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Chapter 7 Solutions

# Chapter 7 Solutions - Solutions winter 7-13 a FIFO cost...

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Unformatted text preview: Solutions Chapter 07 2010 winter 7-13 a) FIFO cost = (30 x \$600) + ( 45 x \$600) + (10 x 625) + (40 x \$625) = \$76,250 1. COGS = 76,250 EI = 50,000 # Units Purchases Cost per u n i t Sales Apr 1 Beg. Inv 75 \$45,000 \$600 Apr 3 Purchase 50 \$31,250 \$625 5 Sale 30 \$33,000 11 Purchase 25 \$16,250 \$650 15 Sale 55 \$68,750 22 Sale 40 \$48,000 28 Purchase 50 \$33,750 \$675 2. Moving Average cost: Apr 5 sale [(\$45,000 + \$31,250) / 125 units] x 30 = \$18,300 Apr 15 sale [(\$45,000 + \$31,250 - \$18,300 + \$16,250) / (150 - 30) x 55 = \$34,008 Apr 22 sale [(\$45,000 + \$31,250 - \$18,300 + \$16,250 - \$34,008) / (150 – 30 - 55) x 40 = \$24,734 Total Cost of goods sold = \$18,300 + \$34,008 + \$24,734 = \$77,042 EI = \$49,208 b) Under FIFO: \$149,750 - 76,250 = \$73,500 Gross margin = 73,500/149,750 = 49.08% Under Moving Average: \$149,750 – 77,042 = \$72,208 Gross margin = 72,208/149,750 = 48.22% FIFO produces the larger gross margin. 7-20 a) 1. FIFO Sale # 1 = 120 units Cost of Goods sold = (45 x \$8) + (75 x \$9) = \$1,035 Sale # 2 = 130 units Cost of Goods sold = (75 x \$9) + (55 x \$10) = \$1225 Total Cost of Goods Sold = \$1,035 + \$1,225 = \$2,260 Gross profit = (120 x \$16) + (130 x \$17) - \$2,260 = \$1,870 2. Weighted Average Sale # 1 = 120 units Cost of Goods sold = Total Cost/Total Units available x units sold = \$2,360/260 x 120 units = \$1,089.23 Note: As of the first sale, only the beginning balance and the first two purchases are in inventory. Average cost therefore is calculated at this point. Sale # 2 = 130 units Cost of Goods sold = Total Cost/Total Units available x units sold = \$1,870.77/190 x 130 units = \$1,280 Note: After the first sale, there are 140 units left in inventory at a total cost of \$1,270.77. The next purchase is added to this and the weighted average is recalculated. Total Cost of Goods Sold = \$1,089.23 + \$1,280 = \$2,369.23 Gross profit = (120 x \$16) + (130 x \$17) - \$2,369.23 = \$1,760.77 b) On the balance sheet, Weighted Average provides the most conservative valuation of inventory because it is the lowest. Conservatism states that assets should be understated rather than overstated where estimates are used. FIFO provides the closest valuation to replacement cost on the balance sheet because the ending inventory figure is calculated by using the most recent costs. However the differences in both cases are not significant. c) Weighted Average provides the most conservative estimate of reported income since cost of goods sold is maximized under weighted average when product costs are rising, as is the case for Black Company. Since cost of goods sold is highest, reported income is lower than under the FIFO cost flow assumptions. The opposite would be true if product costs for Black Company were declining. In that case, FIFO would provide the highest cost of goods sold since later purchases would cost less as prices fall....
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Chapter 7 Solutions - Solutions winter 7-13 a FIFO cost...

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