AFM101 Lecture Notes - Lecture 14: Inventory Turnover, Weighted Arithmetic Mean, Gross Profit

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skyoyster237

24 Oct 2018

School

University of Waterloo

Department

Accounting & Financial Management

Course

AFM101

Professor

Haihao Lu

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AFM101 Lecture Notes - Lecture 13: Gross Profit, Income Statement, Current Asset

AFM101 Lecture Notes - Lecture 14: Inventory Turnover, Weighted Arithmetic Mean, Gross Profit

AFM101 Lecture Notes - Lecture 15: Asset, Land Development, Capital Expenditure

Document Summary

These 3 costing methods have different effects on (1) profits, (2) income taxes, (3) inventory turnover, and (4) gross profit margin. Under this method, each item in inventory has a specific identification number. The acquisition cost of each item sold is individually identified and recorded as. This method is appropriate for distinguishable and high-value items. E. g. , luxury cars, aircrafts, fine jewelry, etc. Fifo and weighted average are the 2 cost flow assumptions allowed under. The physical flow of the goods is not the same as the cost flow of the goods under these two methods. Fifo cost flow assumption: assumes that the first item purchased is the first one sold. Recent costs are assigned to ending inventory. Thus, during rising prices, fifo gives the highest net income. *goods available = beginning inventory + purchases. Weighted average is based on the average cost of inventory during the period.

Related Questions

P7-3 Evaluating Four Alternative Inventory Methods Based on Income and Cash Flow LO7-2, 7-3

At the end of January 2014, the records of Donner Company showed the following for a particular item that sold at $16 per unit:

	Transactions	Units	Amount
	Inventory, January 1, 2014	500	$ 2,365
	Purchase, January 12	600	3,600
	Purchase, January 26	160	1,280
	Sale	(370)
	Sale	(250)

Required:
1a.	Compute Cost of Goods Sold under each method of inventory: average cost, FIFO, LIFO, and specific identification. For specific
	identification, assume that the first sale was selected from the beginning inventory and the second sale was selected from the
	January 12 purchase. (Round unit price to 2 decimal places. Input all amounts as positive values.)
	Input areas are shaded.

	Average Cost	Cost of Good Available for Sale			Cost of Goods Sold
		# of Units	Cost per Unit	Cost of Goods Available for Sale	# of Units Sold	Cost per Unit	Cost of Goods Sold
	Beginning inventory
	Purchases:
	January 12, 2014
	January 26, 2014
	Total

	FIFO	Cost of Goods Available for Sale			Cost of Goods Sold
		# of Units	Cost per Unit	Cost of Goods Available for Sale	# of Units Sold	Cost per Unit	Cost of Goods Sold
	Beginning inventory	500		$0
	Purchases:
	January 12, 2014	600		$0
	January 26, 2014	160		$0
	Total	1,260		$0	0

	LIFO	Cost of Goods Available for Sale			Cost of Goods Sold
		# of Units	Cost per Unit	Cost of Goods Available for Sale	# of Units Sold	Cost per Unit	Cost of Goods Sold
	Beginning inventory	500
	Purchases:
	January 12, 2014	600
	January 26, 2014	160
	Total	1,260		$ -	0		$ 4,040

	Specific Identification	Cost of Goods Available for Sale			Cost of Goods Sold
		# of Units	Cost per Unit	Cost of Goods Available for Sale	# of Units Sold	Cost per Unit	Cost of Goods Sold
	Beginning inventory	500
	Purchases:
	January 12, 2014	600
	January 26, 2014	160
	Total	1,260		$ -	0

Required:
2a.	FIFO and LIFO, which method would result in the higher pretax income?



2b.	FIFO and LIFO, which would result in the higher EPS?



3	FIFO and LIFO, which method would result in the lower income tax expense? Assume a 30 percent average tax rate.



4	FIFO and LIFO, which method would produce the more favorable cash flow?

bronzedeer241

PA7-1 Analyzing the Effects of Four Alternative Inventory Methods in a Periodic Inventory System [LO 7-3]

Gladstone Company tracks the number of units purchased and sold throughout each accounting period but applies its inventory costing method at the end of each period, as if it uses a periodic inventory system. Assume its accounting records provided the following information at the end of the annual accounting period, December 31.

Transactions		Units			Unit Cost
Beginning inventory, January 1			1,600		$	45
Transactions during the year:
a.	Purchase, January 30		2,300			49
b.	Sale, March 14 ($100 each)		(1,250	)
c.	Purchase, May 1		1,000			75
d.	Sale, August 31 ($100 each)		(1,500	)

Assuming that for Specific identification method (item 1d) the March 14 sale was selected two-fifths from the beginning inventory and three-fifths from the purchase of January 30. Assume that the sale of August 31 was selected from the remainder of the beginning inventory, with the balance from the purchase of May 1.

Required:
1.	Compute the amount of goods available for sale, ending inventory, and cost of goods sold at December 31 under each of the following inventory costing methods: (Round intermediate calculations to 2 decimal places and final answers to the nearest whole dollar amount.)

2-a.

Of the four methods, which will result in the highest gross profit?

	Last-in, first-out
	Weighted average cost
	First-in, first-out
	Specific identification

2-b.

Of the four methods, which will result in the lowest income taxes?

	Last-in, first-out
	Weighted average cost
	First-in, first-out
	Specific identification

coffeeduck922

Background Information:

Transactions Units Unit Cost
Beginning inventory, January 1, 2009 1,800 $5.00
Transactions during 2009:
a. Purchase, January 30 2,500 6.20
b. Sale, March 14 ($10 each) (1,450 )
c. Purchase, May 1 1,200 8.00
d. Sale, August 31 ($10 each) (1,900 )

Problem:
Compute the amount of goods available for sale, ending inventory,and cost of goods sold at December 31, 2009, under each of thefollowing inventory costing methods. For Specific Identification,assume that the March 14, 2009, sale was selected two-fifths fromthe beginning inventory and three-fifths from the purchase ofJanuary 30, 2009. And that the sale of August 31, 2009, wasselected from the remainder of the beginning inventory, with thebalance from the purchase of May 1, 2009. (Do not round Weightedaverage cost per unit. Round your final answers to the nearestdollar amount.)

Goods available for sale Ending inventory Cost of goods sold
a. Last-in, first-out. $34,100 $11,170 $22,930
b. Weighted average cost. $34,100 $13,330 $20,770
c. First-in, first-out. $34,100 $15,490 $18,610
d. Specific identification. $34,100 ? ?

Definition:

Specific Identification - The inventory costing method thatidentifies the cost of the specific item that was sold.

I just need help with the specific identification part, I didall the other parts and got them right but I am confused with thewording on the specific information part.

If any one could explain it to me and show me how to do thisproblem then I will award them lifesaver points/karma

taupesardine251

AFM101 Lecture Notes - Lecture 14: Inventory Turnover, Weighted Arithmetic Mean, Gross Profit

AFM101 Lecture Notes - Lecture 13: Gross Profit, Income Statement, Current Asset

AFM101 Lecture Notes - Lecture 14: Inventory Turnover, Weighted Arithmetic Mean, Gross Profit

AFM101 Lecture Notes - Lecture 15: Asset, Land Development, Capital Expenditure

Document Summary

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