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Golden Eagle Company began operations in 2016 by selling a single product. Data on purchases and sales for the year were as follows: On January 4, 2017, the president of the company, Connie Kilmer, asked for your advice on costing the 32,000-unit physical inventory that was taken on December 31, 2016. Moreover, since the firm plans to expand its product line, she asked for your advice on the use of a perpetual inventory system in the future. 1. Determine the cost of the December 31, 2016, inventory under the periodic system, using the (a) first-in, first-out method, (b) last-in, first-out method, and (c) weighted average cost method. 2. Determine the gross profit for the year under each of the three methods in (1). 3. a. Explain varying viewpoints why each of the three inventory costing methods may best reflect the results of operations for 2016. b. Which of the three inventory costing methods may best reflect the replacement cost of the inventory on the balance sheet as of December 31, 2016? c. Which inventory costing method would you choose to use for income tax purposes? Why? d. Discuss the advantages and disadvantages of using a perpetual inventory system. From the data presented in this case, is there any indication of the adequacy of inventory levels during the year?

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Financial Accounting

14th Edition
Carl Warren + 2 others
Publisher: Cengage Learning
ISBN: 9781305088436

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BuyFindarrow_forward

Financial Accounting

14th Edition
Carl Warren + 2 others
Publisher: Cengage Learning
ISBN: 9781305088436
Chapter 7, Problem 3CP
Textbook Problem
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Golden Eagle Company began operations in 2016 by selling a single product. Data on purchases and sales for the year were as follows:

Chapter 7, Problem 3CP, Golden Eagle Company began operations in 2016 by selling a single product. Data on purchases and

On January 4, 2017, the president of the company, Connie Kilmer, asked for your advice on costing the 32,000-unit physical inventory that was taken on December 31, 2016. Moreover, since the firm plans to expand its product line, she asked for your advice on the use of a perpetual inventory system in the future.

  1. 1. Determine the cost of the December 31, 2016, inventory under the periodic system, using the (a) first-in, first-out method, (b) last-in, first-out method, and (c) weighted average cost method.
  2. 2. Determine the gross profit for the year under each of the three methods in (1).
  3. 3. a. Explain varying viewpoints why each of the three inventory costing methods may best reflect the results of operations for 2016.

b. Which of the three inventory costing methods may best reflect the replacement cost of the inventory on the balance sheet as of December 31, 2016?

c. Which inventory costing method would you choose to use for income tax purposes? Why?

d. Discuss the advantages and disadvantages of using a perpetual inventory system. From the data presented in this case, is there any indication of the adequacy of inventory levels during the year?

(1) a.

To determine

Periodic Inventory System: Periodic inventory system is a system, in which the inventory is updated in the accounting records on a periodic basis such as at the end of each month, quarter or year. In other words, it is an accounting method which is used to determine the amount of inventory at the end of each accounting period.

First-in-First-Out: In First-in-First-Out method, the costs of the initially purchased items are considered as cost of goods sold, for the items which are sold first. The value of the ending inventory consists of the recent purchased items.

Calculate the cost of inventory on December 31, 2016 using first in first out method under periodic inventory system.

Explanation of Solution

Calculate the cost of ending inventory as follows:

DetailsUnitsUnit PriceTotal
(A)(B)(A) × (B)
December 108,00048384,000
November 48,00044...

b.

To determine

Calculate the cost of inventory on December 31, 2016 using last in first out method under periodic inventory system.

c.

To determine

Calculate the cost of inventory on December 31, 2016 using weighted-average cost method under periodic inventory system.

2.

To determine

Calculate the gross profit for the year under all the three methods.

(3) a.

To determine

Explain the reason for each of the three inventory costing methods might best reflect the results of operations for 2016.

b.

To determine

Find the three inventory costing methods that may best reflect the replacement cost of the inventory on the balance sheet as of December 31, 2016.

c.

To determine

Explain the inventory costing that would be used for income tax purposes.

d.

To determine

Discuss the advantages and disadvantages of using a perpetual inventory system.

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Chapter 7 Solutions

Financial Accounting
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