CHAPTER 6

INVENTORY costing

Summary of Questions by STUDY Objectives
and Bloom’s Taxonomy

Note: AN = Analysis AP = Application C = Comprehension

* This topic is dealt with in an Appendix to the chapter.

Summary of Questions by LEVEL OF DIFFICULTy (LOD)

Note: E = Easy M = Medium H=Hard

* This topic is dealt with in an Appendix to the chapter.

CHAPTER STUDY OBJECTIVES

1. Describe the steps in determining inventory quantities. The steps in determining inventory quantities are (1) taking a physical inventory of goods on hand, and (2) determining the ownership of goods in transit, on consignment, and in similar situations.

2. Calculate cost of goods sold and ending inventory in a perpetual inventory system using the specific identification, FIFO, and average methods of cost determination. Costs are allocated to the cost of goods sold account each time a sale occurs in a perpetual inventory system. The cost is determined by specific identification or by one of two cost formulas: FIFO (first-in, first-out) and average.

Specific identification is used for goods that are not ordinarily interchangeable (i.e., they are not identical to one another). This method tracks the actual physical flow of goods, allocating the exact cost of each merchandise item to cost of goods sold and ending inventory.

The FIFO cost formula assumes a first-in, first-out cost flow for sales. Cost of goods sold consists of the cost of the earliest goods purchased. Ending inventory is determined by allocating the cost of the most recent purchases to the units on hand.

The average cost formula is used for goods that are homogeneous or non-distinguishable. Under average, a new weighted (moving) average unit cost is calculated after each purchase and applied to the number of units sold and the number of units remaining in inventory.

3. Explain the financial statement effects of inventory cost determination methods. Specific identification results in the best match of costs and revenues on the income statement. When prices are rising, average results in a higher cost of goods sold and lower profit than FIFO. Average results in a better match on the income statement of more current costs with current revenues than does FIFO. On the balance sheet, FIFO results in an ending inventory that is closest to the current (replacement) value and the best balance sheet valuation. All three methods result in the same cash flow.

4. Determine the financial statement effects of inventory errors. An error in beginning inventory will have a reverse effect on profit in the current year (e.g., an overstatement of beginning inventory results in an overstatement of cost of goods sold and an understatement of profit). An error in the cost of goods purchased will have a reverse effect on profit (e.g., an overstatement of purchases results in an overstatement of cost of goods sold and an understatement of profit). An error in ending inventory will have a similar effect on profit (e.g., an overstatement of ending inventory results in an understatement of cost of goods sold and an overstatement of profit). If ending inventory errors are not corrected in the following period, their effect on profit for the second period is reversed and total profit for the two years will be correct. On the balance sheet, ending inventory errors will have the same effects on total assets and total owner’s equity, and no effect on liabilities.

5. Value inventory at the lower of cost and net realizable value. The cost of the ending inventory is compared with its net realizable value. If the cost is lower, no further steps are required. If the net realizable value is lower, a writedown is recorded, which results in an increase in (debit to) cost of goods sold, and a reduction in (credit to) merchandise inventory. The writedown is reversed if the net realizable value of the inventory increases, but the value of the inventory can never be higher than its original cost.

6. Demonstrate the presentation and analysis of inventory. Ending inventory is reported as a current asset on the balance sheet at the lower of cost and net realizable value. Cost of goods sold is reported as an expense on the income statement. Additional disclosures include the cost determination method.

The inventory turnover ratio is a measure of liquidity. It is calculated by dividing the cost of goods sold by average inventory. It can be converted to days sales in inventory by dividing 365 days by the inventory turnover ratio. Days sales in inventory tells us, on average, how quickly a merchandiser takes to turn its inventory over once.

7. Calculate ending inventory and cost of goods sold in a periodic inventory system using FIFO and average inventory cost formulas (Appendix 6A). Under the FIFO cost formula, the cost of the most recent goods purchased is allocated to ending inventory. The cost of the earliest goods on hand is allocated to cost of goods sold. Under the average cost formula, the total cost of goods available for sale is divided by the total units available to calculate a weighted average unit cost. The weighted average unit cost is applied to the number of units on hand at the end of the period to determine ending inventory. Cost of goods sold is calculated by subtracting ending inventory from the cost of goods available for sale.

The main difference between applying cost formulas in a periodic inventory system and applying cost formulas in a perpetual inventory system is the timing of the calculations. In a periodic inventory system, the cost formula is applied at the end of the period. In a perpetual inventory system, the cost formula is applied at the date of each sale to determine the cost of goods sold. FIFO will provide the same result under both the perpetual and periodic system, whereas the average formula will yield different results for perpetual and periodic.

8. Estimate ending inventory using the gross profit and retail inventory methods (Appendix 6B). Two methods of estimating inventories are the gross profit method and the retail inventory method. Under the gross profit method, the gross profit margin is applied to net sales to determine the estimated cost of goods sold. The estimated cost of goods sold is subtracted from the cost of goods available for sale to determine the estimated cost of the ending inventory. Under the retail inventory method, a cost-to-retail ratio is calculated by dividing the cost of goods available for sale by the retail value of the goods available for sale. This ratio is then applied to the ending inventory at retail to determine the estimated cost of the ending inventory.

Exercises

Exercise 1

Workman Art Sales uses the perpetual inventory system. On September 30, 2014, the company’s year end, a physical count was taken of the inventory on hand. The cost of the inventory on hand was determined to be $325,400. However, the accountant has questions about the following items:

1. On the store shelves, the staff counted 7 paintings held by Workman on consignment from a local artist. The paintings are included on the inventory count at a cost of $4,200.

2. On September 30, a shipment of goods was sent to a customer, FOB destination. The cost of the goods shipped is $7,800, and freight, which is to be paid by Workman, will cost $200. These items are not included in the inventory count.

3. On October 2, a freight company delivered goods that cost $10,000 to Workman’s warehouse. The goods had been shipped by the vendor on September 29, FOB shipping point. Freight on this shipment will amount to $500 and will be paid by the appropriate party. The goods are not included on the inventory count.

4. On September 30 a loyal customer visited Workman’s retail shop and asked that certain items be set aside for him. The goods set aside have a cost of $1,300. The customer intends to let Workman know no later than October 2 whether or not he wishes to finalize the sale and have the goods shipped to his home. The freight will cost $50 and will be paid by Workman. The sales person was fairly sure the customer will take the items; and so prepared the sales invoice on September 30. The items are not included on the inventory count.

5. Residing in Workman’s warehouse is merchandise costing $5,000 that was purchased in September and found to be defective. Workman’s purchasing manager has arranged with the vendor to accept return of the goods and has packaged them for return shipment. The vendor processed a credit to Workman’s account on September 28, and has arranged to have the goods picked up on October 1. The items are included on the inventory count.

Instructions

Calculate the correct inventory balance at September 30, 2014. For each of the above items, explain the basis of your treatment of the item.

Exercise 2

Helsinki Furniture Sales uses the periodic inventory system. On April 30, 2014, the company’s year end, a physical count was taken of the inventory on hand in both the warehouse and the retail store area for the purpose of determining cost of goods sold and ending inventory value. The preliminary inventory list prepared by the warehouse manager shows a total inventory on hand of $738,000. The following are items that the warehouse manager noted on a separate sheet. None of these items are currently part of the final inventory listing because the manager was not sure how they should be treated for inventory purposes.

1. On April 30, Helsinki shipped an order to a customer, FOB shipping point. The cost of the goods shipped is $9,650. Freight, which is to be paid by the appropriate party, will cost $375.

2. On April 30, a customer visited Helsinki’s shop and selected a desk that she wanted to purchase and paid for it in full. The sales price of the desk was $3,500, and the cost was $2,200. The customer intends to send a truck to pick up the desk no later than May 2. The freight will cost $50 and will be paid by the customer. A “Sold” sign has been placed on the desk but it is still on display in the store.

3. Residing in Helsinki’s warehouse is furniture costing $21,000 that was purchased in April and needs to be returned. The goods were special ordered for a customer who has since decided not to buy them after all. Helsinki’s supplier has agreed to accept return of the goods and will allow a full credit on Helsinki’s account as soon as they are received. A freight company is scheduled to pick up the merchandise on the morning of May 1, and so they have been set aside near the loading dock. The freight, which will be paid by the customer as a fee for the cancellation, is to cost $300.

4. Helsinki sells some of its merchandise in smaller towns by placing samples on consignment with local hardware stores. The manager noted that 15 desks at a cost of $1,200 each and 30 chairs at $75 each are currently out on consignment.

5. On May 2, a freight company delivered goods that cost $65,000 to Helsinki’s warehouse. The goods had been shipped by the vendor on April 29, FOB destination. Freight on this shipment will amount to $400 and will be paid by the appropriate party.

Instructions

Calculate the correct inventory balance at April 30, 2014. For each of the above items, explain the basis of your treatment of the item.

Exercise 3

Fyodorov Company, using a periodic inventory system, has just completed a physical inventory count at year end, December 31, 2015. Only the items on the shelves, in storage, and in the receiving area were counted. The inventory amounted to $60,000. During the audit, the independent CGA discovered the following additional information:

1. There were goods in transit on December 31, 2015, from a supplier with terms FOB destination, costing $8,000. Because the goods had not arrived, they were excluded from the physical inventory count.

2. On December 27, 2015, a regular customer purchased goods for cash amounting to $1,000 and left them for pickup on January 4, 2016. Fyodorov Company had paid $500 for the goods and, because they were on hand, included them in the physical inventory count.

3. Fyodorov Company, on the date of the inventory count, received notice from a supplier that goods ordered earlier, at a cost of $4,000, had been delivered to the transportation company on December 28, 2015; the terms were FOB shipping point. Because the shipment had not arrived on December 31, 2015, it was excluded from the physical inventory.

4. On December 31, 2015, there were goods in transit to customers, with terms FOB shipping point, amounting to $800 (expected delivery on January 8, 2016). Because the goods had been shipped, they were excluded from the physical inventory count.

5. On December 31, 2015, Fyodorov Company shipped $2,500 worth of goods to a customer, FOB destination, in Thunder Bay. The goods arrived in Thunder Bay on January 5, 2016. Because the goods were not on hand, they were not included in the physical inventory count.

6. Fyodorov Company, as the consignee, had goods on consignment that cost $8,000. Because these goods were on hand as of December 31, 2015, they were included in the physical inventory count.

Instructions

Analyze the above information for Fyodorov Company and calculate a corrected amount for the ending inventory. Explain the basis for your treatment of each item.

Exercise 4

Kersawani Company uses the perpetual inventory system and the average cost formula. The following information is available for the month of June:

Date Explanation Units Unit Cost

Jun 1 Beginning Inventory 200 $10

Jun 15 Purchase 300 11

Jun 17 Sale 250 ?

Jun 24 Purchase 400 12

Instructions

Prepare a schedule to show cost of goods sold and the value of the ending inventory for the month of June.

Exercise 5

Robbins Company uses the perpetual inventory system and the FIFO cost formula.

Purchases Sales

Units Unit Cost Units Selling Price/Unit

Mar 1 Beginning inventory 100 $50

3 Purchase 60 $60

4 Sales 70 $100

10 Purchase 200 $70

16 Sales 80 $110

19 Sales 80 $110

25 Sales 50 $110

30 Purchase 40 $75

Instructions

a. Using the inventory and sales data above, calculate the value assigned to cost of goods sold in March and to the ending inventory at March 31.

b. Prepare the journal entries to record the sales on March 4 and March 19. All sales are made on credit.

Exercise 6

Starshine Coffee Equipment sells European style coffee makers and uses a perpetual inventory system. Its inventory records show that on June 1, Starshine had 12 units on hand at a cost of $220 each. Transactions related to purchase and sale of coffee makers in June were as follows:

Instructions

For each of the following cost formulas, calculate the ending inventory as at June 30 and the cost of goods sold for the month of June. Prove the cost of goods sold calculations.

a. FIFO

b. Average

Exercise 7

In July, Unique Jewels Company purchased the following items:

On July 22, one ring from the July 2 purchase was sold for $19,500 and 2 rings from the July 20 purchase were sold for $1,520 each. All sales and purchases are made on credit.

Instructions

a. Calculate ending inventory and cost of goods sold using specific identification.

b. Prepare the journal entry to record the July 22 sale.

Exercise 8

Bermuda Beach Boutique Company uses a perpetual inventory system. Beginning Inventory is 2,500 t-shirts at a cost $2.50 per shirt. During the year Bermuda Beach Boutique purchased the following shirts:

All purchases and sales are on account.

Instructions

a. Calculate the cost of goods sold and ending inventory using average.

b. Prepare journal entries to record the February 18 and the August 29 sales. All sales and purchases are made in cash only.

Exercise 9

O’Meara Sales sells golf bags and uses a perpetual inventory system. O’Meara’s inventory records show that at March 1, there were 30 units on hand at a cost of $135 each. Transactions related to purchase and sale of golf bags in March were as follows:

Instructions

a. For each of the following cost formulas, calculate the ending inventory as at March 31 and the cost of goods sold for the month of March.

i. FIFO

ii. Average

b. Calculate the gross profit and gross profit margin that will be reported under each of the two cost formulas.

c. Assume that O’Meara is motivated to report the highest profit possible. Which method will they prefer? Would your answer be different if the cost of golf bags was increasing, instead of decreasing? What if the cost was fluctuating randomly? Assume the selling price of the golf bags is the same regardless of which cost formula is used.

Exercise 10

Windsor Company reported the following summarized information at the end of 2015:

Sales revenue $1,200,000

Cost of goods sold* 800,000

Gross profit 400,000

Operating expenses 150,000

Profit $ 250,000

*Calculated using ending FIFO inventory of $250,000.

The controller of the company is considering a switch from FIFO to average. He has determined that under average, the ending inventory would have been $150,000.

Instructions

a. Restate the above summarized information using average.

b. What effect, if any, would the proposed change have on Windsor's profit and cash flows?

c. If you were an owner of this business, what would your reaction be to this proposed change?

Exercise 11

Pete’s Packaging reported its cost of goods sold as follows:

The ending inventory at September 30, 2013 was overstated by $6,500.

Instructions

a. Calculate the correct cost of goods sold for both years.

b. Describe how the error has affected the financial statements for 2013 and for 2014, and for the two years combined.

Exercise 12

Winston Auto Parts reported the following information in its income statement for 2013 and 2014:

Additional Information:

While completing Winston’s 2015 financial statements, the accountant realized that errors had been made in previous years’ inventory calculations. The correct ending inventory at December 31, 2012 was $6,000, the correct ending inventory at December 31, 2013 was $4,000, and the correct ending inventory at December 31, 2014 was $7,000.

Instructions

a. Calculate the correct cost of goods sold and gross profit for 2013 and for 2014.

b. Calculate the inventory turnover for 2013 and 2014:

(i) using the originally reported information; and

(ii) using the corrected information.

c. Calculate the gross profit margin for 2013 and 2014:

(i) using the originally reported information; and

(ii) using the corrected information.

d. Explain how the errors will have caused management performance to be improperly evaluated.

Exercise 13

Labco Company reported the following partial income statement for the previous two years of operations:

2014 2015

Sales $340,000 $360,000

Cost of goods sold 181,000 187,000

Gross Profit $159,000 $173,000

Additional Information:

Beginning Inventory 36,000 37,000

Cost of goods purchased 182,000 196,000

Cost of goods available for sale 218,000 233,000

Ending inventory (37,000) (46,000)

Cost of goods sold 181,000 187,000

Labco uses a perpetual inventory system. The company accountant, while reviewing the financial records of the company noticed that the December 31, 2014 ending inventory was understated by $5,000.

Instructions

a. Prepare the correct partial income statement data for 2014 and 2015.

b. What is the cumulative effect of the inventory error on total gross profit for the two years?

Exercise 14

O'Neil’s Hardware Store, in St. John’s, NL, prepared the following analysis of cost of goods sold for the previous three years:

2013 2014 2015

Beginning inventory, Jan. 1 $40,000 $18,000 $25,000

Cost of goods purchased 50,000 97,000 70,000

Deduct Ending inventory, Dec. 31 (18,000) (25,000) (40,000)

Cost of goods sold $72,000 $90,000 $55,000

Profit for the years 2013, 2014, and 2015 was $83,000, $32,000, and $67,000, respectively. Since income had declined so much from 2013 to 2015, Mr. O’Neil hired a new accountant to investigate the cause(s) for the declines.

The accountant determined the following:

1. Purchases of $42,000 that occurred in 2013 were not recorded until 2014.

2. The December 31 2013 inventory should have been $23,000.

3. The 2014 ending inventory included inventory costing $6,000 that was purchased FOB destination point and was in transit at year end.

4. The 2015 ending inventory did not include goods costing $3,000 that were shipped on December 29 to Rosewell Plumbing Company, FOB shipping point. The goods were still in transit at the end of the year.

Instructions

Determine the correct income for each year. (Show all calculations.)

Exercise 15

For each of the independent events listed below, using a perpetual inventory system, analyze the impact on the indicated items at the end of the current year by placing the appropriate code letter in the box under each item.

Code: O = item is overstated

U = item is understated

NA = item is not affected

Items

Owner’s Cost of Net

Events Assets Equity Goods Sold Income

——————————————————————————————————————————

1. The ending inventory in the previous period was overstated.

——————————————————————————————————————————

2. A physical count of goods on hand at the

end of the current year resulted in some

goods being counted twice.

——————————————————————————————————————————

3. Goods purchased on account in December of the current year and shipped FOB destination were recorded as purchases, but were not included in the count of goods on hand on December 31 because they had not arrived by December 31.

——————————————————————————————————————————

4. Goods purchased on account in December of the current year and shipped FOB shipping point were recorded as purchases, but were not included in the count of goods on hand on December 31 because they had not arrived by December 31.

——————————————————————————————————————————

5. The internal auditors discovered that the

ending inventory in the previous period

was understated $15,000 and that the

ending inventory in the current period

was overstated $25,000.

Exercise 16

Chan Pharmacy reported cost of goods sold as follows:

2015 2016

Beginning inventory $ 54,000 $ 64,000

Cost of goods purchased 847,000 891,000

Deduct Ending inventory (64,000) ( 55,000)

Cost of goods sold $837,000 $900,000

Chan made two errors:

1. 2015 ending inventory was overstated by $3,000.

2. 2016 ending inventory was understated by $9,000.

Instructions

Assuming the errors had not been corrected; indicate the dollar effect that the errors had on the items appearing on the financial statements listed below. Also indicate if the amounts are overstated (O) or understated (U).

2015 2016

Overstated/ Overstated/

Amount Understated Amount Understated

Total assets $_________ _______ $_________ _______

Owner’s equity $_________ _______ $_________ _______

Cost of goods sold $_________ _______ $_________ _______

Profit $_________ _______ $_________ _______

Exercise 17

The controller of Lawn-Man Company is applying the lower of cost and net realizable value of valuing ending inventory. The following information is available:

Cost Net Realizable Value

Lawnmowers:

Self-propelled $ 19,000 $ 21,000

Push type 25,000 20,000

Total 44,000 41,000

Snowblowers:

Manual 38,000 37,000

Self-start 24,000 26,000

Total 62,000 63,000

Total inventory $106,000 $104,000

Instructions

a. Prepare a schedule which shows the value of the inventory by applying the lower of cost and net realizable value to each item in inventory.

b. Prepare the journal entry to record any inventory write down required.

Exercise 18

Benjaha Company is preparing the annual financial statements dated December 31, 2015. Information about inventory stocked for regular sale follows:

Quantity Unit Cost Net Realizable Value

Item on Hand When Acquired at year end

A 25 $25 $22

B 100 55 55

C 20 60 88

D 80 50 46

Instructions

a. Calculate the correct value for the December 31, 2015 ending inventory using the lower of cost and net realizable value.

b. Assume Benjaha uses a perpetual inventory system. Prepare the journal entry to record any inventory write down required.

Exercise 19

The following information is available about the inventory of Read’s Ski House at the company’s year end, December 31:

Instructions

a. Calculate the total cost of the ending inventory at December 31.

b. Calculate the total net realizable value of the ending inventory at December 31.

c. What amount would be reported on Read’s December 31 balance sheet?

Exercise 20

The following information is available from the financial statements of Complete Home Furnishings. The company is a manufacturer of home furnishings, and its sales are mainly on credit.

(In millions)

2016 2015

Sales $76,704 $69,656

Cost of goods sold 49,761 47,257

Beginning inventory 26,031 14,816

Ending inventory 34,162 26,031

Total current assets 87,246 76,857

Total current liabilities 33,589 33,671

Instructions

Evaluate the company’s liquidity position for 2016. As part of your analysis, you will have to calculate the current ratio, inventory turnover ratio, and days in inventory for the company for 2016 and 2015.

Exercise 21

The following information is available for Schulsky’s Deli for three recent years:

The ending inventory at December 31, 2012 was $36,000.

Instructions

Calculate the inventory turnover, the days sales in inventory, and gross profit margin for Schulsky’s Deli for each of the three years, and comment on any trends.

*Exercise 22

Willets Coffee Equipment sells European style coffee makers and uses a periodic inventory system. Its inventory records show that at July 1, Willets had 12 units on hand at a cost of $220 each. Transactions related to purchase and sale of coffee makers in July were as follows:

Instructions

For each of the following cost formulas, calculate the ending inventory as at July 31 and the cost of goods sold for the month of July. Prove the cost of goods sold calculations.

a. FIFO

b. Average

*Exercise 23

Garcia Sales sells golf bags and uses a periodic inventory system. Garcia’s inventory records show that at April 1, there were 30 units on hand at a cost of $135 each. Transactions related to purchase and sale of golf bags in April were as follows:

Instructions

a. For each of the following cost formulas, calculate the ending inventory as at April 30 and the cost of goods sold for the month of April. Prove the cost of goods sold calculations.

i. FIFO

ii. Average

b. Calculate the gross profit and gross profit margin that will be reported under each of the two cost formulas.

c. Assume that Garcia is motivated to report the highest profit possible. Which method will they prefer? Would your answer be different if the cost of golf bags was increasing, instead of decreasing? What if the cost was fluctuating randomly? Assume Garcia cannot change the selling price of their product.

*Exercise 24

McQuire Company uses the periodic inventory method and had the following inventory information available:

Units Unit Cost Total Cost

Jan 1 Beginning Inventory 200 $4 $ 800

Jan 20 Purchase 400 $5 2,000

Jul 25 Purchase 300 $7 2,100

Oct 20 Purchase 400 $8 3,200

1,300 $8,100

A physical count of inventory on December 31 revealed that there were 600 units on hand.

Instructions

Answer the following independent questions and show calculations supporting your answers.

a. Assume that the company uses the FIFO cost formula. The value of the ending inventory at December 31 is $__________.

b. Assume that the company uses the average cost formula. The value of the ending inventory on December 31 is $__________.

c. Determine the difference in the amount of income that the company would have reported if it had used FIFO instead of Average. Would income have been greater or less?

*Exercise 25

Hixenbaugh Company uses the periodic inventory system to account for inventories. Information related to Hixenbaugh Company's inventory at October 31 is given below:

Oct 1 Beginning inventory 300 units @ $10.00 = $ 3,000

8 Purchase 800 units @ $10.40 = 8,320

16 Purchase 700 units @ $10.80 = 7,560

24 Purchase 200 units @ $11.60 = 2,320

Total units and cost 2,000 units $21,200

On October 31 there were 500 units on hand.

Instructions

a. Show calculations to value the ending inventory using FIFO.

b. Show calculations to value the ending inventory using average.

*Exercise 26

Kavenja Company sells many products. Whamo is one of its popular items. Below is an analysis of the inventory purchases of Whamo for the month of March. At the end of the month there were 120 units on hand. Kavenja Company uses the periodic inventory system.

Purchases

Units Unit Cost

Mar 1 Beginning inventory 100 $60

Mar 3 Purchase 60 $75

Mar 10 Purchase 200 $82

Mar 30 Purchase 40 $90

Instructions

a. Using the FIFO cost formula, calculate the cost of goods sold for March. (Show calculations.)

b. Using the average cost formula, calculate the inventory on hand on March 31. (Show calculations.)

*Exercise 27

At the end of April, Greenland Company reports the following for the month:

Date Explanation Units Unit Cost Total Costs

Apr 1 Beginning Inventory 200 $9 $1,800

12 Purchase 300 $12 $3,600

23 Purchase 500 $15 $7,500

30 Ending Inventory 180

Instructions

a. Assuming Greenland uses a periodic inventory system, calculate the cost of ending inventory and the cost of goods sold under (1) FIFO, (2) average.

b. Which cost assumption results in the highest ending inventory? Why?

c. Which cost assumption results in the highest cost of goods sold?

d. Which cost assumption results in the highest cash flow? Why?

*Exercise 28

Passarant Company reports goods available for sale at cost, $156,000. Beginning inventory at retail is $60,000 and goods purchased during the period at retail were $180,000. Sales for the period amounted to $90,000.

Instructions

Determine the estimated cost of the ending inventory using the retail inventory method.

*Exercise 29

Kitchener Department Store prepares monthly financial statements but only takes a physical count of merchandise inventory at the end of the year. The following information has been developed for the month of July:

At Cost At Retail

Beginning inventory $ 50,000 $ 60,000

Merchandise purchases 125,000 190,000

The net sales for July amounted to $150,000.

Instructions

Use the retail inventory method to estimate the ending inventory at cost for July. Show all calculations to support your answer.

*Exercise 30

Terry’s Electronics uses the retail method to determine inventory cost. The following information is available for the month of January, 2014:

Beginning inventory, at cost $64,000

Goods purchased at cost (net of allowances) 168,000

Net sales 295,000

Beginning inventory, at retail 110,000

Goods purchased, at retail 315,000

Instructions

Calculate the estimated cost of the January 31, 2014 inventory using the retail inventory method.

*Exercise 31

North Bay Company suffered a loss of its inventory on March 28 due to a fire in its warehouse. As a basis for filing a claim with its insurance company, North Bay Company developed the following information:

March net sales through March 28 $500,000

Beginning Inventory, March 1 190,000

Merchandise purchases through March 28 225,000

The company has experienced an average gross profit margin of 30% in the past and this margin appears to be appropriate in the current period.

Instructions

Using the gross profit method, prepare an estimate of the cost of the inventory destroyed by fire on March 28. Show all calculations in good form.

*Exercise 32

The inventory of Schooler Company was destroyed by fire on April 1. From an examination of the accounting records, the following data for the first three months of the year are obtained:

Sales $155,000

Sales Returns and Allowances 5,000

Purchases 85,000

Freight In 3,500

Purchase Returns and Allowances 4,000

Instructions

Determine the merchandise lost by fire, assuming a beginning inventory of $60,000 and a gross profit margin of 40% on net sales.

*Exercise 33

Featherstone Dollar Stores uses the periodic inventory, and completes a physical count of inventory annually and adjusts inventory to actual at each year end. For quarterly (interim) financial statements, they use the gross profit method to estimate inventory. The average of the actual gross profit margin for the most recent two years is used to estimate the quarter-end inventory. The average gross profit margin for the years ending December 31, 2012 and 2013 was 26%.

For Quarter 1, 2014, the following sales and purchases data is available:

Instructions

Prepare Featherstone’s multi-step income statement for the three months ended March 31, 2014, and calculate the estimated inventory at March 31, 2014.