INVENTORY MANAGEMENT - SHORT ANSWER QUESTIONS, EXERCISES, AND PROBLEMS
Questions -
Why does an error in ending inventory affect two accounting periods?
What is the meaning of taking a physical inventory?
Which cost elements are included in inventory? What practical problems arise by including the costs of such elements?"
Which accounts that are used under periodic inventory procedure are not used under perpetual inventory procedure?
What entries are necessary under perpetual inventory procedure when goods are sold?
Why is there closer control over inventory under perpetual inventory procedure than under periodic inventory procedure?
Why is perpetual inventory procedure being used increasingly in business?
What is the cost flow assumption? What is meant by the physical flow of goods? Does a relationship between cost flows and the physical flow of goods exist, or should such a relationship exist?
Indicate how a company can manipulate its net income if it uses LIFO. Is the same opportunity available under FIFO? Why or why not?
What are the main advantages of using FIFO and LIFO?
Which inventory method is the correct one? Can a company change inventory methods?
Why are ending inventory and cost of goods sold the same under FIFO perpetual and FIFO periodic?
Would you agree with the following statement? Reducing the amount of taxes payable currently is a valid objective of business management and, since LIFO results in such a reduction, all businesses should use LIFO.
What is net realizable value, and how is it used?
Why is it acceptable accounting practice to recognize a loss by writing down an item in inventory to market, but unacceptable to recognize a gain by writing up an inventory item?
What are the main reasons for estimating ending inventory?
Should a company rely exclusively on the gross margin method to determine the ending inventory and cost of goods sold for the end-of- year financial statements?
How can the retail method be used to estimate inventory?
The Limited Based on the notes to the financial statements of The Limited contained in the Annual Report Appendix, what inventory methods were used?
Exercises -
Exercise 1. Crocker Company reported annual net income as follows:
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2008
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$484,480
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2009
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487,680
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2010
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409,984
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Analysis of its inventories revealed the following incorrect inventory amounts and these correct amounts:
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Incorrect Inventory Amount
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Correct inventory amount
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|
2008 December 31
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$ 76,800
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$89,600
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|
2009 December 31
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86,400
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77,600
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Compute the annual net income for each of the three years assuming the correct inventories had been used.
Exercise 2. Slate Truck Company manufactures trucks and identifies each truck with a unique serial plate. On December 31, a customer ordered 5 trucks from the company, which currently has 20 trucks in its inventory. Ten of these trucks cost $20,000 each, and the other 10 cost $25,000 each. If Slate wished to minimize its net income, which trucks would it ship? By how much could Slate reduce net income by selecting units from one group versus the other group?
Exercise 3. Miami Discount Company inventory records show:
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Units
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Unit Cost
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Total Cost
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Beginning inventory
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3,000
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$38.00
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$114,000
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Purchases:
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|
|
|
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February 14
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900
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39.00
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35,100
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March 18
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2,400
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40.00
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96,000
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July 21
|
1,800
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40.30
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72,540
|
|
September 27
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1,800
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40.60
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73,080
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November 27
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600
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41.00
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24,600
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Sales:
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|
|
|
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April 15
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2,800
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|
|
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August 20
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2,000
|
|
|
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October 3
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1,500
|
|
|
The December 31 inventory was 4,200 units. Miami Discount Company uses perpetual inventory procedure. Present a schedule showing the measurement of the ending inventory using FIFO perpetual inventory procedure.
Exercise 4. Using the data in the previous exercise for Miami Discount Company, present a schedule showing the measurement of the ending inventory using LIFO perpetual inventory procedure.
Exercise 5. London Company had a beginning inventory of 160 units at $24 (total = $3,840) and the following inventory transactions during the year: January 8, sold 40 units.
January 11, purchased 80 units at USD 30.00.
January 15, purchased 80 units at USD 32.00.
January 22, sold 80 units.
Using the preceding information, price the ending inventory at its weighted- average cost, assuming perpetual inventory procedure.
Exercise 6. Kettle Company made the following purchases of Product A in its first year of operations:
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Units
|
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Unit Cost
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January 2
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1,400
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@
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$7.40
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|
March 31
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1,200
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@
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7.00
|
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July 5
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2,400
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@
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7.60
|
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November 1
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1,800
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@
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8.00
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The ending inventory that year consisted of 2,400 units. Kettle uses periodic inventory procedure.
1. Compute the cost of the ending inventory using each of the following methods: (1) FIFO, (2) LIFO, and (3) weighted-average.
2. Which method would yield the highest amount of gross margin? Explain why it does.
Exercise 7. The following are selected transactions and other data of the Custer Company: Purchased 20 units at $360 per unit on account on 2010 September 18. Sold 6 units on account for $576 per unit on 2010 September 20. Discovered a shortage of $2,640 at year-end after a physical inventory. Prepare journal entries for these transactions using FIFO perpetual inventory procedure. Assume the beginning inventory consists of 20 units at $336 per unit.