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Chapter 5: Inventory (Including Appendix A and B)

Chapter 5: Inventory (Including Appendix A and B). Analysis (O = overstated, U = understated): BI + P - EI = COGS NI A = L + SE. Class Problem. 07:. 9u. 9o. 9u. 9u. 9u. 08:. 9u. 9u. 9o. X. X. Why no effect on 2008 ending SE?. NI 2007 understated by $9,000

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Chapter 5: Inventory (Including Appendix A and B)

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  1. Chapter 5: Inventory(Including Appendix A and B)

  2. Analysis (O = overstated, U = understated): BI + P - EI = COGS NI A = L + SE Class Problem 07: 9u 9o 9u 9u 9u 08: 9u 9u 9o X X Why no effect on 2008 ending SE? NI 2007 understated by $9,000 NI 2008 overstated by $9,000 Both closed to RE, so no net effect at end.

  3. FIFO for COGS (top down) 55 units 20 @ $9 = $180 35 @ $10 = $350 Total = $530 LISH for EI (bottom up) 35 units 30 @ $11 = $330 5 @ $10 = $ 50 Total $380 FIFO(LISH)

  4. LIFO for COGS (bottom up) 55 units 30 @ $11 = $330 25 @ $10 = $250 Total = $580 FISH for EI (top down) 35 units 20 @ $ 9 = $180 15 @ $10 = $150 Total = $330 LIFO(FISH)

  5. First calculate average: Goods available cost = $910 Goods available units = 90 units Avg. = $10.11 per unit Now COGS: 55 units x $10.11 per unit = $ 556 Now EI: 35 units x $10.11 per unit = $354 Average

  6. In times of rising prices: highest COGS: lowest COGS highest EI lowest EI highest Net Income lowest Net Income Comparison of FIFO, LIFO, and Average LIFO FIFO FIFO LIFO FIFO LIFO Now work E5-9.

  7. Revised Requirements: Analyze only the 2007 error of 56,000, and its effect on the 2007 and 2008 financials. Use the same format as found in the class Power Points. Problem 5-2A

  8. Analysis (O = overstated, U = understated): BI + P - EI = COGS NI A = L + SE Problem 5-2A 07: 56u 56o 56u 56u 56u 08: 56u 56u 56o X X

  9. Available = 540 units EI = 190 units so units sold = 350 units Part (b) First calculate average: Goods available cost = $3,020 Goods available units = 540 units Avg. = $5.593 per unit Now COGS: 350 units x $5.593 per unit = $1,063 Now EI: 190 units x $5.593 per unit = $1,958 Check: 1,063 + 1,958 = $3,021 (rounding) Exercise 5-9 (omit part a)

  10. FIFO for COGS (top down) 350 units 140 @ $6 = $840 210 @ $5.60 = $1,176 Total = $2,016 LISH for EI (bottom up) 190 units 100 @ $5 = $500 90 @ $5.60 = $504 Total $1,004 Check: 2,016 + 1,004 = $3,020 E5-9, Part (c)

  11. LIFO for COGS (bottom up) 350 units 100 @ $5 = $500 250 @ $5.60 = $1,400 Total = $1,900 FISH for EI (top down) 190 units 140 @ $6 = $840 50 @ $5.60 = $280 Total = $1,120 Check: 1,900 + 1,120 = 3,120 Exercise 5-9, part (d)

  12. GP % = 34% of sales, so COGS % = 66% of sales (net) COGS = .66 x (1,211,160 – 8,398) = $793,823 (estimate) Now: BI + Purch - EI = COGS 302,580 + 941,040 – EI = 793,823 449,797 = EI (estimate) Problem 5-7A

  13. For current year (prior yr. check figures given): Inventory Turnover = COGS/Avg. Inv (Higher turnover indicates more activity) BB, current yr: 20,938 = 7.7 times (2,851 + 2,607)/2 BB, prior yr (check figure) = 8.0 times CC, current yr: 7,904 = 5.3 times (1,460 + 1,517)/2 CC, prior yr (check figure) = 5.2 times BTN 5-2 (page 233)

  14. Days Sales = EI / COGS (More days – more “buffer,” but more inventory to sell) BB, current yr: 2,851 x 365 = 49.7 days 20,938 BB, prior yr (check figure) = 50.9 days CC, current yr: 1,460 x 365 = 67.4 days 7,904 CC, prior yr (check figure) = 73.1 days BTN 5-2 (page 233)

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