Inventory Estimation Methods
PROBLEM SET B
Problem 5-1BA
Perpetual: Alternative cost flows Date Activities Units Acquired at Cost Units Sold at Retail P3
Apr. 1 Beginning inventory . . . 20 units @ $3,000.00 per unit Apr. 6 Purchase . . . 30 units @ $3,500.00 per unit
Apr. 9 Sales . . . 35 units @ $12,000.00 per unit Apr. 17 Purchase . . . 5 units @ $4,500.00 per unit
Apr. 25 Purchase . . . 10 units @ $4,800.00 per unit
Apr. 30 Sales . . . 25 units @ $14,000.00 per unit Total . . . 65 units 60 units
Check (1) Net income: FIFO,
$61,200; LIFO, $57,180; WA,
$59,196
Problem 5-2B
Periodic: Alternative cost flows
P3
Refer to the information in Problem 5-1B and assume the periodic inventory system is used.
Required
1. Compute cost of goods available for sale and the number of units available for sale.
2. Compute the number of units in ending inventory.
3. Compute the cost assigned to ending inventory using (a) FIFO, (b) LIFO, (c) weighted average, and (d) specific identification. (Round all amounts to cents.)
4. Compute gross profit earned by the company for each of the four costing methods in part 3.
Problem 5-3BA
Perpetual: Alternative cost flows
P3
Information: Aloha Company uses a perpetual inventory system. It entered into the following calendar-year 2013 purchases and sales transactions. (For specific identification, the May 9 sale consisted of 80 units from beginning inventory and 100 units from the May 6 purchase; the May 30 sale consisted of 200 units from the May 6 purchase and 100 units from the May 25 purchase.)
Required
1. Compute cost of goods available for sale and the number of units available for sale.
2. Compute the number of units in ending inventory.
3. Compute the cost assigned to ending inventory using (a) FIFO, (b) LIFO, (c) weighted average, and (d) specific identification. (Round all amounts to cents.)
4. Compute gross profit earned by the company for each of the four costing methods in part 3.
Analysis Component
5. If the company’s manager earns a bonus based on a percent of gross profit, which method of inventory costing will the manager likely prefer?
Check (3) Ending inventory: FIFO,
$88,800; LIFO, $62,500; WA, $75,600;
(4) LIFO gross profit,
$449,200
Date Activities Units Acquired at Cost Units Sold at Retail May 1 Beginning inventory . . . 150 units @ $300.00 per unit
May 6 Purchase . . . 350 units @ $350.00 per unit
May 9 Sales . . . 180 units @ $1,200.00 per unit May 17 Purchase . . . 80 units @ $450.00 per unit
May 25 Purchase . . . 100 units @ $458.00 per unit
May 30 Sales . . . 300 units @ $1,400.00 per unit Total . . . 680 units 480 units
Problem 5-4B
Periodic: Alternative cost flows
P3
Refer to the information in Problem 5-3B and assume the periodic inventory system is used.
Required
1. Compute cost of goods available for sale and the number of units available for sale.
2. Compute the number of units in ending inventory.
3. Compute the cost assigned to ending inventory using (a) FIFO, (b) LIFO, (c) weighted average, and (d) specific identification. (Round all amounts to cents.)
4. Compute gross profit earned by the company for each of the four costing methods in part 3.
Analysis Component
5. If the company’s manager earns a bonus based on a percentage of gross profit, which method of inven-tory costing will the manager likely prefer?
Required
1. Compute cost of goods available for sale and the number of units available for sale.
2. Compute the number of units in ending inventory.
3. Compute the cost assigned to ending inventory using (a) FIFO, (b) LIFO, (c) weighted average, and (d) specific identification. (Round all amounts to cents.)
4. Compute gross profit earned by the company for each of the four costing methods in part 3.
Check (3) Ending inventory: FIFO,
$24,000; LIFO, $15,000; WA, $20,000;
(4) LIFO gross profit,
$549,500
Check (3) Ending inventory: FIFO,
$24,000; LIFO, $15,000; WA,
$18,115.40;
(4) LIFO gross profit,
$549,500
Check (3) Ending inventory: FIFO,
$88,800; LIFO, $62,500; WA, $73,324;
(4) LIFO gross profit,
$449,200
Problem 5-5B Lower of cost or market
P2 A physical inventory of Office Necessities taken at December 31 reveals the following.
Office furniture
1. Compute the lower of cost or market for the inventory applied separately to each item.
2. If the market amount is less than the recorded cost of the inventory, then record the LCM adjustment to the Merchandise Inventory account.
Check (1) $580,054
Analysis Component
2. What is the error in total net income for the combined three-year period resulting from the inventory errors? Explain.
3. Explain why the overstatement of inventory by $18,000 at the end of 2012 results in an overstatement of equity by the same amount in that year.
Check (1) Corrected net income:
2012, $157,800; 2013, $256,270; following to show the adjustments necessary to correct the reported amounts.
Problem 5-6B
Analysis of inventory errors
A2 Hallam Company’s financial statements show the following. The company recently discovered that in making physical counts of inventory, it had made the following errors: Inventory on December 31, 2012, is overstated by $18,000, and inventory on December 31, 2013, is understated by $26,000.
For Year Ended December 31 2012 2013 2014 (a) Cost of goods sold . . . $207,200 $213,800 $197,030 (b) Net income . . . 175,800 212,270 184,910 (c) Total current assets . . . 276,000 277,500 272,950 (d ) Total equity . . . 314,000 315,000 346,000
Problem 5-7B
Periodic: Alternative cost flows
P1
Information: Seneca Co. began year 2013 with 6,500 units of product in its January 1 inventory costing
$35 each. It made successive purchases of its product in year 2013 as follows. The company uses a peri-odic inventory system. On December 31, 2013, a physical count reveals that 8,500 units of its product remain in inventory.
Jan. 4 . . . 11,500 units @ $33 each May 18 . . . 13,400 units @ $32 each July 9 . . . 11,000 units @ $29 each Nov. 21 . . . 7,600 units @ $27 each
Check (2) Cost of goods sold:
FIFO, $1,328,700; LIFO, $1,266,500;
WA, $1,294,800
Required
1. Compute the number and total cost of the units available for sale in year 2013.
2. Compute the amounts assigned to the 2013 ending inventory and the cost of goods sold using (a) FIFO, (b) LIFO, and (c) weighted average. (Round all amounts to cents.)
Problem 5-8B
Periodic: Income comparisons and cost flows
A1 P1
Information: Shepard Company sold 4,000 units of its product at $100 per unit in year 2013 and incurred operating expenses of $15 per unit in selling the units. It began the year with 840 units in inventory and made successive purchases of its product as follows.
Jan. 1 Beginning inventory . . . 840 units @ $58 per unit April 2 Purchase . . . 600 units @ $59 per unit June 14 Purchase . . . 1,205 units @ $61 per unit Aug. 29 Purchase . . . 700 units @ $64 per unit Nov. 18 Purchase . . . 1,655 units @ $65 per unit Total . . . 5,000 units
Required
1. Prepare comparative income statements similar to Exhibit 5.8 for the three inventory costing methods of FIFO, LIFO, and weighted average. (Round all amounts to cents.) Include a detailed cost of goods sold section as part of each statement. The company uses a periodic inventory system, and its income tax rate is 40%.
2. How would the financial results from using the three alternative inventory costing methods change if the company had been experiencing decreasing prices in its purchases of inventory?
3. What advantages and disadvantages are offered by using (a) LIFO and (b) FIFO? Assume the continu-ing trend of increascontinu-ing costs.
Check (1) Net income: LIFO,
$52,896; FIFO, $57,000; WA, $55,200
Problem 5-9BB Retail inventory method
P4
The records of Macklin Co. provide the following information for the year ended December 31.
At Cost At Retail January 1 beginning inventory . . . $ 90,022 $115,610 Cost of goods purchased . . . 502,250 761,830 Sales . . . 782,300 Sales returns . . . 3,460
Check (1) Inventory, $66,555 cost;
(2) Inventory shortage at cost, $12,251.25
Required
1. Use the retail inventory method to estimate the company’s year-end inventory.
2. A year-end physical inventory at retail prices yields a total inventory of $80,450. Prepare a calculation showing the company’s loss from shrinkage at cost and at retail.
Problem 5-10BB Gross profit method
P4
Otingo Equipment Co. wants to prepare interim financial statements for the first quarter. The company wishes to avoid making a physical count of inventory. Otingo’s gross profit rate averages 35%. The fol-lowing information for the first quarter is available from its records.
January 1 beginning inventory . . . $ 802,880 Cost of goods purchased . . . 2,209,636 Sales . . . 3,760,260 Sales returns . . . 79,300
Required
Use the gross profit method to estimate the company’s first quarter ending inventory.
Check Estim. ending inventory,
$619,892