会计学基础第七章答案.doc

Chapter 7Reporting and Interpreting Inventories and Cost of Goods SoldANSWERS TO QUESTIONS1.Three goals of inventory management are to make or buy products (1) in sufficient quantities to avoid stock-outs (which could result in lost sales revenue and decreases in customer satisfaction), (2) that provide expected levels of quality, (3) at the lowest possible cost by minimizing the costs of obtaining and carrying inventory (purchasing, production, storage, spoilage, theft, obsolescence, and financing). 2.Merchandisers hold merchandise inventory, which usually is acquired in a finished condition and is ready for sale without further processing. Manufacturers often hold three types of inventory, with each representing a different stage in the manufacturing process: (1) Raw materials inventory includes materials that eventually are processed further to produce finished goods. Items are included in raw materials inventory until they enter the production process, at which time they become part of work in process inventory.(2) Work in process inventory includes goods that are in the process of being manufactured, but are not yet complete. When completed, work in process inventory becomes finished goods inventory.(3) Finished goods inventory includes manufactured goods that are complete and ready for sale. At this stage, finished goods are treated just like merchandise inventory. 3.When goods are sold FOB destination, their cost is removed from the inventory account and reported as an expense only when the goods reach their destination. Because the goods were shipped on September 30, they will not reach their destination until October. Consequently, the company should continue to include the cost of the goods in inventory on September 30. 4.Goods available for sale is the sum of the beginning inventory and the amount of goods purchased or made during the period. Cost of goods sold is the cost of goods actually sold, which can be determined by subtracting the cost of ending inventory from the cost of goods available for sale.5.Beginning inventory is the stock of goods on hand (in inventory) at the start of the accounting period. Ending inventory is the stock of goods on hand (in inventory) at the end of the accounting period. The ending inventory of one period automatically becomes the beginning inventory of the next period. 6.(a)Specific identificationThis inventory costing method requires that each item in the beginning inventory and each item purchased during the period be identified specifically so that its unit cost can be determined by identifying the specific item sold. This method usually requires that each item be marked, often with a code that indicates its cost. When it is sold, that unit cost is the cost of goods sold. To determine the amount to report for ending inventory, the specific items on hand are valued at the actual cost indicated for each item.(b)FIFOThis inventory costing method assumes that the first units purchased as the first units sold. Under this method cost of goods sold is calculated using the oldest unit costs, and the ending inventory is calculated using the newest unit costs.(c)LIFOThis inventory costing method assumes that the last units purchased are the first units sold. Under this method cost of goods sold is calculated using the newest unit costs and the ending inventory is calculated using the oldest unit costs.(d)Weighted average costThis inventory costing method in a periodic inventory system is based on a weighted average cost for the entire period. At the end of the accounting period the average cost is computed by dividing the goods available for sale in units into the cost of goods available for sale in dollars. The computed unit cost then is used to determine the cost of goods sold for the period by multiplying the units sold by this average unit cost. Similarly, the ending inventory for the period is determined by multiplying this average unit cost by the number of units on hand.7.The first-in, first-out (FIFO) cost flow assumption is most similar to the gumball machine. Gumballs (inventory) placed first in the machine are the first out through the bottom of the machine.The last-in, first-out (LIFO) cost flow assumption most resembles the stack of bricks. Bricks (inventory) placed last on the stack are the first off the stack.The weighted average method is similar to gas in a tank. Although the gas may have been purchased at different times and different costs, it all mixes together in the tank. The gas being used is a weighted average of the various gasoline purchases put into the tank.8. Inventory costing does not have to follow the actual flow of a companys products. Due to market prices, income tax effects, and other variables, some companies might want to have more recent costs reported on the balance sheet (FIFO) while others might want more recent costs reported on the income statement (LIFO).9.LIFO and FIFO have opposite effects on ending inventory on the balance sheet. The ending inventory is based upon either the oldest unit cost or the newest unit cost, depending upon which method is used. Under FIFO, the ending inventory is calculated using the latest unit costs, and under LIFO, the ending inventory is calculated using the oldest unit costs. Therefore, when costs are rising (a), the ending inventory reported on the balance sheet will be higher under FIFO than under LIFO. Conversely, when costs are falling (b), the ending inventory on the balance sheet will be higher under LIFO than under FIFO.10.LIFO versus FIFO affects both cost of goods sold and gross profit on the income statement. When the costs are rising (a), FIFO will give a lower cost of goods sold and hence a higher gross profit than will LIFO. In contrast, when costs are falling (b), FIFO will give a higher cost of goods sold and, as a result, a lower gross profit.11. In times of rising costs, LIFO results in the highest Cost of Goods Sold and, therefore, the lowest Net Income. Consequently, it is true that the switch from LIFO to FIFO would increase the companys Gross Profit and Net Income. Whether this switch would benefit the managers by increasing their bonus is debatable. One could argue that the managers contracts were negotiated assuming LIFO would be used to calculate Cost of Goods Sold, so any change in inventory costing method would necessitate a change in the managers contracts. A switch from LIFO to FIFO would likely hurt stockholders because an increase in Gross Profit would lead to greater Income Tax Expense for the company. As a result, the company would have to give up some of its cash that could have been invested, used to expand the business, pay down its liabilities, or pay dividends. The increase in Net Income caused by changing methods is unlikely to fool sophisticated investors into thinking the company is more profitable, so the switch is unlikely to lead to an increase in the companys stock price. 12. LCM is applied when market (often defined as current replacement cost) is lower than the cost of units on hand. The LCM requirement to write down ending inventory from cost to market has the immediate effect of (a) reducing Net Income and (b) reducing the Inventory amount reported on the balance sheet. 13.A general principle is that a purchaser should include in its Inventory account any costs needed to get its inventory into a condition and location ready for sale. Consistent with this reasoning, transportation costs to obtain inventory (freight-in) are included as a cost of inventory. Any costs incurred after the inventory is ready for sale (such as freight-out to deliver goods to customers) are considered selling, general, and administrative expenses. 14.If the new evidence causes the market value of the existing inventory to fall below its original cost, the lower of cost or market rule requires that the inventory be written down. This LCM write-down will reduce the Inventory account on the balance sheet and will increase the Cost of Goods Sold account on the income statement. (In addition to the decline in Sales, the company may experience significant returns of the drug, which the company would report internally as a contra-revenue account and externally as a reduction in Net Sales.) The question of whether you should tell your friend presents an interesting ethical dilemma with no obvious answer. This situation presents a dilemma because it opposes several moral principles (honesty, loyalty, fairness). Your friendship encourages you to be honest and loyal to your friend (and disclose the truth about the drug), but your terms of employment require that you remain loyal to the organization. Fairness (and insider trading laws) also dictate that the truth about the drug be disclosed by appropriate individuals in the company who can reach a broader audience. It would be unfair if you were to tell your friend who might then use this information to gain at someone elses expense.15.The owner is correct in thinking that outsourcing will reduce the amount of inventory that the company needs to carry. All else equal, a reduction in inventory will cause an increase in the inventory turnover ratio (Inventory Turnover Ratio = CGS ÷ Average Inventory). The owner might be wrong in her thinking because outsourcing causes the company to rely on someone outside the organization to produce the clothing. Delays in external production or shipping could delay the time required to complete orders, which could lead to customer dissatisfaction. Also, outsourcing could introduce quality problems, which also could lead to customer dissatisfaction.16.In a perpetual inventory system, LIFO numbers are calculated using the cost of goods last purchased as of the date of sale. This differs from a periodic system, where the cost of goods sold is calculated as if all sales occurred at the end of the period. 17.The effects of inventory errors are felt in more than one period because the ending inventory for the current period becomes the beginning inventory of the next period. 18.The two end-of-period adjustments to Inventory and Cost of Goods Sold occur only once per period in a periodic system, whereas the Cost of Goods Sold and Inventory entries occur with every sale in a perpetual system.Authors' Recommended Solution Time(Time in minutes)Mini-exercisesExercisesProblemsSkills Development Cases*ContinuingCaseNo.TimeNo.TimeNo.TimeNo.TimeNo.Time15120CP7-13012011523215CP7-24022535315CP7-31033043420CP7-42043552530CP7-51553565630CP7-63064075730CP7-710720810825PA7-13093915PA7-2401051015PA7-3101151110PA7-4201231215PA7-5151351310PA7-6301431415PA7-7101561510PB7-1301661615PB7-2401761720PB7-31018101810PB7-43019101910PB7-51520102030PB7-6302130PB7-7102225C7-1602315* It is difficult to estimate the time students will need to complete cases. As with any open-ended project, students could devote significant time to these assignments. While students benefit from the extra effort, we find that some become frustrated by the perceived difficulty of the task. To reduce student frustration and anxiety, make your expectations clear, and offer suggestions (about how to research topics or what companies to select). The skills developed by these cases are indicated below.CaseFinancial AnalysisResearchEthical ReasoningCritical ThinkingTechnologyWritingTeamwork1x2x3xxxxx4xx5xxx6xxx7xxANSWERS TO MINI-EXERCISESM71(a) These items are not reported as The Knots inventory because Emerald Bridal still owns the goods.(b) Winston Wedding Consultants owns the inventory (not The Knot) because the goods were shipped FOB shipping point, meaning that the goods belong to the purchaser the moment they leave the sellers facilities.(c) The Knot would include these items in its inventory because it purchased them FOB shipping point.M72 Type of BusinessType of InventoryMerchandisingManufacturingMerchandiseXFinished goodsXWork in processXRaw materialsXM73Computation:Rearrange the CGS equation (BI + P EI = CGS):Cost of goods sold $4,827 million+Ending inventory 1,374 millionBeginning inventory (1,779) million=Purchases $4,422 millionM741. Rising Costs2. Declining Costsa. Lowest net incomeLIFOFIFOb. Lowest ending inventoryLIFOFIFOM75(a)Declining costsFIFO(b)Rising costsLIFOM76FIFO (aka L.I.S.T.) Beginning Inventory100 units  x $10 $ 1,000+ Purchases500 units  x $13 6,500 Goods Available for Sale 7,500 Ending Inventory (400 × $13) 5,200 Cost of Goods Sold (100 × $10) + (100 × $13) $ 2,300LIFO (aka F.I.S.T.) Beginning Inventory100 units  x $10 $ 1,000+ Purchases500 units  x $13 6,500 Goods Available for Sale 7,500 Ending Inventory (100 × $10) + (300 x $13) 4,900 Cost of Goods Sold (200 × $13) $ 2,600Weighted Average Beginning Inventory100 units  x $10 $ 1,000+ Purchases500 units  x $13 6,500 Goods Available for Sale600 units 7,500Weighted-average unit cost: $7,500   600 units= $12.50 per unitWeighted Average Beginning Inventory100 units  x $10 $ 1,000+ Purchases500 units  x $13 6,500 Goods Available for Sale 7,500 Ending Inventory (400 × $12.50) 5,000 Cost of Goods Sold (200 × $12.50) $ 2,500FIFO LIFO WEIGHTED AVERAGESALES A$3,000 $3,000$3,000COST OF GOODS SOLD (SEE ABOVE)   2,300    2,600 2,500GROSS PROFIT$ 700 $ 400$ 500a Sales: $3,000 = 200 units x $15M77GOODS AVAILABLE FOR SALE - ALL METHODSUNITSUNIT COSTTOTAL COSTBEGINNING INVENTORY2,000 $20$ 40,000NEXT UNITS IN (7/13 PURCHASE)6,000 22 132,000NEXT UNITS IN (7/25 PURCHASE)  8,000 25 200,000 GOODS AVAILABLE FOR SALE16,000$372,000Ending inventory and cost of goods sold:a. First-in, first-out:Ending Inventory(7,000 units x $25)$17