Solution Manual For Accounting Principles Volume 1 7th Canadian Edition By Jerry J. Weygandt Donal

Solution Manual For Accounting Principles Volume 1 7 th Edition By Jerry J. Weygandt Donal Solution Manual for Accounting Principles, Volume1, 7th Canadian Edition by Jerry J. Weygandt, Donald E. Kieso Instant Download Click link below to buy: OR Email us at: OR visit: Instant Download CHAPTER 6 Inventory Costing ASSIGNMENT CLASSIFICATION TABLE Learning Objectives Questions Brief Exercises Exercises Problems Set A Problems Set B 1. Describe the steps in determining inventory quantities. 1, 2, 3 1, 2 1, 2 1, 7 1, 7 2. Calculate cost of goods sold and ending inventory in a perpetual inventory system using specific identification, FIFO, and weighted average methods of cost determination. 4, 5, 6 3, 4, 5, 6, 7, 8 3, 4, 5, 6, 7, *15, *16 2, 3, 4, 5, 6, *12, *13 2, 3, 4, 5, 6, *12, *13 3. Determine the financial statement effects of inventory cost determination methods. 7, 8, 9 9, 10 6, 7 4, 5 4, 5 4. Determine the financial statement effects of inventory errors 10, 11, 11, 12 8, 9 3, 7, 8 3, 7, 8 5. Value inventory at the lower of cost and net realizable value. 12, 13, 14 13, 14 10, 11 6, 9 6, 9 6. Demonstrate the presentation and analysis of inventory. 15, 16, 17, 18 15, 16 11, 12 8, 10 8, 10 *7. Calculate ending inventory and cost of goods sold in a periodic inventory system using FIFO and weighted average inventory cost formulas (Appendix 6A). *19, *20, *21 *17, *18 *13, *14, *15, *16 *11, *12, *13 *11, *12, *13 *8. Estimate ending inventory using the gross profit and retail inventory methods (Appendix 6B). *22, *23, *24 *19, *20 *17, *18 *14, *15 *14, *15 ASSIGNMENT CHARACTERISTIC TABLE Problem Numbe r Description Difficulty Level Time Allotted (min.) 1A Identify items in inventory. Moderate 20-25 2A Apply specific identification. Simple 15-20 3A Apply perpetual FIFO. Record sales and inventory adjustment and calculate gross profit, and answer questions. Moderate 20-25 4A Apply perpetual weighted average and answer questions. Moderate 20-25 5A Apply perpetual FIFO and weighted average. Answer questions about financial statement effects. Moderate 35-45 6A Record transactions using perpetual weighted average. Apply LCNRV. Moderate 35-45 Problem Numbe r Description Difficulty Level Time Allotted (min.) 7A Determine effects of inventory errors. Complex 25-30 8A Determine effects of inventory errors. Calculate inventory turnover. Complex 35-45 9A Apply LCNRV and prepare adjustment. Moderate 20-25 10A Calculate ratios. Simple 15-20 *11A Apply periodic FIFO and weighted average. Simple 20-25 *12A Apply periodic and perpetual FIFO. Moderate 20-25 Problem Numbe r Description Difficulty Level Time Allotted (min.) *13A Apply periodic and perpetual weighted average. Moderate 20-25 *14A Determine inventory loss using gross profit method. Moderate 20-30 *15A Determine ending inventory using retail method. Moderate 20-30 1B Identify items in inventory. Moderate 20-25 2B Apply specific identification. Simple 15-20 3B Apply perpetual weighted average. Record Moderate 20-25 Problem Numbe r Description Difficulty Level Time Allotted (min.) sales and inventory adjustment and calculate gross profit, and answer questions. 4B Apply perpetual FIFO and answer questions. Moderate 20-25 ASSIGNMENT CHARACTERISTICS TABLE (Continued) Problem Numbe r Description Difficulty Level Time Allotted (min.) 5B Apply perpetual FIFO and weighted average. Answer questions about financial statement effects. Moderate 35-45 6B Record transactions using perpetual FIFO. Apply LCNRV. Moderate 35-45 7B Determine effects of inventory errors. Complex 25-30 8B Determine effects of inventory errors. Calculate inventory turnover. Complex 35-45 9B Apply LCNRV and prepare adjustment. Moderate 20-25 10B Calculate ratios. Simple 15-20 *11B Apply periodic FIFO and weighted average. Simple 20-25 *12B Apply periodic and perpetual weighted average. Moderate 20-25 *13B Apply periodic and perpetual FIFO. Moderate 20-25 *14B Determine inventory loss using gross profit method. Moderate 20-30 *15B Determine ending inventory using retail method. Moderate 20-30 BLOOM’S TAXONOMY TABLE Correlation Chart between Bloom’s Taxonomy, Study Objectives and End-of-Chapter Material Learning Objective KnowledgeComprehensionApplicationAnalysis SynthesisEvaluation 1. Describe the steps in determining inventory quantities. BE6-1 E6-1 Q6-1 Q6-2 Q6-3 BE6-2 E6-2 P6-1A P6-1B P6-7A P6-7B 2. Calculate Q6-4 BE6-3 Learning Objective KnowledgeComprehensionApplicationAnalysis SynthesisEvaluation cost of goods sold and ending inventory in a perpetual inventory system using the specific identification, FIFO, and weighted average methods of cost determination. Q6-5 Q6-6 BE6-4 BE6-5 BE6-6 BE6-7 BE6-8 *BE6-18 E6-3 E6-4 E6-5 E6-6 E6-7 *E6-15 *E6-16 P6-2A P6-3A P6-4A P6-5A P6-6A P6-2B P6-3B Learning Objective KnowledgeComprehensionApplicationAnalysis SynthesisEvaluation P6-4B P6-5B P6-6B *P6-12A *P6-13A *P6-12B *P6-13B 3. Determine the financial statement effects of inventory cost determination methods. Q6-9 Q6-7 Q6-8 BE6-9 BE6-10 E6-6 E6-7 P6-4A P6-5A P6-4B P6-5B 4. Determine the financial statement effects of inventory errors. Q6-11 Q6-10 P6-3A P6-3B BE6-11 BE6-12 E6-8 E6-9 P6-7A P6-8A Learning Objective KnowledgeComprehensionApplicationAnalysis SynthesisEvaluation P6-7B P6-8B BLOOM’S TAXONOMY TABLE (Continued) Learning Objective KnowledgeComprehensionApplicationAnalysis SynthesisEvaluation 5. Value inventory at the lower of cost and net realizable value. Q6-13 Q6-12 Q6-14 BE6-13 BE6-14 E6-10 E6-11 P6-6A P6-6B P6-9A P6-9B 6. Demonstrate the presentation and analysis of inventory. Q6-15 Q6-16 Q6-18 BE6-16 BE6-15 E6-11 E6-12 Q6-17 P6-8A P6-10A P6-8B P6-10B *7 Calculate ending inventory and cost of *Q6-20 *Q6-19 *BE6-17 goods sold in a periodic inventory system using FIFO and weighted average inventory cost formulas (Appendix 6A). *Q6-21 *BE6-18 *E6-13 *E6-14 *E6-15 *E6-16 *P6-11A *P6-12A *P6-13A *P6-11B *P6-12B *P6-13B *8. Estimate ending inventory using the gross profit and retail inventory methods (Appendix 6B) *Q6-22 *Q6-23 *Q6-24 *BE6-19 *BE6-20 *E6-17 *E6-18 *P6-14A *P6-15A *P6-14B *P6-15B Broadening Your BYP6-3 BYP6-1 Santé Perspective BYP6-4 BYP6-5 BYP6-2 BYP6-6 Smoothie Saga ANSWERS TO QUESTIONS 1. 1. Taking a physical inventory involves counting, weighing, or measuring each kind of inventory on hand. This is normally done when the store is closed. Tom will probably count items, and mark the quantity, description, location, and inventory number on pre-numbered inventory tags. Retailers, such as a hardware store, generally have thousands of different items to count. Later, unit costs will likely be applied to the inventory quantities using either specific identification or a cost formula. Many businesses also use electronic devices, such as hand-held scanners. Information on the scanners can be uploaded to the perpetual inventory system to partially automate taking an inventory. 2. Goods in transit should be included in the inventory of the company (buyer or seller) that has ownership of the goods. This is determined by the terms of sale and is evidenced by the free on board (FOB) terms. When the terms are FOB shipping point, ownership of the goods passes to the buyer when the public carrier accepts the goods from the seller. When the terms are FOB destination, ownership of the goods remains with the seller until the goods reach the buyer. 3. Consigned goods are goods held on a company’s premises (the consignee), but belong to someone else (the consignor). The consignee agrees to sell the goods for a fee but never takes ownership of the goods even though the goods are physically located on the consignee’s premises. Therefore, the consignor, not the consignee, owns the goods and should include them in inventory. 4. Specific identification is appropriate when goods are uniquely identifiable or produced for a specific purpose, for example, automobiles. GAAP does not allow companies to use specific identification when goods are interchangeable. 5. Specific identification tracks the actual physical flow of goods in the system and matches the cost of a particular item of inventory against its sale price. Each good is uniquely identifiable and can be traced back to its purchase cost, for example, automobiles. This gives the specific identification method the advantage of producing financial results that are more accurate. Specific identification may be more expensive to operate since each item must be tracked individually in the accounting system. QUESTIONS (Continued) 5. (Continued) The FIFO cost formula assumes that the first goods purchased are the first goods sold. The weighted average cost formula determines the cost using a weighted average of the cost of the items purchased. Both the FIFO and the weighted average cost formulas assume a flow of goods that may not exactly match the actual flow of physical goods. These cost formulas can be used in both a periodic and perpetual inventory system; whereas, the specific identification method can only be used in a perpetual system. An example of merchandise that would be valued using the FIFO basis is electronic products; whereas, merchandise such as clothing might be valued on a weighted average basis. 6. Disagree. The weighted average cost per unit is calculated by dividing the cost of goods available for sale by the units available for sale at the date of each purchase. This means that every purchase of product will change the weighted average cost per unit. Sales of product mean that items of inventory are removed from the cost “pool” at the weighted average cost. This does not change the weighted average cost (unless by rounding). 7. (a) Cash: No effect. The cash impact of the purchase and sale is the same regardless of which inventory cost formula is chosen. The inventory cost formula simply allocates the cost of goods available for sale between cost of goods sold and ending inventory. (b) Ending inventory: In a period of rising prices, FIFO will produce a higher ending inventory as inventory is costed using the most recent (higher) prices; Weighted average will produce a lower ending inventory as ending inventory is costed at an average of all the inventory available for sale during the accounting period. (c) Cost of goods sold: The cost of goods sold effect is opposite to that of ending inventory. Hence, cost of goods sold will be lower under FIFO and higher under weighted average cost. (d) Profit: Because of the effect on the cost of goods sold, profit will be higher under FIFO and lower under weighted average cost. 8. The weighted average cost formula results in more recent costs being reflected in cost of goods sold. This better matches current costs with current revenues and provides a better income statement valuation. The FIFO cost formula provides the better inventory valuation because the cost of older items is transferred to cost of goods sold. This leaves the more recently purchased items in ending inventory, which better reflects replacement cost. QUESTIONS (Continued) 9. (a) Choose a method that corresponds as closely as possible to the physical flow of goods. (b) Report an inventory cost on the balance sheet that is close to the inventory’s recent costs. (c) Use the same method for all inventories having a similar nature and use in the company. 10. (a) Mila Company’s 2016 profit will be overstated (O) $5,000. Beginning inventory Sales + Purchases – Cost of goods sold U $5,000 = Cost of goods = Gross profit/Profit O $5,000 available for sale – Ending inventory O $5,000 = Cost of goods sold U $5,000 (b) Mila’s 2017 profit will be understated (U) $5,000 since the ending inventory of 2016 becomes the beginning inventory of 2017. Beginning inventory O $5,000 Sales + Purchases – Cost of goods sold O $5,000 = Cost of goods available for sale O $5,000 = Gross profit/Profit U $5,000 – Ending inventory = Cost of goods sold O $5,000 (c) The combined profit for the two years will be correct because the errors offset each other (O $5,000 in 2016 and U $5,000 in 2017). 11. Common errors that occur related to inventory include: Recording errors Errors in taking the physical count Errors caused by not properly investigating goods in transit or goods on consignment Pricing errors for the ending inventory Errors in the compilation or summarizing of the inventory count. Errors in arriving at the proper value for the lower of cost and net realizable value QUESTIONS (Continued) 12. Lucy should know the following: (a) A departure from the cost basis of accounting for inventories is justified when the utility (revenue-producing ability) of the goods is no longer as great as its cost. The writedown to net realizable value should be recognized in the period in which the decline in utility occurs.  Net realizable value means the estimated selling price less any estimated costs required to complete the sale. 13. Net realizable value is the selling price of an inventory item, less any estimated costs required to make the item saleable. 14. No. Net realizable value is usually higher than cost because this is the nature of selling merchandise inventory for a profit. The recognition of the gain occurs when the inventory is sold, in accordance with revenue recognition criteria. 15. In order to be classified as inventory, an asset must be owned by the business and must be in a form ready for sale. 16. The additional disclosures on the financial statements concerning inventory include  Details of inventory categories such as raw materials and finished goods.  The cost determination method used (specific identification, FIFO, or weighted average).  A statement that the inventory is reported at the lower of cost and net realizable value.  The amount of cost of goods sold.  The amount of any writedown to net realizable value.  The amount of any reversals of previous writedowns, including the reason why the writedown was reversed. 17. A decrease in the days sales in inventory ratio from one year to the next would usually be seen as an improvement in the company’s efficiency in managing inventory. It means that less inventory is being held relative to sales. QUESTIONS (Continued) 18. The inventory turnover ratio measures the number of times, on average, inventory is sold (turned over) during the period. Although there is no right number of times, there would be an optimum number of times depending on which industry the business belongs. Having too high an inventory turnover ratio can result in too few items left in inventory causing a stockout or shortages, which may upset customers. Having too low a turnover may add risks to the business that the inventory will go out of date, deteriorate, or become obsolete and lose its resale value. In addition, too slow an inventory turnover brings on additional costs to the business such as warehousing and financing. Inventory ties up the firm’s cash and can compromise working capital. *19. It is necessary to calculate cost of goods available for sale in a periodic inventory system because we wait until the end of the period to allocate the amount to ending inventory (unsold) and cost of goods sold (sold). *20. The cost flow relationships for inventory can be translated into the following equations: (1) Beginning Inventory + Cost of Goods Purchased = Cost of Goods Available for Sale, (2) Cost of Goods Available for Sale – Cost of Goods Sold = Ending Inventory. *21. In a periodic system, the average is a weighted average calculated at the end of the period based on total goods available for sale for the entire period. In a perpetual system, the weighted average is calculated after each purchase (goods available for sale in dollars ÷ goods available for sale in units). A new weighted average must be calculated with each purchase and thus the weighted average becomes a moving average. *22. Inventories must be estimated when (1) a company uses the periodic inventory system and management wants interim (monthly or quarterly) financial statements but a physical inventory is only taken annually, or (2) a fire or other type of casualty makes it impossible to take a physical inventory. An estimate of the inventory can also help to test the reasonableness of the inventory balance that was determined when a physical count is done. *23. Disagree. A company’s gross profit margin does not necessarily remain constant from year to year. Gross profit can change due to changes in merchandising policies or in market conditions. The accuracy of the method is also affected by the mix of products sold during the year and whether the method is applied to a product line, a department, or the company as a whole. The year-end inventory count also serves internal control purposes. It helps management examine the presence of merchandise and its physical condition. QUESTIONS (Continued) *24. The retail inventory method is an averaging technique and may produce an incorrect inventory valuation if the blend of inventory items in ending inventory is not the same as in cost of goods available for sale. It produces an estimate of ending inventory based on the weighted average cost formula and would not be appropriate if the company is using a FIFO approach. SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 6-1 (a) Ownership of the goods belongs to the consignor (Helgeson). Thus, these goods should be included in Helgeson’s inventory. (b) The goods in transit should not be included in inventory as title remains with the seller until the goods reach the buyer (Helgeson). (c) The goods being held belong to the customer. They should not be included in Helgeson’s inventory. (d) Ownership of these goods rests with the other company (the consignor). These goods should not be included in Helgeson’s inventory. (e) The goods in transit to a customer should not be included in inventory as title passes to the buyer when the public carrier accepts the goods from the seller. BRIEF EXERCISE 6-2 The correct cost of inventory is: Total cost per inventory count $55,500 (a) Inventory held for alterations (1,500) (b) Inventory held on consignment (4,250) (c) Goods shipped FOB shipping point prior to Dec. 31 2,875 Freight on inventory purchase 310 (d) Goods shipped FOB destination prior to Dec. 31 0 Freight on inventory purchase 0 Correct inventory cost at December 31 $52,935 BRIEF EXERCISE 6-3 Cost of Goods Sold Painting Total Cost 3 $2,900 4 3,900 Total $6,800 Ending Inventory Painting Total Cost 1 $ 500 2 2,500 Total $3,000 BRIEF EXERCISE 6-4 (a) 2 FIFO (b) 1 Specific identification (c) 3 Weighted Average (d) 3 Weighted Average (e) 3 Weighted Average (f) 1 Specific identification (g) 1 Specific identification BRIEF EXERCISE 6-5 Purchases Cost Of Goods Sold Inventory Balance Date Units Cost Total Units Cost Total Units Cost Total June 1 200 $25.00 $5,000.00 200 $25.00 $5,000.00 7 400 $22.00 $8,800.00 (a) 200 400 (b) $25.00 $22.00 (c) 5,000.00 8,800.00 13,800.00 18 (d) (e) (f) 200 150 $25.00 $22.00 $5,000.00 $3,300.00 $8,300.00 250 (g) $22.00 (h) 5,500.00 26 350 $20.00 $7,000.00 (i) 250 350 (j) $22.00 $20.00 (k) 5,500.00 7,000.00 12,500.00 BRIEF EXERCISE 6-6 Weighted Average Calculations Date Purchases Cost of goods sold Inventory Balance Units Cost Total Units Cost Total Units Cost Total Units 01-Jun Beginning inventory A 400 $25.00 $10,000.00 400 $25.00 $10,000.00 (a) (b) (c) 07-Jun 600 22.00 13,200.00 1,000 23.20 23,200.00 400 600 1,000 (d) (e) (f) (g) (h) 18-Jun 550 $23.20 $12,760.00 450 23.20 10,440.00 1,000 -550 450 (i) (j) (k) 26-Jun 450 20.00 9,000.00 900 21.60 19,440.00 450 450 900 (a) 1,000 = 400 + 600 (b) ($10,000.00 + $13,200.00) ÷ (400 + 600) = $23.20 (c) $13,800.00 = $5,000.00 + $8,800.00 (d) see (b) above (e) $12,760.00 = 550 × $23.20 (f) 450 = 1,000 – 550 (g) see (b) above (h) $10,440.00 = 450 × $23.20 (or $23,200.00 – $12,760.00) (i) 900 = 450 + 450 (j) $21.60 = ($10,440.00 + $9,000.00) ÷ (450 + 450) (k) $19,440.00 = 600 × $21.25 (or $10,440.00 + $9,000.00) BRIEF EXERCISE 6-7 (a) FIFO Purchases Cost of Goods Sold Inventory Balance Date Units Cost Total Units Cost Total Units Cost Total Nov. 1 Beginning inventory 10 $5.00 $50 10 $5.00 $50 4 20 5.50 110 10 20 5.00 5.50 50 110 160 7 20 6.00 120 10 20 20 5.00 5.50 6.00 50 110 120 280 10 10 $5.00 $50 20 20 5.50 6.00 110 120 230 12 _ _ 20 10 5.50 6.00 110 60 170 10 6.00 60 Total 50 $280 40 $220 10 $60 Cost of goods available for sale Cost of goods sold Ending inventory Check: Cost Units Cost of goods available for sale $280.00 50 Less: cost of goods sold 220.00 40 Ending inventory $ 60.00 10 BRIEF EXERCISE 6-7 (Continued) (b) Weighted Average Weighted Average Calculations Date Purchases Cost of goods sold Inventory Balance Units Cost Total Units Cost Total Units Cost Total Units Nov 1 Beginning inventory A 10 $5.00 $50.00 10 $5.00 $50.00 4 20 5.50 110.00 30 5.33 170.00 10 20 30 7 20 6.00 120.00 50 5.60 280.00 30 20 50 10 10 $5.60 $56.00 40 5.60 224.00 50 -10 40 12 30 5.60 168.00 10 5.60 56.00 40 -30 10 Total 50 $280.00 40 $224.00 10 $ 56.00 Cost of goods available for sale- Cost of goods sold Ending inventory Check: Cost Units Cost of goods available for sale $280.00 50 Less: cost of goods sold 224.00 40 Ending inventory $ 56.00 10 BRIEF EXERCISE 6-8 (a) FIFO Date Account Titles and Explanation Debit Credit Nov. 4 Merchandise Inventory (20 × $5.50)…….. 110 Accounts Payable………………………………… 110 Nov. 12 Accounts Receivable………………………….. 240 Sales (30 × $8.00)………………………………….. 240 Cost of Goods Sold…………………………….. 170 Merchandise Inventory…………… 170 ([20 × $5.50] + [10 × $6.00]) (b) Weighted Average Date Account Titles and Explanation Debit Credit Nov. 4 Merchandise Inventory (20 × $5.50)…….. 110 Accounts Payable………………………………… 110 Nov. 12 Accounts Receivable………………………….. 240 Sales (30 × $8.00)………………………………….. 240 Cost of Goods Sold…………………………….. 168 Merchandise Inventory (30 × $5.60) 168 BRIEF EXERCISE 6-9  FIFO  Weighted average cost  Weighted average cost  FIFO BRIEF EXERCISE 6-10  Weighted average cost gives the higher inventory valuation when prices are falling. This is because the cost of the units are a blend of older and newer items. Under the FIFO system, ending inventory is composed of newer items purchased at a lower cost.  FIFO gives the higher cost of goods sold amount. This is because the cost of the units purchased earlier, at a higher cost, are assumed to have been sold first and are allocated to cost of goods sold. (c) The selection of a cost formula does not affect cash flow. The cost formula is a method of allocating costs to cost of goods sold and ending inventory. It does not involve the inflow or outflow of cash