutes)

Part 1

MACKLIN COMPANY

Estimated Inventory

December 31

At Cost At Retail

Goods available for sale

Beginning inventory ………………………………………

$ 90,022

$115,610

Cost of goods purchased ……………………………….

Less: Sales returns …………………………………………..

Net sales ………………………………………………………...

Part 2

MACKLIN COMPANY

Inventory Shortage

December 31

At Cost At Retail

Estimated inventory (from part 1) ……………………….

$66,555.00

$98,600.00

Physical inventory* …………………………………………….

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Problem 5-10BB (25 minutes)

OTINGO EQUIPMENT CO.

Estimated Inventory at March 31

At Cost

At Retail

Goods available for sale

Beginning inventory, Jan. 1 ………………………

$ 802,880

Cost of goods purchased ………………………….

2,209,636

Goods available for sale …………………………...

Less estimated cost of goods sold

Sales ………………………………………………………..

Less sales returns ……………………………………

Net sales ………………………………………………….

Estimated cost of goods sold

[$3,680,960 x (1 – 35%)] …………………………

Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 5

SERIAL PROBLEM — SP 5

Serial Problem — SP 5, Business Solutions (20 minutes)

Part A

Per Unit

Total

LCM Applied

Inventory Items

Units

Cost

Market

Cost

Market

To Items

Office productivity ……..

3

$ 76

$ 74

$228

$222

2

3

Part B

1. Ratio computations for the three months ended March 31, 2020:

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 competitors’ 15 times.

• Its days’ sales in inventory is 18.3 days versus competitors’ 25 days.

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Financial Analysis — AA 5-1 (20 minutes)

($ millions for all parts)

1. a. $4,855

3. Lower.

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Comparative Analysis — AA 5-2 (35 minutes)

($ millions)

1. Inventory turnover =

Apple — current year

Google — current year

Inventory turnover = = 89.6 times

Cost of sales

Average inventory

$45,583

($749 + $268) / 2

Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 5

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

= ($749/$45,583) x 365 = 6.0 days

3. a. Outperformed.

Explanation: Apple compares favorably to (exceeds) the industry

average of 15 for inventory turnover for the current year.

Ending Inventory

Costs of Goods Sold

Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 5

Global Analysis — AA 5-3 (25 minutes)

1. Inventory turnover =

Days’ sales in inventory = x 365

b. Current year —Samsung days’ sales in inventory (₩ millions):

x 365 days = 70.5 days

2. Unfavorable.

Explanation: Samsung’s inventory turnover is on an unfavorable trend.

3. Underperform.

Explanation: Samsung compares unfavorably to (is below) the industry

Cost of sales

Average inventory

Ending Inventory

Costs of Goods Sold

₩24,983,355

₩129,290,661

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Ethics Challenge — BTN 5-1

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.

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Communicating in Practice — BTN 5-2

[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

Taking It to the Net — BTN 5-3

1. Apple designs, manufactures, and markets mobile communication and

media devices, personal computers, and sells a variety of related

3. Its gross margin is ($ millions):

Sales ……………………………………………………………

$ 229,234

4. Inventory turnover

$141,048 mil./ [($4,855 mil. + $2,132 mil.)/2] = 40.4 times

Days’ sales in inventory

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Teamwork in Action — BTN 5-4

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

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Teamwork in Action (Continued)

LIFO Expert:

(a) and (b) Concept:

Purchases are always recorded at actual costs. The LIFO cost flow

(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

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Teamwork in Action (Continued)

FIFO Expert:

(a) and (b) Concept:

Purchases are always recorded at actual costs. The FIFO cost flow

the amount after deducting goods sold using the earliest costs.

(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

Apr.30

200 @ $150 = $30,000

70 @ $120 = $ 8,400

200 @ $150 = 30,000

20 @ $100 = $ 2,000

150 @ $120 = 18,000

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Teamwork in Action (Continued)

Weighted Average Expert:

(a) and (b) Concept:

Purchases are always recorded at actual costs. The Weighted Average

cost flow assumption requires units sold be assigned a cost based on

(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

Feb.15

100 @ $117.647 = $11,765*

70 @ $117.647 = $ 8,235*

(270 +300)

Oct. 5

350 @ $172.342 = $60,320

220 @ $172.342* =

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Teamwork in Action (Concluded)

(c) Cost Flow versus Actual Physical Flow

Typical comments experts may express in response to (c):

More Specific Expert Comments to (c):

Specific Identification—Always reflects the actual cost flow. Electronic

scanning has increased the ability to use this method in businesses that sell

homogeneous goods.

(d) Impact of Methods

Typical comments experts may express in response to (d):

In a period of rising prices LIFO will generally result in the highest cost of

goods sold and therefore the lowest net income and lowest tax. However,

LIFO must be used for financial reporting if it is used for tax purposes.

(e) Valuation

Typical comments experts may express in response to (e):

FIFO tends to value ending inventory closest to replacement cost whereas

LIFO does not. Weighted average tends to value inventory between old and

new market values, and specific identification depends on whether the items

remaining in inventory have costs similar to current replacement costs.

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Entrepreneurial Decision — BTN 5-5

Part 1

(a) Current inventory turnover = $120,000 / $30,000 = 4 times

Part 2

The proposal 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 91 days to 46 days. Assuming

an inventory buffer of 46 days is sufficient, then the proposal should be

implemented.

Hitting the Road — BTN 5-6

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.

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