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Q2CA.

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Intermediate Accounting (Kieso)
Found in: Page 436

Short Answer

Clay Mattews, an inventory control specialist, is interested in better understanding the accounting for inventories. Although Clay understands the more sophisticated computer inventory control systems, he has littleknowledge of how inventory cost is determined. In studying the records of Strider Enterprises, which sells normal brand-namegoods from its own store and on consignment through Chavez Inc., he asks you to answer the following questions.

Instructions

(a) Should Strider Enterprises include in its inventory normal brand-name goods purchased from its suppliers but not yetreceived if the terms of purchase are f.o.b. shipping point (manufacturer’s plant)? Why?

(b) Should Strider Enterprises include freight-in expenditures as an inventory cost? Why?

(c) If Strider Enterprises purchases its goods on terms 2/10, net 30, should the purchases be recorded gross or net? Why?

(d) What are products on consignment? How should they be reported in the financial statements?

Purchase on shipping point must be recorded. Freight in expenses must be included in the inventory, and the goods on consignment should not be reordered. The preferred method of purchase recording is the gross method.

See the step by step solution

Step by Step Solution

Step1: Purchased on f.o.b. shipping point

At f.o.b. shipping point, the title of the goods is transferred on shipping the goods. Thus the goods have been assumed to be in the control of the buyer. In this case, there should be a recording of the inventory purchase on the date of shipping. And the goods must be included in the ending inventory irrespective of the fact that the goods have not been received.

Step 2: Freight in expenditure

Freight in expenditure is the costs that are incurred for acquiring the goods. These are the costs that are related to the transportation of the goods purchased. According to the inventory accounting standard, all the costs directly related to the acquisition of the goods must be included in the cost.

So per these standards, the freight cost would be included in the purchased inventories.

Step 3: Net vs. Gross method of inventory recording

The gross method of inventory recording reflects the inventories at their original cost without subtracting any cash discount. However, under net methods, goods are shown on their net amount irrespective of whether the discount has been earned or not.

Thus the gross method is more conservative than the net method. So priority should be given to the gross method. However, any method can be adapted to record the purchases.

Step 4: Products on consignment

Product on consignment is the gods taken on the agency to sell them to customers. Under this system, the agent does not take possession or title of the goods but acts as an agent on behalf of the seller to sell the goods. So there is no liability on the consignor.

In the financial statement, goods taken on consignment are not shown in any of the statements. The only commission received on selling the goods is recorded.

Most popular questions for Business-studies Textbooks

Question: Presented below is a list of items that may or may not be reported as inventory in a company’s December 31 balance sheet.

1. Goods out on consignment at another company’s store.

2. Goods sold on an installment basis (bad debts can be reasonably estimated).

3. Goods purchased f.o.b. shipping point that are in transit at December 31.

4. Goods purchased f.o.b. destination that are in transit at December 31.

5. Goods sold to another company, for which our company has signed an agreement to repurchase at a set price that coversall costs related to the inventory.

6. Goods sold where large returns are predictable.

7. Goods sold f.o.b. shipping point that are in transit at December 31.

8. Freight charges on goods purchased.

9. Interest costs incurred for inventories that are routinely manufactured.

10. Costs incurred to advertise goods held for resale.

11. Materials on hand not yet placed into production by a manufacturing firm.

12. Office supplies.

13. Raw materials on which a manufacturing firm has started production but which are not completely processed.

14. Factory supplies.

15. Goods held on consignment from another company.

16. Costs identified with units completed by a manufacturing firm but not yet sold.

17. Goods sold f.o.b. destination that are in transit at December 31.

18. Short-term investments in stocks and bonds that will be resold in the near future.

Instructions

Indicate which of these items would typically be reported as inventory in the financial statements. If an item should not bereported as inventory, indicate how it should be reported in the financial statements.

Accounting, Analysis, and Principles

Englehart Company sells two types of pumps. One is large and is for commercial use. The other is smaller and is used in residentialswimming pools. The following inventory data is available for the month of March.

Price per

Units Unit Total

Residential Pumps

Inventory at Feb. 28: 200 $ 400 $ 80,000

Purchases:

March 10 500 $ 450 $225,000

March 20 400 $ 475 $190,000

March 30 300 $ 500 $150,000

Sales:

March 15 500 $ 540 $270,000

March 25 400 $ 570 $228,000

Inventory at March 31: 500

Commercial Pumps

Inventory at Feb. 28: 600 $ 800 $480,000

Purchases:

March 3 600 $ 900 $540,000

March 12 300 $ 950 $285,000

March 21 500 $1,000 $500,000

Sales:

March 18 900 $1,080 $972,000

March 29 600 $1,140 $684,000

Inventory at March 31: 500

Accounting

(a) Assuming Englehart uses a periodic inventory system, determine the cost of inventory on hand at March 31 and thecost of goods sold for March under first-in, first-out (FIFO).

(b) Assume Englehart uses dollar-value LIFO and one pool, consisting of the combination of residential and commercialpumps. Determine the cost of inventory on hand at March 31 and the cost of goods sold for March. Assume Englehart’sinitial adoption of LIFO is on March 1. Use the double-extension method to determine the appropriate price indices.

(Hint: The price index for February 28/March 1 should be 1.00.) (Round the index to three decimal places.)

Analysis

(a) Assume you need to compute a current ratio for Englehart. Which inventory method (FIFO or dollar-value LIFO) doyou think would give you a more meaningful current ratio?

(b) Some of Englehart’s competitors use LIFO inventory costing and some use FIFO. How can an analyst compare theresults of companies in an industry, when some use LIFO and others use FIFO?

Principles

Can companies change from one inventory accounting method to another? If a company changes to an inventory accounting methodused by most of its competitors, what are the trade-offs in terms of the conceptual framework discussed in Chapter 2 of the textbook?

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