EXERCISES. Ex Ex. 6 2

Transcription

1 EXERCISES Ex. 6 1 Switching to a perpetual inventory system will strengthen A4A Hardware s internal controls over inventory, since the store managers will be able to keep track of how much of each item is on hand. This should minimize shortages of goodselling items and excess inventories of poor-selling items. On the other hand, switching to a perpetual inventory system will not eliminate the need to take a physical inventory count. A physical inventory must be taken to verify the accuracy of the inventory records in a perpetual inventory system. In addition, a physical inventory count is needed to detect shortages of inventory due to damage or theft. Ex. 6 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. c. Inappropriate. Good controls include a receiving report, prepared after all inventory items received have been counted and inspected. Inventory purchased should only be recorded and paid for after reconciling the receiving report, the initial purchase order, and the vendor s invoice. 391

2 Ex. 6 3 a. Date Quantity Portable Video Players Purchases of Merchandise Sold Inventory Quantity Quantity June , , , , , , , , ,470 3, Balances 5,310 5,070 b. Since the prices rose from $40 for the June 1 inventory to $45 for the purchase on June 30, we would expect that under last-in, first-out the inventory would be lower. Note to Instructors: Exercise 6 4 shows that the inventory is $5,040 under LIFO. 392

3 Ex. 6 4 Date Quantity Portable Video Players Purchases of Merchandise Sold Inventory Quantity Quantity June , , , , , , , , Balances 5,340 5,

4 Ex. 6 5 a. Prepaid Cell Phones Purchases of Merchandise Sold Inventory Quantity Date Quantity July , , , , , Quantity 25,000 9, , , , ,500 23, , ,500 10, Balances 60,500 23,900 b. Since the prices rose from $45 for the July 1 inventory to $52 for the purchase on July 20, we would expect that under first-in, first-out the inventory would be higher. Note to Instructors: Exercise 6 6 shows that the inventory is $25,900 under FIFO. 394

5 Ex. 6 6 Prepaid Cell Phones Purchases of Merchandise Sold Inventory Quantity Date Quantity July , , , , , , , Quantity , ,500 10, , ,000 23, , ,500 23, Balances 58,500 25,

6 Ex. 6 7 a. $15,540 ($ units) b. $15,100 [($80 60 units) + ($ units) + ($84 25 units)] = $4,800 + $8,200 + $2,100 Ex. 6 8 a. $7,812 (12 units at $495 plus 4 units at $468) = $5,940 + $1,872 b. $6,138 (9 units at $360 plus 7 units at $414) = $3,240 + $2,898 c. $7,056 (16 units at $441; $26,460/60 units = $441) of merchandise available for sale: 9 units at $ $ 3, units at $ , units at $ , units at $ , units (at average cost of $441)... $26,

7 Ex. 6 9 Merchandise Merchandise Inventory Method Inventory Sold a. FIFO... $4,986 $ 9,639 b. LIFO... 4,365 10,260 c. Average cost... 4,680 9,945 of merchandise available for sale: 21 units at $ $ 3, units at $ , units at $ , units at $ units (at average cost of $195)... 3,150 $14,625 a. First-in, first-out: Merchandise inventory: 15 units at $ $3,150 9 units at $ , units... $4,986 Merchandise sold: $14,625 $4, $9,639 b. Last-in, first-out: Merchandise inventory: 21 units at $ $3,780 3 units at $ units... $4,365 Merchandise sold: $14,625 $4, $10,260 c. Average cost: Merchandise inventory: 24 units at $195 ($14,625/75 units)... $4,680 Merchandise sold: $14,625 $4, $9,

8 Ex a. 1. FIFO inventory > (greater than) LIFO inventory 2. FIFO cost of goods sold < (less than) LIFO cost of goods sold 3. FIFO net income > (greater than) LIFO net income 4. FIFO income tax > (greater than) LIFO income tax b. In periods of rising prices, the income shown on the company s tax return would be lower than if 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 A B C D E F G 1 2 Inventory Market Lower 3 Commodity Quantity Price Price Market of C or M 4 AL65 40 $28 $30 $ 1,120 $ 1,200 $ 1,120 5 CA ,500 3,250 3,250 6 LA SC , UT ,500 4,650 4,500 9 $10,980 $10,550 $10,320 Ex The merchandise inventory would appear in the Current Assets section, as follows: Merchandise inventory at lower of cost (FIFO) or market... $10,320 Alternatively, the details of the method of determining cost and the method of valuation could be presented in a note. 398

9 Ex a. Balance Sheet Merchandise inventory... $11,350* understated Current assets... $11,350 understated assets... $11,350 understated Stockholders equity (retained earnings)... $11,350 understated *$11,350 = $451,000 $439,650 b. Income Statement of merchandise sold... $11,350 overstated Gross profit... $11,350 understated Net income... $11,350 understated c. Income Statement of merchandise sold... $11,350 understated Gross profit... $11,350 overstated Net income... $11,350 overstated d. The December 31, 2013, balance sheet would be correct, since the 2012 inventory error reverses itself in Ex a. b. c. Merchandise inventory... Current assets... assets... Stockholders equity (retained earnings)... *$12,000 = $350,000 $338,000 of merchandise sold... Gross profit... Net income... of merchandise sold... Gross profit... Net income... Balance Sheet $12,000* overstated $12,000 overstated $12,000 overstated $12,000 overstated Income Statement $12,000 understated $12,000 overstated $12,000 overstated Income Statement $12,000 overstated $12,000 understated $12,000 understated d. The December 31, 2013, balance sheet would be correct, since the 2012 inventory error reverses itself in

10 Ex 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 retained earnings account credited for $18,000. Failure to correct the error for 2011 and purposely misstating the inventory and the cost of merchandise sold in 2012 would cause the income statements for the two years to not be comparable. The balance sheet at the end of 2012 would be correct, however, since the 2011 inventory error reverses itself in Ex a. Apple: 48.5 {$23,397,000,000/[($455,000,000 + $509,000,000)/2]} American Greetings: 3.9 {$809,956,000/[($203,873,000 + $216,671,000)/2]} b. Lower. Although American Greetings business is seasonal in nature, with most of its revenue generated during the major holidays, much of its nonholiday inventory may turn over very slowly. Apple, on the other hand, turns its inventory over very fast because it maintains a low inventory, which allows it to respond quickly to customer needs. Additionally, Apple s computer products can quickly become obsolete, so it cannot risk building large inventories. 400

11 Ex a. Number of Days Sales in Inventory = Kroger, Safeway, $4,859 $4,855 $58,564/365 Winn-Dixie, $2,591 $2,798 $31,589/365 / 2 / 2 $665 $649 / 2 $5,269/365 $4, Average Inventory of Goods Sold/365 $2, $ days 46 days 31 days Inventory Turnover = of Goods Sold Average Inventory Kroger, $58,564 ($4,859 $4,855)/ Safeway, $31,589 ($2,591 $2,798)/ Winn-Dixie, $5,269 ($665 $649)/2 8.0 b. The number of days sales in inventory and inventory turnover ratios are relatively the same for Kroger and Safeway. Winn-Dixie has significantly higher number of days sales in inventory and significantly lower inventory turnover than Kroger and Safeway. These results suggest that Kroger and Safeway are more efficient than Winn-Dixie in managing inventory. 401

12 Ex (Concluded) c. If Winn-Dixie matched Kroger s days sales in inventory, then its hypothetical ending inventory would be determined as follows, Number of Days Sales in Inventory = Average Inventory of Goods Sold/365 X 30 days = $5,269/365 X = 30 ($5,269/365) = 30 $14.4 per day X = $432 Thus, the additional cash flow that would have been generated is the difference between the actual average inventory and the hypothetical average inventory, as follows: Actual average inventory... Hypothetical average inventory... Positive cash flow potential... $657 million 432 $225 million That is, a lower average inventory amount would have required less cash than actually was required. Appendix Ex $507,000 ($780,000 65%) Appendix Ex $380,000 ($475,000 80%) Appendix Ex $648,000 ($900,000 72%) 402