Intermediate Accounting

Donald E. Kieso, Jerry J. Weygandt, Terry D. Warfield

Chapter 8

Valuation of Inventories: A Cost-Basis Approach - all with Video Answers

Educators

Chapter Questions

Problem 1

In what ways are the inventory accounts of a retailing company different from those of a manufacturing company?

Ameer Said

Ameer Said

Numerade Educator

Problem 2

Why should inventories be included in (a) a statement of financial position and (b) the computation of net income?

Puneet Prajapati

Puneet Prajapati

Numerade Educator

Problem 3

What is the difference between a perpetual inventory and a physical inventory? If a company maintains a perpetual inventory, should its physical inventory at any date be equal to the amount indicated by the perpetual inventory records? Why?

Jennifer Stoner

Jennifer Stoner

Numerade Educator

Problem 4

Mishima, Inc. indicated in a recent annual report that approximately $\$ 19$ million of merchandise was received on consignment. Should Mishima, Inc. report this amount on its balance sheet? Explain.

Daniel Cisneros

Daniel Cisneros

Numerade Educator

Problem 5

What is a product financing arrangement? How should product financing arrangements be reported in the financial statements?

Shazia Naz

Numerade Educator

Problem 6

Where, if at all, should the following items be classified on a balance sheet?
(a) Goods out on approval to customers.
(b) Goods in transit that were recently purchased fo.b. destination.
(c) Land held by a realty firm for sale.
(d) Raw materials.
(e) Goods received on consignment.
(f) Manufacturing supplies.

Puneet Prajapati

Puneet Prajapati

Numerade Educator

Problem 7

At the balance sheet date Clarkson Company held title to goods in transit amounting to $\$ 214,000$. This amount was omitted from the purchases figure for the year and also from the ending inventory. What is the effect of this omission on the net income for the year as calculated when the books are closed? What is the effect on the company's financial position as shown in its balance sheet? Is materiality a factor in determining whether an adjustment for this item should be made?

Puneet Prajapati

Puneet Prajapati

Numerade Educator

Problem 8

Define "cost" as applied to the valuation of inventories.

Paul A.

California State Polytechnic University, Pomona

Problem 9

Distinguish between product costs and period costs as they relate to inventory

Ameer Said

Numerade Educator

Problem 10

Ford Motor Co. is considering alternate methods of accounting for the cash discounts it takes when paying suppliers promptly. One method suggested was to report these discounts as financial income when payments are made. Comment on the propriety of this approach.

Puneet Prajapati

Puneet Prajapati

Numerade Educator

Problem 11

Zonker Inc. purchases 500 units of an item at an invoice cost of $\$ 30,000 .$ What is the cost per unit? If the goods are shipped f.o.b. shipping point and the freight bill was $\$ 1,500,$ what is the cost per unit if Zonker Inc. pays the freight charges? If these items were bought on $2 / 10, n / 30$ terms and the invoice and the freight bill were paid within the 10 -day period, what would be the cost per unit?

Rashmi Sinha

Numerade Educator

Problem 12

Specific identification is sometimes said to be the ideal method of assigning cost to inventory and to cost of goods sold. Briefly indicate the arguments for and against this method of inventory valuation.

Jennifer Stoner

Jennifer Stoner

Numerade Educator

Problem 13

FIFO, weighted-average, and LIFO methods are often used instead of specific identification for inventory valuation purposes. Compare these methods with the specific identification method, discussing the theoretical propriety of each method in the determination of income and asset valuation.

Adriano Chikande

Adriano Chikande

Numerade Educator

Problem 14

How might a company obtain a price index in order to apply dollar-value LIFO?

Paul A.

California State Polytechnic University, Pomona

Problem 15

Describe the LIFO double-extension method. Using the following information, compute the index at December 31 $2010,$ applying the double-extension method to a LIFO pool consisting of 25,500 units of product A and 10,350 units of product B. The base-year cost of product A is $\$ 10.20$ and of product $\mathrm{B}$ is $\$ 37.00 .$ The price at December 31,2010 for product A is $\$ 21.00$ and for product $B$ is $\$ 45.60$

Adriano Chikande

Adriano Chikande

Numerade Educator

Problem 16

As compared with the FIFO method of costing inventories, does the LIFO method result in a larger or smaller net income in a period of rising prices? What is the comparative effect on net income in a period of falling prices?

Nick Johnson

Numerade Educator

Problem 17

What is the dollar-value method of LIFO inventory valuation? What advantage does the dollar-value method have over the specific goods approach of LIFO inventory valuation? Why will the traditional LIFO inventory costing method and the dollar-value LIFO inventory costing method produce different inventory valuations if the composition of the inventory base changes?

Jennifer Stoner

Jennifer Stoner

Numerade Educator

Problem 18

Explain the following terms.
(a) LIFO layer.
(b) LIFO reserve.
(c) LIFO effect.

Nick Johnson

Numerade Educator

Problem 19

On December 31,2009 , the inventory of Powhattan Company amounts to $\$ 800,000$. During 2010 , the company decides to use the dollar-value LIFO method of costing inventories. On December 31,2010 , the inventory is $\$ 1,053,000$ at December $31,2010,$ prices. Using the December 31,2009 , price level of 100 and the December 31,2010 price level of $108,$ compute the inventory value at December $31,2010,$ under the dollar-value LIFO method.

Adriano Chikande

Adriano Chikande

Numerade Educator

Problem 20

In an article that appeared in the Wall Street Journal, the phrases "phantom (paper) profits" and "high LIFO profits" through involuntary liquidation were used. Explain these phrases.

EA

Erwin Antoni

Numerade Educator