# Calculated in part a do not reflect the inventory

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calculated in part a) do not reflect the inventory investment that was necessary to generate the sales reported for the year. Understanding these seasonal effects can be important for cash management over the year. continued next page ©Cambridge Business Publishers, 2015 Solutions Manual, Chapter 7 7-11
E7-25. concluded d. One approach to calculating an inventory turnover ratio is to use an “average of averages” approach. For the first quarter of 2010, the average inventory was (\$197 + \$243) / 2 = \$220. Follow the same process to determine the average inventory for quarters two, three and four. Then average the averages. The effect of this process is the following: 2010: Weighted average inventory = [197 + 2x(243 + 240 + 209) + 202)] / 10 = \$223 2011: Weighted average inventory = [202 + 2x(248 + 242 + 212) + 194)] / 10 = \$224 The weighted average inventory levels are greater than the simple annual averages for both years because the fiscal year-end is set when inventory is predictably low. When these inventory values are divided into annual cost of goods sold, the inventory turnover ratios are lower than those calculated in part Weighted average inventory turnover ratio: 2010: \$447 / \$223 = 2.0 times 2011: \$458 / \$225 = 2.0 times E7-26. (30 minutes) Units Cost Beginning Inventory 1,000 \$ 20,000 Purchases: #1 1,800 39,600 #2 800 20,800 #3 1,200 34,800 Goods available for sale 4,800 \$115,200 Units in ending inventory = 4,800 – 2,800 = 2,000 a. First-in, first-out Units Cost Total 1,200 @ \$29 = \$34,800 800 @ \$26 = 20,800 Ending Inventory 2,000 \$55,600 Cost of goods available for sale \$115,200 Less: Ending inventory 55,600 Cost of goods sold \$ 59,600 continued next page ©Cambridge Business Publishers, 2015 7-12 Financial & Managerial Accounting for Decision Makers, 2 nd Edition
E7-26. concluded b. Last-in, first-out Units Cost Total 1,000 @ \$20 = \$20,000 1,000 @ \$22 = 22,000 Ending inventory 2,000 \$42,000 Cost of goods available for sale \$115,200 Less: Ending inventory 42,000 Cost of goods sold \$ 73,200 c. Average cost \$115,200/4,800 = \$24 average unit cost 2,000 x \$24 = \$48,000 ending inventory \$115,200 - \$48,000 = \$67,200 cost of goods sold (or 2,800x\$24) d. 1. The first-in, first-out method in most circumstances represents physical flow. This inventory system applies to perishables or to situations in which the earliest items acquired are moved out first because of risk of deterioration or obsolescence. 2. Last-in, first-out results in the lowest inventory amount during periods of rising unit costs, which in turn results in the lowest net income and the lowest income tax. 3. The first-in, first-out results in the lowest cost of goods sold in periods of rising prices. This is the inventory method Chen should use to report the largest amount of income. Of course, this assumes that prices will continue to rise. Companies cannot change inventory costing methods without justification, and the change may be prohibited by tax laws as well. ©Cambridge Business Publishers, 2015 Solutions Manual, Chapter 7 7-13
E7-27. (25 minutes) Units Cost Total Beginning inventory 100 @ \$46 = \$ 4,600 Purchases: Purchase #1 650 @ 42 = 27,300 Purchase #2 550 @ 38 = 20,900 Purchase #3 200 @ 36 = 7,200 Cost of goods available for sale 1,500 \$60,000 a. First-in, first-out Units Cost Total 200 @ \$36 = \$ 7,200 150 @ 38 = 5,700 Ending inventory ...................................... 350 \$12,900 Cost of goods available for sale ............... \$60,000 Less: Ending inventory ............................ 12,900 Cost of goods sold ................................... \$47,100 b. Average cost Cost of Goods Available for Sale/Total Units Available for Sale