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Inventory Costs in Various Businesses, p. 276 Problem 5-1 Inventory Costs in Various Businesses Businesses incur various costs in selling goods and services. Koch business must decide which costs arc expenses of the period and which should be included in the cost of table inventory. The following table lists various types of businesses along with certain types of costs they incur Required Fill in the table to indicate the correct accounting for each type of cost by placing an X' in the appropriate column. For any costs that receive other treatment, explain what the appropriate treatment is for accounting purposes. Hint: Think about the "cost principle" and the "matching principle" concerning when an item is considered an expense. IV. Problem 5-3 Evaluation of Inventory Costing Methods, p. 277 Problem 5-3 Evaluation of Inventory Costing Methods Users of financial statements rely on the information available to them to decide whether to invest in a company or lend it money. .Vs an investor, you are comparing three companies in the same industry-. The cost to purchase inventory is rising in the industry Assume that all expenses incurred by the three companies are the same except for com of goods sold. The companies use the following methods to calculate ending inventory: Company A weighted average cost Compay B - first is firstout(FIFO) Compay C - last in first out, (Lifo) Required Which of the three companies will report the highest net income? Explain your answer. Which of the three companies will pay the least m income taxes? Explain your answer. Winch method of inventory costing do you believe is superior to the: others in providing information to potential investors? Explain. Explain hour your answers to pans (1), (2), and (3) would change if the costs to purchase inventory had been falling instead of rising. Hint: Do this problem with the review problem which is done for you at the end of the chapter. This should help you to see the effect of each method on the circumstances in the problem. Brief Exercise 5-8 Inventory Error, p. 268 Brief Exercise 5-8 Inventory Error Due to a clerical error, a company overstated by $50,000 the amount of inventory on hand at the end of the year. Will net income for the year be overstated or understated? Identify the two accounts on the year-end balance sheet that will be in error and indicate whether they will be understated or overstated. Hint: The cost of inventory must end up in one of two places; either an asset, since it is still on hand and of value, or an expense. Exercise 5-13 Evaluation of Inventory Costing Methods, pp. 271-272 Exercise 5-13 Evaluation of Inventory Costing Methods Write the letter of the method that is most applicable to each statement. Specific identification Average cost First-in, first-out (FIFO) Last-in, first-out (I IFOI Is the most realistic ending inventory Results in cost of goods sold being closest to current product costs Results in highest income during periods of inflation Results in highest ending inventory during periods of inflation Smooths out costs during periods of inflation Is not practical for most businesses Puts more weight on the cost of the larger number of units purchased Is an assumption that most closely reflects the physical flow of goods for most businesses Is not an acceptable method under IFRS Hint: Think about the concepts of each method. Remember that FIFO means the "first costs in (to inventory) are the first costs out (to cost of goods sold)." UFO means the "last costs in (to inventory) are the first costs out (to cost of goods sold)." The physical flow does not have to agree with the cost flow
