Note: To receive partial credit on problems which require calculations, calculations must be shown.
Problem I: Indicate whether each of the following statements is true (T) or false (F).
|
a.
|
___
|
A company which uses a just-in-time (JIT) inventory system strives to manufacture or purchase its inventory when they believe its sale will shortly occur.
|
|
|
|
|
|
b.
|
___
|
A successful just-in-time (JIT) inventory system allows companies to use unreliable suppliers.
|
|
|
|
|
|
c.
|
___
|
GAAP requires companies to choose an inventory cost flow assumption for financial reporting purposes that most closely resembles the manner in which their inventory physically flows or moves.
|
|
|
|
|
|
d.
|
___
|
Assuming inventory costs are rising over time, one of the main advantages of the LIFO inventory method is its tax savings.
|
|
|
|
|
|
e.
|
___
|
Under current tax laws in the United States, a company which uses the LIFO method for tax purposes must also use the LIFO method for financial reporting purposes.
|
|
|
|
|
|
f.
|
___
|
Under current tax laws in the United States, a company which uses the FIFO method for tax purposes must also use the FIFO method for financial reporting purposes.
|
|
|
|
|
|
g.
|
___
|
GAAP allows companies to switch inventory methods back and forth (ex. FIFO to LIFO) from year to year based upon which method maximizes the company's net income.
|
|
|
|
|
|
h.
|
___
|
An ending inventory error in a given year which overstates net income will understate net income in the subsequent year.
|
|
|
|
|
|
i.
|
___
|
An ending inventory error in a given year will affect the balance sheet only in that year.
|
|
|
|
|
|
j.
|
___
|
When applying the Lower-of-Cost-or-Market (LCM) method, the word "market" is referring to the inventory's fair market value.
|
|
|
|
|
|
k.
|
___
|
The Lower-of-Cost-or-Market (LCM) method is an application of the conservatism principle.
|
|
|
|
|
|
l.
|
___
|
The "LIFO reserve" is the dollar difference between the cost of inventory using the LIFO cost flow assumption and the FIFO cost flow assumption.
|
Problem II:
Assuming inventory costs are rising over time and new inventory layers are being added, indicate using a checkmark (√) whether, if applicable, the LIFO or FIFO method would give the desired effect for the pattern being described below in a given year. If the inventory costing method does not affect the pattern being described, select "no effect". Only one checkmark should be shown per row.
|
|
All else being equal, which method would yield the...
|
FIFO
|
LIFO
|
No Effect
|
|
a.
|
Highest cost of goods sold
|
|
|
|
|
b.
|
Lowest income tax expense
|
|
|
|
|
c.
|
Highest net income
|
|
|
|
|
d.
|
Lowest inventory balance
|
|
|
|
|
e.
|
Highest gross margin
|
|
|
|
|
f.
|
Highest sales revenue
|
|
|
|
Problem III:
Using a checkmark (√), indicate whether each of the inventory items described below should or should not be include in Durfee's physical inventory count at 12/31/X1.
|
|
|
Should be included
|
Should not be included
|
|
a.
|
200 units of inventory being shipped on consignment by Durfee (the consignor) to another company (the consignee).
|
|
|
|
b.
|
120 units of inventory held on consignment by Durfee (the consignee) from another company (the consignor).
|
|
|
|
c.
|
50 units of inventory Durfee sold to a customer but is being held for customer pickup.
|
|
|
|
d.
|
1,000 units of inventory in transit being shipped to Durfee F.O.B. destination.
|
|
|
|
e.
|
1,600 units of inventory in transit being shipped to Durfee F.O.B. shipping point.
|
|
|
Problem IV: Below is Wolfpack Inc.'s schedule showing the cost details of widgets it purchased during the year:
|
Widgets
|
|
|
Units
|
Unit Cost
|
Total Cost
|
|
Jan. 1 Beginning inventory
|
100
|
$15
|
$ 1,500
|
|
May 1 purchases
|
900
|
$20
|
18,000
|
|
September 1 purchases
|
1,500
|
$21
|
31,500
|
|
Available for sale
|
2,500
|
|
$51,000
|
During the year, a total of 2,200 units were sold for $75 each. Wolfpack uses the periodic inventory system.
Required: Fill in the chart below with the cost of goods sold and the cost of ending inventory under the three cost flow assumptions indicated. In order to receive partial credit, show below, or attach a page to the end of this document showing your work.
|
Inventory costing method:
|
Cost of Goods Sold
|
Cost of Ending Inventory
|
|
FIFO
|
|
|
|
LIFO
|
|
|
|
Weighted-average **
|
|
|
** When doing the weighted-average method, round the cost per unit to the nearest penny.
Problem V: Joyner Company uses the periodic inventory system. As a result, any error in its ending inventory calculations will result in an error to its cost of goods sold calculation for the year.
Joyner had the following beginning inventory and net purchase amounts for 20X1.
- Beginning inventory, $10,000
- Net purchases, $300,000
At the end of 20X1, Joyner failed to properly include all of its inventory in its physical inventory count, resulting in the cost of its ending inventory being understated by $2,000.
What will be the dollar effect on 20X1's cost of goods sold amount due to this ending inventory error? Based on your answer to part "A", how will Joyner's net income for 20X1 be affected? As a result of the 20X1 error, Joyner's beginning inventory in the subsequent year, 20X2, will now be understated by $2,000. All else being equal in 20X2, how will the 20X1 continue to affect 20X2's net income? Be sure to indicate whether the dollar effect results in an overstatement or understatement to net income.
Problem VI: The following information is available for Salem Corp. for the past three years:
|
|
20X3
|
|
20X2
|
|
20X1
|
|
Inventory
|
mce_markernbsp; 50,000
|
|
mce_markernbsp; 60,000
|
|
mce_markernbsp; 30,000
|
|
Net Sales
|
2,000,000
|
|
2,400,000
|
|
2,500,000
|
|
Cost of Goods sold
|
600,000
|
|
800,000
|
|
700,000
|
- In the chart below, indicate Salem's inventory turnover for 20X3 and 20X2. Round answers to two decimal places.
Calculations:
- What does the inventory turnover indicate? Also, in general, when comparing the turnover from one year to the next, do companies prefer it to be higher or lower over time? (two - three sentences)
- Is it possible for the inventory turnover to be too high? Explain. (two - three sentences)