W4 Assignment “Week 4 Problem Sets”
Week 4 Problem Sets
1.You own Widgets ‘R Us and are preparing your year-end financial statements: What inventory accounting method do you use and why (FIFO, LIFO, or Weighted-Average)? What are its advantages and disadvantages?
2.You own Widgets ‘R Us and are preparing your year-end financial statements: What activities should you perform to correctly account for your inventory at year-end?
3.You own Widgets ‘R Us and are preparing your year-end financial statements: Why is it important to track inventory? What does this information tell you about your business?
Exercise 5-1A Effect of inventory cost flow assumption on financial statements
For each of the following situations, indicate whether FIFO, LIFO, or weighted average applies:
a. In a period of falling prices, net income would be highest.
b. In a period of falling prices, the unit cost of goods would be the same for ending inventory
and cost of goods sold.
c. In a period of rising prices, net income would be highest.
d. In a period of rising prices, cost of goods sold would be highest.
e. In a period of rising prices, ending inventory would be highest.
Exercise 5-2A Allocating product cost between cost of goods sold and ending inventory
Jones Co. started the year with no inventory. During the year, it purchased two identical inventory items at different times. The first purchase cost $1,060 and the other, $1,380. Jones sold one
of the items during the year.
Based on this information, how much product cost would be allocated to cost of goods sold and
ending inventory on the year-end financial statements, assuming use of
c. Weighted average?
Exercise 5-3A Allocating product cost between cost of goods sold and ending
inventory: multiple purchases
Cortez Company sells chairs that are used at computer stations. Its beginning inventory of chairs
was 100 units at $60 per unit. During the year, Cortez made two batch purchases of this chair.
The first was a 150-unit purchase at $68 per unit; the second was a 200-unit purchase at $72 per
unit. During the period, it sold 270 chairs.
Determine the amount of product costs that would be allocated to cost of goods sold and ending
inventory, assuming that Cortez uses
c. Weighted average.
Exercise 5-4A Effect of inventory cost flow (FIFO, LIFO, and weighted average)
on gross margin
The following information pertains to Mason Company for 2016:
Jan. 1 Beginning inventory 400 units @ $30
Apr. 1 Purchased 2,000 units @ $35
Oct. 1 Purchased 600 units @ $38
During 2016, Parvin sold 2,700 units of inventory at $90 per unit and incurred $41,500 of operating expenses. Parvin currently uses the FIFO method but is considering a change to LIFO. All
transactions are cash transactions. Assume a 30 percent income tax rate. Parvin started the
period with cash of $75,000, inventory of $12,000, common stock of $50,000, and retained earnings of $37,000.
a. Record the above transactions in general journal form and post to T-accounts using (1) FIFO
and (2) LIFO. Use a separate set of journal entries and T-accounts for each method.
b. Prepare income statements using FIFO and LIFO.
Ending inventory consisted of 30 units. Mason sold 370 units at $90 each. All purchases and
sales were made with cash. Operating expenses amounted to $4,100.
a. Compute the gross margin for Mason Company using the following cost flow assumptions:
(1) FIFO, (2) LIFO, and (3) weighted average.
b. What is the amount of net income using FIFO, LIFO, and weighted average? (Ignore income
c. Compute the amount of ending inventory using (1) FIFO, (2) LIFO, and (3) weighted average.
Exercise 5-5A Effect of inventory cost flow on ending inventory balance and
The Shirt Shop had the following transactions for T-shirts for 2016, its first year of operations:
Jan. 20 Purchased 400 units @ $ 8 5 $3,200
Apr. 21 Purchased 200 units @ $10 5 2,000
July 25 Purchased 280 units @ $13 5 3,640
Sept. 19 Purchased 90 units @ $15 5 1,350
During the year, The Shirt Shop sold 810 T-shirts for $30 each.
a. Compute the amount of ending inventory The Shirt Shop would report on the balance
sheet, assuming the following cost flow assumptions: (1) FIFO, (2) LIFO, and (3) weighted
b. Record the above transactions in general journal form and post to T-accounts assuming
(1) FIFO, (2) LIFO, and (3) weighted average methods. Use a separate set of journal entries
and T-accounts for each method. Assume all transactions are cash transactions.
c. Compute the difference in gross margin between the FIFO and LIFO cost flow assumptions.
W4 Assignment “Week 4 Problem Sets”