Chap 8 assignment

LO8-6
Phillips Supply uses a periodic inventory system but needs to determine the
EXERCISE 8.10 approximate amount of inventory at the end of each month without taking a
physical inventory. Phillips has provided the following inventory data:
Estimating
Inventory by the
Retail Method

Estimate the cost of goods sold and the cost of the July 31 ending
inventory using the retail method of evaluation.

Was the cost of Phillips's inventory, as a percentage of retail selling

prices, higher or lower in July than it was in June? Explain.

Cost
Inventory of merchandise, June
30
Purchases during July
Goods available for sale
during July

Price

$300,000.00

Retail Selling
Price
$500,000.00

222,000.00

400,000.00

522,000.00

900,000.00

Cost Ratio (522,000/900,000)= 58%

Net sales during
July
Inventory of merchandise,
July 30
Ending Inventory at
Cost:
300,000 x58%=
Cost of Goods
Sold:
$522,000-$174,000=
Cost of Inventory for June
(300,000/500,000)= 60%
Cost of Inventory for July
(222,000/400,000)= 55.5%

600,000.00
300,000.00
174,000.00
348,000.00

It shows that the cost of Phillips inventory as a percentage of retail sales

in July is lower than it was in June. At June 30, the percentage was 60%.
Meanwhile, in July the percentage was only 55.5% which is based on
Phillips purchases.

LO8-1, LO87
Walmart uses LIFO to account for its inventories. Recent financial statements
were used to compile the following information (dollar figures are in millions):
PROBLEM
8.8A
FIFO versus
LIFO
Comparisons

Instructions
1. Using the information provided, compute the following measures based
upon the LIFO method:
1. Inventory turnover.
Cost of goods sold/average Inventory= 352,488/42,259= 8.34
times
2. Current ratio (see Chapter 5 for a discussion of this ratio).
Current Ratio= Current assets/Current Liabilities=
59,940/71,818= 0.83
3. Gross profit rate (see Chapter 6 for a discussion of this statistic).
Gross profit rate= Gross profit/Sales= 116,674/469,162=
24.87%
2. Assuming cost of goods sold would be lower under FIFO, what
circumstances must the company have encountered to cause this situation?
(Were replacement costs, on average, rising or falling?)
The cost of goods sold is lower under FIFO (First In, First Out) as to
compare to LIFOs cost of goods sold because the economic price of
the product is continuing to increase from period to period. The cost
of the last in product, in fact, is the basis for computing

COGS/Inventory under LIFO, whereas, the First In product cost will

be summed for FIFOs COGS. Thus, it causes a lower profit margin
(if economic cost of the product increases) than assigning the first or
oldest costs to the cost of goods sold under FIFO. The replacement
Cost will increase under FIFO rather than LIFO in the state of
increasing the cost .
3. How would you expect these ratios to differ (i.e., what direction) had the
company used FIFO instead of LIFO?
If the economic cost of the product increases, the inventory turnover
ratio under FIFO will decrease because the COGS diminish its value
and the average inventory increases. Moreover, the current ratio and
gross profit margin ratio will increase due to the increase of the
ending inventory.
Meanwhile, if the costs of the product continue to decrease; it will
take the other/opposite directions.

4. Explain why the average number of days required by Walmart to collect

its accounts receivable is so low. (See Chapter 7 for a discussion of the
accounts receivable turnover rate.)
The average number of days to collect by Walmart is so low because
the firm is maintaining small value of accounts Receivable. Perhaps,
the firm uses some alternative to attract the customer to pay its debt
on time through giving discounts (e.g. 2/10,n/30). This is a good
indication that the company is doing well in its receivables and thus, it
keeps small value of allowance for bad debts.