Revised Pages
374
CHAPTER 7
Reporting and Interpreting Cost of Goods Sold and Inventory
A LT E R N AT E P R O B L E M S
AP7-1
Analyzing the Effects of Four Alternative Inventory Methods (P7-2)
LO7-2
Dixon Company uses a periodic inventory system. At the end of the annual accounting period, December 31,
2014, the accounting records for the most popular item in inventory showed the following:
Transactions
Beginning inventory, January 1, 2014
Transactions during 2014:
a. Purchase, February 20
b. Purchase, June 30
c. Sale ($50 each)
d. Sale ($50 each)
Units
Unit Cost
390
$32.00
700
460
(70)
(750)
34.25
37.00
Required:
Compute the cost of (a) goods available for sale, (b) ending inventory, and (c) goods sold at December 31,
2014, under each of the following inventory costing methods (show computations and round to the
nearest dollar):
1. Average cost (round average cost per unit to the nearest cent).
2. First-in, first-out.
3. Last-in, first-out.
4. Specific identification, assuming that the first sale was selected two-fifths from the beginning inventory and three-fifths from the purchase of February 20, 2014. Assume that the second sale was selected
from the remainder of the beginning inventory, with the balance from the purchase of June 30, 2014.
AP7-2
LO7-2, 7-3
Evaluating Four Alternative Inventory Methods Based on Income and Cash Flow (P7-3)
At the end of January 2015, the records of NewRidge Company showed the following for a particular
item that sold at $16 per unit:
Transactions
Inventory, January 1, 2015
Purchase, January 12
Purchase, January 26
Sale
Sale
Units
Amount
120
380
200
(100)
(140)
$
960
3,420
2,200
Required:
1. Assuming the use of a periodic inventory system, prepare a summarized income statement through
gross profit for January 2015 under each method of inventory: (a) weighted average cost, (b) FIFO,
(c) LIFO, and (d) specific identification. For specific identification, assume that the first sale was
selected from the beginning inventory and the second sale was selected from the January 12 purchase. Show the inventory computations (including for ending inventory) in detail.
2. Of FIFO and LIFO, which method would result in the higher pretax income? Which would result in
the higher EPS?
3. Of FIFO and LIFO, which method would result in the lower income tax expense? Explain, assuming
a 30 percent average tax rate.
4. Of FIFO and LIFO, which method would produce the more favorable cash flow? Explain.
AP7-3
LO7-2, 7-3
Evaluating the LIFO and FIFO Choice When Costs Are Rising and Falling (P7-5)
Income is to be evaluated under four different situations as follows:
a. Prices are rising:
(1) Situation A: FIFO is used.
(2) Situation B: LIFO is used.
b. Prices are falling:
(1) Situation C: FIFO is used.
(2) Situation D: LIFO is used.
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