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Accounting 211

Tuesday, February 9th, 1999
Announcements:

Exam #1: Range = 21-100, Average = 67%
There will be a curve at the end of the semester.
Read chapters 9 & 11 for this week and chapters 10 & 8 for next week.

Lecture notes:

Chapter 9 Illustration:

Beginning Inventory

500 units at $10 each

Purchase #1

300 units at $11 each

Purchase #2

400 units at $12 each

Purchase #3

700 units at $14 each

Sales = 1,500 units

 

Weighted Average Method

# of units

Cost

Beginning Inventory

500

$5,000

Purchase #1

300

$3,300

Purchase #2

400

$4,800

Purchase #3

700

9,800

1,900

$22,900


Average cost per unit = 22,900 / 1,900 = $12.053

Cost of Goods Sold

1,500 x $12.053 = $18,080

Ending Inventory

400 x $12.053 = $4,821

*18,080 + 4,821 = about 22,900

 

First-In, First-Out (FIFO) Method

Cost of Goods Sold

500 at $10 =

$5,000

300 at $11 =

$3,300

400 at $12 =

$4,800

300 at $14 =

$4,200

$17,300


Ending Inventory

400 at $14 = $5,600

*17,300 + 5,600 = 22,900

 

Last-In, Last-Out (LIFO) Method

Cost of Goods Sold

700 at $14 =

$9,800

400 at $12 =

$4,800

300 at $11 =

$3,300

100 at $10 =

$1,000

$18,900


Ending Inventory

400 at $10 = $4,000

*18,900 + 4,000 = 22,900

 

LIFO has higher Cost of Goods Sold, which is an expense. This lowers Net Income. If Net Income is lower you pay less taxes. Therefore, when prices are rising, LIFO reduces taxes whereas FIFO increases Income.

 

The 1998 ending inventory was understated by $7,000.

Cost of Goods Available for Sale

- Ending Inventory

(too low)

Cost of Goods Sold

(too high)


1998 Income Statement:
Cost of Goods Sold too high, Net Income too low

12/31/98 Balance Sheet:
Assets too low, SE too low

1999:

Beginning Inventory

(too low)

+ Net Purchases

+ Trans In

Cost of Goods Available for Sale

(too low)

- Ending Inventory

Cost of Goods Sold

(too low)


1999 Income Statement:
Cost of Goods Sold too low, Net Income too high

12/31/99 Balance Sheet:
NO ERRORS
1998 & 1999 errors balance out

Counter Balancing Error--corrects itself after 2 periods

 

Gross Profit Method of Estimating Cost of Goods Sold and Ending Inventory
(can only be used internally to estimate)

Net Sales =

$700,000

Net Purchases =

$400,000

Beginning Inventory =

$200,000

Gross Profit =

30% of Sales

Net Sales

700,000

- Cost of Goods Sold

- 490,000

(0.7 x 700,000)

Gross Profit

210,000

Cost of Goods Avail for Sale

600,000

(400,000 + 200,000)

- Ending Inventory

- 110,000

Cost of Goods Sold

490,000

 


Page 400, Exercise #3:

Average Cost Method:

36,550 / 1,350 = $27.07

Cost of Goods Sold

1,000 x $27.07 = $27,070

Ending Inventory

350 x $27.07 = $9,475


LIFO Method:

Ending Inventory

250 at $23 =

$5,750

100 at $26 =

$2,600

$8,350

Cost of Goods Sold

Cost of Goods Avail for Sale

36,550

- Ending Inventory

- 8,350

Cost of Goods Sold

$28,200

 

FIFO Method:

Ending Inventory

150 at $28 =

$6,000

200 at $30 =

$4,200

$10,200

Cost of Goods Sold

Cost of Goods Avail for Sale

36,550

- Ending Inventory

- 10,200

Cost of Goods Sold

$26,350

 

Specific Identification Method:

Ending Inventory

50 at $23 =

$1,150

100 at $26 =

$2,600

100 at $26 =

$2,600

100 at $28 =

$2,800

$9,150

Cost of Goods Sold

Cost of Goods Avail for Sale

36,550

- Ending Inventory

- 9,150

Cost of Goods Sold

$27,400



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