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Control of inventories
Triple Creek Hardware Store currently uses a periodic inventory system. Kevin Carlton, the owner, is considering the purchase of a computer system that would make it feasible to switch to a perpetual inventory system.
Kevin is unhappy with the periodic inventory system because it does not provide timely information on inventory levels. Kevin has noticed on several occasions that the store runs out of good-selling items, while too many poor-selling items are on hand.
Kevin is also concerned about lost sales while a physical inventory is being taken. Triple Creek Hardware currently takes a physical inventory twice a year. To minimize distractions, the store is closed on the day inventory is taken. Kevin believes that closing the store is the only way to get an accurate inventory count.
Will switching to a perpetual inventory system strengthen Triple Creek Hardware's control over inventory items? Will switching to a perpetual inventory system eliminate the need for a physical inventory count? Explain.
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Yes, Switching to perpetual inventory system will strengthen H store's control over Inventory items.
Because when the periodic inventory system is used, only revenue is recorded each time a sale is made. No entry is made at the time of the sale to record the cost of merchandise sold. At the end of accounting period, a physical inventory is taken to determine the cost of the inventory and cost of merchandise sold. But in perpetual inventory system, entry to record the cost of merchandise sold is made at the time of merchandise sold and this system also tells daily balance with the total cost of inventory held. So if you have daily information about your inventory you can control it in a better way.
But switching to perpetual inventory system cannot eliminate the need for a physical inventory count because to make sure that the quantity of inventory reported in financial statements is accurate. It gives the report of inventory loss or any error due to theft or any other reason.
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If merchandise inventory is being valued at cost and the price level is decreasing, which of the three methods of costing-FIFO, LIFO, or weighted average cost-will yield (a) the highest inventory cost, (b) the lowest inventory cost, (c) the highest gross profit, and (d) the lowest gross profit?
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When price level is decreasing LIFO method generates highest inventory cost, FIFO generates lowest inventory cost. LIFO method shows highest gross profit and FIFO method shows lowest gross profit. In detailed explanation is given below.
When price level is decreasing:
(a) The highest inventory cost-LIFO
(b) The lowest inventory cost- FIFO
(c) Highest gross profit-FIFO
(d) Lowest gross profit -LIFO
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Before inventory purchases are recorded, the receiving report should be reconciled to what documents?
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Inventory purchases:
Inventory purchases mean the inventory that has been purchased from outside vendors as per the requirements of production. The amount of inventory purchases to be recorded in the books of accounts is the cost incurred to purchase the inventory. Cost incurred to purchase inventory is the cost paid to the vendor for acquiring the inventory.
Accounting for inventory purchases:
Before recording the amount of inventory purchases in the books of accounts, the receiving report of the inventory is to be reconciled with the relevant documents. It is reconciled to record the purchase at correct amount.
The relevant documents used to reconcile with the receiving report are purchase order and the vendor invoice. The purchase order is the order of the requirements of the inventory made by the company to vendor. Vendor invoice is the invoice sent by the vendor for the amount due by the company.
The purchase order and the vendor invoice is reconciled with the receiving report because the excess inventory or the less inventory received will be returned or additional order can be raised to the vendor. If the inventory received is not as per the requirements of the company then it will be returned to the vendor. This process of reconciliation is adapted in order to avoid many entries in the books of accounts.
Thus, the relevant documents to reconcile with the receiving report are purchase order and vendor invoice.
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Do the terms FIFO, LIFO, and weighted average refer to techniques used in determining quantities of the various classes of merchandise on hand? Explain.
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Weighted average cost method with perpetual inventory
The beginning inventory for Funky Party Supplies and data on purchases and sales for a three-month period are shown in Problem 7-1A.
Instructions
1. Record the inventory, purchases, and cost of merchandise sold data in a perpetual inventory record similar to the one illustrated in Exhibit 6, using the weighted average cost method.
2. Determine the total sales, the total cost of merchandise sold, and the gross profit from sales for the period.
3. Determine the ending inventory cost as of March 31, 2016.
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Weighted average cost method with perpetual inventory
The beginning inventory for Dunne Co. and data on purchases and sales for a three-month period are shown in Problem 7-1B.
Instructions
1. Record the inventory, purchases, and cost of merchandise sold data in a perpetual inventory record similar to the one illustrated in Exhibit 6, using the weighted average cost method.
2. Determine the total sales, the total cost of merchandise sold, and the gross profit from sales for the period.
3. Determine the ending inventory cost on June 30, 2016.
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LIFO perpetual inventory
The beginning inventory at Funky Party Supplies and data on purchases and sales for a three-month period are shown in Problem 7-1A.
Instructions
1. Record the inventory, purchases, and cost of merchandise sold data in a perpetual inventory record similar to the one illustrated in Exhibit 5, using the last-in, first-out method.
2. Determine the total sales, the total cost of merchandise sold, and the gross profit from sales for the period.
3. Determine the ending inventory cost as of March 31, 2016.
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Inventory ratios for Dell and HP
Dell Inc. and Hewlett-Packard Development Company, L.P. (HP) are both manufacturers of computer equipment and peripherals. However, the two companies follow two different strategies. Dell follows primarily a build-to-order strategy, where the consumer orders the computer from a Web page. The order is then manufactured and shipped to the customer within days of the order. In contrast, HP follows a build-to-stock strategy, where the computer is first built for inventory, then sold from inventory to retailers, such as Best Buy. The two strategies can be seen in the difference between the inventory turnover and number of days' sales in inventory ratios for the two companies. The following financial statement information is provided for Dell and HP for a recent fiscal year (in millions):
a. Determine the inventory turnover ratio and the number of days' sales in inventory ratio for each company. Use 365 days and round to one decimal place.
b. Interpret the difference between the ratios for the two companies.
a. Determine the inventory turnover ratio and the number of days' sales in inventory ratio for each company. Use 365 days and round to one decimal place.
b. Interpret the difference between the ratios for the two companies. Essay
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LIFO perpetual inventory
The beginning inventory for Dunne Co. and data on purchases and sales for a three-month period are shown in Problem 7-1B.
Instructions
1. Record the inventory, purchases, and cost of merchandise sold data in a perpetual inventory record similar to the one illustrated in Exhibit 5, using the last-in, first-out method.
2. Determine the total sales, the total cost of merchandise sold, and the gross profit from sales for the period.
3. Determine the ending inventory cost on June 30, 2016.
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FIFO perpetual inventory
The beginning inventory of merchandise at Dunne Co. and data on purchases and sales for a three-month period ending June 30, 2016, are as follows:
Instructions
1. Record the inventory, purchases, and cost of merchandise sold data in a perpetual inventory record similar to the one illustrated in Exhibit 4, using the first-in, first-out method.
2. Determine the total sales and the total cost of merchandise sold for the period. Journalize the entries in the sales and cost of merchandise sold accounts. Assume that all sales were on account.
3. Determine the gross profit from sales for the period.
4. Determine the ending inventory cost on June 30, 2016.
5. Based upon the preceding data, would you expect the inventory using the last-in, first-out method to be higher or lower?
Instructions
1. Record the inventory, purchases, and cost of merchandise sold data in a perpetual inventory record similar to the one illustrated in Exhibit 4, using the first-in, first-out method.
2. Determine the total sales and the total cost of merchandise sold for the period. Journalize the entries in the sales and cost of merchandise sold accounts. Assume that all sales were on account.
3. Determine the gross profit from sales for the period.
4. Determine the ending inventory cost on June 30, 2016.
5. Based upon the preceding data, would you expect the inventory using the last-in, first-out method to be higher or lower? Essay
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LIFO and inventory flow
The following is an excerpt from a conversation between Paula Marlo, the warehouse manager for Musick Foods Wholesale Co., and its accountant, Mike Hayes. Musick Foods operates a large regional warehouse that supplies produce and other grocery products to grocery stores in smaller communities.
Paula: Mike, can you explain what's going on here with these monthly statements?
Mike: Sure, Paula. How can I help you?
Paula: I don't understand this last-in, first-out inventory procedure. It just doesn't make sense.
Mike: Well, what it means is that we assume that the last goods we receive are the first ones sold. So the inventory consists of the items we purchased first.
Paula: Yes, but that's my problem. It doesn't work that way! We always distribute the oldest produce first. Some of that produce is perishable! We can't keep any of it very long or it'll spoil.
Mike: Paula, you don't understand. We only assume that the products we distribute are the last ones received. We don't actually have to distribute the goods in this way.
Paula: I always thought that accounting was supposed to show what really happened. It all sounds like "make believe" to me! Why not report what really happens?
Respond to Paula's concerns.
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Control of inventories
Hardcase Luggage Shop is a small retail establishment located in a large shopping mall. This shop has implemented the following procedures regarding inventory items:
a. Because the shop carries mostly high-quality, designer luggage, all inventory items are tagged with a control device that activates an alarm if a tagged item is removed from the store.
b. Because the display area of the store is limited, only a sample of each piece of luggage is kept on the selling floor. Whenever a customer selects a piece of luggage, the salesclerk gets the appropriate piece from the store's stockroom. Because all salesclerks need access to the stockroom, it is not locked. The stockroom is adjacent to the break room used by all mall employees.
c. Whenever Hardcase Luggage Shop receives a shipment of new inventory, the items are taken directly to the stockroom. Hardcase's accountant uses the vendor's invoice to record the amount of inventory received. State whether each of these procedures is appropriate or inappropriate. If it is inappropriate, explain why.
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A ? Perpetual inventory using LIFO
Beginning inventory, purchases, and sales for Item Zebra 9x are as follows:
Assuming a perpetual inventory system and using the last-in, first-out (LIFO) method, determine (a) the cost of merchandise sold on April 27 and (b) the inventory on April 30.
B ? Perpetual inventory using LIFO
Beginning inventory, purchases, and sales for Item Foxtrot are as follows:
Assuming a perpetual inventory system and using the last-in, first-out (LIFO) method, determine (a) the cost of merchandise sold on March 27 and (b) the inventory on March 31.
Assuming a perpetual inventory system and using the last-in, first-out (LIFO) method, determine (a) the cost of merchandise sold on April 27 and (b) the inventory on April 30.
B ? Perpetual inventory using LIFO
Beginning inventory, purchases, and sales for Item Foxtrot are as follows:
Assuming a perpetual inventory system and using the last-in, first-out (LIFO) method, determine (a) the cost of merchandise sold on March 27 and (b) the inventory on March 31. Essay
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Perpetual inventory using FIFO
Beginning inventory, purchases, and sales data for portable DVD players are as follows:
The business maintains a perpetual inventory system, costing by the first-in, first-out method.
a. Determine the cost of the merchandise sold for each sale and the inventory balance after each sale, presenting the data in the form illustrated in Exhibit 4.
b. Based upon the preceding data, would you expect the inventory to be higher or lower using the last-in, first-out method?
The business maintains a perpetual inventory system, costing by the first-in, first-out method.
a. Determine the cost of the merchandise sold for each sale and the inventory balance after each sale, presenting the data in the form illustrated in Exhibit 4.
b. Based upon the preceding data, would you expect the inventory to be higher or lower using the last-in, first-out method? Essay
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FIFO perpetual inventory
The beginning inventory at Funky Party Supplies and data on purchases and sales for a three-month period ending March 31, 2016, are as follows:
Instructions
1. Record the inventory, purchases, and cost of merchandise sold data in a perpetual inventory record similar to the one illustrated in Exhibit 4, using the first-in, first-out method.
2. Determine the total sales and the total cost of merchandise sold for the period. Journalize the entries in the sales and cost of merchandise sold accounts. Assume that all sales were on account.
3. Determine the gross profit from sales for the period.
4. Determine the ending inventory cost as of March 31, 2016.
5. Based upon the preceding data, would you expect the inventory using the last-in, first-out method to be higher or lower?
Instructions
1. Record the inventory, purchases, and cost of merchandise sold data in a perpetual inventory record similar to the one illustrated in Exhibit 4, using the first-in, first-out method.
2. Determine the total sales and the total cost of merchandise sold for the period. Journalize the entries in the sales and cost of merchandise sold accounts. Assume that all sales were on account.
3. Determine the gross profit from sales for the period.
4. Determine the ending inventory cost as of March 31, 2016.
5. Based upon the preceding data, would you expect the inventory using the last-in, first-out method to be higher or lower? Essay
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Why is it important to take a physical inventory periodically when using a perpetual inventory system?
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A ? Cost flow methods
The following three identical units of Item BZ1810 are purchased during November:
Assume that one unit is sold on November 30 for $90.
Determine the gross profit for November and ending inventory on November 30 using the (a) first-in, first-out (FIFO); (b) last-in, first-out (LIFO); and (c) weighted average cost methods.
B ? Cost flow methods
The following three identical units of Item Beta are purchased during June:
Assume that one unit is sold on June 27 for $110.
Determine the gross profit for June and ending inventory on June 30 using the (a) first-in, first-out (FIFO); (b) last-in, first-out (LIFO); and (c) weighted average cost methods.
Assume that one unit is sold on November 30 for $90.
Determine the gross profit for November and ending inventory on November 30 using the (a) first-in, first-out (FIFO); (b) last-in, first-out (LIFO); and (c) weighted average cost methods.
B ? Cost flow methods
The following three identical units of Item Beta are purchased during June:
Assume that one unit is sold on June 27 for $110.
Determine the gross profit for June and ending inventory on June 30 using the (a) first-in, first-out (FIFO); (b) last-in, first-out (LIFO); and (c) weighted average cost methods. Essay
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Costing inventory
Golden Eagle Company began operations in 2016 by selling a single product. Data on purchases and sales for the year were as follows:
On January 4, 2017, the president of the company, Connie Kilmer, asked for your advice on costing the 32,000-unit physical inventory that was taken on December 31, 2016. Moreover, since the firm plans to expand its product line, she asked for your advice on the use of a perpetual inventory system in the future.
1. Determine the cost of the December 31, 2016, inventory under the periodic system, using the (a) first-in, first-out method, (b) last-in, first-out method, and (c) weighted average cost method.
2. Determine the gross profit for the year under each of the three methods in (1).
3. a. Explain varying viewpoints why each of the three inventory costing methods may best reflect the results of operations for 2016.
b. Which of the three inventory costing methods may best reflect the replacement cost of the inventory on the balance sheet as of December 31, 2016?
c. Which inventory costing method would you choose to use for income tax purposes? Why?
d. Discuss the advantages and disadvantages of using a perpetual inventory system. From the data presented in this case, is there any indication of the adequacy of inventory levels during the year?
On January 4, 2017, the president of the company, Connie Kilmer, asked for your advice on costing the 32,000-unit physical inventory that was taken on December 31, 2016. Moreover, since the firm plans to expand its product line, she asked for your advice on the use of a perpetual inventory system in the future.
1. Determine the cost of the December 31, 2016, inventory under the periodic system, using the (a) first-in, first-out method, (b) last-in, first-out method, and (c) weighted average cost method.
2. Determine the gross profit for the year under each of the three methods in (1).
3. a. Explain varying viewpoints why each of the three inventory costing methods may best reflect the results of operations for 2016.
b. Which of the three inventory costing methods may best reflect the replacement cost of the inventory on the balance sheet as of December 31, 2016?
c. Which inventory costing method would you choose to use for income tax purposes? Why?
d. Discuss the advantages and disadvantages of using a perpetual inventory system. From the data presented in this case, is there any indication of the adequacy of inventory levels during the year? Essay
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Ethics in Action
Anstead Co. is experiencing a decrease in sales and operating income for the fiscal year ending October 31. Ryan Frazier, controller of Anstead Co., has suggested that all orders received before the end of the fiscal year be shipped by midnight, October 31, even if the shipping department must work overtime. Because Anstead Co. ships all merchandise FOB shipping point, it would record all such shipments as sales for the year ending October 31, thereby offsetting some of the decreases in sales and operating income. Discuss whether Ryan Frazier is behaving in a professional manner.
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A ? Perpetual inventory using FIFO
Beginning inventory, purchases, and sales for Item ProX2 are as follows:
Assuming a perpetual inventory system and using the first-in, first-out (FIFO) method, determine (a) the cost of merchandise sold on January 25 and (b) the inventory on January 31.
B ? Perpetual inventory using FIFO
Beginning inventory, purchases, and sales for Item Delta are as follows:
Assuming a perpetual inventory system and using the first-in, first-out (FIFO) method, determine (a) the cost of merchandise sold on July 24 and (b) the inventory on July 31.
Assuming a perpetual inventory system and using the first-in, first-out (FIFO) method, determine (a) the cost of merchandise sold on January 25 and (b) the inventory on January 31.
B ? Perpetual inventory using FIFO
Beginning inventory, purchases, and sales for Item Delta are as follows:
Assuming a perpetual inventory system and using the first-in, first-out (FIFO) method, determine (a) the cost of merchandise sold on July 24 and (b) the inventory on July 31. Essay
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