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Accounting (Text Only)

26th Edition
Carl Warren + 2 others
ISBN: 9781285743615

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Accounting (Text Only)

26th Edition
Carl Warren + 2 others
ISBN: 9781285743615
Textbook Problem
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Costing inventory

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 7.3CP, Costing inventory Golden Eagle Company began operations in 2016 by selling a single product. Data on

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. 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.

Last-in-Last-Out:

In Last-in-First-Out method, the costs of last purchased items are considered as the cost of goods sold, for the items which are sold first. The value of the closing stock consists of the initial purchased items.

Weighted-average cost method:

Under Weighted average cost method, the company calculates a new average cost after every purchase is made. It is determined by dividing the cost of goods available for sale by the units on hand.

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

Explanation

Calculate the cost of ending inventory as follows:

Details Units Unit Price Total
(A) (B) (A) × (B)
December 10 8,000 48 384,000
November 4 8,000 44...

b.

To determine

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

c.

To determine

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

2.

To determine

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

(3) a.

To determine

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

b.

To determine

To 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

To Explain: The inventory costing that would be used for income tax purposes.

d.

To determine

To Discuss: The advantages and disadvantages of using a perpetual inventory system.

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