Spiceland C8 Solutions.docx

1、Spiceland C8 SolutionsChapter 8 Inventories: MeasurementQuestions for Review of Key TopicsQuestion 8-1Inventory for a manufacturing company consists of (1) raw materials, (2) work in process, and (3) finished goods. Raw materials represent the cost, primarily purchase price plus freight charges, of

2、goods purchased from other manufacturers that will become part of the finished product. Work-in-process inventory represents the products that are not yet complete. The cost of work in process includes the cost of raw materials used in production, the cost of labor that can be directly traced to the

3、 goods in process, and an allocated portion of other manufacturing costs, called manufacturing overhead. When the manufacturing process is completed, these costs that have been accumulated in work in process are transferred to finished goods.Question 8-2Beginning inventory plus net purchases for the

4、 period equals cost of goods available for sale. The main difference between a perpetual and a periodic system is that the periodic system allocates cost of goods available for sale to ending inventory and cost of goods sold only at the end of the period. The perpetual system accomplishes this alloc

5、ation by decreasing inventory and increasing cost of goods sold each time goods are sold.Question 8-3 Perpetual System Periodic System(1) purchase of merchandise debit inventory debit purchases(2) sale of merchandise debit cost of goods sold; credit inventory no entry(3) return of merchandise credit

6、 inventory credit purchase returns (4) payment of freight debit inventory debit freight-inQuestion 8-4 Inventory shipped f.o.b. shipping point is included in the inventory of the purchaser when the merchandise reaches the common carrier. Laetner Corporation records the purchase in 2011 and includes

7、the shipment in its ending inventory. Bockner Company records the sale in 2011. Inventory shipped f.o.b. destination is included in the inventory of the seller until it reaches the purchasers location. Bockner would include the merchandise in its 2011 ending inventory and the sale/purchase would be

8、recorded in 2012.Answers to Questions (continued)Question 8-5 A consignment is an arrangement under which goods are physically transferred to another company (the consignee), but the transferor (consignor) retains legal title. If the consignee cant find a buyer, the goods are returned to the consign

9、or. Goods held on consignment are included in the inventory of the consignor until sold by the consignee.Question 8-6 By the gross method purchase discounts not taken are viewed as part of inventory cost. By the net method purchase discounts not taken are considered interest expense, because they ar

10、e viewed as compensation to the seller for providing financing to the buyer.Question 8-7 1. Beginning inventory increase 2. Purchases increase 3. Ending inventory decrease 4. Purchase returns decrease 5. Freight-in increaseQuestion 8-8 Four methods of assigning cost to ending inventory and cost of g

11、oods sold are (1) specific identification, (2) first-in, first-out (FIFO), (3) last-in, first-out (LIFO), and (4) average cost. The specific identification method requires each unit sold during the period or each unit on hand at the end of the period to be traced through the system and matched with

12、its actual cost. First-in, first-out (FIFO) assumes that units sold are the first units acquired. The last-in, first-out (LIFO) method assumes that the units sold are the most recent units purchased. The average cost method assumes that cost of goods sold and ending inventory consist of a mixture of

13、 all the goods available for sale. The average unit cost applied to goods sold or ending inventory is an average unit cost weighted by the number of units acquired at the various unit prices.Question 8-9 When costs are declining, LIFO will result in a lower cost of goods sold and higher income than

14、FIFO. This is because LIFO will include in cost of goods sold the most recently purchased lower cost merchandise. LIFO also will provide a higher ending inventory in the balance sheet.Answers to Questions (continued)Question 8-10 Proponents of LIFO argue that it provides a better match of revenues a

15、nd expenses because cost of goods sold includes the costs of the most recent purchases. These are matched with sales that reflect a current selling price. On the other hand, inventory costs in the balance sheet generally are out of date because they are derived from old purchase transactions. It is

16、conceivable that a companys LIFO inventory balance could be based on unit costs actually incurred several years earlier. When inventory quantity declines during a period, then these out-of-date inventory layers will be liquidated and cost of goods sold will match noncurrent costs with current sellin

17、g prices.Question 8-11 Many companies choose the LIFO inventory method to reduce income taxes in periods when prices are rising. In periods of rising prices, LIFO results in a higher cost of goods sold and therefore a lower net income than the other methods. The companies income tax returns will rep

18、ort lower taxable incomes using LIFO and lower taxes will be paid currently. If a company uses LIFO to measure its taxable income, IRS regulations require that LIFO also be used to measure income reported to investors and creditors.Question 8-12 The gross profit, inventory turnover, and average days

19、 in inventory ratios are designed to monitor inventories. The gross profit ratio is calculated by dividing gross profit (net sales minus cost of goods sold) by net sales. Inventory turnover is calculated by dividing cost of goods sold by average inventory, and we compute average days in inventory by

20、 dividing the number of days in the period by the inventory turnover ratio.Question 8-13 A LIFO inventory pool groups inventory units into pools based on physical similarities of the individual units. The average cost for all of a pools beginning inventory and for all of a pools purchases during the

21、 period is used instead of individual unit costs. If the quantity of ending inventory for the pool increases, then ending inventory will consist of the beginning inventory plus a layer added during the period at the average acquisition cost for the pool.Question 8-14 The dollar-value LIFO method has

22、 important advantages. First, it simplifies the recordkeeping procedures compared to unit LIFO because no information is needed about unit flows. Second, it minimizes the probability of the liquidation of LIFO inventory layers, even more so than the use of pools alone, through the aggregation of man

23、y types of inventory into larger pools. In addition, firms that do not replace units sold with new units of the same kind can use the method.Answers to Questions (concluded)Question 8-15 After determining ending inventory at year-end cost, the following steps remain: 1. Convert ending inventory valu

24、ed at year-end cost to base year cost.2. Identify the layers in ending inventory with the years they were created.3. Convert each layers base year cost measurement to layer year cost measurement using the layer years cost index and then sum the layers.Question 8-16 The primary difference between U.S

25、. GAAP and IFRS in the methods allowed to value inventory is that IFRS does not allow the use of the LIFO method.BRIEF EXERCISESBrief Exercise 8-1Beginning inventory $186,000Plus: Purchases 945,000Less: Cost of goods sold (982,000) Ending inventory $149,000Brief Exercise 8-2 To record the purchase o

26、f inventory on account.Inventory 845,000 Accounts payable 845,000 To record sales on account and cost of goods sold.Accounts receivable 1,420,000 Sales revenue 1,420,000Cost of goods sold 902,000 Inventory 902,000Brief Exercise 8-3Both shipments should be included in inventory. The goods shipped to

27、a customer f.o.b. destination did not arrive at the customers location until after the fiscal year-end. They belong to Kelly until they arrive at the customers location. Title to the goods shipped from a supplier to Kelly on December 30, f.o.b. shipping point, changed hands on December 30.Brief Exer

28、cise 8-4 Purchase price = 10 units x $25,000 = $250,000December 28, 2011Inventory 250,000 Accounts payable 250,000January 6, 2012Accounts payable 250,000 Cash (99% x $250,000) 247,500 Inventory (1% x $250,000) 2,500 Brief Exercise 8-5December 28, 2011Inventory (99% x $250,000) 247,500 Accounts payab

29、le 247,500January 6, 2012Accounts payable 247,500 Cash 247,500Brief Exercise 8-6 Cost of goods available for sale: Beginning inventory (200 x $25) $5,000 Purchases: 100 x $28 $2,800 200 x $30 6,000 8,800 Cost of goods available (500 units) $13,800First-in, first-out (FIFO) Cost of goods available fo

30、r sale (500 units) $13,800 Less: Ending inventory (determined below) (8,100) Cost of goods sold $5,700 Cost of ending inventory: Date of purchase Units Unit cost Total cost January 8 75 $28 $2,100 January 19 200 30 6,000 Total $8,100Average cost Cost of goods available for sale (500 units) $13,800 L

31、ess: Ending inventory (determined below) (7,590) Cost of goods sold $6,210 * Cost of ending inventory: $13,800 Weighted-average unit cost = = $27.60 500 units 275 units x $27.60 = $7,590 * Alternatively, could be determined by multiplying the units sold by the average cost: 225 units x $27.60 = $6,2

32、10Brief Exercise 8-7First-in, first-out (FIFO) Cost of goods sold: Date of Cost of sale Units sold Units Sold Total Cost January 10 125 (from Beg. Inv.) $25 $3,125 January 25 75 (from Beg. Inv.) 25 1,875 25 (from 1/8 purchase) 28 700 Total 225 $5,700 Ending inventory: Date of purchase Units Unit cost Total cost January 8 75