Worksheet 2: Inventory Valuation and Control Study Questions

Transcription

1 UNIVERSITY OF THE WEST INDIES Open Campus ACCT Intro. to Cost & Management Accounting Worksheet 2: Inventory Valuation and Control Study Questions Question 1 Hyatt Magic carries an inventory of putters and other gulf clubs. Hyatt uses the FIFO method and a perpetual inventory system. Company records indicate the following for a particular line of Hyatt Magic putters: Date Item Quantity Unit Cost November 1 November 6 November 8 November 17 November 30 Balance. Sale Purchase. Sale. Sale $70 $79 i) Prepare a perpetual inventory record for the putters using the FIFO method. What amounts would Hyatt report for ending inventory and cost of goods sold? ii) Assume that Hyatt Magic uses the LIFO method of inventory costing, what would be the cost of ending inventory and cost of goods sold? iii) Prepare Hyatt Magic perpetual inventory record assuming the company uses the averagecost method. Round average cost per unit to the nearest cent and all other amounts to the nearest dollar. iv) After preparing the FIFO perpetual inventory record in part (i), journalize Hyatt Magic s November 8 purchase of inventory on account and November 17 th cash sale (sale price of each putter was $120). Question 2 a) Leather Goods Company began the year with inventory of $50,000 and purchased $250,000 worth of goods during the year. Sales for the year are $500,000, and Leather Goods gross profit percentage is 55% of sales. Compute the estimated cost of ending inventory by the gross profit method. b) See Through Inc retails hand blown glass vases and uses a perpetual inventory system. A statement of their purchases and sales of these vases for the month of June 20X9 is given below. June 1 Opening stock of 30 vases valued at a total cost of $27,000. June 3 Purchased 45 vases at a cost of $980 each. June 5 Sold 55 vases at $1,600 each. June 6 Purchased 70 vases at $1,200 each but a trade discount of 3% was received. June 10 Sold 60 vases for $114,000. June 14 Purchased 80 vases at $1,100 each but additionally there was a shipping cost of $200 per vase. June 18 Sold 65 vases for $2,300 each. June 23 Purchased 75 vases at a total cost of $108,750. June 25 5 of the vases last sold were returned, as the customer purchased an incorrect quantity. June 27 Sold 112 vases for $280,000. June 30 An actual count of vases was carried out which revealed that there were only 9 hand blown glass vases in the store room

2 i) Prepare the inventory record for See Through Inc. using the LIFO method. ii) Determine the gross profit earned by See Through Inc. for the period. iii) State the journal entries necessary to record the transactions on June 6 & 18 under the -perpetual inventory system -periodic inventory system Question 3 (i) Electronics Ltd manufactures air conditioners. It purchases 200,000 units of a particular type of compressor part, CU30, each year at a cost of $64 per unit. Annual carrying cost (for insurance, material handling, breakage etc) per unit is 5% of the unit purchase price. Currently Electronics Ltd places 50 orders for 4,000 units each year and ordering costs per purchase order are $18. (ii) a) Calculate the current annual ordering cost. b) Calculate the current annual carrying cost. c) What is the current total stock administration cost? d) Calculate the EOQ. e) What is the minimum ordering cost? f) What is the minimum storage cost? g) What is the minimum total stock administration cost? h) How much savings would Electronics Ltd. make using the EOQ policy, rather than the current policy of purchasing 4,000 units per order. Maximum usage for Electronics Ltd. For any one week is 1,000 units and the minimum usage 400 units. Suppliers take anywhere from 2 to 4 weeks to deliver supplies after the order is placed. Using the EOQ policy, determine the re-order level, minimum level & maximum level of inventory. Discussion Questions (Kindly prepare these questions before each tutorial session) Question 1 Hobart Sign Company began the month of June with an inventory of 50 signs that cost a total of $1,500. Hobart purchased and sold merchandise on account as follows: June 3 Purchase.. 60 $35 each June 8 Sale $60 each June 18 Purchase.. 90 $40 each June 28 Sale $70 each Hobart uses the FIFO cost method. Cash payments, on account, totaled $5,000. Operating expenses were $2,700; Hobart paid two-thirds in cash and accrued the rest as Accounts Payable. i) Prepare a perpetual inventory record, at FIFO cost, for this merchandise. ii) Make journal entries to record the company s transactions iii) Prepare an income statement for Hobart Sign Company for the month ended June 30. Question 2 a) Matthew Perry a merchandiser recently attended a seminar where he was informed that he should maintain proper stock control records and be able to calculate the various stock levels. Identify these stock levels, their purpose(s) and the factors to be considered in setting them

3 b) Hi-Tech are retailers who sell scientific calculators and use the FIFO method to value inventory. During the second quarter (April to June) of 20X9, they decided to concentrate their selling activities on the "Casio fx 6300G" model, which experienced several cost fluctuations during the period. The company began the quarter with 50 calculators with a unit cost of $4,000. The following transactions took place during the quarter. April 10 April calculators were purchased at a cost of $4,050 each but in addition there was a freight charge of $90 as well as customs import charge of $150 each. During the month 180 calculators were sold at a price of $5,250 each. May 1 A new batch of 120 calculators was purchased at a total cost of $612,000. May 28 The sales for May were 120 calculators at a unit selling price of $6,450. June 2 June 5 June 30 A further 220 calculators were purchased at a cost of $6,200 each and these were subject to a trade discount of 12½% each. 15 of the calculators purchased on June 2 were found to be defective and were returned to the supplier. 225 calculators were sold during June at a price of $6,900 each. Required: i) Prepare the perpetual inventory record for Hi-Tech to determine the value of inventory on hand at June 30, 20X9. ii) Calculate the gross profit earned for the quarter. iii) State the journal entries necessary to record the transactions on April 10 & 30 under the: -perpetual inventory system -periodic inventory system Question 3 Van Dyke Copier inventory data for the year ended December 31, 2008 is as follow: Sales Revenue $50,000 Cost of Goods Sold: Beginning Inventory.. $ 4,200 Net Purchases 27,400 Cost of Goods Available 31,600 Ending Inventory (4,600) 27,000 Gross Profit $23,000 a) Assume that ending inventory was accidentally overstated by $1,000. What are the correct amounts for cost of goods sold and gross profit? b) How would the inventory error affect cost of goods sold and gross profit for the year ended December 31, 2009? Question 4 Shepard Company sold 2,000 units of its product at $108 per unit in 2008 and incurred operating expenses of $14 per unit in selling the units. It began the year with 840 units in inventory and made successive purchases of its product as follows: - 3 -

4 January 2 Beginning Inventory $58 per unit April 2 Purchase $59 per unit June 14 Purchase $61 per unit August 29 Purchase $64 per unit November 18 Purchase $65 per unit Total 3,540 units Shepard Company uses a periodic inventory system. i) Determine the ending inventory and cost of goods sold amounts for the December financial statement under the FIFO, LIFO and average-cost methods. ii) Prepare comparative income statements for the three inventory costing methods. iii) How would the financial results from using the three alternative inventory costing methods change if Shepard had been experiencing decreasing prices in its purchases of inventory? Question 5 The ordering of material KL has caused concern in the past according to the chief accountant. There have been occasions when an excessive amount of stock has been carried beyond any possible demand and when the problem was addressed and the stock level cut, orders have been unfulfilled and sales lost because the company has run out of material KL. The chief accountant has said he wants a policy that achieves the following aims. Adequate stock of material KL so as to minimize the risk of shortage and production dislocation. This should be balanced with the avoidance of excessive stock levels of material KL and the consequent tying up of scarce resources. You are given the following information: i) Budgeted average demand for material KL is 400 kilos per week and production is maintained for 50 weeks in the year. ii) The ordering cost is $150 per order iii) The standard material cost of KL is $6 per kilo and carrying costs are 33 ⅓% of that figure per annum, for each kilo iv) The maximum usage in any one-week is 600 kilos and the minimum 400 kilos. On average, the order takes anything from one to three weeks to be delivered after they have been placed. Required: In order to meet the chief accountant s objectives, determine the following a) The optimum order quantity that should be placed b) The reorder level for stock KL c) The minimum level of stock that should be held d) The maximum level of stock that should be held

5 Practice Questions (The following questions are to be used for self study sessions) 1. Which of the statements is generally true when prices are rising? a) LIFO produces taxable income that exceeds taxable income of FIFO. b) FIFO results in less tax than LIFO. c) The use of LIFO will result in less tax than FIFO. d) Managers will use LIFO if they want to maximize income reported to shareholders. 2. In a periodic inventory system, the quantity of ending inventory is determined by: a) Subtracting units sold from units purchased b) A physical inventory count c) Looking at the balance in the inventory account d) Subtracting COGS from the beginning inventory balance 3. Which of the following statements is true about a company making an accounting change in its financial statements? a) It is generally entitled to make one accounting change per year. b) It must disclose the effect of the change on net income. c) Companies can never make accounting changes because of the consistency principle. d) It must petition the Financial Accounting Standards Board for permission to make the change. 4. The following data are for the Daisy s Florist shop for the first seven months of its fiscal year: Beginning inventory $53,500 Purchases $75,500 Net sales revenue $93,700 Normal gross profit percent 30% What is the estimated inventory on hand as determined by the gross profit method? a) $63,410 b) $65,590 c) $100,890 d) $28, Two separate errors affected Computer Sales in The beginning inventory was understated by $28,000 and the ending inventory was understated by $43,000. Net income in 2006 will be: a) Overstated by $15,000 b) Overstated by $43,000 c) Understated by $43,000 d) Understated by $71,

6 6. Given the following data, what is the average cost of ending inventory rounded to the nearest whole dollar? Sales revenue 100 units at $10 per unit Beginning inventory 50 units at $8 per unit Purchases 90 units at $9 per unit a) $400 b) $360 c) $1,210 d) $ If a company uses a perpetual inventory system, which of the following entry or entries are required to record the sale of merchandise on credit? a) Dr. Accounts Receivable and Cr. Sales revenue b) Dr. COGS and Cr. Purchases c) Dr. COGS and Cr. Inventory d) Both A and C are necessary entries 8. Which International Accounting Standard prescribes the treatment for inventories? a) IAS 2 b) IAS 7 c) IAS 16 d) IAS If the EOQ for laptops at Computer Boutique is 40 units and the annual demand is 2000 models with an ordering cost per model of $5. What is the carrying cost per unit? a) $1600 b) $12.50 c) $0.08 d) $20, LIFO tends to decrease taxes when: a) Costs are declining b) Costs are increasing c) Costs are constant d) LIFO will always yield the lowest possible taxes - 6 -