Principles of Accounting
12th Edition
ISBN: 9781285607047
Author: NEEDLES
Publisher: Cengage Learning
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Chapter 7, Problem 1C
To determine
Explain the LIFO inventory method and its effect on reported income, cash flows, and income taxes at the time of change in inventory prices.
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The level of inventory a company maintains has important economic consequences, and it involves conflicting goals. The ability to control inventory levels is a critical skill in managing a business.
Three retailing giants, Best Buy Co., Inc. (NYSE: BBY), Amazon.com, Inc., (NASDAQ: AMZN), and Target Corporation (NYSE: TGT) each use a different inventory costing method. Best Buy uses weighted-average cost, Amazon uses FIFO, and Target uses LIFO.
Below is a hypothetical example that highlights the potential differences in income statements and balance sheets that could arise simply because of the use of a different inventory costing method.
Assume that all three retailers sell a popular shirt that retails for $32. To compare the impact of inventory costing method, we will also assume that all three retailers have the following inventory and sales data for the same period. To keep the calculations simple, a “unit” represents one million shirts.
Beginning inventory: 3 units @ $10.00…
Algro Inc. keeps a wide range of parts and materials on hand for use in its production
processes. Management has recently had difficulty managing parts inventory as demand
for its finished goods has increased; they frequently run out of some critical parts while
having an endless supply of others. They would like to classify their parts inventory
according to the ABC approach to better control inventory. The following is a list of
parts, along with their annual usage and unit value:
Item
Annual Unit
Item
Annual
Unit
Number
Usage
Cost
Number
Usage
Cost
1
36
$350
2
510
30
3
50
23
300
45
5
18
1900
6
500
8
7
710
4
8
80
26
9
344
28
10
67
440
11
510
2
12315
682
35
95
50
14
10
3
820
1
KARAN2222222222
16
60
$610
17
120
20
18
270
15
19
45
50
20
19
3200
21
910
3
12
4750
23
30
2710
24
24
1800
25
870
105
26
244
30
27
750
15
28
45
110
29
46
160
30
165
25
a. Classify the inventory items according to the ABC approach using the dollar
value of annual demand.
b. Clearly explain why you classified items…
It’s common in the electronics industry for unit costs of raw materials inventories to decline over time. In this environment, explain the difference between LIFO and FIFO in terms of the effect on cost of goods sold and ending inventory. Assume that inventory quantities remain the same for the period.
Chapter 7 Solutions
Principles of Accounting
Ch. 7 - Prob. 1DQCh. 7 - Which of the following methods do not require a...Ch. 7 - Prob. 3DQCh. 7 - Prob. 4DQCh. 7 - Prob. 5DQCh. 7 - Prob. 6DQCh. 7 - Prob. 7DQCh. 7 - Prob. 1SECh. 7 - Assume the following data with regard to inventory...Ch. 7 - Prob. 3SE
Ch. 7 - Prob. 4SECh. 7 - Prob. 5SECh. 7 - Prob. 6SECh. 7 - Prob. 7SECh. 7 - Prob. 8SECh. 7 - Prob. 9SECh. 7 - Prob. 10SECh. 7 - Prob. 11SECh. 7 - Prob. 12SECh. 7 - Prob. 1EACh. 7 - Prob. 2EACh. 7 - Prob. 3EACh. 7 - Prob. 4EACh. 7 - Prob. 5EACh. 7 - Prob. 6EACh. 7 - During July 2014, Micanopy, Inc., sold 500 units...Ch. 7 - Prob. 8EACh. 7 - Prob. 9EACh. 7 - Prob. 10EACh. 7 - Prob. 11EACh. 7 - Prob. 12EACh. 7 - Midori Company merchandises a single product...Ch. 7 - The inventory of Wood4Fun and data on purchases...Ch. 7 - Prob. 3PCh. 7 - Prob. 4PCh. 7 - Prob. 5PCh. 7 - Prob. 6APCh. 7 - DiPaolos inventory, purchases, and sales for March...Ch. 7 - Prob. 8APCh. 7 - Prob. 9APCh. 7 - Zubac Company is a large retail furniture company...Ch. 7 - Prob. 1CCh. 7 - Prob. 2CCh. 7 - ExxonMobil Corporation had net income of 41.0...Ch. 7 - Prob. 4CCh. 7 - JCPenney, a large retail company with many stores,...
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- The Aztec Company stocks a variety of parts and materi-als it uses in its manufacturing processes. Recently, as de-mand for its finished goods has increased, management has had difficulty managing parts inventory; they fre-quently run out of some crucial parts and seem to have an endless supply of others. In an effort to control inventory more effectively, they would like to classify their inven-tory of parts according to the ABC approach. Following is a list of selected parts and the annual usage and unitvalue for each:Classify the inventory items according to the ABC ap-proach using dollar value of annual demand.arrow_forwardIf the ending inventory of a firm is overstated by $56,000, by how much and in what direction (overstated or understated) will the firm's operating income be misstated? (Hint: Use the cost of goods sold model, enter hypothetically "correct" data, and then reflect the effects of the ending inventory error and determine the effect on cost of goods sold.) Operating income byarrow_forward(Inventoriable Goods and Costs) Clay Mattews, an inventory control specialist, is interested in better understanding the accounting for inventories. Although Clay understands the more sophisticated computer inventory control systems, he has little knowledge of how inventory cost is determined. In studying the records of Strider Enterprises, which sells normal brand-name goods from its own store and on consignment through Chavez Inc., he asks you to answer the following questions.Instructions(a) Should Strider Enterprises include in its inventory normal brand-name goods purchased from its suppliers but not yet received if the terms of purchase are f.o.b. shipping point (manufacturer’s plant)? Why?(b) Should Strider Enterprises include freight-in expenditures as an inventory cost? Why?(c) If Strider Enterprises purchases its goods on terms 2/10, net 30, should the purchases be recorded gross or net? Why?(d) What are products on consignment? How should they be reported in the financial…arrow_forward
- Companies that sell products and goods will have inventory and cost of goods sold accounts. The basic cost of goods sold equation is: Beginning Inventory + Purchases – Ending Inventory = Cost of Goods Sold The ending inventory of one period is the beginning inventory of the next period. Businesses that offer services do not normally sell products as their primary business activity but may sell them to supplement their services. What additional accounts would you expect to find in a manufacturing firm and how do they relate to the cost of goods sold?arrow_forward) Why might a company estimate ending inventory instead of performing a physical count? O The mathematical estimates can determine if inventory has been lost. O The mathematical estimates are more accurate than 'doing inventory. O The mathematical estimates take less time and are all acceptable under GAAP. The mathematical estimates result in greater job security for accounting staff. ?)arrow_forwardLIFO and FIFO are two key inventory reporting options for organizations. For this discussion, discuss the tradeoffs between LIFO and FIFO. Provide examples using companies that utilize each of these strategies. I need 300 words, thanks.arrow_forward
- Assume that the ending inventory of a merchandising firm is overstated by $40,000. a. By how much and in what direction (overstated or understated) will the firms cost of goods be misstated? b. If this error is not corrected, what effect will it have on the subsequent period's operating income? c. If this error is not corrected, what effect will it have on the total operating income of the two periods (the period in which there is an error and the subsequent period) combined?arrow_forwardWhich one of the following inventories may not be valued for balance sheet purposes at the inventory's selling price less distribution costs even if it is above the cost of the inventory? a. grain for an agricultural company b. crude oil for an oil company c. gold for a minnung corporation d. laptops for a computer manaufacturerarrow_forwardYou work for a CPA firm that has been hired by Widget Tek, a merchandising company that is getting ready to expand. The president of Widget Tek is concerned with obtaining a loan for the expansion and wants to be sure that all the financial statements accurately reflect the company’s accounting records. As preparation for this assignment, you have been asked to review the effects of changing prices on three inventory costing methods: LIFO, FIFO, and weighted average. Identify the scenarios and inventory methods that result in the highest and lowest values for each item listed. Enter “Highest”, “Lowest”, or leave the box blank. Cost of Merchandise Sold Ending Merchandise Inventory Net Income LIFO, when prices are rising FIFO, when prices are falling FIFO, when prices are rising Weighted average, when prices are rising Weighted average, when prices are falling LIFO, when prices are fallingarrow_forward
- ST is adistribution company which buys a product in bulk from manufacturers, repackages the product into smaller packs and then sells the packs to retail customers. ST’s customers vary in size and consequently the size and frequency of their orders also varies. Some customers order large quantities from ST each time they place an order. Other customers order only a few packs each time. The current accounting system of ST produces very basic management information that reports only the overall company profit. ST is therefore unaware of the costs of servicing individual customers. However, the company has now decided to investigate the use of Direct Customer Profitability Analysis (DCPA). ST would like to see the results from a small sample of customers before it decides whether to fully introduce DCPA. The information for two customers, and for the whole company, for the previous period was as follows:…arrow_forwardThe management of Milque Corp. is considering the effects of inventory-costing methods on its financial statements and its income tax expense. Assuming that the cost the company pays for inventory is increasing, which method will: (a) (b) (c) Provide the highest net income? Provide the highest ending inventory? Result in the lowest income tax expense? 10arrow_forwardVanity Corporation sells different types of paint. Due to the low demand, it would be testing its inventory for impairment. It acquired the following data: What amount should be reported by Vanity Corporation as loss from inventory write-down?arrow_forward
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