Managing merchandise cost for benefit
| Vibrant Company had $850,000 of sales in each of three consecutive years 2014–2016, and it purchased merchandise costing $500,000 in each of those years. It also maintained a $250,000 physical inventory from the beginning to the end of that three-year period. In accounting for inventory, it made an error at the end of year 2014 that caused its year-end 2014 inventory to appear on its statements as $230,000 rather than the correct $250,000. 1. Determine the correct amount of the company’s gross profit in each of the years 2014–2016. 2. Prepare comparative income statements as in Exhibit 6.11 to show the effect of this error on the company’s cost of goods sold and gross profit for each of the years 2014–2016. |
| Use the following information for Palmer Co. to compute inventory turnover for 2015 and 2014, and its days’ sales in inventory at December 31, 2015 and 2014. (Round answers to one decimal.) Comment on Palmer’s efficiency in using its assets to increase sales from 2014 to 2015. |
| 2015 | 2014 | 2013 | ||||
| Cost of goods sold . . . . . . . . . $643,825 $426,650 $391,300 | ||||||
| Ending inventory . . . . . . . . . . . 97,400 87,750 92,500 | ||||||
| QP Corp. sold 4,000 units of its product at $50 per unit in year 2015 and incurred operating expenses of $5 per unit in selling the units. | |||||||||||||||||
| It began the year with 700 units in inventory and made successive purchases of its product as follows. | |||||||||||||||||
| Jan. 1 Beginning inventory . . . . . . . . 700 units @ $18.00 per unit | |||||||||||||||||
| Feb. 20 Purchase . . . . . . . . . . . . . . . . . 1,700 units @ $19.00 per unit | |||||||||||||||||
| May 16 Purchase . . . . . . . . . . . . . . . . . 800 units @ $20.00 per unit | |||||||||||||||||
| Oct. 3 Purchase . . . . . . . . . . . . . . . . . 500 units @ $21.00 per unit | |||||||||||||||||
| Dec. 11 Purchase . . . . . . . . . . . . . . . . . 2,300 units @ $22.00 per unit | |||||||||||||||||
| Total . . . . . . . . . . . . . . . . . . . . 6,000 units | |||||||||||||||||
| Required 1. Prepare comparative income statements similar to Exhibit 6.8 for the three inventory costing methods of FIFO, LIFO, and weighted average. (Round all amounts to cents.) | |||||||||||||||||
| Include a detailed cost of goods sold section as part of each statement. The company uses a periodic inventory system, and its income tax rate is 40%. | |||||||||||||||||
| 2. How would the financial results from using the three alternative inventory costing methods change if the company had been experiencing declining costs in its purchases of inventory? |
| 3. What advantages and disadvantages are offered by using (a) LIFO and (b) FIFO? Assume the continuing trend of increasing costs. |
| PART II (Modules 3 and 4) | |||||||||||||
| Scenario: On October 1, 2015, Santana Rey launched a computer services company called Business Solutions, which provides consulting services, computer system installations, and custom program development. Rey adopts the calendar year for reporting purposes and expects to prepare the company’s first set of financial statements on December 31, 2015. The company’s initial chart of accounts follows. | |||||||||||||
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