BAT 4M
Inventory Valuation
Name: _______________________
1.
You own a Home Depot store and are trying to determine the best inventory cost flows to
use for certain items for accounting purposes. For each of the items below, explain which of
the 4 methods (FIFO, LIFO, AC or SI) would be best to use to match the physical flow of the
goods and WHY. (9 Marks)
a) A bin of small washers that holds up to 10,000 washers and is just refilled on top with new
inventory
b) You carry about 2 or 3 different models of BBQs made from 6 different companies.
c) You sell propane from a large 15,000 gallon tank. When the tank is filled up, the propane
mixes easily with propane already in the tank.
2.
The records of Wilkes-Paul Shovels showed the beginning inventory balance of their
“Shovel-it-all” model of snow shovel on February 1st and the purchases of this item during
current year to be:
Feb. 01
Feb. 15
Feb. 28
Mar. 07
Mar. 20
Beginning Inventory……………….. 1,000 @ $10.00
Purchase……………………………. 3,200 @ $11.00
Purchase……………………………. 2,000 @ $11.20
Purchase……………………………. 2,000 @ $11.60
Purchase……………………………. 800 @ $12.50
a) At March 31, the ending inventory consisted of 1,200 units. Determine the cost of the ending
inventory, based on each of the following inventory valuation methods assuming they use the
periodic method.
i)
ii)
iii)
iv)
Average Cost (2 Marks)
FIFO (2 Marks)
LIFO (2 Marks)
Specific Identification (it is known that 600 Mar. 20 units are here plus 300 each from
Feb. 28 and Mar. 07. (2 Marks)
b) Using the above purchase data and assuming the company uses a PERPETUAL method,
given sales on Feb. 18 of 3500 units and March 14 of 4200 units, calculate the total COGS
using….
i)
FIFO (3 Marks)
ii)
Avg Cost (3 Marks)
3.
a) Assume that Will Phone Company has a beginning inventory of $80,000 on Jan.1.
During the month of January, net purchases amount to $40,000 and net sales total $70,000.
Assuming that the company’s normal gross profit rate is 30%, show your calculations to
determine the companies cost of goods sold and ending inventory using the gross profit
method. (4 Marks)
b) Now, using a new set of information (below) calculate the Will Phone Company’s COGS
and ending inventory using the retail method given a net sales figure of $120,000. (4 Marks)
Cost Price
Retail Selling Price
Beginning Inventory
$240,000
$350,000
Net Purchases
120,000
150,000
4.
Graham’s Shady Auto Parts prepared condensed income statements for 3 successive
years:
Sales
COGS
Gross Profit
Expenses
Net Income (loss)
2009
2008
2007
925,000
500,000
425,000
310,000
115,000
850,000
650,000
200,000
300,000
(100,000)
800,000
350,000
450,000
270,000
180,000
At the end of 2008, it was determined that the 2007 inventory figure had been grossly
miscalculated. As a result, the 2007 ending inventory was valued $120,000 higher than it
should have been. Also at the end of 2009, the ending inventory figure is tampered with to alter
the net income. The ending inventory has been undervalued by $75,000.
a) Re-prepare the 3 years worth of financial data accurately…knowing that errors can carry
over… (6 Marks)
b) Write a brief paragraph explaining the effects of these errors on how users of the financial
statements would have interpreted the Graham’s Shady Auto Parts company. (5 Marks)
5.
Journal Entries
a) With a FIFO cost flow assumption that amounted to $1,800 for the sale of 14 office desks,
prepare the 2 journal entries to record this sale of 14 desks at $225 apiece on Oct. 18. (4
Marks)
b) Given the following data:
Purchase on Nov. 12: 12 units @ $80……. $960
Purchase on Nov. 20: 22 units @ $90…… . 1,980
Total………………………………………. $2,940
A physical count of inventory reveals 29 units left.
If the company is using the LIFO method, calculate and record the shrinkage loss given that the
company will record it as Cost of Goods Sold IF it is under 10% of total inventory value AND
prepare the journal entry to record the shrinkage. (4 Marks)
T
C
A
Total
_______ + _______ + _______ = ________
9
5
36
50