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Chapter 8: Question 1Q (page 421)

In what ways are the inventory accounts of a retailing company different from those of a manufacturing company?

Short Answer

Expert verified

Retailing companies account for only one class of inventory, i.e., finished products. In contrast, manufacturing companies take the record of inventories at every level of production.

Step by step solution

01

Inventory account for a retailing company

Retail companies mostly deal with 鈥渞eady to sale鈥漡oods. It is also the goods for final consumption. Thus the inventories for the retailing companies constitute final goods that cannot be further processed.

Examples of inventories for retailing companies are FMCG goods, electronics goods, readymade garments, etc.

02

Inventory account for manufacturing company.

A manufacturing company uses inventory for production purposes and then makes them ready for sale.Thus inventories for manufacturing companies fall under three heads 鈥� raw materials, work in process, and finished product.

Examples of inventories for manufacturing companies are Leather, Jute, steel, etc.

03

Comparison of inventory accounts between retailing and manufacturing company

Inventory account for a retailing company is simple. Retailing companies need to record one class of inventories, i.e., finished goods. On the balance sheet, only finished goods as closing inventory would appear.

In comparison to that, the manufacturing company has a complex inventory accounting. They need to keep a record of inventories at every level of production. In order to get the estimated finished inventory value, unprocessed and partially processed inventory (WIP) is converted to the finished product value. On the balance sheet, all the categories of inventories are listed.

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Most popular questions from this chapter

FIFO, average-cost, and LIFO methods are often used instead of specific identification for inventory valuation purposes. Compare these methods with the specific identification method, discussing the theoretical propriety of each method in the determination of income and asset valuation.

Inventory information for Part 311 of Monique Aaron Corp. discloses the following information for the month of June.

June 1 Balance 300 units @ \(10 June 10 Sold 200 units @ \)24

11 Purchased 800 units @ \(12 15 Sold 500 units @ \)25

20 Purchased 500 units @ \(13 27 Sold 300 units @ \)27

Instructions

(a) Assuming that the periodic inventory method is used, compute the cost of goods sold and ending inventory under(1) LIFO and (2) FIFO.

(b) Assuming that the perpetual inventory method is used and costs are computed at the time of each withdrawal, what is the value of the ending inventory at LIFO?

(c) Assuming that the perpetual inventory method is used and costs are computed at the time of each withdrawal, what is the gross profit if the inventory is valued at FIFO?

(d) Why is it stated that LIFO usually produces a lower gross profit than FIFO?

Shawnee Corp., a household appliances dealer, purchases its inventories from various suppliers. Shawnee has consistently stated its inventories at FIFO cost.

Instructions

Shawnee is considering alternate methods of accounting for the cash discounts it takes when paying its suppliers promptly.From a theoretical standpoint, discuss the acceptability of each of the following methods.

(a) Financial income when payments are made.

(b) Reduction of cost of goods sold for the period when payments are made.

(c) Direct reduction of the purchase cost.

Presented below is information related to Blowfish radios for the Hootie Company for the month of July.

Units Unit Total Units Selling Total

InCostSoldPrice

Date Transaction

July 1 Balance 100 \(4.10 \) 410

6 Purchase 800 4.20 3,360

7 Sale 300\(7.00 \) 2,100

10 Sale 300 7.30 2,190

12 Purchase 400 4.50 1,800

15 Sale 200 7.40 1,480

18 Purchase 300 4.60 1,380

22 Sale 400 7.40 2,960

25 Purchase 500 4.58 2,290

30 Sale 200 7.50 1,500

Totals 2,100\(9,240 1,400\)10,230

Instructions

(a) Assuming that the periodic inventory method is used, compute the inventory cost at July 31 under each of the following cost flow assumptions.

(1) FIFO.

(2) LIFO.

(3) Weighted-average.

(b) Answer the following questions.

(1) Which of the methods used above will yield the lowest figure for gross profit for the income statement? Explain why.

(2) Which of the methods used above will yield the lowest figure for ending inventory for the balance sheet? Explain why.

The management of Tritt Company has asked its accounting department to describe the effect upon the company鈥檚 financial position and its income statements of accounting for inventorieson the LIFO rather than the FIFO basis during 2017 and 2018. The accounting department is to assume that the change to LIFO wouldhave been effective on January 1, 2017, and that the initial LIFO base would have been the inventory value on December 31, 2016. Thefollowing are the company鈥檚 financial statements and other data for the years 2017 and 2018 when the FIFO method was employed.

Financial Position as of

12/31/16 12/31/17 12/31/18

Cash \( 90,000 \)130,000 \(154,000

Accounts receivable 80,000 100,000 120,000

Inventory 120,000 140,000 176,000

Other assets 160,000 170,000 200,000

Total assets \)450,000 \(540,000 \)650,000

Accounts payable \( 40,000 \) 60,000 \( 80,000

Other liabilities 70,000 80,000 110,000

Common stock 200,000 200,000 200,000

Retained earnings 140,000 200,000 260,000

Total liabilities and equity \)450,000 \(540,000 \)650,000

Income for Years Ended

12/31/17 12/31/18

Sales revenue \(900,000 \)1,350,000

Less: Cost of goods sold 505,000 756,000

Other expenses 205,000 304,000

710,000 1,060,000

Income before income taxes 190,000 290,000

Income taxes (40%) 76,000 116,000

Net income \(114,000 \) 174,000

Other data:

1. Inventory on hand at December 31, 2016, consisted of 40,000 units valued at \(3.00 each.

2. Sales (all units sold at the same price in a given year):

2017鈥�150,000 units @ \)6.00 each 2018鈥�180,000 units @ \(7.50 each

3. Purchases (all units purchased at the same price in given year):

2017鈥�150,000 units @ \)3.50 each 2018鈥�180,000 units @ $4.40 each

4. Income taxes at the effective rate of 40% are paid on December 31 each year.

Instructions

Name the account(s) presented in the financial statements that would have different amounts for 2018 if LIFO rather than FIFOhad been used, and state the new amount for each account that is named. Show computations.
See all solutions

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