Chapter 8: Question 2Q (page 421)
Why should inventories be included in (a) a statement of financial position and (b) the computation of net income?
Inventories are the main trading commodity. So it must be accounted for both making sales and keeping in hand.
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Question:In your audit of Jose Oliva Company, you find that a physical inventory on December 31, 2017, showed merchandise with a cost of \(441,000 was on hand at that date. You also discover the followingitems were all excluded from the \)441,000.
1. Merchandise of \(61,000 which is held by Oliva on consignment. The consignor is the Max Suzuki Company.
2. Merchandise costing \)38,000 which was shipped by Oliva f.o.b. destination to a customer on December 31, 2017. The customerwas expected to receive the merchandise on January 6, 2018.
3. Merchandise costing \(46,000 which was shipped by Oliva f.o.b. shipping point to a customer on December 29, 2017. Thecustomer was scheduled to receive the merchandise on January 2, 2018.
4. Merchandise costing \)83,000 shipped by a vendor f.o.b. destination on December 30, 2017, and received by Oliva on January4, 2018.
5. Merchandise costing $51,000 shipped by a vendor f.o.b. shipping point on December 31, 2017, and received by Oliva onJanuary 5, 2018.
Instructions
Based on the above information, calculate the amount that should appear on Oliva’s balance sheet at December 31, 2017, for inventory.
Question:Two or more items are omitted in each of the following tabulations of income statement data. Fill in the amounts that are missing.
2016 2017 2018
Sales revenue \(290,000 \) ?$410,000
Sales returns and allowances 11,000 13,000 ?
Net sales ? 347,000 ?
Beginning inventory 20,000 32,000 ?
Ending inventory ? ? ?
Purchases ? 260,000 298,000
Purchase returns and allowances 5,000 8,000 10,000
Freight-in 8,000 9,000 12,000
Cost of goods sold 233,000 ? 293,000
Gross profi t on sales 46,000 91,000 97,000
Define “cost” as applied to the valuation of inventories.
Arruza Co. is considering switching from the specific-goods LIFO approach to the dollar-value LIFO approach. Because the financial personnel at Arruza know very little about dollar-value LIFO, they ask youto answer the following questions.
(a) What is a LIFO pool?
(b) Is it possible to use a LIFO pool concept and not use dollar-value LIFO? Explain.
(c) What is a LIFO liquidation?
(d) How are price indexes used in the dollar-value LIFO method?
(e) What are the advantages of dollar-value LIFO over specific-goods LIFO?
Accounting, Analysis, and Principles
Englehart Company sells two types of pumps. One is large and is for commercial use. The other is smaller and is used in residentialswimming pools. The following inventory data is available for the month of March.
Price per
Units Unit Total
Residential Pumps
Inventory at Feb. 28: 200 \( 400 \) 80,000
Purchases:
March 10 500 \( 450 \)225,000
March 20 400 \( 475 \)190,000
March 30 300 \( 500 \)150,000
Sales:
March 15 500 \( 540 \)270,000
March 25 400 \( 570 \)228,000
Inventory at March 31: 500
Commercial Pumps
Inventory at Feb. 28: 600 \( 800 \)480,000
Purchases:
March 3 600 \( 900 \)540,000
March 12 300 \( 950 \)285,000
March 21 500 \(1,000 \)500,000
Sales:
March 18 900 \(1,080 \)972,000
March 29 600 \(1,140 \)684,000
Inventory at March 31: 500
Accounting
(a) Assuming Englehart uses a periodic inventory system, determine the cost of inventory on hand at March 31 and thecost of goods sold for March under first-in, first-out (FIFO).
(b) Assume Englehart uses dollar-value LIFO and one pool, consisting of the combination of residential and commercialpumps. Determine the cost of inventory on hand at March 31 and the cost of goods sold for March. Assume Englehart’sinitial adoption of LIFO is on March 1. Use the double-extension method to determine the appropriate price indices.
(Hint:The price index for February 28/March 1 should be 1.00.) (Round the index to three decimal places.)
Analysis
(a) Assume you need to compute a current ratio for Englehart. Which inventory method (FIFO or dollar-value LIFO) doyou think would give you a more meaningful current ratio?
(b) Some of Englehart’s competitors use LIFO inventory costing and some use FIFO. How can an analyst compare theresults of companies in an industry, when some use LIFO and others use FIFO?
Principles
Can companies change from one inventory accounting method to another? If a company changes to an inventory accounting methodused by most of its competitors, what are the trade-offs in terms of the conceptual framework discussed in Chapter 2 of the textbook?
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