Chapter 8: Question 8Q (page 421)
Distinguish between product costs and period costs as they relate to inventory.
Product costs are directly attached to the inventory, whereas period costs are indirectly related to inventory.
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Specific identification is sometimes said to be the ideal method of assigning a cost to inventory and to the cost of goods sold. Briefly indicate the arguments for and againstthis method of inventory valuation.
(FIFO and LIFO) Harrisburg Company is considering changing its inventory valuation method from FIFO to LIFO because of the potential tax savings. However, management wishes to consider all of the effects on the company, including its reported performance, before making the final decision.
The inventory account, currently valued on the FIFO basis, consists of 1,000,000 units at \(8 per unit on January 1, 2017. There are 1,000,000 shares of common stock outstanding as of January 1, 2017, and the cash balance is \)400,000.
The company has made the following forecasts for the period 2017–2019.
2017 | 2018 | 2019 | |
Unit sales (in millions of units) | 1.1 | 1.0 | 1.3 |
Sales price per unit | \(10 | \)12 | \(12 |
Unit purchases (in millions of units) | 1.0 | 1.1 | 1.2 |
Purchase price per unit | \)8 | \(9 | \)10 |
Annual depreciation (in thousands of dollars) | \(300 | \)300 | \(300 |
Cash dividends per share | \)0.15 | \(0.15 | \)0.15 |
Cash payments for additions to and replacement of plant and equipment (in thousands of dollars) | \(350 | \)350 | $350 |
Income tax rate | 40% | 40% | 40% |
Operating expenses (exclusive of depreciation) as a percent of sales | 15% | 15% | 15% |
Common shares outstanding (in millions) | 1 | 1 | 1 |
Instructions
a. Prepare a schedule that illustrates and compares the following data for Harrisburg Company under the FIFO and the LIFO inventory method for 2017–2019. Assume the company would begin LIFO at the beginning of 2017.
Assume all sales are collected in the year of sale and all purchases, operating expenses, and taxes are paid during the year incurred.
b. Using the data above, your answer to (a), and any additional issues you believe need to be considered, prepare a report that recommends whether or not Harrisburg Company should change to the LIFO inventory method. Support your conclusions with appropriate arguments.
What is the difference between a perpetual inventory and a physical inventory? If a company maintains a perpetual inventory, should its physical inventory at any date be equal to the amount indicated by the perpetual inventory records? Why?
Question:Matlock Company uses a perpetual inventory system. Its beginning inventory consists of 50 units that cost \(34 each. During June, the company purchased 150 units at \)34 each, returned 6 units for credit, and sold 125 units at $50 each.
Journalize the June transactions.
Mishima, Inc. indicated in a recent annual report that approximately $19 million of merchandise was received on consignment. Should Mishima, Inc. report this amount on its balance sheet? Explain.
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