Inventory Valuation Methods - Assignment Example

FIFO Method:                         Units               $                                  $

Jan 1                                  300@$40                                            12000

Feb 21                               700@44                                              30800

March 28                           800@50                                              40000

Goods available for sale   1800                                                    82800

Less cost of sales:                         300@40          12000

                                          700@44          30800

                                          400@50          20000                          (62800)

Ending inventory              400@50                                              20000

LIFO Method:

Goods available for sale                                                               82800

Less cost of sales:             800@50          40000

                                          600@44          26400                          (66400)

Ending inventory                                                                          16400

Ending inventory made up of:

                                          100@44          4400

                                          300@40          12000

                                                                  16400

Weighted average Method:

Goods available for sales       1800@46                                                        82800

Less cost of sales                    1400@46                                                        (64400)

Ending inventory                                                                                            18400

FIFO

LIFE

Weighted average

Goods available for sale

$

$

$

Ending inventory, March 31

20000

16400

18400

Cost of goods sold

62800

66400

64400

2. Analysis of LIFO versus FIFO. Indicate whether LIFO or FIFO best describes each of the following:
3. Gives highest profits when prices fall -FIFO
4. Yields lowest income taxes when prices rise -LIFO.
5. Generates an ending inventory valuation that somewhat approximates replacement cost-FIFO.
6. Matches recent costs against current selling prices on the income state­ment-
7. Comes closest to approximating the physical flow of goods of a fruit and vegetable dealer-
8. Results in lowest cost of goods sold in inflationary periods-

3. Inventory Errors. The income statements of Diamond Company for the years ended Decem­ber 31, 19X1, and 19X2 follow.

19X1

19X2

Net sales

Cost of goods sold

    Beginning inventory

    Add: Net purchases

$ 95,000 380,000

$440,000

$109,000 404,000

$483,000

    Goods available for

        sale

 Less: Ending inventory

$475,000 109,000

$513,000 127,000

    Cost of goods sold

366,000

386,000

Gross profit

Operating expenses

$ 74,000 58,000

$ 97,000 67,000

Net income

$ 16,000

$ 30,000

Diamond uses a periodic inventory system. A detailed review of the accounting records disclosed the following:

260. A review of 19X1 purchase invoices revealed that a clerk had incor­rectly recorded a $12,600 purchase as $1,260.
261. A $4,800 purchase was made on December 30, 19X2, terms F.O.B. ship­ping point. The invoice was not recorded in 19X2 nor were the goods included in the 19X2 ending physical inventory count. Both the goods and invoice were received in early 19X3, with the invoice being re­corded at that time.
262. Goods costing $3,000 were accidentally excluded from the 19X1 ending physical inventory count. These goods were sold during 19X2, and all aspects of the sale were properly recorded.

Instructions:

• Prepare corrected income statements for 19X1 and 19X2.
• Determine the impact of the preceding errors on the December 31, 19X2, owner's equity balance.
• Corrected Income Statement:

Net purchases 19X1=             380000+ 12600-1260=           391340

Purchases 19X2=                    404000+ 4800=                       408800

Closing inventory 19X2=       127000+ 4800=                       131800

Closing inventory 19X1=       109000+ 3000=                       112000

Opening inventory 19X2=      109000+ 3000=                       112000           

19X1

19X2

Net sales

Cost of goods sold

    Beginning inventory

    Add: Net purchases

$ 95,000

391340

$440,000

$112,000 408,800

$483,000

    Goods available for

        sale

 Less: Ending inventory

$486,340 112,000

$520,800 131,800

    Cost of goods sold

374,340

389,000

Gross profit

Operating expenses

$ 65,660 58,000

$ 94,000 67,000

Net income

$ 7,660

$ 27,000

• The above errors had an overall effect of overstating the balance of the owner’s equity as of December 31, 19X2. In the first error, it is assumed that only the purchases journal was wrongly entered. The effect of understating cost is an understatement of the cost of goods sold, hence overstating the net income, which is part of the owner’s equity.

The ownership of goods purchased on F.O.B terms reverts to the buyer immediately after the seller delivers them to the port of delivery. It is therefore assumed that the goods were already in transit by the end of business on December 31, 19X2. Therefore the exclusion of this transaction had no effect on the cost of goods sold since it was neither included as purchases nor closing inventory. It will only affect the value of inventory in the balance sheet with no effect and accounts payable or cash. There is no effect on the owner’s equity.

Excluding $3,000 from the closing inventory in 19X1 means that the cost of goods sold was understated with the ending result being an overstatement of net income, hence owner’s equity. Since the amount was not included in 19X2, it means that sales revenue was recognized on these goods with no corresponding cost.

4. Inventory valuation methods. Computations and concepts. Wave Riders Surf Board Company began business on January 1 of the current year. Purchases of surfboards were as follows:

Jan.

3

100 boards <& $125

Mar.

17

50 boards @ $130

May

9

246 boards @ $140

July

3

400 boards @ $150

Oct.

23

74 boards @ $160

Wave Riders sold 710 boards at an average price of $250 per board. The company uses a periodic inventory system.

Instructions:

Calculate the cost of goods sold, ending inventory, and gross profit under each of the following inventory valuation methods: First-in, first-out

Jan.

3

100 boards <& $125=  12500

Mar.

17

50 boards @ $130=       6500

May

9

246 boards @ $140=    34440

July

3

400 boards @ $150=    60000

Oct.

23

74 boards @ $160=      11840

Goods available for sale:                                                            125280       

Cost of goods sold:                 100@125=      12500

                                                 50@130=       6500

                                                246@140=      34440

                                                314@150=      47100

                                                                       100540

Ending inventory:

                                                86@150=        12900

                                                74@160=        11840 

                                                                        24740

Sales                                       710@250=                              177500

Less Cost of goods sold:                                                        (100540)        

Gross profits                                                                           76960