Based on the following data, estimate the cost of the ending merchandise inventory: Sales $9,250,000

Based on the following data, estimate the cost of the ending merchandise inventory:

Sales $9,250,000

Estimated gross profit rate 36%

Beginning merchandise inventory $  180,000

Purchases (net) 5,945,000

Merchandise available for sale $6,125,000

Answer:

Merchandise available for sale......................................................... $6,125,000

Less cost of merchandise sold [$9,250,000 × (100% – 36%)].................. 5,920,000

Estimated ending merchandise inventory.......................................... $ 205,000

Based on the following data, estimate the cost of the ending merchandise inventory: Sales $1,450,000 Estimated gross profit rate 42%

Based on the following data, estimate the cost of the ending merchandise inventory:

Sales $1,450,000

Estimated gross profit rate 42%

Beginning merchandise inventory $    100,000

Purchases (net) 860,000

Merchandise available for sale $ 960,000

Answer:

Merchandise available for sale......................................................... $960,000

Less cost of merchandise sold [$1,450,000 × (100% – 42%)].................. 841,000

Estimated ending merchandise inventory.......................................... $119,000

The merchandise inventory was destroyed by fire on December 13. The following data were obtained from the accounting records:

The merchandise inventory was destroyed by fire on December 13. The following data were obtained from the accounting records:

Jan. 1 Merchandise inventory $  350,000

Jan. 1–Dec. 31 Purchases (net) 2,950,000

                          Sales                 4,440,000

         Estimated gross profit rate         35%

a. Estimate the cost of the merchandise destroyed.

b. Briefly describe the situations in which the gross profit method is useful.

Answer:

a. Merchandise inventory, January 1$ 350,000 Purchases (net), January 1–December 312,950,000 Merchandise available for sale$3,300,000 Sales, January 1–December 31 $4,440,000 Less estimated gross profit ($4,440,000 × 35%) 1,554,000 Estimated cost of merchandise sold2,886,000 Estimated merchandise inventory, December 31 $ 414,000 b. The gross profit method is useful for estimating inventories for monthly or quarterly financial statements. It is also useful in estimating the cost of merchandise destroyed by fire or other disasters.

On the basis of the following data, estimate the cost of the merchandise inventory at June 30 by the retail method:Cost Retail Merchandise inventory, June 1$

On the basis of the following data, estimate the cost of the merchandise inventory at June 30 by the retail method:

                                                          Cost  |  Retail

June 1 Merchandise inventory $  165,000 | $ 275,000

June 1–30 Purchases (net)       2,361,500 | 3,800,000

June 1–30 Sales                                          3,550,000

Answer:

Cost Retail Merchandise inventory, June 1$ 165,000 $ 275,000 Purchases in June (net)2,361,500 3,800,000 Merchandise available for sale $2,526,500 $4,075,000 $2,526,500 $4,075,000 Sales for June 3,550,000 Merchandise inventory, June 30, at retail price$ 525,000 Merchandise inventory, June 30, at estimated cost ($525,000 × 62%)$ 325,500

A business using the retail method of inventory costing determines that merchandise inventory at retail is $1,235,000

A business using the retail method of inventory costing determines that merchandise inventory at retail is $1,235,000. If the ratio of cost to retail price is 54%, what is the amount of inventory to be reported on the financial statements?

Answer:

$666,900 ($1,235,000 × 54%)

A business using the retail method of inventory costing determines that merchandise inventory at retail is $396,400

A business using the retail method of inventory costing determines that merchandise inventory at retail is $396,400. If the ratio of cost to retail price is 61%, what is the amount of inventory to be reported on the financial statements?

Answer:

$241,804 ($396,400 × 61%)

A business using the retail method of inventory costing determines that merchandise inventory at retail is $775,000

A business using the retail method of inventory costing determines that merchandise inventory at retail is $775,000. If the ratio of cost to retail price is 66%, what is the amount of inventory to be reported on the financial statements?

Answer:

$511,500 ($775,000 × 66%)

Kroger, Sprouts Farmers Market, Inc., and Whole Foods Markets, Inc. are three grocery chains in the United States

Kroger, Sprouts Farmers Market, Inc., and Whole Foods Markets, Inc. are three grocery chains in the United States. Inventory management is an important aspect of the grocery retail business. Recent balance sheets for these three companies indicated the following merchandise inventory (in millions) information:

Kroger Sprouts Whole Foods

Cost of merchandise sold $85,512 $2,541 $9,973

Inventory, end of year 5,688 165 500

Inventory, beginning of year 5,651 143 441

a. Determine the inventory turnover. Round to two decimal places.

b. Determine the days’ sales in inventory. Round to one decimal place.

c. Interpret your results in parts (a) and (b).

d. If Kroger had Whole Foods’ days’ sales in inventory, how much additional cash flow (rounded to nearest million) would have been generated from the smaller inventory relative to its actual average inventory position?

Answer:

a. Sprouts: ($500 + $441) ÷ 2 b. Inventory Turnover Cost of Merchandise Sold Average Inventory Kroger: = ($5,688 + $5,651) ÷ 2

($165 + $143) ÷ 2 = = $4,030 Thus, the additional cash flow that would have been generated is the difference between the actual average inventory and the hypothetical average inventory, as follows: Actual average inventory............................................. $5,670 million Hypothetical average inventory.................................... 4,030 million Positive cash flow potential....................................... $1,640 million That is, a lower average inventory amount would have required less cash than actually was required.

The following data (in millions) were taken from recent annual reports of Apple Inc., a manufacturer of personal computers and related products

The following data (in millions) were taken from recent annual reports of Apple Inc., a manufacturer of personal computers and related products, and Mattel Inc., a manufacturer of toys, including Barbie®, Hot Wheels®, and Disney Classics:

                                                     Apple | Mattel 

Cost of merchandise sold      $140,089 | $2,896

Inventory, end of year                  2,349 | 588

Inventory, beginning of the year  2,111 | 562

a. Determine the inventory turnover for Apple and Mattel. Round to one decimal place.

b. Would you expect Mattel’s inventory turnover to be higher or lower than Apple’s? Why?

Answer:

a. Apple: 62.8 {$140,089 ÷ [($2,349 + $2,111) ÷ 2]}

Mattel: 5.0 {$2,896 ÷ [($588 + $562) ÷ 2]}

b. Lower. Although Mattel’s business is seasonal, with most of its revenue generated during the major holidays, much of its nonholiday inventory may turn over very slowly. Apple, on the other hand, turns its inventory over very fast because it maintains a low inventory, which allows it to respond quickly to customer needs. In addition, Apple’s computer products can become obsolete quickly, so it cannot risk building large inventories.

Fonda Motorcycle Shop sells motorcycles, ATVs, and other related supplies and accessories. During the taking of its physical inventory on December 31, 20Y8

Fonda Motorcycle Shop sells motorcycles, ATVs, and other related supplies and accessories. During the taking of its physical inventory on December 31, 20Y8, Fonda Motorcycle Shop incorrectly counted its inventory as $337,500 instead of the correct amount of $328,850.

a. State the effect of the error on the December 31, 20Y8, balance sheet of Fonda Motorcycle Shop.

b. State the effect of the error on the income statement of Fonda Motorcycle Shop for the year ended December 31, 20Y8.

c. If uncorrected, what would be the effect of the error on the 20Y9 income statement?

d. If uncorrected, what would be the effect of the error on the December 31, 20Y9, balance sheet?

Answer:

a.

Merchandise inventory*................................................ $8,650 overstated

Current assets............................................................ $8,650 overstated

Total assets............................................................... $8,650 overstated

Owner’s equity............................................................ $8,650 overstated

* $8,650 = $337,500 – $328,850

b.

Cost of merchandise sold............................................. $8,650 understated

Gross profit............................................................... $8,650 overstated

Net income.................................................................. $8,650 overstated

c.

Cost of merchandise sold............................................. $8,650 overstated

Gross profit............................................................... $8,650 understated

Net income.................................................................. $8,650 understated

d. The December 31, 20Y9, balance sheet would be correct, since the 20Y8

inventory error reverses itself in 20Y9.

During 20Y5, the accountant discovered that the physical inventory at the end of 20Y4 had been understated by $42,750

During 20Y5, the accountant discovered that the physical inventory at the end of 20Y4 had been understated by $42,750. Instead of correcting the error, however, the accountant assumed that the error would balance out (correct itself) in 20Y5. 

Are there any flaws in the accountant’s assumption? Explain.

Answer:

When an error is discovered affecting the prior period, it should be corrected. In this case, the merchandise inventory account should be debited and the owner’s capital account credited for $42,750.

Failure to correct the error for 20Y4 and purposely misstating the inventory and the cost of merchandise sold in 20Y5 would cause the income statements for the two years not to be comparable. The balance sheet at the end of 20Y5 would be correct, however, because the 20Y4 inventory error reverses itself in 20Y5.

Missouri River Supply Co. sells canoes, kayaks, whitewater rafts, and other boating supplies. During the taking of its physical inventory on December 31, 20Y2,

Missouri River Supply Co. sells canoes, kayaks, whitewater rafts, and other boating supplies. During the taking of its physical inventory on December 31, 20Y2, Missouri River Supply incorrectly counted its inventory as $233,400 instead of the correct amount of $238,600.

a. State the effect of the error on the December 31, 20Y2, balance sheet of Missouri River Supply.

b. State the effect of the error on the income statement of Missouri River Supply for the year ended December 31, 20Y2.

c. If uncorrected, what would be the effect of the error on the 20Y3 income statement?

d. If uncorrected, what would be the effect of the error on the December 31, 20Y3, balance sheet?

Answer:

a.

Merchandise inventory*................................................ $5,200 understated

Current assets............................................................ $5,200 understated

Total assets............................................................... $5,200 understated

Owner’s equity............................................................ $5,200 understated

* $5,200 = $238,600 – $233,400

b.

Cost of merchandise sold............................................. $5,200 overstated

Gross profit............................................................... $5,200 understated

Net income.................................................................. $5,200 understated

c.

Cost of merchandise sold............................................. $5,200 understated

Gross profit............................................................... $5,200 overstated

Net income.................................................................. $5,200 overstated

d. The December 31, 20Y3, balance sheet would be correct, since the 20Y2

inventory error reverses itself in 20Y3.

Based on the data in Exercise 7-15 and assuming that cost was determined by the FIFO method, show how the merchandise inventory would appear on the balance sheet.

Based on the data in Exercise 7-15 and assuming that cost was determined by the FIFO method, show how the merchandise inventory would appear on the balance sheet.

Answer:

The merchandise inventory would appear in the Current assets section, as follows:

Merchandise inventory—at lower of cost (FIFO) or market........................ $41,880

Alternatively, the details of the method of determining cost and the method of valuation could be presented in a note.

On the basis of the following data, determine the value of the inventory at the lower of cost or market. Assemble the data in the form illustrated in Exhibit 9.

On the basis of the following data, determine the value of the inventory at the lower of cost or market. Assemble the data in the form illustrated in Exhibit 9.

Inventory Item Inventory Quantity Cost per Unit Market Value per Unit (Net Realizable Value) Birch 100 $125 $120 Cypress 75 100 108 Mountain Ash 80 90 86Spruce 130 74 80 Willow 60 105 98

Answer:

Market Value per Cost Unit (Net Inventory per Realizable Quantity Unit Value) Cost Market LCM 100 $125 $120 $12,500 $12,000 $12,000 75 100 108 7,500 8,100 7,500 80 90 86 7,200 6,880 6,880 130 74 80 9,620 10,400 9,620 60 105 98 6,300 5,880 5,880 $43,120 $43,260 $41,880

There are 2,000 units of the item in the physical inventory at December 31. The periodic inventory system is used.

The units of an item available for sale during the year were as follows:

Jan.  1 Inventory 1,800 units at $108

Mar. 10 Purchase 2,240 units at $110

Aug. 30 Purchase 2,000 units at $116

Dec. 12 Purchase 1,960 units at $120

There are 2,000 units of the item in the physical inventory at December 31. The periodic inventory system is used. Determine the inventory cost and the cost of merchandise sold by three methods, presenting your answers in the following form:

Cost Inventory Method Merchandise Inventory Merchandise Sold a. First-in, first-out $ $ b. Last-in, first-out c. Weighted average cost

Answer:

Merchandise Merchandise Inventory Method Inventory Sold a. FIFO$239,840 $668,160 b. LIFO216,400 691,600 c. Weighted average cost 227,000 681,000 Cost of merchandise available for sale: 1,800 units at $108........................................................................... $194,400 2,240 units at $110........................................................................... 246,400 2,000 units at $116.......................................................................... 232,000 1,960 units at $120......................................................................... 235,200 8,000 units (at an average cost of $113.50)....................................... $908,000 a. First-in, first-out: Merchandise inventory: 1,960 units at $120.......................................................................... $235,200 40 units at $116........................................................................... 4,640 2,000 units...................................................................................... $239,840

Merchandise sold: $908,000 – $239,840......................................................................... $668,160 b. Last-in, first-out: Merchandise inventory: 1,800 units at $108........................................................................... $194,400 200 units at $110......................................................................... 22,000 2,000 units.................................................................................... $216,400

Merchandise sold: $908,000 – $216,400.......................................................................... $691,600 c. Weighted average cost:

Merchandise inventory: 2,000 units at $113.50 ($908,000 ÷ 8,000 units)....................................$227,000 Merchandise sold: $908,000 – $227,000....................................................................... $681,000

Assume that a firm separately determined inventory under FIFO and LIFO and then compared the results.

Assume that a firm separately determined inventory under FIFO and LIFO and then compared the results.

a. In each space that follows, place the correct sign [less than (<), greater than (>), or equal (=)] for each comparison, assuming periods of rising prices.

1. FIFO inventory ________ LIFO inventory

2. FIFO cost of merchandise sold ________ LIFO cost of merchandise sold

3. FIFO net income ________ LIFO net income

4. FIFO income taxes ________ LIFO income taxes

b. Why would management prefer to use LIFO over FIFO in periods of rising prices?

Answer:

a. 1. FIFO inventory > (greater than) LIFO inventory

2. FIFO cost of merchandise sold < (less than) LIFO cost of merchandise sold

3. FIFO net income > (greater than) LIFO net income

4. FIFO income taxes > (greater than) LIFO income taxes

b. In periods of rising prices, the income shown on the company’s tax return would be lower if LIFO rather than FIFO were used; thus, there is a tax advantage of using LIFO.

The units of an item available for sale during the year were as follows: Jan. 1 Inventory 1,000 units at $120

The units of an item available for sale during the year were as follows:

Jan.  1 Inventory 1,000 units at $120

Feb. 17 Purchase 1,375 units at $128

July 21 Purchase 1,500 units at $136

Nov. 23 Purchase 1,125 units at $140

There are 1,200 units of the item in the physical inventory at December 31. The periodic inventory system is used. Determine the inventory cost by (a) the first-in, first-out method; (b) the last-in, first-out method; and (c) the weighted average cost method.

Answer:

a. $167,700 (1,125 units at $140 plus 75 units at $136) = $157,500 + $10,200 b. $145,600 (1,000 units at $120 plus 200 units at $128) = $120,000 + $25,600 c. $157,800 (1,200 units at $131.50) Cost of merchandise available for sale: units @ $120……………………………………………… $120,000 units @ $128……………………………………………… 176,000 units @ $136……………………………………………… 204,000 units @ $140……………………………………………… 157,500 units (at an average cost of $131.50)………………… $657,500

Assume that the business in Exercise 7-9 maintains a perpetual inventory system. Determine the cost of merchandise sold for each sale

Assume that the business in Exercise 7-9 maintains a perpetual inventory system. Determine the cost of merchandise sold for each sale and the inventory balance after each sale, assuming the last-in, first-out method. Present the data in the form illustrated in Exhibit 4.

Answer:

Inventory Unit  Total Unit  Total  Total Quantity Cost  Cost Quantity Cost  Cost Quantity Unit Cost  Cost 14,000 20.00 80,000 192,500 20.00 50,000 1,500 20.00 30,000 30 6,000 24.00 144,0001,500 20.00 30,000 6,000 24.00 144,000 24,500 24.00 108,000 1,500 20.00 30,000 1,500 24.00 36,000 15 1,000 25.00 25,0001,500 20.00 30,000 1,500 24.00 36,000 1,000 25.00 25,000 31 Balances 158,000 91,000

Assume that the business in Exercise 7-9 maintains a perpetual inventory system. Determine the cost of merchandise sold for each sale

Assume that the business in Exercise 7-9 maintains a perpetual inventory system. Determine the cost of merchandise sold for each sale and the inventory balance after each sale, assuming the first-in, first-out method. Present the data in the form illustrated in Exhibit 3.

Answer:

Cost of Merchandise Sold Unit  Total Unit  Total  Total Quantity Cost  Cost Quantity Cost  Cost Quantity Unit Cost  Cost  Jan. 14,000 20.00 80,000 Apr. 192,500 20.00 50,000 1,500 20.00 30,000 June 30 6,000 24.00 144,0001,500 20.00 30,000 6,000 24.00 144,000 Sept. 21,500 20.00 30,000 3,000 24.00 72,000 3,000 24.00 72,000 Nov. 15 1,000 25.00 25,0003,000 24.00 72,000 1,000 25.00 25,000 Dec. 31 Balances152,000 97,000

The following units of a particular item were available for sale during the calendar year: Jan. 1 Inventory 30,000 units at $30.00

The following units of a particular item were available for sale during the calendar year:

Jan.  1 Inventory 30,000 units at $30.00

Mar. 18 Sale 24,000 units

May  2 Purchase 54,000 units at $31.00

Aug.  9 Sale 45,000 units

Oct. 20 Purchase 21,000 units at $32.10

The firm uses the weighted average cost method with a perpetual inventory system. Determine the cost of merchandise sold for each sale and the inventory balance after each sale. Present the data in the form illustrated in Exhibit 5.

Answer:

Cost of Merchandise Sold Unit  Total Unit  Total  Total Quantity Cost  Cost Quantity Cost  Cost Quantity Unit Cost  Cost Jan. 130,000 30.00 900,000 Mar. 1824,000 30.00 720,000 6,000 30.00 180,000 May 2 54,000 31.00 1,674,00060,000 30.90 1,854,000 Aug. 945,000 30.90 1,390,500 15,000 30.90 463,500 Oct. 20 21,000 32.10 674,10036,000 31.60 1,137,600 Dec. 31 Balances2,110,500 36,000 31.60 1,137,600