Question 220

1. Raw materials inventory includes direct material costs associated with purchasing raw materials in order to manufacture the product as well as freight-in costs related to acquiring the materials. Materials could include things such as wood or plastic that are directly involved in production of the product. The work-in-process inventory also includes direct materials costs, and also includes direct labor costs and overhead incurred during the period. Direct labor costs include not only wages accrued by workers, but also employee benefits; overhead includes overtime and supervisor salaries earned during the period. The finished goods inventory includes all costs from the work-in-process inventory that have been completed during the period. 2. Inventories are recorded net of unmarketable or obsolete inventory. This allowance is based on current inventory levels, past sales trends, and historical data in addition to management's estimates on market conditions and predictions for future market conditions and product demand. All of these things are subject to change, and therefore management must make proper and conservative estimates in order to have a correct estimate of inventory, which should be approximately equal to the fair value of the inventory. 3. a. This amount for unmarketable or obsolete inventory does not appear as a line item within the financial statements. This amount may be disclosed in the notes to the financial statements, but without such a note, it does not appear on the financial statements. b. Gross inventories 2011 - $243,870 Inventory amount on the balance sheet for 2011 - $233,070 Balance in allowance account at year-end 2011 - $10,800 27 Gross inventories 2012 - $199,214 Inventory amount on the balance sheet for 2012 - $211,734 Balance in allowance account at year-end 2012 - $12,520 c. The allowance for obsolete and unmarketable inventory would be attributed to the finished goods and raw materials inventories. The portions attributable to each type of inventory would be based on the proportion of total inventory that each type makes up. Obsolete inventory, by nature, could not be attributed to work-in-process inventory because the units would have to be finished or not yet begun to be considered unmarketable; for example, a portion of raw materials could be considered obsolete if some amount of raw materials was unused at the end of the period. 4. 2012 Cost of goods sold 13,348 Allowance for obsolete and unmarketable inventory 13,348 Allowance for obsolete and unmarketable inventory 11,628 Finished goods inventory 11,628 28 5. a. $572,549 is the cost of finished goods sold. b. $568,735 is the cost of finished goods transferred from work-in-process. c. $442,068 is the cost of raw materials transferred from work-in-process. d. $438,561 is the amount of raw materials purchased. e. $432,197 is the amount of cash disbursed for raw materials. 6. 2011 Inventory Turnover ratio = $575,226/(($211,734+233,070)/2) =2.6344 times 2012 Inventory Turnover ratio = $585,897/(($233,070+268,591)/2) =2.2933 times 7. 2011 Inventory Holding Period = 365/2.6344 =138.55 days 2012 Inventory Holding Period = 365/2.2933 =159.16 days On average during 2011, the company is holding inventory for 139 days before it is sold. In 2012, the company holds its inventory for 159 days before it is sold. From 2011 to 2012, the company is slightly less efficient in its in inventory management. 8. Percent of finished goods estimated as obsolete = 13,348/(167,646+13,348) =0.0737, or 7.37% of finished goods are considered obsolete in the current year. This is the Raw materials inventory Work-in-process inventory Finished goods inventory, net $46,976 $1,286 $184,808 $438,561 $568,735 $13,348 $442,068 $126,000 $572,549 $43,469 $442,068 $568,735 $619 $167,646 Cost of sales Accounts payable $- $39,012 $13,348 $438,561 $572,549 $432,197 $585,897 $45,376 29 provision for obsolete inventory divided by gross finished goods inventory, which is the net finished goods inventory plus the provision. As an investor, I would like to know more information regarding prior years in order to determine whether or not the company is improving this ratio. It might also be helpful to know what type of product this company is making so that this percentage and other ratios may be compared to other industry companies.

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