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Feb 03, 2017

Assignment: Chap7_HW_CNOW1.Blueprint Problem: Perpetual Average CostInventory Valuation BasicsIncome measurement and asset valuation are two concepts at the core of accounting....

Assignment: Chap7_HW_CNOW1.

Blueprint Problem: Perpetual Average Cost

Inventory Valuation Basics

Income measurement and asset valuation are two concepts at the core of accounting. Recall that the matching principle requires that costs incurred to generate revenue should be recognized in the same period that the revenue is earned. For most merchandising companies, the cost and control of inventory is the focal point of the operation. Inventory valuation applies to many companies. Thinking about this lesson, choose which companies below might benefit from inventory valuation.

Company Type1. a law firm _________________ 2. an electronics company _________________ 3. a car dealership _________________ 4. a textbook company _________________

Inventory Systems and Costing Methods

Inventory systems and inventory costing methods must be understood for proper inventory valuation and measurement. The two basic systems of accounting for merchandise inventory are the perpetual inventory system and the periodic inventory system. Under the perpetual inventory system, continuous records are kept of the quantity and, usually, the cost of individual items as they are bought and sold. Under the periodic inventory system, the inventory not yet sold, or on hand, is counted periodically. This physical count is usually taken at the end of the accounting period.

What type of inventory tracking system is in use when changes in inventory are immediately displayed on the balance sheet?

_________________

"Goods Flow" versus "Cost Flow"

The term "goods flow" refers to the PHYSICAL MOVEMENT of inventory through the operations of the business. In most business, we try to sell our oldest merchandise first. The term "cost flow" refers to the COST associated with the assumed flow of merchandise (i.e. how much of the cost is allocated to to the items sold and how much is allocated to the unsold ending inventory). An accounting issue arises when identical units of merchandise are acquired at different unit costs during a period. In such cases, when an item is sold, it is necessary to determine its cost using a cost flow assumption and related inventory costing method. Does the "cost flow" method need to be the same as as the physical "goods flow"? _________________

Different valuation methods produce significantly different values for cost of merchandise sold and subsequent inventory levels. This means that the choice of inventory valuation method can have a significant effect on a company's financial position.

Although the implications are far reaching, the two items most directly and immediately affected by the choice of inventory valuation method are cost of merchandise sold on the _________________ and inventory on the _________________ .

The following formula illustrates the relationship between the cost of merchandise sold and the ending inventory. The part of the cost of merchandise available for sale is allocated to the cost of merchandise sold for the inventory that is sold and the value of the unsold inventory is assigned to the ending inventory. Therefore, a change in the amount of the cost of merchandise will impact the value of the ending inventory.

Beginning inventory+Purchases=Cost of merchandise available for sale-Cost of merchandise sold=Ending Inventory

How would an inventory valuation method that results in higher cost of merchandise sold for the current period affect the following items?

1.Ending Inventory _________________ 2.Revenue _________________ 3.Net Income _________________ 4.Total Expenses _________________

Choosing a Valuation Method

There are four costing methods: specific identification; first-in, first-out (FIFO); last-in, first-out (LIFO); and average cost. To better understand the average cost method, imagine beginning inventory and each purchase as separate layers. These layers determine the cost of merchandise available for sale. A physical inventory is taken, and cost of goods available for sale is then allocated to cost of merchandise sold and ending inventory.

Imagine that you are an external consultant for Portsmouth Co., a company trying to determine the most appropriate inventory valuation method for its operations. Its cost of inventory has been fluctuating up and down all year, so Portsmouth Co.'s primary goals are to minimize the effects of the cost fluctuations on its figures for cost of merchandise sold, without spending too much money. The available options are FIFO , LIFO , average cost, and specific identification.

Given Portsmouth Co.'s unique needs, which method would you recommend?

_________________

Applying Average Cost

Click hereto review an illustrated example of the average cost calculation. The key is to compute a new average cost after each purchase.

You will now put the average cost method into practice. Portsmouth Co. would like to explore what is meant by the weighted average cost per unit, a concept that is central to this method of inventory valuation. Remember, the weighted average must be adjusted with each purchase. Also, as sales occur, previous inventory values must be bundled to keep track of inventory on hand and to accurately track subsequent additions to inventory.

The data for Portsmouth Co. is below for the month of November.Portsmouth Co.'s inventory data for NovemberDateDescriptionUnits Purchased at CostUnits Sold at RetailNov. 1Beg. Inv.500 units @ $12 = $6,000 4Purchase 1200 units @ $12 = $2,400 7Sale 1 420 @ $4112Purchase 2600 units @ $10 = $6,000 15Purchase 3700 units @ $3 = $2,100 23Sale 2 350 @ $41

Complete the schedule below. Remember, the weighted average must be adjusted with each purchase. Also, as sales occur, previous inventory values must be bundled to keep track of inventory on hand and to accurately track subsequent additions to inventory. Round the average cost per unit to four decimal places and total costs to the nearest dollar.

DateDescription Inventory BalanceInventory TotalWeighted Average

Cost Per UnitCost of Goods Sold

Nov. 1Beginning Inventory 500 x $12= $6,000

= $12.00/unit

4Balance forward

Purchase 1 (200 @ $12

500 x $12

200 x $12

= $6,000

= $2,400

= $ _________________ / unit

7Sale 1 (420 @ $41) 420 x $ _________________ = = $ _________________ 12Balance forward

Purchase 2 (600 @ $10

_________________ x $ _________________

600 x $10

= $ _________________

= $6,000

= $ _________________ /unit

15Balance forward

Purchase 3 (700 @ $3)

_________________ x $ _________________

700 x $3

= $ _________________

= $2,100

= $ _________________ /unit

23Sale 2 (350 @ $41) 350 x $ _________________ = $ _________________ End of month balance _________________ x $ _________________ $ _________________ 2.

Blueprint Problem: FIFO inventory – perpetual

Inventory and Cost of Merchandise Sold

Asset valuation and income measurement are two of the most fundamental accounting concepts. For any company that sells goods, inventory is a main focus. This problem concentrates on perpetual FIFO inventory valuation.

When a company sells inventory, an expense is recorded. Which of the following facts regarding this statement are true?

1. The expense is recorded as “Cost of Merchandise Available for Sale.” _________________ 2. The revenue recognition principle dictates the timing. _________________ 3. The expense appears on the balance sheet. _________________ 4. The expense appears on the income statement. _________________ 5. The matching principle dictates the time of record. _________________ 6. The expense is recorded as “Cost of Merchandise Sold.” _________________

When a company purchases inventory, it is immediately displayed on the _________________ as _________________

The amount at which inventory is recorded is based upon the _________________ .

Inventory Systems and Costing Methods

There are two concepts that must be understood for inventory valuation and measurement: inventory systems and inventory costing methods. The two basic systems of accounting for merchandise inventory are the perpetual inventory system and the periodic inventory system. Under the perpetual inventory system, continuous records are kept of the quantity and, usually, the cost of individual items as they are bought and sold. Under the periodic inventory system, the inventory not yet sold, or on hand, is counted periodically. This physical count is usually taken at the end of the accounting period.

What type of inventory tracking system is in use when changes in inventory are immediately displayed on the balance sheet?

_________________

"Goods Flow" versus "Cost Flow"

First-in, First-out (FIFO)

There are four costing methods: specific identification; first-in, first-out (FIFO); last-in, first-out (LIFO); and average cost. This example will focus on FIFO. Under the first-in, first-out (FIFO) inventory cost flow method, the first units purchased are assumed to be sold and the ending inventory is made up of the most current purchases.

To better understand the FIFO method, imagine that beginning inventory and each purchase is a separate layer. These layers determine the cost of goods available for sale. For each sale, start with the earliest purchase (which may be beginning inventory) and work forward until you have accounted for the units sold.

Using FIFO, we assume the costs of the _________________ items we purchased are assigned to the first items we sell. Therefore, the the most recent costs are assigned to the _________________ while the _________________ will consists of costs the beginning inventory and earlier purchases.

According to GAAP, there are three acceptable ways in which a publicly traded company may value inventory. They are FIFO, LIFO, and average cost. In the period below, which of the components in the cost of merchandise sold calculation would be affected by a current period change in inventory valuation method (i.e. switching from LIFO to FIFO)?

Beginning inventory _________________ + Purchases _________________ Cost of merchandise available for sale _________________ – Cost of merchandise sold _________________ Ending inventory _________________

FIFO Inventory Calculation

Click here to review an illustrated example of the FIFO calculation. The steps illustrated in the example are recapped below.1. Start with beginning inventory.2. Add a layer for each purchase made.3. Record cost of merchandise sold as sales occur and adjust layers.4. Compute the ending inventory for the period.

Below is the data for the month of January, 2011.

1/1 Beg. Inv.220 Units @ $91/8 Purchase120 Units @ $111/14 Sale176 Units1/22 Purchase150 Units @ $91/25 Sale104 Units

Compute the FIFO layers amounts for the cost of merchandise available for sale after each purchase and sale.

After 1/8 PurchaseLayer 1 _________________ units $ _________________ price per unit $ _________________ value of the layerLayer 2 _________________ units $ _________________ price per unit $ _________________ value of the layer

After 1/14 Sale

After 1/22 Purchase

Layer 1 _________________ units $ _________________ price per unit $ _________________ value of the layerLayer 2 _________________ units $ _________________ price per unit $ _________________ value of the layerLayer 3 _________________ units $ _________________ price per unit $ _________________ value of the layer

After 1/25 Sale

Based on your answers above, complete the worksheet below.

FIFO Inventory Worksheet for Month Ending January 2011Purchases Cost of Merchandise SoldInventory Balance1/1 Beg. Inv.220 Units @ $9 1,9801/8 Purchase120 Units @ $11$ _________________ $ _________________ 1/14 Sale176 Units $ _________________ $ _________________ 1/22 Purchase150 Units @ $9$ _________________ $ _________________ 1/25 Sale104 Units $ _________________ $ _________________ Total $ _________________ $ _________________ $ _________________

Recording Changes in Inventory under FIFO Valuation

Under the perpetual system, two journal entries are are required to record sales; one to record the sale and one to record the cost of merchandise sold. Click on the links below to review the journal entries for purchases and sales transactions.PurchaseSales

After a purchase or sale occurs, the transaction must be recorded or journalized. In the following journal, record the purchases and sales for the month assuming that all inventory purchases were made with cash and all sales were made on account at a fixed unit price of $22 per unit. There are several facts to remember:

(1) All inventory is purchased with cash, and cash only.

(2) All sales are made on account, and on account only.

(3) When recording sales, record the revenue portion of the transaction first.

Not sure about the account title? Click here to view the chart of accounts.+ Assets+ Liabilities+ Equity+ Revenues/Gains+ Expenses/LossesGENERAL JOURNALpage DATE DESCRIPTION DOC.

NO.

POST.

REF.

DEBIT CREDIT 1 Jan. 08 12 23 34 Jan. 14 Record revenue 45 56 67 Jan. 14 Record cost 78 89 910 Jan. 22 1011 1112 1213 Jan. 25 Record revenue 1314 1415 1516 Jan. 25 Record cost 1617 1718 18 3.

Blueprint Problem: LIFO inventory - perpetual

Inventory and Cost of Merchandise Sold

When a company records a sale, it is displayed on the _________________ as _________________ . The amount at which sold inventory is expensed depends on the _________________ . The inventory remaining must be properly valued so that it can be reported on the _________________ in the _________________ section.

Why isn't an expense recorded for inventory when it is purchased instead of when it is sold?

_________________

In order to determine the amounts to be reported on the balance sheet and income statement, you must first understand the relationship between the cost of merchandise sold and ending inventory. This relationship is expressed in the cost of merchandise sold model.

Use the selection lists to build the cost of merchandise sold model.

1. _________________ 2. _________________ 3. Cost of merchandise available for sale4. - Ending Inventory5. _________________

Based on the cost of merchandise sold formula, the ending inventory can be computed by subtracting the _________________ from the _________________

Inventory Systems and Costing Methods

There are two concepts that must be understood for inventory valuation and measurement: inventory systems and inventory costing methods. The two basic systems of accounting for merchandise inventory are the perpetual inventory system and the periodic inventory system. Under the _________________ inventory system, continuous records are kept of the quantity and, usually, the cost of individual items as they are bought and sold. Under the _________________ inventory system, the inventory not yet sold, or on hand, is counted periodically. This physical count is usually taken at the end of the accounting period.

Although it is more expensive to maintain, the _________________ system is far more accurate and up-to-date than other inventory tracking systems.

"Goods Flow" versus "Cost Flow"

The term "goods flow" refers to the PHYSICAL MOVEMENT of inventory through the operation of the business. In most business, we try to sell our oldest merchandise first. The term "cost flow" refers to the COST associated with the assumed flow of merchandise (i.e. how much of the cost is allocated to to the items sold and how much is allocated to the unsold ending inventory). It is important to note that the "cost flow" method _________________ be the same as the physical "goods flow".

An accounting issue arises when identical units of merchandise are acquired at different unit costs during a period. In such cases, when an item is sold, it is necessary to determine its cost using a cost flow assumption and related inventory costing method. An inventory costing method _________________

LIFO (Last-in, First-out) Costing

There are four costing methods: specific identification; first-in, first-out (FIFO); last-in, first-out (LIFO); and average cost. This example will focus on LIFO. Under the last-in, first-out (LIFO) inventory cost flow method, the last units purchased are assumed to be sold and the ending inventory is made up of the earlier purchases.

To better understand the LIFO method, imagine that beginning inventory and each purchase is a separate layer. These layers determine the cost of goods available for sale. For each sale, start with the latest purchase and work backwards until you have accounted for the units sold.

Using LIFO, we assume the costs of the _________________ items we purchased are assigned to the first items we sell. Therefore, the most recent costs are assigned to the _________________ while the _________________ will consists of costs the beginning inventory and earlier purchases.

APPLY THE CONCEPTS: LIFO inventory calculation

Click here to review an illustrated example of the LIFO calculation. The steps illustrated in the example are recapped below.1. Start with beginning inventory.2. Add inventory layers as purchases are made.3. Compute the cost of merchandise sold as sales occur. Use only the cost of merchandise available for sale as of the sales date.4. Update the inventory balance after each transaction. (Be sure you do not use an amount more than once.)5. Determine the ending inventory for the period.

Below is the data for the month of January, 2011.

1/1 Beg. Inv.210 Units @ $101/8 Purchase100 Units @ $131/14 Sale70 Units1/22 Purchase130 Units @ $71/25 Sale150 Units

Compute the LIFO layers amounts for the cost of merchandise available for sale after each purchase and sale.

After 1/8 Purchase

After 1/14 Sale

After 1/22 Purchase

After 1/25 Sale

Based on your answers above, complete the worksheet below.

LIFO Inventory WorksheetTransactionPurchases Cost of Merchandise SoldInventory balance1/1 Beg. Inv.210 Units @ $10 $2,1001/8 Purchase100 Units @ $13$ _________________ $ _________________ 1/14 Sale70 Units $ _________________ $ _________________ 1/22 Purchase130 Units @ $7$ _________________ $ _________________ 1/25 Sale150 Units $ _________________ $ _________________ Total $ _________________ $ _________________ $ _________________

APPLY THE CONCEPTS: Recording changes in inventory under LIFO valuation

After a purchase or sale occurs, the transaction must be recorded or journalized. In the following journal, record the purchases and sales for the month, assuming that all inventory purchases were made with cash and all sales were made on account at a fixed unit price of $22 per unit. Several facts to remember: (1) All inventory purchases are made with cash and cash only; (2) All sales are made on account and on account only; and (3) when recording sales, Schiphol wants you to record the revenue portion of the transaction first.

If an amount box does not require an entry leave it blank.

Not sure about the account title? Click here to view the chart of accounts.+ Assets+ Liabilities+ Equity+ Revenues/Gains+ Expenses/LossesGENERAL JOURNALpage DATE DESCRIPTION DOC.

NO.

POST.

REF.

DEBIT CREDIT 1 Jan. 08 12 23 34 Jan. 14 Record sale 45 56 67 Jan. 14 Record cost 78 89 910 Jan. 22 blank 1011 1112 1213 Jan. 25 Record sale 1314 1415 1516 Jan. 25 Record cost 1617 1718 18 4.eBookeBookeBookeBookeBookeBookeBookeBook Animated Example ExerciseAnimated Example ExerciseAnimated Example ExerciseAnimated Example ExerciseAnimated Example ExerciseAnimated Example ExerciseAnimated Example ExerciseAnimated Example Exercise

Cost Flow Methods

Three identical units of Item JC07 are purchased during July, as shown below.

Item JC07 Units Cost July 9Purchase 1 $241 July 17Purchase 1 244 July 26Purchase 1 247 Total 3 $732 Average cost per unit $244($732 ÷ 3 units)

Assume that one unit is sold on July 31 for $349. Determine the gross profit for July and ending inventory on July 31 using the (a) first-in, first-out (FIFO); (b) last-in, first-out (LIFO); and (c) weighted average cost methods.

Gross ProfitEnding Inventorya. First-in, first-out (FIFO)$ _________________ $ _________________ b. Last-in, first-out (LIFO)$ _________________ $ _________________ c. Weighted average cost$ _________________ $ _________________ 5.eBookeBookeBookeBookeBookeBookeBookeBook Animated Example ExerciseAnimated Example ExerciseAnimated Example ExerciseAnimated Example ExerciseAnimated Example ExerciseAnimated Example ExerciseAnimated Example ExerciseAnimated Example Exercise

Perpetual Inventory Using FIFO

Beginning inventory, purchases, and sales for Item ER27 are as follows:

January 1 Inventory78 units @ $219 Sale53 units13 Purchase55 units @ $2428 Sale29 units

Assuming a perpetual inventory system and using the first-in, first-out (FIFO) method, determine (a) the cost of merchandise sold on January 28 and (b) the inventory on January 31.

a. Cost of merchandise sold on January 28$ _________________ b. Inventory on January 31$ _________________ 6.eBookeBookeBookeBookeBookeBookeBookeBook Animated Example ExerciseAnimated Example ExerciseAnimated Example ExerciseAnimated Example ExerciseAnimated Example ExerciseAnimated Example ExerciseAnimated Example ExerciseAnimated Example Exercise

Perpetual Inventory Using LIFO

Beginning inventory, purchases, and sales for Item CZ83 are as follows:

January 1 Inventory110 units @ $195 Sale88 units11 Purchase122 units @ $2321 Sale102 units

Assuming a perpetual inventory system and using the last-in, first-out (LIFO) method, determine (a) the cost of merchandise sold on January 21 and (b) the inventory on January 31.

a. Cost of merchandise sold on January 21$ _________________ b. Inventory on January 31$ _________________ 7.eBookeBookeBookeBookeBookeBookeBookeBook Animated Example ExerciseAnimated Example ExerciseAnimated Example ExerciseAnimated Example ExerciseAnimated Example ExerciseAnimated Example ExerciseAnimated Example ExerciseAnimated Example Exercise

Lower-of-Cost-or-Market Method

On the basis of the following data, determine the value of the inventory at the lower-of-cost-or-market by applying lower-of-cost-or-market to each inventory item, as shown in Exhibit 9.

ItemInventory QuantityUnit Cost PriceUnit Market PriceCK3J 95$57$55VZ31186 29 31

$ _________________

8.eBookeBookeBookeBookeBookeBookeBookeBook Animated Example ExerciseAnimated Example ExerciseAnimated Example ExerciseAnimated Example ExerciseAnimated Example ExerciseAnimated Example ExerciseAnimated Example ExerciseAnimated Example Exercise

Effect of Inventory Errors

During the taking of its physical inventory on December 31, 2014, Zula Company incorrectly counted its inventory as $266,700 instead of the correct amount of $304,040. Indicate the effect of the misstatement on Zula's December 31, 2014, balance sheet and income statement for the year ended December 31, 2014.

Cost of merchandise sold _________________ _________________ $ _________________ Current assets _________________ _________________ $ _________________ Gross profit _________________ _________________ $ _________________ Merchandise inventory _________________ ________________ $ _________________ Net income _________________ _________________ $ _________________ Owner's equity _________________ _________________ $ _________________ Total assets _________________ _________________ $ _________________ 9.eBookeBookeBookeBookeBookeBookeBookeBook Animated Example ExerciseAnimated Example ExerciseAnimated Example ExerciseAnimated Example ExerciseAnimated Example ExerciseAnimated Example ExerciseAnimated Example ExerciseAnimated Example Exercise

Inventory Turnover and Number of Days' Sales in Inventory

The following financial statement data for years ending December 31 for Gillispie Company are shown below.

20142013Cost of merchandise sold$1,276,040 $957,760 Inventories: Beginning of year$275,210 $191,990 End of year396,390 275,210

a. Determine the inventory turnover for 2014 and 2013. Round to one decimal place.

Inventory Turnover2014 _________________ 2013 _________________

b. Determine the number of days' sales in inventory for 2014 and 2013. Assume 365 days a year. Round interim calculations and final answers to one decimal place.

Number of Days' Sales in Inventory2014 _________________ days2013 _________________ days

c. Does the change in inventory turnover and the number of days' sales in inventory from 2013 to 2014 indicate a favorable or an unfavorable trend?

_________________

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Perpetual Inventory Using FIFO

Beginning inventory, purchases, and sales data for portable DVD players are as follows:

June 1 Inventory48 units @ $496 Sale32 units14 Purchase24 units @ $5219 Sale20 units25 Sale10 units30 Purchase35 units @ $56

The business maintains a perpetual inventory system, costing by the first-in, first-out method.

Determine the cost of the merchandise sold for each sale and the inventory balance after each sale, presenting the data in the form illustrated in Exhibit 3.

a. Under FIFO, if units are in inventory at two different costs, enter the units with the LOWER unit cost first in the Cost of Merchandise Sold Unit Cost column and in the Inventory Unit Cost column.

Cost of the Merchandise Sold Schedule First-in, First-out Method Portable DVD Players Date Quantity Purchased Purchases Unit Cost Purchases Total Cost Quantity Sold Cost of Merchandise Sold Unit Cost Cost of Merchandise Sold Total Cost Inventory Quantity Inventory Unit Cost Inventory Total Cost June 1 48 $ 49 $ 2,352 June 6 $ $