Group 1

Abhay Gupta FT243001

Ajay KJ FT243002
Akash Kumar FT243003
Akshat Jain FT243004
Apoorva Ganta FT243007
Exercise 5-21

Sales Revenue 125,600.00

Less: Sales Return & Allowance 3,560.00
Net Sales 122,040.00

Cost of Goods Sold:

Beginning Inventory 23,400.00
Purchases 75,900.00
Less: Purchase Discounts 1,300.00
Net Purchases 74,600.00
Add: Transport in 6,550.00
Cost of Goods Purchased 81,150.00
Cost of Goods Available for Sales 104,550.00
Less: Ending Inventory 21,110.00
Cost of Goods Sold 83,440.00
Gross Profit 38,600.00
Operating Expenses (Less) 12,300.00
Income Before Tax 26,300.00
Income Tax Expense 10,300.00
Net Income 16,000.00

Exercise 5-22

Sales Revenue 80000

Less: Sales Return & Allowance 500
Less: Sales Discount 1200
Net Sales 78300

Cost of Goods Sold

Beginning Inventory 4000
Purchase 30000
Add: Transpotation in 1000
Less: Purchase Return and Allowance 400
Less: Purchase Discounts 800
Cost of Goods Available for Sales 33800
Less: Ending Inventorty 3800
Cost of Goods Sold 30000
Gross Profit 48300

Gross Profit Ratio = (Gross Profit / Net

Sales) x 100 61.68582375
Problem 5-3

companyA weighted Avg

companyB FIFO
companyC LIFO
Assumption - inflation is +ve YoY
1
company B will report the highest profit, because it uses FIFO method to calculate its COGS. In FIFO method, COGS comes out

2
Company C will pay least in income taxes because company C uses LIFO method to calculate its COGS. LIFO method increases

3
FIFO method is more lucrative to use when presenting to investors because by using FIFO method, one can reduce the net CO

4
If cost of purchasing had been falling then -
1 companyC LIFO
2 companyB FIFO
3 LIFO

Problem 5-11 Case of DEFLATION

1
Method COGS Cost of Ending Inventory Total Cost Net Profit
weighted AVG 107500 21500 129000 15,750.0
FIFO 112500 16500 129000 12,250.0
LIFO 104000 25000 129000 18,200.0
 3
I recommend to use FIFO method to pay least profit in year 2012. this is maily due to decreasing cost of un

4
Yes, they can switch to LIFO method so, that they pay least tax in 2013. but at the same time, their net inc

DC 5-1
COGS Asset on B/S
Service provider NO
Merchandiser YES Merchandise inventory
Manufacturers YES Raw material + WIP + finished goods

1
Kellogg's Merchandise
General Mills Merchandise

2
Company Name Inventory Total Asset %
Kellogg's 1056 11847 9%
General Mills 1344 17678.9 8%

3
Kellogg's uses wt Avg method to calculate inventory cost
Advantages of using wt Avg method -
a. smooths out fluctuations in the cost of inventory.
b. reflects an average cost that more closely resembles the cost of inventory sold during the period

4
General Mills uses LIFO method to calculate inventory cost
LIFO method (Generally) inflates COGS and thus makes profit appear less on income statement.
Thus, to compare 2 companies using different methods, it becomes necessary to Adjust inventory valuation. (Apple to Apple c

5
Since both companies are in business of food (perishable item) - I recommend them to use FIFO.
Advantages of using FIFO -
a. FIFO ensures that the oldest items are sold first, reducing the risk of spoilage or obsolescence.
 b. FIFO may be more suitable for businesses with a continuous flow of perishable items as it aligns with their natural usage

DC 5-3

1
Gap Inc. uses wt Avg method to calculate inventory cost
Advantages of using wt Avg method -
a. smooths out fluctuations in the cost of inventory.
b. reflects an average cost that more closely resembles the cost of inventory sold during the period

2
"we value inventory at lower of cost or market" in a company's financial statements refers to -
A. valuing inventory at the lower of its historical cost or its current market value.
B. it is applied to ensure prudent and conservative reporting of inventory values on the balance sheet.

The "market" refers to the current replacement cost or net realizable value of the inventory.
The net realizable value is the estimated selling price in the ordinary course of business, less any estimated costs of completio
It represents the amount the company could reasonably expect to receive if the inventory were sold in the current market con
 method, COGS comes out to be minimum

GS. LIFO method increases the COGS and hene reduces the net profit

one can reduce the net COGS and hence increase the net profit for that particular accounting cycle

2
Weaver Corp.
Income Statement
weighted avg cost 8.6 [USD $ ]
Total inventory 15000
sold inventory 12500 Sales Revenue
ending inventory 2500

Total Net Revenue

COGS(wt. Avg)
Gross Profit

Expenses
Other Expense 1
Other Expense 2
Total Expenses
Earnings Before Interest & Taxes
 Interest Expense
Earnings Before Taxes

Income Taxes
Net Earnings

due to decreasing cost of unit

he same time, their net income will also reduce. Company has to use same method for both - taxation and financial accounts

aluation. (Apple to Apple comparison)

ns with their natural usage

stimated costs of completion, disposal, and transportation.

d in the current market conditions.
 Weaver Corp. Weaver Corp.
Income Statement Income Statement
[USD $ ] [USD $ ]
2012 2012
150,000.0 Sales Revenue 150,000.0 Sales Revenue

150,000.0 Total Net Revenue 150,000.0 Total Net Revenue

107,500.0 COGS(FIFO) 112,500.0 COGS(LIFO)

42,500.0 Gross Profit 37,500.0 Gross Profit

Expenses
20,000.0 Other Expense 1
- Other Expense 2
20,000.0 Total Expenses
22,500.0 Earnings Before Interest & Taxes
Expenses
20,000.0 Other Expense 1
- Other Expense 2
20,000.0 Total Expenses
17,500.0 Earnings Before Interest & Taxes
 Interest Expense Interest Expense
22,500.0 Earnings Before Taxes 17,500.0 Earnings Before Taxes

6,750.0 Income Taxes 5,250.0 Income Taxes

15,750.0 Net Earnings 12,250.0 Net Earnings

d financial accounts
 2012
150,000.0

150,000.0

104,000.0
46,000.0

20,000.0
-
20,000.0
26,000.0
26,000.0

7,800.0
18,200.0
Exercise 7-2

Accounts Recivable a/c Allowance for Bad Debts a/c

Dr. Cr. Dr. Cr.
Amt. Amt. Amt. Amt.
Allowanc
Opening e for Bad Accounts Opening
Balance 51000 Debts 4000 Recivable 4000 Balance 3000

Closing Bad Debts

Sales 80000 Cash 68000 Balance 5000 Expense 6000
Closing
Balance 59000

Total 131000 Total 131000 9000 9000

Cash
Answer 1 Collected 68000
Bad Debt
Answer 2 Expense 6000

Exercise 7-3
1
Journal
Debit Credit
a. Bad Debts Expense 16680
Allowance for Doubtful Accounts 16680

b. Allowance for Doubtful Accounts 19206

Account Recivable 19206

2
Journal
Debit Credit
Bad Debts Expense 16680
Allowance for Doubtful Accounts 16680

The Journal Entry would be the same. The

closing balance of Allowance for Bad
Answer Debts would increase to 33286.
Exercise 7-6

1
Accounts Recivable Turnover Ratio = Net Sales
Average Accounts Recivable

Net Sales 14796.5

Recivables (Opening) 1041.6
Recivables (Closing) 953.4 1518.3

Average Accounts Recivable 997.5 v

Accounts Recivable Turnover Ratio = 14.83358

2
Average Collection Period = 365 Days
Accounts Recivable Turnover Ratio

Average Collection Period = 24.60633

Average Collection Period of 24.61 means that it

takes the company approximately 24.61 days to
collect payments from customers after the credit
sales are made.

General Mills is an FMCG company manufacturing

Cheerios and Wheaties. They would require large
distribution network of Wholesellers and Retailers.
Hence, they would be their customers.
 Bad Debts Expense a/c
Dr. Cr.
Amt. Amt.
Allowanc
e For Bad To Income
debts a/c 6000 Statement 6000

Total 6000 Total 6000