Details of this Paper

Assignment: Chap7_HW_CNOW;1.;Blueprint Problem: Perpetual Average Cost;Inventory Valuation Basics;Income measurement and asset valuation are two concepts at the core of accounting....

Description

solution


Question

Assignment: Chap7_HW_CNOW 1.;Blueprint Problem: Perpetual Average Cost;Inventory Valuation Basics;Income measurement and asset valuation are two concepts at the core of accounting. Recall that the matching principle requires that costs incurred to generate revenue should be recognized in the same period that the revenue is earned. For most merchandising companies, the cost and control of inventory is the focal point of the operation. Inventory valuation applies to many companies. Thinking about this lesson, choose which companies below might benefit from inventory valuation.;Company Type;1. a law firm;2. an electronics company;3. a car dealership;4. a textbook company;Inventory Systems and Costing Methods;Inventory systems and inventory costing methods must be understood for proper inventory valuation and measurement. The two basic systems of accounting for merchandise inventory are the perpetual inventory system and the periodic inventory system. Under the perpetual inventory system, continuous records are kept of the quantity and, usually, the cost of individual items as they are bought and sold. Under the periodic inventory system, the inventory not yet sold, or on hand, is counted periodically. This physical count is usually taken at the end of the accounting period.;What type of inventory tracking system is in use when changes in inventory are immediately displayed on the balance sheet?;Goods Flow" versus "Cost Flow" The term "goods flow" refers to the PHYSICAL MOVEMENT of inventory through the operations of the business. In most business, we try to sell our oldest merchandise first. The term "cost flow" refers to the COST associated with the assumed flow of merchandise (i.e. how much of the cost is allocated to to the items sold and how much is allocated to the unsold ending inventory). An accounting issue arises when identical units of merchandise are acquired at different unit costs during a period. In such cases, when an item is sold, it is necessary to determine its cost using a cost flow assumption and related inventory costing method. Does the "cost flow" method need to be the same as as the physical "goods flow"?;Different valuation methods produce significantly different values for cost of merchandise sold and subsequent inventory levels. This means that the choice of inventory valuation method can have a significant effect on a company's financial position.;Although the implications are far reaching, the two items most directly and immediately affected by the choice of inventory valuation method are cost of merchandise sold on the _________________ and inventory on the _________________.;The following formula illustrates the relationship between the cost of merchandise sold and the ending inventory. The part of the cost of merchandise available for sale is allocated to the cost of merchandise sold for the inventory that is sold and the value of the unsold inventory is assigned to the ending inventory. Therefore, a change in the amount of the cost of merchandise will impact the value of the ending inventory.;Beginning inventory;+ Purchases;= Cost of merchandise available for sale;- Cost of merchandise sold;= Ending Inventory;How would an inventory valuation method that results in higher cost of merchandise sold for the current period affect the following items?;1. Ending Inventory;2. Revenue;3. Net Income;4. Total Expenses;Choosing a Valuation Method;There are four costing methods: specific identification, first-in, first-out (FIFO), last-in, first-out (LIFO), and average cost. To better understand the average cost method, imagine beginning inventory and each purchase as separate layers. These layers determine the cost of merchandise available for sale. A physical inventory is taken, and cost of goods available for sale is then allocated to cost of merchandise sold and ending inventory.;Imagine that you are an external consultant for Portsmouth Co., a company trying to determine the most appropriate inventory valuation method for its operations. Its cost of inventory has been fluctuating up and down all year, so Portsmouth Co.'s primary goals are to minimize the effects of the cost fluctuations on its figures for cost of merchandise sold, without spending too much money. The available options are FIFO, LIFO, average cost, and specific identification.;Given Portsmouth Co.'s unique needs, which method would you recommend?;Applying Average Cost Click here to review an illustrated example of the average cost calculation. The key is to compute a new average cost after each purchase.;You will now put the average cost method into practice. Portsmouth Co. would like to explore what is meant by the weighted average cost per unit, a concept that is central to this method of inventory valuation. Remember, the weighted average must be adjusted with each purchase. Also, as sales occur, previous inventory values must be bundled to keep track of inventory on hand and to accurately track subsequent additions to inventory. The data for Portsmouth Co. is below for the month of November.;Portsmouth Co.'s inventory data for November;Date Description Units Purchased at Cost Units Sold at Retail;Nov. 1 Beg. Inv. 500 units @ $12 = $6,000;4 Purchase 1 200 units @ $12 = $2,400;7 Sale 1 420 @ $41;12 Purchase 2 600 units @ $10 = $6,000;15 Purchase 3 700 units @ $3 = $2,100;23 Sale 2 350 @ $41;Complete the schedule below. Remember, the weighted average must be adjusted with each purchase. Also, as sales occur, previous inventory values must be bundled to keep track of inventory on hand and to accurately track subsequent additions to inventory. Round the average cost per unit to four decimal places and total costs to the nearest dollar.;Date Description Inventory Balance Inventory Total Weighted Average;Cost Per Unit Cost of Goods Sold;Nov. 1 Beginning Inventory 500 x $12 = $6,000;= $12.00/unit;4 Balance forward;Purchase 1 (200 @ $12 500 x $12;200 x $12 = $6,000;= $2,400;= $ _________________ / unit;7 Sale 1 (420 @ $41) 420 x $ _________________ = = $;12 Balance forward;Purchase 2 (600 @ $10 _________________ x $;600 x $10 = $;= $6,000;= $ _________________ /unit;15 Balance forward;Purchase 3 (700 @ $3) _________________ x $;700 x $3 = $;= $2,100;= $ _________________ /unit;23 Sale 2 (350 @ $41) 350 x $ _________________ = $;End of month balance _________________ x $ _________________ $ _________________ 2.;Blueprint Problem: FIFO inventory ? perpetual;Inventory and Cost of Merchandise Sold;Asset valuation and income measurement are two of the most fundamental accounting concepts. For any company that sells goods, inventory is a main focus. This problem concentrates on perpetual FIFO inventory valuation.;When a company sells inventory, an expense is recorded. Which of the following facts regarding this statement are true?;1. The expense is recorded as ?Cost of Merchandise Available for Sale.?;2. The revenue recognition principle dictates the timing.;3. The expense appears on the balance sheet.;4. The expense appears on the income statement.;5. The matching principle dictates the time of record.;6. The expense is recorded as ?Cost of Merchandise Sold.?;When a company purchases inventory, it is immediately displayed on the _________________ as;The amount at which inventory is recorded is based upon the _________________.;Inventory Systems and Costing Methods;There are two concepts that must be understood for inventory valuation and measurement: inventory systems and inventory costing methods. The two basic systems of accounting for merchandise inventory are the perpetual inventory system and the periodic inventory system. Under the perpetual inventory system, continuous records are kept of the quantity and, usually, the cost of individual items as they are bought and sold. Under the periodic inventory system, the inventory not yet sold, or on hand, is counted periodically. This physical count is usually taken at the end of the accounting period.;What type of inventory tracking system is in use when changes in inventory are immediately displayed on the balance sheet?;Goods Flow" versus "Cost Flow" The term "goods flow" refers to the PHYSICAL MOVEMENT of inventory through the operations of the business. In most business, we try to sell our oldest merchandise first. The term "cost flow" refers to the COST associated with the assumed flow of merchandise (i.e. how much of the cost is allocated to to the items sold and how much is allocated to the unsold ending inventory). An accounting issue arises when identical units of merchandise are acquired at different unit costs during a period. In such cases, when an item is sold, it is necessary to determine its cost using a cost flow assumption and related inventory costing method. Does the "cost flow" method need to be the same as as the physical "goods flow"?;First-in, First-out (FIFO);There are four costing methods: specific identification, first-in, first-out (FIFO), last-in, first-out (LIFO), and average cost. This example will focus on FIFO. Under the first-in, first-out (FIFO) inventory cost flow method, the first units purchased are assumed to be sold and the ending inventory is made up of the most current purchases.;To better understand the FIFO method, imagine that beginning inventory and each purchase is a separate layer. These layers determine the cost of goods available for sale. For each sale, start with the earliest purchase (which may be beginning inventory) and work forward until you have accounted for the units sold.;Using FIFO, we assume the costs of the _________________ items we purchased are assigned to the first items we sell. Therefore, the the most recent costs are assigned to the _________________ while the _________________ will consists of costs the beginning inventory and earlier purchases.;According to GAAP, there are three acceptable ways in which a publicly traded company may value inventory. They are FIFO, LIFO, and average cost. In the period below, which of the components in the cost of merchandise sold calculation would be affected by a current period change in inventory valuation method (i.e. switching from LIFO to FIFO)?;Beginning inventory;+ Purchases;Cost of merchandise available for sale;? Cost of merchandise sold;Ending inventory;FIFO Inventory Calculation;Click here to review an illustrated example of the FIFO calculation. The steps illustrated in the example are recapped below.;1. Start with beginning inventory.;2. Add a layer for each purchase made.;3. Record cost of merchandise sold as sales occur and adjust layers.;4. Compute the ending inventory for the period.;Below is the data for the month of January, 2011.;1/1 Beg. Inv. 220 Units @ $9;1/8 Purchase 120 Units @ $11;1/14 Sale 176 Units;1/22 Purchase 150 Units @ $9;1/25 Sale 104 Units;Compute the FIFO layers amounts for the cost of merchandise available for sale after each purchase and sale. After 1/8 Purchase;Layer 1 _________________ units $ _________________ price per unit $ _________________ value of the layer;Layer 2 _________________ units $ _________________ price per unit $ _________________ value of the layer;After 1/14 Sale;Layer 1 _________________ units $ _________________ price per unit $ _________________ value of the layer;Layer 2 _________________ units $ _________________ price per unit $ _________________ value of the layer;After 1/22 Purchase;Layer 1 _________________ units $ _________________ price per unit $ _________________ value of the layer;Layer 2 _________________ units $ _________________ price per unit $ _________________ value of the layer;Layer 3 _________________ units $ _________________ price per unit $ _________________ value of the layer;After 1/25 Sale;Layer 1 _________________ units $ _________________ price per unit $ _________________ value of the layer;Layer 2 _________________ units $ _________________ price per unit $ _________________ value of the layer;Layer 3 _________________ units $ _________________ price per unit $ _________________ value of the layer;Based on your answers above, complete the worksheet below.;FIFO Inventory Worksheet for Month Ending January 2011 Purchases Cost of Merchandise Sold Inventory Balance;1/1 Beg. Inv. 220 Units @ $9 1,980;1/8 Purchase 120 Units @ $11 $ _________________ $;1/14 Sale 176 Units $ _________________ $;1/22 Purchase 150 Units @ $9 $ _________________ $;1/25 Sale 104 Units $ _________________ $;Total $ _________________ $ _________________ $;Recording Changes in Inventory under FIFO Valuation Under the perpetual system, two journal entries are are required to record sales, one to record the sale and one to record the cost of merchandise sold. Click on the links below to review the journal entries for purchases and sales transactions.;Purchase Sales;After a purchase or sale occurs, the transaction must be recorded or journalized. In the following journal, record the purchases and sales for the month assuming that all inventory purchases were made with cash and all sales were made on account at a fixed unit price of $22 per unit. There are several facts to remember;(1) All inventory is purchased with cash, and cash only.;(2) All sales are made on account, and on account only.;(3) When recording sales, record the revenue portion of the transaction first.;Not sure about the account title? Click here to view the chart of accounts.;+ Assets;+ Liabilities;+ Equity;+ Revenues/Gains;+ Expenses/Losses;GENERAL JOURNAL;page;DATE DESCRIPTION DOC.;NO. POST.;REF. DEBIT CREDIT;1 Jan. 08 1;2 2;3 3;4 Jan. 14 Record revenue 4;5 5;6 6;7 Jan. 14 Record cost 7;8 8;9 9;10 Jan. 22 10;11 11;12 12;13 Jan. 25 Record revenue 13;14 14;15

 

Paper#74986 | Written in 18-Jul-2015

Price : $27
SiteLock