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Assignment 6.1 Handout 1. Shepherd Cycles used the FIFO inventory method in 2010. Shepherd Cycles plans to continue using the FIFO method in future years. Requirement R1. Which inventory principle is most relevant to Shepherd's decision? 2. Shepherd Cycles does not expect prices to change dramatically and wants to use a method that averages price changes. Requirements R1. Which inventory method would best meet Shepherd's goal? R2. What if Shepherd wanted to expense out the newer purchases of goods instead? Which inventory would best meet that need? 3. Innovation Cycles uses the FIFO inventory method. Innovation started March with 10 bicycles that cost $60 each. On March 16, Innovation bought 20 bicycles at $70 each. On March 31, Innovation sold 25 bicycles. Requirement R1. Prepare Innovation's perpetual inventory record. 4. Review the facts on Innovation Cycles in problem #3. Requirement R1. Prepare a perpetual inventory record for the LIFO method. 5. Review the facts on Innovation Cycles in problem #3. Requirement R1. Prepare a perpetual inventory record for the average-cost method. Round average cost per unit to the nearest cent and all other amounts to the nearest dollar. 6. Use the Innovation Cycles data in problem #3 to journalize. Requirements R1. The March 16 purchase of inventory on account. R2. The March 31 sale of inventory on account. Innovation sold each bicycle for $120. R3. Cost of goods sold under FIFO on March 31. 7. Use the Innovation Cycles data in problem #4 to journalize. Requirements R1. The March 16 purchase of inventory on account. R2. The March 31 sale of inventory on account. Innovation sold each bicycle for $120. R3. The Cost of goods sold under LIFO on March 31. 8. Use the Innovation Cycles data in problem #5 to journalize. Requirements R1. The March 16 purchase of inventory on account. R2. The March 31 sale of inventory on account. Innovation sold each bicycle for $120. R3. The Cost of goods sold under average cost on March 31. 1 9. Refer to problems #3 through #8. After completing those exercises, answer the following questions: Requirements R1. Which method of inventory accounting produced the lowest cost of goods sold? R2. Which method of inventory accounting produced the highest cost of goods sold? R3. If prices had been declining instead of rising, which inventory method would have produced the highest cost of goods sold? 10. Assume that a Queen Burger restaurant has the following perpetual inventory record for hamburger patties: Requirements R1. At April 30, the accountant for the restaurant determines that the current replacement cost of the ending inventory is $515. Make any adjusting entry needed to apply the lower-of-cost-ormarket rule. Inventory would be reported on the balance sheet at what value on April 30? R2. Inventory would be reported on the balance sheet at what value if Queen uses the averagecost method? 11. Boston Cycles' inventory data for the year ended December 31, 2011, follow: Assume that the ending inventory was accidentally overstated by $2,200. Requirement R1. What are the correct amounts for cost of goods sold and gross profit? 12. Refer back to the Boston Cycles' inventory data in problem #11. Requirement R1. How would the inventory error affect Boston Cycles' cost of goods sold and gross profit for the year ended December 31, 2012, if the error is not corrected in 2011? 2 13. Electronic Company began the year with inventory of $55,800 and purchased $277,000 of goods during the year. Sales for the year are $476,000, and Electronic's gross profit percentage is 45% of sales. Requirement R1. Compute the estimated cost of ending inventory by the gross profit method. 14. Fancy Iron Industries began October with 54 units of iron inventory that cost $39 each. During October, the company completed the following inventory transactions: Requirements R1. Prepare a perpetual inventory record for the inventory using FIFO. R2. Prepare a perpetual inventory record for the inventory using LIFO. R3. Prepare a perpetual inventory record for the inventory using average cost. R4. Determine the company's cost of goods sold for October using FIFO, LIFO, and average cost. R5. Compute gross profit for October using FIFO, LIFO, and average cost. 15. Antique Carpets' books show the following data (in thousands). In early 2013, auditors found that the ending inventory for 2010 was understated by $8 thousand and that the ending inventory for 2012 was overstated by $9 thousand. The ending inventory at December 31, 2011, was correct. Requirements R1. Prepare corrected income statements for the three years. R2. State whether each year's net incomebefore your correctionsis understated or overstated and indicate the amount of the understatement or overstatement. 3 16. Gala Costumes estimates its inventory by the gross profit method. The gross profit has averaged 28% of net sales. The company's inventory records reveal the following data (amounts in thousands): Requirements R1. Estimate the December 31 inventory, using the gross profit method. R2. Prepare the December income statement through gross profit for Gala Costumes. 17. A Futuristic Electronic Center began December with 91 units of inventory that cost $73 each. During December, the store made the following purchases: Futuristic uses the periodic inventory system, and the physical count at December 31 indicates that 115 units of inventory are on hand. Requirements R1. Determine the ending inventory and cost-of-goods-sold amounts for the December financial statements under the average cost, FIFO, and LIFO methods. R2. Sales revenue for December totaled $24,000. Compute Futuristic's gross profit for December under each method. R3. Which method will result in the lowest income taxes for Futuristic? Why? Which method will result in the highest net income for Futuristic? Why? 4 Answer: 1 Shephard follows consistency principle which states that the company continues to follow same method of accounting 2 r1 r2 Shepherd should use weighted average method For expensing out newer goods, shepherd should follow LIFO method 3 Purchases Units cost Date Beginning 10 20 Mar-16 Mar-31 4 Using LIFO Date Total 60 70 Cost of goods sold Units cost Total 600 1400 25 Purchases Units cost Beginning Total 10 20 Mar-16 Mar-31 60 70 600 1400 30 Cost of goods sold Units cost Total 5 20 25 60 70 300 1400 Balance Units cost 5 Total 60 300 1700 5 Average cost Purchases Units cost Date Beginning Total 10 20 6 Account Mar-16 inventory Accounts Payable 1400 3000 3000 350 350 Debit 1400 3000 3000 Cost of goods sold Inventory 300 300 Debit 10 Adjusting entry Account Inventory cost of goods sold r2 If company used average cost method Credit 1400 1400 Mar-31 Accounts receivable Sales 9 Lowest COGS = Highest COGS = If prices are declining Credit 1400 Mar-31 Accounts receivable Sales Cost of goods sold Inventory Credit 1400 Cost of goods sold Inventory 8 Account Mar-16 inventory Accounts Payable 2000 Debit Mar-31 Accounts receivable Sales 7 Account Mar-16 inventory Accounts Payable 600 1400 30 66.6667 Mar-16 Mar-31 60 70 3000 3000 333.33 333.33 FIFO LIFO FIFO Debit Credit 55 55 Cost of goods sold Units cost Total Balance Units cost Total 5 20 25 66.667 1666.67 5.00 66.67 333.33 Value of inventory = 460 11 Beginning inventory Purchases cost of goods available Ending inventory 5400 26700 32100 1400 Cost of goods sold 30700 Gross profit 15300 12 If the error is not corrected then the cost of goods sold will be understated and gross profit would be overstated 13 Beginning Purchases Goods available Sales Gross profit Cost of goods sold Ending inventory 14 FIFO Beginning Oct 3 sale Oct 8 purchase 55800 277000 332800 476000 45% 261800 71000 Inventory 54 39 Cost of goods sold 2106 44 44 LIFO Beginning Oct 3 sale Oct 8 purchase 14 152 48 Inventory 54 39 1716 39 44 390 2816 3696 Oct 21 Sale Oct 30 purchase Total 39 10 64 84 Ending balance 672 6474 118 4922 Cost of goods sold 10 10 84 39 39 44 390 390 3696 20 14 34 44 48 880 672 1552 Ending balance 2106 44 44 1716 10 10 84 39 39 44 390 390 3696 74 84 39 44 3256 10 10 14 34 39 44 48 390 440 672 1502 3696 Oct 21 Sale Oct 30 purchase Total Average Beginning Oct 3 sale Oct 8 purchase 14 152 48 Inventory 54 39 672 6474 118 Cost of goods sold 44 Ending balance 2106 44 84 4972 39 1716 3696 10 10 94 39 43.468 43.468 390 434.68 4086 10 39 84 44 94 43.4681 390 3696 4086 Oct 21 Sale 74 Oct 30 purchase Total FIFO LIFO Average 15 Net sales revenue Cost of goods sold Beginning inventory Net purchases Cost of goods available Ending inventory Cost of goods sold Gross profit Operating expenses Net income Net income 14 152 48 672 6474 Sales Cost of GGross Profit 11356 4922 6434 11356 4972 6384 11356 4932.63 6423.37 2012 206 2011 160 2010 175 19 138 157 21 136 70 52 18 31 95 126 19 107 53 37 16 43 81 124 31 93 82 34 48 43.468 3216.63 34 118 4932.63 45.334 1541.36 1541.36 20 43.4681 869.362 14 48 672 34 45.3342 1541.36 Before OverstatedOverstat understated 16 Inventory Purchases Discounts Returns Sales Returns 295 7639 177 39 8623 21 Net sales Gross profit 8602 2408.56 Total inventory available Cost of goods sold Ending 7718 6193.44 1524.56 Sales Less: Returns Net sales Cost of goods available Beginning inventory Net purchases Available Cost of goods sold Ending inventory Gross profit 8623 21 8602 295 7423 7718 6193.44 1524.56 2408.56 17 Units Beginning Cost 91 22 47 77 237 115 122 Dec-03 Dec-12 Dec-18 Ending inventory Sold 73 78 80 83 Total 6643 1716 3760 6391 18510 Average cost FIFO LIFO Cost of gooEnding inventory 9528.354 8981.65 9079 9431 9991 8519 sales COGS Gross profit Average FIFO LIFO 24000 24000 24000 9528.354 9079 9991 14471.65 14921 14009 Lowest income tax Highest net income LIFO FIFO Answer: 1 Shephard follows consistency principle which states that the company continues to follow same method of accounting 2 r1 r2 Shepherd should use weighted average method For expensing out newer goods, shepherd should follow LIFO method 3 Purchases Units cost Date Beginning 10 20 Mar-16 Mar-31 4 Using LIFO Date Total 60 70 Cost of goods sold Units cost Total 600 1400 25 Purchases Units cost Beginning Total 10 20 Mar-16 Mar-31 60 70 600 1400 30 Cost of goods sold Units cost Total 5 20 25 60 70 300 1400 Balance Units cost 5 Total 60 300 1700 5 Average cost Purchases Units cost Date Beginning Total 10 20 6 Account Mar-16 inventory Accounts Payable 1400 3000 3000 350 350 Debit 1400 3000 3000 Cost of goods sold Inventory 300 300 Debit 10 Adjusting entry Account Inventory cost of goods sold r2 If company used average cost method Credit 1400 1400 Mar-31 Accounts receivable Sales 9 Lowest COGS = Highest COGS = If prices are declining Credit 1400 Mar-31 Accounts receivable Sales Cost of goods sold Inventory Credit 1400 Cost of goods sold Inventory 8 Account Mar-16 inventory Accounts Payable 2000 Debit Mar-31 Accounts receivable Sales 7 Account Mar-16 inventory Accounts Payable 600 1400 30 66.6667 Mar-16 Mar-31 60 70 3000 3000 333.33 333.33 FIFO LIFO FIFO Debit Credit 55 55 Cost of goods sold Units cost Total Balance Units cost Total 5 20 25 66.667 1666.67 5.00 66.67 333.33 Value of inventory = 460 11 Beginning inventory Purchases cost of goods available Ending inventory 5400 26700 32100 1400 Cost of goods sold 30700 Gross profit 15300 12 If the error is not corrected then the cost of goods sold will be understated and gross profit would be overstated 13 Beginning Purchases Goods available Sales Gross profit Cost of goods sold Ending inventory 14 FIFO Beginning Oct 3 sale Oct 8 purchase 55800 277000 332800 476000 45% 261800 71000 Inventory 54 39 Cost of goods sold 2106 44 44 LIFO Beginning Oct 3 sale Oct 8 purchase 14 152 48 Inventory 54 39 1716 39 44 390 2816 3696 Oct 21 Sale Oct 30 purchase Total 39 10 64 84 Ending balance 672 6474 118 4922 Cost of goods sold 10 10 84 39 39 44 390 390 3696 20 14 34 44 48 880 672 1552 Ending balance 2106 44 44 1716 10 10 84 39 39 44 390 390 3696 74 84 39 44 3256 10 10 14 34 39 44 48 390 440 672 1502 3696 Oct 21 Sale Oct 30 purchase Total Average Beginning Oct 3 sale Oct 8 purchase 14 152 48 Inventory 54 39 672 6474 118 Cost of goods sold 44 Ending balance 2106 44 84 4972 39 1716 3696 10 10 94 39 43.468 43.468 390 434.68 4086 10 39 84 44 94 43.4681 390 3696 4086 Oct 21 Sale 74 Oct 30 purchase Total FIFO LIFO Average 15 Net sales revenue Cost of goods sold Beginning inventory Net purchases Cost of goods available Ending inventory Cost of goods sold Gross profit Operating expenses Net income Net income 14 152 48 672 6474 Sales Cost of GGross Profit 11356 4922 6434 11356 4972 6384 11356 4932.63 6423.37 2012 206 2011 160 2010 175 19 138 157 21 136 70 52 18 31 95 126 19 107 53 37 16 43 81 124 31 93 82 34 48 43.468 3216.63 34 118 4932.63 45.334 1541.36 1541.36 20 43.4681 869.362 14 48 672 34 45.3342 1541.36 Before OverstatedOverstat understated 16 Inventory Purchases Discounts Returns Sales Returns 295 7639 177 39 8623 21 Net sales Gross profit 8602 2408.56 Total inventory available Cost of goods sold Ending 7718 6193.44 1524.56 Sales Less: Returns Net sales Cost of goods available Beginning inventory Net purchases Available Cost of goods sold Ending inventory Gross profit 8623 21 8602 295 7423 7718 6193.44 1524.56 2408.56 17 Units Beginning Cost 91 22 47 77 237 115 122 Dec-03 Dec-12 Dec-18 Ending inventory Sold 73 78 80 83 Total 6643 1716 3760 6391 18510 Average cost FIFO LIFO Cost of gooEnding inventory 9528.354 8981.65 9079 9431 9991 8519 sales COGS Gross profit Average FIFO LIFO 24000 24000 24000 9528.354 9079 9991 14471.65 14921 14009 Lowest income tax Highest net income LIFO FIFO