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CW 3 Solution

The document describes inventory calculations using average cost and FIFO costing methods for Acme company. It provides beginning inventory, purchases, sales, and ending inventory figures. Calculations are shown for determining cost of goods sold and ending inventory value under each method. A second section discusses the effects of an understated ending inventory error on various financial statement line items in subsequent periods. It defines key terms and indicates whether items would be understated, overstated, or unaffected. The third section calculates inventory turnover ratio for Delta Company. The fourth section provides multiple inventory purchases and a sale, and calculates cost of goods sold using FIFO costing for a periodic inventory system.

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66 views

CW 3 Solution

The document describes inventory calculations using average cost and FIFO costing methods for Acme company. It provides beginning inventory, purchases, sales, and ending inventory figures. Calculations are shown for determining cost of goods sold and ending inventory value under each method. A second section discusses the effects of an understated ending inventory error on various financial statement line items in subsequent periods. It defines key terms and indicates whether items would be understated, overstated, or unaffected. The third section calculates inventory turnover ratio for Delta Company. The fourth section provides multiple inventory purchases and a sale, and calculates cost of goods sold using FIFO costing for a periodic inventory system.

Uploaded by

Mtl Andy
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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1. Acme has the following information about its inventory.

Units Unit Cost Balance


Beginning inventory- 120 $ 3.00 120 units
May 1
Purchase- May 2 280 2.80 400 units
Sold units – May 15 300 100 units
Purchase – May 20 450 2.20 550 units

Using a perpetual inventory system, calculate the costs to be assigned to the ending
inventory and to goods sold under:
a. Average cost
b. FIFO

Average Cost Method:


Purchases Cost of Goods Balance
Sold
Beginning inventory- 120 @ $3.00 $360
May 1 $360 (120 @ $3.00)
Purchase- May 2 280 @ $2.80 $1,144
$784 (400@$2.86)
Sold units – May 15 $858 $286
(300@ $2.86) (100 @ $2.86)
Purchase – May 20 450 @ $2.20 $1,276
$990 (550@$2.32)

Cost of Ending Inventory using the Average costing method is $1,276


Cost of Goods Sold using the Average costing method is $858

FIFO:
Purchases Cost of Goods Balance
Sold
Beginning inventory- 120 @ $3.00 = 120 @ $3.00 $360
May 1 $360
Purchase- May 2 (280 @ $2.80) = 120 @ $3.00 $360
$784 280 @ $2.80 $784
$1,144
Sold units – May 15 120 @ $3.00 = 100 @ $2.80 $280
$360
180 @ $2.80 =
=$504
Purchase – May 20 450 @ $2.20 = 100 @ $2.80 $280
$990 450 @ $2.20 $990
$1,270

Cost of Ending Inventory using the FIFO costing method is $1,270


Cost of Goods Sold using the FIFO costing method is $864
2. Paddy Company, which uses a perpetual inventory system, miscounted its ending
inventory in Year 1, causing it to be understated. The error was not detected. Using the
symbols U, O, and NE to represent understated, overstated, and no effect, indicate the
impact of the error on each of the following items.
Item Effect
Year 1 cost of goods sold
Year 1 gross profit
Year 1 ending shareholders’ equity
Year 2 cost of goods sold
Year 2 net income

Item Effect
Year 1 cost of goods sold O
Year 1 gross profit U
Year 1 ending shareholders’ equity U
Year 2 cost of goods sold U
Year 2 net income O

3. Given the following information for Delta Company, calculate the inventory turnover ratio:

Cost of Goods Sold $945,230


Opening Inventory $278,560
Ending Inventory $303,457

= $945,230 ÷ (($278,560+$303,457) ÷ 2) = $945,230 ÷ $291,008.5 = 3.25 times

4. A company just starting business made the following four inventory purchases in August:
August 1 300 units $1,560
August 12 400 units 2,340
August 24 400 units 2,520
August 30 300 units 1,980
1,400 units $8,400

On August 24, there were a total of 900 units sold. Using the FIFO inventory cost method
for a periodic inventory system, what is the amount allocated to cost of goods sold for
August?

August 1 300 units cost $1,560


August 12 400 units cost $2,340
August 24 200 units cost (2,520/400) = $6.3 per unit x 200 = $1,260

Total cost of goods sold = $1,560 + $2,340 + $1,260 = $5,160

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