solutions to questions on Chapter 8

solutions to questions on Chapter 8 - Fall 07 final exam...

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Fall 07 final exam Req. 1 SCORESBY, INC. Income Statement For the Year Ended December 31, 2007 Case A Case B FIFO Weighted Average Sales revenue 1 .............................. $786,000 $786,000 Cost of goods sold : Beginning inventory . ................. 56,000 56,000 Purchases . ................................. 259,000 259,000 Cost of goods available for sale 2 315,000 315,000 Ending inventory 3 . ................... 88,000 74,080 Cost of goods sold. ................ 227,000 240,920 Gross profit . ............................... 559,000 545,080 Expenses .................................. 500,000 500,000 Pretax income . ............................... $ 59,000 $ 45,080 Computations: (1) Sales: (10,000 units @ $29) + (16,000 units @ $31) = $786,000 (2) Goods available for sale (for both cases): Units Unit Cost Total Cost Beginning inventory 7,000 $8 $ 56,000 Purchase, March 5, 2007 19,000 9 171,000 Purchase, September 19, 2007 8,000 11 88,000 Goods available for sale 34,000 $315,000 (3) Ending inventory (34,000 available – 26,000 units sold = 8,000 units): Case A FIFO: 8,000 units @ $11 = $88,000 Case B Weighted Average: $315,000 ÷ 34,000 units = $9.26 per unit 8,000 units @ $9.26 = $74,080
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Req. 2 Comparison of Amounts Case A Case B FIFO Weighted Average Pretax Income $59,000 $45,080 Difference $13,920 Ending Inventory 88,000 74,080 Difference 13,920 The above tabulation demonstrates that the difference in pretax income between the two cases is exactly the same as the difference in the costs of the ending inventory. Differences in inventory have a dollar-for-dollar effect on pretax income. Req. 3 The weighted average cost method may be preferred for income tax purposes because it reports less taxable income (when prices are rising) and hence it reduces (a) income tax and (b) cash outflows for the period. Req. 4
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This note was uploaded on 04/01/2010 for the course JMSB Comm 217 taught by Professor Byronsong during the Winter '09 term at Concordia Canada.

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solutions to questions on Chapter 8 - Fall 07 final exam...

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