PE 7-2B Perpetual inventory using FIFO

Beginning inventory, purchases, and sales for Item CSW15 are as follows:

           Mar. 1           Inventory             100 units at $15
                   7            Sale                     88 units
                  15           Purchase              125 units at $18
                  24           Sale                      75 units
Assuming a perpetual inventory system and using the first-in, first-out (FIFO) method, determine (a) the cost of merchandise sold on March 24 and (b) the inventory on March 31.

Answer:
a. Cost of merchandise sold (March 24):
          12 units @ $15                     $ 180
          63 units @ $18                     1,134
          75                                      $1,314

b. Inventory, March 31: $1,116 = 62 units × $18

PE 7-2A Perpetual inventory using FIFO

Beginning inventory, purchases, and sales for Item B901 are as follows:

              Aug. 1             Inventory          50 units at $80
                      9              Sale                  30 units
                     13             Purchase          40 units at $85
                     28             Sale                   25 units
Assuming a perpetual inventory system and using the first-in, first-out (FIFO) method, determine (a) the cost of merchandise sold on August 28 and (b) the inventory on August 31.

Answer:
a. Cost of merchandise sold (August 28):
          20 units @ $80             $1,600
            5 units @ $85                  425
          25                                $2,025

b. Inventory, August 31: $2,975 = 35 units × $85

PE 7-1B Cost flow methods

Three identical units of Item ZE9 are purchased during April, as shown below.

                         Item JC07       Units          Cost
Apr. 2                Purchase            1              $10
      12                Purchase            1                12
      23                Purchase            1                14
     Total                                       3               $36
Average cost per unit                                     $12 ($36 ÷ 3 units)

Assume that one unit is sold on April 27 for $29.
Determine the gross profit for April and ending inventory on April 30 using the
(a) first-in, first-out (FIFO); (b) last-in, first-out (LIFO); and (c) average cost methods.

Answer:
                                                 Gross Profit               Ending Inventory
                                                       July                               July 31
a. First-in, first-out (FIFO)        $19 ($29 – $10)               $26 ($12 + $14)
b. Last-in, first-out (LIFO)        $15 ($29 – $14)               $22 ($10 + $12)
c. Average cost                         $17 ($29 – $12)                 $24 ($12 × 2)

PE 7-1A Cost flow methods

Three identical units of Item K113 are purchased during July, as shown below.
                         Item JC07       Units          Cost
July 9                 Purchase           1              $160
      17                Purchase           1                168
      26                Purchase           1                176
    Total                                       3              $504
Average cost per unit                                   $168 ($504 ÷ 3 units)

Assume that one unit is sold on July 31 for $225.
Determine the gross profit for July and ending inventory on July 31 using the
(a) first-in, first-out (FIFO); (b) last-in, first-out (LIFO); and (c) average cost methods.

Answer:
                                                 Gross Profit               Ending Inventory
                                                       July                               July 31
a. First-in, first-out (FIFO)      $65 ($225 – $160)           $344 ($168 + $176)
b. Last-in, first-out (LIFO)      $49 ($225 – $176)           $328 ($160 + $168)
c. Average cost                        $57 ($225 – $168)          $336 ($168 × 2)

PE 6-7B Ratio of net sales to assets

The following financial Statement data for years ending December 31 for Beading Company
are shown below.
                                                                        2012               2011
                      Net sales                                $675,000          $475,000
                      Total assets:
                              Beginning of year            200,000            180,000
                              End of year                     250,000            200,000
a. Determine the ratio of net sales to assets for 2012 and 2011.
b. Does the change in the ratio of net sales to assets from 2011 to 2012 indicate a favorable or an unfavorable trend?

Answer:
a.                                                                        2012                   2011
           Ratio of net sales to assets                         3.0*                   2.5**
           *$675,000/[($200,000 + $250,000)/2]
           **$475,000/[($180,000 + $200,000)/2]

b. The change from 2.5 to 3.0 indicates a favorable trend in using assets to generate sales.

PE 6-7A Ratio of net sales to assets

The following financial statement data for years ending December 31 for Foodworks
Company are shown below.
                                                            2012              2011
              Net sales                             $880,000        $787,500
              Total assets:
                   Beginning of year            500,000          375,000
                   End of year                     600,000          500,000
a. Determine the ratio of net sales to assets for 2012 and 2011.
b. Does the change in the ratio of net sales to assets from 2011 to 2012 indicate a favorable
or an unfavorable trend?

Answer:
a.                                                                        2012                2011
               Ratio of net sales to assets                     1.6*                1.8**
               *$880,000/[($500,000 + $600,000)/2]
               **$787,500/[($375,000 + $500,000)/2]

b. The change from 1.8 to 1.6 indicates an unfavorable trend in using assets to
generate sales.

PE 6-6B Inventory shrinkage

Zurich Company’s perpetual inventory records indicate that $1,380,000 of merchandise
should be on hand on August 31, 2012. The physical inventory indicates that $1,315,900
of merchandise is actually on hand. Journalize the adjusting entry for the inventory shrinkage
for Zurich Company for the year ended August 31, 2012. Assume that the inventory
shrinkage is a normal amount.

Answer:
Aug. 31 Cost of Merchandise Sold........................................ 64,100
                                 Merchandise Inventory ....................................... 64,100
                                       Inventory shrinkage
                                      ($1,380,000 – $1,315,900).