lecture7_updated_student - Luo, Shuqing Biz1, #07-13 Office...

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Luo, Shuqing Biz1, #07-13 Office hour: Tuesday afternoon 4.30 p.m.-6:00 p.m. Today’s outline Chapter 7 part II Chapter 5 1
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Financial statement effects in times of rising costs FIFO LIFO Cost of goods sold on income statement Net income Income taxes Inventory on balance sheet Chapter 7 Review 2
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This exercise tests your understanding of the various inventory costing methods, specific identification (S), weighted average (W) LIFO (L) and FIFO (F). In the space provided, write the name of the inventory method that best fits the description. Assume that the cost of inventory is rising and that the company is in a taxpaying position. 1. _______ Used to account for automobiles, jewelry and art objects. 2. _______ Reports the highest amount of gross profit/net income. 3. _______ Results in a good match of the most current estimate of cost of goods sold against revenue. 4. _______ Results in a measure of ending inventory that is not equal to current costs and is much lower than the cost of replacing the inventory. 5. _______ Results in the lowest amount of income taxes paid. 6. _______ Results in the lowest amount of gross profit/net income. 7._______ Reports a unit cost for ending inventory that is identical to the unit cost for cost of goods sold and is somewhere between the highest unit cost paid and the lowest unit cost paid. 8._______ If used for tax purposes, must be used for financial reporting purposes. 9. _______ Can result in unusually low cost of goods sold if ending inventory levels dip below beginning inventory levels. 10._______ The cost of inventory using this method must be reported in the financial statements whether or not the method is used. 3
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Valuation at Lower of Cost or Market Ending inventory is reported at the lower of cost or market (LCM) . Replacement Cost The current purchase price for identical goods. The company will recognize a “holding” loss in the current period rather than the period in which the item is sold. This practice is conservative .
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E7-12, P380 5
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6 Item Quantity Cost Replacement Cost LCM A 20 10 15 B 75 40 36 C 35 57 55 D 10 27 32 Debit Credit Date Description GENERAL JOURNAL (line-by-line) Debit Credit Date Description GENERAL JOURNAL (total value)
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Errors in Measuring Ending Inventory 7 Errors in Measuring Inventory Ending Inventory Beginning Inventory Overstated Understated Overstated Understated Ending Inventory + Retained Earnings + Goods Available for Sale N/A N/A Cost of Goods Sold Gross Profit Net Income Effect on Current Period's Balance Sheet Effect on n Current Period's Income Statement
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E7-17, p381 8 2010 2011 Beginning inventory purchases Ending Inventory Retained Earnings Goods Available for Sale Cost of Goods Sold Gross Profit Net Income Effect on Current Period's Balance Sheet Effect on n Current Period's Income Statement
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E7-19 9
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E7-19 1st Quarter 2nd Quarter Incorrect Correct Error Incorrect Correct Error Beginning inventory $4,000 $3,800 Purchases 3000 13,000 Ending inventory 3,800 9,000 Cost of goods sold 3,200 7,800 Gross profit 7,800 10,200 Pretax income 2,800 4,200 10
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Inventory Methods and Financial Statement Analysis Beginning LIFO Reserve - Ending LIFO Reserve
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lecture7_updated_student - Luo, Shuqing Biz1, #07-13 Office...

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