Chapter 6: Inventories Summary

Chapter 6: Inventories

Homework Exercises

Exercise 1: Topp Hat Shop

1. Inventory Calculation

   • Shipment Cost: $2,970
   • Cash Discount: $30
   • Freight Charges: $50
   • Total Inventory Cost:
     ext{Inventory} = ext{Shipment Cost} - ext{Cash Discount} + ext{Freight Charges} = 2970 - 30 + 50 = 2990
     Therefore, Topp will record the inventory at $2,990 because it reflects the actual costs incurred to acquire the inventory.

2. Inventory Cost Flow Method Selection

   • It is a decision made by accountants based on the nature of the inventory and business practices.
   • Accounting Requirement: Once a method is selected, it must be used consistently over time.

3. Assumed Inventory Cost Flow Methods
   a) Parallels Physical Flow: FIFO (First-In, First-Out)
   b) Average Cost: Weighted Average Cost
   c) Latest Units Sold First: LIFO (Last-In, First-Out)

Brief Exercise 1: Peosta Company Inventory Decisions

• Include or Exclude Inventory Items:
  a) Excluded (goods sold on consignment)
  b) Excluded (goods in transit, FOB destination)
  c) Included (goods on consignment from another company)

Brief Exercise 2: Cruz Video Center Inventory Valuation

• Lower-of-Cost-or-Net Realizable Value Calculation:

  Item	Cost	Net Realizable Value	Lower of Cost or NRV
  Cameras	$12,000	$12,300	$12,000
  Camcorders	$9,500	$9,700	$9,500
  Blu-ray Players	$14,000	$12,900	$12,900

  • Total Lower of Cost or NRV:
    12000 + 9500 + 12900 = 34400

Exercise 1: Abdullah’s Photo Corporation

• Data for 2018, 2019, 2020:
  • Calculate the following:
  • Inventory Turnover Rate:
    ext{Turnover} = rac{ ext{Cost of Goods Sold}}{ ext{Average Inventory}}
  • Days in Inventory:
    ext{Days} = rac{365}{ ext{Inventory Turnover}}
  • Gross Profit Rate:
    ext{Gross Profit Rate} = rac{ ext{Gross Profit}}{ ext{Sales Revenue}}

Exercise 2: Shereen Company

• November Data:
  • Calculate Gross Profit Rate:
  • Cost of Goods Sold and Sales Revenue:
  • Estimate Lost Inventory Post-Fire:
    Using November’s gross profit rate, apply it to December data to estimate lost inventory.

Problem 1: Sami Distribution

1. Cost of Goods Available for Sale Calculation:
   ext{Total Cost} = ( ext{Beginning Inventory} imes ext{Cost}) + ext{Purchases}

   • Calculate total costs based on individual purchases and existing inventory.

2. Ending Inventory and COGS Calculations:

   • Assumed Methods: FIFO, LIFO, Average Cost.
   • Determine impact on Balance Sheet and Income Statement.

Problem 2: Sekhon Company

1. Cost of Goods Available for Sale:
   ext{Total Cost} = ext{Beginning Inventory} + ext{Purchases}

2. Ending Inventory and COGS under Cost Flow Methods.

   • Analyze the differences based on FIFO, LIFO, and Average Cost values.

3. Impact on Financial Statements:

   • Determine which method results in the highest balance sheet valuation and COGS.