Homework Problems (4 Total) - Accounting And Finance Problems

Chapter 6

Problems: Set B

P6-1B Sun Company is trying to determine the value of its ending inventory as of March 31, 2014, the company’s year-end. The following transactions occurred, and the accountant asked your help in determining whether they should be recorded or not.

(a) On March 30, Sun shipped to a customer goods costing $1,000. The goods were shipped FOB destination, and the receiving report indicates that the customer received the goods on April 1.

(b) On March 28, Wholesale Inc. shipped goods to Sun FOB shipping point. The invoice price was $600 plus $20 for freight. The receiving report indicates that the goods were received by Sun on April 2.

(c) Sun had $750 of consigned goods from Frederick Inc.

(d) Sun had $380 of inventory at Stephen’s Variety, on consignment from Sun.

(e) On March 29, Sun ordered goods costing $640. The goods were shipped FOB destination on March 31. Sun received the goods on April 3.

(f) A customer returned goods to Sun on March 31. Upon inspection, the goods were found to be undamaged and were accepted as returned goods. These goods originally cost $400 and Sun sold them for $640.

Instructions

For each of the above transactions, specify whether the item in question should be included in ending inventory, and if so, at what amount. For each item that is not included in ending inventory, indicate who owns it and what account, if any, it should have been recorded in.

P6-2B Lifetime Distribution markets classic children’s books. At the beginning of June, Lifetime had in beginning inventory 1,200 books with a unit cost of $3. During June, Lifetime made the following purchases of books.

June 3 4,000 @ $3 June 29 4,000 @ $6

June 18 7,500 @ $5

During June, 10,500 books were sold. Lifetime uses a periodic inventory system.

Instructions

(a) Determine the cost of goods available for sale.

(b) Determine (1) the ending inventory and (2) the cost of goods sold under each of the assumed cost flow methods (FIFO, LIFO, and average-cost). Prove the accuracy of the cost of goods sold under the FIFO and LIFO methods. (Note: For average-cost, round cost per unit to three decimal places.)

(c) Which cost flow method results in (1) the highest inventory amount for the balance sheet and (2) the highest cost of goods sold for the income statement?

P6-3B Smythe Company Inc. had a beginning inventory of 200 units of Product ERV at a cost of $6 per unit. During the year, purchases were:

Jan. 24 800 units at $7 Aug. 19 600 units at $ 9

Apr. 12 400 units at $8 Nov. 30 350 units at $10

Smythe Company uses a periodic inventory system. Sales totalled 1,900 units.

Instructions

(a) Determine the cost of goods available for sale.

(b) Determine the ending inventory and the cost of goods sold under each of the assumed cost flow methods (FIFO, LIFO, and average-cost). Prove the accuracy of the cost of goods sold under the FIFO and LIFO methods. (Round average unit cost to three decimal places.)

(c) Which cost flow method results in the lowest inventory amount for the balance sheet? The lowest cost of goods sold for the income statement?

P6-4B The management of Weigel Inc. asks your help in determining the comparative effects of the FIFO and LIFO inventory cost flow methods. For 2014 the accounting records show these data.

Inventory, January 1 (4,000 units) $ 16,000

Cost of 105,000 units purchased 470,500

Selling price of 100,000 units sold 900,000

Operating expenses 185,000

Units purchased consisted of 35,000 units at $4.21 on March 20; 65,000 units at $4.60 on July 24; and 5,000 units at $4.83 on December 12. Income taxes are 30%.

Instructions

(a) Prepare comparative condensed income statements for 2014 under FIFO and LIFO. (Show computations of ending inventory.)

(b) Answer the following questions for management in the form of a business letter.

(1) Which inventory cost flow method produces the most meaningful inventory amount for the balance sheet? Why?

(2) Which inventory cost flow method produces the most meaningful net income? Why?

(3) Which inventory cost flow method is most likely to approximate the actual physical flow of the goods? Why?

(4) How much more cash will be available under LIFO than under FIFO? Why?

(5) How much of the gross profit under FIFO is illusionary in comparison with the gross profit under LIFO?

P6-5B You have the following information for Crystal Inc. for the month ended May 31, 2014. Crystal uses a periodic method for inventory.

Unit Cost or

  Date         Description       Quantity Selling Price

May 1 Beginning inventory 40 $20

May 6 Purchase 110 23

May 7 Sale 90 32

May 15 Purchase 70 25

May 18 Sale 40 37

May 24 Purchase 60 26

May 30 Sale 80 38

Instructions

(a) Calculate (i) ending inventory, (ii) cost of goods sold, (iii) gross profit, and (iv) gross profit rate under each of the following methods.

(1) LIFO.

(2) FIFO.

(3) Average-cost. (Round cost per unit to three decimal places.)

(b) Compare results for the three cost flow assumptions.

P6-6B You have the following information for Limex Watches. Limex uses the periodic method of accounting for its inventory transactions. Limex carries only one brand of hand-crafted jeweled watches—all are identical. Each batch of watches purchased is carefully coded and marked with its purchase cost.

July 1 Beginning inventory 220 watches at a cost of $420 per watch.

July 2 Purchased 200 watches at a cost of $450 each.

July 5 Sold 180 watches for $700 each.

July 14 Purchased 350 watches at a cost of $480 each.

July 28 Sold 480 watches for $720 each.

Instructions

(a) Assume that Limex uses the specific identification cost flow method.

(1) Demonstrate how Limex could maximize its gross profit for the month by specifically selecting which watches to sell on July 5 and July 28.

(2) Demonstrate how Limex could minimize its gross profit for the month by selecting which watches to sell on July 5 and July 28.

(b) Assume that Limex uses the FIFO cost flow assumption. Calculate cost of goods sold. How much gross profit would Limex report under this cost flow assumption?

(c) Assume that Limex uses the LIFO cost flow assumption. Calculate cost of goods sold. How much gross profit would the company report under this cost flow assumption?

(d) Which cost flow method should Limex Watches select? Explain.

P6-7B Suppose this information is available for the Automotive Sector of NoGo Motor Company for 2014. NoGo uses the LIFO inventory method.

(in millions)

Beginning inventory $ 10,017

Ending inventory 10,121

LIFO reserve 1,100

Current assets 54,243

Current liabilities 50,218

Cost of goods sold 130,460

Sales 154,379

Instructions

(a) Calculate the inventory turnover and days in inventory.

(b) Calculate the current ratio based on inventory as reported using LIFO.

(c) Calculate the current ratio after adjusting for the LIFO reserve.

(d) Comment on any difference between parts (b) and (c).

*P6-8B Morse Inc. is a retail company that uses the perpetual inventory method. Assume that there are no credit transactions; all amounts are settled in cash. You have the following information for Morse Inc. for the month of January 2014.

Unit Cost or

     Date            Description       Quantity Selling Price

Dec. 31 Ending inventory 140 $14

Jan. 2 Purchase 120 15

Jan. 6 Sale 150 30

Jan. 9 Purchase 85 17

Jan. 10 Sale 70 35

Jan. 23 Purchase 100 20

Jan. 30 Sale 110 42

Instructions

(a) For each of the following cost flow assumptions, calculate (i) cost of goods sold, (ii) ending inventory, and (iii) gross profit.

(1) LIFO.

(2) FIFO.

(3) Moving-average. (Round cost per unit to three decimal places.)

(b) Compare results for the three cost flow assumptions.

*P6-9B Shiraz Rugs began operations on February 1. It uses a perpetual inventory system. During February, the company had the following purchases and sales.

        Purchases        

    Date       Units     Unit Cost     Sales Units  

Feb. 1 12 $150

Feb. 6 9

Feb. 11 8 $168

Feb. 14 5

Feb. 21 6 $182

Feb. 27 4

Instructions

(a) Determine the ending inventory under a perpetual inventory system using (1) FIFO, (2) moving-average (round unit cost to three decimal places), and (3) LIFO.

(b) Which costing method produces the highest ending inventory valuation?

Determine items and amounts to be recorded in inventory.

(LO 1), AN

Determine cost of goods sold and ending inventory using FIFO, LIFO, and average-cost with analysis.

(LO 2), AP

(a) Cost of goods sold:

FIFO $42,100

LIFO $56,500

Average $48,475

Determine cost of goods sold and ending inventory using FIFO, LIFO, and average-cost in a periodic inventory system and assess financial statement effects.

(LO 2), AP

(b) Cost of goods sold:

FIFO $14,500

LIFO $15,950

Average $15,281

Compute ending inventory, prepare income statements, and answer questions using FIFO and LIFO.

(LO 2), AN

(a) Gross profit:

FIFO $456,050

LIFO $450,550

Calculate ending inventory, cost of goods sold, gross profit, and gross profit rate under periodic method; compare results.

(LO 2), AP

(a) Gross profit:

LIFO $2,250

FIFO $2,570

Average $2,420

Compare specific identification, FIFO, and LIFO under periodic method; use cost flow assumption to influence earnings.

(LO 2), AP

(a) Gross profit:

Maximum $174,000

Minimum $167,400

Compute inventory turnover and days in inventory; compute current ratio based on LIFO and after adjusting for LIFO reserve.

(LO 3), AP

Calculate cost of goods sold, ending inventory, and gross profit under LIFO, FIFO, and moving-average under the perpetual system; compare results.

(LO 4), AP

(a) Gross profit:

LIFO $5,990

FIFO $6,620

Average $6,382

Determine ending inventory under a perpetual inventory system.

(LO 4), AP

(a) FIFO $1,428

Average $1,381

LIFO $1,318