Chapter 08 Solution of fundamental of financial accouting by EDMONDS (4th edition)
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Transcript of Chapter 08 Solution of fundamental of financial accouting by EDMONDS (4th edition)
ANSWERS TO QUESTIONS - CHAPTER 8
1. 1. First In, First Out - The inventory cost flow method that assumes that the first items purchased are the first items sold for the purpose of computing cost of goods sold and inventory.
2. Last In, First Out - The inventory cost flow method that assumes that the first items purchased are the last items sold for the purpose of computing cost of goods sold and inventory.
3. Weighted Average - The inventory cost flow method that allocates cost between cost of goods sold and inventory based on an average cost per unit.
4. Specific Identification - The inventory cost flow method that assigns cost to cost of goods sold based on the specific cost of each unit sold.
2. One advantage of the specific identification method is that both the inventory account and cost of goods sold reflect the actual amounts on hand and sold. This method is usually required for high cost items such as automobiles, boats, etc. One disadvantage of this method is that recordkeeping can become burdensome for high-volume, lower-priced items.
3. FIFO allocates the cost of the first units purchased to the first units sold; consequently, in a period of rising prices, this would produce a larger net income. This may be an advantage for the purpose of financial reporting if reporting a higher profit is desired. However, this is a disadvantage for tax reporting because a higher profit means paying more tax. FIFO also tends to best match physical flow for most products.
4. LIFO allocates the cost of the last units purchased to the first units sold; consequently, in a period of rising prices, this would produce a smaller net income. This may be a disadvantage for the purpose of financial reporting if
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reporting a higher profit is desired. However, for tax reporting, a lower profit means paying less tax.
5. In an inflationary period, i.e., a period where prices are consistently rising, FIFO will produce the largest amount of income. This is true because the items purchased first (and at the lowest cost) are the items that are deemed sold first (these are the items whose cost is charged to expense). The highest cost items remain in the asset account inventory. Since the lowest cost items have been expensed, net income will be larger than it would assuming a LIFO flow.
6. In an inflationary period, FIFO will produce the largest amount of total assets. (Refer to the discussion for Question 5.) The unsold items, inventory, are the highest cost items. Consequently, assuming rising prices, FIFO flow produces a higher inventory amount than would be the case under a LIFO flow.
7. Flow of costs refers to the assumption that is made for the purpose of determining the cost of inventory items that are sold when preparing financial statements. The cost flow assumption that a business makes may have nothing to do with the actual flow of inventory into and out of the business. The physical flow of goods refers to the actual timing of when goods are sold. For example, a grocery store may use a FIFO cost flow assumption for financial statement purposes and this may reflect the physical flow of some inventory items but not others. The grocer will put the oldest detergent on the shelf for the customer to purchase (FIFO) but may display the last produce purchased (the freshest) for the customer to buy.
8. In a world where there is no income tax, the choice of cost flow method would not affect the statement of cash flows because it is simply allocating some of the cost of inventory purchased to expense and the remainder to assets. The statement of cash flows is affected when cash is received for goods sold and when cash is paid for goods purchased. However, most businesses do face income tax consequences. In that situation, the difference in tax paid
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based on each cost flow assumption would cause a difference in the cash flow statement. In a period of rising prices, LIFO would produce a smaller cash outflow for the payment of tax, because a smaller amount of income tax would be paid on a smaller amount of income.
8-3
9. Key Company (first year of operations):
Beginning inventory $ -0-
Merchandise purchased 1,000 units @ 25 25,000
Cost of Goods Sold 850 units @ 25 21,250
Ending Inventory 150 units @ 25 3,750
Cost of goods sold will be the same for all methods because all items were purchased for the same cost. Consequently, it will not make any difference whether the first unit sold is assumed to be the first or last purchased. Weighted average will also be the same.
10. The amount of cost of goods sold for Key Company will be different using different cost flow assumptions because the units purchased during the second year have a different cost than those purchased the previous year.
Beginning inventory 150 units @ 25 $ 3,750Merchandise purchased1,500 units @ 27 40,500Total 1,650 $44,250
Units sold 1,500
FIFO: 150 units @ 25 $ 3,7501,350 units @ 27 36,450
Cost of Goods Sold 1,500 $40,200
LIFO 1,500 units @ 27 $40,500Cost of Goods Sold $40,500
Weighted Average: Total Cost Total Units = Cost per unit
44,250 1,650 = $26.82 per unitCost of Goods Sold: 1,500 units @ 26.82 = $40,230
11. It may be advantageous to use FIFO for financial statement purposes because it produces the smallest cost of goods sold and consequently, the largest gross margin
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and net income. It also produces the largest amount of assets. However, a larger net income produces a higher income tax expense, so LIFO would be more desirable strictly from an income tax perspective in that the cost of goods sold would be larger, and consequently the net income and income tax paid will be smaller. Since each cost flow method is desirable for a specific group of users, the cost flow assumptions chosen must be the best for the business overall. A part of that consideration is the ease of applying each method.
12. In an inflationary period, for a business subject to income tax, LIFO would produce the larger amount of cash flow because the smaller net income (larger cost of goods sold) would result in a smaller amount of income tax being paid.
13. A deflationary period, i.e., a period of falling prices, would produce results opposite of those for an inflationary period. FIFO would produce the smallest amount of net income, because the goods purchased first would cost more than the goods purchased last. This would cause a larger amount of cost to be expensed resulting in a lower net income. LIFO would produce the largest net income.
14. When using a perpetual inventory system, each item purchased is added to inventory and each item sold is taken out of inventory. When using the periodic inventory system, all items purchased are charged to a purchases account. At the end of the period, a physical count is made to determine the amount of goods in inventory.
15. "Lower of cost or market" is an accounting convention that helps to reduce overstating inventory (assets) when the market value of certain items has fallen below the original cost. It is a conservative accounting measure that helps to prevent any material misstatement of the asset inventory.
16. For merchandise that has declined in value, the "lower of cost or market" rule will cause a reduction in the asset account inventory and result in an overall reduction of
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total assets. This causes more cost to be shifted to cost of goods sold, thus causing net income to be lower.
17. In certain situations it is not possible or practical to take a complete inventory. One such situation is when the inventory or part of it has been destroyed by some disaster or similar event. Another situation where it is not practical to take inventory is when monthly or quarterly financial statements are prepared when the periodic inventory method is used. It is not cost effective to physically count inventory of any size on a regular basis. In a third situation, when the periodic method is used, inventory may be estimated on a monthly or weekly basis to provide information for insurance coverage.
18. It is generally easier to manipulate net income when a periodic inventory system is used. There is no accounting for inventory at the time it is sold. There is very little control over the inventory (as far as the accounting records are concerned) except at the end of the year. The only measurement available is the amount of inventory still on hand. There is no control over the amount that was sold, damaged, or stolen. In addition, if the inventory is counted wrong or priced wrong, the amount of cost of goods sold will also be determined incorrectly. For a business owner wishing to manipulate profit, it is easy to either overstate or understate the amount of ending inventory.
19. Goods Available for Sale $123,000Sales $130,000Less: Estimated GrossMargin ($130,000 x .25) (32,500) Cost of Goods Sold (97,500) Estimated Ending Inventory $
25,500
20. When using the periodic method, an overstated ending inventory at the end of 2001 will result in an understated cost of goods sold (expense). If cost of goods sold is understated, then net income will be overstated. Since the ending inventory used to compute cost of goods sold
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is the same inventory that is listed as an asset on the balance sheet, assets will also be overstated for 2001. In addition, the ending inventory for 2001 is the beginning inventory for 2002. If the beginning inventory is overstated, the total cost of goods available for sale for 2002 will be overstated. Assuming the ending inventory is correct for 2002, cost of goods sold will then be overstated in 2002 because goods available for sale (more specifically, beginning inventory was overstated). The overstatement of cost of goods sold for 2002 will cause gross margin and net income to be understated in 2002. There is no effect on the 2002 balance sheet, assuming the 2002 ending inventory is correct.
21. The inventory turnover tells the user how many times average inventory has been sold during the year.
22. Discount merchandisers such as Wal-Mart and K-Mart should have a high inventory turnover.Specialty stores such as exclusive jewelers and antique shops will have a low inventory turnover.
23. Operating Cycle = average number of days to sell inventory + average number of days to collect receivables.
24. Historical cost information is used in financial statements because it is reliable and objective, whereas market value is often subjective and difficult to determine.
25. FASB requires market value information to be disclosed for certain types of investment securities and inventory.
26. Market value of marketable investment securities is easy to determine because the securities are traded daily in established markets.
Some items of property, plant and equipment may be difficult to value at FMV. Such items may not have a ready market and accountants/management may not be able to agree on an appraised value.
27. The two primary types of investment securities are debt and equity securities.
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28. A debt security is acquired by loaning assets to the investee. Examples include bonds, notes, certificates of deposit, and commercial paper.
29. An equity security is acquired when an investor gives assets or services to an investee in exchange for an ownership interest in the investee. Examples are common and preferred stock.
30. The primary securities market is made up of transactions directly between the investee and investors. The secondary securities market refers to securities exchanges between investors.
31. Marketable securities are those that are regularly traded in established secondary markets.
32. The three categories of investment securities are:Held-to-maturity: the investor has the intent and ability to hold the securities until maturity.
Trading: securities that are bought and sold for the purpose of generating profits on the short-term appreciation of stock and/or bond prices.
Available-for-sale: all marketable securities not properly classified as Held-to-Maturity or Trading.
33. The equity method must be used to account for investments in equity securities when the investor exercises significant influence (i.e., 20%-50% ownership) over the investee.
8-8
SOLUTIONS TO EXERCISES - SERIES A - CHAPTER 8
EXERCISE 8-1A
a. FIFO
b. FIFO
c. FIFO
d. Weighted Average
e. LIFO
f. Weighted Average
g. LIFO
h. LIFO
8-9
EXERCISE 8-2A
Tyler Co.First Purchase $3,000Second Purchase 4,000Total $7,000
(a) (b) (c)FIFO LIFO W. AVG.
Cost of Goods Sold $3,000 $4,000 $3,500*
Ending Inventory 4,000 3,000 3,500*
*Average Cost per Unit: $3,000 + $4,000 = $7,000;$7,000 2 = $3,500
8-10
EXERCISE 8-3AThe Breckin CompanyInventory Purchases
Beginning Inventory 100
@ $40 = $ 4,000
First Purchase 150
@ 60 = 9,000
Second Purchase 200
@ 68 = 13,600
Goods Available for Sale
450
$26,600
a. Cost of Goods Sold:
FIFO UnitsCost per Unit
Cost of Goods Sold
From Beginning Inventory
100 @ $40 = $ 4,000
From First Purchase 150 @ 60 = 9,000From Second Purchase 10 @ 68 = 680Total Units Sold 260 $13,680
Ending Inventory: 190 units @ Second Purchase Cost of $68 =
$12,920
b. Cost of Goods Sold:
LIFO UnitsCost per Unit
Cost of Goods Sold
From Second Purchase 200 @ $68 = $13,600From First Purchase 60 @ 60 = 3,600Total Units Sold 260 $17,200
Ending Inventory: 190 units. 90 @ first purchase price $60 = $5,400 100 @ Beginning Inv. Cost of $40 =
$4,000c. $9,400
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Weighted Average:
Total Cost Total Units
= Cost per Unit
$26,600 450 = $59.111
Cost of Goods Sold 260 units
@ $59.111
= $15,368.89
Ending Inventory: 190 units
@ $59.111
= $11,231.11
8-12
EXERCISE 8-4A
a. (1) Porter CompanyFIFO
Sales (320 @ $30) $9,600
Cost of Goods Sold:From Beginning
Inv. 50 units @ $10
= $ 500
From Purchases 270 units @ $15
= 4,050 (4,550)
Gross Margin $5,050
a. (2)LIFO
Sales (320 @ $30) $9,600
Cost of Goods Sold:From Purchases 275 units @
$15= $4,125
From Beg. Inv. 45 units @ $10
= 450 (4,575)
Gross Margin $5,025
a. (3)Weighted Average
Sales (320 @ $30) $9,600
Cost of Goods Sold:Average Cost per
Unit320 @ $14.23*
= $4,554 (4,554)
Gross Margin $5,046
*Total cost $4,625 Total units 325 = $14.23 Cost per unit
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b. $25 ($5,050 $5,025). The difference in net income would be the same as the difference in gross margin, assuming there are no income tax considerations.
8-14
EXERCISE 8-4A (cont.)
c.FIFO LIFO W. Avg.
Cash Flows From Operating Activities:
Cash Inflow from Customers $9,600 $9,600 $9,600Cash Outflow for Inventory (4,625) (4,625) (4,625)
Net Cash Flow from Operating Act.
$4,975 $4,975 $4,975
Net cash flow from operating activities will be the same for all three methods because the amount of cash from sales and the amount of cash paid for inventory is the same regardless of the method of cost flow assumed. If the company were subject to income tax, the amount of cash paid for tax expense would be different because the amount of taxable income would be different.
8-15
EXERCISE 8-5A
McKee SalesSummary of Purchase Transactions
1/20 Purchased Units
450 @ $20 = $ 9,000
4/21 Purchased Units
200 @ 24 = 4,800
7/25 Purchased Units
100 @ 30 = 3,000
9/19 Purchased Units
75 @ 18 = 1,350
Available for Sale
825 $18,150
a. (1)
FIFO UnitsCost per Unit
Ending InventoryFrom 9/19
Purchase75 @ $18 = $1,350
From 7/25 Purchase
25 @ $30 = 750
Total Ending Inventory
100 $2,100
a. (2)LIFO Units Cost
per Unit
Ending InventoryFrom 1/20
Purchase100 @ $20 = $2,000
Total Ending Inventory
100 $2,000
8-16
a. (3)Weighted Average
Total Cost Total Units = Cost per Unit
$18,150 825 = $22
Ending Inventory 100 units @ $22= $2,200
8-17
EXERCISE 8-5A (cont.)
b.FIFO
Sales (725 units @ $50) $36,250
Cost of Goods SoldCost of Goods Avail. for
Sale*$18,150
Less: Ending Inventory (2,100)Cost of Goods Sold (16,050)
Gross Margin $20,200
LIFO
Sales (725 units @ $50) $36,250
Cost of Goods SoldCost of Goods Avail. for
Sale*$18,150
Less: Ending Inventory (2,000)Cost of Goods Sold (16,150)
Gross Margin $20,100
*This amount is computed in the Summary of Purchase Transactions at the beginning of the problem.
Difference in Gross Margin: $20,200 $20,100 = $100
Note to Instructor: Cost of goods sold can be computed on a units sold basis rather than subtracting ending inventory from goods available for sale.
8-18
EXERCISE 8-6A
a.Foley Company
Income Statements
FIFO
Sales (3,400 @ $20)
$68,000
Cost of Goods Sold:From Beginning
Inv. 500 units @ $10
= $ 5,000
From 4/1 Purchase
2,500 units @ $11
= 27,500
From 10/1 Purchase
400 units @ $14
= 5,600
Cost of Goods Sold
(38,100)
Gross Margin 29,900
Operating Expenses
(17,000)
Income Before Tax 12,900Income Tax Expense
(30%) (3,870)
Net Income $ 9,030
LIFO
Sales (3,400 @ $20)
$68,000
Cost of Goods Sold:From 10/1
Purchase 800 units @ $14
= $11,200
From 4/1 Purchase
2,500 units @ $11
= 27,500
From Beginning Inv.
100 units @ $10
= 1,000
8-19
Cost of Goods Sold
(39,700)
Gross Margin 28,300
Operating Expenses
(17,000)
Income Before Tax 11,300Income Tax Expense
(30%) (3,390)
Net Income $ 7,910
EXERCISE 8-6A (cont.)
b. Income tax savings would be the difference between the tax using FIFO and the tax using LIFO, or $3,870 $3,390 = $480.
c.Foley Company
Cash Flows from Operating Activities
FIFO LIFO
Cash Flows From Operating Activities:
Cash Inflow from Customers $68,000 $68,000Cash Outflow for Inventory* (38,700) (38,700)Cash Outflow for Operating
Expenses(17,000) (17,000)
Cash Outflow for Income Tax Expense
(3,870) (3,390)
Net Cash Flow from Operating Activities
$ 8,430 $ 8,910
*Computation of cash paid for inventory:
4/1 Purchase 2,500 units @ $11 =$27,50010/1 Purchase 800 units @ 14 = 11,200
$38,700
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d. More income tax must be paid on the higher amount of net income reported under FIFO.
8-21
EXERCISE 8-7A a.Tiny Tots Company
Effect of Events on Financial Statements
Panel 1: FIFO Cost Flow
Event
Cash + Inv. = C. Stk. + Ret. Ear.
Rev. Exp. = Net Inc.
Cash Flows
1. 125,000 + NA = NA + 125,000
125,000
NA = 125,000
125,000OA
2. (35,000) + 35,000 = NA + NA NA NA = NA (35,000)OA
3. (28,500) + 28,500 = NA + NA NA NA = NA (28,500)OA
4. NA + (44,500)1
= NA + (44,500)
NA 44,500
= (44,500)
NA
5. (32,200)2
+ NA = NA + (32,200)
NA 32,200
= (32,200)
(32,200)OA
Bal. 29,300 + 19,000 = NA + 48,300 125,000
76,700
= 48,300 29,300 NC
Panel 2: LIFO Cost Flow
Event
Cash + Inv. = C. Stk + Ret. Ear.
Rev. Exp. = Net Inc.
Cash Flows
1. 125,000 + NA = NA + 125,000
125,000
NA = 125,000
125,000OA
2. (35,000) + 35,000 = NA + NA NA NA = NA (35,000)OA
3. (28,500) + 28,500 = NA + NA NA NA = NA (28,500)OA
4. NA + (46,000)3
= NA + (46,000)
NA 46,000
= (46,000)
NA
5. (31,600)4
+ NA = NA + (31,600)
NA 31,600
= (31,600)
(31,600)OA
8-22
Bal. 29,900 + 17,500 = NA + 47,400 125,000
77,600
= 47,400 29,900 NC
1Cost of Goods Sold -- FIFO: 4/2 200 units @ $175 =$35,0009/1 50 units @ $190 = 9,500 Total $44,500
2Income Tax Expense: ($125,000 $44,500) x 40% = $32,200.3Cost of Goods Sold -- LIFO: 9/1 150 units @ $190 = $28,500
4/2 100 units @ $175 = 17,500 Total $46,000
4Income Tax Expense ($125,000 $46,000) x 40% = $31,600.
8-23
EXERCISE 8-7A (cont.)
b. Net Income assuming FIFO cost flow: $48,300 (see statements model above).
c. Net Income assuming LIFO cost flow: $47,400 (see statements model above).
d. LIFO produces a lower income tax of $600 ($32,200 $31,600). This results because a larger amount of inventory is expensed resulting in a lower income before tax. The last purchase was bought at a higher price than the first purchase.
e. The difference in cash flow from operating activities is caused by the difference in income tax paid of $600. LIFO will produce a larger cash flow because there was $600 less income tax paid.
8-24
EXERCISE 8-8A
a.Nikols Company - General Journal
Date Account Titles Debit Credit
1/1/04 Merchandise Inventory (250 @ $10)
2,500
Cash 2,500
4/1a Cash (125 @ $18) 2,250Sales Revenue 2,250
4/1b Cost of Goods Sold (125 @ $11)
1,375
Merchandise Inventory 1,375
8/1 Merchandise Inventory (400 @ $11)
4,400
Cash 4,400
12/1a Cash (500 @ $19) 9,500Sales Revenue 9,500
12/1b Cost of Goods Sold* 5,250Merchandise Inventory 5,250
*Cost of Goods Sold: 50 @ $11 = $ 550250 @ $10 = 2,500200 @ $11 = 2,200
$5,250
b. Ending Inventory: 200 units @ $11 = $2,200.
8-25
EXERCISE 8-9A
a. Spring Hill, Inc.
Date Purchased Sold Inventory BalanceUnits Cost Total Units Cost Total Units Cost Total
1/1 Beg. Inv.
50 @ $20 = $1,000
3/15 Pur. 200 @
$24 =$4,800 50 @200 @
$20$24
==
$1,000$4,800
5/30 Sold 50 @120
@
$20$24
==
$1,000$2,880 80 @ $24 =
-0-$1,920
8/10 Pur 275 @
$25 =$6,87580 @
275 @$24$25
==
$1,920$6,875
11/20 Sold
80 @ $24 = $1,920 -0-
260 @ $25 = $6,500 15 @ $25 = $375
Ending Inventory: 15 units @ $25 = $375
b. A problem arises when LIFO is applied to intermittent sales and purchase transactions. LIFO requires that the unit cost of the last purchase be applied to the first units sold. However, at the time of the first sale, that cost is not known. This problem is often overcome by recording only quantities of units sold on a perpetual basis. At the end of the accounting period, costs are then assigned perpetually to the units that have been sold.
8-26
EXERCISE 8-10Aa.
Auto Parts, Co.a. b. c. d. e. f. g. h.
Item
Quantity
Cost Per Unit
Mkt. Val.per Unit
Unit LowerCost/Mkt.
Total Cost
Total Market
Ind. Item
Lower Cost/Mkt.
(b x c) (b x d) (b x e)P 100 $4 $3 $3 $400 $300 $300D 50 5 4 4 250 200 200S 20 6 7 6 120 140 120J 15 5 4 4 75 60 60
$845 $700 $680
1. Ending inventory using the individual item method: $6802. Ending inventory using the aggregate method: $700
b.
Date Account Titles Debit Credit
1. Cost of Goods Sold* 165Merchandise Inventory 165
2. Cost of Goods Sold** 145Merchandise Inventory 145
*$845 $680 = $165**$845 $700 = $145
8-27
EXERCISE 8-11A
a.a. b. c. d. e. f. g.
Item Quantity
Cost Per Unit
Market Per Unit
Unit Lower
Cost/Mkt.
Total Cost
Total Lower
Cost/Mkt.
(b x c) (b x e)O 200 $10 $ 9 $ 9 $2,000 $1,800J 250 15 14 14 3,750 3,500R 175 5 8 5 875 875
Totals
$6,625 $6,175
The inventory would be carried at $6,175, the lower of cost or market applied to individual inventory items.
b. Under the periodic method, the amount of ending inventory would be shown at the lower of cost or market in the schedule of cost of goods sold. By lowering the ending inventory, cost of goods sold is increased. The loss is automatically included in cost of goods sold.
8-28
EXERCISE 8-12A Rick’s Fishing Supplies
a. Gross Margin: Sales x Gross Margin % $550,000 x 20% = $110,000
b. Cost of Goods Sold: Sales x Cost of Goods Sold % $550,000 x 80% = $440,000
c. Computation of Ending Inventory:
Beginning Inventory $100,000Plus: Purchases 400,000Goods Available for Sale 500,000Less: Cost of Goods Sold (Est.) (440,000 ) Ending Inventory (Est.) $ 60,000
d. Lost Inventory: Estimated Ending Inventory $60,000Less: Undamaged Inventory (8,000 ) Inventory Lost $52,000
EXERCISE 8-13A
June 14 Inventory Account Balance
$164,000
Less: Cost of Unrecorded Sale (21,000)Balance in the Warehouse 143,000
Less: 5% Shrinkage (7,150)Less: Amount of Inventory in Showroom
(37,500)
Inventory Lost $ 98,350
8-29
8-30
EXERCISE 8-14A
Marshall Company
The uncounted inventory will only affect The Marshall Company’s financial statements if the book amount of the inventory is actually written down to the counted amount. The perpetual system records the actual amount of goods as they are purchased and sold. However, if an adjustment is actually made on the books, the reduction in inventory would cause cost of goods sold to be overstated, gross margin and net income to be understated, and total assets and total stockholders’ equity to be understated.
EXERCISE 8-15A
Tedall Company
Item Number
Year Amount Affected Effect
1. 2005 Beginning Inventory NA2. 2005 Purchases NA3. 2005 Goods Available for
SaleNA
4. 2005 Cost of Goods Sold Overstated5. 2005 Gross Margin Understate
d6. 2005 Net Income Understate
d7. 2006 Beginning Inventory Understate
d8. 2006 Purchases NA9. 2006 Goods Available for
SaleUnderstated
10. 2006 Cost of Goods Sold Understate
8-31
d11. 2006 Gross Margin Overstated12. 2006 Net Income Overstated
8-32
EXERCISE 8-16A
Asset FMV LCM HC/AC
Buildings XAvailable-for-Sale Securities
X
Office Equipment XInventory XSupplies XLand XTrading Securities XCash X XHeld-to-Maturity Securities
X
8-33
EXERCISE 8-17A
a.
Balance Sheet Income Statement Stmt. ofType Cas
h+ Inv.
Sec.= Liab
.+ S.
EquityRev
. Exp
.Net Inc.
Cash Flows
Held + NA NA NA NA NA IATrading + NA NA NA NA NA OAAvailable
+ NA NA NA NA NA IA
b.
Martinez BrothersComputation of Net Income
Classified as:Held-to-Maturity Trading
Available-for-Sale
Revenue $5,000 $5,000 $5,000
Expenses (1,500) (1,500) (1,500)
Unrealized Loss -0- (1,500) -0-
Net Income $3,500 $2,000 $3,500
8-34
EXERCISE 8-18A a. Tony ElectronicsHorizontal Statements Models
(1) Held-to-MaturityBalance Sheet Income Statement Statement
Event
Cash + Inv. Sec.
= Liab. + Ret. Ear.
+Unreal. Gain.
Rev./Gain
Exp./Loss = Net Inc.
ofCash Flows
1. (150,000)
+ 150,000
= NA + NA + NA NA NA = NA (150,000)IA
2. 9,000 + NA = NA + 9,000 + NA 9,000 -0- = 9,000 9,000OA
3. 30,000 + (25,000)
= NA + 5,000 + NA 5,000 -0- = 5,000 30,000 IA
4. NA + NA = NA + NA + NA NA NA NA NATot. (111,000
)+ 125,00
0= -0- + 14,000 + -0- 14,000 -0- = 14,000 (111,000)
NC
(2) Trading
Event
Cash + Inv. Sec.
= Liab.
+ Ret. Ear.
+Unreal.
Gain
Rev./Gain
Exp./Loss = Net Inc. Cash Flow
1. (150,000)
+ 150,000
= NA + NA + NA NA NA = NA (150,000)OA
2. 9,000 + NA = NA + 9,000 + NA 9,000 NA = 9,000 9,000 OA3. 30,000 + (25,00
0)= NA + 5,000 + NA 5,000 NA = 5,000 30,000 OA
4. NA + (25,000)
= NA + (25,000)
+ NA NA 25,000 = (25,000)
NA
Tot. (111,000)
+ 100,000
= -0- + (11,000)
+ -0- 14,000
25,000 = (11,000)
(111,000)NC
(3) Available-for-Sale
8-35
Event
Cash + Inv. Sec.
= Liab.
+ Ret. Ear.
+Unreal.
GainRev./Gain
Exp./
Loss= Net
Inc.Cash Flow
1. (150,000)
+ 150,000
= NA + NA + NA NA NA = NA (150,000) IA
2. 9,000 + NA = NA + 9,000 + NA 9,000 NA = 9,000 9,000 OA3. 30,000 + (25,00
0)= NA + 5,000 + NA 5,000 NA = 5,000 30,000 IA
4. NA + (25,000)
= NA + NA + (25,000)
NA NA = NA NA
Tot. (111,000)
+ 100,000
= -0- + 14,000 + (25,000)
14,000 -0- = 14,000 (111,000)NC
8-36
EXERCISE 8-18A (cont.)
b. Held-to-Maturity $14,000Trading $(11,000)Available-for-Sale $14,000
c. The amount of change in cash from these activities is the same for all three classifications ($111,000). Held-to-maturity and available-for-sale securities each had net cash inflows from operating activities of $9,000, while trading securities had a net cash outflow of $111,000 from operating activities.
d. The amount of net income and the amount of cash flow from operating activities is different for those securities classified as trading from those classified as held-to-maturity or as available-for-sale. The difference is caused by the recognition of the unrealized loss on the income statement for trading securities and treating investments in trading securities as an operating activity rather than an investing activity. The gain on the sale increased net income by $5,000 in each case.
8-37
EXERCISE 8-19A
Transactions are recorded in the accounting equation for the use of the instructor.
Assets = Stockholders’ Equity
Event Cash + Inv. Sec.
= C. Stock + Ret. Earn.
+ Unreal. Gain
Beg. Bal. 80,000 80,000 -0- -0-1. Pur. Sec. (40,000
)40,000 -0- -0- -0-
2. Inv. Rev. 1,200 -0- -0- 1,200 -0-3. Sold Sec 16,000 (12,000) -0- 4,000 -0-4. Pur. Sec. (18,000
)18,000 -0- -0- -0-
Totals 39,200 46,000 80,000 5,200 -0-5. Mkt. Val. if HM
-0- -0- -0- -0- -0-
5. Mkt. Val. if TR
-0- 2,000 -0- 2,000 -0-
5. Mkt. Val. if AS
-0- 2,000 -0- -0- 2,000
8-38
EXERCISE 8-19A (cont.)Poort Inc.
Financial Statements For Year Ending 2001
Classified as: Held Trading Available
Income Statements
Investment Revenue $1,200 $ 1,200 $ 1,200Realized Gain 4,000 4,000 4,000Unrealized Gain -0- 2,000 -0-
Net Income $5,200 $7,200 $5,200
Balance Sheets
AssetsCash $39,200 $39,200 $39,200Investment Securities 46,000 48,000 48,000
Total Assets $85,200 $87,200 $87,200
Stockholders’ EquityCommon Stock $80,000 $80,000 $80,000Retained Earnings 5,200 7,200 5,200Unrealized Gain -0- -0- 2,000
Total Stockholders’ Equity $85,200 $87,200 $87,200
Statements of Cash Flows
Cash Flows From Operating Act.:
Inflow from Invest. Revenue
$ 1,200 $ 1,200 $ 1,200
Outflow to Purchase Securities
-0- (58,000) -0-
Inflow from Sale of Securities
-0- 16,000 -0-
Net Cash Inflow from Oper. Act.
1,200 (40,800) 1,200
Cash Flows From Investing Act.:
Outflow to Purchase Securities
(58,000) -0- (58,000)
Inflow from Sale of 16,000 -0- 16,000
8-39
SecuritiesNet Cash Flow from Investing Act.
(42,000) -0- (42,000)
Cash Flows From Financing Act.
-0- -0- -0-
Net Change in Cash (40,800) (40,800) (40,800)Plus: Beginning Cash Balance
80,000 80,000 80,000
Ending Cash Balance $39,200 $39,200 $39,200
8-40
EXERCISE 8-20A
Investment
Category
Types of Securiti
es
Types of
Revenue
Value Reported on
Balance Sheet
Recognition of Unrealized Gains/Losses Income Stmt.
Cash Flow from
Purchase or Sale
Classified As
Held Debt Interest
Amortized Cost
No Investing Act.
TradingDebt & Equity
Interest & Div.
Market Value
Yes Operating Act.
Available
Debt & Equity
Interest & Div.
Market Value
No Investing Act.
8-41
SOLUTIONS TO PROBLEMS - SERIES A - CHAPTER 8
PROBLEM 8-21ASharp Photography Inc.
Inventory Purchases
Beginning Inventory 150
@ $110 = $16,500
First Purchase 120
@ 85 = 10,200
Second Purchase 200
@ 100 = 20,000
Total 470
$46,700
a. Cost of Goods Sold:
FIFO UnitsCost per Unit
Cost of Goods Sold
From Beginning Inventory
150 @ $110 = $16,500
From First Purchase 120 @ 85 = 10,200From Second Purchase 30 @ 100 = 3,000Total Units Sold 300 $29,700
Ending Inventory:
FIFO UnitsCost per Unit
Ending Inventor
yFrom Second Purchase 170 @ 100 = $17,000
Cost of Goods Sold:
LIFO UnitsCost per Unit
Cost of Goods Sold
From Second Purchase 200 @ $100 = $20,000From First Purchase 100 @ 85 = 8,500Total Units Sold 300 $28,500
8-42
Ending Inventory:LIFOFrom Beginning Inventory
150 @ 110 = $16,500
From First Purchase 20 @ 85 = 1,700Total Ending Inventory $18,200
8-43
PROBLEM 8-21A a. (cont.)
Weighted Average
Total Cost Total Units
= Cost per Unit
$46,700 470 = $99.362
Weighted Average
Cost of Goods Sold: 300 units
@ $99.362
= $29,809
Ending Inventory: 170 units
@ $99.362
= $16,891
b.
Sharp Photography Inc.
FIFO LIFOWeighte
dAverage
Sales (300 units @ $185) $55,500 $55,500 $55,500Cost of Goods Sold (29,700) (28,500) (29,809)Gross Margin 25,800 27,000 25,691Operating Expenses (12,000) (12,000) (12,000)Income Before Tax 13,800 15,000 13,691Income Tax (40%) (5,520) (6,000) (5,476)Net Income $ 8,280 $ 9,000 $ 8,215
FIFO LIFOWeighte
dAverage
Income Tax Expense $5,520 $6,000 $ 5,476
8-44
Net Income 8,280 9,000 8,215
8-45
PROBLEM 8-21A (cont.)
c. The Accounting Equation is provided for the use of the instructor.
Assets = Stockholders’ Equity
Event Cash Inventory
= Com Stock
Ret. Earn.
FIFO Cost FlowBeginning Balance $22,000 $16,500 $14,300 $24,2001. First Purchase (10,200) 10,2002. Second Purchase (20,000) 20,0003a. Sale of Inventory
55,500 55,500
3b. Cost of Goods Sold
(29,700) (29,700)
4. Paid Oper. Expenses
(12,000) (12,000)
5. Paid Income Tax (5,520) (5,520)Totals $29,780 $17,000 = $14,300 $32,480
LIFO Cost FlowBeginning Balance $22,000 $16,500 $14,300 $24,2001. First Purchase (10,200) 10,2002. Second Purchase (20,000) 20,0003a. Sale of Inventory
55,500 55,500
3b. Cost of Goods Sold
(28,500) (28,500)
4. Paid Oper. Expenses
(12,000) (12,000)
5. Paid Income Tax (6,000) (6,000)Totals $29,300 $18,200 = $14,300 $33,200
Weighted AverageBeginning Balance $22,000 $16,500 $14,300 $24,2001. First Purchase (10,200) 10,2002. Second Purchase (20,000) 20,000
8-46
3a. Sale of Inventory
55,500 55,500
3b. Cost of Goods Sold
(29,809) (29,809)
4. Paid Oper. Expenses
(12,000) (12,000)
5. Paid Income Tax (5,476) (5,476)Totals $29,824 $16,891 = $14,300 $32,415
8-47
PROBLEM 8-21A (cont.) c.
Sharp Photography Inc.Financial Statements
For Year Ended December 31, 2007
FIFO LIFO Weight. Av.
Income Statements
Sales $55,500 $55,500 $55,500Cost of Goods Sold (29,700) (28,500) (29,809)Gross Margin 25,800 27,000 25,691
Operating Expenses (12,000) (12,000) (12,000)Income Before Tax 13,800 15,000 13,691Income Tax Expense (5,520) (6,000) (5,476)
Net Income $ 8,280 $ 9,000 $ 8,215
Balance Sheets
AssetsCash $29,780 $29,300 $29,824Merchandise Inventory 17,000 18,200 16,891
Total Assets $46,780 $47,500 $46,715
Stockholders’ EquityCommon Stock $14,300 $14,300 $14,300Retained Earnings 32,480 33,200 32,415
Total Stockholders’ Equity $46,780 $47,500 $46,715
8-48
PROBLEM 8-21A c. (cont.)
Sharp Photography Inc.Statements of Cash Flows
For the Year Ended December 31, 2007
FIFO LIFO Weight. Av.
Cash Flows From Operating. Act.:
Cash Inflow from Customers
$55,500 $55,500 $55,500
Cash Outflow for Inventory
(30,200) (30,200) (30,200)
Cash Outflow for Oper. Exp.
(12,000) (12,000) (12,000)
Cash Outflow for Income Tax
(5,520) (6,000) (5,476)
Net Cash Flow from Oper. Act.
7,780 7,300 7,824
Cash Flows From Investing Act.
-0- -0- -0-
Cash Flows From Financing Act.
-0- -0- -0-
Net Change in Cash 7,780 7,300 7,824Plus: Beginning Cash Balance
22,000 22,000 22,000
Ending Cash Balance $29,780 $29,300 $29,824
8-49
PROBLEM 8-22A Provided for the use of the instructor:
Milan, Inc.Sales and Purchase Transactions for 2006
Sales Purchases Cost of Goods Sold Inventory
Date Units
Price Per Unit
=Total Unit
s
Cost Per Unit
Total Units
Cost per Unit
TotalUnit
sCost per Unit
Total
1/1 80 @120 = $ 9,600
3/5 80 @$125 = $10,000
8080
@$120@$125
==
$ 9,600$10,000
4/10 60 @$245 = $14,700
60 @$120
= $ 7,200
2080
@$120@$125
==
$ 2,400$10,000
6/19 70 @$245 = $17,150
2050
@$120
@$125
==
$ 2,400
$ 6,250
30 @$125 = $ 3,750
9/16 60 @$130 = $ 7,800
3060
@$125@$130
==
$ 3,750$ 7,800
11/28
55 @$255 = $14,025
3025
@$125
@$130
==
$ 3,750
$ 3,250
35 @$130 = $ 4,550
Totals
Sales = $45,875
COGS = $22,850
End Inv.
$ 4,550
8-50
8-51
PROBLEM 8-22A (cont.)a.
Milan, Inc.General Journal, 2006
Date Account Titles Debit Credit
3/5 Merchandise Inventory 10,000Cash 10,000
4/10 Cash 14,700Sales 14,700
4/10 Cost of Goods Sold* 7,200Merchandise Inventory 7,200
6/19 Cash 17,150Sales 17,150
6/19 Cost of Goods Sold* 8,650Merchandise Inventory 8,650
9/16 Merchandise Inventory 7,800Cash 7,800
11/28 Cash 14,025Sales 14,025
11/28 Cost of Goods Sold* 7,000Merchandise Inventory 7,000
*See schedule above for computation.
b. Sales $45,875Cost of Goods Sold (22,850 ) Gross Margin $23,025
c. Ending Inventory: $4,550 (See computation above)
8-52
PROBLEM 8-23A
DOT Computer Repair
Individual Item Lower of Cost or
Market
Item Quantity
Unit Cost
Unit Mark
et
Total Cost
Total Marke
tUnit
s
LCM per Unit Total
D1 60 $30 $35 $1,800
$2,100
60 @ $30 $1,800
D2 30 55 50 1,650 1,500 30 @ $50 1,500D3 44 40 55 1,760 2,420 44 @ $40 1,760D4 40 50 35 2,000 1,400 40 @ $35 1,400
$7,210
$7,420
$6,460
a. $6,460
b.Debit Credi
tCost of Goods Sold (Inventory Loss)*
750
Merchandise Inventory 750
*$7,210 $6,460 = $750
c. $7,210
d. No entry; Cost is lower than market.
e. Under the periodic system, the amount of ending inventory would be shown at the lower of cost or market in the schedule of cost of goods sold. By lowering the ending inventory, cost of goods sold is increased. Any loss is automatically included in cost of goods sold.
8-53
PROBLEM 8-24A
a. 1. Estimated Gross Margin:
Sales x Gross Margin %: $520,000 x .25 = $130,000
2. Estimated Cost of Goods Sold:
Sales Gross Margin: $520,000 $130,000= $390,000Or:Sales x Cost of Goods Sold %: $520,000 x 75% =
$390,000
3. Estimated Inventory at September 21:
Beginning Inventory $ 68,000Plus: Purchases 350,000Less: Cost of Goods Sold (390,000)Ending Inventory $ 28,000
b. Loss: Total Inventory $28,000Less: Undamaged (8,000) Total Loss $20,000
c. Under the perpetual inventory system, if records are maintained accurately, the balance in the inventory account should be equal to the amount of the inventory on hand at the time of the loss. Any differences would be attributable to lost, stolen, or damaged goods.
8-54
PROBLEM 8-25A
Lexington Company
2004 2005 Total
Net Sales $140,000 $200,000
$340,000
Cost of Goods Sold (62,000) (90,000) (152,000)
Gross Margin 78,000 110,000 188,000
Gross Margin % $188,000 $340,000
= 55%
Cost of Goods Sold %
152,000 340,000
= 45%
a. Computation of Gross Margin:
Sales $240,000Less: Sales Discounts (10,000)Net Sales 230,000x Gross Margin % 55%Gross Margin $126,500
b. Computation of Ending Inventory:
Beginning Inventory $ 60,000Plus: Purchases 160,000Plus: Transportation-In 4,000Goods Available for Sale224,000Less: Cost of Goods Sold (103,500)*
Ending Inventory $120,500
*$230,000 x 45% = $103,500
8-55
8-56
PROBLEM 8-26A
Error No.1 Amount of Error
Effect
Sales, 2002 NA NAEnding Inventory, 12/31/02
NA NA
Gross Margin, 2002 $1,400 Beginning Inventory, 1/1/03
NA NA
Cost of Goods Sold, 2002
1,400 +
Net Income, 2002 NA NARetained Earnings, 12/31/02
NA NA
Total Assets, 12/31/02 NA NA
Error No. 2 Amount of Error
Effect
Sales, 2002 $2,400 Ending Inventory, 12/31/02
1,344 +
Gross Margin, 2002 1,056 Beginning Inventory, 1/1/03
1,344 +
Cost of Goods Sold, 2002
1,344
Net Income, 2002 1,056 Retained Earnings, 12/31/02
1,056
Total Assets, 12/31/02 1,056
Error No. 3 Amount of Error
Effect
8-57
Sales, 2002 NA NAEnding Inventory, 12/31/02
$1,200
Gross Margin, 2002 1,200 Beginning Inventory, 1/1/03
1,200
Cost of Goods Sold, 2002
1,200 +
Net Income, 2002 1,200 Retained Earnings, 12/31/02
1,200
Total Assets, 12/31/02 1,200
8-58
PROBLEM 8-27A
(a). Held-to-Maturity
T-Accounts
Cash Investment Sec. Common Stock1. 20,000 3. 20,000 3. 20,000 8.5,000 1. 20,0002. 60,000 4. 19,000 6. 12,000 Bal.
20,0005. 400 6. 12,000 Bal.
27,0008. 6,300 7. 2,000 Dividends9. 1,000 7. 2,000Bal.
34,700Bal.2,000
Service Revenue2. 60,000Bal.60,000
Investment Income5. 4009. 1,000Bal. 1,400
Gain on Sale of Invest.
8.1,300Bal.1,300
Operating Expenses
4. 19,000Bal.
19,000
8-59
PROBLEM 8-27A (cont.)
(b). Trading
T-Accounts
Cash Investment Sec. Common Stock1. 20,000 3. 20,000 3.20,000 8.5,000 1. 20,0002. 60,000 4. 19,000 6.12,000 Bal.
20,0005. 400 6. 12,000 10.
13,0008. 6,300 7. 2,000 Bal.
40,000Dividends
9. 1,000 7. 2,000Bal.
34,700Bal.2,000
Service Revenue2. 60,000Bal.60,000
Investment Income5. 4009. 1,000Bal. 1,400
Gain on Sale of Invest.
8. 1,300Bal. 1,300
Operating Expenses
4. 19,000Bal.
19,000
(Income Account)Unrealized Gain/Loss
8-60
10.13,000Bal.13,000
8-61
PROBLEM 8-27A (cont.)
(c). Available-for-Sale
T-Accounts
Cash Investment Securities
Common Stock
1. 20,000 3. 20,000 3. 20,000 8. 5,000 1. 20,0002. 60,000 4. 19,000 6. 12,000 Bal.
20,0005. 400 6. 12,000 10.
13,0008. 6,300 7. 2,000 Bal.
40,000Dividends
9. 1,000 7. 2,000Bal.
34,700Bal.
2,000
(Equity Account)Unrealized Gain/Loss
10.13,000Bal.13,000
Service Revenue2. 60,000Bal.60,000
Investment Income
5. 4009. 1,000Bal. 1,400
Gain on Sale of Invest.
8. 1,300Bal. 1,300
8-62
Operating Expenses
4. 19,000Bal.
19,000
8-63
PROBLEM 8-27A (cont.)
Best Answering ServiceComparative Financial Statements
For the Year Ended 2007
Investment Securities Classified As
Held Trading Available
Income Statements
Services Revenue $60,000
$60,000 $60,000
Operating Expenses (19,000)
(19,000)
(19,000)
Net Operating Income 41,000 41,000 41,000
Investment Revenue 1,400 1,400 1,400Realized Gains 1,300 1,300 1,300Unrealized Gains -0- 13,000 -0-
Net Income $43,700
$56,700 $43,700
Balance Sheets
AssetsCash $34,70
0$34,700 $34,700
Investment Securities @ Cost
27,000 -0- -0-
Investment Securities @ Market
-0- 40,000 40,000
Total Assets $61,700
$74,700 $74,700
Stockholders’ EquityCommon Stock $20,00
0$20,000 $20,000
Retained Earnings 41,700 54,700 41,700Unrealized Gain -0- -0- 13,000
8-64
Total Stockholders’ Equity $61,700
$74,700 $74,700
8-65
PROBLEM 8-27A (cont.)
Best Answering ServiceComparative Financial Statements
For the Year Ended 2007
Investment Securities Classified as
Held Trading Available
Statements of Cash Flows
Cash Flows From Operating Act.:
Cash Inflow from Customers
$60,000
$60,000 $60,000
Cash Inflow from Invest. Rev.
1,400 1,400 1,400
Outflow for Expenses (19,000)
(19,000)
(19,000)
Outflow to Purchase Securities
-0- (32,000)
-0-
Inflow from Sale of Securities
-0- 6,300 -0-
Net Cash Flow from Oper. Act.
42,400 16,700 42,400
Cash Flows From Investing Act.:
Outflow to Purchase Securities
(32,000)
-0- (32,000)
Inflow from Sale of Securities
6,300 -0- 6,300
Net Cash Flow from Investing Act.
(25,700)
-0- (25,700)
Cash Flows From Financing Act.:
Inflow from Stock Issue 20,000 20,000 20,000Outflow for Dividends (2,000) (2,000) (2,000)
Net Cash Flow from Financing Act.
18,000 18,000 18,000
Net Change in Cash $34,70 $34,700 $34,70
8-66
0 0Plus: Beginning Cash Balance -0- -0- -0-Ending Cash Balance $34,70
0$34,700 $34,700
8-67
PROBLEM 8-28A
a.Balance Sheet Income Statement Stmt. of
Event
Assets
= Liab. + S. Equity
Rev. Exp. = Net Inc.
Cash Flow
1. + NA + NA NA NA + FA2. + + NA NA NA NA NA3. + NA NA NA NA NA OA4. NA NA + NA5. NA NA NA NA NA6. NA NA NA NA NA NA NA7. NA NA + NA8. NA NA NA NA NA NA NA 9. NA NA + NA
10. NA NA + NA
b. The directional effect is the same for events 9 and 10. In both transactions, inventory was reduced and an expense was recorded that decreased stockholders’ equity. However, the amounts would be different during periods of changing prices.
8-68
SOLUTIONS TO EXERCISES - SERIES B - CHAPTER 8
EXERCISE 8-1B
a. FIFO
b. LIFO
c. FIFO
d. LIFO
e. Weighted Average
8-69
EXERCISE 8-2B
Spruell Co.First Purchase $ 750Second Purchase 1,000Total $1,750
(a) (b) (c)FIFO LIFO W. AVG.
Cost of Goods Sold $ 750 $1,000 $875*
Ending Inventory 1,000 750 875*
*Average Cost per Unit: $ 750 + $1,000 = $1,750;$1,750 2 = $875
8-70
EXERCISE 8-3BThe Perez Company Inventory Purchases
Beginning Inventory 100
@ $40 = $ 4,000
First Purchase 150
@ 50 = 7,500
Second Purchase 200
@ 60 = 12,000
Goods Available for Sale
450
$23,500
a.Cost of Goods Sold:
FIFO Units
Unit Cost
Cost of Goods Sold
From Beginning Inventory
100 @ $40 = $ 4,000
From First Purchase 150 @ 50 = 7,500From Second Purchase
10 @ 60 = 600
Total Units Sold 260 $12,100
Ending Inventory: FIFO Unit
sUnit Cost
Ending Inventory
From Second Purchase
190 @ $60 = $11,400
b. Cost of Goods SoldLIFO Unit
sUnit Cost
Cost of Goods Sold
From Second Purchase
200 @ $60 = $12,000
From First Purchase 60 @ 50 = 3,000Total Units Sold 260 $15,000
Ending InventoryLIFO Unit
sUnit Cost
Ending Inventory
From Beginning Inventory
100 @ $40 = $4,000
8-71
From First Purchase 90 @ 50 = 4,500Total Ending Inventory
190 $8,500
c.
Weighted Average:
Total Cost Total Units
= Cost per Unit
$23,500 450 = $52.222
Cost of Goods Sold 260 units
@ $52.222
= $13,577.72
Ending Inventory: 190 units
@ $52.222
= $9,922.18*
*.10 difference due to rounding
8-72
EXERCISE 8-4B
a. (1) Parker CompanyFIFO
Sales (210 @ $50) $10,500
Cost of Goods Sold:From Beginning
Inv. 40 units @ $20
= $ 800
From Purchases 170 units @ $25
= 4,250 ( 5,050)
Gross Margin $ 5,450
a. (2)LIFO
Sales (210 @ $50) $10,500
Cost of Goods Sold:From Purchases 200 units @
$25= $5,000
From Beg. Inv. 10 units @ $20
= 200 (5,200)
Gross Margin $ 5,300
a. (3)Weighted Average
Sales (210 @ $50) $10,500
Cost of Goods Sold:Average Cost per
Unit210 @ $24.1671
= $5,0752
( 5,075)
Gross Margin $ 5,425
1Total cost ($800 + $5,000) $5,800 Total units 240 = $24.167 Cost per unit
8-73
2Rounded to the nearest dollar.
b. The difference between net income using FIFO and LIFO is $150 ($5,450 $5300). The difference between FIFO and Weighted Average is $25 ($5,450 $5,425). The difference in the net incomes would be the same as the difference in gross margins, assuming there are no income tax considerations.
8-74
EXERCISE 8-4B (cont.)
c.Ending InventoryFIFO 30 @ $25 = $750LIFO 30 @ $20 = 600Weighted Average
30 @ $24.167
= 725
8-75
EXERCISE 8-5B
King SalesSummary of Purchase Transactions
1/20 Purchased Units
450 @ $5 = $2,250
4/21 Purchased Units
200 @ 6 = 1,200
7/25 Purchased Units
100 @ 10 = 1,000
9/19 Purchased Units
75 @ 8 = 600
Available for Sale
825 $5,050
a. (1)FIFO Units Unit Cost Total
Ending InventoryFrom 9/19
Purchase75 @ $8 $600
From 7/25 Purchase
25 @ $10 250
Total Ending Inventory
100 $850
a. (2)LIFO Units Unit Cost Total
Ending InventoryFrom 1/20
Purchase100 @ $5 $500
Total Ending Inventory
100 $500
a. (3)Weighted Average
8-76
Total Cost Total Units = Cost per Unit$5,050 825 = $6.12
Ending Inventory 100 units @ $6.12 = $612
8-77
EXERCISE 8-5B (cont.)
b.FIFO
Sales (725 units @ $20) $14,500
Cost of Goods SoldCost of Goods Avail. for
Sale*$5,050
Less: Ending Inventory (850)Cost of Goods Sold (4,200)
Gross Margin $10,300
LIFO
Sales (725 units @ $20) $14,500
Cost of Goods SoldCost of Goods Avail. for
Sale*$5,050
Less: Ending Inventory (500)Cost of Goods Sold (4,550)
Gross Margin $ 9,950
*This amount is computed in the Summary of Purchase Transactions at the beginning of the problem.
Difference in Gross Margin: $10,300 $9,950 = $350
Note to Instructor: Cost of goods sold can be computed on a units sold basis rather than subtracting ending inventory from goods available for sale.
8-78
EXERCISE 8-6B
a.Market Company
Income Statements
FIFO
Sales (3,400 @ $40)
$136,000
Cost of Goods Sold:From Beginning
Inv. 500 units @ $20
= $10,000
From 4/1 Purchase
2,500 units @ $22
= 55,000
From 10/1 Purchase
400 units @ $28
= 11,200
Cost of Goods Sold
(76,200)
Gross Margin 59,800
Operating Expenses
(34,000)
Income Before Tax 25,800Income Tax Expense
(30%) (7,740)
Net Income $ 18,060
LIFO
Sales (3,400 @ $40)
$136,000
Cost of Goods Sold:From 10/1
Purchase 800 units @ $28
= $22,400
From 4/1 Purchase
2,500 units @ $22
= 55,000
From Beginning Inv.
100 units @ $20
= 2,000
8-79
Cost of Goods Sold
(79,400)
Gross Margin 56,600
Operating Expenses
(34,000)
Income Before Tax 22,600Income Tax Expense
(30%) (6,780)
Net Income $ 15,820
EXERCISE 8-6B (cont.)
b. Income tax paid using FIFO: $7,740Income tax paid using LIFO: $6,780
c.Market Company
Cash Flows from Operating Activities
FIFO LIFO
Cash Flows From Operating Activities:
Cash Inflow from Customers $136,000
$136,000
Cash Outflow for Inventory* (77,400) (77,400)Cash Outflow for Operating
Expense(34,000) (34,000)
Cash Outflow for Income Tax Expense
(7,740) (6,780)
Net Cash Flow from Operating Activities
$ 16,860
$ 17,820
*Computation of cash paid for inventory:
4/1 Purchase 2,500 units @ $22 =$55,000
8-80
10/1 Purchase 800 units @ 28 = 22,400$77,400
d. The difference in cash flow from operating activities between FIFO and LIFO is caused by the difference in income tax paid for the two methods. Taxable income is greater by using FIFO; consequently more income tax will be paid causing a greater cash outflow for tax expense.
8-81
EXERCISE 8-7B aWest Coast Company
Effect of Events on Financial Statements
Panel 1: FIFO Cost Flow
Event
Cash + Inv. = C. Stk.
+ Ret. Ear.
Rev. Exp. = Net Inc. Cash Flows
1. 250,000 + NA = NA + 250,000 250,000
NA = 250,000 250,000 OA
2. (70,000) + 70,000 = NA + NA NA NA = NA (70,000) OA3. (56,250) + 56,250 = NA + NA NA NA = NA (56,250) OA4. NA + (88,750
)1= NA + (88,750
)NA 88,750 = (88,750
)NA
5. (64,500)2
+ NA = NA + (64,500) NA 64,500 = (64,500)
(64,500) OA
Bal. 59,250 + 37,500 = NA + 96,750 250,000
153,250
= 96,750 59,250 NC
Panel 2: LIFO Cost Flow
Event
Cash + Inv. = C. Stk.
+ Ret. Earn.
Rev. Exp. = Net Inc. Cash Flows
1. 250,000 + NA = NA + 250,000 250,000
NA = 250,000 250,000 OA
2. (70,000) + 70,000 = NA + NA NA NA = NA (70,000) OA3. (56,250) + 56,250 = NA + NA NA NA = NA (56,250) OA4. NA + (91,250
)3= NA + (91,250
)NA 91,250 = (91,250
)NA
5. (63,500)4
+ NA = NA + (63,500)
NA 63,500 = (63,500)
(63,500) OA
Bal. 60,250 + 35,000 = NA + 95,250 250,000
154,750
= 95,250 60,250 NC
1Cost of Goods Sold -- FIFO: 4/2 200 units @ $350 =$70,000
8-82
9/1 50 units @ $375 = 18,750 Total $88,750
2Income Tax Expense: ($250,000 $88,750) x 40% = $64,500.3Cost of Goods Sold -- LIFO: 9/1 150 units @ $375 = $56,250
4/2 100 units @ $350 = 35,000 Total $91,250
4Income Tax Expense ($250,000 $91,250) x 40% = $63,500.
8-83
EXERCISE 8-7B (cont.)
b. Net Income assuming FIFO cost flow: $96,750 (see statements model above).
c. Net Income assuming LIFO cost flow: $95,250 (see statements model above).
d. LIFO produces an income tax that is $1,000 lower ($64,500 $63,500) than FIFO. This results because a larger amount of inventory is expensed using LIFO. The last purchase was bought at a higher price than the first purchase.
e. FIFO
8-84
EXERCISE 8-8B
a.Polo Company - General Journal
Date Account Titles Debit Credit
1/1/06 Inventory (250 @ $40) 10,000Cash 10,000
4/1a Cash (125 @ $70) 8,750Sales Revenue 8,750
4/1b Cost of Goods Sold (125 @ $34)
4,250
Inventory 4,250
8/1 Inventory (400 @ $44) 17,600Cash 17,600
12/1a Cash (500 @ $76) 38,000Sales Revenue 38,000
12/1b Cost of Goods Sold* 20,500Inventory 20,500
*Cost of Goods Sold: 50 @ $34 = $ 1,700250 @ $40 = 10,000200 @ $44 = 8,800
$20,500
b. Total Cost of Goods Sold:4/1 $ 4,25012/1 20,500
Total $24,750
8-85
EXERCISE 8-9B
a. Big Hill, Inc.Date Purchased Sold Inventory Balance
Units Cost Total Units Cost Total Units Cost Total
1/1 Beg. Inv.
50 @ $30 = $1,500
3/15 Pur. 200 @
$35 =$7,000 50 @200 @
$30$35
==
$1,500$7,000
5/30 Sold 50 @120
@
$30$35
==
$1,500$4,200 80 @ $35 =
-0-$2,800
8/10 Pur 275 @
$40 =$11,000
80 @275 @
$35$40
==
$2,800$11,00
0
11/20 Sold
80 @ $35 = $ 2,800
-0-
260 @ $40 = $10,400
15 @ $40 = $600
Ending Inventory: 15 units @ $40 = $600
b. A problem arises when Weighted Average is applied to intermittent sales and purchase transactions. Weighted Average requires that average cost be computed when each sale is made. This problem is often overcome by recording only quantities of units sold on a perpetual basis. At the end of the accounting period, costs are then assigned perpetually to the units that have been sold.
8-86
EXERCISE 8-10Ba.
Original Woodworka. b. c. d. e. f. g. h.
Item
Quantity
Cost Per Unit
Mkt. Val.per Unit
Unit LowerCost/Mkt.
Total Cost
Total Market
Ind. Item
Lower Cost/Mkt.
(b x c) (b x d) (b x e)P 100 $ 16 $ 12 $ 12 $1,600 $1,200 $1,200D 50 18 16 16 900 800 800S 20 24 26 24 480 520 480J 15 20 22 20 300 330 300
$3,280 $2,850 $2,780
1. Ending inventory using the individual item method: $2,7802. Ending Inventory using the aggregate method: $2,850
b.
Date Account Titles Debit Credit
1. Cost of Goods Sold* 500Inventory 500
2. Cost of Goods Sold** 430Inventory 430
*$3,280 $2,780 = $500**$3,280 $2,850 = $430
8-87
EXERCISE 8-11B
a.a. b. c. d. e. f. g.
Item Quantity
Cost Per Unit
Market Per Unit
Unit Lower
Cost/Mkt.
Total Cost
Total Lower
Cost/Mkt.
(b x c) (b x e)B 100 $40 $36 $36 $ 4,000 $ 3,600C 150 60 56 56 9,000 8,400D 90 20 30 20 1,800 1,800
Totals
$14,800 $13,800
The inventory would be carried at $13,800, the lower of cost or market applied to individual inventory items.
b. Under the periodic method, the amount of ending inventory would be shown at the lower of cost or market in the schedule of cost of goods sold. By lowering the ending inventory, cost of goods sold is increased. The loss is automatically included in cost of goods sold.
8-88
EXERCISE 8-12B Deep Woods Hunting Goods
a. Gross Margin: Sales x Gross Margin % $137,500 x 25% = $34,375
b. Cost of Goods Sold: Sales x Cost of Goods Sold % $137,500 x 75% = $103,125
c. Computation of Ending Inventory:
Beginning Inventory $ 25,000Plus: Purchases 100,000Goods Available for Sale 125,000Less: Cost of Goods Sold (Est.) (103,125 ) Ending Inventory (Est.) $ 21,875
d. Lost Inventory: Estimated Ending Inventory $21,875Less: Undamaged Inventory (2,000 ) Inventory Lost $19,875
EXERCISE 8-13B
June 14 Inventory Account Balance
$338,000
Less: Cost of Unrecorded Sale (42,000)Balance in the Warehouse 296,000
Less: 5% Shrinkage (14,800)Less: Amount of Inventory in Showroom
(75,000)
Inventory Lost $206,200
8-89
8-90
EXERCISE 8-14B
Short Company
The uncounted inventory will only affect The Short Company’s balance sheet if the book amount of the inventory is actually written down to the counted amount. The perpetual system records the actual amount of goods as they are purchased and sold. However, if an adjustment is actually made on the books, the reduction in inventory would cause the inventory amount shown on the balance sheet to be understated.
EXERCISE 8-15B
Tefall Company
Item Number
Year Amount Affected Effect
1. 2006 Beginning Inventory NA2. 2006 Purchases NA3. 2006 Goods Available for
SaleNA
4. 2006 Cost of Goods Sold Overstated5. 2006 Gross Margin Understate
d6. 2006 Net Income Understate
d7. 2007 Beginning Inventory Understate
d8. 2007 Purchases NA9. 2007 Goods Available for
SaleUnderstated
10. 2007 Cost of Goods Sold Understated
11. 2007 Gross Margin Overstated12. 2007 Net Income Overstated
8-91
8-92
EXERCISE 8-16B
Asset FMV LCM HC/AC
Inventory XPrepaid Rent XCash X XHeld-to-Maturity Securities
X
Machinery XAvailable-for-Sale Securities
X
Certificate of Deposit XTrading Securities X
8-93
EXERCISE 8-17B
a.
Balance Sheet Income Statement Stmt. ofType Cas
h+ Inv.
Sec.= Lia
b.+ S.
EquityRev. Exp. = Net
Inc.Cash Flows
Held + NA NA NA NA NA IATrading + NA NA NA NA NA OAAvailable
+ NA NA NA NA NA IA
b.
Blass BrothersComputation of Net Income
Classified as:Held-to-Maturity Trading
Available-for-Sale
Revenue $10,000 $10,000 $10,000
Expenses (4,000) (4,000) (4,000)
Unrealized Gain -0- 7,000 -0-
Net Income $ 6,000 $13,000 $ 6,000
8-94
EXERCISE 8-18B a.Circuit Electronics
Horizontal Statements Models
(1) Held-to-MaturityBalance Sheet Income Statement Statement
Event Cash + Inv. Sec.
= Liab. + Ret. Ear.
+Unreal. Gain.
Rev./Gain
Exp./
Loss= Net Inc.
ofCash Flows
1. (75,000) + 75,000 = NA + NA + NA NA NA = NA (75,000)IA
2. 4,500 + NA = NA + 4,500 + NA 4,500 -0- = 4,500 4,500OA
3. 15,000 + (12,500)
= NA + 2,500 + NA 2,500 -0- = 2,500 15,000 IA
4. NA + NA = NA + NA + NA NA NA = NA NATotals (55,500)
1+ 62,500 = -0- + 7,000 + -0- 7,000 -0- = 7,000 (55,500)
NC
(2) Trading
Event Cash + Inv. Sec.
= Liab.
+ Ret. Ear.
+Unreal.
GainRev./Gain
Exp./Loss = Net Inc. Cash Flow
1. (75,000)
+ 75,000 = NA + NA + NA NA NA = NA (75,000)OA
2. 4,500 + NA = NA + 4,500 + NA 4,500 NA = 4,500 4,500 OA3. 15,000 + (12,500
)= NA + 2,500 + NA 2,500 NA = 2,500 15,000 OA
4. NA + (12,500)
= NA + (12,500)
+ NA NA 12,500 = (12,500)
NA
Totals (55,500)
+ 50,000 = -0- + (5,500) + -0- 7,000 12,500 = (5,500) (55,500)NC
(3) Available-for-Sale
Unreal. Rev./ Exp.
8-95
Event Cash + Inv. Sec.
= Liab. + Ret. Ear.
+ Gain Gain /Loss
= Net Inc. Cash Flow
1. (75,000)
+ 75,000 = NA + NA + NA NA NA = NA (75,000)IA
2. 4,500 + NA = NA + 4,500 + NA 4,500 NA = 4,500 4,500 OA3. 15,000 + (12,500
)= NA + 2,500 + NA 2,500 NA = 2,500 15,000 IA
4. NA + (12,500)
= NA + NA + (12,500)
NA NA = NA NA
Totals (55,500)
+ 50,000 = -0- + 7,000 + (12,500)
7,000 -0- = 7,000 (55,500)NC
1Cash is negative because these transactions do not reflect any beginning balances.
8-96
EXERCISE 8-18B (cont.)
b. (1) Held-to-Maturity $7,000(2) Trading $(5,500)(3) Available-for-Sale $7,000
c. The amount of change in total cash from these activities is the same for all three classifications ($55,500). Held-to-maturity and available-for-sale securities each had a net cash inflow from operating activities of $4,500, while trading securities had a net cash outflow of $55,500 from operating activities.
d. (1) Held-to-Maturity $62,500(2) Trading $50,000(3) Available-for-Sale $50,000
8-97
EXERCISE 8-19B
Transactions are recorded in the accounting equation for the use of the instructor.
Assets = Stockholders’ Equity
Event Cash + Inv. Sec.
= C. Stock + Ret. Earn.
+ Unreal. Gain
Beg. Bal. 60,000 60,000 -0- -0-1. Pur. Sec. (30,000
)30,000 -0- -0- -0-
2. Inv. Rev. 800 -0- -0- 800 -0-3. Sold Sec 10,000 (7,000) -0- 3,000 -0-4. Pur. Sec. (10,000
)10,000 -0- -0- -0-
Totals 30,800 33,000 60,000 3,800 -0-5. Mkt. Val. if HM
-0- -0- -0- -0- -0-
5. Mkt. Val. if TR
-0- 1,000 -0- 1,000 -0-
5. Mkt. Val. if AS
-0- 1,000 -0- -0- 1,000
8-98
EXERCISE 8-19B. (cont.)Deal Inc.
Financial Statements For Year Ended 2002
Classified as: Held Trading Available
Income Statements
Investment Revenue $ 800 $ 800 $ 800Realized Gain 3,000 3,000 3,000Unrealized Gain -0- 1,000 -0-
Net Income $3,800 $4,800 $3,800
Balance Sheets
AssetsCash $30,800 $30,800 $30,800Investment Securities 33,000 34,000 34,000
Total Assets $63,800 $64,800 $64,800
Stockholders’ EquityCommon Stock $60,000 $60,000 $60,000Retained Earnings 3,800 4,800 3,800Unrealized Gain -0- -0- 1,000
Total Stockholders’ Equity $63,800 $64,800 $64,800
Statements of Cash Flows
Cash Flows From Operating Act.:
Inflow from Invest. Revenue
$ 800 $ 800 $ 800
Outflow to Purchase Securities
-0- (40,000) -0-
Inflow from Sale of Securities
-0- 10,000 -0-
Net Cash Inflow from Oper. Act.
800 (29,200) 800
Cash Flows From Investing Act.:
Outflow to Purchase Securities
(40,000) -0- (40,000)
Inflow from Sale of 10,000 -0- 10,000
8-99
SecuritiesNet Cash Flow from Investing Act.
(30,000) -0- (30,000)
Cash Flows From Financing Act.
-0- -0- -0-
Net Change in Cash (29,200) (29,200) (29,200)Plus: Beginning Cash Balance
60,000 60,000 60,000
Ending Cash Balance $30,800 $ 30,800 $30,800
8-100
EXERCISE 8-20B
The three classifications of investment securities are:
1. Held-to-Maturity Securities: An example of held-to-maturity securities would be bonds that are intended to be held to their maturity date.
2. Trading Securities: An example of trading securities would more likely be stocks that are intended to be held a short time and are traded on a regular basis for the purpose of generating profit.
3. Available-for-Sale Securities: An example would be stocks and bonds that are neither trading nor held-to-maturity. The company may buy a stock with the intention of holding it until it appreciates and it may be sold within a short period of time or held for several years. Intent determines the classification.
8-101
SOLUTIONS TO PROBLEMS - SERIES B - CHAPTER 8
PROBLEM 8-21B
Paul’s Bicycle ShopInventory Purchases
Beginning Inventory 200
@ $280 = $56,000
First Purchase 120
@ 300 = 36,000
Second Purchase 140
@ 330 = 46,200
Total 460
$138,200
a. Cost of Goods Sold:FIFO Unit
sUnit Cost
Cost of Goods Sold
From Beginning Inventory
200 @ $280 = $ 56,000
From First Purchase 120 @ 300 = 36,000From Second Purchase
80 @ 330 = 26,400
Total Units Sold 400 $118,400
Ending Inventory: FIFO Unit
sUnit Cost
Ending Inventory
From Second Purchase
60 @ $330 = $19,800
Cost of Goods Sold:LIFO Unit
sUnit Cost
Cost of Goods Sold
From Second Purchase
140 @ $330 = $46,200
From First Purchase 120 @ 300 = 36,000From Beginning 140 @ 280 = 39,200
8-102
InventoryTotal Units Sold 400 $121,400
Ending Inventory: 60 @ $280 = $16,800LIFO Unit
sUnit Cost
Ending Inventory
From Beginning Inventory
60 $280 = $16,800
8-103
PROBLEM 8-21B a. (cont.)
Weighted Average
Total Cost Total Units
= Cost per Unit
$138,200 460 = $300.435
Cost of Goods Sold: 400 units
@ $300.435
= $120,174
Ending Inventory: 60 units @ $300.435
= $18,026
b.Paul’s Bicycle Shop
Computation of Net Income
FIFO LIFOWeighte
dAverage
Sales (400 units @ $450) $180,000
$180,000
$180,000
Cost of Goods Sold (118,400)
(121,400)
(120,174)
Gross Margin 61,600 58,600 59,826Salaries Expenses (30,000) (30,000) (30,000)Income Before Tax 31,600 28,600 29,826Income Tax (25%) (7,900) (7,150) (7,457)Net Income $23,700 $21,450 $22,369
8-104
PROBLEM 8-21B (cont.)
c. The Accounting Equation is provided for the use of the instructor.
Event Assets = Stockholders’ Equity
Cash Inventory
= C. Stock Ret. Earn.
FIFO Cost Flow
Beginning Balance $ 50,800 $56,000 $43,000 $63,8001. First Purchase (36,000) 36,0002. Second Purchase (46,200) 46,2003a. Sale of Inventory
180,000 180,000
3b. Cost of Goods Sold
(118,400)
(118,400)
4. Paid Sal. Expense
(30,000) (30,000)
5. Paid Income Tax (7,900) (7,900)Totals $110,700 $19,800 $43,000 $87,500
LIFO Cost FlowBeginning Balance $50,800 $56,000 $43,000 $63,8001. First Purchase (36,000) 36,0002. Second Purchase (46,200) 46,2003a. Sale of Inventory
180,000 180,000
3b. Cost of Goods Sold
(121,400)
(121,400)
4. Paid Sal. Expense
(30,000) (30,000)
5. Paid Income Tax (7,150) (7,150)Totals $111,450 $16,800 $43,000 $85,250
Weighted AverageBeginning Balance $50,800 $56,000 $43,000 $63,8001. First Purchase (36,000) 36,0002. Second Purchase (46,200) 46,200
8-105
3a. Sale of Inventory
180,000 180,000
3b. Cost of Goods Sold
(120,174)
(120,174)
4. Paid Sal. Expense
(30,000) (30,000)
5. Paid Income Tax (7,457) (7,457)Totals $111,143 $18,026 $43,000 $86,169
8-106
PROBLEM 8-21B (cont.) c.
Paul’s Bicycle ShopFinancial Statements
For Year Ended December 31,2007
FIFO LIFO Weight. Av.
Income Statements
Sales $180,000 $180,000
$180,000
Cost of Goods Sold (118,400)
(121,400)
(120,174)
Gross Margin 61,600 58,600 59,826
Salaries Expense (30,000) (30,000) (30,000)Income Before Tax 31,600 28,600 29,826Income Tax Expense (7,900) (7,150) (7,457)
Net Income $23,700 $21,450 $22,369
Balance Sheets
AssetsCash $110,700 $111,45
0$111,143
Inventory 19,800 16,800 18,026Total Assets $130,500 $128,25
0$129,169
Stockholders’ EquityCommon Stock $43,000 $43,000 $43,000Retained Earnings 87,500 85,250 86,169
Total Stockholders’ Equity $130,500 $128,250
$129,169
8-107
PROBLEM 8-21B c. (cont.)
Paul’s Bicycle ShopStatements of Cash Flows
For the Year Ended December 31, 2007
FIFO LIFO Weight. Av.
Cash Flows From Oper. Act.:
Cash Inflow from Customers
$180,000 $180,000
$180,000
Cash Outflow for Inventory
(82,200) (82,200) (82,200)
Cash Outflow for Sal. Exp.
(30,000) (30,000) (30,000)
Cash Outflow for Income Tax
(7,900) (7,150) (7,457)
Net Cash Flow from Oper. Act.
59,900 60,650 60,343
Cash Flows From Investing Act.
-0- -0- -0-
Cash Flows From Financing Act.
-0- -0- -0-
Net Change in Cash 59,900 60,650 60,343Plus: Beginning Cash Balance
50,800 50,800 50,800
Ending Cash Balance $110,700 $111,450
$111,143
8-108
PROBLEM 8-22BProvided for the use of the instructor:
Fred’s FireplacesSales and Purchase Transactions for 2008
Date Sales Purchases Cost of Goods Sold Inventory
UnitsPrice Per Unit
= Total Units
Cost Per Unit
Total Units
Cost per Unit
Total Units
Cost per Unit
Total
1/1 60 @$350 = $21,000
3/5 50 @$370 = $18,500
6050
@$350@$370
==
$21,000$18,500
4/10 40 @$450
= $18,000
40 @$350 = $14,000
2050
@$350@$370
==
$ 7,000$18,500
6/19 50 @$450
= $22,500
2030
@$350@$370
==
$ 7,000
$11,100
20 @$370 = $ 7,400
9/16 50 @$390 = $19,500
2050
@$370@$390
==
$ 7,400$19,500
11/28
35 @$470
= $16,450
2015
@$370@$390
==
$ 7,400
5,850
35 @$390 = $13,650
Totals
Sales $56,95 0
COGS $45,35 0
End Inv.
$13,650
8-109
8-110
PROBLEM 8-22B (cont.)a.
Fred’s FireplacesGeneral Journal, 2008
Date Account Titles Debit Credit
3/5 Inventory 18,500Cash 18,500
4/10 Cash 18,000Sales 18,000
4/10 Cost of Goods Sold* 14,000Inventory 14,000
6/19 Cash 22,500Sales 22,500
6/19 Cost of Goods Sold* 18,100Inventory 18,100
9/16 Inventory 19,500Cash 19,500
11/28 Cash 16,450Sales 16,450
11/28 Cost of Goods Sold* 13,250Inventory 13,250
*See previous schedule for computation.
b. Sales $56,950Cost of Goods Sold (45,350 ) Gross Margin $11,600
c. Ending Inventory $13,650 (See previous computation)
8-111
PROBLEM 8-23B
Ed’s Repair Service
Individual Item Lower of Cost or Market
Item Quantity
Unit Cost
Unit Marke
t
Total Cost
Total Market Unit
s
LCM per Unit
Total
P1 80 $80 $90 $ 6,400
$ 7,200 80 @ $80 $ 6,400
P2 60 60 66 3,600 3,960 60 @ $60 3,600
P3 100 140 130 14,000 13,000 100 @ $130 13,000
P4 50 130 140 6,500 7,000 50 @ $130 6,500
$30,500
$31,160 $29,500
a. $29,500
b.Debit Credi
tCost of Goods Sold (Inventory Loss)*
1,000
Inventory 1,000
*($30,500 $29,500)
c. $30,500
d. No entry; cost is lower than market.
e. Under the periodic system the amount of ending inventory would be shown at the lower of cost or market in the schedule of cost of goods sold. By lowering the ending inventory, cost of goods sold is increased. Any loss is automatically included in cost of goods sold.
8-112
PROBLEM 8-24B
Hank’s Fun House
a. 1.Estimated Gross Margin:
Sales x Gross Margin %: $1,140,000 x .30 = $342,000
2. Estimated Cost of Goods Sold:
Sales Gross Margin: $1,140,000 $342,000= $798,000Or:Sales x Cost of Goods Sold %: $1,140,000 x 70% =
$798,000
3. Estimated Inventory at October 6:
Beginning Inventory $162,000Plus: Purchases 680,000Less: Cost of Goods Sold (798,000)Ending Inventory $ 44,000
b. Loss: Total Inventory $ 44,000Less: Undamaged (20,000)Total Loss $ 24,000
c. Under the perpetual inventory system, if records are maintained accurately, the balance in the inventory account should be equal to the amount of the inventory on hand at the time of the loss. Any differences would be attributable to lost, stolen, or damaged goods.
8-113
PROBLEM 8-25B
Elle’s Eatery
2006 2007 Total
Net Sales $60,000 $70,000 $130,000Cost of Goods Sold (31,000) (36,500) (67,500)Gross Margin $
29,000$33,500 $ 62,500
Gross Margin % $62,500 $130,000
= 48%
Cost of Goods Sold %
$67,500 130,000 = 52%
a. Computation of Gross Margin:
Sales $56,500Less: Sales Discounts (2,500)Net Sales 54,000x Gross Margin % 48%Gross Margin $25,920
b. Computation of Ending Inventory:
Beginning Inventory $12,500Plus: Purchases 41,000Plus: Transportation-In 2,000Goods Available for Sale 55,500Less: Cost of Goods Sold (28,080 ) *
Ending Inventory $27,420
*$54,000 x 52% = $28,080
8-114
PROBLEM 8-26B
Error No.1 Amount of Error
Effect
Sales, 2006 NA NAEnding Inventory, 12/31/06
NA NA
Gross Margin, 2006 $2,000 Beginning Inventory, 1/1/07
NA NA
Cost of Goods Sold, 2006
2,000 +
Net Income, 2006 NA NARetained Earnings, 12/31/06
NA NA
Total Assets, 12/31/06 NA NA
Error No. 2 Amount of Error
Effect
Sales, 2006 $500 Ending Inventory, 12/31/06
300 +
Gross Margin, 2006 200 Beginning Inventory, 1/1/07
300 +
Cost of Goods Sold, 2006
300
Net Income, 2006 200 Retained Earnings, 12/31/06
200
Total Assets, 12/31/06 200
Error No. 3 Amount of Error
Effect
8-115
Sales, 2006 NA NAEnding Inventory, 12/31/06
$1,800
Gross Margin, 2006 1,800 Beginning Inventory, 1/1/07
1,800
Cost of Goods Sold, 2006
1,800 +
Net Income, 2006 1,800 Retained Earnings, 12/31/06
1,800
Total Assets, 12/31/06 1,800
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PROBLEM 8-27B
(a). Held-to-Maturity
T-Accounts
Assets = Stockholders’ Equity
Cash Investment Sec. Common Stock1. 15,000 3. 12,000 3. 12,000 8. 6,000 1. 15,0002. 50,000 4. 17,000 6. 16,000 Bal.
15,0005. 400 6. 16,000 Bal.
22,0008. 6,400 7. 1,000 Dividends9. 900 7. 1,000Bal.
26,700Bal.1,000
Service Revenue2. 50,000Bal.50,000
Investment Income5. 4009. 900Bal. 1,300
Gain on Sale of Invest.
8. 400Bal. 400
Operating Expenses
4. 17,000Bal.
17,000
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PROBLEM 8-27B (cont.)
(b). Trading
T-Accounts
Assets = Stockholders’ Equity
Cash Investment Sec. Common Stock1. 15,000 3. 12,000 3. 12,000 8.6,000 1. 15,0002. 50,000 4. 17,000 6. 16,000 Bal.
15,0005. 400 6. 16,000 10.
2,0008. 6,400 7. 1,000 Bal.
20,000Dividends
9. 900 7. 1,000Bal.
26,700Bal.1,000
Service Revenue2. 50,000Bal.50,000
Investment Income5. 4009. 900Bal. 1,300
Gain on Sale of Invest.
8. 400Bal. 400
Operating Expenses
4. 17,000Bal.
17,000
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(Income Account)Unrealized Gain/Loss
10. 2,000Bal. 2,000
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PROBLEM 8-27B (cont.)
(c). Available-for-Sale
T-Accounts
Assets = Stockholders’ Equity
Cash Investment Securities
Common Stock
1. 15,000 3. 12,000 3.12,000 8. 6,000 1. 15,0002. 50,000 4. 17,000 6.16,000 10.
2,000Bal.15,000
5. 400 6. 16,000 Bal.20,000
8. 6,400 7. 1,000 Dividends9. 900 7. 1,000Bal.
26,700Bal.1,000
(Equity Account)Unrealized Gain/Loss
10.2,000Bal.2,000
Service Revenue2. 50,000Bal.50,000
Investment Income5. 4009. 900Bal. 1,300
Gain on Sale of Invest.
8. 400Bal. 400
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Operating Expenses
4. 17,000Bal.
17,000
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PROBLEM 8-27B (cont.)
Brogan’s Trucking CompanyComparative Financial Statements
For the Year Ended 2007
Investment Securities Classified As:
Held Trading
Available
Income Statements
Services Revenue $50,000 $50,000
$50,000
Operating Expenses (17,000)
(17,000)
(17,000)
Net Operating Income 33,000 33,000 33,000
Investment Revenue 1,300 1,300 1,300Realized Gains 400 400 400Unrealized Loss -0- (2,000) -0-
Net Income $34,700 $32,700
$34,700
Balance Sheets
AssetsCash $26,700 $26,70
0$26,70
0Investment Securities @
Cost22,000 -0- -0-
Investment Securities @ Market
-0- 20,000 20,000
Total Assets $48,700 $46,700
$46,700
Stockholders’ EquityCommon Stock $15,000 $15,00
0$15,00
0Retained Earnings* 33,700 31,700 33,700Unrealized Loss -0- -0- (2,000)
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Total Stockholders’ Equity $48,700 $46,700
$46,700
*Net Income above less $1,000 dividends
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PROBLEM 8-27B (cont.)
Brogan’s Trucking CompanyComparative Financial Statements
For the Year Ended 2007
Investment Securities Classified As:
Held Trading Available
Statements of Cash Flows
Cash Flows From Operating Act.:
Cash Inflow from Customers
$50,000
$50,000 $50,000
Cash Inflow from Invest. Rev.
1,300 1,300 1,300
Outflow for Expenses (17,000)
(17,000)
(17,000)
Outflow to Purchase Securities
-0- (28,000)
-0-
Inflow from Sale of Securities
-0- 6,400 -0-
Net Cash Flow from Oper. Act.
34,300 12,700 34,300
Cash Flows From Investing Act.:
Outflow to Purchase Securities
(28,000)
-0- (28,000)
Inflow from Sale of Securities
6,400 -0- 6,400
Net Cash Flow from Investing Act.
(21,600)
-0- (21,600)
Cash Flows From Financing Act.:
Inflow from Stock Issue 15,000 15,000 15,000Outflow for Dividends (1,000) (1,000) (1,000)
Net Cash Flow from Financing Act.
14,000 14,000 14,000
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Net Change in Cash 26,700 26,700 26,700Plus: Beginning Cash Balance -0- -0- -0-Ending Cash Balance $26,70
0$26,700 $26,70
0
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PROBLEM 8-28B
a.Even
tBalance Sheet Income Statement Stmt. of
Assets
= Liab. + S. Equity
Rev. Exp. = Net Inc.
Cash Flows
1. + NA + NA NA NA + FA2. + NA NA NA NA NA IA3. + NA NA NA NA NA OA4. + NA + + NA + NA5. + NA + NA NA NA NA6. NA NA NA NA NA NA NA7. NA NA + NA8. NA NA NA NA NA NA NA9. NA NA + NA
10. NA NA + NA
b. The directional effect is the same for events 9 and 10. In both events, you are reducing inventory and recording an expense that reduces stockholders’ equity. However, the amounts would be different during periods of changing prices.
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ATC 8-1Financial Statement Analysis
a. Inventory turnover:
$25,445 ÷ $400 = 63.61 times
Average days to sell inventory:
365 days ÷ 63.6 = 5.7 days (Wow!)
b. FIFO. See Note 1 on page 31 of the annual report.
c. Unlike most companies, including other direct marketers such as Land’s End, Dell does not need to maintain significant quantities of “finished goods” inventory. Dell builds computers “to order”, so its inventory includes an inventory of parts. See Note 9 on page 42 of the annual report. Conversely, Land’s End must maintain many different sizes and colors of each of its clothing products, so it can fill customers’ orders on a timely basis. Additionally, Dell is famous for its very efficient “just-in-time” inventory system, which results in very low inventory levels.
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ATC 8-2a.
Blue Bird CompanyInventory Purchases
Beginning Inventory 100 @ $50 = $ 5,000 70 @ 55 = 3,850
First Purchase 100 @ 54 = 5,400Second Purchase 250 @ 58 = 14,500Total 520 $28,750
FIFOCost of Goods Sold:
FIFO UnitsCost per
UnitCost of Goods
SoldFrom Beginning Inventory 100 @ $50 = $ 5,000From Beginning Inventory 70 @ 55 = 3,850From First Purchase 100 @ 54 = 5,400From Second Purchase 150 @ 58 = 8,700Total Units Sold 420 $22,950
Ending Inventory: 100 units @ $58 = $5,800
LIFOCost of Goods Sold:
LIFO UnitsCost per
UnitCost of Goods
SoldFrom Second Purchase 250 @ $58 = $14,500From First Purchase 100 @ 54 = 5,400From Beginning Inventory 70 @ 55 = 3,850Total Units Sold 420 $23,750
Ending Inventory: 100 units @ $50 = $5,000
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ATC 8-2 a. (cont.)
Weighted Average
Total Cost Total Units = Cost per Unit$28,750 520 = $55.288
Cost of Goods Sold 420 units @ $55.288 = $23,221
Ending Inventory 100 units @ $55.288 = $5,529
Blue Bird Company
Income Statements FIFO LIFOWeightedAverage
Sales (220 @$80; 200 @ $90) $35,600 $35,600 $35,600Cost of Goods Sold (22,950) (23,750) (23,221)Gross Margin 12,650 11,850 12,379Operating Expenses (3,200) (3,200) (3,200)Income Before Tax 9,450 8,650 9,179Income Tax (30%) (2,835) (2,595) (2,754)Net Income $6,615 $6,055 $6,425
b. LIFO may be preferred for tax purposes in a period of rising prices because it will result in the lowest net income and, consequently, the lowest amount of tax paid for the year. FIFO may be preferred for financial statement purposes because it will result in the higher net income in a period of rising prices. The higher net income is more favorable to stockholders. Because LIFO generally results in a deferral of the payment of income tax, if it is used for tax reporting, it must also be used for financial statement purposes to prevent abuse by taxpayers.
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ATC 8-3
Real World Case
Note, all dollar amounts are in millions.a. Sales for 2000 $141,230.0 x decrease in gross margin percentage (11.9% - 10.7%) 0.012 Decrease in 2000's pretax earnings due
to the lower gross margin $ 1,694.8
b. Ending inventory for 2000 $ 7,514.0 x Ford’s interest rate 0.075 x increased portion of a year to sell inventory from 1999 to 2000 (22 days - 17 days) 5 ÷ 365 Increase in financing cost per inventory cycle 7.7 x inventory cycles per year for 2000 (365/22) 16.6
Decrease in 2000 pretax earnings due to increased financing cost resulting from longer time to sell inventory $ 127.8
c. Decrease in 2000's pretax earnings due to the lower gross margin (see a. above) $ 1,694.8
Decrease in 2000 pretax earnings due to increased financing cost resulting from longer time to sell inventory (see b. above) 127.8
Total 1,822.6÷ Decrease in pretax earnings from 1999 to 2000 ÷ 2,008.0
Percentage of decrease in pretax earnings resulting from the lower gross margin percentage and the longer time to sell
inventory 90.8%
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ATC 8-4
Inventory turnover: $7,518,000 $289,000 = 26 inventory turnovers
365 26 = 14 days to sell inventory
The average days to sell inventory is 14 days. However, the average shelf life for the fruit sold is only 10 days. The inventory does not appear to be good collateral for the loan.
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ATC 8-5
a. First the company's gross margins must be calculated:
Cosmos FantasySales $2,000,000 $2,000,000Cost of Goods Sold (1,200,000) (1,260,000)Gross Margin $ 800,000 $ 740,000
Gross margin %:Cosmos: $800,000 ÷ $2,000,000 = 40%Fantasy: $740,000 ÷ $2,000,000 = 37%
Cosmos appears to be charging more in relation to cost of goods sold.
b. Inventory turnover ratios:Cosmos: $1,200,000 ÷ $240,000 = 5.0 timesFantasy: $1,260,000 ÷ $180,000 = 7.0 times
Average days to sell inventory:Cosmos: 365 days ÷ 5.0 = 73 daysFantasy: 365 days ÷ 7.0 = 52 days
Cosmos appears to incur the higher costs to finance inventory for two reasons: (1) it takes the longest time to sell its inventory, and (2) it has more inventory than Fantasy.
c. Other things being equal, this would indicate a company sells its product at a lower price. The lower the price, the more quickly goods should sell. “Other things” are not equal in this problem. Fantasy is using LIFO while Cosmos is using FIFO. Assuming prices are rising, LIFO causes the gross margin percentage to be lower, due to the higher cost of goods sold. LIFO also causes ending inventory to appear to be lower. The higher cost of goods sold and the lower ending inventory resulting from LIFO both cause the inventory turnover ratio to be higher than if FIFO is being used. However, neither the lower gross margin percentage nor the higher inventory turnover ratio that results from using LIFO have any effect on cash flows, except for the related income tax effects.
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ATC 8-5 (cont.)
d. First, calculate the accounts receivable turnover ratio:
Cosmos: $2,000,000 ÷ $320,000 = 6.3 timesFantasy: $2,000,000 ÷ $320,000 = 6.3 times
Next, calculate the average days to collect accounts receivable:
Both companies: 365 days ÷ 6.3 = 58 days
Finally, using the “average days to sell inventory” calculated in part b. and the “average days to collect accounts receivable,” calculated above, determine the length of the operating cycle.
Cosmos Fantasy
Days to sell inventory (see b.) 73 52Days to collect receivables 58 58Operating cycle 131 110
The shorter a company’s operating cycle, the more quickly it gets its cash back and the more quickly this cash can be reinvested. The quicker money is reinvested, the more money can be made. As noted above in c., this is not entirely true if the shorter operating cycle results from using different inventory flow assumptions.
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ATC 8-6
a.The following amounts would be shown on the balance sheet at December 31, 2001:
Assets:InvestmentsAvailable for Sale $19,978.5
Held-to-maturity $143.0
Trading securities $16,535.7
Stockholders’ Equity:Unrealized gains on investment securities(Available for Sale) $871.4 (951.3 79.9)
b. The memo should include an explanation of the difference in intent between available-for-sale, held-to-maturity, and trading securities. Also the memo should include an explanation of how each is reported on the balance sheet.
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ATC 8-7
a. When the LIFO method is used, tax law requires companies to use the same cost flow method for financial reporting that they use for tax reporting. Consequently, if the company uses LIFO for tax purposes, then it is legally bound to use the same method in its financial statements. Accordingly, it would be illegal for Coolage to follow Bailey’s instructions. It is not unethical to report certain items one way on the tax return and a different way on the financial statements, so long as there is no legal requirement preventing it. Indeed, this is common business practice. The requirement for consistency between LIFO on the tax return and LIFO on the income statement is an exception to the general rule. Nevertheless, it would be illegal and unethical to violate the tax laws.
b. The switch to FIFO would increase the amount of ending inventory reported on Far Eastern’s balance sheet. Assuming an inflationary economy, the first inventory purchased, which would be the lower cost inventory, would be the first inventory expensed when goods are sold under FIFO. This would leave the higher cost inventory in ending inventory which is the cost that would appear on the balance sheet.
c. It would be unwise to pay $400,000 of additional taxes in order to increase the amount of reported net income by $800,000. Since LIFO reduces cash outflow for taxes, it increases the value of the company to its owners. The switch to FIFO would decrease the value of the company and thereby would act to deter rather than stimulate investment. According to accounting research, investors are not fooled by deceptive reporting practices. They make investment decisions on the basis of the economic consequences (i.e., cash consequences) rather than spurious values that may be reported in the financial statements.
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ATC 8-8Using the EDGAR Database
NOTE: This solution was accurate as of January 3, 2002. However, the EDGAR database is subject to update at any time, so this solution will likely be “dated” at the time you assign this case to your students.
These data are from the February 3, 2001 financial statements and dollar amounts are in thousands.
a. Gap Company had 3,676 stores and total merchandise inventory of $1,904,153. The average inventory per store was $518.
b. During its 2000 fiscal year, Gap opened 731 new stores and closed 73 existing stores, for a net increase of 658 stores. (See the “properties” section of MD&A)
c. Quarter Sales During Each Quarter 1 $2,731,990 2 2,947,714 3 3,414,668 4 4,579,088
d. Gap has higher sales during the third and fourth quarters due to Christmas sales. Yes, its inventory must also vary throughout the year to support the changing level of sales.
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