FA 6 Inventory Methods.handout.pencast
LO1 LO3 Periodic Inventory System and Inventory Costing
Methods
P 7. The inventory, purchases, and sales of Product CAT for March and
April are listed below. The company closes its books at the end of each
month. It uses the periodic inventory system.
Mar. 1 Beginning inventory 60 units @ $98
10 Purchase
100 units @ $104
19 Sale
90 units
31 Ending inventory 70 units
Apr. 4 Purchase
120 units @ $106
15 Purchase
50 units @ $108
23 Sale
200 units
25 Purchase
100 units @ $110
30 Ending inventory 140 units
Required
1. Compute the cost of the ending inventory on March 31 and April
30 using the average-cost method. In addition, determine cost of
goods sold for March and April. Round unit costs to cents and
totals to dollars.
2. Compute the cost of the ending inventory on March 31 and April
30 using the FIFO method. Also determine cost of goods sold for
March and April.
3. Compute the cost of the ending inventory on March 31 and April
30 using the LIFO method. Also determine cost of goods sold for
March and April.
4. Do the cash flows from operations for March and April differ
depending on which inventory costing method is used—averagecost, FIFO, or LIFO? Explain.
LO1 LO5 Perpetual Inventory System and Inventory Costing
Methods
P 8. Use the data provided in P 7, but assume that the company uses the
perpetual inventory system. (Hint : In preparing the solutions required
below, it is helpful to determine the balance of inventory after each
transaction, as shown in the Review Problem in this chapter.)
Required
1. Determine the cost of ending inventory and cost of goods sold for
March and April using the average-cost method. Round unit costs
to cents and totals to dollars.
2. Determine the cost of ending inventory and cost of goods sold for
March and April using the FIFO method.
3. Determine the cost of ending inventory and cost of goods sold for
March and April using the LIFO method.
4. Assume that this company grows for many years in a long period
of rising prices. How realistic do you think the balance sheet value
for inventory would be and what effect would it have on the
inventory turnover ratio?
SO6 Retail Method
P 9. Decent Company operates a large discount store and uses the retail
method to estimate the cost of ending inventory. Management suspects
that in recent weeks there have been unusually heavy losses from
shoplifting or employee pilferage. To estimate the amount of the loss,
the company has taken a physical inventory and will compare the results
with the estimated cost of inventory. Data from the accounting records
of Decent Company are as follows:
At Cost At Retail
August 1 beginning inventory
$51,488 $ 74,300
Purchases
71,733 108,500
Purchases returns and allowances
(2,043) (3,200)
Freight-in
950
Sales
109,183
Sales returns and allowances
(933)
August 31 physical inventory at retail
62,450
Required
1. Using the retail method, prepare a schedule to estimate the dollar
amount of the store's month-end inventory at cost.
2. Use the store's cost to retail ratio to reduce the retail value of the
physical inventory to cost.
3. Calculate the estimated amount of inventory shortage at cost and at
retail.
4. Many retail chains use the retail method because it is efficient.
Why do you think using this method is an efficient way for these
companies to operate?
LO6 Gross Profit Method
P 10. Pearly Tooth Corporation is a large retailer of medical equipment.
It operates in two adjacent warehouses. One warehouse is a showroom,
and the other is used to store merchandise. On the night of May 5, 2009,
a fire broke out in the storage warehouse and destroyed the merchandise
stored there. Fortunately, the fire did not reach the showroom, so all the
merchandise on display was saved.
Although the company maintained a perpetual inventory system, its
records were rather haphazard, and the last reliable physical inventory
had been taken on December 31. In addition, there was no control of the
flow of goods between the showroom and the warehouse. Thus, it was
impossible to tell what goods would have been in either place. As a
result, the insurance company required an independent estimate of the
amount of loss. The insurance company examiners were satisfied when
they received the following information:
Merchandise inventory on December 31, 2008
$ 727,400
Purchases, January 1 to May 5, 2009
1,206,100
Purchases returns, January 1 to May 5, 2009
(5,353)
Freight-in, January 1 to May 5, 2009
26,550
Sales, January 1 to May 5, 2009
1,979,525
Sales returns, January 1 to May 5, 2009
(14,900)
Merchandise inventory in showroom on May 5, 2009 201,480
Average gross margin
48%
Required
1. Prepare a schedule that estimates the amount of the inventory lost
in the fire.
2. What are some other reasons management might need to estimate
the amount of inventory?