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Chapter 6: 7SE_3 (page 359)

Question:Refer to Short Exercises S6-4 through S6-6. After completing those exercises, answer the following questions:

Requirements

3. If costs had been declining instead of rising, which inventory costing methodwould have produced the highest cost of goods sold?

Short Answer

Expert verified

Under declining cost conditions FIFO would yield the highest cost.

Step by step solution

01

Step-by-Step-SolutionStep1: COGS computed under methods

The inventory methods used in the previous exercises used inventory methods namely 鈥� FIFO, LIFO, and Weighted Average Cost

FIFO computes the COGS at the historical prices. LIFO computes the cost at the current prices, and the average method takes the mid-value between the FIFO valuation and LIFO valuation.

02

Declining cost condition and highest COGS

If the cost is being declined, so the current cost would be lower than the historical prices. As discussed above, the FIFO value stock on the historical prices and LIFO on the current prices.

Thus in case of declining prices, the inventory value on the historical cost would be highest than the inventory valued on the current cost.

The inventory valued by the average method would still take the mid-value.

So under the declining cot method, FIFO would yield the highest cost.

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Most popular questions from this chapter

What is the effect on the cost of goods sold, gross profit, and net income if ending merchandise inventory is understated?

Fit Gym began January with merchandise inventory of 78 crates of vitamins that cost a total of \(4,290. During the month, Fit Gym purchased and sold merchandise on account as follows:

Jan. 5 Purchase 156 crates @ \) 64 each

13 Sale 180 crates @ \( 100 each

18 Purchase 114 crates @ \) 75 each

26 Sale 150 crates @ $ 116 each

Requirements

1. Prepare a perpetual inventory record, using the FIFO inventory costing method, and determine the company鈥檚 cost of goods sold, ending merchandise inventory, and gross profit.

Question:This problem continues the Crystal Clear Cleaning problem begun in Chapter 2 and continued through Chapter 5.

Consider the December transactions for Crystal Clear Cleaning that were presentedin Chapter 5. (Cost data have been removed from the sale transactions.) Crystal Clearuses the perpetual inventory system.

Dec. 2 Purchased 1,000 units of inventory for \(4,000 on account from Sparkle

Company on terms, 5/10, n/20.

5 Purchased 1,200 units of inventory from Borax on account with terms

4/10, n/30. The total invoice was for \)6,000, which included a \(300

freight charge.

7 Returned 300 units of inventory to Sparkle from the December 2

purchase.

9 Paid Borax.

11 Sold 500 units of goods to Happy Maids for \)5,500 on account with

termsn/30.

12 Paid Sparkle.

15 Received 100 units with a sales price of \(1,100 of goods back from

customer Happy Maids.

21 Received payment from Happy Maids, settling the amount due in full.

28 Sold 500 units of goods to Bridget, Inc. on account for \)6,500. Terms

1/15,n/30.

29 Paid cash for utilities of \(550.

30 Paid cash for Sales Commission Expense of \)214.

31 Received payment from Bridget, Inc., less discount.

31 Recorded the following adjusting entries:

a. Physical count of inventory on December 31 showed 800 units of

goods on hand.

b. Depreciation, \(150.

c. Accrued salaries expense of \)2,100.

d. Estimated sales returns of \(1,500, with cost of \)540.

e. Prepared all other adjustments necessary for December (Hint: You willneed to review the adjustment information in Chapter 3 to determinethe remaining adjustments). Assume the cleaning supplies left atDecember 31 are $50.

Requirements

2. Journalize the transactions for December 11th, 28th, and 31st (adjusting entry aonly) using the perpetual inventory record created in Requirement 1.

Question:This problem continues the Canyon Canoe Company situation from Chapter 5. At the beginning of the January 2019, Canyon Canoe Company decided to carry and sellT-shirts with its logo printed on them. Canyon Canoe Company uses the perpetualinventory system to account for the inventory. During February 2019, Canyon CanoeCompany completed the following merchandising transactions:

Feb. 2 Sold 60 T-shirts at \(10 each.

5 Purchased 50 T-shirts at \)6 each.

7 Sold 45 T-shirts for \(10 each.

8 Sold 20 T-shirts for \)10 each.

10 Canyon Canoe Company realized the inventory was running

low, so it placed a rush order and purchased 20 T-shirts. The

premium cost for these shirts was \(7 each.

12 Placed a second rush order and purchased 40 T-shirts at \)7

each.

13 Sold 20 T-shirts for \(10 each.

15 Purchased 50 T-shirts for \)6 each.

20 In order to avoid future rush orders, purchased 150 T-shirts.

Due to the volume of the order, Canyon Canoe Company

was able to negotiate a cost of \(5 each.

21 Sold 40 T-shirts for \)10 each.

22 Sold 35 T-shirts for \(10 each.

24 Sold 20 T-shirts for \)10 each.

25 Sold 45 T-shirts for \(10 each.

27 Sold 40 T-shirts for \)10 each.

Requirements

2. Provide a summary for the month, in both units and dollars, of the change in inventory in the following format:

Number of T-shirts

Dollar Amount

Beginning Balance

Add: Purchases

Less: Cost of goods sold

Ending Balance

Discuss the materiality concept. Is the dollar amount that is material the same for a company that has annual sales of \(10,000 compared with a company that has annual sales of \)1,000,000?
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