Based on its physical count of inventory in its warehouse at year-end, December 31, 2010, Austin Company planned to report inventory of $34,500. During the audit, the independent CPA developed the following additional information:
Goods from a supplier costing $700 are in transit with UPS on December 31, 2010. The terms are FOB shipping point (explained in the “Required” section). Because these goods had not arrived, they were excluded from the physical inventory count.
Austin delivered samples costing $1,300 to a customer on December 27, 2010, with the understanding that they would be returned to Austin on January 15, 2011. Because these goods were not on hand, they were excluded from the inventory count.
On December 31, 2010, goods in transit to customers, with terms FOB shipping point, amounted to $4,000 (expected delivery date January 10, 2011). Because the goods had been shipped, they were excluded from the physical inventory count.
On December 31, 2010, goods in transit to customers, with terms FOB destination, amounted to $1,500 (expected delivery date January 10, 2011). Because the goods had been shipped, they were excluded from the physical inventory count.
Required:
Austin’s accounting policy requires including in inventory all goods for which it has title. Note that the point where title (ownership) changes hands is determined by the shipping terms in the sales contract. When goods are shipped “F.O.B. shipping point,” title changes hands at shipment and the buyer normally pays for shipping. When they are shipped “F.O.B. destination,” title changes hands on delivery, and the seller normally pays for shipping. Begin with the $34,500 inventory amount and compute the correct amount for the ending inventory. Explain the basis for your treatment of each of the preceding items. (Hint: Set up three columns: Item, Amount, and Explanation.)
E7-1 Analyzing Items to Be Included in Inventory LO1
Supply the missing dollar amounts for the 2009 income statement of Travis Company for each of the following independent cases (Hint: In case B work from the bottom up.):
E7-3 Inferring Missing Amounts Based on Income Statement Relationships LO1
Abercrombie and Fitch is a leading retailer of casual apparel for men, women, and children. Assume that you are employed as a stock analyst and your boss has just completed a review of the new Abercrombie annual report. She provided you with her notes, but they are missing some information that you need. Her notes show that the ending inventory for Abercrombie in the current year was $427,447,000 and in the previous year was $362,536,000. Net sales for the current year were $3,318,158,000. Cost of goods sold was $1,109,152,000. Net income was $60,000,000. For your analysis, you determine that you need to know the amount of purchases for the year.
Required:
Can you develop the information from her notes? Explain and show calculations. (Hint: Use the cost of goods sold equation or the inventory T-account to solve for the needed value.)
Solar company uses a periodic inventory system. At the end of the annual accounting period, December 31, 2010, the accounting records provided the following information for product 1:
Compute ending inventory and cost of goods sold under FIFO, LIFO, and weighted average costing methods. (Hint: Set up adjacent columns for each case.)
E7-5 Calculating Ending Inventory and Cost of Goods Sold Under FIFO, LIFO, and Weighted Average LO2
Clor company uses a periodic inventory system. At the end of the annual accounting period, December 31, 2010, the accounting records provided the following information for product 1:
Compute ending inventory and cost of goods sold under FIFO, LIFO, and weighted average costing methods. (Hint: Set up adjacent columns for each case.)
E7-6 Calculating Ending Inventory and Cost of Goods Sold Under FIFO, LIFO, and Weighted Average LO2
Lunar company uses a periodic inventory system. At the end of the annual accounting period, December 31, 2010, the accounting records provided the following information for product 2:
Prepare a separate income statement through pretax income that details cost of goods sold for
Case A: FIFO.
Case B: LIFO.
For each case, show the computation of the ending inventory. (Hint: Set up adjacent columns for each case.)
Compare the pretax income and the ending inventory amounts between the two cases. Explain the similarities and differences.
Which inventory costing method may be preferred for income tax purposes? Explain.
E7-7 Analyzing and Interpreting the Financial Statement Effects of LIFO and FIFO LO2, 3
Scoresby Inc. uses a periodic inventory system. At the end of the annual accounting period, December 31, 2012, the accounting records provided the following information for product 2:
Prepare a separate income statement through pretax income that details cost of goods sold for Cases A and B. For each case, show the computation of the ending inventory. (Hint: Set up adjacent columns for each case.)
Case A: FIFO.
Case B: LIFO.
Compare the pretax income and the ending inventory amounts between the two cases. Explain the similarities and differences.
Which inventory costing method may be preferred for income tax purposes? Explain.
E7-8 Analyzing and Interpreting the Financial Statement Effects of LIFO and FIFO LO2, 3
Courtney Company uses a periodic inventory system. Data for 2011: beginning merchandise inventory (December 31, 2010), 2,000 units at $38; purchases, 8,000 units at $40; expenses (excluding income taxes), $144,500; ending inventory per physical count at December 31, 2011, 1,800 units; sales 8,200 units; sales price per unit, $65; and average income tax rate, 30 percent.
Required:
Prepare income statements under the FIFO, LIFO, and weighted average costing methods. Use a format similar to the following:
Following is partial information for the income statement of Timber Company under three different inventory costing methods, assuming the use of a periodic inventory system:
Peterson Company is preparing the annual financial statements dated December 31, 2010. Ending inventory information about the five major items stocked for regular sale follows:
Compute the valuation that should be used for the 2010 ending inventory using the LCM rule applied on an item-by-item basis. (Hint: Set up columns for Item, Quantity, Total Cost, Total Market, and LCM Valuation.)
E7-11 Reporting Inventory at Lower of Cost or Market LO4
Demski Company was formed on January 1, 2011, and is preparing the annual financial statements dated December 31, 2011. Ending inventory information about the four major items stocked for regular sale follows:
Compute the valuation that should be used for the 2011 ending inventory using the LCM rule applied on an item-by-item basis. (Hint: Set up columns for Item, Quantity, Total Cost, Total Market, and LCM Valuation.)
What will be the effect of the write-down of inventory to lower of cost or market on cost of goods sold for the year ended December 31, 2011?
E7-12 Reporting Inventory at Lower of Cost or Market LO4
Dell Inc. is the leading manufacturer of personal computers. In a recent year, it reported the following in dollars in millions:
Compute the inventory turnover ratio under the FIFO and LIFO inventory costing methods (show computations and round to the nearest dollar). Explain which you believe is the more accurate indicator of the efficiency of inventory management.
E7-14 Analyzing and Interpreting the Effects of the LIFO/FIFO Choice on Inventory Turnover Ratio
First Team Sports, Inc., is engaged in the manufacture (through independent contractors) and distribution of in-line roller skates, ice skates, street hockey equipment, and related accessory products. Its recent annual report included the following on its balance sheet:
Explain the effects of the changes in inventory and trade accounts payable on cash flow from operating activities for the current year.
E7-15 Interpreting the Effect of Changes in Inventories and Accounts Payable on Cash Flow from Operations LO5
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The following note was contained in a recent Ford Motor Company annual report:
What amount of ending inventory would have been reported in the current year if Ford had used only FIFO?
The cost of goods sold reported by Ford for the current year was $129,821 million. Determine the cost of goods sold that would have been reported if Ford had used only FIFO for both years.
Explain why Ford management chose to use LIFO for certain of its inventories.
E7-16 Analyzing Notes to Adjust Inventory from LIFO to FIFO LO6
Garraway Ski Company mistakenly recorded purchases of inventory on account received during the last week of December 2010 as purchases during January of 2011 (this is called a purchases cutoff error). Garraway uses a periodic inventory system, and ending inventory was correctly counted and reported each year.
Required:
Assuming that no correction was made in 2010 or 2011, indicate whether each of the following financial statement amounts will be understated, overstated, or correct.
Net Income for 2010.
Net Income for 2011.
Retained Earnings for December 31, 2010.
Retained Earnings for December 31, 2011.
E7-17 Analyzing the Effects of an Error in Recording Purchases LO7
Several years ago, the financial statements of Gibson Greeting Cards contained the following note:
On July 1, the Company announced that it had determined that the inventory … had been overstated…. The overstatement of inventory … was $8,806,000.
Gibson reported an incorrect net income amount of $25,852,000 for the year in which the error occurred and the income tax rate was 39.3 percent.
Required:
Compute the amount of net income that Gibson reported after correcting the inventory error. Show computations.
Assume that the inventory error was not discovered. Identify the financial statement accounts that would have been incorrect for the year the error occurred and for the subsequent year. State whether each account was understated or overstated.
E7-18 Analyzing the Effect of an Inventory Error Disclosed in an Actual Note to a Financial Statement
E7-19 Analyzing and Interpreting the Impact of an Inventory Error LO7
An annual report of Eastman Kodak Company contained the following note:
During this year and last year, inventory usage resulted in liquidations of LIFO inventory quantities. In the aggregate, these inventories were carried at the lower costs prevailing in prior years as compared with the costs of current purchases. The effect of these LIFO liquidations was to reduce cost of goods sold by $53 million in the current year and $31 million in the previous year.
Required:
Explain why the reduction in inventory quantity increased net income for Eastman Kodak.
If Eastman Kodak had used FIFO, would the reductions in inventory quantity during the two years have increased net income? Explain.
E7-20 (Supplement A) Analyzing the Effects of a Reduction in the Amount of LIFO Inventory
The Cycle Shop sells merchandise on credit terms of 2.5/15, n/30. A sale invoiced at $900 (cost of sales $600) was made to Missy Clemons on February 1, 2011. The company uses the gross method of recording sales discounts.
Required:
Give the journal entry to record the credit sale. Assume use of the perpetual inventory system.
Give the journal entry, assuming that the account was collected in full on February 9, 2011.
Give the journal entry, assuming, instead, that the account was collected in full on March 2, 2011.
On March 4, 2011, the company purchased bicycles and accessories from a supplier on credit, invoiced at $8,400; the terms were 3.5/10, n/30. The company uses the gross method to record purchases.
Required:
Give the journal entry to record the purchase on credit. Assume the use of the perpetual inventory system.
Give the journal entry, assuming that the account was paid in full on March 12, 2011.
Give the journal entry, assuming, instead, that the account was paid in full on March 28, 2011.
E7-21 (Supplement B) Recording Sales and Purchases with Cash Discounts
Snowball Company reported beginning inventory of 100 units at a unit cost of $20. It engaged in the following purchase and sale transactions during 2009:
At the end of 2009, a physical count showed that Snowball Company had 50 units of inventory still on hand.
Required:
Record each transaction, assuming that Snowball Company uses (a) a perpetual inventory system and (b) a periodic inventory system (including any necessary entries at the end of the accounting period on December 31).
E7-22 (Supplement C) Recording Purchases and Sales Using a Perpetual and Periodic Inventory System
