Will the dollar amount assigned to inventory differ when a company uses the weighted average cost method depending on whether a periodic or perpetual inventory system is used? Explain your answer.
HOMEWORK
LO9 LO10 LO11 LO12 LO13E X E R C I S E S
Exercise 5-1
Classification of Inventory Costs
Put an Xin the appropriate column next to the inventory item to indicate its most likely classifi- cation on the books of a company that manufactures furniture and then sells it in retail company stores.
Classification
Raw Work in Finished Merchandise
Inventory Item Material Process Goods Inventory
Fabric Lumber
Unvarnished tables
Chairs on the showroom floor Cushions
Decorative knobs Drawers Sofa frames
Chairs in the plant warehouse Chairs in the retail storeroom
Exercise 5-2
Inventoriable Costs
During the first month of operations, ABC Company incurred the following costs in ordering and receiving merchandise for resale. No inventory was sold.
LO1
LO2 LO2 Appliance store Car dealership Drugstore Furniture store Grocery store Hardware store Jewelry store
How might changes in technology affect the ability of merchandisers to use perpetual inventory systems?
Exercise 5-5
Missing Amounts in Cost of Goods Sold Model
For each of the following independent cases, fill in the missing amounts. Case 1 Case 2 Case 3 Beginning inventory $ (a) $2,350 $1,890
Purchases (gross) 6,230 5,720 (e)
Purchase returns and allowances 470 800 550
Purchase discounts 200 (c) 310
Transportation-in 150 500 420
Cost of goods available for sale 7,110 (d) 8,790
Ending inventory (b) 1,750 1,200
Cost of goods sold 5,220 5,570 (f)
LO3
List price, $100, 200 units purchased Volume discount, 10% off list price Paid freight costs, $56
Insurance cost while goods were in transit, $32 Long-distance phone charge to place orders, $4.35 Purchasing department salary, $1,000
Supplies used to label goods at retail price, $9.75 Interest paid to supplier, $46
Required
What amount do you recommend the company record as merchandise inventory on its bal- ance sheet? Explain your answer. For any items not to be included in inventory, indicate their appropriate treatment in the financial statements.
Exercise 5-3
Perpetual and Periodic Inventory Systems
Following is a partial list of account balances for two different merchandising companies. The amounts in the accounts represent the balances at the end of the year beforeany adjustments are made or the books are closed.
Company A Company B
Sales Revenue $50,000 Sales Revenue $85,000 Sales Discounts 3,000 Sales Discounts 2,000 Merchandise Inventory 12,000 Merchandise Inventory 9,000 Cost of Goods Sold 38,000 Purchases 41,000 Purchase Discounts 4,000 Purchases Returns and
Allowances 1,000
Required
1. Identify which inventory system, perpetual or periodic, each of the two companies uses. Explain how you know which system each company uses by looking at the types of accounts on its books. 2. How much inventory does Company A have on hand at the end of the year? What is its cost
of goods sold for the year?
3. Explain why you cannot determine Company B’s cost of goods sold for the year from the information available.
Exercise 5-4
Perpetual and Periodic Inventory Systems
From the following list, identify whether the merchandisers described would most likely use a perpetual or a periodic inventory system.
Exercises 239
Exercise 5-6
Purchase Discounts
For each of the following transactions of Buckeye Corporation, prepare the appropriate jour- nal entry. (All purchases on credit are made with terms of 1/10, net 30; and Buckeye uses the peri- odic system of inventory.)
July 3: Purchased merchandise on credit from Wildcat Corp. for $3,500. July 6: Purchased merchandise on credit from Cyclone Company for $7,000. July 12: Paid amount owed to Wildcat Corp.
August 5: Paid amount owed to Cyclone Company.
Exercise 5-7
Purchases—Periodic System
For each of the following transactions of Wolverine Corporation, prepare the appropriate journal entry. The company uses the periodic system.
March 3: Purchased merchandise from Spartan Corp. for $2,500 with terms of 2/10, net/30. Shipping costs of $250 were paid to Neverlate Transit Company.
March 7: Purchased merchandise from Boilermaker Company for $1,400 with terms of net/30.
March 12: Paid amount owed to Spartan Corp.
March 15: Received a credit of $500 on defective merchandise purchased from Boilermaker Company. The merchandise was kept.
March 18: Purchased merchandise from Gopher Corp. for $1,600 with terms of 2/10, net 30. March 22: Received a credit of $400 from Gopher Corp. for spoiled merchandise
returned to Gopher. This is the amount of credit exclusive of any discount. April 6: Paid amount owed to Boilermaker Company.
April 18: Paid amount owed to Gopher Corp.
Exercise 5-8
Shipping Terms and Transfer of Title
On December 23, 2008, Miller Wholesalers ships merchandise to Michael Retailers with terms of FOB destination point. The merchandise arrives at Michael’s warehouse on January 3, 2009. Required
1. Identify who pays to ship the merchandise.
2. Determine whether the inventory should be included as an asset on Michael’s December 31, 2008, balance sheet. Should the sale be included on Miller’s 2008 income statement? Explain.
3. Explain how your answers to (2) would have been different if the terms of shipment had been FOB shipping point.
Exercise 5-9
Transfer of Title to Inventory
Identify whether the transactions described should be recorded by Cameron Companies during December 2008 (fill in the blank with a D) or January 2009 (fill in the blank with a J).
Purchases of merchandise that are in transit from vendors to Cameron Companies on December 31, 2008.
Shipped FOB shipping point Shipped FOB destination point
Sales of merchandise that are in transit to customers of Cameron Companies on December 31, 2008.
Shipped FOB shipping point Shipped FOB destination point
Exercise 5-10
Inventory and Income Manipulation
The president of SOS Inc. is concerned that the net income at year-end will not reach the expected figure. When the sales manager receives a large order on the last day of the fiscal year, the presi- dent tells the accountant to record the sale but to ignore any inventory adjustment because the physical inventory has already been taken. How will this affect the current year’s net income? next year’s income? What would you do if you were the accountant? Assume that SOS uses a periodic inventory system.
HOMEWORK
LO3 LO3 LO3 LO3 LO5LO6
LO7
LO8
LO8
Exercise 5-11
Inventory Costing Methods
VanderMeer Inc. reported the following information for the month of February: Inventory, February 1 65 units @ $20
Purchases:
February 7 50 units @ $22 February 18 60 units @ $23 February 27 45 units @ $24
During February, VanderMeer sold 140 units. The company uses a periodic inventory system. Required
What is the value of ending inventory and cost of goods sold for February under the following assumptions:
1. Of the 140 units sold, 55 cost $20, 35 cost $22, 45 cost $23, and 5 cost $24. 2. FIFO
3. LIFO
4. Weighted average
Exercise 5-12
Evaluation of Inventory Costing Methods
Write the letter of the method that is most applicable to each statement. a. Specific identification
b. Average cost
c. First-in, first-out (FIFO) d. Last-in, first-out (LIFO)
1. Is the most realistic ending inventory
2. Results in cost of goods sold being closest to current product costs 3. Results in highest income during periods of inflation
4. Results in highest ending inventory during periods of inflation 5. Smooths out costs during periods of inflation
6. Is not practical for most businesses
7. Puts more weight on the cost of the larger number of units purchased
8. Is an assumption that most closely reflects the physical flow of goods for most businesses
Exercise 5-13
Inventory Errors
For each of the following independent situations, fill in the blanks to indicate the effect of the error on each of the various financial statement items. Indicate an understatement (U), an over- statement (O), or no effect (NE). Assume that each of the companies uses a periodic inventory system.
Balance Sheet Income Statement
Retained Cost of Net
Error Inventory Earnings Goods Sold Income
1. Goods in transit at year-end are not included in the physical count; they were shipped FOB
shipping point. ________ ________ ________ ________ 2. One section of a warehouse is
counted twice during the year-end
count of inventory. ________ ________ ________ ________ 3. During the count at year-end, the
inventory sheets for one of the
stores of a discount retailer are lost. ________ ________ ________ ________
Exercise 5-14
Transfer of Title to Inventory
For each of the following transactions, indicate which company should include the inventory on its December 31, 2008 balance sheet:
Exercises 241
1. Michelson Supplies Inc. shipped merchandise to PJ Sales on December 28, 2008, terms FOB destination. The merchandise arrives at PJ’s on January 4, 2009.
2. Quarton Inc. shipped merchandise to Filbrandt on December 25, 2008, FOB destination. Filbrandt received the merchandise on December 31, 2008.
3. James Bros. Inc. shipped merchandise to Randall Company on December 27, 2008, FOB ship- ping point. Randall Company received the merchandise on January 3, 2009.
4. Hinz Company shipped merchandise to Barner Inc. on December 24, 2008, FOB shipping point. The merchandise arrived at Barner’s on December 29, 2008.
Exercise 5-15
Gross Profit Method
On February 12, a hurricane destroys the entire inventory of Suncoast Corporation. An estimate of the amount of inventory lost is needed for insurance purposes. The following information is available:
Inventory on January 1 $ 15,400 Net sales from January 1 to February 12 105,300 Purchases from January 1 to February 12 84,230
Suncoast estimates its gross profit ratio as 25% of net sales. The insurance company has agreed to pay Suncoast $10,000 as a settlement for the inventory destroyed.
Required
Determine the effect on the accounting equation of the adjustment to recognize the inventory lost and the insurance reimbursement.
Exercise 5-16
Inventory Turnover for Best Buy
The following amounts are available from the 2007 annual report of Best Buy Co., Inc. (All amounts are in millions of dollars.)
Cost of goods sold (for year ended March 3, 2007) $27,165 Merchandise inventories, March 3, 2007 4,028 Merchandise inventories, February 25, 2006 3,338
Required
1. Compute Best Buy’s inventory turnover ratio for 2007.
2. What is the average length of time it takes to sell an item of inventory? Explain your answer. 3. Do you think the average length of time it took Best Buy to sell inventory in 2007 is reason-
able? What other information do you need to fully answer that question?
Exercise 5-17
Impact of Transactions Involving Inventories on Statement of Cash Flows
From the following list, identify whether the change in the account balance during the year is added to (A) or deducted from (D) net income when the indirect method is used to determine cash flows from operating activities.HOMEWORK
LO10
LO11
LO12
Increase in accounts payable Decrease in accounts payable
Increase in inventories Decrease in inventories
Exercise 5-18
Effects of Transactions Involving Inventories on the Statement of Cash Flows—
Direct Method
Masthead Company’s comparative balance sheets included inventory of $180,400 at December 31, 2007, and $241,200 at December 31, 2008. Masthead’s comparative balance sheets also included accounts payable of $85,400 at December 31, 2007, and $78,400 at December 31, 2008. Masthead’s accounts payable balances are composed solely of amounts due to suppliers for pur- chases of inventory on account. Cost of goods sold, as reported by Masthead on its 2008 income statement, amounted to $1,200,000.
Required
What is the amount of cash payments for inventory that Masthead will report in the Operating Activities category of its 2008 statement of cash flows assuming that the direct method is used?
LO12