Fundamentals Of Financial Accounting
Fundamentals Of Financial Accounting
6th Edition
ISBN: 9781259864230
Author: PHILLIPS, Fred, Libby, Robert, Patricia A.
Publisher: Mcgraw-hill Education,
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Chapter 7, Problem 6E

Requirement 1.

To determine

The cost of goods available for sale.

Requirement 1.

Expert Solution
Check Mark

Explanation of Solution

Determine cost of goods available for sale.

Date Particulars Units ($) Unit cost ($) Total cost ($)
(a) (b) (c = a × b)
a. Beginning inventory 300 12 3,600
b. Purchased 900 10 9,000
c. Purchased 800 13 10,400
  Total 2,000 $23,000

Table (1)

Conclusion

Therefore, the cost of goods sold available for sale for 2,000 units of inventory is $23,000.

Requirement 2.

To determine

To Calculate: The number of units in ending inventory.

Requirement 2.

Expert Solution
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Explanation of Solution

Number of units in ending inventory:

Number of units inending inventory} = (Total units available for sale Total units of sales)=(2,000900)=1,100 units

Conclusion

Therefore, the number of units in ending inventory is 1,100units.

Requirement 3.(a)

To determine

To Calculate: The cost ending inventory and the cost of goods sold under FIFO.

Requirement 3.(a)

Expert Solution
Check Mark

Explanation of Solution

In First-in-First-Out method, the cost of initial purchased items is sold first. The value of the ending inventory consists the recent purchased items.

Calculate ending inventory and cost of goods sold under FIFO method.

Determine the amount of cost of goods sold.

Date Particulars Units Unit cost ($) Total cost ($)
  (a) (b) (c = a × b)
a. Beginning inventory 300 12 3,600
b. Purchased 600 10 6,000
  Cost of goods sold 900 $9,600

Table (2)

Determine ending inventory under FIFO method.

Date Particulars Units Unit cost ($) Total cost ($)
  (a) (b) (c = a × b)
b. Purchased 300 10 3,000
c. Purchased 800 13 10,400
  Ending inventory 1,100   $13,400

Table (3)

Conclusion

Hence, the cost of goods sold under FIFO is $9,600 and the value of ending inventory is $13,400.

Requirement 3.(b)

To determine

To Calculate: The cost ending inventory and the cost of goods sold under LIFO.

Requirement 3.(b)

Expert Solution
Check Mark

Explanation of Solution

In Last-in-First-Out method, the cost of last purchased items is sold first. The value of the closing stock consists the initial purchased items.

Determine the amount of cost of goods sold.

Date Particulars Units Unit cost ($) Total cost ($)
  (a) (b) (c = a × b)
c. Purchased 800 13 10,400
b. Purchased 100 10 1,000
  Cost of goods sold 900   $11,400

Table (4)

Determine ending inventory under LIFO method.

Date Particulars Units Unit cost ($) Total cost ($)
  (a) (b) (c = a × b)
a. Beginning inventory 300 12 3,600
b. Purchased 800 10 8,000
  Ending inventory 1,100   $11,600

Table (5)

Conclusion

Hence, the cost of goods sold under LIFO is $11,400 and the value of ending inventory is $11,600.

Requirement 3.(c)

To determine

The ending inventory and the cost of goods sold under average-cost method.

Requirement 3.(c)

Expert Solution
Check Mark

Explanation of Solution

In Average Cost Method the cost of inventory is priced at the average rate of the goods available for sale. Following is the mathematical representation:

Weighted-average Cost=Total Cost of Goods Available For SaleTotal Number of Units Available For Sale

Determine cost of ending inventory under average-cost method.

Date Particulars Units Unit cost ($) Total cost ($)
  (a) (b) (c = a × b)
a. Beginning inventory 300 12 3,600
b. Purchased 900 10 9,000
c. Purchased 800 13 10,400
  Cost of goods available for sale 2,000   23,000
  Less: Ending inventory 1,100 11.5 12,650
  Cost of goods sold   $10,350

Table (6)

Determine cost of goods sold under average cost method.

Cost of goods sold = (Number of units sold×Weighted average unit cost)=(900×$11.5)=$10,350

Working note:

Determine weighted average unit cost.

Weightedaverageunitcost}=(Costofgoodsavailableforsale)(Totalunitsavailableforsales)=$23,0002,000=$11.5per unit

Conclusion

Hence, the cost of goods sold under weighted average cost method is $10,350 and the value of ending inventory is $12,650.

Requirement 4.

To determine

To Prepare: An income statement.

Requirement 4.

Expert Solution
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Explanation of Solution

Particulars FIFO LIFO Weighted Average
Sales Revenue 36,000 36,000 36,000
Cost of Goods Sold   9,600 11,400 10,350
Gross Profit 26,400 24,600 25,650
Operating Expenses 19,500 19,500 19,500
Income from Operations $6,900 $5,100 $6,150

Table (7)

Working Note:

Calculate the amount of sales revenue:

Sales revenue=[(Number of units sold on May 1 ×Sales per unit ) +( Number of units sold on July 3 ×Sales per unit )]= [(300×$40) +(600×$40)]= [$12,000 +$24,000]=$36,000

Conclusion

Therefore, the income from operation for FIFO is $6,900, LIFO is $5,100 and weighted average method is $6,150.

Requirement 5.

To determine

To Compare: The income from operations and ending inventory amount reported in three methods.

Requirement 5.

Expert Solution
Check Mark

Explanation of Solution

Comparison of Amounts  
Particulars FIFO LIFO Weighted Average
       
Income from Operations   6,900 5,100  6,150
Ending Inventory   13,400   11,600   12,650

Table (8)

To determine

To Explain: The similarities and differences.

Expert Solution
Check Mark

Explanation of Solution

  • From the above table, it clearly shows the income from operation under three methods.
  • The differences in inventory have a dollar–for–dollar effect on Income from operations. 
  • The method with the highest ending inventory always has the highest Income from operations.
  • In most cases, the weighted average method falls between the FIFO and LIFO methods. 

Requirement 6.

To determine

Themethod of inventory costing minimizes income taxes.

Requirement 6.

Expert Solution
Check Mark

Explanation of Solution

  • By comparing the three inventory method, it is found that the use of LIFO method will minimizes the income taxes because it reports less taxable income as a result of using higher unit costs (in this case) to calculate cost of goods sold.
  • A higher Cost of Goods Sold means less Income from Operations. Therefore it reduce tax amount.

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Chapter 7 Solutions

Fundamentals Of Financial Accounting

Ch. 7 - You work for a made-to-order clothing company,...Ch. 7 - Prob. 12QCh. 7 - (Supplement 7B) Explain why an error in ending...Ch. 7 - Which of the following statements are true...Ch. 7 - The inventory costing method selected by a company...Ch. 7 - Which of the following is not a name for a...Ch. 7 - Which of the following correctly expresses the...Ch. 7 - A New York bridal dress designer that makes...Ch. 7 - If costs are rising, which of the following will...Ch. 7 - Which inventory method provides a better matching...Ch. 7 - Which of the following regarding the lower of cost...Ch. 7 - An increasing inventory turnover ratio a....Ch. 7 - In which of the following situations is an LCM/NRV...Ch. 7 - Matching Inventory Items to Type of Business Match...Ch. 7 - Reporting Goods in Transit Abercrombie Fitch Co....Ch. 7 - Prob. 3MECh. 7 - Reporting Inventory-Related Accounts in the...Ch. 7 - Matching Financial Statement Effects to Inventory...Ch. 7 - Matching Inventory Costing Method Choices to...Ch. 7 - Calculating Cost of Goods Available for Sale,...Ch. 7 - Calculating Cost of Goods Available for Sale,...Ch. 7 - Calculating Cost of Goods Available for Sale,...Ch. 7 - Prob. 10MECh. 7 - Calculating Cost of Goods Available for Sale, Cost...Ch. 7 - Calculating Cost of Goods Available for Sale, Cost...Ch. 7 - Calculating Cost of Goods Available for Sale, Cost...Ch. 7 - Reporting Inventory under Lower of Cost or...Ch. 7 - Preparing the Journal Entry to Record Lower of...Ch. 7 - Determining the Effects of Inventory Management...Ch. 7 - Interpreting LCM Financial Statement Note...Ch. 7 - Calculating the Inventory Turnover Ratio and Days...Ch. 7 - Prob. 19MECh. 7 - Prob. 20MECh. 7 - Prob. 21MECh. 7 - (Supplement 7A) Calculating Cost of Goods Sold and...Ch. 7 - (Supplement 7B) Determining the Financial...Ch. 7 - Prob. 24MECh. 7 - Reporting Goods in Transit and Consignment...Ch. 7 - Determining the Correct Inventory Balance Seemore...Ch. 7 - Determining the Correct Inventory Balance Seemore...Ch. 7 - Calculating Cost of Ending Inventory and Cost of...Ch. 7 - Calculating Cost of Ending Inventory and Cost of...Ch. 7 - Prob. 6ECh. 7 - Analyzing and Interpreting the Financial Statement...Ch. 7 - Evaluating the Effects of Inventory Methods on...Ch. 7 - Choosing LIFO versus FIFO When Costs Are Rising...Ch. 7 - Using FIFO for Multiproduct Inventory Transactions...Ch. 7 - Reporting Inventory at Lower of Cost or Market/Net...Ch. 7 - Reporting Inventory at Lower of Cost or Market/Net...Ch. 7 - Analyzing and Interpreting the Inventory Turnover...Ch. 7 - Analyzing and Interpreting the Effects of the...Ch. 7 - Prob. 15ECh. 7 - Analyzing and Interpreting the Financial Statement...Ch. 7 - Prob. 17ECh. 7 - Analyzing the Effects of Four Alternative...Ch. 7 - Evaluating the Income Statement and Income Tax...Ch. 7 - Calculating and Interpreting the Inventory...Ch. 7 - Prob. 4CPCh. 7 - (Supplement 7B) Analyzing and Interpreting the...Ch. 7 - Analyzing the Effects of Four Alternative...Ch. 7 - Evaluating the Income Statement and Income Tax...Ch. 7 - Prob. 3PACh. 7 - Prob. 4PACh. 7 - (Supplement 7B) Analyzing and Interpreting the...Ch. 7 - Prob. 1PBCh. 7 - Prob. 2PBCh. 7 - Prob. 3PBCh. 7 - Prob. 4PBCh. 7 - (Supplement 7B) Analyzing and Interpreting the...Ch. 7 - Prob. 1COPCh. 7 - (Supplement 7A) Recording Inventory Transactions,...Ch. 7 - (Supplement 7A) Recording Inventory Purchases,...Ch. 7 - (Supplement 7A) Recording Inventory Purchases,...Ch. 7 - Prob. 5COPCh. 7 - Prob. 6COPCh. 7 - Prob. 7COPCh. 7 - Prob. 8COPCh. 7 - Prob. 9COPCh. 7 - Prob. 10COPCh. 7 - Prob. 11COPCh. 7 - Prob. 12COPCh. 7 - Prob. 1SDCCh. 7 - Prob. 2SDCCh. 7 - Critical Thinking: Income Manipulation under the...Ch. 7 - Accounting for Changing Inventory Costs In...
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