Log in
HomeStudy Guides420,000CA160,000

ACC 100 Final: So how do businesses choose between the three costing methods

36 views2 pages
lavendermole636
12 Apr 2016
School
Ryerson University
Department
Accounting
Course
ACC 100
Professor
Else Grech

For unlimited access to Study Guides, a Grade+ subscription is required.

Document Summary

First, if businesses have unique items with high dollar values they always use speciic ideniicaion. Makes sense because they are then able to calculate the exact gross proit for everything they sell. This is because their cost of goods sold really is the cost of the item they just sold so. Sales revenue less cost of goods sold really is the exact gross proit made on the sale of that product. If businesses have any other type of inventory they choose between fifo and average cost, whichever method best matches the physical low of goods. It means that if the oldest items are sold irst then the business would use fifo. Because the physical low of goods (oldest are sold irst) is the same as the method. Let"s just demonstrate the physical low of goods with an example of a loral business (lower store).

Get access

Grade+
$40 USD/m
Billed monthly
Grade+
Homework Help
Study Guides
Textbook Solutions
Class Notes
Textbook Notes
Booster Class
10 Verified Answers

Related Documents

ACC 100 Chapter Notes - Chapter 6: Inventory Control
magentamallard935
ACC 100 Lecture Notes - Lecture 5: Income Statement, European Cooperation In Science And Technology
bluemole10
ACC 100
Final Exam
Study Guide
ACC 100 Study Guide - Final Guide: Fifo (Computing And Electronics), The Home Depot, Lululemon Athletica
plumbat413

Related Questions

Background: This is a continuation of the activities at TECHNOGYM in January, 2017. As in past activities, TECHNOGYM uses a Jan. 1 – Dec. 31 financial year.
Exercise for Inventory:
TECHNOGYM uses a periodic inventory system for its normal operations. Following are the unadjusted account balances as of Dec. 31, 2016 for all accounts related to sales and inventory of TechTone products.
Account Debit Credit
Accounts Receivable 17,607,500
Allowance for Doubtful Accounts 20,000
Purchases 85,832,500
Inventory. 2,500,000
TechTone Sales Revenue 134,500,000
TechTone Sales Returns 2,017,500
Cost of TechTone Equipment Sold 0
Upper management is contemplating changing the method used to report the cost of goods sold. They will choose the method (either FIFO or DVLIFO) that maximizes operating cash flow. The general ledger has historically been kept on a FIFO basis. Following is the inventory purchases information for 2016:
Purchases for 2016 (normal operations)
Beginning: 5,000 units @ $500 each
Purchases:
Apr-May 40,000 units @ $500 each
Jun-Jul 35,000 units @ $505 each
Aug-Sep 48,500 units @ $515 each
Oct 24,000 units @ $520 each
Nov-Dec 20,000 units @ $535 each
Year-End Physical Inventory Count 38,000 units
Note: For full credit, you must show documentation for both DVLIFO and FIFO calculations, with indication and reasoning for your choice.
Requirement 1: Develop a detailed schedule showing the calculation of Ending Inventory and Cost of Goods Sold using FIFO for 2016.
Requirement 2: Show the adjusting journal entry(ies) (if any) that is/are needed on Dec. 31, 2016 related to FIFO inventory. Remember to show the journal entry in proper form!







Requirement 3: Develop a detailed schedule showing the calculation of Ending Inventory and Cost of Goods Sold using DVLIFO for 2016. Hint: DVLIFO adjustments are calculated at the end of the year, using annual layers—not based on each individual purchase. TECHNOGYM used 1.07 as its DVLIFO index.
Requirement 4: Show the adjusting journal entry(ies) (if any) that would be needed on Dec. 31, 2016 if management decides to adopt the DVLIFO inventory method. Remember to show the journal entry in proper form!

Requirement 5: Using the table below, show the amounts that would appear on indicated line items of the Income Statement and Balance Sheet under the two methods.
FIFO Method DVLIFO Method
Income Statement Cost of TechTone Equipment Sold
Balance Sheet Inventory
Which method gives higher net income?
Which method gives higher assets?

Background: This is a continuation of the activities at TECHNOGYM in January, 2017. As in past activities, TECHNOGYM uses a Jan. 1 – Dec. 31 financial year.

Exercise for Inventory:

TECHNOGYM uses a periodic inventory system for its normal operations. Following are the unadjusted account balances as of Dec. 31, 2016 for all accounts related to sales and inventory of TechTone products.

Account Debit Credit

Accounts Receivable 17,607,500

Allowance for Doubtful Accounts 20,000

Purchases 85,832,500

Inventory 2,500,000

TechTone Sales Revenue 134,500,000

TechTone Sales Returns 2,017,500

Cost of TechTone Equipment Sold 0

Upper management is contemplating changing the method used to report the cost of goods sold. They will choose the method (either FIFO or DVLIFO) that maximizes operating cash flow. The general ledger has historically been kept on a FIFO basis. Following is the inventory purchases information for 2016:

Purchases for 2016 (normal operations)

Beginning:

5,000

units @

$500

each

Purchases:

Apr-May

40,000

units @

$500

each

Jun-Jul

35,000

units @

$505

each

Aug-Sep

48,500

units @

$515

each

Oct

24,000

units @

$520

each

Nov-Dec

20,000

units @

$535

each

Year-End Physical Inventory Count

38,000

units

Note: For full credit, you must show documentation for both DVLIFO and FIFO calculations, with indication and reasoning for your choice.

Requirement 1: Develop a detailed schedule showing the calculation of Ending Inventory and Cost of Goods Sold using FIFO for 2016.

Requirement 2: Show the adjusting journal entry(ies) (if any) that is/are needed on Dec. 31, 2016 related to FIFO inventory. Remember to show the journal entry in proper form!

Requirement 3: Develop a detailed schedule showing the calculation of Ending Inventory and Cost of Goods Sold using DVLIFO for 2016. Hint: DVLIFO adjustments are calculated at the end of the year, using annual layers—not based on each individual purchase. TECHNOGYM used 1.07 as its DVLIFO index.

Requirement 4: Show the adjusting journal entry(ies) (if any) that would be needed on Dec. 31, 2016 if management decides to adopt the DVLIFO inventory method. Remember to show the journal entry in proper form!

Requirement 5: Using the table below, show the amounts that would appear on indicated line items of the Income Statement and Balance Sheet under the two methods.

FIFO Method

DVLIFO Method

Income Statement

Cost of TechTone Equipment Sold

Balance Sheet

Inventory

Which method gives higher net income?

Which method gives higher assets?

Background: This is a continuation of the activities at TECHNOGYM in January, 2017. As in past activities, TECHNOGYM uses a Jan. 1 – Dec. 31 financial year.

Exercise for Inventory:

TECHNOGYM uses a periodic inventory system for its normal operations. Following are the unadjusted account balances as of Dec. 31, 2016 for all accounts related to sales and inventory of TechTone products.

Account Debit Credit

Accounts Receivable 17,607,500

Allowance for Doubtful Accounts 20,000

Purchases 85,832,500

Inventory 2,500,000

TechTone Sales Revenue 134,500,000

TechTone Sales Returns 2,017,500

Cost of TechTone Equipment Sold 0

Upper management is contemplating changing the method used to report the cost of goods sold. They will choose the method (either FIFO or DVLIFO) that maximizes operating cash flow. The general ledger has historically been kept on a FIFO basis. Following is the inventory purchases information for 2016:

Purchases for 2016 (normal operations)

Beginning:

5,000

units @

$500

each

Purchases:

Apr-May

40,000

units @

$500

each

Jun-Jul

35,000

units @

$505

each

Aug-Sep

48,500

units @

$515

each

Oct

24,000

units @

$520

each

Nov-Dec

20,000

units @

$535

each

Year-End Physical Inventory Count

38,000

units

Note: For full credit, you must show documentation for both DVLIFO and FIFO calculations, with indication and reasoning for your choice.

Requirement 1: Develop a detailed schedule showing the calculation of Ending Inventory and Cost of Goods Sold using FIFO for 2016.

Requirement 2: Show the adjusting journal entry(ies) (if any) that is/are needed on Dec. 31, 2016 related to FIFO inventory. Remember to show the journal entry in proper form!

Requirement 3: Develop a detailed schedule showing the calculation of Ending Inventory and Cost of Goods Sold using DVLIFO for 2016. Hint: DVLIFO adjustments are calculated at the end of the year, using annual layers—not based on each individual purchase. TECHNOGYM used 1.07 as its DVLIFO index.

DV LIFO

Ending Inventory at Year-End Cost

Index

Ending Inventory at Base-Yr Cost

Inventory Layers at
Base-Yr Cost

Inventory Layers at
Acq.-Yr Cost

Ending Inventory at DV LIFO Cost

LIFO Reserve Adjustment

2015

2016

Requirement 4: Show the adjusting journal entry(ies) (if any) that would be needed on Dec. 31, 2016 if management decides to adopt the DVLIFO inventory method. Remember to show the journal entry in proper form!

Requirement 5: Using the table below, show the amounts that would appear on indicated line items of the Income Statement and Balance Sheet under the two methods.

FIFO Method

DVLIFO Method

Income Statement

Cost of TechTone Equipment Sold

Balance Sheet

Inventory

Which method gives higher net income?

Which method gives higher assets?