# Application Problems

Assignment Requirements

You own Widgets ‘R Us and are preparing your year-end financial statements.

What inventory system do you use and why? What are its advantages and disadvantages?
What activities should you perform to correctly account for your inventory at year-end?

3. Why is it important to track inventory? What does this information tell you about your business?

Spice Co. started the year with no inventory. During the year, it purchased two identical inventory items. The inventory was purchased at different times. The first purchase cost \$3,600 and the other, \$4,200. One of the items was sold during the year.

Required
Based on this information, how much product cost would be allocated to cost of goods sold and ending inventory on the year-end financial statements assuming use of
a. FIFO?
b. LIFO?
c. Weighted average

Suggs Company sells coffee makers used in business offices. Its beginning inventory of coffee makers was 400 units at\$50 per unit. During the year, Suggs made two batch purchases of coffee makers. The first was a \$500-unit purchase at \$55 per unit; the second was a 600- unit purchase at \$58 per unit. During the period, Suggs sold 1,200 coffee makers.

Required
Determine the amount of product cost that would be allocated to cost of goods sold and ending inventory, assuming Suggs uses
a. FIFO
b. LIFO
c. Weighted Average

The following information pertains to Baxter Company for 2013: Beginning inventory 90units @\$15 units purchased 320 units @\$. Ending inventory of 40 units. Baxter sold 370 units at \$30 each. All purchases ands sales were made with cash.

Required
a. Compute the Gross margin fro Baxter Company using the following cost flow assumptions: (1) FIFO (2) LIFO (3) weighted average
b. What is the dollar amount of differences in net income between using FIFO versus LIFO? (Ignore income tax considerations)
c. Determine the cash flow from operating activities; using each of the three cost flow assumptions listed in Requirement a. ignore the effect of income taxes. Explain why these cash flows have no difference.

Dugan Sales had the following transactions for jackets in 2013, its first year of operations.

Jan 20        Purchased 80 units @ \$15 = \$1,200
Apr. 21        Purchased 420 units@ \$16 = 6,720 July 25
Purchased 250 units @ \$20 = 5,000
Sept. 19     Purchased 150 units @ \$22 = 3,300

During the year, Dugan Sales sold 830 jackets for \$40 each.

Required
a Compute the amount of ending inventory Dugan would report on the balance sheet, assuming the following cost flow assumptions: (1)  FIFO, (2) LIFO, and (3) weighted average.
b Record the above transactions in general journal form and post T-accounts using (1)  FIFO, (2) LIFO, and (3) weighted average. Use a separate set of journal entries and T-accounts for each method. Assume all transactions are cash transactions.
c Compute the difference in gross margin between the FIFO and LIFO cost flow assumptions.

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