This is “End-of-Chapter Exercises”, section 9.7 from the book Business Accounting (v. 2.0).
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The Ames Company has exactly $60 in cash. The company buys three pieces of inventory which are all exactly the same. Because it is a highly inflationary market, the first one cost $16, the second cost $19, and the third cost $25. Shortly thereafter, one of these three is sold for $40. Answer each of the following questions.
Which of the following provides the best matching of expenses with related revenues?
Milby Corporation purchased three hats to sell during the year. The first, purchased in February, cost $5. The second, purchased in April, cost $6. The third, purchased in July, cost $8. If Milby sells two hats during the year and uses the FIFO method, what is cost of goods sold for the year?
Which of the following is not a typical reason that a company would choose to use LIFO for financial reporting when prices are rising?
Traylor Corporation began the year with three items in beginning inventory, each costing $4. During the year Traylor purchased five more items at a cost of $5 each and then two more items at a cost of $6.50 each. Traylor sold eight items for $9 each. If Traylor uses a periodic LIFO system, what would be Traylor’s gross profit for this year?
The Greene Company uses a periodic LIFO system for its inventory and starts off the current year with 10 units costing $8 each. Seven units are sold for $16 each, followed by the purchase of 10 additional units at $10 each. Then, 7 more units are sold for $20 each. Finally, 10 units are bought for $13 each. On December 31 of that year, a customer offers to buy one of the units still in inventory but is only willing to pay $12. If Greene takes that offer, what is the impact of that sale on reported net income?
The Bleu Company uses a perpetual LIFO system for its inventory and starts off the current year with 10 units costing $8 each. Seven units are sold for $16 each, followed by the purchase of 10 additional units at $10 each. Then, 7 more units are sold for $20 each. Finally, 10 units are bought for $13 each. On December 31 of that year, a customer offers to buy one of the units still in inventory but is only willing to pay $12. If Bleu takes that offer, what is the impact of that sale on reported net income?
The Whyte Company uses a FIFO system for its inventory and starts off the current year with 10 units costing $8 each. Seven units are sold for $16 each, followed by the purchase of 10 additional units at $10 each. Then, 7 more units are sold for $20 each. Finally, 10 units are bought for $13 each. On December 31 of that year, a customer offers to buy one of the units still in inventory but is only willing to pay $12. If Whyte takes that offer, what is the impact of that sale on reported net income?
The Osborne Company starts the current year with 30 units of inventory costing $20 each. A few weeks later, 20 of these units are sold for $40 each. Then, 20 units are bought to restock inventory at $24.50 each. Later, 20 more units are sold for $50 each and the company buys 20 new units but again at $24.50 each. Late in the year, 20 final units are sold for $60 each. What is the reported cost of the ending inventory if a moving average (perpetual) system is used?
A decision maker is studying a company that has applied LIFO for over 20 years during a period of inflation. The decision maker is looking at the most recent financial statements and notices a note that indicates that a LIFO liquidation occurred. What information is most likely being conveyed by this note?
Buffalo Inc. buys inventory items for $300 each and sells them for $400 each. During the year, the company bought and sold hundreds of these items. The company uses a perpetual system. One unit was sold near the end of the year. The recording was a debit to cash for $400, a credit to inventory for $300, and a credit to gain on sale of inventory for $100. No other entry or correction was made. Which of the following statements is true about Buffalo’s reported information for the period?
Gross profit was correct, net income was understated, and inventory was overstated.
The following information pertains to multiple-choice questions 11, 12, 13, and 14: A company produces financial statements each year. It is started in Year One and has the following transactions:
Based on the previous information, the company holds 16 units at the end of Year Two. What is reported for this inventory if a FIFO system is used?
Based on the previous information, the company holds 16 units at the end of Year Two. What is reported for this inventory if a periodic LIFO system is used?
Based on the previous information, the company holds 16 units at the end of Year Two. What is reported for this inventory if a perpetual LIFO system is used?
Based on the previous information, the company holds 16 units at the end of Year Two. What is reported for this inventory if a weighted average (periodic) system is used?
A company buys and sells inventory and ends each year with approximately 50 units kept in stock at all time. It pays $10 per unit in Year One, $8 per unit in Year Two, and $7 per unit in Year Three. Which of the following statements is true about the Year Three financial statements if LIFO is used rather than FIFO?
During the year, Hostel Company had net sales of $4,300,000 and cost of goods sold of $2,800,000. Beginning inventory was $230,000 and ending inventory was $390,000. Which of the following would be Hostel’s inventory turnover for the year?
During the year, the Brighton Corporation had net sales of $4,800,000 and inventory purchases of $3,600,000. Beginning inventory for the year was $280,000 and ending inventory was $320,000. Which of the following would be Brighton’s inventory turnover for the year?
Ace Company starts the year with 30,000 units costing $8 each. During the year, Ace bought 100,000 more units at $12 each. A count of the ending inventory finds 40,000 units on hand. If the company uses periodic FIFO, what is the inventory turnover for the year?
During the year, the Trenton Company had net sales of $3,200,000 and cost of goods sold of $2,920,000. Beginning inventory was $250,000 and ending inventory was $390,000. What was the average number of days during the year that Trenton held its inventory items?
During the year, the Wyglio Corporation had net sales of $5,100,000 and inventory purchases of $4,340,000. Beginning inventory for the year was $320,000 and ending inventory was $280,000. What was the average number of days during the year that Wyglio held its inventory items?
Professor Joe Hoyle discusses the answers to these two problems at the links that are indicated. After formulating your answers, watch each video to see how Professor Hoyle answers these questions.
Your roommate is an English major. The roommate’s parents own a chain of ice cream shops throughout Florida. One day, while walking over to the science building for a general education class, your roommate poses this question: “Dairy prices have been going up over the last couple of years which has caused a steady rise in the price of the ice cream that my parents buy. I was talking with them recently and they were telling me that they use an accounting system called last-in, first-out in recording their inventory. This makes no sense to me. Everyone knows that all stores always sell their oldest ice cream first so it won’t begin to melt and start losing flavor. I don’t understand how they could possibly be using a last-in, first-out system. In this case, the accounting sounds like a work of fiction. What is going on?” How would you respond?
Your uncle and two friends started a small office supply store several years ago. The company has expanded and now has several large locations. Your uncle knows that you are taking a financial accounting class and asks you the following question: “When we first got started, our accountant told us to use LIFO for our inventory. We were paying her a lot of money so we followed that advice. One of our biggest customers is owned by a company located in Italy. Recently, the manager for that company was telling me that their accounting is based on IFRS rather than U.S. GAAP and that IFRS apparently believes that LIFO is theoretically flawed. Why are we using a flawed system? I don’t even what impact LIFO has on our financial statements. I know that we started out this year with 100,000 units that cost $5 each and then we bought another 400,000 units for $8.00. At the end of the year, because of our sales during the period, we only had 100,000 units left. What difference did LIFO make?” How would you respond?
SuperDuper Company sells top of the line skateboards. SuperDuper is concerned about maintaining high earnings and has chosen to use the periodic FIFO method of inventory costing. At the beginning of the year, SuperDuper had 5,000 skateboards in inventory, each costing $20. In April, SuperDuper purchased 2,000 skateboards at a cost of $22 and in August, purchased 4,000 more at a cost of $23. During the year, SuperDuper sold 9,000 skateboards for $40 each.
A company starts operations on October 1, Year One, holding 400 units of inventory which fills its store. This inventory cost $10 per unit. After that, enough inventory is bought on the last day of each month to bring the quantity on hand back to exactly 400 units. In October, 140 units were sold; in November, 150 units were sold; and in December, 180 units were sold. On October 31, the company bought units for $12 each; on November 30, the company bought units for $13 each; on December 31, the company bought units for $15 each.
Paula’s Parkas sells NorthPlace jackets. At the beginning of the year, Paula’s had 20 jackets in stock, each costing $35 and selling for $60. The following table details the purchases and sales made during January:
Assume that Paula’s Parkas uses the perpetual FIFO method to maintain its inventory records.
Assume the same facts as in problem 6 except that Paula’s Parkas uses the perpetual LIFO method.
Assume the same facts as in problem 6 above except that Paula’s Parkas uses the moving average method.
In Year One, the Major Corporation had the following inventory transactions:
In Year Two, the company had the following inventory transactions:
December 1: Sell 700 units for $22 each.
A company starts the year with 20 units of inventory costing $20 each. In January, 10 of these units are sold for $40 each. Then, 10 new units are bought for $22 each. Shortly thereafter, 10 units are sold for $50 each. Then, 10 units are bought for $27 each. Finally, near the end of the year, 10 units are sold for $60 each.
The Quiqqley Company is started in Year One and buys 400 pieces of inventory for $4 each on June 1. The company sells 300 of these units on September 1 for $20 each. The company buys another 400 units for $7 each on November 1 and finishes Year One with 500 units in stock.
In Year Two, on February 1, the company sells 300 units for $20 each. On July 1, Year Two, the company buys 200 more units for $9 each. On August 1, Year Two, the company sells 100 units for $25 each. Finally, on December 1, Year Two, the company buys another 100 units for $10 each.
The Furn Store sells home furnishings, including bean bag chairs. Furn currently uses the periodic FIFO method of inventory costing, but is considering implementing a perpetual system. It will cost a good deal of money to start and maintain, so Furn would like to see the difference, if any, between the two and is using its bean bag chair inventory to do so. Here is the first quarter information for bean bag chairs:
Each bean bag chair sells for $40.
Rollrbladz Inc. is trying to decide between a periodic or perpetual LIFO system. Management would like to see the effect of each on cost of goods sold and ending inventory for the year. The following is information concerning purchases and sales of its specialty line of rollerblades:
Highlander Corporation sells swords for decorative purposes. It would like to know the difference in cost of goods sold and ending inventory if it uses the weighted average method or the moving average method. Use the following information to help determine these amounts for the second quarter.
Swords retail for $120 each.
In Chapter 4 "How Does an Organization Accumulate and Organize the Information Necessary to Create Financial Statements?", Heather Miller started her own business, Sew Cool. The financial statements for December were presented in Chapter 7 "In Financial Reporting, What Information Is Conveyed about Receivables?" and are shown again below. For convenience, assume the business was started on January 1, 20X8 with no assets.
Based on the financial statements determine the following:
This problem will carry through over several chapters to enable students to build their accounting skills using knowledge gained in previous chapters.
In Chapter 8 "How Does a Company Gather Information about Its Inventory?", financial statements were prepared for Webworks for August 31 and the month then ended. Those financial statements are included here as a starting point for the financial reporting for September.
The following events occur during September:
Webworks pays taxes of $795 in cash.
Record cost of goods sold.
Assume that you take a job as a summer employee for an investment advisory service. One of the partners for that firm is currently looking at the possibility of investing in Deere & Company. The partner is interested in the impact of the recession on a company that is so closely tied to the agriculture industry. The partner is especially interested in the speed with which the company is able to sell its inventory and also the impact of recording most inventory using LIFO. The partner asks you to look at the 2010 financial statements for Deere & Company by following this path: