ch06 - Chapter 6 - Solutions Overview: Problem Length {S}...

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Chapter 6 - Solutions Overview: Problem Length Problem #s {S} 1, 2, 7, 14, 15, 17, 19 - 23 {M} 3, 4, 10 - 13, 16, 18, 24 {L} 5, 6, 8, 9 1.{S}a. Start with the basic inventory relationship BI + P = COGS + EI Opening inventory 400 units @ $20 $ 8,000 Purchases 1,000 25,000 Total 1,400 units $33,000 (i) Under FIFO, ending inventory consists of 600 units: 100 purchased in second quarter at $24 $2,400 300 purchased in third quarter at $26 7,800 200 purchased in fourth quarter at $28 5,600 600 units total $15,800 (ii) Under LIFO, ending inventory consists of 600 units: 400 inventory at January 1 at $20 $8,000 200 purchased in first quarter at $22 4,400 600 units total $12,400 (iii)Under average cost, ending inventory consists of 600 units with an average cost of $33,000/1,400 = $23.5714 per unit or $14,142.84 total. b. COGS for the year equals the $33,000 total of opening inventory plus purchases, less closing inventory under the method chosen: (i) FIFO: $33,000 less $15,800 = $17,200 (ii) LIFO: $33,000 less $12,400 = $20,600 (iii)Average cost: $33,000 less $14,142.84 = $18,857.16 c. (i) Reported income is highest under FIFO (lowest COGS) and lowest under LIFO (highest COGS). Average cost is in between FIFO and LIFO. (ii) Stockholders’ equity is highest under FIFO (highest 6-1
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inventory and retained earnings) and lowest under LIFO (lowest inventory and retained earnings), with average cost in between. 2.{S}Using FIFO instead of LIFO when prices are rising and inventory quantities are stable has the following effects: (i) Gross profit margins are higher under FIFO than under LIFO because revenues at higher current prices are matched with cost-of-goods-sold measured using older (lower) prices. (ii) Net income is lower under LIFO than under FIFO because cost-of-goods-sold is higher. (iii) Cash from operations is higher under LIFO than under FIFO because income tax paid is lower. (iv) Inventory balances are lower under LIFO than under FIFO because cost-of-goods-sold is higher and lower prices remain in inventory. (v) Inventory turnover is lower under FIFO than under LIFO because cost-of-goods-sold is lower and inventory balances higher. Both factors decrease the inventory turnover ratio. (vi) Working capital is lower under LIFO than under FIFO because inventory balances are lower, despite partial offset from higher cash balances (because of lower tax payments). (vii) Total assets are higher under FIFO because FIFO inventory balances are higher. (viii) The debt-to-equity ratio is lower under FIFO than under LIFO because equity is higher, reflecting higher retained earnings. 3.{M}a. Start with the basic inventory relationship BI + P = COGS + EI Since opening inventory is zero, both BI and P (purchases) are identical under FIFO and LIFO; the difference in COGS 6-2
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equals the difference in ending inventory. That difference can be computed as follows: Total purchases in units = (3 x 100,000) + (3 x 125,000) + (3 x 150,000) + (3 x 200,000) = 1,725,000 Total sales in units = (6 x 100,000) + (6 x 150,000) = 1,500,000. Therefore units in ending inventory = 1,725,000 - 1,500,000 = 225,000 (i) Purchases are identical; there is no difference between methods.
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ch06 - Chapter 6 - Solutions Overview: Problem Length {S}...

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