Excel Applications for Accounting Principles
4th Edition
ISBN: 9781111581565
Author: Gaylord N. Smith
Publisher: Cengage Learning
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Textbook Question
Chapter 7, Problem 4R
Del Rio began Rio Enterprises on January 1 with 200 units of inventory. During the year, 500 additional units were purchased, 500 units were sold, and Del ended the year with 200 units. Del is very satisfied with his first year of business although the cost of replacing his inventory rose continually throughout the year. The 500 units sold for a total of $320,000 and the 500 units purchased to replace them cost $256,000, so his cash account has increased by $64,000. Del is concerned however because he has three obligations yet to meet: taxes, dividends, and his wife. Federal and state income taxes will take 40% of his income. His investors are to receive dividends equal to half of any income after taxes are paid. And finally, Del promised his wife a big trip to Hawaii if she let him quit his job as a professor and start his own business. He promised her heʼd “make at least $50,000 after taxes. That will give us $25,000 after paying off the investors.”
Del kept fairly good records during the year and knows the specific cost of each inventory unit sold. He has prepared the following table to summarize his purchases and sales.
Examine your completed worksheet and answer the following questions:
- a. Which inventory cost flow assumption produces the most net income?
- b. Which inventory cost flow assumption produces the least net income?
- c. What caused the difference between your answers to a and b?
- d. Which inventory cost flow assumption produces the highest ending cash balance?
- e. Which inventory cost flow assumption produces the lowest ending cash balance?
- f. Does the assumption that produces the highest net income also produce the highest cash balance? Explain.
- g. As you recall, Del originally used the specific identification method in his initial calculations when he projected $51,600 net income. According to Delʼs reckoning, that should have left him cash of $25,800 (50% of $51,600) after paying his investors. Why would he only have $3,800 left? Explain.
- h. Which inventory cost flow assumption would you suggest Del use? Explain.
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Chapter 7 Solutions
Excel Applications for Accounting Principles
Ch. 7 - Del Rio began Rio Enterprises on January 1 with...Ch. 7 - Del Rio began Rio Enterprises on January 1 with...Ch. 7 - Prob. 3RCh. 7 - Del Rio began Rio Enterprises on January 1 with...Ch. 7 - What changes would have taken place if Dels...Ch. 7 - Suppose Dels purchase prices had remained...Ch. 7 - Del Rio began Rio Enterprises on January 1 with...Ch. 7 - Reset the November 20 purchase to 150 units,...Ch. 7 - Click the Chart sheet tab. On the screen is a...
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