Quiz 3                                                                                                                         Name:…………………..…

Inventory

 

1.0              a) Assume Tara Inc, ships $10,000 of goods on December 29, 20x1 to Jim Inc, FOB destination point. The goods arrive at Jim Inc on Jan 2, 20x2.  During the physical count of inventory, Tara Inc employees count only inventory in their warehouse. How is Tara’s income statement and balance sheet affected?

 

b) Ming Inc receives a $10,000 shipment of inventory on Jan 2, 19x2. The inventory was shipped on Dec 29, 19x1 as FOB shipping point.  The bill of lading arrived with the inventory on January 2, 19x2 at which point the accountants recorded the purchase.  How is Ming’s income statement and balance sheet affected?

 

c) Delmar Inc understates $10,000 of inventory and overstates revenues by $3,000 in 19x1. In 19x2, Delmar overstates inventory by $5,000 and overstates revenue by $4,000. What is the effect of Delmar’s of these errors on her income statement and balance sheet in 19x1, 19x2 and 19x3.

 

2.0 Land’s End Inc. reports the following inventory $168.7 million and $149.7 million for 2006 and 2005 respectively. Their footnote states as follows:

 

Inventory, primarily merchandise held for sale, is stated at last-in, first-out (LIFO) cost, which is lower than market. If first-in, first-out (FIFO) method of accounting for inventory had been used, inventory would have been approximately $18.9 million and $19.1 million higher than reported at the end of 2006 and 2005 respectively.

 

a) You would like to compare Land’s End’s operations to those of a competitor. The competitor uses the FIFO method of inventory costing. Will you or the competitor show a higher income given your choices?

b) Assume that Land’s End cost of goods sold for 2006 is $568.6 million. Calculate the competitor’s cost of goods sold.

c) Assume that Land’s End’s inventory balances are the same for financial and tax purposes are the same. Estimate the cumulative tax savings through 2006 by Land’s End by using the LIFO method of inventory costing instead of FIFO. Assume a tax rate of 40%.

 

3.0 Sun Inc. began a merchandising business on January 1, 2002. Sun acquired inventory as needed for the business and reported ending inventory for the next three years as follows: (Hint: Use the inventory equation to answer this question)

 

December 31

LIFO cost

FIFO cost

Weighted Average

2002

$40,200

$40,000

$40,100

2003

36,000

36,000

32,000

2004

41,800

44,000

41,000

 

a)      Did the prices go up or down in year 1?

b)      Which inventory method will give you the highest income in year 1?

c)      Which inventory method will give you the highest income in year 3?

d)     If Sun Inc., wanted to show the highest income for the three years combined which method should Sun choose?

 

4.0 The inventory footnote to the annual report of Thomas Company reads in part as follows:

            Because of continuing high demand throughout the year, inventories were unavoidably reduced and could not be replaced. Under the LIFO system of accounting, used for many years by Thomas Company, the net effect of all the inventory changes was to increase pretax income by $1,200,000 over what it would have been had inventories been maintained at their physical levels at the start of the year.

 

            The price of Thomas Company’s merchandise purchases was $30 per unit during the year, after having risen erratically over past years. Thomas Company uses a periodic inventory method. Its inventory positions at the beginning and the end of the year appear below:

 

            Date                                        Physical count of inventory                LIFO Cost of inventory

December 31, 20x1                             300,000 units                                      $?

December 31, 20x2                             200,000 units                                      $800,000        

 

a)      What was the average cost per unit of the 100,000 units removed from the January 1 LIFO inventory?

b) What was the January 1 LIFO cost of inventory?