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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

Colin Davis Machine Company maintains a general ledger account for each class of inventory, debiting such accounts for increases during the period and crediting them for decreases. The transactions below relate to the Raw Materials inventory account, which is debited for materials purchased and credited for materials requisitioned for use.

1. An invoice for \(8,100, terms f.o.b. destination, was received and entered January 2, 2017. The receiving report shows that the materials were received December 28, 2016.

2. Materials costing \)28,000, shipped f.o.b. destination, were not entered by December 31, 2016, 鈥渂ecause they were in a railroad car on the company鈥檚 siding on that date and had not been unloaded.鈥�

3. Materials costing \(7,300 were returned to the supplier on December 29, 2016, and were shipped f.o.b. shipping point. The return was entered on that date, even though the materials are not expected to reach the supplier鈥檚 place of business until January 6, 2017.

4. An invoice for \)7,500, terms f.o.b. shipping point, was received and entered December 30, 2016. The receiving report shows that the materials were received January 4, 2017, and the bill of lading shows that they were shipped January 2, 2017.

5. Materials costing $19,800 were received December 30, 2016, but no entry was made for them because 鈥渢hey were ordered with a specified delivery of no earlier than January 10, 2017.鈥�

Instructions -

Prepare correcting general journal entries required at December 31, 2016, assuming that the books have not been closed.

John Adams Company鈥檚 record of transactions for the month of April was as follows.

Purchases Sales

April 1 (balance on hand) 600 @ \( 6.00 April 3 500 @ \)10.00

4 1,500 @ 6.08 9 1,400 @ 10.00

8 800 @ 6.40 11 600 @ 11.00

13 1,200 @ 6.50 23 1,200 @ 11.00

21 700 @ 6.60 27 900 @ 12.00

29 500 @ 6.79 4,600

5,300

Instructions

(a) Assuming that periodic inventory records are kept in units only, compute the inventory at April 30 using (1) LIFO and(2) average-cost.

(b) Assuming that perpetual inventory records are kept in dollars, determine the inventory using (1) FIFO and (2) LIFO.

(c) Compute the cost of goods sold assuming periodic inventory procedures and inventory priced at FIFO.

(d) In an inflationary period, which inventory method鈥擣IFO, LIFO, average cost鈥攚ill show the highest net income?

Prepare a memorandum containing responses to the following items.

(a) Describe the cost flow assumptions used in average-cost, FIFO, and LIFO methods of inventory valuation.

(b) Distinguish between weighted-average-cost and moving-average-cost for inventory costing purposes.

(c) Identify the effects on both the balance sheet and the income statement of using the LIFO method instead of the FIFOmethod for inventory costing purposes over a substantial time period when purchase prices of inventoriable items arerising. State why these effects take place.

Question: Shania Twain Company was formed on December 1, 2016. The following information is available from Twain鈥檚 inventory records for Product BAP.

Units Unit Cost

January 1, 2017 (beginning inventory) 600 $ 8.00

Purchases:

January 5, 2017 1,200 9.00

January 25, 2017 1,300 10.00

February 16, 2017 800 11.00

March 26, 2017 600 12.00

A physical inventory on March 31, 2017, shows 1,600 units on hand.

Instructions

Prepare schedules to compute the ending inventory at March 31, 2017, under each of the following inventory methods.

(a) FIFO (b) LIFO. (c) Weighted-average (round unit costs to two decimal places).

George Solti, the controller for Garrison Lumber Company, has recently hired you as assistant controller. He wishes to determine your expertise in the area of inventory accounting and therefore asks you to answer thefollowing unrelated questions.

(a) A company is involved in the wholesaling and retailing of automobile tires for foreign cars. Most of the inventory is imported,and it is valued on the company鈥檚 records at the actual inventory cost plus freight-in. At year-end, the warehousing costs areprorated over cost of goods sold and ending inventory. Are warehousing costs considered a product cost or a period cost?

(b) A certain portion of a company鈥檚 鈥渋nventory鈥� is composed of obsolete items. Should obsolete items that are not currentlyconsumed in the production of 鈥済oods or services to be available for sale鈥� be classified as part of inventory?

(c) A company purchases airplanes for sale to others. However, until they are sold, the company charters and services theplanes. What is the proper way to report these airplanes in the company鈥檚 financial statements?

(d) A company wants to buy coal deposits but does not want the financing for the purchase to be reported on its financialstatements. The company therefore establishes a trust to acquire the coal deposits. The company agrees to buy the coalover a certain period of time at specified prices. The trust is able to finance the coal purchase and pay off the loan as itis paid by the company for the minerals. How should this transaction be reported?
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