Chapter 5: 6DQ (page 259)
Can a company change its inventory method each accounting period? Explain.
Theconsistency principle does not allow to change inventory methods in each period.
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Question: BTN 5-2 Comparative figures for Apple and Microsoft follow
| \( million | Apple | Microsoft | ||||
| Current year | One year Prior | Two years prior | Current year | One year Prior | Two years prior | |
Inventory | \)2,349 | \(2,111 | \)1,764 | \(2,902 | \)2,660 | $1,938 |
Cost of Sales | 140,089 | 112,258 | 106,606 | 33,038 | 27,078 | 20,385 |
Required
1. Compute inventory turnover for each company for the most recent two years shown.
Refer to the information in Problem 5-3A and assume the periodic inventory system is used
Required
Analysis Component
5. If the company’s manager earns a bonus based on a percentage of gross profit, which method of inventory costing will the manager likely prefer?
Oingo Equipment Co. wants to prepare interim financial statements for the first quarter. The company wishes to avoid making a physical count of inventory. Otingo’s gross profit rate averages 35%. The following information for the first quarter is available from its records.
January 1, Beginning inventory | $802,880 |
Cost of goods purchased | 2,209,636 |
Sales | 3,760,260 |
Sales return | 79,300 |
Required
Use the gross profit method to estimate the company’s first-quarter ending inventory.
Hemming Co. reported the following current-year purchases and sales for its only product.
Date | Activities | Units acquired at a cost | Units Sold to Retail |
Jan 1 | Beginning Inventory | 200 units @ \(10 = \)2,000 | |
Jan 10 | Sales | 150 units @ \(40 | |
March 14 | Purchase | 350 units @ \)15= \(5,250 | |
March 15 | Sales | 300 units @ \)40 | |
July 30 | Purchases | 450 units @ \(20 = \)9,000 | |
Oct 5 | Sales | 430 units @ \(40 | |
Oct 26 | Purchase | 100 units @ \)25 = \(2,500 | |
Total | 1,100 units for \)18,750 | 880 units |
Required
Hemming uses a perpetual inventory system. Determine the costs assigned to ending inventory and to cost of goods sold using (a) FIFO and (b) LIFO. Compute the gross margin for each method. (Round amounts to cents.)
Vibrant Company had \(850,000 of sales in each of three consecutive years 2016–2018, and it purchased merchandise costing \)500,000 in each of those years. It also maintained a \(250,000 physical inventory from the beginning to the end of that three-year period. In accounting for inventory, it made an error at the end of year 2016 that caused its year-end 2016 inventory to appear on its statements as \)230,000 rather than the correct $250,000.
Prepare comparative income statements as in Exhibit 5.11 to show the effect of this error on the company’s cost of goods sold and gross profit for each of the years 2016–2018.
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