Mastery Problem: Inventories

Changing Prices

You work for a CPA firm that has been hired by Widget Tek Inc., a merchandising company that is getting ready to expand. The president of Widget Tek Inc. 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. if not affected select "No effect".

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

Inventory Records

Widget Tek Inc.s 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 Tek Inc.s main product for March.

	Inventory
Date	Quantity			Unit Cost			Total Cost
Mar. 1		850			$98			$83,300
		1,275			$95			$121,125
Mar. 8		650			$98			$63,700
Mar. 11		325			$98			$31,850
Mar. 14		325			$98			$31,850
		780			$103			$80,340
Mar. 22		260			$98			$25,480
Mar. 25		260			$98			$25,480
		2,000			$100			$200,000

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

1. Assuming that the product sells for $160 and that 70% of sales are on account, determine the gross profit from sales for March. $_______________________________________--

2. Making the same assumptions as in (1), determine the ending inventory cost for March.

________________________________________

3. Which inventory method is being used?

______________________________

Final Questions

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

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

1. To better account for the older inventory, the president of Widget Tek Inc. wonders whether the inventory should be valued using a different method. Do you agree, and why or why not? ___________because_________________will_____________________________

2. Will a change in inventory method increase a companys net income on its financial statements? .________________________________

3. When is inventory not valued at cost?

______________________________--

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