Chapter 12, Problem 14E

1.

To determine

To identify: the amount deducted by each company on the income statement related to inventory.

Answer to Problem 14E

The amount deducted by the each company on the income statement related to inventory is the amount of the cost of goods sold of each company. The amounts deducted by each company on the income statement are shown below.

	Corporation A	B Unlimited	C Cycles
Cost of goods     sold	$ 175	$ 175	$ 350

Table (1)

Explanation of Solution

The amount deducted by the each company on the income statement related to inventory is the amount of cost of goods sold.

2.

To determine

To identify: the total amount, each company pay out in cash during the period related to inventory purchased with cash and on account.

Explanation of Solution

The total amount, each company pay out in cash during the period related to inventory purchased with cash and on account are shown as below.

	Corporation A	B Unlimited	C Cycles
Cash purchases	$ 200	$     0	$ 200
Payments on     account	0	160	160
Total cash paid	$ 200	$ 160	$ 360

Table (2)

3.

To determine

the difference amount of the requirements 1 and 2 for each company.

Explanation of Solution

The difference amount is determined as follows:

	Corporation A	B Unlimited	C Cycles
Cost of goods     sold	$ 175	$ 175	$ 350
Total cash paid	200	160	360
Difference	$ (25)	$   15	$  (10)

Table (3)

4.

To determine

To identify: the amount of increase (decrease) for each company’s inventory and accounts payable.

Answer to Problem 14E

The amount increased (decreased) by each company’s inventory and accounts payable.

	Corporation A	B Unlimited	C Cycles
Inventory increase	$ 25	$ 25	$ 50
Accounts payable      increase	0	40	40

Table (4)

Explanation of Solution

Calculate the increase (decrease) inventory for each company.

$\begin{array}{l}\begin{array}{l}\hfill \\ \text{Inventory increase = Total inventory – Cost of goods sold}\hfill \end{array}\\ \text{For}\text{Corporation}\text{A}\text{=}\left(\$200+\$0\right)-\$175=\$25\\ \text{For B Unlimited =}\left(\$0+\$200\right)-\$175=\$25\\ \text{For C Cycles}\text{=}\left(\$200+\$200\right)-\$350=\$50\end{array}$

Calculate the increase (decrease) inventory for each company.

$\begin{array}{c}\text{accounts}\text{payable}\text{increase}\text{(decrease)}\text{=}\text{Purchased on account}-\text{payment to suppliers}\\ \text{for}\text{Corporation}\text{A}\text{=}\$0-\$0=\$0\\ \text{for B Unlimited}\text{=}\$200-\$160=\$40\\ \text{for C Cycles}\text{=}\$200-\$160=\$40\end{array}$

5.

To determine

To identify: the amounts that each company added (deduct) from the net income to convert from accrual to cash basis using indirect method of presentation.

Answer to Problem 14E

The amounts added or deducted under indirect method is as follows:

	Corporation A	B Unlimited	C Cycles
Subtract : inventory     increase	$ (25)	$ (25)	$ (50)
Add: accounts    payable increase	0	40	40
Total	$ (25)	$   15	$ (10)

Table (5)

Explanation of Solution

To convert the net income from accrual basis to cash basis under indirect method is as follows:

Adjustments to the net income:

Add: accounts payable increased

Less: increase in inventory

6.

To determine

To describe: the similarities between the requirements 3 and 5. Explain the reasons.

Explanation of Solution

Requirement 3 and 5 for each company should be similar. Because the requirement 3 is to determinethe difference amount of the requirements 1 and 2 for each company that is difference between the cash basis and accrual based amounts by identifying that were recorded during the year.

In the requirement 5 it was toidentify that the amounts each company added (deducted) from the net income to convert from accrual to cash basis using indirect method of presentation. It determines the changes in the year end balances of the accounts affected by the inventory purchases.

Both the requirements are having same goal which is to adjust the net income as per the cash basis. These two are having same goals but different directions to achieve the goal.