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Homework Solutions - Ch 20

Homework Solutions - Ch 20 - Exercise 20-1 Requirement 1...

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Exercise 20-1 Requirement 1 January 1, 2006 (\$ in millions) Retained earnings .......................................................................... 30 Inventory (cumulative effect) * .................................................. 30 2005 2004 Total * Cost of goods sold (FIFO) ........................................................ 40 38 Cost of goods sold (average) .................................................... 56 52 Difference .............................................................................. 16 14 30 Since the cost of goods available for sale each period is the sum of the cost of goods sold and the cost of goods unsold (inventory), a \$30 million difference (\$16 + 14) in cost of goods sold due to using FIFO rather than Average means there also is a \$30 million difference in inventory. The cumulative prior year difference in cost of goods sold is reflected as a difference in prior years’ income and therefore the balance in retained earnings. Requirement 2 C OMPARATIVE I NCOME S TATEMENTS (\$ in millions) 2006 2005 Revenues \$420 \$390 Cost of goods sold (average) (62) (56) Operating expenses (254) (250) Net income \$104 \$ 84 Requirement 3 Calculations (\$ in millions) : 2004 Revenues \$380 Cost of goods sold (FIFO) (38) Operating expenses (242) Net income \$100 Dividends (20) Retained earnings, Jan. 1, 2004 0 Retained earnings, Jan. 1, 2005 \$ 80

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