Problem Sheet 3

1. Effects of Inventory Costing Methods on Income

Martin Merchandising has hired you to examine whether the company should use the
LIFO or FIFO inventory costing method. The company uses a perpetual inventory
system and has supplied the following information for the month:

Beginning inventory, 2,000 units at ₹40 ₹ 80,000

Purchases on June 4, 12,000 units at ₹45 540,000
Sales on June 18, 10,500 units at ₹77 808,500
Operating expenses (excluding taxes) 148,000
Company tax rate 35%

Prepare multi-step income statements under the LIFO and FIFO costing methods.
Explain to Martin the advantages and disadvantages of using each inventory costing
method. Use the income statements to support your explanation.

2. Analyzing Different Inventory Costing Methods

Farmville Tools sells shovels nationwide to farmers. For March, Farmville had
beginning inventory of 270 shovels with a per-shovel cost of ₹15. During March,
Farmville made the following purchases of additional shovels.

March 8 50 @ ₹16.25 March 22 115 @ ₹ 18.00

March 13 130 @ ₹17.50 March 29 60 @ ₹ 18.50

Farmville uses a perpetual inventory system. During March, 525 shovels were sold
on the following dates:

March 10 100 March 21 175

March 17 120 March 30 130

Required
a. Determine the appropriate balance in ending inventory and cost of goods sold under
each of the inventory cost flow assumptions (LIFO, FIFO, and moving average).
Round all values to the nearest penny.

b. Compute the inventory turnover and days-in-inventory ratios under each inventory
costing method.

c. Which method yields ratios that show the most effective turnover of inventory? Are
the company's inventory sales different depending on the costing method chosen? If
not, why are the ratios different?

3. Recording Inventory Activity

Campbell Candy Company starts the month of January with 40 boxes of Tiger Bars
costing ₹20 each. The following transactions occurred during the month:

Jan. 2 Purchased 15 additional boxes for ₹22 each. Paid with cash.
Jan. 4 Paid freight costs of ₹30 on January 2 purchase.
Jan. 10 Sold 45 boxes for ₹40 each.
Jan. 27 Purchased 10 additional boxes on account for ₹23 each.

Campbell uses a perpetual inventory system and the FIFO inventory costing method.

Required

a. Prepare all necessary journal entries related to Campbell's inventory activity.

b. Suppose that the inventory has a replacement value of ₹375 at the end of the
month. What entry, if any, is required?

4. Analyzing Inventory

The following is comparative financial data for JK Martin Company and Stratton
Company (in thousands):
 JK Martin Company Stratton Company
2013 2012 2013 2012
Net sales ₹20,00,000 ₹5,50,000
Cost of goods sold 11,00,000 2,40,000
Operating expenses 3,05,000 75,000
Income tax expense 52,000 6,500
Cash 85,070 ₹82,508 16,100 ₹15,777
Inventory 2,50,000 2,25,000 70,000 65,600
Equipment 5,25,000 5,00,000 1,40,000 1,25,000
Current liabilities 65,000 75,000 35,000 30,000
Long-term liabilities 1,09,000 88,000 29,000 24,800
Common stock, ₹10 par 4,90,000 4,90,000 1,15,000 1,15,000
Retained earnings 1,73,000 1,47,520 40,756 30,289

Required
a. Prepare a vertical analysis of the 2013 income N data. Round percentages to one
decimal point (i.e., 4.8%). Is one company more profitable than the other?

b. Prepare a horizontal analysis of all accounts. Round percentages to one decimal

point (i.e., 4.8%). What does this analysis show?

c. Compute the inventory turnover and days-in-inventory ratios for 2013. Do these
ratios change your conclusions about these companies?

5. Analyzing Different Inventory Costing Methods

Farmville Tools sells shovels nationwide to farmers. For March, Farmville had
beginning inventory of 270 shovels with a per-shovel cost of ₹15. During March,
Farmville made the following purchases of additional shovels.

March 8 50 @ ₹16.25 March 22 115 @ ₹ 18.00

March 13 130 @ ₹17.50 March 29 60 @ ₹18.50
Farmville uses a periodic inventory system. During March, 525 shovels were sold on
the following dates:

March 10 100 March 21 175

March 17 120 March 30 130

Required

a. Determine ending inventory and cost of goods sold under each of the inventory
cost flow assumptions (LIFO, FIFO, and weighted average).

b. Compute the inventory turnover and days-in-inventory ratios under each inventory
costing method.

c. Which method yields ratios that show the most effective turnover of inventory? Are
the company's inventory sales different depending on the costing method chosen? If
not, why are the ratios different?