Assignment: Chap7_HW_CNOW1.Blueprint Problem: Perpetual Average CostInventory Valuation BasicsIncome measurement and asset valuation are two concepts at the core of accounting….

Assignment: Chap7_HW_CNOW1.Blueprint Problem: Perpetual Average CostInventory Valuation BasicsIncome measurement and asset valuation are two concepts at the core of accounting. Recall that the matching principle requires that costs incurred to generate revenue should be recognized in the same period that the revenue is earned. For most merchandising companies, the cost and control of inventory is the focal point of the operation. Inventory valuation applies to many companies. Thinking about this lesson, choose which companies below might benefit from inventory valuation.Company Type1. a law firm  _________________  2. an electronics company  _________________  3. a car dealership  _________________  4. a textbook company  _________________  Inventory Systems and Costing MethodsInventory systems and inventory costing methods must be understood for proper inventory valuation and measurement. The two basic systems of accounting for merchandise inventory are the perpetual inventory system and the periodic inventory system. Under the perpetual inventory system, continuous records are kept of the quantity and, usually, the cost of individual items as they are bought and sold. Under the periodic inventory system, the inventory not yet sold, or on hand, is counted periodically. This physical count is usually taken at the end of the accounting period.What type of inventory tracking system is in use when changes in inventory are immediately displayed on the balance sheet?   _________________  “Goods Flow” versus “Cost Flow”The term “goods flow” refers to the PHYSICAL MOVEMENT of inventory through the operations of the business. In most business, we try to sell our oldest merchandise first. The term “cost flow” refers to the COST associated with the assumed flow of merchandise (i.e. how much of the cost is allocated to to the items sold and how much is allocated to the unsold ending inventory). An accounting issue arises when identical units of merchandise are acquired at different unit costs during a period. In such cases, when an item is sold, it is necessary to determine its cost using a cost flow assumption and related inventory costing method. Does the “cost flow” method need to be the same as as the physical “goods flow”?   _________________  Different valuation methods produce significantly different values for cost of merchandise sold and subsequent inventory levels. This means that the choice of inventory valuation method can have a significant effect on a company’s financial position.Although the implications are far reaching, the two items most directly and immediately affected by the choice of inventory valuation method are cost of merchandise sold on the   _________________   and inventory on the   _________________   .The following formula illustrates the relationship between the cost of merchandise sold and the ending inventory. The part of the cost of merchandise available for sale is allocated to the cost of merchandise sold for the inventory that is sold and the value of the unsold inventory is assigned to the ending inventory. Therefore, a change in the amount of the cost of merchandise will impact the value of the ending inventory. Beginning inventory+Purchases=Cost of merchandise available for sale-Cost of merchandise sold=Ending InventoryHow would an inventory valuation method that results in higher cost of merchandise sold for the current period affect the following items? 1.Ending Inventory  _________________   2.Revenue  _________________   3.Net Income  _________________   4.Total Expenses  _________________  Choosing a Valuation MethodThere are four costing methods: specific identification; first-in, first-out (FIFO); last-in, first-out (LIFO); and average cost. To better understand the average cost method, imagine beginning inventory and each purchase as separate layers. These layers determine the cost of merchandise available for sale. A physical inventory is taken, and cost of goods available for sale is then allocated to cost of merchandise sold and ending inventory.Imagine that you are an external consultant for Portsmouth Co., a company trying to determine the most appropriate inventory valuation method for its operations. Its cost of inventory has been fluctuating up and down all year, so Portsmouth Co.’s primary goals are to minimize the effects of the cost fluctuations on its figures for cost of merchandise sold, without spending too much money. The available options are FIFO , LIFO , average cost, and specific identification.Given Portsmouth Co.’s unique needs, which method would you recommend?   _________________  Applying Average CostClick hereto review an illustrated example of the average cost calculation. The key is to compute a new average cost after each purchase.You will now put the average cost method into practice. Portsmouth Co. would like to explore what is meant by the weighted average cost per unit, a concept that is central to this method of inventory valuation. Remember, the weighted average must be adjusted with each purchase. Also, as sales occur, previous inventory values must be bundled to keep track of inventory on hand and to accurately track subsequent additions to inventory.The data for Portsmouth Co. is below for the month of November.Portsmouth Co.’s inventory data for NovemberDateDescriptionUnits Purchased at CostUnits Sold at RetailNov. 1Beg. Inv.500 units @ $12 = $6,000 4Purchase 1200 units @ $12 = $2,400 7Sale 1 420 @ $4112Purchase 2600 units @ $10 = $6,000 15Purchase 3700 units @ $3 = $2,100 23Sale 2 350 @ $41 Complete the schedule below. Remember, the weighted average must be adjusted with each purchase. Also, as sales occur, previous inventory values must be bundled to keep track of inventory on hand and to accurately track subsequent additions to inventory. Round the average cost per unit to four decimal places and total costs to the nearest dollar. DateDescription Inventory BalanceInventory TotalWeighted Average Cost Per UnitCost of Goods SoldNov. 1Beginning Inventory 500 x $12= $6,000= $12.00/unit 4Balance forward Purchase 1 (200 @ $12 500 x $12200 x $12= $6,000= $2,400= $   _________________   / unit        7Sale 1 (420 @ $41) 420 x $   _________________  = = $   _________________         12Balance forward Purchase 2 (600 @ $10   _________________   x $   _________________   600 x $10= $   _________________   = $6,000= $   _________________   /unit        15Balance forward Purchase 3 (700 @ $3)   _________________   x $   _________________   700 x $3= $   _________________   = $2,100= $   _________________   /unit        23Sale 2 (350 @ $41) 350 x $   _________________    = $   _________________          End of month balance   _________________   x $   _________________  $   _________________    2.Blueprint Problem: FIFO inventory – perpetualInventory and Cost of Merchandise SoldAsset valuation and income measurement are two of the most fundamental accounting concepts. For any company that sells goods, inventory is a main focus. This problem concentrates on perpetual FIFO inventory valuation.When a company sells inventory, an expense is recorded. Which of the following facts regarding this statement are true?1.  The expense is recorded as “Cost of Merchandise Available for Sale.”  _________________  2.  The revenue recognition principle dictates the timing.  _________________  3.  The expense appears on the balance sheet.  _________________  4.  The expense appears on the income statement.  _________________  5.  The matching principle dictates the time of record.  _________________  6.  The expense is recorded as “Cost of Merchandise Sold.”  _________________  When a company purchases inventory, it is immediately displayed on the   _________________   as   _________________  The amount at which inventory is recorded is based upon the   _________________   .Inventory Systems and Costing MethodsThere are two concepts that must be understood for inventory valuation and measurement: inventory systems and inventory costing methods. The two basic systems of accounting for merchandise inventory are the perpetual inventory system and the periodic inventory system. Under the perpetual inventory system, continuous records are kept of the quantity and, usually, the cost of individual items as they are bought and sold. Under the periodic inventory system, the inventory not yet sold, or on hand, is counted periodically. This physical count is usually taken at the end of the accounting period.What type of inventory tracking system is in use when changes in inventory are immediately displayed on the balance sheet?   _________________  “Goods Flow” versus “Cost Flow”The term “goods flow” refers to the PHYSICAL MOVEMENT of inventory through the operations of the business. In most business, we try to sell our oldest merchandise first. The term “cost flow” refers to the COST associated with the assumed flow of merchandise (i.e. how much of the cost is allocated to to the items sold and how much is allocated to the unsold ending inventory). An accounting issue arises when identical units of merchandise are acquired at different unit costs during a period. In such cases, when an item is sold, it is necessary to determine its cost using a cost flow assumption and related inventory costing method. Does the “cost flow” method need to be the same as as the physical “goods flow”?   _________________  First-in, First-out (FIFO) There are four costing methods: specific identification; first-in, first-out (FIFO); last-in, first-out (LIFO); and average cost. This example will focus on FIFO. Under the first-in, first-out (FIFO) inventory cost flow method, the first units purchased are assumed to be sold and the ending inventory is made up of the most current purchases.To better understand the FIFO method, imagine that beginning inventory and each purchase is a separate layer. These layers determine the cost of goods available for sale. For each sale, start with the earliest purchase (which may be beginning inventory) and work forward until you have accounted for the units sold. Using FIFO, we assume the costs of the   _________________   items we purchased are assigned to the first items we sell. Therefore, the the most recent costs are assigned to the   _________________   while the   _________________   will consists of costs the beginning inventory and earlier purchases.According to GAAP, there are three acceptable ways in which a publicly traded company may value inventory. They are FIFO, LIFO, and average cost. In the period below, which of the components in the cost of merchandise sold calculation would be affected by a current period change in inventory valuation method (i.e. switching from LIFO to FIFO)?Beginning inventory  _________________  + Purchases  _________________  Cost of merchandise available for sale  _________________  – Cost of merchandise sold  _________________  Ending inventory  _________________  FIFO Inventory CalculationClick here to review an illustrated example of the FIFO calculation. The steps illustrated in the example are recapped below.1.  Start with beginning inventory.2.  Add a layer for each purchase made.3.  Record cost of merchandise sold as sales occur and adjust layers.4.  Compute the ending inventory for the period.Below is the data for the month of January, 2011.1/1 Beg. Inv.220 Units @ $91/8 Purchase120 Units @ $111/14 Sale176 Units1/22 Purchase150 Units @ $91/25 Sale104 UnitsCompute the FIFO layers amounts for the cost of merchandise available for sale after each purchase and sale.After 1/8 PurchaseLayer 1   _________________   units   $   _________________   price per unit   $   _________________   value of the layerLayer 2   _________________   units   $   _________________   price per unit   $   _________________   value of the layerAfter 1/14 SaleLayer 1   _________________   units   $   _________________   price per unit   $   _________________   value of the layerLayer 2   _________________   units   $   _________________   price per unit    $   _________________   value of the layerAfter 1/22 PurchaseLayer 1   _________________   units   $   _________________   price per unit   $   _________________   value of the layerLayer 2   _________________   units   $   _________________   price per unit   $   _________________   value of the layerLayer 3   _________________   units   $   _________________   price per unit   $   _________________   value of the layerAfter 1/25 SaleLayer 1   _________________   units   $   _________________   price per unit   $   _________________   value of the layerLayer 2   _________________   units   $   _________________   price per unit   $   _________________   value of the layerLayer 3   _________________   units   $   _________________   price per unit   $   _________________   value of the layerBased on your answers above, complete the worksheet below.FIFO Inventory Worksheet for Month Ending January 2011Purchases Cost of Merchandise SoldInventory Balance1/1 Beg. Inv.220 Units @ $9   1,9801/8 Purchase120 Units @ $11$   _________________    $   _________________  1/14 Sale176 Units  $   _________________  $   _________________  1/22 Purchase150 Units @ $9$   _________________    $   _________________  1/25 Sale104 Units  $   _________________  $   _________________  Total $   _________________   $   _________________  $   _________________   Recording Changes in Inventory under FIFO ValuationUnder the perpetual system, two journal entries are are required to record sales; one to record the sale and one to record the cost of merchandise sold. Click on the links below to review the journal entries for purchases and sales transactions.PurchaseSalesAfter a purchase or sale occurs, the transaction must be recorded or journalized. In the following journal, record the purchases and sales for the month assuming that all inventory purchases were made with cash and all sales were made on account at a fixed unit price of $22 per unit. There are several facts to remember:(1) All inventory is purchased with cash, and cash only. (2) All sales are made on account, and on account only. (3) When recording sales, record the revenue portion of the transaction first.Not sure about the account title? Click here to view the chart of accounts.+ Assets+ Liabilities+ Equity+ Revenues/Gains+ Expenses/LossesGENERAL JOURNALpage                DATE        DESCRIPTION DOC. NO. POST. REF. DEBIT  CREDIT     1 Jan. 08           12                       23                       34 Jan. 14 Record revenue           45                       56                       67 Jan. 14 Record cost           78                       89                       910 Jan. 22           1011                       1112                       1213 Jan. 25 Record revenue           1314                       1415                       1516 Jan. 25 Record cost           1617                       1718                       18        3.Blueprint Problem: LIFO inventory – perpetualInventory and Cost of Merchandise SoldAsset valuation and income measurement are two of the most fundamental accounting concepts. For any company that sells goods, inventory is a main focus. This problem concentrates on perpetual LIFO inventory valuation.When a company records a sale, it is displayed on the   _________________   as   _________________   . The amount at which sold inventory is expensed depends on the   _________________   . The inventory remaining must be properly valued so that it can be reported on the   _________________   in the   _________________   section.Why isn’t an expense recorded for inventory when it is purchased instead of when it is sold?  _________________  In order to determine the amounts to be reported on the balance sheet and income statement, you must first understand the relationship between the cost of merchandise sold and ending inventory. This relationship is expressed in the cost of merchandise sold model. Use the selection lists to build the cost of merchandise sold model.1.    _________________  2.    _________________  3.  Cost of merchandise available for sale4.  – Ending Inventory5.    _________________   Based on the cost of merchandise sold formula, the ending inventory can be computed by subtracting the   _________________   from the   _________________  Inventory Systems and Costing MethodsThere are two concepts that must be understood for inventory valuation and measurement: inventory systems and inventory costing methods. The two basic systems of accounting for merchandise inventory are the perpetual inventory system and the periodic inventory system. Under the   _________________   inventory system, continuous records are kept of the quantity and, usually, the cost of individual items as they are bought and sold. Under the   _________________   inventory system, the inventory not yet sold, or on hand, is counted periodically. This physical count is usually taken at the end of the accounting period.Although it is more expensive to maintain, the   _________________   system is far more accurate and up-to-date than other inventory tracking systems.”Goods Flow” versus “Cost Flow”The term “goods flow” refers to the PHYSICAL MOVEMENT of inventory through the operation of the business. In most business, we try to sell our oldest merchandise first. The term “cost flow” refers to the COST associated with the assumed flow of merchandise (i.e. how much of the cost is allocated to to the items sold and how much is allocated to the unsold ending inventory). It is important to note that the “cost flow” method   _________________   be the same as the physical “goods flow”. An accounting issue arises when identical units of merchandise are acquired at different unit costs during a period. In such cases, when an item is sold, it is necessary to determine its cost using a cost flow assumption and related inventory costing method. An inventory costing method   _________________  LIFO (Last-in, First-out) CostingThere are four costing methods: specific identification; first-in, first-out (FIFO); last-in, first-out (LIFO); and average cost. This example will focus on LIFO. Under the last-in, first-out (LIFO) inventory cost flow method, the last units purchased are assumed to be sold and the ending inventory is made up of the earlier purchases.To better understand the LIFO method, imagine that beginning inventory and each purchase is a separate layer. These layers determine the cost of goods available for sale. For each sale, start with the latest purchase and work backwards until you have accounted for the units sold. Using LIFO, we assume the costs of the   _________________   items we purchased are assigned to the first items we sell. Therefore, the most recent costs are assigned to the   _________________   while the   _________________   will consists of costs the beginning inventory and earlier purchases.APPLY THE CONCEPTS: LIFO inventory calculationClick here to review an illustrated example of the LIFO calculation. The steps illustrated in the example are recapped below.1. Start with beginning inventory.2. Add inventory layers as purchases are made.3. Compute the cost of merchandise sold as sales occur. Use only the cost of merchandise available for sale as of the sales date.4. Update the inventory balance after each transaction. (Be sure you do not use an amount more than once.)5. Determine the ending inventory for the period. Below is the data for the month of January, 2011.1/1 Beg. Inv.210 Units @ $101/8 Purchase100 Units @ $131/14 Sale70 Units1/22 Purchase130 Units @ $71/25 Sale150 UnitsCompute the LIFO layers amounts for the cost of merchandise available for sale after each purchase and sale.After 1/8 PurchaseLayer 1   _________________   units   $   _________________   price per unit   $   _________________   value of the layerLayer 2   _________________   units   $   _________________   price per unit   $   _________________   value of the layerAfter 1/14 SaleLayer 1   _________________   units   $   _________________   price per unit   $   _________________   value of the layerLayer 2   _________________   units   $   _________________   price per unit    $   _________________   value of the layerAfter 1/22 PurchaseLayer 1   _________________   units   $   _________________   price per unit   $   _________________   value of the layerLayer 2   _________________   units   $   _________________   price per unit   $   _________________   value of the layerLayer 3   _________________   units   $   _________________   price per unit   $   _________________   value of the layerAfter 1/25 SaleLayer 1   _________________   units   $   _________________   price per unit   $   _________________   value of the layerLayer 2   _________________   units   $   _________________   price per unit   $   _________________   value of the layerBased on your answers above, complete the worksheet below. LIFO Inventory WorksheetTransactionPurchases Cost of Merchandise SoldInventory balance1/1 Beg. Inv.210 Units @ $10   $2,1001/8 Purchase100 Units @ $13$   _________________    $   _________________              1/14 Sale70 Units  $   _________________  $   _________________  1/22 Purchase130 Units @ $7$   _________________    $   _________________  1/25 Sale150 Units  $   _________________  $   _________________  Total $   _________________   $   _________________  $   _________________   APPLY THE CONCEPTS: Recording changes in inventory under LIFO valuationUnder the perpetual system, two journal entries are are required to record sales; one to record the sale and one to record the cost of merchandise sold. Click on the links below to review the journal entries for purchases and sales transactions.PurchaseSalesAfter a purchase or sale occurs, the transaction must be recorded or journalized. In the following journal, record the purchases and sales for the month, assuming that all inventory purchases were made with cash and all sales were made on account at a fixed unit price of $22 per unit. Several facts to remember: (1) All inventory purchases are made with cash and cash only; (2) All sales are made on account and on account only; and (3) when recording sales, Schiphol wants you to record the revenue portion of the transaction first.If an amount box does not require an entry leave it blank.Not sure about the account title? Click here to view the chart of accounts.+ Assets+ Liabilities+ Equity+ Revenues/Gains+ Expenses/LossesGENERAL JOURNALpage                DATE        DESCRIPTION DOC. NO. POST. REF. DEBIT  CREDIT     1 Jan. 08           12           23            34 Jan. 14 Record sale           45           56            67 Jan. 14 Record cost           78           89            910 Jan. 22         blank 1011           1112            1213 Jan. 25 Record sale           1314           1415            1516 Jan. 25 Record cost           1617           1718            18        4.eBookeBookeBookeBookeBookeBookeBookeBook Animated Example ExerciseAnimated Example ExerciseAnimated Example ExerciseAnimated Example ExerciseAnimated Example ExerciseAnimated Example ExerciseAnimated Example ExerciseAnimated Example Exercise Cost Flow MethodsThree identical units of Item JC07 are purchased during July, as shown below. Item JC07 Units Cost July 9Purchase 1 $241 July 17Purchase 1 244 July 26Purchase 1 247 Total  3 $732 Average cost per unit    $244($732 ÷ 3 units)Assume that one unit is sold on July 31 for $349. Determine the gross profit for July and ending inventory on July 31 using the (a) first-in, first-out (FIFO); (b) last-in, first-out (LIFO); and (c) weighted average cost methods. Gross ProfitEnding Inventorya. First-in, first-out (FIFO)$   _________________  $   _________________  b. Last-in, first-out (LIFO)$   _________________  $   _________________  c. Weighted average cost$   _________________  $   _________________  5.eBookeBookeBookeBookeBookeBookeBookeBook Animated Example ExerciseAnimated Example ExerciseAnimated Example ExerciseAnimated Example ExerciseAnimated Example ExerciseAnimated Example ExerciseAnimated Example ExerciseAnimated Example Exercise Perpetual Inventory Using FIFOBeginning inventory, purchases, and sales for Item ER27 are as follows:January 1 Inventory78 units @ $219 Sale53 units13 Purchase55 units @ $2428 Sale29 unitsAssuming a perpetual inventory system and using the first-in, first-out (FIFO) method, determine (a) the cost of merchandise sold on January 28 and (b) the inventory on January 31.a. Cost of merchandise sold on January 28$   _________________  b. Inventory on January 31$   _________________  6.eBookeBookeBookeBookeBookeBookeBookeBook Animated Example ExerciseAnimated Example ExerciseAnimated Example ExerciseAnimated Example ExerciseAnimated Example ExerciseAnimated Example ExerciseAnimated Example ExerciseAnimated Example Exercise Perpetual Inventory Using LIFOBeginning inventory, purchases, and sales for Item CZ83 are as follows:January 1 Inventory110 units @ $195 Sale88 units11 Purchase122 units @ $2321 Sale102 unitsAssuming a perpetual inventory system and using the last-in, first-out (LIFO) method, determine (a) the cost of merchandise sold on January 21 and (b) the inventory on January 31.a. Cost of merchandise sold on January 21$   _________________  b. Inventory on January 31$   _________________  7.eBookeBookeBookeBookeBookeBookeBookeBook Animated Example ExerciseAnimated Example ExerciseAnimated Example ExerciseAnimated Example ExerciseAnimated Example ExerciseAnimated Example ExerciseAnimated Example ExerciseAnimated Example Exercise Lower-of-Cost-or-Market MethodOn the basis of the following data, determine the value of the inventory at the lower-of-cost-or-market by applying lower-of-cost-or-market to each inventory item, as shown in Exhibit 9.ItemInventory QuantityUnit Cost PriceUnit Market PriceCK3J  95$57$55VZ31186  29  31$   _________________  8.eBookeBookeBookeBookeBookeBookeBookeBook Animated Example ExerciseAnimated Example ExerciseAnimated Example ExerciseAnimated Example ExerciseAnimated Example ExerciseAnimated Example ExerciseAnimated Example ExerciseAnimated Example Exercise Effect of Inventory ErrorsDuring the taking of its physical inventory on December 31, 2014, Zula Company incorrectly counted its inventory as $266,700 instead of the correct amount of $304,040. Indicate the effect of the misstatement on Zula’s December 31, 2014, balance sheet and income statement for the year ended December 31, 2014.Cost of merchandise sold  _________________    _________________  $   _________________  Current assets  _________________    _________________  $   _________________  Gross profit  _________________    _________________  $   _________________  Merchandise inventory  _________________    ________________  $   _________________  Net income  _________________    _________________  $   _________________  Owner’s equity  _________________    _________________  $   _________________  Total assets  _________________    _________________  $   _________________  9.eBookeBookeBookeBookeBookeBookeBookeBook Animated Example ExerciseAnimated Example ExerciseAnimated Example ExerciseAnimated Example ExerciseAnimated Example ExerciseAnimated Example ExerciseAnimated Example ExerciseAnimated Example Exercise Inventory Turnover and Number of Days’ Sales in InventoryThe following financial statement data for years ending December 31 for Gillispie Company are shown below. 20142013Cost of merchandise sold$1,276,040  $957,760  Inventories:        Beginning of year$275,210  $191,990    End of year396,390   275,210  a.  Determine the inventory turnover for 2014 and 2013. Round to one decimal place. Inventory Turnover2014  _________________  2013  _________________  b.  Determine the number of days’ sales in inventory for 2014 and 2013. Assume 365 days a year. Round interim calculations and final answers to one decimal place. Number of Days’ Sales in Inventory2014  _________________   days2013  _________________   daysc.  Does the change in inventory turnover and the number of days’ sales in inventory from 2013 to 2014 indicate a favorable or an unfavorable trend?   _________________  10.eBookeBookeBookeBookeBookeBookeBookeBook Perpetual Inventory Using FIFOBeginning inventory, purchases, and sales data for portable DVD players are as follows:June 1 Inventory48 units @ $496 Sale32 units14 Purchase24 units @ $5219 Sale20 units25 Sale10 units30 Purchase35 units @ $56The business maintains a perpetual inventory system, costing by the first-in, first-out method.Determine the cost of the merchandise sold for each sale and the inventory balance after each sale, presenting the data in the form illustrated in Exhibit 3.  a.  Under FIFO, if units are in inventory at two different costs, enter the units with the LOWER unit cost first in the Cost of Merchandise Sold Unit Cost column and in the Inventory Unit Cost column. Cost of the Merchandise Sold Schedule First-in, First-out Method Portable DVD Players Date   Quantity Purchased   Purchases Unit Cost   Purchases Total Cost   Quantity Sold   Cost of Merchandise Sold Unit Cost   Cost of Merchandise Sold Total Cost   Inventory Quantity   Inventory Unit Cost   Inventory Total Cost June 1               48   $ 49   $ 2,352 June 6            $   $