Chapter 5: 10E (page 263)
Martinez Company’s ending inventory includes the following items. Compute the lower of cost or market for ending inventory applied separately to each product.
Product | Unit | Cost per unit | Market per unit |
Helmet | 24 | \(50 | \)54 |
Bat | 17 | 78 | 72 |
Shoes | 38 | 95 | 91 |
Uniforms | 42 | 36 | 36 |
Ending Inventory totals$7,394.
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Question: BTN 5-3 Golf Challenge Corp. is a retail sports store carrying golf apparel and equipment. The store is at the end of its second year of operation and is struggling. A major problem is that its cost of inventory has continually increased in the past two years. In the first year of operations, the store assigned inventory costs using LIFO. A loan agreement the store has with its bank, its prime source of financing, requires the store to maintain a certain profit margin and current ratio. The store’s owner is currently looking over Golf Challenge’s preliminary financial statements for its second year. The numbers are not favorable. The only way the store can meet the required financial ratios agreed on with the bank is to change from LIFO to FIFO. The store originally decided on LIFO because of its tax advantages. The owner recalculates ending inventory using FIFO and submits those numbers and statements to the loan officer at the bank for the required bank review. The owner thankfully reflects on the available latitude in choosing the inventory costing method.
Required:
Is the action by Golf Challenge’s owner ethical? Explain.
Question: Part A
Santana Rey of Business Solutions is evaluating her inventory to determine whether it must be adjusted based on lower of cost or market rules. Business Solutions has three different types of software in its inventory, and the following information is available for each.
Inventory Item | Units | Cost Per unit | Market per unit |
Office Productivity | 3 | \(76 | \)74 |
Desktop publishing | 2 | 103 | 100 |
Accounting | 3 | 90 | 96 |
Required
1. Compute the lower of cost or market for ending inventory assuming Rey applies the lower of cost or market rule to inventory as a whole. Must Rey adjust the reported inventory value? Explain.
2. Assume that Rey had instead applied the lower cost or market rule to each product in inventory. Under this assumption, must Rey adjust the reported inventory value? Explain.
Identify the inventory costing method best described by each of the following separate statements. Assume a period of increasing costs.
_____4. Recognizes (matches) recent costs against net sales.
Warnerwoods Company uses a perpetual inventory system. It entered into the following purchases and sales transactions for March. (For specific identification, the March 9 sale consisted of 80 units from beginning inventory and 340 units from the March 5 purchase; the March 29 sale consisted of 40 units from the March 18 purchase and 120 units from the March 25 purchase.) Date Activities Units Acquired at Cost.
Date | Activities | Units acquired at cost | Units sold at retail |
March 1 | Beginning inventory | 100 units @ \(50.00 per unit | |
March 5 | Purchase | 400 units @ \)55.00 per unit | |
March 9 | Sales | 420 units @ \(85.00 per unit | |
March 18 | Purchase | 120 units @ \)60.00 per unit | |
March 25 | Purchase | 200 units @ \(62.00 per unit | |
March 29 | Sales | 160 units @ \)95.00 per unit | |
Total | 820 units | 580 units |
Required
2. Compute the number of units in ending inventory.
Refer to the information in QS 5-10 and assume the periodic inventory system is used. Determine the costs assigned to ending inventory when costs are assigned based on the LIFO method. (Round per unit costs and inventory amounts to cents.)
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