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Chapter 05 - Accounting for Inventories

Demonstration Problem 5-1 - Inventory Cost Issue

A furniture store inventory includes two beds that are identical with respect to appearance, quality, and brand name. However, the store purchased the beds at different times for differ- ent prices. The first bed cost the store $400, and the second bed cost $450. Assume the store sells one of the beds for $600. Also assume the store manager cannot identify which bed was sold.

Required

Determine the gross margin on the sale of the bed.

Demonstration Problem 5-2 - Inventory Cost Flow Assumptions

Crystal Apple Sales Company began 2010 with cash of $2,000, inventory of $3,600 (200 crystal apples that cost $18 each), $2,500 of common stock, and $3,100 of retained earnings. The following events occurred during 2010.

1. Crystal Apple purchased additional inventory twice during 2010. The first purchase consisted of 800 apples that cost $20 each, and the second consisted of 1,200 apples that cost $24 each. The purchases were on account.

2. The company sold 2,040 apples for cash at a selling price of $40 each.

3. The company paid $44,800 cash on accounts payable for inventory purchases.

4. Crystal Apple paid $26,000 cash for operating expenses.

Required

a. Record the events in ledger T-accounts or using the horizontal financial statements model using the three different cost flow assumptions: FIFO, LIFO, and weighted aver- age.

b. Prepare an income statement, a balance sheet, and a statement of cash flows under each of the three cost flow assumptions.