Solutions Chapter 7 – Set B Exercises – Libby 7e
E7–1B
Item
Amount
Explanation
Ending inventory (physical count on
December 31, 2011)
$36,500
Per physical inventory.
a.
Goods purchased and in transit
+ 1,700
Goods purchased and in transit,
F.O.B. shipping point, are owned by
the purchaser.
b.
Samples out on trial to customer
+ 1,825
Samples held by a customer on trial
are still owned by the vendor; no sale
E7–2B.
(Italics for missing amounts only.)
Case
Sales
Revenue
Beg.
Inven-
tory
Pur-
chases
Total
Avail-
able
Ending
Inventory
Cost of
Goods
Sold
Gross
Profit
Ex–
penses
Pretax
Income
or
(Loss)
A
$ 655
$115
$800
$915
$400
$515
$140
$130
$10
inventory correctly excluded these
items.
d.
Goods sold and in transit
Goods sold and in transit, F.O.B.
destination, are owned by the seller
until they reach destination.
Correct inventory, December 31, 2011
E7–3B
Average
Units FIFO LIFO Cost
Cost of goods sold:
Beginning inventory ($15) …………… 12,000 180,000 180,000 180,000
Purchases (March 21) ($17) ……….. 15,000 255,000 255,000 255,000
(August 1) ($18) ……….. 13,000 234,000 234,000 234,000
E7–4B.
Req. 1 REFLECTION COMPANY
Income Statement
For the Year Ended December 31, 2012
Case A Case B
FIFO LIFO
Sales revenue1 …………………………….. $660,000 $660,000
Cost of goods sold:
Beginning inventory ……………….. $ 48,000 $ 48,000
Computations:
(1) Sales: (12,000 units @ $55) = $660,000
(2) Goods available for sale (for both cases):
Units Unit Cost Total Cost
Beginning inventory 4,000 $12 $ 48,000
(3) Ending inventory (23,000 available – 12,000 units sold = 11,000 units):
Case A FIFO:
Req. 2
Comparison of Amounts
Case A Case B
FIFO LIFO
Pretax Income $237,000 $200,000
Difference $37,000
E7–5B.
Req. 1
Average
Units FIFO LIFO Cost
Cost of goods sold:
Beginning inventory …………………… 3,000 $ 105,000 $ 105,000 $ 105,000
Average
Income statement FIFO LIFO Cost
Sales revenue ……………………………………. $688,500 $688,500 $688,500
Cost of goods sold ………………………………. 319,200 332,500 323,190
Gross profit ……………………………………. 369,300 356,000 365,310
Req. 2
FIFO produces a more favorable (higher) net income because when prices are rising it gives a
lower cost of goods sold amount. FIFO allocates the old (lower) unit costs to cost of goods sold.
Req. 3
When prices are falling, the opposite effect occurs–LIFO produces higher net income and less
favorable cash flow than does FIFO.
E7–6B.
Req. 1
Average
FIFO LIFO Cost
Cost of goods sold:
Beginning inventory (400 units @ $25) …….. $10,000 $10,000 $10,000
*Computation of ending inventory:
FIFO: (475 units x $36) + (100 units x $25) = $19,600
LIFO: (400 units x $25) + (175 units x $36) = $16,300
Req. 2
Average
FIFO LIFO Cost
Sales revenue ($56 x 300) ………………………………. $16,800 $16,800 $16,800
Req. 3
Ranking in order of favorable cash flow: The higher rankings are given to the methods that
produce the lower income tax expense because the lower the income tax expense the higher
the cash savings.
(2) Weighted average–produces next lower pretax income.
(3) FIFO–produces the highest pretax income and as a result the highest income tax. This
E7–7B.
Item
Quantity
Total Cost
Total Market
LCM
Valuation
A
57
x
$16
=
$ 912
x
$13
=
$741
$741
B
87
x
=
x
=
C
17
x
=
x
901
D
77
x
=
=
E
x
=
x
=
$10,371
$10,086
$8,415
E7–8B.
Req. 1
Inventory turnover
=
Cost of Goods Sold
=
$52,144
=
44.43
Average Inventory
($1,380+$967)/2
Average days to sell inventory = 365 / inventory turnover = 365 / 44.43 = 8.2 days
Req. 2
The inventory turnover ratio reflects how many times average inventory was produced and sold
E7–9B.
CASE A – FIFO:
Goods available for sale for FIFO:
Units (19 + 23 + 47) …………………………………………………… 89
Amount ($285 + 322 + 893) ………………………………………… $1,500
Inventory turnover
=
Cost of Goods Sold
=
$987
=
2.47
Average Inventory
($285+$513)/2
Inventory turnover
=
=
=
4.16
CASE B – LIFO:
Goods available for sale for LIFO:
Units (19 + 23 + 47) …………………………………………………… 89
Amount ($209 + 322 + 893) ………………………………………… $1,424
The FIFO inventory turnover ratio is normally thought to be a more accurate indicator when
prices are changing because LIFO can include very old inventory prices in ending inventory
balances.
E7–10B.
Req. 1 Retained Earnings for December 31, 2011, will be Overstated because of the
overstatement of Net Income for 2011.
BI + P – EI = CGS
Understate Understate
Req. 4 Net Income for 2012 will be Understated. An overstatement of purchases produces an