Assignment
Addison Company sells two types of pumps. One is large and is for commercial use. The other is smaller and is used in residential swimming pools. The following inventory data is available for the month of March.
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Residential Pumps
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Units
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Cost/Price Per Unit
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Inventory, 2/28/16
|
200
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$ 400
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March purchases
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|
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10-Mar
|
500
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$ 450
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20-Mar
|
400
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$ 475
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30-Mar
|
300
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$ 500
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March sales
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|
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15-Oct
|
500
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$ 540
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25-Oct
|
400
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$ 570
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Commercial Pumps
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Inventory, 2/28/16
|
600
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$ 800
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March purchases
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|
|
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3-Mar
|
600
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$ 900
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12-Mar
|
300
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$ 950
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21-Mar
|
500
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$ 1,000
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March sales
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|
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18-Oct
|
900
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$ 1,080
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29-Oct
|
600
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$ 1,140
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Required:
a. Assuming Addison uses a periodic inventory system, determine the cost of inventory on hand at March 31 and the cost of goods sold for March under first-in, first-out (FIFO).
b. Assume Addison uses dollar-value LIFO and one pool, consisting of the combination of residential and commercial pumps. Determine the cost of inventory on hand at March 31 and the cost of goods sold for March. Assume Addison'sinitial adoption of LIFO is on March 1. Use the double-extension method to determine the appropriate price indices.
(Hint: The price index for February 28/March 1 should be 1.000) (Round the index to three decimal places.)
c. Assume you need to compute a current ratio for Addison's. Which inventory method (FIFO or dollar-value LIFO) do you think would give you a more meaningful current ratio?
d. Some of Addison'scompetitors use LIFO inventory costing and some use FIFO. How can an analyst compare the results of companies in an industry, when some use LIFO and others use FIFO?
e. Can companies change from one inventory accounting method to another? If a company changes to an inventory accounting method used by most of its competitors, what are the trade-offs in terms of the conceptual framework discussed in Chapter 2 of the textbook?