Accounting Chapter 7 Homework The receiving report should be reconciled to the initial purchase order and the vendor’s invoice before inventory purchases are recorded and paid

1. The receiving report should be reconciled to the initial purchase order and the vendor’s invoice

b

efore inventory purchases are recorded and paid. This procedure will verify that the inventory

received matches the type and quantity of inventory ordered. It also verifies that the vendor’s

invoice is charging the company for the actual quantity of inventory received at the agreed-

upon price.

4. a. LIFO c. LIFO

b. FIFO d. FIFO

5. FIFO.

6. LIFO. In periods of rising prices, the use of LIFO will result in the lowest net income and thus the

lowest income tax expense.

7. The merchandise should be valued using the lower of its cost of $1,350 or its market (net realizable)

value of $1,295 ($1,475

–

$180). Thus, the merchandise should be valued at its market value of

10. Manufacturer’s. The manufacturer retains title until the goods are sold. Thus, any unsold

merchandise at the end of the year is part of the manufacturer’s (consignor’s) inventory, even

though the merchandise is in the hands of the retailer (consignee).

CHAPTER 7

INVENTORIES

DISCUSSION QUESTIONS

CHAPTER 7 Inventories

PE 7-1A

a. First-in, first-out (FIFO)

b. Last-in, first-out (LIFO)

c. Weighted average cost

PE 7-1B

PE 7-2A

a. Cost of merchandise sold (March 25):

60 units @ $7 $ 420

280 units @ $8 2,240

340 $2,660

b. Inventory, March 31: $1,040 = 130 units × $8

PE 7-2B

a. Cost of merchandise sold (July 24):

$164 ($81 + $83)$56 ($132 – $76)

$157 ($76 + $81)

$160 ($80 × 2)

$49 ($132 – $83)

$52 ($132 – $80)

PRACTICE EXERCISES

Gross Profit

April

Ending Inventory

April 30

CHAPTER 7 Inventories

PE 7-3A

a. Cost of merchandise sold (September 27):

$27,300 = (105 units × $260)

b. Inventory, September 30:

15 units @ $255 $3,825

5units @ $260 1,300

20 $5,125

PE 7-3B

a. Cost of merchandise sold (March 27):

PE 7-4A

a. Weighted average unit cost: $132

Inventory total cost after purchase on July 23:

90 units @ $120 $10,800

360 units @ $135 48,600

450 $59,400

Weighted average unit cost = $132 ($59,400 ÷ 450 units)

b. Cost of merchandise sold (July 26): $43,560 (330 units @ $132)

c. Inventory, July 31: $15,840 (120 units @ $132)

PE 7-4B

a. Weighted average unit cost: $15.50

Inventory total cost after purchase on October 22:

CHAPTER 7 Inventories

PE 7-5A

a. First-in, first-out (FIFO) method: $86,700 = 17 units × $5,100

b. Last-in, first-out (LIFO) method: $69,200 = [(15 units × $4,000) + (2 units × $4,600)]

c. Weighted average cost method: $78,200 (17 units × $4,600), where average cost =

$4,600 = $248,400 ÷ 54 units

PE 7-5B

a. First-in, first-out (FIFO) method: $32,851 = (50 units × $456) + (23 units × $437)

PE 7-6A

Market

Value per

Cost Unit (Net

Inventory per Realizable

Item Quantity Unit Value) Cost Market LCM

Raven 10 1,700 $163 $159 $277,100 $270,300 $270,300

Dove 23 9,200 24 30 220,800 276,000 220,800

Total $497,900 $546,300 $491,100

PE 7-6B

Market

Total

PE 7-7A

Balance Sheet:

Merchandise inventory understated*………………

…

Current assets understated……………………………

…

Total assets understated………………………………

…

Owner’s equity understated……………………………

Income Statement:

Cost of merchandise sold overstated………………

…

Gross profit understated………………………………

…

Net income understated………………………………

…

*$560,700 – $543,500 = $17,200

PE 7-7B

…

Overstatement (Understatement)

Amount of Misstatement

Overstatement (Understatement)

(17,200)

$(17,200)

(17,200)

$ 17,200

(17,200)

CHAPTER 7 Inventories

PE 7-8A

a.

Cost of merchandise sold

b.

Cost of merchandise sold

Average daily cost of

merchandise sold

Average inventory

Days’ sales in inventory

($620,500 ÷ $9,860) ($591,300 ÷ $8,262)

($3,598,900 ÷ 365 days) ($3,015,630 ÷ 365 days)

$620,500 $591,300

[($593,000 + $648,000) ÷ 2] [($589,600 + $593,000) ÷ 2]

62.9 71.6

$9,860 $8,262

$3,598,900 $3,015,630

20Y4 20Y3

Days’ Sales in Inventory

20Y4 20Y3

$3,598,900 $3,015,630

Inventory Turnover

b.

Cost of merchandise sold

Average daily cost of

merchandise sold

Average inventory

Days’ sales in inventory

$3,009,790

20Y7 20Y6

(

$511

,

000 ÷ $7

,

980

)

(

$485

,

450 ÷ $8

,

246

)

Days’ Sales in Inventory

[($489,000 + $533,000) ÷ 2] [($481,900 + $489,000) ÷ 2]

$7,980 $8,246

($2,912,700 ÷ 365 days) ($3,009,790 ÷ 365 days)

$511,000 $485,450

64.0 days 58.9 days

$2,912,700

CHAPTER 7 Inventories

Ex. 7-1

Switching to a perpetual inventory system will strengthen Triple Creek Hardware’s

internal controls over inventory because the store managers will be able to keep

track of how much of each item is on hand. This should minimize shortages of

good-selling items and excess inventories of poor-selling items.

Ex. 7-2

a. Appropriate. The inventory tags will protect the inventory from customer theft.

b. Inappropriate. The control of using security measures to protect the inventory

is violated if the stockroom is not locked.

EXERCISES

CHAPTER 7 Inventories

Ex. 7-3

a.

Unit Total Unit Total Unit Total

Quantity Cost Cost Quantity Cost Cost Quantity Cost Cost

Apr. 1 180 40 7,200

10 140 40 5,600 40 40 1,600

15 210 42 8,820 40 40 1,600

Date

Portable Game Players

Purchases Cost of Merchandise Sold Inventory

CHAPTER 7 Inventories

Ex. 7-4

Unit Total Unit Total Unit Total

Quantity Cost Cost Quantity Cost Cost Quantity Cost Cost

Apr. 1 180 40 7,200

Date

Portable Game Players

Purchases Cost of Merchandise Sold Inventory

CHAPTER 7 Inventories

Ex. 7-5

a.

Unit Total Unit Total Unit Total

Quantity Cost Cost Quantity Cost Cost Quantity Cost Cost

May 1 1,550 44 68,200

10 720 45 32,400 1,550 44 68,200

720 45 32,400

12 720 45 32,400 1,070 44 47,080

Date

Prepaid Cell Phones

Purchases Cost of Merchandise Sold Inventory

CHAPTER 7 Inventories

Ex. 7-6

Unit Total Unit Total Unit Total

Quantity Cost Cost Quantity Cost Cost Quantity Cost Cost

May 1 1,550 44 68,200

10 720 45 32,400 1,550 44 68,200

720 45 32,400

12 1,200 44 52,800 350 44 15,400

Date

Prepaid Cell Phones

Purchases Cost of Merchandise Sold Inventory

CHAPTER 7 Inventories

Ex. 7-7

a. $823,680 ($26.40 × 31,200 units)

b. $763,200 [($20.00 × 7,200 units) + ($25.20 × 12,000 units) + ($26.40 × 12,000 units)] = $144,000 + $302,400 + $316,800

Ex. 7-8

Unit Total Unit Total Total

Quantity Cost Cost Quantity Cost Cost Quantity Unit Cost Cost

Jan. 1 15,000 60.00 900,000

Ex. 7-9

Unit Total Unit Total Total

Quantity Cost Cost Quantity Cost Cost Quantity Unit Cost Cost

Jan. 1 4,000 20.00 80,000

Apr. 19 2,500 20.00 50,000 1,500 20.00 30,000

Date

Inventory

Date

Purchases

Cost of Merchandise Sold

CHAPTER 7 Inventories

Ex. 7-10

Cost of Merchandise Sold

Unit Total Unit Total Total

Quantity Cost Cost Quantity Cost Cost Quantity Unit Cost Cost

Jan. 1 4,000 20.00 80,000

Date

InventoryPurchases

CHAPTER 7 Inventories

Ex. 7-11

Inventory

Unit Total Unit Total Total

Quantit

y

Cost Cost Quantit

y

Cost Cost Quantit

y

Unit Cost Cost

1 4,000 20.00 80,000

19 2,500 20.00 50,000 1,500 20.00 30,000

30 6,000 24.00 144,000 1,500 20.00 30,000

6,000 24.00 144,000

Ex. 7-12

a. $167,700 (1,125 units at $140 plus 75 units at $136) = $157,500 + $10,200

b. $145,600 (1,000 units at $120 plus 200 units at $128) = $120,000 + $25,600

c. $157,800 (1,200 units at $131.50)

Cost of merchandise available for sale:

Cost of Merchandise SoldPurchases

Date

Jan.

Apr.

June

1,000

CHAPTER 7 Inventories

Ex. 7-13

Merchandise Merchandise

Inventory Method Inventory Sold

a. FIFO $59,960 $167,040

b. LIFO 54,100 172,900

c. Weighted average cost 56,750 170,250

Cost of merchandise available for sale:

a. First-in, first-out:

Merchandise inventory:

980 units at $60…………………………………………………..………… $58,800

20 units at $58……………………………………………………………

…

1,160

1,000 units……………………………………………………..……………… $59,960

Merchandise sold:

$227,000 – $59,960…………………………………….………………………

…

$167,040

b. Last-in, first-out:

…

c. Weighted average cost:

Merchandise inventory:

1,000 units at $56.75 ($227,000 ÷ 4,000 units)……………………………

…

$56,750

Merchandise sold:

$227,000 – $56,750……………………………………………………………

…

$170,250

Cost

…

CHAPTER 7 Inventories

Ex. 7-14

a. 1. FIFO inventory > (greater than) LIFO inventory

2. FIFO cost of < (less than) LIFO cost of

b. In periods of rising prices, the income shown on the company’s tax return

would be lower if LIFO rather than FIFO were used; thus, there is a tax advantage

of using LIFO.

Note to Instructors: The federal tax laws require that if LIFO is used for tax

purposes, LIFO must also be used for financial reporting purposes. This is

known as the LIFO conformity rule. Thus, selecting LIFO for tax purposes means

that the company’s reported income will also be lower than if FIFO had been

used. Companies using LIFO believe the tax advantages from using LIFO

outweigh any negative impact of reporting a lower income to shareholders.

Ex. 7-15

Market

Value per

Cost Unit (Net

Inventory per Realizable

Quantity Unit Value) Cost Market LCM

120 $150 $140 $18,000 $16,800 $16,800

90 120 130 10,800 11,700 10,800

Ex. 7-16

The merchandise inventory would appear in the Current Assets section, as

follows:

Inventory

Birch

Total

Item

Cypress

CHAPTER 7 Inventories

Ex. 7-17

a.

Merchandise inventory*………………………………………

…

$5,200 understated

Current assets…………………………………………………

…

$5,200 understated

Total assets……………………………………………………

…

$5,200 understated

Owner’s equity…………………………………………………

…

$5,200 understated

*$5,200 = $238,600 – $233,400

c.

Cost of merchandise sold……………………………………

…

$5,200 understated

Gross profit……………………………………………………

…

$5,200 overstated

Net income………………………………………………………

…

$5,200 overstated

Ex. 7-18

a.

Merchandise inventory*………………………………………

…

$8,650 overstated

Current assets…………………………………………………

…

$8,650 overstated

Total assets……………………………………………………

…

$8,650 overstated

Owner’s equity…………………………………………………

…

$8,650 overstated

*$8,650 = $337,500 – $328,850

b.

…

c.

Cost of merchandise sold……………………………………

…

$8,650 overstated

Gross profit……………………………………………………

…

$8,650 understated

Net income………………………………………………………

…

$8,650 understated

Balance Sheet

Income Statement

Balance Sheet

Income Statement

…

CHAPTER 7 Inventories

Ex. 7-19

When an error is discovered affecting the prior period, it should be corrected. In

this case, the merchandise inventory account should be debited and the owner’s

capital account credited for $42,750.

Failure to correct the error for 20Y4 and purposely misstating the inventory and

the cost of merchandise sold in 20Y5 would cause the income statements for the

two years not to be comparable. The balance sheet at the end of 20Y5 would be

correct, however, because the 20Y4 inventory error reverses itself in 20Y5.

Ex. 7-20

cannot risk building large inventories.

CHAPTER 7 Inventories

Ex. 7-21

$7,952.0

$260.0

$247.0

$9.5

$360.5

$8.5

Alternatively, the day’s sales in inventory could be computed by dividing 365

days by the inventory turnover as follows:

Kroger: 30.6 days (365 ÷ 11.93)

Sprouts: 26.1 days* (365 ÷ 14.01)

Ingles: 42.2 days* (365 ÷ 8.64)

* Difference is due to rounding.

d. If Ingles matched Kroger’s days’ sales in inventory, then its hypothetical ending

inventory would be determined as follows:

X= 30.6 × ($3,113 ÷ 365) = 30.6 × $8.5

X=

30.6 days X

($3,113 ÷ 365)

=

Days’ Sales in Inventory Average Inventory

Cost of Merchandise Sold ÷ 365

=

a.

b.

Inventory Turnover Cost of Merchandise Sold

Average Inventory

=

42.4 days=

$3,460 ÷ 365

==

= 30.6 days=

26.0 days

$260.1

Days’ Sales in Inventory Cost of Merchandise Sold ÷ 365

Average Inventory

$3,113 ÷ 365

($372 + $349) ÷ 2

Ingles: =

Sprouts:

Kroger: ($8,123 + $7,781) ÷ 2

$94,894 ÷ 365

($264 + $230) ÷ 2