Chapter 6 answers to questions PDF

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ANSWERS TO QUESTIONS (Chapter – 6) SELECT QUESTIONS QUESTION: (1) “The key to successful business operations is effective inventory management”” Do you agree? Explain.

1. Agree. Effective inventory management is frequently the key to successful business operations. Management attempts to maintain sufficient quantities and types of goods to meet expected customer demand. It also seeks to avoid the cost of carrying inventories that are clearly in excess of anticipated sales. QUESTION: (2) An item must possess two characteristics to be classified as inventory by a merchandiser. What are these two characteristics?

2. Inventory items for a merchandising company have two common characteristics: (1) they are owned by the company and (2) they are in a form ready for sale in the ordinary course of business. QUESTION: (3) Your friend Art Mega has been hired to help take the physical inventory in Jaegar hardware Store. Explain to Art Mega what this job will entail. 3. Taking a physical inventory involves actually counting, weighing or measuring each kind of inventory on hand. Retailers, such as a hardware store, generally have thousands of different items to count. This is normally done when the store is closed.

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QUESTION: (6) Explain the difference between the terms FOB shipping point and FOB destination.

6. FOB shipping point means that ownership of the goods in transit passes to the buyer when the public carrier accepts the goods from the seller. FOB destination means that ownership of the goods in transit remains with the seller until the goods reach the buyer.

QUESTION: (8) What is a major advantage and a major disadvantage of the specific identification method of inventory costing?

8. The major advantage of the specific identification method is that it tracks the actual physical flow of the goods available for sale. The major disadvantage is that management could manipulate net income.

QUESTION: (9) “The selection of an inventory cost flow method is a decision made by accountants “Do you agree? Explain Once a method has been selected, what accounting requirement applies?

9. No. Selection of an inventory costing method is a management decision. However, once a method has been chosen, it should be used consistently from one accounting period to another.

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BRIEF EXERCISE 6-5 = (6-4 3ed) The management of Muni Corp. is considering the effects of inventory – costing method on its financial statement and its income tax expense. Assuming that the price the company pays for inventory is increasing, which method will: (a) Provide the higher net income? (b) Provide the higher ending inventory? (c) Result in the more stable earnings over several years?

BRIEF EXERCISE 6-5 = (6-4 3ed) (a) FIFO would result in the highest net income. - highest ending inventory, - lowest cost of goods sold, - highest income tax expense) (b) FIFO would result in the highest ending inventory. (c) Average cost would result in the most stable income over a number of years because it averages out any big changes in the cost of inventory.

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BRIEF EXERCISE 6-7 (6-5 3ed) Blackburn Appliance Center accumulates the following cost and net realizable value data at December 31 Required: Compute the Lower- of cost- -or – net realizable value valuation for the company’s total inventory.

Inventory Categories Cameras

Cost

NRV

$12,000

$12,100

Lower of cost or Net Realizable value $12,000

Camcorders

9,420

9,200

9,200

DVD players

14,000

12,800

12,800

Total valuation

$34,000

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DO IT! 6-1 Recife Company just took its physical inventory. the count of inventory items on hand at the company’s business locations resulted in total inventory cost of $300,000. In reviewing the details of the count and related inventory transaction, you have discovered the following. 1. Recife Company sent inventory costing $18,000 on consignment to Rio company. all of this inventory was at Rio’s showrooms on December 31. 2. The company did not include in the inventory count (cost$ 20,000) that was purchased on December 28, terms FOB shipping point. the goods were in transit on December 31. 3. The company did not include in the inventory count (cost, R$17,000) that was sold with terms of FOB shipping point. The goods were in transit on December 31. Compute the correct December 31 inventory.

DO IT! 6-1 Inventory per physical count.................................................... $300,000 Inventory out on consignment ................................................. 18,000 Inventory purchased, in transit at year-end............................... 20,000 Inventory sold, in transit at year-end ............................

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Correct December 31 inventory................................................ $338,000

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DO IT! 6-2 The accounting records of Connor Electronics, Ltd. Show the following data. Beginning inventory

3,000 units at $5

Purchases

8,000 units at $7

Sales

9,400 units at $10

Determine cost of goods sold during the period under a periodic inventory system using (a) the FIFO method and (b) the average-cost method. (Round unit cost to nearest tenth of a cent.)

DO IT! 6-2 Cost of goods available for sale = (3,000 X $5) + (8,000 X $7) = $71,000 Ending inventory = 3,000 + 8,000 – 9,400 = 1,600 units (a) FIFO: $71,000 – (1,600 X $7) = $59,800 (b) Average cost: $71,000/11,000 = $6.455 per unit 9,400 X $6.455 = $60,677 6.455x 1,600= 10328 71,005 = 71000

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DO IT! 6-3 (a) Guo Company Ltd. Sells three different categories of tools (small, medium, and large). The cost and net realizable value of its inventory of tools are as follows. Cost Net Realizable Value Small HK$ 640,000 HK$ 730,000 Medium 2,900,000 2,600,000 Large 1,520,000 1,485,000 Determine the value of the company’s inventory under the lower-of-costor-net realizable value approach. (b) Guo Company. Understated its 2016 ending inventory by HK$284,000. Determine the impact this error has on ending inventory, cost of goods sold, and equity in 2016 and 2017.

DO IT! 6-3 (a) The lowest value for each inventory type is: Small $640,000, Medium $2,600,000, and Large $1,485,000. The total inventory value is the sum of these figures, $4,725,000.

(b)

2016

2017

Ending inventory

$284,000 understated

No effect

Cost of goods sold

$284,000 overstated

$284,000 understated

Stockholders’ equity

$284,000 understated

No effect

BEG. INV+ PURCHSES -END.INV= COGS 3000+4000 -1000= 6000 3000+4000- 716= 6284 7

DO IT! 6-4 Early in 2017, Lausanne Company AG switched to a just-in-time inventory system. Its sales, cost of goods sold, and inventory amounts for 2016 and 2017 are shown below. 2016 Sales Cost of goods sold

2017

CHF3,120,000

CHF3,713,000

1,200,000

1,425,000

Beginning inventory

180,000

220,000

Ending inventory

220,000

100,000

Determine the inventory turnover and days in inventory for 2016 and 2017. Discuss the changes in the amount of inventory, the inventory turnover and days in inventory, and the amount of sales across the two years.

DO IT! 6-4 2014 Inventory turnover

2015 =6

$1,200,000

($180,000 + $220,000)/2

Days in inventory

365 ÷ 6 = 60.8 days

1,425,000

=

8.9

220,000+ 100,000/2

365 ÷ 8.9 = 41 days

The company experienced a very significant decline in its ending inventory as a result of the just-in-time inventory. This decline improved its inventory turnover and its days in inventory. It is possible that this increase is the result of a more 8

focused inventory policy. It appears that this change is a win-win situation for Early Company.

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