Lesson%207%20Solutions

# Lesson%207%20Solutions - Suggested Solutions for ACCT 351...

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Unformatted text preview: Suggested Solutions for ACCT 351 Adapted from Beechy, T. H., & Conrod, J. E. D. (2005). Solutions manual to accompany intermediate accounting, volume 1 (3 rd Can. ed.). Toronto: McGraw-Hill Ryerson. Reproduced with permission. Page 1 of 11 Lesson 7, Chapter 8 Assignment 8-7 (text, p. 446) Requirement 1 20X0 20X1 20X2 20X3 FIFO income \$26,250 \$45,000 \$48,750 \$67,500 Closing inventory cost differential 1 (3,750) (40,350) (46,500) (37,500) Opening inventory cost differential 3,750 40,350 46,500 \$22,500 \$ 8,400 \$42,600 \$76,500 1 20X0, \$82,250 - \$78,500 = \$3,750 20X1, \$142,000 - \$101,650 = \$40,350 20X2, \$164,000 - \$117,500 = \$46,500 20X3 \$173,000 - \$135,500 = \$37,500 Requirement 2 If LIFO were used, inventories would be lower than average cost and income would be lower than average cost in 20X0, 20X1, and 20X2. Note the pattern of average cost lower than FIFO by an increasing amount is broken in 20X3. The differential between average cost and FIFO inventories has declined during the year, implying that prices declined during the year. Depending on the extent of the price changes, LIFO may have higher net income than AC in 20X3. Requirement 3 a) Match recent costs with revenue—LIFO. b) Minimize income tax—AC (except in 20X3!). c) Maximize inventory values—FIFO. Suggested Solutions for ACCT 351 Page 2 of 11 Assignment 8-8 (text, p. 447) Requirement 1 Company A Company B Profit margins: 29.4% (\$140/\$476) 23.8% (\$100/\$420) Company A uses FIFO, because it has a higher ending inventory value for an identical physical quantity of inventory. This means that during the year it has expensed older, less expensive items and thus has a higher gross profit margin. Company A Company B Sales.......................................................................... \$476,000 \$420,000 Cost of goods sold Opening inventory ............................................... 16,000 14,000 Purchases.............................................................. 360,000 340,000 Closing inventory 1 ............................................... 34,000 34,000 Cost of goods sold .................................................... 342,000 320,000 Gross profit............................................................... 134,000 100,000 Operating expenses................................................... 70,000 72,000 Net income................................................................ \$ 64,000 \$ 28,000 1 Assumes average cost is the same for both companies Requirement 2 Companies that wish to maximize earnings or current assets (inventory) may prefer FIFO. Those wishing to minimize net income and tax payments may prefer average cost. Average cost is also easy to use. Requirement 3 Standard setters allow choice because there is no one clearly preferable method and companies pick the method that suits their industry’s reporting environment most closely. Companies would be reluctant to switch to a (for them) less desirable method unless there was some fatal flaw with their existing choice....
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## This note was uploaded on 09/22/2009 for the course ACCOUNTING ACCT-351 taught by Professor Charko during the Fall '09 term at Humber.

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Lesson%207%20Solutions - Suggested Solutions for ACCT 351...

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