T16-1 REVIEW EXERCISES CHAPTER 16 SECTION I

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1 T16-1 REVIEW EXERCISES CHAPTER 16 SECTION I 1. Calculate the total number of units available for sale and the cost of goods available for sale from the following inventory of oil filters for Action Auto Parts: Action Auto Parts Oil Filter Inventory Units Cost per Total Date Purchased Unit Cost Beginning Inventory, Jan $1.45 Purchase, March Purchase, May Purchase, August Purchase, October Total units available: 1,110 Cost of goods available for sale: 2. When the merchandise manager of Action Auto Parts took physical inventory of the oil filters on December 31, it was found that 550 remained in inventory. a. What is the dollar value of the oil filter inventory by using FIFO? 550 remaining using FIFO Units Cost>Unit Total $ FIFO b. What is the dollar value of the oil filter inventory by using LIFO? 550 remaining using LIFO Units Cost>Unit Total $ LIFO c. What is the dollar value of the filters by using the average cost method? Average cost 5 $1, ,110 5 $1.62 Each Total value $ $1,798.30

2 T16-2 REVIEW EXERCISES CHAPTER 16 SECTION I 3. The following data represents the inventory for home burglar alarm systems at Omega Security Corporation: Omega Security Corp. Burglar Alarm Systems Inventory Date Units Cost per Unit Total Cost Beginning Inventory, January $ Purchase, March $ Purchase, May $ Purchase, October 9 78 $ Alarm systems available for sale 600 Cost of goods available for sale $32, , , , $86, a. How many alarm systems did Omega Security have available for sale? 600 b. What is the total cost of the alarm systems available for sale? $86,230 c. If physical inventory on December 31 showed 167 alarm systems on hand, what is their value using FIFO? Units Cost/Unit Total , ,065, $24, d. What is the value of the 167 alarm systems using LIFO? Units Cost/Unit Total $23,380 e. What is the value of the alarm systems using the average cost method? Average cost 5 86, $ each Total value $ $24,001.24

3 T16-3 REVIEW EXERCISES CHAPTER 16 SECTION I 4. The following data represent the inventory figures for 55-gallon fish tanks at Something s Fishy: Something s Fishy 55-Gallon Fish Tanks Inventory Amount January 1 Beginning Inventory 42 $38.00 March 12 Purchase 80 $36.50 July 19 Purchase 125 $39.70 September 2 Purchase 75 $41.75 Fish tanks available for sale: 322 Cost of tanks available for sale: 1, , , , $12, a. How many fish tanks did Something s Fishy have available for sale? 322 b. What is the total cost of the tanks available for sale? $12,609.75

4 T16-4 REVIEW EXERCISES CHAPTER 16 SECTION I c. If physical inventory on December 31 was 88 tanks on hand, what is the value of those tanks by using FIFO? 88 tanks using FIFO , Value of tanks $3, d. What is the value of the 88 tanks by using LIFO? 88 tanks using LIFO , , Value of tanks $3, e. What is the value of the 88 tanks by using the average cost method? Average cost 5 $12, $39.16 Each Total value $3,446.08

5 T16-5 REVIEW EXERCISES CHAPTER 16 SECTION I 5. Determine the amount of the following inventory for Tru-Value Hardware by using the lower-of-cost-or-market rule: Tru-Value Hardware Power Tool Inventory Unit Price Valuation Description Quantity Cost Market Basis Amount 3 8 " Drill 15 $25.60 $22.40 Market 1 2 " Drill Market 7" Circle Saw Cost 3 8 " Router Market 5" Rotary Sander Market 9" Belt Sander Cost Total value of inventory: $ $2, Use the lower-of-cost-or-market rule to determine the value of the following inventory for the Sunset Emporium: Sunset Emporium Unit Price Valuation Description Quantity Cost Market Basis Amount Dish Sets 220 $36 $33 Market $ 7, Table Cloths Cost 2, Barbeque Tools Market 14, Outdoor Lamps Market 13, Ceramic Statues Market 5, Total Value of Inventory: $43,030.00

6 T16-6 BUSINESS DECISION CHAPTER 16 SECTION I IN OR OUT? 7. You are the accounting manager for Marcel Industries. One of your junior accountants is working on the December 31, year-end inventory figures, and has asked for help in determining which units represent actual inventory. From the following inventory scenarios, choose which should be included in the year-end inventory and which should not. Hint: Refer to Exhibit 7-3, Freight Terminology, page 206. a. Marcel shipped 4,650 units FOB shipping point on December 31. They were picked up by the freight company at 11:30 p.m. b. On December 27, Franklin Supply Company returned 1,200 units to Marcel that were the wrong merchandise. The replacement order is scheduled to be shipped on January 6. c. Marcel has moved 4,500 units from the warehouse to the packing department for shipment on January 3, to Castlewood, Inc. d. Merchandise that Marcel shipped to Brantley Distributors FOB shipping point was picked up by the freight company on December 26, but was not delivered at its destination until January 5. e. On December 19, Marcel received 25 units from Dorsey Discount for warranty repair. These are scheduled to be returned to Dorsey on January 5. f. Marcel shipped 3,400 units FOB destination on December 29, which arrived on January 3. Included in inventory: b, c, f Not included in inventory: a, d, e

7 T16-7 REVIEW EXERCISES CHAPTER 16 SECTION II 1. Using the retail method, estimate the value of the ending inventory at cost on September 30 from the following information for Contemporary Furniture Designs, Inc. Round the cost ratio to the nearest tenth percent. Contemporary Furniture Designs, Inc. September 1 September 30 Cost Retail Beginning Inventory, Sept. 1 $150,000 $450,000 Purchases (September) 90, ,000 Net Sales (September) $395, ,000 Cost ratio 5 240, , % Cost Retail Beginning inventory, Sept. 1 Purchases (September) Goods available for sale 150,000 90,000 $240, , ,000 $720,000 Goods available for sale at retail Net sales Ending inventory at retail 720, , $325, Ending inventory at cost 5 325, % 5 $108,225.00

8 T16-8 REVIEW EXERCISES CHAPTER 16 SECTION II 2. Winston Industries had net sales of $205,400 in the month of November. Use the retail method to estimate the value of the inventory as of November 30 from the following financial information: Winston Industries Financial Highlights November 1 November 30 Cost Retail Beginning Inventory $137,211 $328,500 Net Purchases (November) 138, ,500 Goods available for sale $276,060 $642,000 Cost ratio 5 276, , % Goods available for sale at retail Net sales Ending inventory at retail 642, ,400 $436,600 Ending inventory at cost 5 436, % 5 $187,738

9 T16-9 REVIEW EXERCISES CHAPTER 16 SECTION II 3. Precision Fitness Equipment, Inc., maintains a gross margin of 55% on all its weight training products. In April, Precision had a beginning inventory of $146,000, net purchases of $208,000, and net sales of $437,000. Use the gross profit method to estimate the cost of ending inventory. Beginning inventory 146, Net purchases 1 208, Goods available for sale $354, Estimated cost of goods sold 437,000.00(100% 2 55%) 437, $196, Goods available for sale Cost of goods sold Estimated ending inventory 354, , $157, Granby Engineering Supplies maintains a gross margin of 58% on all of its merchandise. In June the company had a beginning inventory of $622,500, net purchases of $92,400, and net sales of $127,700. Use the gross profit method to estimate the cost of ending inventory as of June 30. Beginning inventory 622,500 Net purchases 1 92,400 Goods available for sale 714,900 Estimated cost of goods sold 127,700(100% 2 58%) 127, ,634 Goods available for sale Cost of goods sold Estimated ending inventory 714, ,634 $661,266

10 T16-10 REVIEW EXERCISES CHAPTER 16 SECTION II 5. The following data represent the inventory figures for Marathon Welding Supply, Inc. Using the retail method, estimate the value of the ending inventory at cost on January 31. Round the cost ratio to the nearest tenth percent. Marathon Welding Supply, Inc. January 1 January 31 Cost Retail Beginning Inventory, Jan. 1 $50,000 $120,000 Purchases (January) 90, ,000 Net Sales (January) $188, , Cost ratio 5 140, , % Cost Retail Beginning inventory, Jan. 1 Purchases (January) Goods available for sale Cost Retail 50, , $140, , , $336, , Goods available for sale at retail Net sales Ending inventory at retail 336, , $148, Ending inventory at cost 5 148, $61,716.00

11 T16-11 REVIEW EXERCISES CHAPTER 16 SECTION II 6. You are the warehouse manager for the Carpet Boutique, Inc. On a Sunday in May, you receive a phone call from the owner. He states that the entire building and contents were destroyed by fire. For the police report and the insurance claim, the owner has asked you to estimate the value of the lost inventory. Your records, which luckily were backed up on the hard drive of your home computer, indicate that at the time of the fire the net sales to date were $615,400 and the purchases were $232,600. The beginning inventory, on January 1, was $312,000. For the past 3 years, the company has operated at a gross margin of 60%. Use the gross profit method to calculate your answer. Beginning inventory Net purchases Total goods available 312, , $544, Est. cost of goods sold 615,400.00(100% 2 60%) 615, $246, Total goods available Est. cost of goods sold Est. ending inventory 544, , $298,440.00

12 T16-12 BUSINESS DECISION CHAPTER 16 SECTION II OVER OR UNDER? 7. You own Champion Marine, a retailer of boats, motors, and marine accessories. The store manager has just informed you that the amount of the physical inventory was incorrectly reported as $540,000 instead of the correct amount of $450,000. Unfortunately, yesterday you sent the quarterly financial statements to the stockholders. Now you must send revised statements and a letter of explanation. a. What effect did the error have on the items of the balance sheet for Champion? Express your answer as overstated or understated for the items affected by the error. Merchandise inventory was overstated by $90,000 ($540,000 2 $450,000). Therefore, Current assets, Total assets, and Total stockholders equity were also overstated by $90,000. b. What effect will the error have on the items of the income statement for Champion? Cost of goods sold was understated by $90,000. Therefore, Gross profit and Net income were overstated by $90,000. c. Did this error make the Champion quarterly results look better or worse than they actually are? The inventory overstatement made the company s quarterly results look better than they actually were.

13 T16-13 REVIEW EXERCISES CHAPTER 16 SECTION III Assuming that all net sales figures are at retail and all cost of goods sold figures are at cost, calculate the average inventory and inventory turnover for the following. If the actual turnover is less than the published rate, calculate the target average inventory necessary to come up to industry standards: Net Cost of Beginning Ending Average Inventory Published Target Sales Goods Sold Inventory Inventory Inventory Turnover Rate Average Inventory 1. $ 500,000 $ 50,000 $ 70,000 $60, $335,000 48,000 56,000 $52, ,200, , ,000 $486, $50, Above $342, ,570, , ,300 $752, $557,317.07

14 T16-14 REVIEW EXERCISES CHAPTER 16 SECTION III 5. Quality Brakes and Parts, Inc., had net sales of $145,900 for the year. The beginning inventory at retail was $24,000, and the ending inventory at retail was $32,900. a. What is the average inventory at retail? Average inventory 5 24, , $28, b. What is the inventory turnover rounded to the nearest tenth? Inventory turnover 5 145,900 28, Times 6. The Luna Nuevo Bath Boutique had net sales of $245,300 for the year. The beginning inventory at retail was $62,600 and the ending inventory at retail was $54,200. a. What is the average inventory at retail? Average inventory 5 62, , $58,400 b. What is the inventory turnover, rounded to the nearest tenth? Inventory turnover 5 245,300 58, Times

15 T16-15 REVIEW EXERCISES CHAPTER 16 SECTION III 7. The Gourmet s Delight, a cooking equipment wholesaler, had cost of goods sold of $458,900 for the year. The beginning inventory at cost was $83,600, and the ending inventory at cost was $71,700. a. What is the average inventory at cost? 83, ,700 Average inventory 5 5 $77, b. What is the inventory turnover, rounded to the nearest tenth? Inventory turnover 5 458,900 77, Times 8. Duster Industries had cost of goods sold of $359,700 for the year. The beginning inventory at cost was $73,180 and the ending inventory at cost was $79,500. a. What is the average inventory at cost? 73, ,500 Average inventory 5 5 $76,340 2 b. What is the inventory turnover rounded to the nearest tenth? Inventory turnover 5 359,700 5 times 4.7 times 76, Swanson Supply is a plumbing parts wholesaler. Last year, their average inventory at cost was $154,800, and their cost of goods sold was $738,700. The inventory turnover rate published for a business of this size is 5.5 times. a. Calculate the actual inventory turnover rate at cost for Swanson (round to the nearest tenth). Inventory turnover 5 738, , Times b. If the turnover rate is below the industry average of 5.5 times, calculate the target average inventory needed to match the industry standard. Target inventory 5 738,700 5 $134,

16 T16-16 REVIEW EXERCISES CHAPTER 16 SECTION III 10. Modern Molding Corporation had cost of goods sold for the year of $1,250,000. The beginning inventory at cost was $135,000, and the ending inventory at cost amounted to $190,900. The inventory turnover rate published as the industry standard for a business of this size is 9.5 times. a. Calculate the average inventory and actual inventory turnover rate for the company. Average inventory 5 b. If the turnover rate is less than 9.5 times, calculate the target average inventory needed to theoretically come up to industry standards. Target inventory 5 1,250, Trophy Masters had net sales for the year of $145,000. The beginning inventory at retail was $36,000, and the ending inventory at retail amounted to $40,300. The inventory turnover rate published as the industry standard for a business of this size is 4.9 times. a. Calculate the average inventory and actual inventory turnover rate for the company. Average inventory 5 Inventory turnover 5 145,000 38,150 b. If the turnover rate is less than 4.9 times, calculate the target average inventory needed to theoretically come up to industry standards. Target inventory 5 145, , ,900 2 Inventory turnover 5 1,250, ,950 5 $131, , , Times Times 5 $29, $162, $38,150.00

17 T16-17 BUSINESS DECISION CHAPTER 16 SECTION III KEEP YOUR EYE ON THE FEET 12. Another way to look at the concept of inventory turnover is by measuring sales per square foot. Taking the average inventory at retail and dividing it by the number of square feet devoted to a particular product will give you average sales per square foot. When you multiply this figure by the inventory turnover rate you get the annual sales per square foot. It is important to know the amount of sales per square foot your merchandise is producing, both on the average and annually. These figures should be tracked monthly, and compared with industry standards for businesses of similar size and type.