Download Warren/Reeve/Duchac Accounting 23e - Chapter 7 Pr 7-1A, Pr 7

Warren/Reeve/Duchac Accounting 23e – Chapter 7
Pr 7-1A, Pr 7-1B
Key Learning Outcome Addressed: Describe three inventory cost flow
assumptions and how they impact the income statement and balance sheet;
Determine the cost of inventory under the perpetual inventory system,
using the FIFO, LIFO, and average cost methods
Length: 70 seconds
Narrative:
On the date of each transaction, record the units, as well as the cost of
merchandise purchased and sold, in the perpetual inventory record. Also,
journalize entries for each sale. Use the first-in, first-out method to
determine the cost of merchandise sold. The beginning inventory
represents the first cost of the accounting period and thus becomes the
first cost of merchandise sold. Costs are then included in the order in
which they were purchased.
Ending inventory represents the most recent purchases.
The perpetual inventory record includes columns for cost of merchandise
sold and ending inventory. These columns may include more than one layer
of data. Each layer represents unit and cost data for either the
beginning inventory or a purchase.
The sale of merchandise decreases
one or more of the layers. Update the quantity and cost information
after each purchase and sale.
Gross profit from sales is computed by subtracting the cost of
merchandise sold from the sales revenue.
Pr 7-2A, Pr 7-2B
Key Learning Outcome Addressed: Describe three inventory cost flow
assumptions and how they impact the income statement and balance sheet;
Determine the cost of inventory under the perpetual inventory system,
using the FIFO, LIFO, and average cost methods
Length: 75 seconds
Narrative:
On the date of each transaction, record the units, as well as the cost of
merchandise purchased and sold, in the perpetual inventory record. Use
the last-in, first-out method to determine the cost of merchandise sold.
Cost of merchandise sold is the cost of the most recent, or latest,
purchases.
This method matches the cost of the most recent purchases to
the sales revenue for the accounting period.
This cost flow assumption
generally does not represent the physical flow of goods.
Ending inventory represents the oldest costs.
The perpetual inventory record includes columns for cost of merchandise
sold and ending inventory. These columns may include more than one layer
of data. Each layer represents unit and cost data for either the
beginning inventory or a purchase.
The sale of merchandise causes a
decrease in one or more of the layers. Update this quantity and cost
information after each purchase and sale.
Gross profit from sales is computed by subtracting the cost of
merchandise sold from the sales revenue.
Pr 7-3A, Pr 7-3B
Key Learning Outcome Addressed: Describe three inventory cost flow
assumptions and how they impact the income statement and balance sheet;
Determine the cost of inventory under the periodic inventory system,
using the FIFO, LIFO, and average cost methods
Length: 70 seconds
Narrative:
When using the periodic inventory method, revenue is recorded at the time
a sale is made. However, no entry is made to record the cost of
merchandise sold. At the end of the accounting period, one of the three
cost flow assumptions is used to determine the cost of inventory, as well
as the cost of merchandise sold.
The problem provides the quantity and unit cost for both the beginning
inventory and purchases. The quantity of ending inventory is also
provided.
Determine the cost of ending inventory by applying each of the three
inventory cost flow assumptions. The ending inventory under the FIFO and
LIFO methods may involve more than one layer of units and costs.
Subtract the cost of ending inventory from the cost of merchandise
available for sale to determine cost of merchandise sold.
When prices are rising, the cost of acquiring merchandise goes up. The
opposite happens when prices are declining. Analyze the effects of these
two market conditions on net income determined by FIFO and LIFO. Discuss
which method is preferred for income taxes.
Pr 7-5A, Pr 7-5B
Key Learning Outcome Addressed:
method
Appendix – Retail method; Gross profit
Length: 60 seconds
Narrative:
The chapter appendix lists reasons for estimating the amount of ending
inventory. Retail and gross profit methods are used to make the
estimate.
Merchandise available for sale must be computed for both methods. The
beginning inventory plus the net purchases for the accounting period
equals merchandise available for sale.
This formula can show cost, as
well as, retail prices.
The retail method uses both cost and retail prices. Divide the retail
price of merchandise available for sale by the cost of merchandise
available for sale to compute the ratio of cost to retail price.
The estimated gross profit rate is used in the gross profit method. This
rate is determined by dividing gross profit by net sales. The appendix
discusses ways to estimate the amount of gross profit.
As you work this problem, be sure to show your computations and label
your work.
Sheila Ammons
7/17/2008 4:46 PM
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