INVENTORY CONTROL FOR FTMBA-SECTION-E, FTMBA Capital Markets &

Executive MBA_NMIMS_2010-11
PROBLEM 1. ANS: Shipped To To From From Cole Cole Cole Cole Terms FOB Shipping Point FOB Destination FOB Shipping Point FOB Destination Inventory on hand Total inventory OBJ: KP 10-1 2. ANS: Cost of Inventory 900 600 2,000 300 100 200 3,700 900 Expense 500 TOP: What Is Reported as Inventory? Cost $15,000 12,000 18,000 11,000 $56,000 Date Arrived January 3 January 2 January 4 January 3 Included $ 15,000

11,000 $ 26,000 125,000 $151,000

Cost of plastic for toys Cost of utilities for office building Salaries of factory supervisors Salaries of production workers Salaries of salespersons Salary of president Taxes on factory building OBJ: KP 10-2 TOP: The Cost of Inventory DISCUSSED IN CLASS (05/09/10) 3. ANS: It is helpful to rearrange the accounts into standard order: a 15,000 2,000 10,000 12,000 2,000 10,000 5,000 b 30,000 5,000 20,000 25,000 6,000 19,000 11,000 c 35,000 3,000 45,000 48,000 25,000 23,000 12,000

Sales Beginning inventory Purchases Total available for sale Less: Ending inventory Cost of goods sold Gross profit

d 18,000 2,000 10,000 12,000 1,000 11,000 7,000

e 53,000 4,000 36,000 40,000 5,000 35,000 18,000

f 82,000 6,000 50,000 56,000 5,000 51,000 31,000

OBJ: KP 10-3 TOP: Accounting for Inventory and Cost of Goods Sold DISCUSSED IN CLASS (05/09/10)

1 Amit Shrivastava

80 × 12.000 OBJ: KP 10-4 7.224. ANS: (Inventory Errors) The total effect of Walt's errors would cause Brintnal's gross profit on sales to be overstated by $700 calculated as follows: Error – 500 500 (1. Inventory flow assumptions have to do with the order in which you 2 Amit Shrivastava .224.000 @ $100) = $1.725.000 Gross profit $152.200) 700 700 DISCUSSED IN CLASS (05/09/10) Beginning Inventory Add: Purchases Goods Available for Sale Less: Ending Inventory Cost of Goods Sold Gross Profit on Sales okay overstated overstated overstated understated overstated TOP: Accounting for Inventory and Cost of Goods Sold DISCUSSED IN CLASS (05/09/10) 6.INVENTORY CONTROL FOR FTMBA-SECTION-E.000 W AVG COGS: $1.000 units = $102. ANS: FIFO $1. gross profit is TOP: Inventory Valuation Methods Sales $482.542.600 $ 491.000 1.000 @ $106) = $1.400 LIFO $1.000 = $1. 5.000 1.000 @ $106) + (5.000 1.60) + (1.000 @ $100) + (5.000 @ 103.000 $ 501.600 LIFO COGS: (4.000 @ $103.242.000 Sales Cost of goods sold [see below] Gross profit FIFO COGS: (6.233.000 ÷ 15.000 Cost of goods sold 330.242.000 under all three methods.725.000 $ 483. For the three-year period.233. FTMBA Capital Markets & Executive MBA_NMIMS_2010-11 4.60) + (3.000 Wtd Avg $1. ANS: 1.725.

COGS) LIFO Beginning inventory Purchases Total available Ending inventory Cost of goods sold Gross profit Weighted Average Beginning inventory Purchases Total available in dollars Ending inventory* Cost of goods sold Gross profit *Ending Inventory calculation Year 1 $135.000 10.000 50.000 10.000 100.000 0 100.000 Year 2 $160.000 100.000 120.910 3 Amit Shrivastava .91 $10.000 10. Once you've sold them all.000 Year 2 1.000 Year 2 1.910 Gross profit for each of the three years and in the aggregate is as follows: Sales Revenue FIFO Beginning inventory Purchases Total available Ending inventory Cost of goods sold Gross profit (Sales . 2. Ending inventory for each year under the different methods is as follows: FIFO Ending Inventory Year 1 Units 1.000 45.000 $ 11.000 110.000 $ 10.000 $ 0 100.000 110.000 $ 10.090 50.000 51.000 90.000 120.000 Year 2 1.000 0 100. as this firm has by the end of Year 3.000 90.000 11.00 $10.00 $10.000 45.000 $ 10.00 $10.000 10.000 120. FTMBA Capital Markets & Executive MBA_NMIMS_2010-11 assume the goods were sold.000 110.000 110.000 45.000 109. the overall cost of goods sold is the same no matter what the order in which they were sold.000 $ 10.000 10.000 10.000 LIFO Ending Inventory Units Cost/unit Ending inventory Weighted Average End Inv Units Cost/unit Ending inventory Year 1 1.000 90.00 $11.910 109.INVENTORY CONTROL FOR FTMBA-SECTION-E.000 Cost/unit $ 10.000 100.000 10.000 $ 10.000 Year 1 1.00 Ending inventory $10.

700 units × 20%) valuation: LIFO: (500 × $3.000 4 Amit Shrivastava . ANS: LIFO Sales (1.15) = $1.000 $120. ANS: (Inventory Costing Methods) The inventory and cost of goods sold figures are given below: a. ANS: TOP: Inventory Valuation Methods $100.50) + (100 × $5.998 $7.000 11.910 Goods available for sale End inventory [see below] Cost of goods sold LIFO $9.350 b.005 1. Cost of goods available for sale: Date Units Unit Cost July 1 (beginning) 600 4.400 2.007 Average cost $9.005 ÷ 2.70 = $1.000 10.005 1.00 1.335 × 540 = $1.00 July 8 (purchase) 500 5.200 @ $10) Cost of goods sold: $12.00 July 25 (purchase) 200 6.000 $ 10.998 W Avg: $9. = $2.00 Units Available 1.200 $8.200) Units on Hand 500 Ending Inventory using LIFO (500 × $4) Cost of Goods Sold using FIFO [(600 × $4.000 1.700 units = $3.700 units Units Sold (1.000 = $5.000 10.00)] Cost Per Unit using Average Cost ($8.700 units) TOP: Inventory Valuation Methods Total Cost $2. d.50 July 21 (purchase) 400 5.650 = $ 4.91 1.000 10.750 2.00) + (500 × $5.350 / 1.801 $7.91 OBJ: KP 10-4 10.626 FIFO: 540 @ $3.801 OBJ: KP 10-4 TOP: Inventory Valuation Methods 9. FTMBA Capital Markets & Executive MBA_NMIMS_2010-11 Total available in dollars ÷ Total available in units = Wtd avg cost per unit × Units of ending inventory = End inventory in dollars OBJ: KP 10-4 8.379 FIFO $9.INVENTORY CONTROL FOR FTMBA-SECTION-E.000 FIFO $12. c.005 1.626 $7.000 $ 10.00) + (40 × $3.204 Ending Inventory (2.

300 FIFO ending inventory consists of the value associated with the most recent purchase.400 3.900 c.900 9. ANS: (Inventory Costing Methods) The inventory and cost of goods sold information is given below: a.200 350 $1.75) Cost of goods sold Gross profit * 2.300 2.75 = 300 × 4. Ending Inventory using FIFO: 300 × $4. Since 600 units comprise ending inventory.75. July's beginning inventory consisted of units with a cost of $4.00 = 200 × 1.75 = $1.600 5 Amit Shrivastava . July 21 for $5.850 d.75 = $1.900 5.100 5.500 350 $1.417 Cost of Goods Sold using LIFO: 400 × $1.00 = b.400 6.INVENTORY CONTROL FOR FTMBA-SECTION-E.400/1. $ 700 1.250 2. it is considered to be made up of the 400 units from the July 25 purchase plus 200 units from the second-most-recent purchase. Cost of Goods Sold using FIFO: 500 × $3.400 6.00 = 200 × 1.550 OBJ: KP 10-4 TOP: Inventory Valuation Methods 12.200 $1. ANS: (Inventory Costing Methods) The inventory and Cost of Goods Sold figures are given below: $18 24 28 × × × 100 200 200 = = = $ 1. Ending Inventory using Average Cost: $3.550 6. 400 units were purchased at $6. LIFO ending inventory is valued at the oldest inventory costs available.900 9. TOP: Inventory Valuation Methods OBJ: KP 10-4 11.800 4.800 5.00.200 × 500 units = $1. On July 25.00.750 6. FTMBA Capital Markets & Executive MBA_NMIMS_2010-11 Beg inventory (600 @ $4) Purchases Goods available for sale End inventory* (600 @ 4) (400 @ 6) + (200 @ 5.

200 units sold = = = = $ 4. OBJ: KP 10-4 13.000 4.000 55.200/15.200 40.000 3.040 $12.200/700 × 320 units = $8.777 TOP: Inventory Valuation Methods $35 28 = = $ 7.700 × 6.800 c. Cost of Goods Sold using LIFO: 5. $35 28 = = c.000 1.700. Ending Inventory using Average Cost: $144.000 5.INVENTORY CONTROL FOR FTMBA-SECTION-E.000 $144.500 b.040 b.200 a.000 13.000 5.700 (6.64 TOP: Inventory Valuation Methods OBJ: KP 10-4 6 Amit Shrivastava . Ending Inventory under FIFO: 200 × 120 × Cost of Goods Sold using LIFO: 200 × 180 × Ending Inventory using Average Cost: $19.500) 9.500 $68.000 5.360 $ 7.000 15. ANS: (Inventory Costing Methods) The inventory and Cost of Goods Sold figures are given below: $ 6 8 9 11 Units Available Ending Inventory × × × × 700 5.500 × × $11 9 = = $55. Ending Inventory under FIFO: 5.500 units = $59.360 $10.800 $92.000 $19.200 × × $11 9 = = $55.200 units sold a. FTMBA Capital Markets & Executive MBA_NMIMS_2010-11 35 Units Available Ending Inventory × 200 700 (320) 380 = 7.000 45.000 37.

000 × TOP: Inventory Valuation Methods $17 = $119.000) 7.000 × 5.000 = 16.000 36. LIFO 2. SI OBJ: KP 10-4 TOP: Inventory Valuation Methods 7 Amit Shrivastava .000 95.000 c. b.000 x 7. FIFO 4.000 $689.000 = 2.000 OBJ: KP 10-4 15. Cost of Ending Inventory under LIFO: 7. LIFO 3.000 180.000 a. $17 18 19 20 = = = = $238. ANS: (Inventory Costing Methods) The appropriate methods are presented below: 1.000 × 9.000 = 37.000 95.000 320.000 units = $130. ANS: (Inventory Costing Methods) The inventory and cost of goods sold figures are given below: 14.000 (30.000 36.000 × $17 18 19 20 Units available Units sold × × × × $238.000/37.000 units on hand Ending Inventory using Average Cost: $689. FTMBA Capital Markets & Executive MBA_NMIMS_2010-11 14.000 $549.000 = 5.INVENTORY CONTROL FOR FTMBA-SECTION-E.351 Cost of goods sold using FIFO: 14.000 × 2.

000 50.95 Gross profit percentage [Sales .000 . From the data given for the weighted average method.000 300.000 39.000 / 6.000 30.000 530. Ending inventory is given. cost of goods for the period will increase.000 more than the newest inventory purchases. FTMBA Capital Markets & Executive MBA_NMIMS_2010-11 16.000 30.000 530. TOP: Inventory Valuation Methods OBJ: KP 10-4 17.000 300.000. total available for sale is also the same for all three methods.21 Inventory turnover COGS ÷ Avg Inven FIFO 8 Amit Shrivastava .000 Goods available for sale (inferred) Ending inventory (given) Cost of goods sold Sales Cost of goods sold Gross profit Operating expenses Net operating income Interest expense Net income before taxes Tax expense (30%) Net income 2.COGS] ÷ Sales (58. Under FIFO.000 470.300 = 0.000 550.000 = 36.000.000 LIFO 1. so the older inventory cost $20.000 42.000 540. FIFO 600.000 150. On these facts.000 / 6.93 (58.000 300.000 LIFO 600.37.000 140.000 30.000 .000) / 58.000 120.000 550. ANS: 1.11 6. ANS: If ending inventory is decreased due to the change from FIFO to LIFO then total ending current assets and average inventory will also decrease.INVENTORY CONTROL FOR FTMBA-SECTION-E.000 170.000) / 58.000 Wtd Avg 600.000 160.000 higher than under LIFO. The data suggest that prices have been falling. it can be inferred that total goods available for sale were $600.000 60.000 Wtd Avg 1. so COGS can be computed.000 FIFO 1. cost of goods sold under FIFO is $20.000 130.000 36. you assume that you sold the first ones.000.000.000 84. under LIFO you assume that you sold the last ones.000 91.000 450.000 460.300 = 1.000 = 37.000 98.000 70. (000s omitted) LIFO Working capital ratio Current assets ÷ Current liabil 7.000 540.36. Because beginning inventory (zero) and purchases were the same for all three methods.

000) $179.000 $ 61.000 = 9.800.000 (190.000 (193.000) $307.000 22.00 OBJ: KP 10-4 TOP: Inventory Valuation Methods 37.000 281.000 (300.000 = = = GAFS 215.000 LIFO $750. ANS: (Inventory Costing Methods and Taxes) a.000) $525.000) $115.000 $ 46.500 b.500 = 8. The LIFO method lowers taxes by $7. & c.000 + LIFO: ??? + EI 56.000 (300.000 COGS + FIFO: 225.800 FIFO $500.000 (251.200.000 / 4. The LIFO method lowers taxes by $5.000) $102.000 30.000 / 4. & c.000) (20.000 $ 40. FTMBA Capital Markets & Executive MBA_NMIMS_2010-11 36. ANS: (Inventory Costing Methods and Taxes) a.000 (180.700 FIFO $750.000) (20.000 215. Cost of goods sold using LIFO: $193.INVENTORY CONTROL FOR FTMBA-SECTION-E.000 LIFO $500.000 (225.000) (15.000 $ 53.000 (190.000) (15.000) $320. TOP: More About LIFO 9 Amit Shrivastava . Cost of goods sold using LIFO: $251.000 + LIFO: ??? + EI 35. Sales Cost of goods sold Gross profit Operating expenses Interest expense Income before taxes Taxes (30%) d. Sales Cost of goods sold Gross profit Operating expenses Interest expense Income before taxes Taxes (40%) d.25 18. OBJ: KP 10-5 TOP: More About LIFO 19.000) $499. OBJ: KP 10-5 20.000) $205.000 COGS + FIFO: 180.000 b.000 = = = COGAFS 281.

000 30.000 219.000 128.000 / $128.000 184.INVENTORY CONTROL FOR FTMBA-SECTION-E.000 ounces: units at beginning inv value: 1. and 2.000 174. ANS: 1.000 35. ANS: Sales (January 1 .000 .000 10 Amit Shrivastava .June 28) 100% 3-year aggregate gross profit* 14% Estimated cost of sales 86% Cost of goods sold: Beginning inventory Purchases Goods Available for sale Estimated inventory (destroyed) *Three-year aggregate gross profit: 3 year aggregate Sales 3 year aggregate Cost of goods sold 3 year aggregate Gross profit Aggregate gross profit rate for 3 years $18.000 189.000 oz @ $3 plus units at first purchase value: 1.4. FTMBA Capital Markets & Executive MBA_NMIMS_2010-11 ANS: fourth purchase not made Sales Rev COGS: BI Purch GAFS End Inv (LIFO)* COGS Gross Profit *LIFO Ending Inventory calculations: fourth purchase not made: ending inventory is 1.000 25.000 ounces: units at beginning inv value: 10.000 = 14% OBJ: KP 10-6 22.000 10.000 oz @ $3 fourth purchase made.000 24. Net Value in TOP: Inventory Estimation and Valuation 29.000 110.060 TOP: More About LIFO 195.000 171.000 11.000 35.000 oz @ $5 OBJ: KP 10-5 21.940 10.060 24.000 fourth purchase made 195. ending inventory is 11.000 3.000 30.000 144.000 18.

000 = 7.000 3. Inventory Turnover = Cost of Goods Sold ÷ Average Inventory = ($96. $14. ANS: (Inventory Turnover) a.000 (60.000) ÷ [($96.$64.000 = $900 OBJ: KP 10-6 23.900 .250 Ending Inventory $ 3.000 + $560.000) $600.000 ÷ $80.500 2.900 $14.000 Item A Item B Item C Item D Totals 3.000 15 times 360 days 360 days 24 days / / / / Average Inventory 40.4 times Average number of days that inventory is on hand: = 365 days ÷ 7.000 Inventory turnover 15 $ 20.900 Realizable Value $ 3.600 4.500 $14.000 640.000 Average days in stock b.950 $14.600 4.050 3. ANS: The necessary calculations are given below: Beginning inventory Purchases Goods available for sale Less: Ending inventory Cost of goods sold a.700 $ 4.$14.4 times = approximately 49 days TOP: Evaluating Inventory Levels and Budgeting Cash Disbursements OBJ: KP 10-7 24.000 + $64.900 $14. FTMBA Capital Markets & Executive MBA_NMIMS_2010-11 Original Cost $ 3. Maximum acceptable average inventory level: 17 Max days in stock = = = 360 days 360 COGS / / / Inventory turnover ??? 21 times per year Average Inventory 21 Inv turnover times 11 Amit Shrivastava .700 2.INVENTORY CONTROL FOR FTMBA-SECTION-E.000 $ 3.000) ÷ 2] = $592.800 4. Average days a package of Clutch is currently in stock: Inventory turnover = = = = = = COGS 600.000 .300 Replacement Cost $ 3. TOP: Inventory Estimation and Valuation b.650 $ 2.100 4.500 2.000 $660.

000 June 690.000 705.000 144.000 60.000 651.000 750.000 April 600.850.000 69.000 375.000 600.000 576.000 444.850.000 249.000 600.000 180.000 45.000 240.000 May 750.000 75.INVENTORY CONTROL FOR FTMBA-SECTION-E.000 TOP: Evaluating Inventory Levels and Budgeting Cash Disbursements 12 Amit Shrivastava .000 450.000 360.000 300. ANS: Purchases made in in the amount of will be paid for in: March April May June July August September Totals OBJ: KP 10-7 March 360.571 avg inv TOP: Evaluating Inventory Levels and Budgeting Cash Disbursements 180.000 276.000 2.000 345.000 225.000 45.000 36.000 300.000 690.000 Aggregate 2. FTMBA Capital Markets & Executive MBA_NMIMS_2010-11 = = OBJ: KP 10-7 25.000 July 450.000 ??? $28.000 180.

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