Mastery Problem: Inventories

Changing Prices

You work for a CPA firm that has been hired by Widget Tek, a merchandising company that is getting ready to expand. The president of Widget Tek is concerned with obtaining a loan for the expansion and wants to be sure that all the financial statements accurately reflect the companys accounting records.

As preparation for this assignment, you have been asked to review the effects of changing prices on three inventory costing methods: LIFO, FIFO, and weighted average.

Identify the scenarios and inventory methods that result in the highest and lowest values for each item listed. Enter Highest, Lowest, or leave the box blank.

	Cost of Merchandise Sold	Ending Merchandise Inventory	Net Income
Weighted average, when prices are rising
LIFO, when prices are falling
LIFO, when prices are rising
FIFO, when prices are falling
Weighted average, when prices are falling
FIFO, when prices are rising

Inventory Records

Widget Teks original accountant accepted a position with another firm and left in early March. You have been asked to review the subsidiary inventory ledger record for Widget Teks main product for March.

Date	Inventory
	Quantity	Unit Cost	Total Cost
Mar. 1	850	$98.00	$83,300
	1,275	95.00	121,125
Mar. 8	650	98.00	63,700
Mar. 11	325	98.00	31,850
Mar. 14	325	98.00	31,850
	780	103.00	80,340
Mar. 22	260	98.00	25,480
Mar. 25	260	98.00	25,480
	1,600	100.00	160,000

Study the inventory record for March and answer the questions that follow.

	Assuming that the product sells for $160 and that 80% of sales are on account, determine the gross profit from sales for March.
	Making the same assumptions as in (1), determine the ending inventory cost for March.
	Which inventory method is being used? LIFO OR FIFO

In conversation with the president of Widget Tek, you have learned that much of the companys merchandise inventory consists of older Widget Tek models. These older models sell for less than the newer Widget Tek models, but customers strongly prefer the newer models. The company believes that the net realizable value of the older merchandise inventory is less than its value in the subsidiary inventory ledger.

Considering all of the information you have about Widget Tek, answer the following questions.

	To better account for the older merchandise inventory, the president of Widget Tek wonders whether the merchandise inventory should be valued using a different method. Do you agree, and why or why not? ______ because _________ will.
	Will a change in inventory method increase a companys net income on its financial statements?
	When is merchandise inventory not valued at cost?