Problem - Natalie is busy establishing both divisions of her business (cookie classes and mixer sales) and completing her business degree. Her goals for the next 11 months are to sell one mixer per month and to give two to three classes per week. The cost of the fine European mixers is expected to increase. Natalie has just negotiated new terms with Kzinski that include shipping costs in the negotiated purchase price (mixers will be shipped FOB destination). Assume that Natalie has decided to use a periodic inventory system and now must choose a cost flow assumption for her mixer inventory.
The following transactions occur in February to May 2008.
Feb. 2 Natalie buys two deluxe mixers on account from Kzinski Supply Co. for $1,200 ($600 each), FOB destination, terms n/30.
16 She sells one deluxe mixer for $1,050 cash.
25 She pays the amount owed to Kzinski.
Mar. 2 She buys one deluxe mixer on account from Kzinski Supply Co. for $618, FOB destination, terms n/30.
30 Natalie sells two deluxe mixers for a total of $2,300 cash.
31 She pays the amount owed to Kzinski.
Apr. 1 She buys two deluxe mixers on account from Kzinski Supply Co. for $1,224 ($612 each), FOB destination, terms n/30.
13 She sells three deluxe mixers for a total of $3,450 cash.
30 Natalie pays the amounts owed to Kzinski.
May 4 She buys three deluxe mixers on account from Kzinski Supply Co. for $1,875 ($573.33 each), FOB destination, terms n/30.
27 She sells one deluxe mixer for $1,150 cash.
Instructions -
(a) Prepare journal entries for each of the transactions.
(b) Determine the cost of goods available for sale. Recall from Chapter 5 that at the end of January, Cookie Creations had three mixers on hand at a cost of $595 each.
(c) Calculate (i) ending inventory, (ii) cost of goods sold, (iii) gross profit, and (iv) gross profit rate under each of the following methods: LIFO, FIFO, and average cost.
(d) Natalie is thinking of getting a bank loan. If this is the only factor Natalie hs to consider in choosing an inventory cost flow assumption, which cost flow assumption would you recommend that Natalie use? Why?