MA2203Chapter-8 PDF

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Chapter 8 Inventory EstimationPROBLEM 2: FOR CLASSROOM DISCUSSIONGross profit rate The following data relate to the records of Powell Corp. for the month of September: Sales............................................................... 160, Beginning inventory..........................................

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Chapter 8 Inventory Estimation

PROBLEM 2: FOR CLASSROOM DISCUSSION Gross profit rate 1. The following data relate to the records of Powell Corp. for the month of September: Sales……………………………………………………… 160,000

Beginning inventory…………………………………..

20,000

Purchases...........................................................

180,000

Goods available for sale………………………………

200,000

Requirements: Using these data, estimate the cost of ending inventory for each situation below: a) Markup is 50 percent on cost. 160,000/1.50 = 106, 667 200,000 - 106,667 = 93,333 ending inventory b) Markup is 60 percent on sales. 160,000 x (100% - 60%) = 64,000 200,000 - 64,000 = 136,000 ending inventory c) Markup is 25 percent on cost. 160,000 /1.25 = 128,000 200,000 - 128,000 = 72,000 ending inventory d) Markup is 40 percent on sales 160,000 x (100% - 40%) = 96,000 200,000 – 96,000 = 104,000 ending inventory Gross profit method 2. Northstar Sales Corp. was organized on January 1, 2001. On December 31, 2002, the company lost most of its inventory in a warehouse fire just before

the year-end count of inventory was to take place. Data from the records disclosed the following: 2001

2002

P0

173,120

Purchases during year

860,000

Purchase returns and allowances during year

46,120

692,000 64,600

Sales during year

788,000

Sales returns and allowances during year

16,000

Inventory, January 1

836,000 20,000

On January 1, 2002, Northstar's pricing policy was changed so that the gross profit rate would be 3 percentage points higher than the one earned in 2001. Salvaged undamaged merchandise was marked to sell at P24,000, while damaged merchandise marked to sell at P16,000 had an estimated net realizable value of P3,600. Requirement: Determine the company's inventory loss due to the fire that occurred on December 31, 2002. Solution: 2001

2002

Gross profit % % Sales (net) 100% Cost of goods sold: Beginning inventory Purchases (net) Goods available for sale Ending inventory Cost of goods sold Gross profit on sales *17% + 3% = 20% ** 816,000 x 80%= 652,800 *** 800,520 - 652,800 = 147,720 *640,760/772,000 = 83% 131,240/772,000 = 17%

772,000

0 813,880 813,880 173,120 640,760 131,240

100%

83% 17%

Gross profit 816,000

173,120 627,400 800,520 147,720 652,800 80% 163,200 20%

*652,800/816,000 = 80% 163,200/816,000 = 20% December 31,2002 Ending inventory (cost) Less: Cost of undamaged inventory Net realizable value of damaged merchandise Inventory loss due to 124,920

147,720 19,200 3,600 22,800 fire

Retail method 3. Gibb's Department Store uses the retail inventory method. Information relating to the computation of the inventory at December 31, 2002, is as follows:

Inventory at January 1, 2002

Cost

Retail

45,000

75,000

Sales

600,000

Purchases

270,000

Freight-in

6,750

590,000

Markups

50,000

Markdowns

20,000

Estimated normal shrinkage

2% of sales

Requirements: Compute for (1) ending inventory and (2) cost of goods sold under the following methods: a. Average cost method Solution: Inventory, Jan. 1, 2002 Purchases Freight-in Markups Total goods available for sale Net sales Ending inventory at retail 83,000

Cost 45,000 270,000 6,750 321,750

Retail 75,000 590,000 50,000 715,000 (632,000)

The Average cost ratio is computed as follows: Cost ratio = Total goods avail. for sale at cost (Average cost method) Total goods avail. for sale at retail Average cost ratio = (321,750/715,000) = 45% Net sales is computed as follows: Sales Markdowns Normal shrinkage (600,000 x 2%) Net sales

600,000 20,000 12,000 632,000

Ending inventory at cost is estimated under the Average cost method as follows: Ending inventory at retail (or at selling price) 83,000 Multiply by: Average cost ratio 45% Ending inventory at cost 37,350

Cost of goods sold is estimated under the Average cost method follows: Total goods available for sale at cost 321,750 Ending inventory at cost (37,350) Cost of goods sold 284,400 Optional reconciliation: Net sales (at selling price) Multiply by: Average cost ratio Cost of goods sold

632,000 45% 284,400

b. FIFO Cost method Cost ratio = TGAS at cost less beg. inventory at cost (FIFO cost method) TGAS at retail less beg. inventory at retail FIFO cost ratio = [(321,750 - 45,000) ÷ (715,000 - 75,000) = 43. 2421875%

The ending inventory at cost is estimated under the FIFO cost method as follows:

Ending inventory at retail Multiply by: FIFO cost ratio Ending inventory at cost

83,000 43.2421875% 35,891.01563

Cost of goods sold is estimated under the Average cost method follows: Total goods available for sale at cost 321,750 Ending inventory at cost (35,891.01563) Cost of goods sold 285,858.9844

Optional reconciliation: Net sales Less: Beginning inventory at retail Total Multiply by: FIFO cost ratio Total Add back: Beginning inventory at cost Cost of goods sold

632,000 75,000 557,000 43.2421875% 240,858.9844 45,000 285,858.9844...