Financial Accounting
9th Edition
ISBN: 9781259738692
Author: Libby
Publisher: MCG
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Textbook Question
Chapter 7, Problem 7.6P
Evaluating the Income Statement and
Jaffa Company prepared its annual financial statements dated December 31 of the current year. The company applies the FIFO inventory costing method: however, the company neglected to apply LCM to the ending inventory. The preliminary current year income statement follows:
| Sales revenue | $300,000 | |
| Cost of goods sold | ||
| Beginning inventory | $ 33,000 | |
| Purchases | 184,000 | |
| Goods available for sale | 217,000 | |
| Ending inventory (FIFO cost) | 50,450 | |
| Cost of goods sold | 166,550 | |
| Gross profit | 133,450 | |
| Operating expenses | 62,000 | |
| Pretax income | 71,450 | |
| Income tax expense (30%) | 21,435 | |
| Net income | $ 50,015 |
Assume that you have been asked to restate the current year financial statements to incorporate LCM. You have developed the following data relating to the current year ending inventory:
| Acquisition Cost | Net Realizable Value | |||
| Item | Quantity | Unit | Total | (Market) |
| A | 3,050 | $3 | $ 9,150 | $4 |
| B | 1,500 | 5.5 | 8,250 | 3.5 |
| C | 7,100 | 1.5 | 10,650 | 3.5 |
| D | 3,200 | 7 | 22,400 | 4 |
| 550,450 | ||||
Required:
- 1. Restate this income statement to reflect LCM valuation of the current year ending inventory. Apply LCM on an item-by-item basis and show computations.
- 2. Compare and explain the LCM effect on each amount that was changed on the income statement in requirement (1).
- 3. What is the conceptual basis for applying LCM to merchandise inventories?
- 4. Thought question: What effect did LCM have on the current year cash flow? What will be the long-term effect on cash flow?
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Chapter 7 Solutions
Financial Accounting
Ch. 7 - Why is inventory an important item to both...Ch. 7 - Prob. 2QCh. 7 - Prob. 3QCh. 7 - Prob. 4QCh. 7 - Prob. 5QCh. 7 - The chapter discussed tour inventory costing...Ch. 7 - Prob. 7QCh. 7 - Contrast the effects of LIFO versus FIFO on...Ch. 7 - Contrast the income statement effect of LIFO...Ch. 7 - Prob. 10Q
Ch. 7 - Explain briefly the application of the LCM concept...Ch. 7 - Prob. 12QCh. 7 - Consider the following information: ending...Ch. 7 - The inventory costing method selected by a company...Ch. 7 - Which of the following is not a component of the...Ch. 7 - Consider the following information: beginning...Ch. 7 - Consider the following information: beginning...Ch. 7 - An increasing inventory turnover ratio a....Ch. 7 - If the ending balance in accounts payable...Ch. 7 - Which of the following regarding the lower of cost...Ch. 7 - Which inventory method provides a better matching...Ch. 7 - Which of the following is false regarding a...Ch. 7 - Prob. 7.1MECh. 7 - Recording the Cost of Purchases for a Merchandiser...Ch. 7 - Identifying the Cost of Inventories for a...Ch. 7 - Inferring Purchases Using the Cost of Goods Sold...Ch. 7 - Prob. 7.5MECh. 7 - Matching Inventory Costing Method Choices to...Ch. 7 - Reporting Inventory under Lower of Cost or Market...Ch. 7 - Determining the Effects of Inventory Management...Ch. 7 - Prob. 7.9MECh. 7 - Prob. 7.1ECh. 7 - Inferring Missing Amounts Based on Income...Ch. 7 - Prob. 7.3ECh. 7 - Inferring Merchandise Purchases Abercrombie and...Ch. 7 - Calculating Ending Inventory and Cost of Goods...Ch. 7 - Calculating Ending Inventory and Cost of Goods...Ch. 7 - Analyzing and Interpreting the Financial Statement...Ch. 7 - Analyzing and Interpreting the Financial Statement...Ch. 7 - Evaluating the Choice among Three Alternative...Ch. 7 - Evaluating the Choice among Three Alternative...Ch. 7 - Prob. 7.11ECh. 7 - Reporting Inventory at Lower of Cost or Market...Ch. 7 - Prob. 7.13ECh. 7 - Prob. 7.14ECh. 7 - Prob. 7.15ECh. 7 - Prob. 7.16ECh. 7 - Prob. 7.17ECh. 7 - Prob. 7.18ECh. 7 - Prob. 7.19ECh. 7 - Prob. 7.20ECh. 7 - (Chapter Supplement A) Analyzing the Effects of a...Ch. 7 - (Chapter Supplement B) FIFO and LIFO Cost of Goods...Ch. 7 - (Chapter Supplement C) Recording Sales and...Ch. 7 - Analyzing Items to Be Included in Inventory Travis...Ch. 7 - Prob. 7.2PCh. 7 - Evaluating Four Alternative Inventory Methods...Ch. 7 - Prob. 7.4PCh. 7 - Evaluating the LIFO and FIFO Choice When Costs Are...Ch. 7 - Evaluating the Income Statement and Cash Flow...Ch. 7 - Evaluating the Effects of Manufacturing Changes on...Ch. 7 - Evaluating the Choice between LIFO and FIFO Based...Ch. 7 - Prob. 7.9PCh. 7 - (Chapter Supplement A) Analyzing LIFO and FIFO...Ch. 7 - Prob. 7.1APCh. 7 - Evaluating Four Alternative Inventory Methods...Ch. 7 - Evaluating the UFO and FIFO Choice When Costs Are...Ch. 7 - Prob. 7.4APCh. 7 - Prob. 7.1CONCh. 7 - Finding Financial Information Refer to the...Ch. 7 - Finding Financial Information Refer to the...Ch. 7 - Comparing Companies within an Industry Refer to...Ch. 7 - Prob. 7.4CPCh. 7 - Using Financial Reports: Interpreting Effects of...Ch. 7 - Making a Decision as a Financial Analyst: Analysis...Ch. 7 - Evaluating an Ethical Dilemma: Earnings, Inventory...
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