CHAPTER 7

CHAPTER 7 - CHAPTER 7 HOMEWORK SOLUTIONS Questions: 1....

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CHAPTER 7 HOMEWORK SOLUTIONS Questions: 1. Inventory often is one of the largest amounts listed under assets on the balance sheet which means that it represents a significant amount of the resources available to the business. The inventory may be excessive in amount, which is a needless waste of resources; alternatively it may be too low, which may result in lost sales. Therefore, for internal users inventory control is very important. On the income statement, inventory exerts a direct impact on the amount of income. Therefore, statement users are interested particularly in the amount of this effect and the way in which inventory is measured. Because of its impact on both the balance sheet and the income statement, it is of particular interest to all statement users. 2. Fundamentally, inventory should include those items, and only those items, legally owned by the business. That is, inventory should include all goods that the company owns, regardless of their particular location at the time. 4. Goods available for sale is the sum of the beginning inventory and the amount of goods purchased during the period. Cost of goods sold is the amount of goods available for sale less the ending inventory. 7. The specific identification method of inventory costing is subject to manipulation. Manipulation is possible because one can, at the time of each sale, select (pick and choose) from the shelf the item that has the highest or the lowest (or some other) unit cost with no particular rationale for the choice. The rationale may be that it is desired to influence, by arbitrary choice, both the amount of income and the amount of ending inventory to be reported on the financial statements. To illustrate, assume item A is stocked and three are on the shelf. One cost $100; the second one cost $115; and the third cost $125. Now assume that one unit is sold for $200. If it is assumed arbitrarily that the first unit is sold, the gross profit will be $100; if the second unit is selected, the gross profit will be $85; or alternatively, if the third unit is selected, the gross profit will be $75. Thus, the amount of gross profit (and income) will vary significantly depending upon which one of the three is selected arbitrarily from the shelf for this particular sale. This assumes that all three items are identical in every respect except for their unit costs. Of course, the selection of a different unit cost, in this case, also will influence the ending inventory for the two remaining items.
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Multiple Choice: Mini-Exercises: M7–5. (a) Rising costs Highest net income FIFO Highest inventory FIFO (b) Declining costs Highest net income LIFO Highest inventory LIFO M7–7. Quantity Cost per item Replacement cost per item Lower of cost or market Reported on Balance Sheet Item A 50 $ 75 $100 $75 50 x $75 = $3,750 Item B 25 60 50 50 25 x $50 = $1,250 Total $5,000
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Exercises: E7–2. (Italics for missing amounts only.)
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CHAPTER 7 - CHAPTER 7 HOMEWORK SOLUTIONS Questions: 1....

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