Financial Accounting, 8th Edition
Financial Accounting, 8th Edition
8th Edition
ISBN: 9780078025556
Author: Robert Libby, Patricia Libby, Daniel Short
Publisher: McGraw-Hill Education
Question
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Chapter 8, Problem 1DCOMP

1. a.

To determine

Calculate the cost of ending inventory, and cost of goods sold under First-in, first-out (FIFO) method.

1. a.

Expert Solution
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Explanation of Solution

First-in-First-Out:

In First-in-First-Out method, the costs of the initially purchased items are considered as cost of goods sold, for the items which are sold first. The value of the ending inventory consists of the recent purchased items.

Calculate the Cost of goods available for sales.

DateParticularsUnits (a)Unit Cost (in $) (b)Total Cost (in $)(c)=(a)×(b)
November 1 Beginning inventory100161,600
November 4 Purchase300195,700
November 13 Purchase5002110,500
Total900$17,800

Table (1)

Calculate the cost of goods sold.

DateParticularsUnits (a)Unit Cost (in $) (b)Total Cost (in $) (c)=(a)×(b)
November 7 Sales100161,600
100191,900
November 22 Sales200193,800
300216,300
Total 700$13,600

Table (2)

Calculate the Cost of Ending Inventory.

DateUnits (a)Unit Cost (in $) (b)Total Cost (in $) (c)=(a)×(b)
November 13200214,200
Total 200$4,200

Table (3)

Hence, the cost of ending inventory, and cost of goods sold under First-in, first-out (FIFO) method is $4,200, and $13,600 respectively.

1. b.

To determine

Calculate the cost of ending inventory, and cost of goods sold under Last-in, first-out (LIFO) method.

1. b.

Expert Solution
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Explanation of Solution

Last-in-Last-Out:

In Last-in-First-Out method, the costs of last purchased items are considered as the cost of goods sold, for the items which are sold first. The value of the closing stock consists of the initial purchased items.

Calculate the Cost of goods available for sales.

DateParticularsUnits (a)Unit Cost (in $) (b)Total Cost (in $)(c)=(a)×(b)
November 1 Beginning inventory100161,600
November 4 Purchase300195,700
November 13 Purchase5002110,500
Total900$17,800

Table (4)

Calculate the cost of goods sold.

DateParticularsUnits (a)Unit Cost (in $) (b)Total Cost (in $) (c)=(a)×(b)
November 7 Sales200214,200
November 22 Sales300216,300
200193,800
Total 700$14,300

Table (5)

Calculate the Cost of Ending Inventory.

DateUnits (a)Unit Cost (in $) (b)Total Cost (in $) (c)=(a)×(b)
November 1100161,600
November 4100191,900
Total 200$3,500

Table (6)

Hence, the cost of ending inventory, and cost of goods sold under Last-in, first-out (LIFO) method is $3,500, and $14,300 respectively.

1. c.

To determine

Calculate the cost of ending inventory, and cost of goods sold under weighted average method.

1. c.

Expert Solution
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Explanation of Solution

Weighted-average cost method:

Under average cost method inventories are priced at the average of all available inventories. Average cost is the quotient of total cost of goods available for sale and total units available for sale.

Weighted-average Cost=Total Cost of Goods Available For SaleTotal number of units Available for Sale

Calculate the Weighted-average cost.

Weighted-average Cost=Total Cost of Goods Available For SaleTotal number of units Available for Sale=$17,800900 Units=$19.78

Calculate the amount of Ending Inventory.

Cost of Ending inventory=(Number of units in Ending inventory (1) ×Weighted-average cost per unit)=200units×$19.78=$3,956

Calculate the Cost of goods sold.

Cost of goods sold=Cost of goods available for saleEnding inventory=$17,800$3,956=$13,844

Working Note:

Calculate the number of units in ending inventory.

Ending inventory = (Total units of goods available for saleTotal units of sales)=900units700units=200units (1)

Hence, the cost of ending inventory, and cost of goods sold under weighted average method is $3,956, and $13,844 respectively.

2. a.

To determine

Ascertain the gross profit percentage under the FIFO method.

2. a.

Expert Solution
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Explanation of Solution

Gross Profit Rate:

Gross is the financial ratio that shows the relationship between the gross profit and net sales. It represents gross profit as a rate of net sales. Gross Profit is the difference between the net sales revenue, and the cost of goods sold. It can be calculated by using the following formula:

Gross profit percentage =Gross profitNet sales×100

Calculate gross profit percentage:

Gross profit percentage=Gross profitNet sales×100=$21,400$35,000×100=61.14%

Working Note:

Calculate the gross profit.

Gross profit=Sales revenueCost of goods sold=[(Number of units sold×Sale price per unit)Cost of goods sold]=[(700units×$50)$13,600]=$35,000$13,600

=$21,400

Hence, the gross profit percentage under the FIFO method is 61.14%.

2. b.

To determine

Ascertain the net income under the LIFO method.

2. b.

Expert Solution
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Explanation of Solution

Net Income:

Net income is the sum total of all the revenues generated in a particular accounting period after deducting cost of goods sold and expenses and losses, such as rent expense, depreciation of that particular accounting period.

Determine the net income under the LIFO method.

Sales revenue$35,000
Less:  Cost of goods sold14,300
Gross profit20,700
Less:  Operating expenses16,000
Pretax income4,700
Less:  Income tax expense1,410
Net income$3,290

Table (7)

Hence, the net income under the LIFO method is $3,290.

2. c.

To determine

Identify the method which would be recommended to Company S for tax and financial reporting purposes and to explain it.

2. c.

Expert Solution
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Explanation of Solution

The method which would be recommended to Company S for tax and financial reporting purposes is the Last-in, first-out (LIFO) method. The prices of the inventories are increasing. When the prices increase, under LIFO method, the cost of goods sold will be increased, which results in the decreased net income. Due to this decreased net income, the amount of tax payable will also be less. Hence, for tax purposes, LIFO method is the best inventory method. The LIFO Conformity Rule indicates that when a company adopts the LIFO method for tax purposes, it must use the same LIFO method for financial reporting purposes also, even if it reports the lowest net income.

Therefore, the method which would be recommended to Company S for tax and financial reporting purposes is the LIFO method.

3.

To determine

Ascertain the amount of inventory that would be reported on the balance sheet of Company S and to discuss the reason behind it.

3.

Expert Solution
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Explanation of Solution

Lower-of-cost-or-market:

The lower-of-cost-or-market (LCM) is a method which requires the reporting of the ending merchandise inventory in the financial statement of a company, at its current market value (market) or at its historical cost price, whichever is less.

Compute the amount of ending inventory using lower-of-cost-or-market method:

Quantity (Units)Cost PriceMarket PriceLower-of-cost-or-market (LCM)
Rate per unitTotal cost ($)Rate per unitTotal cost ($)
200214,20019.503,9003,900

Table (8)

Hence, the amount of inventory that would be reported on the balance sheet of Company S is $3,900, as the market value of ending inventory ($3,900) is lower than the FIFO cost of the ending inventory ($4,200). This difference amount of $300($4,200$3,900) would increase the cost of goods sold, which in turn decreases the net income of the company for the month.

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Chapter 8 Solutions

Financial Accounting, 8th Edition

Ch. 8 - Prob. 11QCh. 8 - Prob. 12QCh. 8 - Prob. 13QCh. 8 - Prob. 14QCh. 8 - Prob. 15QCh. 8 - Why is depreciation expense added to net income...Ch. 8 - Prob. 1MCQCh. 8 - Prob. 2MCQCh. 8 - Prob. 3MCQCh. 8 - Prob. 4MCQCh. 8 - Prob. 5MCQCh. 8 - Prob. 6MCQCh. 8 - Prob. 7MCQCh. 8 - Prob. 8MCQCh. 8 - Prob. 9MCQCh. 8 - (Chapter Supplement) Irish Industries purchased a...Ch. 8 - Prob. 1MECh. 8 - Prob. 2MECh. 8 - Prob. 3MECh. 8 - Prob. 4MECh. 8 - Computing Book Value (Double-Declining-Balance...Ch. 8 - Computing Book Value (Units-of-Production...Ch. 8 - Identifying Asset Impairment LO8-4 For each of the...Ch. 8 - Prob. 8MECh. 8 - Prob. 9MECh. 8 - Prob. 10MECh. 8 - Prob. 1ECh. 8 - Prob. 2ECh. 8 - Computing and Recording Cost and Depreciation of...Ch. 8 - Prob. 4ECh. 8 - Prob. 5ECh. 8 - Prob. 6ECh. 8 - Prob. 7ECh. 8 - Computing Depreciation under Alternative Methods...Ch. 8 - Prob. 9ECh. 8 - Prob. 10ECh. 8 - Computing Depreciation and Book Value for Two...Ch. 8 - Prob. 12ECh. 8 - Prob. 13ECh. 8 - Prob. 14ECh. 8 - Prob. 15ECh. 8 - Prob. 16ECh. 8 - Prob. 17ECh. 8 - Prob. 18ECh. 8 - Prob. 19ECh. 8 - Prob. 20ECh. 8 - Prob. 21ECh. 8 - Prob. 22ECh. 8 - Prob. 23ECh. 8 - Prob. 1PCh. 8 - Prob. 2PCh. 8 - Prob. 3PCh. 8 - Prob. 4PCh. 8 - Evaluating the Effect of Alternative Depreciation...Ch. 8 - Prob. 6PCh. 8 - Prob. 7PCh. 8 - Prob. 8PCh. 8 - Prob. 9PCh. 8 - Prob. 10PCh. 8 - Prob. 11PCh. 8 - Prob. 1APCh. 8 - Prob. 2APCh. 8 - Computing the Acquisition Cost and Recording...Ch. 8 - Prob. 4APCh. 8 - Prob. 5APCh. 8 - Prob. 6APCh. 8 - Prob. 7APCh. 8 - Prob. 1ACOMPCh. 8 - Prob. 1BCOMPCh. 8 - Prob. 1CCOMPCh. 8 - Prob. 1DCOMPCh. 8 - Prob. 1ECOMPCh. 8 - Prob. 1CPCh. 8 - Prob. 2CPCh. 8 - Prob. 3CPCh. 8 - Prob. 4CPCh. 8 - Prob. 5CPCh. 8 - Prob. 6CPCh. 8 - Prob. 7CPCh. 8 - Prob. 9CPCh. 8 - Prob. 1CC
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