Download exercise 6-3 - Fisher College of Business

EXERCISE 6-3
(a)
$1,460
($1,500  $40)
(g)
$7,500
($290 + $7,210)
(b)
$1,570
($1,460 + $110)
(h)
$730
($7,940  $7,210)
(c)
$1,510
($1,820  $310)
(i)
$8,940
($1,000 + $7,940)
(d)
$50
($1,080  $1,030)
(j)
$5,200
($49,530  $44,330 from (l))
(e)
$200
($1,230  $1,030)
(k)
$1,500
($43,590  $42,090)
(f)
$120
($1,350  $1,230)
(l)
$44,330
($42,090 + $2,240)
EXERCISE 6-7
(a)
(1) FIFO
Beginning inventory (200 X $5) ......................................................................
$1,000
Purchases
June 12 (300 X $6) ..................................................................... $1,800
June 23 (500 X $7) ..................................................................... 3,500
5,300
Cost of goods available for sale .....................................................................
6,300
Less: Ending inventory (180 X $7) ...............................................................
1,260
Cost of goods sold ..........................................................................................
$5,040
(2) LIFO
Cost of goods available for sale .....................................................................
$6,300
Less: Ending inventory (180 X $5) ...............................................................
900
Cost of goods sold ..........................................................................................
$5,400
(3) AVERAGE COST
Cost of Goods
Available for Sale
Total Units

Available for Sale
$6,300
Weighted Average
=
1,000
Unit Cost
$6.30
Ending inventory (180 X $6.30) $1,134
Cost of goods sold (820 X 6.30) $5,166 or $6,300 – $1,134 = $5,166
(b)The FIFO method will produce the highest ending inventory because costs have been rising. Under this
method, the earliest costs are assigned to cost of goods sold, and the latest costs remain in ending inventory.
The LIFO method will produce the highest cost of goods sold for Dakota Company. Under LIFO the most recent
costs are charged to cost of goods sold and the earliest costs are included in the ending inventory.
(a) The average cost ending inventory ($1,134) is higher than LIFO ($900) but lower than FIFO ($1,260). For cost of
goods sold, average cost ($5,166) is higher than FIFO ($5,040) but lower than LIFO ($5,400).
(b) The simple average would be (($5 + $6 + $7)/3) = $6. However, the average cost method uses a weighted
average unit cost, not a simple average of unit costs .
PROBLEM 6-1A
(a)
General Journal
Date
Apr.
5
Account Titles and Explanation
Debit
Purchases
2,600
Credit
Accounts Payable
7
2,600
Freight-in
80
Cash
9
80
Accounts Payable
100
Purchase Returns and Allowances
10
Accounts Receivable
100
1,200
Sales
12
1,200
Purchases
660
Accounts Payable
14
660
Accounts Payable ($2,600  $100)
2,500
Purchase Discounts ($2,500 X 2%)
50
Cash ($2,500  $50)
17
2,450
Accounts Payable
60
Purchase Returns and Allowances
20
60
Accounts Receivable
900
Sales
21
900
Accounts Payable ($660  $60)
600
Purchase Discounts($600 X 1%)
6
Cash ($600  $6)
27
594
Sales Returns and Allowances
30
Accounts Receivable
30
30
Cash
600
Sales
30
600
Cash
1,100
Accounts Receivable
1,100
(b)
Cash
4/1 Bal.
2,500
4/7
Common Stock
80
4/30
600
4/14
2,450
4/30
1,100
4/21
594
4/30 Bal.
1,076
4/1 Bal.
6,000
4/30 Bal.
6,000
Sales
Accounts Receivable
4/10
1,200
4/27
30
4/20
900
4/30
1,100
4/30 Bal.
970
4/10
1,200
4/20
900
4/30
600
4/30 Bal.
Sales Returns and Allowances
Merchandise Inventory
4/27
30
2,700
4/1 Bal.
3,500
4/30 Bal.
3,500
4/30 Bal.
30
Purchases
Accounts Payable
4/9
100
4/14
2,500
4/17
60
4/21
600
4/5
4/5
2,600
4/12
660
4/30 Bal.
2,600
4/12
4/30 Bal.
660
3,260
0
Purchase
Returns and Allowances
Freight-in
4/9
100
4/17
60
4/30 Bal.
4/7
80
4/30 Bal.
80
160
Purchase Discounts
4/14
50
4/21
6
4/30 Bal.
56
(c)
MURDOCH’s PRO SHOP
Trial Balance
April 30, 2001
Debit
Cash ........................................................................................................ $1,076
Accounts Receivable
970
Merchandise Inventory
3,500
Accounts Payable
.
Common Stock
.
Sales
.
Sales Returns and Allowances
30
Purchases
3,260
Purchase Returns and Allowances
.
Purchase Discounts
.
Freight-in
80 .
$8,916 .
MURDOCH’s PRO SHOP
Income Statement (Partial)
For the Month Ended April 30, 2001
Credit
$ -0$6,000
2,700
160
56
_____
$8,916
Sales revenues
Sales
..................................................
$2,700
Less:
Sales returns and allowances
30
.............................................
2,670
Net Sales
Cost of goods sold
Inventory, April 1 ......................................
Purchases
Less:
$3,500
.............................................
$3,260
Purchase returns and allowances $ 160
Purchase discounts ................
56
216
Net purchases ...........................................
Add:
3,044
Freight-in .................................
80
Cost of goods purchased ........................
3,124
Cost of goods available for sale .............
6,624
Inventory, April 30 ....................................
4,200
Cost of goods sold ...........................
Gross profit
2,424
$ 246
PROBLEM 6-4A
(a)
ZUCCHINI, INC.
Condensed Income Statements
For the Year Ended December 31, 2001
Sales
FIFO
LIFO
...................................................................................... $665,000
$665,000
Cost of goods sold
Beginning inventory ..................................................................35,000
35,000
Cost of goods purchased ........................................................502,000
502,000
Cost of goods available for sale .............................................537,000
537,000
Ending inventory ................................................................... 153,000a
135,000b
Cost of goods sold ...................................................................384,000
402,000
Gross profit .........................................................................................281,000
263,000
Operating expenses ...........................................................................120,000
120,000
Income before income taxes .............................................................161,000
143,000
Income tax expense (28%) ................................................................. 45,080
40,040
Net income ...................................................................................... $115,920
$102,960
a(20,000 @ $4.50) + (15,000 @ $4.20) = $153,000.
b(10,000 @ $3.50) + (25,000 @ $4.00) = $135,000.
(b)
Answers to questions:
(1)
The FIFO method produces the most meaningful inventory amount for the balance sheet
because the units are costed at the most recent purchases.
(2)
The LIFO method produces the most meaningful net income because the cost of the most
recent purchases are matched against sales.
(3)
The FIFO method is most likely to approximate actual physical flow because the oldest goods
are usually sold first to minimize spoilage and obsolescence.
(4)
There will be $5,040 additional cash available under LIFO because income taxes are $40,040
under LIFO and $45,080 under FIFO.
(5)
The illusionary profit is $18,000 ($281,000  $263,000). Under LIFO, Zucchini, Inc. has
recovered the current replacement cost of the units ($402,000), whereas under FIFO, it has
only recovered the earlier costs ($384,000). This means that under FIFO, the company must
reinvest $18,000 of the gross profit to replace the units used.
Answer in business-letter form:
Dear Zucchini, Inc.
After preparing the comparative condensed income statements for 2001 under FIFO and LIFO methods, we
have found the following:
The FIFO method produces the most meaningful inventory amount for the balance sheet because the units
are costed at the most recent purchases. This method is most likely to approximate actual physical flow
because the oldest goods are usually sold first to minimize spoilage and obsolescence.
The LIFO method produces the most meaningful net income because the costs of the most recent
purchases are matched against sales. There will be $5,040 additional cash available under LIFO because
income taxes are $40,040 under LIFO and $45,080 under FIFO.
There exists an illusionary profit of $18,000 ($281,000  $263,000). Under LIFO, you have recovered the
current replacement cost of the units ($402,000) whereas under FIFO you have only recovered the earlier
costs ($384,000). This means that under FIFO, the company must reinvest $18,000 of the gross profit to
replace the units used.
Sincerely,
PROBLEM 6-5A
(a)
1998
Inventory
turnover
$117, 973
($12,102  $12, 207)  2
ratio
$117, 973
 9.7
$12, 154.5
Days in
inventory
365
 37.6 days
9.7
Current
$44,363
 0.93 : 1
$47,806
ratio
(b)
1998
Ending inventory using LIFO
$ 12,207
Ending LIFO reserve
2,295
Ending inventory assuming FIFO
$ 14,502
Cost of goods sold using LIFO
$117,973
Less: Increase in LIFO reserve
27
Cost of goods sold assuming FIFO
$117,946
1998
Inventory
turnover
ratio
$117, 946
($14, 370 * $14, 502)  2
$117,946
 8 .2
$14,436
Days in
inventory
365
 44.5 days
8 .2
*$12,102 + $2,268
1998
Current assets using LIFO
Ending LIFO reserve
Current assets assuming FIFO
Current ratio
(c)
$44,363
2,295
$46,658
$46,658
 0.98 : 1
$47,806
The inventory turnover ratio in (a) was significantly higher than in (b) while the days in
inventory was correspondingly lower in (a) compared to (b). However, the current ratio was
slightly higher in (b) compared to (a) because current assets (i.e., inventory) are larger in
(b).