Financial and Managerial Accounting (Looseleaf) (Custom Package)
Financial and Managerial Accounting (Looseleaf) (Custom Package)
6th Edition
ISBN: 9781259754883
Author: Wild
Publisher: MCG
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Chapter 5, Problem 7E
To determine

Inventory:

Inventory refers to the stock or goods which will be sold in the near future and thus is an asset for the company. It comprises of the raw materials which are yet to be processed, the stock which is still going through the process of production and it also includes completed products that are ready for sale. Thus inventory is the biggest and the important source of income and profit for the business.

Perpetual Inventory System:

In perpetual inventory system, there is a continuous recording of transactions as and when they take place that is purchase and sale transactions are recorded whenever they occur.

Cost of Goods Sold:

Cost of goods sold is the total expenses or the cost incurred by the business during the process of manufacturing of goods and is directly related to the production. It generally includes the cost of raw material, labor and other manufacturing support costs.

First In First Out: In case of First in, first out method, also known as FIFO method, the inventory which was bought first will also be the first one to be taken out.

Last In First Out: In case of Last in, First out, also known as LIFO method, the inventory which was bought in the last will be taken out first.

The cost assigned to ending inventory, cost of goods sold and gross margin as per the perpetual inventory system under the following methods:
(a) FIFO
(b) LIFO

Expert Solution & Answer
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Explanation of Solution

    Date Particulars Units acquired Cost per unit ($) Cost of goods available ($) Units sold Retail price per unit ($)
    Jan 1 Beginning inventory 200 10 2,000
    Jan 10 Sales 150 40
    Mar 14 Purchase 350 15 5,250
    Mar 15 Sales 300 40
    July 30 Purchase 450 20 9,000
    Oct 5 Sales 430 40
    Oct 26 Purchases 100 25 2,500
    Total 1,100 18,750 880

(a)

First in, First out method (FIFO)

Cost of the Ending inventory

    Date Purchases Cost of goods sold Ending inventory
    Quantities (units) Unit cost ($) Total cost ($) Quantities (units) Unit cost ($) Total cost ($) Quantities (units) Unit cost ($) Balance ($)
    Jan 1 200 10 2,000
    Jan 10 150 10 1,500 50 10 500
    Mar 14 350 15 5,250 50 350 } 10 15 } 500 5,250 } =5,750
    Mar 15 50 250 } 10 15 } 500 3,750 } =4,250 100 15 1,500
    July 30 450 20 9,000 100 450 } 15 20 } 1,500 9,000 } =10,500
    Oct 5 100 330 } 15 20 } 1,500 6,000 } =8,100 120 20 2400
    Oct 26 100 25 2,500 120 100 } 20 25 } 2,400 2,500 } =4,900

The cost of ending inventory is $4,900.

Compute cost of goods sold.

Formula to calculate cost of goods sold is,

    Costofgoodssold=CostofgoodsavailableforsaleCostofendinginventory

Substitute $18,750 for cost of goods available for sale (given) and $4,900 for cost of ending inventory (as calculated above) in the above formula.

    Costofgoodssold=$18,750$4,900 =$13,850

Compute gross margin.

Formula to calculate gross margin is,

    Grossmargin=Netsales-costofgoodssold

Substitute $35,200 for net sales (working notes) and $13,850 for cost of goods sold (as calculated above) in the above formula.
Grossmargin=$35,200-$13,850 =$21,350

The cost of ending inventory is $4,900 and it consists of 120 units at the rate of $20 and 100 units at the rate of $25. Also the cost of goods sold is $13,850 and gross margin is $21,350.

(b)

Last in, First out Method (LIFO)

Cost of the Ending inventory

    Date Purchases Cost of goods sold Ending inventory
    Quantities (units) Unit cost ($) Total cost ($) Quantities (units) Unit cost ($) Total cost ($) Quantities (units) Unit cost ($) Balance ($)
    Jan 1 200 10 2,000
    Jan 10 150 10 1,500 50 10 500
    Mar 14 350 15 5,250 50 350 } 10 15 } 500 5,250 } =5,750
    Mar 15 300 15 4,500 50 50 } 10 15 } 500 750 } =1,250
    July 30 450 20 9,000 50 50 450 } 10 15 20 } 500 750 9,000 } =10,250
    Oct 5 430 20 8,600 50 50 20 } 10 15 20 } 500 750 400 } =10,250
    Oct 26 100 25 2,500 50 50 20 100 } 10 15 20 25 } 500 750 400 2,500 } =4,150
    Date Receipts Issues Balance
    Units Rate ($) Amount ($) Units Rate ($) Amount ($) Units Rate ($) Amount ($)
    Jan 1 200 10 2,000
    Jan 10 150 10 1,500 50 10 500
    Mar 14 350 15 5,250 50 350 10 15 500 5,250
    Mar 15 300 15 4,500 50 50 10 15 500 750
    Jul 30 450 20 9,000 50 50 450 10 15 20 500 750 9,000
    Oct 5 430 20 8,600 50 50 20 10 15 20 500 750 400
    Oct 26 100 25 2,500 50 50 20 100 10 15 20 25 500 750 400 2,500

The cost of ending inventory is $4,150.

Compute cost of goods sold.

Formula to calculate cost of goods sold is,

    Costofgoodssold=CostofgoodsavailableforsaleCostofendinginventory

Substitute $18,750 for cost of goods available for sale (given) and $4,150 for cost of ending inventory (as calculated above) in the above formula.

    Costofgoodssold=$18,750$4,150 =$14,600

Compute gross margin.

Formula to calculate gross margin is,

    Grossmargin=Netsales-costofgoodssold

Substitute $35,200 for net sales (working notes) and $14,600 for cost of goods sold (as calculated above) in the above formula.

    Grossmargin=$35,200-$14,600 =$20,600

Working notes:

    Netsales=Totalnumberofunitssold×Priceperunit =880×$40 =$35,200

The closing inventory is $4,150 and it consists of 50 units at the rate of $10, 50 units at the rate of $15, 20 units at the rate of $20 and 100 units at the rate of $25. Also the cost of goods sold is $14,600 and the gross margin is $20,600.

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Chapter 5 Solutions

Financial and Managerial Accounting (Looseleaf) (Custom Package)

Ch. 5 - Prob. 5DQCh. 5 - Prob. 6DQCh. 5 - Prob. 7DQCh. 5 - Prob. 8DQCh. 5 - Prob. 9DQCh. 5 - Prob. 10DQCh. 5 - Prob. 11DQCh. 5 - What factors contribute to (or cause) inventory...Ch. 5 - Prob. 13DQCh. 5 - Prob. 14DQCh. 5 - Prob. 15DQCh. 5 - Prob. 16DQCh. 5 - Prob. 17DQCh. 5 - Prob. 1QSCh. 5 - Prob. 2QSCh. 5 - Prob. 3QSCh. 5 - Perpetual: Inventory costing with FIFO P1 A...Ch. 5 - Prob. 5QSCh. 5 - Prob. 6QSCh. 5 - Prob. 7QSCh. 5 - Prob. 8QSCh. 5 - A Periodic: Inventory costing with weighted...Ch. 5 - Prob. 10QSCh. 5 - Prob. 11QSCh. 5 - Perpetual: Inventory costing with weighted average...Ch. 5 - Prob. 13QSCh. 5 - Prob. 14QSCh. 5 - Prob. 15QSCh. 5 - Prob. 16QSCh. 5 - Prob. 17QSCh. 5 - Prob. 18QSCh. 5 - Prob. 19QSCh. 5 - QS 5-20 Inventory errors A2 In taking a...Ch. 5 - Prob. 21QSCh. 5 - Prob. 22QSCh. 5 - Prob. 23QSCh. 5 - Prob. 1ECh. 5 - Prob. 2ECh. 5 - Exercise 5-3 Perpetual: Inventory costing methods...Ch. 5 - Prob. 4ECh. 5 - Prob. 5ECh. 5 - Prob. 6ECh. 5 - Prob. 7ECh. 5 - Prob. 8ECh. 5 - Prob. 9ECh. 5 - Prob. 10ECh. 5 - Prob. 11ECh. 5 - Prob. 12ECh. 5 - Prob. 13ECh. 5 - Prob. 14ECh. 5 - Prob. 15ECh. 5 - Prob. 16ECh. 5 - Prob. 17ECh. 5 - Prob. 18ECh. 5 - Prob. 1PSACh. 5 - Prob. 2PSACh. 5 - Prob. 3PSACh. 5 - Problem 5-4AA Periodic: Alternative cost flows...Ch. 5 - Prob. 5PSACh. 5 - Prob. 6PSACh. 5 - Prob. 7PSACh. 5 - Prob. 8PSACh. 5 - Prob. 9PSACh. 5 - Prob. 10PSACh. 5 - Prob. 1PSBCh. 5 - Prob. 2PSBCh. 5 - Prob. 3PSBCh. 5 - Prob. 4PSBCh. 5 - Prob. 5PSBCh. 5 - Prob. 6PSBCh. 5 - Prob. 7PSBCh. 5 - Prob. 8PSBCh. 5 - Prob. 9PSBCh. 5 - Prob. 10PSBCh. 5 - Prob. 5SPCh. 5 - Prob. 1BTNCh. 5 - Prob. 2BTNCh. 5 - Prob. 3BTNCh. 5 - Prob. 4BTNCh. 5 - Prob. 5BTNCh. 5 - Prob. 6BTNCh. 5 - Prob. 7BTNCh. 5 - Prob. 8BTNCh. 5 - Prob. 9BTN
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