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Chapter 9: Q2FSAC (page 491)

Barrick Gold Corporation, with headquarters in Toronto, Canada, is the world鈥檚 most profitable and largest gold mining company outside South Africa. Part of the key to Barrick鈥檚 success has been due to its ability to maintain cash flow while improving production and increasing its reserves of gold-containing property. In the most recent year, Barrick achieved record growth in cash flow, production, and reserves. The company maintains an aggressive policy of developing previously identified target areas that have the possibility of a large amount of gold ore, and that have not been previously developed. Barrick limits the riskiness of this development by choosing only properties that are located in politically stable regions, and by the company鈥檚 use of internally generated funds, rather than debt, to finance growth. Using Your Judgment 491 492 Chapter 9 Inventories: Additional Valuation Issues Barrick鈥檚 inventories are as follows. Barrick Gold Corporation Inventories (in millions, US dollars) Current Gold in process \(133 Mine operating supplies 82 \)215 Non-current (included in Other assets) Ore in stockpiles \(65 Instructions (a) Why do you think that there are no finished goods inventories? Why do you think the raw material, ore in stockpiles, is considered to be a non-current asset? (b) Consider that Barrick has no finished goods inventories. What journal entries are made to record a sale? (c) Suppose that gold bullion that cost \)1.8 million to produce was sold for $2.4 million. The journal entry was made to record the sale, but no entry was made to remove the gold from the gold in process inventory. How would this error affect the following? Balance Sheet Income Statement Inventory ? Cost of goods sold ? Retained earnings ? Net income ? Accounts payable ? Working capital ? Current ratio ?

Short Answer

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All the requirements are mentioned in the steps.

Step by step solution

01

Reason for no inventory

Barrick Gold Corporation is a gold mining company thatmines gold from the gold ore. As gold is ahighly liquid commodity, there will probably be no ending inventories at the end of the year, as it can be easily sold.

Ore stockpiles arenon-current assets, as theycan be realized into cash within a year or an operating cycle because it takes more time to process to item extracted from the ore.

02

Journal entry for sales

(b) Following journal entry will be recorded:

Date

Description

Debit

Credit

Cash

XXX

Sales Revenue

XXX

(To record sales revenue)

Cost of Goods Sold

XXX

Gold in Process

XXX

(To record cost of goods sold)

03

Effect on Balance sheet and income statement items

The effect is shown as follows:

Balance Sheet
Income Statement

Inventory

Overstated

Retained earnings

Overstated

Accounts payable

No effect

Working capital

Overstated

Current ratio

Overstated


Cost of goods sold

Understated

Net income

Overstated


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Most popular questions from this chapter

Riegel Company uses the LCNRV method, on an individual-item basis, in pricing its inventory items. The inventory at December 31, 2017, consists of products D, E, F, G, H, and I. Relevant per unit data for these products appear below. Item DE F GH I Estimated selling price \(120 \)110 \(95 \)90 \(110 \)90 Cost 75 80 80 80 50 36 Cost to complete 30 30 25 35 30 30 Selling costs 10 18 10 20 10 20 Instructions Using the LCNRV rule, determine the proper unit value for balance sheet reporting purposes at December 31, 2017, for each of the inventory items above.

All of the following are key similarities between GAAP and IFRS with respect to accounting for inventories except: (a) costs to include in inventories are similar. (b) LIFO cost flow assumption where appropriate is used by both sets of standards. (c) fair value valuation of inventories is prohibited by both sets of standards. (d) guidelines on ownership of goods are similar

GROUPWORK (Retail, LIFO Retail, and Inventory Shortage) Late in 2014, Joan Seceda and four other investors took the chain of Becker Department Stores private, and the company has just completed its third year of operations under the ownership of the investment group. Andrea Selig, controller of Becker Department Stores, is in the process of preparing the year-end financial statements. Based on the preliminary financial statements, Seceda has expressed concern over inventory shortages, and she has asked Selig to determine whether an abnormal amount of theft and breakage has occurred. The accounting records of Becker Department Stores contain the following amounts on November 30, 2017, the end of the fiscal year. Cost Retail Beginning inventory \( 68,000 \)100,000 Purchases 255,000 400,000 Net markups 50,000 Net markdowns 110,000 Sales revenue 320,000 According to the November 30, 2017, physical inventory, the actual inventory at retail is $115,000. Instructions (a) Describe the circumstances under which the retail inventory method would be applied and the advantages of using the retail inventory method. (b) Assuming that prices have been stable, calculate the value, at cost, of Becker Department Stores鈥� ending inventory using the last-in, first-out (LIFO) retail method. Be sure to furnish supporting calculations. Problems 487 488 Chapter 9 Inventories: Additional Valuation Issues (c) Estimate the amount of shortage, at retail, that has occurred at Becker Department Stores during the year ended November 30, 2017. (d) Complications in the retail method can be caused by such items as (1) freight-in costs, (2) purchase returns and allowances, (3) sales returns and allowances, and (4) employee discounts. Explain how each of these four special items is handled in the retail inventory method.

Fiedler Co. follows the practice of valuing its inventory at the lower-ofcost-or-market. The following information is available from the company鈥檚 inventory records as of December 31, 2017. Item Quantity Unit Cost Replacement Cost/Unit Estimated Selling Price/Unit Completion & Disposal Cost/Unit Normal Profit Margin/Unit A 1,100 \(7.50 \)8.40 \(10.50 \)1.50 $1.80 B 800 8.20 7.90 9.40 0.90 1.20 C 1,000 5.60 5.40 7.20 1.15 0.60 D 1,000 3.80 4.20 6.30 0.80 1.50 E 1,400 6.40 6.30 6.70 0.70 1.00Instructions Greg Forda is an accounting clerk in the accounting department of Fiedler Co., and he cannot understand why the market value keeps changing from replacement cost to net realizable value to something that he cannot even figure out. Greg is very confused, and he is the one who records inventory purchases and calculates ending inventory. You are the manager of the department and an accountant. (a) Calculate the lower-of-cost-or-market using the individual-item approach. (b) Show the journal entry he will need to make in order to write down the ending inventory from cost to market. (c) Write a memo to Greg explaining what designated market value is as well as how it is computed. Use your calculations to aid in your explanation

Deere and Company reported inventory in its balance sheet as follows. Inventories $1,999,100,000 What additional disclosures might be necessary to present the inventory fairly?
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