pratt_8e_chapter_7_solns - CHAPTER 7 MERCHANDISE INVENTORY...

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CHAPTER 7 MERCHANDISE INVENTORY BRIEF EXERCISES BE7–1 The inventory purchases made by Hewlett-Packard during 2008 can be calculated as follows: Beginning inventory $ 8.0 billion + Purchases X – Cost of Goods Sold 69.3 =Ending Inventory $ 7.9 billion Purchases = $69.2 billion BE7–2 a. From the footnote it is apparent that Johnson & Johnson is a manufacturer. A retailer or a service company would not have accounts called Raw materials and supplies or a Goods in process within the detail of their inventory. These accounts are only used by manufacturing companies. b. From this disclosure it appears that Johnson & Johnson uses the FIFO inventory cost flow assumption. If a company uses LIFO it must disclose the amount of the LIFO reserve imbedded in the valuation of the inventory. BE7–3 If General Electric used the FIFO inventory cost flow assumption instead of LIFO, its inventory balance for 2008 would be ($13.7 + 0.706) = $14.406 billion. This disclosure is useful to financial statement users because it can make it easier to compare GE’s results with a company that uses a FIFO assumption. It also tells the reader the financial statement and tax liability impact on GE if it were to switch to a FIFO assumption. EXERCISES E7–1 (1) Since the goods were shipped FOB shipping point, legal title to the goods passes to the buyer when the goods are shipped on December 30, 2011. Since Dallas is the buyer, Dallas has legal title to the inventory as of December 31, 2011. Further, Dallas rightfully included the items in its inventory. There will be no misstatement on any of the financial statements. (2) The goods were shipped FOB shipping point, so legal title passes to the buyer when the goods are shipped on December 31, 2011. Since Dallas is the seller, not the buyer, legal title passed from Dallas on December 31, 2011. Dallas, wrongfully included the items in its ending inventory. This would result in an overstatement of inventory on the balance sheet. Assuming E7–1 Concluded 1
that Dallas has properly recorded the sale but did not yet record the COGS, there will be an understatement of COGS on the income statement and an overstatement of net income and retained earnings. (3) Since the goods were shipped FOB destination, legal title to the goods passes to the buyer when the goods reach their destination on January 2, 2012. Since Dallas is the seller, not the buyer, Dallas has legal title to the inventory as of December 31, 2011. Dallas has rightfully included the items in its inventory. Assuming no other entries regarding the sale have been made, there will not be any misstatement on any of the financial statements. (4) The goods were shipped FOB destination, so legal title to the goods passes to the buyer when the goods reach their destination on December 31, 2011. Since Dallas is the buyer, Dallas has legal title to the inventory as of December 31, 2011. Dallas has rightfully included the items in its inventory, and assuming that the goods were correctly included in purchases as of December 31, 2011, there will not be any misstatement on any of the financial statements.

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