INVENTORY CONTROL FOR FTMBA-SECTION-E, FTMBA Capital Markets &

Executive MBA_NMIMS_2010-11
PROBLEM 1. ANS: Shipped To To From From Cole Cole Cole Cole Terms FOB Shipping Point FOB Destination FOB Shipping Point FOB Destination Inventory on hand Total inventory OBJ: KP 10-1 2. ANS: Cost of Inventory 900 600 2,000 300 100 200 3,700 900 Expense 500 TOP: What Is Reported as Inventory? Cost $15,000 12,000 18,000 11,000 $56,000 Date Arrived January 3 January 2 January 4 January 3 Included $ 15,000

11,000 $ 26,000 125,000 $151,000

Cost of plastic for toys Cost of utilities for office building Salaries of factory supervisors Salaries of production workers Salaries of salespersons Salary of president Taxes on factory building OBJ: KP 10-2 TOP: The Cost of Inventory DISCUSSED IN CLASS (05/09/10) 3. ANS: It is helpful to rearrange the accounts into standard order: a 15,000 2,000 10,000 12,000 2,000 10,000 5,000 b 30,000 5,000 20,000 25,000 6,000 19,000 11,000 c 35,000 3,000 45,000 48,000 25,000 23,000 12,000

Sales Beginning inventory Purchases Total available for sale Less: Ending inventory Cost of goods sold Gross profit

d 18,000 2,000 10,000 12,000 1,000 11,000 7,000

e 53,000 4,000 36,000 40,000 5,000 35,000 18,000

f 82,000 6,000 50,000 56,000 5,000 51,000 31,000

OBJ: KP 10-3 TOP: Accounting for Inventory and Cost of Goods Sold DISCUSSED IN CLASS (05/09/10)

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INVENTORY CONTROL FOR FTMBA-SECTION-E, FTMBA Capital Markets &

Executive MBA_NMIMS_2010-11
4. 5. ANS: (Inventory Errors) The total effect of Walt's errors would cause Brintnal's gross profit on sales to be overstated by $700 calculated as follows: Error 500 500 (1,200) 700 700 DISCUSSED IN CLASS (05/09/10)

Beginning Inventory Add: Purchases Goods Available for Sale Less: Ending Inventory Cost of Goods Sold Gross Profit on Sales

okay overstated overstated overstated understated overstated

TOP: Accounting for Inventory and Cost of Goods Sold DISCUSSED IN CLASS (05/09/10) 6. ANS: FIFO $1,725,000 1,224,000 $ 501,000 Wtd Avg $1,725,000 1,233,600 $ 491,400 LIFO $1,725,000 1,242,000 $ 483,000

Sales Cost of goods sold [see below] Gross profit

FIFO COGS: (6,000 @ $100) + (5,000 @ $103.60) + (1,000 @ $106) = $1,224,000 W AVG COGS: $1,542,000 15,000 units = $102.80 12,000 = $1,233,600 LIFO COGS: (4,000 @ $106) + (5,000 @ 103.60) + (3,000 @ $100) = $1,242,000 OBJ: KP 10-4 7. ANS: 1. For the three-year period, gross profit is TOP: Inventory Valuation Methods

Sales $482,000 Cost of goods sold 330,000 Gross profit $152,000 under all three methods. Inventory flow assumptions have to do with the order in which you

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INVENTORY CONTROL FOR FTMBA-SECTION-E, FTMBA Capital Markets &

Executive MBA_NMIMS_2010-11
assume the goods were sold. Once you've sold them all, as this firm has by the end of Year 3, the overall cost of goods sold is the same no matter what the order in which they were sold. 2. Ending inventory for each year under the different methods is as follows: FIFO Ending Inventory Year 1 Units 1,000 Cost/unit $ 10.00 Ending inventory $10,000 LIFO Ending Inventory Units Cost/unit Ending inventory Weighted Average End Inv Units Cost/unit Ending inventory Year 1 1,000 $ 10.00 $10,000 Year 1 1,000 $ 10.00 $10,000

Year 2 1,000 $ 11.00 $11,000 Year 2 1,000 $ 10.00 $10,000 Year 2 1,000 $ 10.91 $10,910

Gross profit for each of the three years and in the aggregate is as follows: Sales Revenue FIFO Beginning inventory Purchases Total available Ending inventory Cost of goods sold Gross profit (Sales - COGS) LIFO Beginning inventory Purchases Total available Ending inventory Cost of goods sold Gross profit Weighted Average Beginning inventory Purchases Total available in dollars Ending inventory* Cost of goods sold Gross profit *Ending Inventory calculation Year 1 $135,000 Year 2 $160,000

0 100,000 100,000 10,000 90,000 45,000 0 100,000 100,000 10,000 90,000 45,000 $ 0 100,000 100,000 10,000 90,000 45,000

10,000 110,000 120,000 11,000 109,000 51,000 10,000 110,000 120,000 10,000 110,000 50,000 $ 10,000 110,000 120,000 10,910 109,090 50,910

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INVENTORY CONTROL FOR FTMBA-SECTION-E, FTMBA Capital Markets &

Executive MBA_NMIMS_2010-11
Total available in dollars Total available in units = Wtd avg cost per unit Units of ending inventory = End inventory in dollars OBJ: KP 10-4 8. ANS: TOP: Inventory Valuation Methods $100,000 10,000 $ 10.00 1,000 10,000 $120,000 11,000 $ 10.91 1,000 10,910

Goods available for sale End inventory [see below] Cost of goods sold

LIFO $9,005 1,626 $7,379

FIFO $9,005 1,998 $7,007

Average cost $9,005 1,801 $7,204

Ending Inventory (2,700 units 20%) valuation: LIFO: (500 $3.00) + (40 $3.15) = $1,626 FIFO: 540 @ $3.70 = $1,998 W Avg: $9,005 2,700 units = $3.335 540 = $1,801 OBJ: KP 10-4 TOP: Inventory Valuation Methods

9. ANS: (Inventory Costing Methods) The inventory and cost of goods sold figures are given below: a. Cost of goods available for sale: Date Units Unit Cost July 1 (beginning) 600 4.00 July 8 (purchase) 500 5.50 July 21 (purchase) 400 5.00 July 25 (purchase) 200 6.00 Units Available 1,700 units Units Sold (1,200) Units on Hand 500 Ending Inventory using LIFO (500 $4) Cost of Goods Sold using FIFO [(600 $4.00) + (500 $5.50) + (100 $5.00)] Cost Per Unit using Average Cost ($8,350 / 1,700 units) TOP: Inventory Valuation Methods

Total Cost $2,400 2,750 2,000 1,200 $8,350

b. c. d.

= $2,000 = $5,650 = $ 4.91

OBJ: KP 10-4 10. ANS:

LIFO Sales (1,200 @ $10) Cost of goods sold: $12,000

FIFO $12,000

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INVENTORY CONTROL FOR FTMBA-SECTION-E, FTMBA Capital Markets &

Executive MBA_NMIMS_2010-11
Beg inventory (600 @ $4) Purchases Goods available for sale End inventory* (600 @ 4) (400 @ 6) + (200 @ 5.75) Cost of goods sold Gross profit * 2,400 6,900 9,300 2,400 3,550 6,900 5,100 5,750 6,250 2,400 6,900 9,300

FIFO ending inventory consists of the value associated with the most recent purchase. On July 25, 400 units were purchased at $6.00. Since 600 units comprise ending inventory, it is considered to be made up of the 400 units from the July 25 purchase plus 200 units from the second-most-recent purchase, July 21 for $5.75. LIFO ending inventory is valued at the oldest inventory costs available. July's beginning inventory consisted of units with a cost of $4.00. TOP: Inventory Valuation Methods

OBJ: KP 10-4

11. ANS: (Inventory Costing Methods) The inventory and cost of goods sold information is given below: a. Ending Inventory using Average Cost: $3,400/1,200 500 units = $1,417 Cost of Goods Sold using LIFO: 400 $1.75 = 300 4.00 =

b.

$ 700 1,200 $1,900

c.

Cost of Goods Sold using FIFO: 500 $3.00 = 200 1.75 =

$1,500 350 $1,850

d.

Ending Inventory using FIFO: 300 $4.00 = 200 1.75 =

$1,200 350 $1,550

OBJ: KP 10-4

TOP: Inventory Valuation Methods

12. ANS: (Inventory Costing Methods) The inventory and Cost of Goods Sold figures are given below: $18 24 28 100 200 200 = = = $ 1,800 4,800 5,600

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INVENTORY CONTROL FOR FTMBA-SECTION-E, FTMBA Capital Markets &

Executive MBA_NMIMS_2010-11
35 Units Available Ending Inventory 200 700 (320) 380 = 7,000 $19,200 units sold

a.

Ending Inventory under FIFO: 200 120 Cost of Goods Sold using LIFO: 200 180 Ending Inventory using Average Cost: $19,200/700 320 units = $8,777 TOP: Inventory Valuation Methods

$35 28

= =

$ 7,000 3,360 $10,360 $ 7,000 5,040 $12,040

b.

$35 28

= =

c.

OBJ: KP 10-4 13.

ANS: (Inventory Costing Methods) The inventory and Cost of Goods Sold figures are given below: $ 6 8 9 11 Units Available Ending Inventory 700 5,000 5,000 5,000 15,700 (6,500) 9,200 units sold = = = = $ 4,200 40,000 45,000 55,000 $144,200

a.

Ending Inventory under FIFO: 5,000 1,500 $11 9 = = $55,000 13,500 $68,500

b.

Cost of Goods Sold using LIFO: 5,000 4,200 $11 9 = = $55,000 37,800 $92,800

c.

Ending Inventory using Average Cost: $144,200/15,700 6,500 units = $59,700.64 TOP: Inventory Valuation Methods

OBJ: KP 10-4

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INVENTORY CONTROL FOR FTMBA-SECTION-E, FTMBA Capital Markets &

Executive MBA_NMIMS_2010-11
14. ANS: (Inventory Costing Methods) The inventory and cost of goods sold figures are given below: 14,000 = 2,000 = 5,000 = 16,000 = 37,000 (30,000) 7,000 units on hand Ending Inventory using Average Cost: $689,000/37,000 x 7,000 units = $130,351 Cost of goods sold using FIFO: 14,000 2,000 5,000 9,000 $17 18 19 20 Units available Units sold $238,000 36,000 95,000 320,000 $689,000

a.

b.

$17 18 19 20

= = = =

$238,000 36,000 95,000 180,000 $549,000

c.

Cost of Ending Inventory under LIFO: 7,000 TOP: Inventory Valuation Methods

$17

$119,000

OBJ: KP 10-4 15.

ANS: (Inventory Costing Methods) The appropriate methods are presented below: 1. LIFO 2. LIFO 3. FIFO 4. SI OBJ: KP 10-4 TOP: Inventory Valuation Methods

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INVENTORY CONTROL FOR FTMBA-SECTION-E, FTMBA Capital Markets &

Executive MBA_NMIMS_2010-11
16. ANS: 1. From the data given for the weighted average method, it can be inferred that total goods available for sale were $600,000. Because beginning inventory (zero) and purchases were the same for all three methods, total available for sale is also the same for all three methods. Ending inventory is given, so COGS can be computed. FIFO 600,000 50,000 550,000 FIFO 1,000,000 550,000 450,000 300,000 150,000 30,000 120,000 36,000 84,000 Wtd Avg 600,000 60,000 540,000 Wtd Avg 1,000,000 540,000 460,000 300,000 160,000 30,000 130,000 39,000 91,000 LIFO 600,000 70,000 530,000 LIFO 1,000,000 530,000 470,000 300,000 170,000 30,000 140,000 42,000 98,000

Goods available for sale (inferred) Ending inventory (given) Cost of goods sold

Sales Cost of goods sold Gross profit Operating expenses Net operating income Interest expense Net income before taxes Tax expense (30%) Net income 2.

The data suggest that prices have been falling. Under FIFO, you assume that you sold the first ones; under LIFO you assume that you sold the last ones. On these facts, cost of goods sold under FIFO is $20,000 higher than under LIFO, so the older inventory cost $20,000 more than the newest inventory purchases. TOP: Inventory Valuation Methods

OBJ: KP 10-4 17. ANS:

If ending inventory is decreased due to the change from FIFO to LIFO then total ending current assets and average inventory will also decrease; cost of goods for the period will increase. (000s omitted) LIFO Working capital ratio Current assets Current liabil 7,000 / 6,300 = 1.11 6,000 / 6,300 = 0.95 Gross profit percentage [Sales - COGS] Sales (58,000 - 36,000) / 58,000 = 37.93 (58,000 - 37,000) / 58,000 = 36.21 Inventory turnover COGS Avg Inven FIFO

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INVENTORY CONTROL FOR FTMBA-SECTION-E, FTMBA Capital Markets &

Executive MBA_NMIMS_2010-11
36,000 / 4,500 = 8.00 OBJ: KP 10-4 TOP: Inventory Valuation Methods 37,000 / 4,000 = 9.25

18. ANS: (Inventory Costing Methods and Taxes) a. Cost of goods sold using LIFO: $251,000 COGS + FIFO: 225,000 + LIFO: ??? +

EI 56,000 30,000

= = =

COGAFS 281,000 281,000 LIFO $750,000 (251,000) $499,000 (300,000) (20,000) $179,000 $ 53,700 FIFO $750,000 (225,000) $525,000 (300,000) (20,000) $205,000 $ 61,500

b. & c. Sales Cost of goods sold Gross profit Operating expenses Interest expense Income before taxes Taxes (30%) d. The LIFO method lowers taxes by $7,800. OBJ: KP 10-5 TOP: More About LIFO

19. ANS: (Inventory Costing Methods and Taxes) a. Cost of goods sold using LIFO: $193,000 COGS + FIFO: 180,000 + LIFO: ??? +

EI 35,000 22,000

= = =

GAFS 215,000 215,000 LIFO $500,000 (193,000) $307,000 (190,000) (15,000) $102,000 $ 40,800 FIFO $500,000 (180,000) $320,000 (190,000) (15,000) $115,000 $ 46,000

b. & c. Sales Cost of goods sold Gross profit Operating expenses Interest expense Income before taxes Taxes (40%) d. The LIFO method lowers taxes by $5,200. OBJ: KP 10-5 20. TOP: More About LIFO

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INVENTORY CONTROL FOR FTMBA-SECTION-E, FTMBA Capital Markets &

Executive MBA_NMIMS_2010-11
ANS: fourth purchase not made Sales Rev COGS: BI Purch GAFS End Inv (LIFO)* COGS Gross Profit *LIFO Ending Inventory calculations: fourth purchase not made: ending inventory is 1,000 ounces: units at beginning inv value: 1,000 oz @ $3 fourth purchase made; ending inventory is 11,000 ounces: units at beginning inv value: 10,000 oz @ $3 plus units at first purchase value: 1,000 oz @ $5 OBJ: KP 10-5 21. ANS: Sales (January 1 - June 28) 100% 3-year aggregate gross profit* 14% Estimated cost of sales 86% Cost of goods sold: Beginning inventory Purchases Goods Available for sale Estimated inventory (destroyed) *Three-year aggregate gross profit: 3 year aggregate Sales 3 year aggregate Cost of goods sold 3 year aggregate Gross profit Aggregate gross profit rate for 3 years $18,000 / $128,000 = 14% OBJ: KP 10-6 22. ANS: 1. and 2. Net Value in TOP: Inventory Estimation and Valuation 29,000 - 4,060 24,940 10,000 25,000 35,000 10,060 TOP: More About LIFO 195,000 30,000 144,000 174,000 3,000 171,000 24,000 30,000 189,000 219,000 35,000 184,000 11,000 fourth purchase made 195,000

128,000 110,000 18,000

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INVENTORY CONTROL FOR FTMBA-SECTION-E, FTMBA Capital Markets &

Executive MBA_NMIMS_2010-11
Original Cost $ 3,500 2,800 4,100 4,500 $14,900 Realizable Value $ 3,650 $ 2,700 $ 4,000 $ 3,950 $14,300 Replacement Cost $ 3,700 2,600 4,050 3,900 $14,250 Ending Inventory $ 3,500 2,600 4,000 3,900 $14,000

Item A Item B Item C Item D Totals 3. $14,900 - $14,000 = $900 OBJ: KP 10-6 23. ANS: (Inventory Turnover) a.

TOP: Inventory Estimation and Valuation

b.

Inventory Turnover = Cost of Goods Sold Average Inventory = ($96,000 + $560,000 - $64,000) [($96,000 + $64,000) 2] = $592,000 $80,000 = 7.4 times Average number of days that inventory is on hand: = 365 days 7.4 times = approximately 49 days TOP: Evaluating Inventory Levels and Budgeting Cash Disbursements

OBJ: KP 10-7

24. ANS: The necessary calculations are given below: Beginning inventory Purchases Goods available for sale Less: Ending inventory Cost of goods sold a. Average days a package of Clutch is currently in stock: Inventory turnover = = = = = = COGS 600,000 15 times 360 days 360 days 24 days / / / / Average Inventory 40,000 Inventory turnover 15 $ 20,000 640,000 $660,000 (60,000) $600,000

Average days in stock

b. Maximum acceptable average inventory level: 17 Max days in stock = = = 360 days 360 COGS / / / Inventory turnover ??? 21 times per year Average Inventory

21 Inv turnover times

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INVENTORY CONTROL FOR FTMBA-SECTION-E, FTMBA Capital Markets &

Executive MBA_NMIMS_2010-11
= = OBJ: KP 10-7 25. ANS: Purchases made in in the amount of will be paid for in: March April May June July August September Totals OBJ: KP 10-7 March 360,000 April 600,000 May 750,000 June 690,000 July 450,000 Aggregate 2,850,000 600,000 ??? $28,571 avg inv

TOP: Evaluating Inventory Levels and Budgeting Cash Disbursements

180,000 144,000 36,000

300,000 240,000 60,000

375,000 300,000 75,000

345,000 276,000 69,000 690,000

360,000

600,000

750,000

225,000 180,000 45,000 450,000

180,000 444,000 651,000 705,000 576,000 249,000 45,000 2,850,000

TOP: Evaluating Inventory Levels and Budgeting Cash Disbursements

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