Measuring and Reporting Inventories Practice Problems

Demonstration problem

Demonstration problem A 

Following are data related to Adler Company's beginning inventory, purchases, and sales:

a. Compute the ending inventory under each of the following methods:

Specific identification (assume ending inventory is taken equally from the August 12 and November 20 purchases).

FIFO: (a) Assume use of perpetual inventory procedure.

(b) Assume use of periodic inventory procedure.

LIFO: (a) Assume use of perpetual inventory procedure.

(b) Assume use of periodic inventory procedure.

Weighted-average: (a) Assume use of perpetual inventory procedure.

(b) Assume use of periodic inventory procedure.

(Carry unit cost to four decimal places and round total cost to nearest dollar.)

b. Give the journal entries to record the individual purchases and sales (Cost of Goods Sold entry

only) under the LIFO method and perpetual procedure.

Demonstration problem B 

a. Joel Company reported annual net income as follows:

2007.... USD 27,200

2008.... USD 28,400 2009.... USD 24,000

Analysis of the inventories shows that certain clerical errors were made with the following results:

What is the corrected net income for 2007, 2008, and 2009?

b. The records of Little Corporation show the following account balances on the day a fire destroyed

the company's inventory:

Merchandise inventory, January 1 USD 40,000

Net cost of purchases (to date) USD 200,000

Sales (to date) USD 300,000

Average rate of gross margin for the past five years 30 per cent of net sales.

Compute an estimated value of the ending inventory using the gross margin method. c. The records of Draper Company show the following account balances at year-end:

Compute the estimated ending inventory at cost using the retail inventory method.

Source: Textbook Equity, https://learn.saylor.org/pluginfile.php/41219/mod_resource/content/3/AccountingPrinciples.pdf
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Solution to demonstration problems

Solution to demonstration problem A

a. The ending inventory is 5,000 units, calculated as follows:

Ending inventory under specific identification:

2. Ending inventory under FIFO:

1. Perpetual:

               (b) Periodic:

*Note that the cost of ending inventory is the same as under perpetual.

3. Ending inventory under LIFO:

  Ending inventory =   (1,000 X $3.00) + (250 X $3.12) + (3,750 X          $3.72) = $17,730

(b) Periodic:

4. Ending inventory under weighted-average:

(a) Perpetual:

Weighted-average unit cost = $98,925/30,000 = $3.2975
Ending inventory cost = $3.2975 x 5,000 = $16,488*
*Rounding difference

1. Journal entries under LIFO perpetual:

Solution to demonstration problem B 

a. Corrected net income:

(1) Ending inventory understated ($5,680 - $4,800 = $880)
(2) Beginning inventory understated (5,680 – 4,800 = 880)
Ending inventory overstated (5,600 – 4,680 = 920)
(3) Beginning inventory overstated (5,600 – 4,680 = 920)

(b)  Computation of inventory:

Self-test

True-false

Indicate whether each of the following statements is true or false.

1. Overstated ending inventory results in an overstatement of cost of goods sold and an understatement of gross margin and net income.

2. In a period of rising prices, FIFO results in the lowest cost of goods sold.

3. Under LCM, inventory is written down to market value when the market value is less than the cost, and inventory is written up to market value when the market value is greater than the cost.

4. Under the gross margin method, an estimate must be made of gross margin to determine estimated cost of goods sold and estimated ending inventory.

5. To use the retail inventory method, both cost and retail prices must be known for the goods available for sale.

6. Under perpetual procedure, cost of goods sold is determined as a result of the closing entries made at the end of the period.

Multiple-choice

Select the best answer for each of the following questions.

Jack Company began the accounting period with inventory of 3,000 units at USD 30 each. During the period, the company purchased an additional 5,000 units at USD 36 each and sold 4,600 units.

Assume the use of periodic inventory procedure for the following six questions.

1. Cost of ending inventory using FIFO is:

1. USD 104,400.
2. USD 122,400.
3. USD 120,000.
4. USD 147,600.
5. None of the above.

2. Cost of goods sold using FIFO is:

1. USD 165,600.
2. USD 150,000.
3. USD 147,600.
4. USD 122,400.
5. None of the above.

3. Cost of ending inventory using LIFO is:

1. USD 104,400.
2. USD 114,750.
3. USD 156,000.
4. USD 122,400.
5. None of the above.

4. Cost of goods sold using LIFO is:

1. USD 155,250.
2. USD 114,000.
3. USD 147,600.
4. USD 165,600.
5. None of the above.

5. Cost of ending inventory using weighted-average is:

1. USD 114,750.
2. USD 157,600.
3. USD 122,400.
4. USD 109,650.
5. None of the above.

6. Cost of goods sold using weighted-average is:

1. USD 147,200.
2. USD 160,350.
3. USD 155,250.
4. USD 114,000.
5. None of the above.

7. During a period of rising prices, which inventory method might be expected to give the highest net income?

a. Weighted-average.

b. FIFO.

c. LIFO.

d. Specific identification.

e. Cannot determine.

Self-test - Answers

True-false

1. False. Overstated ending inventory results in an understatement of cost of goods sold and an overstatement of gross margin and net income.

2. True. The cost of goods sold consists of the earliest purchases at the lowest costs in a period of rising prices.

3. False. Under LCM, inventory is adjusted to market value only when the market (replacement) value is less than the cost.

4. True. The first step in the gross margin method is to estimate gross margin using the gross margin rate experienced in the past.

5. True. The cost/retail ratio is computed by dividing the cost of goods available for sale by the retail price of the goods available for sale.

6. False. Under perpetual procedure, the Cost of Goods Sold account is updated as sales occur.

Multiple-choice

1. b. The cost of ending inventory using FIFO consists of the most recent purchase:

 Cost of ending inventory =3,400× USD 36= USD 122,400

2. c. The cost of goods sold using FIFO is:

 Cost of goods available for sale =(3,000× USD 30)+(5,000× USD 36)= USD 270,000

 Cost of goods sold = USD 270,000- USD 122,400= USD 147,600

3. a. The cost of ending inventory using LIFO is:

(3,000×USD 30)+(400×USD 36)=USD 104,400

4. d. The cost of goods sold using LIFO is:

 USD  270,000-USD 104,400 = USD 165,600

5. a. The cost of ending inventory using weighted-average cost is computed:

 Unit cost =  USD  270,000-8,000 = USD  33.79

 Cost of ending inventory =3,400XUSD33.75 = USD 114,750

6. c. The cost of goods sold using weighted-average cost is:

 USD  270,000-USD 114,750 = USD 155,250

7. b. During a period of rising prices, FIFO results in the lowest cost of goods sold, thus the highest net income.