Fundamentals Of Financial Accounting
6th Edition
ISBN: 9781259864230
Author: PHILLIPS, Fred, Libby, Robert, Patricia A.
Publisher: Mcgraw-hill Education,
expand_more
expand_more
format_list_bulleted
Videos
Textbook Question
Chapter 7, Problem 2PA
Evaluating the Income Statement and Income Tax Effects of Lower of Cost or Market/Net Realizable Value
Springer Anderson Gymnastics prepared its annual financial statements dated December 31. The company reported its inventory using the LIFO inventory costing method but did not compare the cost of its ending inventory to its market value (replacement cost). The preliminary income statement follows:
Assume that you have been asked to restate the financial statements to incorporate the LCM/NRV rule. You have developed the following data relating to the ending inventory:
Required:
- 1. Restate the income statement to reflect LCM/NRV valuation of the ending inventory. Apply LCM/NRV on an item-by-item basis and show computations.
- 2. Compare and explain the LCM/NRV effect on each amount that was changed in the preliminary income statement in requirement 1.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
[The following information applies to the questions displayed below.]
Jaffa Company prepared its annual financial statements dated December 31 of the current year. The company applies the
FIFO inventory costing method; however, the company neglected to apply lower of cost or net realizable value to the
ending inventory. The preliminary current year income statement follows:
Sales revenue
$290,000
Cost of goods sold
Beginning inventory
$ 34,000
194,000
228,000
63,300
Purchases
Goods available for sale
Ending inventory (FIFO cost)
Cost of goods sold
Gross profit
Operating expenses
Pretax income
Income tax expense (35%)
164,700
125,300
63,000
62,300
21,805
$ 40,495
Net income
Assume that you have been asked to restate the current year financial statements to incorporate lower of cost or NRV. You
have developed the following data relating to the current year ending inventory:
Acquisition
Cost
Net Realizable
Item
Quantity
Unit
Total
Value Per Unit
$ 12,600
9,600
18,000
23,100
A
3,150
$ 4.00…
Springer Anderson Gymnastics prepared its annual financial statements dated December 31. The company reported its inventory using the LIFO inventory costing method but did not compare the cost of its ending inventory to its market value (replacement cost). The preliminary income statement follows:
wer the following independent questions and show computations supporting your answers.
1. Assume that the company uses the FIFO method. The value of the ending inventory at December 31 is
2. Assume that the company uses the average cost method. The value of the ending inventory on Decemb
$.
3. Assume that the company uses the LIFO method. The value of the ending inventory on December 31 is
Chapter 7 Solutions
Fundamentals Of Financial Accounting
Ch. 7 - What are three goals of inventory management?Ch. 7 - Describe the specific types of inventory reported...Ch. 7 - The chapter discussed four inventory costing...Ch. 7 - Which inventory cost flow method is most similar...Ch. 7 - Where possible, the inventory costing method...Ch. 7 - Contrast the effects of LIFO versus FIFO on ending...Ch. 7 - Contrast the income statement effect of LIFO...Ch. 7 - Several managers in your company are experiencing...Ch. 7 - Explain briefly the application of the LCM rule to...Ch. 7 - Prob. 10Q
Ch. 7 - You work for a made-to-order clothing company,...Ch. 7 - Prob. 12QCh. 7 - (Supplement 7B) Explain why an error in ending...Ch. 7 - Which of the following statements are true...Ch. 7 - The inventory costing method selected by a company...Ch. 7 - Which of the following is not a name for a...Ch. 7 - Which of the following correctly expresses the...Ch. 7 - A New York bridal dress designer that makes...Ch. 7 - If costs are rising, which of the following will...Ch. 7 - Which inventory method provides a better matching...Ch. 7 - Which of the following regarding the lower of cost...Ch. 7 - An increasing inventory turnover ratio a....Ch. 7 - In which of the following situations is an LCM/NRV...Ch. 7 - Matching Inventory Items to Type of Business Match...Ch. 7 - Reporting Goods in Transit Abercrombie Fitch Co....Ch. 7 - Prob. 3MECh. 7 - Reporting Inventory-Related Accounts in the...Ch. 7 - Matching Financial Statement Effects to Inventory...Ch. 7 - Matching Inventory Costing Method Choices to...Ch. 7 - Calculating Cost of Goods Available for Sale,...Ch. 7 - Calculating Cost of Goods Available for Sale,...Ch. 7 - Calculating Cost of Goods Available for Sale,...Ch. 7 - Prob. 10MECh. 7 - Calculating Cost of Goods Available for Sale, Cost...Ch. 7 - Calculating Cost of Goods Available for Sale, Cost...Ch. 7 - Calculating Cost of Goods Available for Sale, Cost...Ch. 7 - Reporting Inventory under Lower of Cost or...Ch. 7 - Preparing the Journal Entry to Record Lower of...Ch. 7 - Determining the Effects of Inventory Management...Ch. 7 - Interpreting LCM Financial Statement Note...Ch. 7 - Calculating the Inventory Turnover Ratio and Days...Ch. 7 - Prob. 19MECh. 7 - Prob. 20MECh. 7 - Prob. 21MECh. 7 - (Supplement 7A) Calculating Cost of Goods Sold and...Ch. 7 - (Supplement 7B) Determining the Financial...Ch. 7 - Prob. 24MECh. 7 - Reporting Goods in Transit and Consignment...Ch. 7 - Determining the Correct Inventory Balance Seemore...Ch. 7 - Determining the Correct Inventory Balance Seemore...Ch. 7 - Calculating Cost of Ending Inventory and Cost of...Ch. 7 - Calculating Cost of Ending Inventory and Cost of...Ch. 7 - Prob. 6ECh. 7 - Analyzing and Interpreting the Financial Statement...Ch. 7 - Evaluating the Effects of Inventory Methods on...Ch. 7 - Choosing LIFO versus FIFO When Costs Are Rising...Ch. 7 - Using FIFO for Multiproduct Inventory Transactions...Ch. 7 - Reporting Inventory at Lower of Cost or Market/Net...Ch. 7 - Reporting Inventory at Lower of Cost or Market/Net...Ch. 7 - Analyzing and Interpreting the Inventory Turnover...Ch. 7 - Analyzing and Interpreting the Effects of the...Ch. 7 - Prob. 15ECh. 7 - Analyzing and Interpreting the Financial Statement...Ch. 7 - Prob. 17ECh. 7 - Analyzing the Effects of Four Alternative...Ch. 7 - Evaluating the Income Statement and Income Tax...Ch. 7 - Calculating and Interpreting the Inventory...Ch. 7 - Prob. 4CPCh. 7 - (Supplement 7B) Analyzing and Interpreting the...Ch. 7 - Analyzing the Effects of Four Alternative...Ch. 7 - Evaluating the Income Statement and Income Tax...Ch. 7 - Prob. 3PACh. 7 - Prob. 4PACh. 7 - (Supplement 7B) Analyzing and Interpreting the...Ch. 7 - Prob. 1PBCh. 7 - Prob. 2PBCh. 7 - Prob. 3PBCh. 7 - Prob. 4PBCh. 7 - (Supplement 7B) Analyzing and Interpreting the...Ch. 7 - Prob. 1COPCh. 7 - (Supplement 7A) Recording Inventory Transactions,...Ch. 7 - (Supplement 7A) Recording Inventory Purchases,...Ch. 7 - (Supplement 7A) Recording Inventory Purchases,...Ch. 7 - Prob. 5COPCh. 7 - Prob. 6COPCh. 7 - Prob. 7COPCh. 7 - Prob. 8COPCh. 7 - Prob. 9COPCh. 7 - Prob. 10COPCh. 7 - Prob. 11COPCh. 7 - Prob. 12COPCh. 7 - Prob. 1SDCCh. 7 - Prob. 2SDCCh. 7 - Critical Thinking: Income Manipulation under the...Ch. 7 - Accounting for Changing Inventory Costs In...
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.Similar questions
- Data on the physical inventory of Ashwood Products Company as of December 31 follow: Quantity and cost data from the last purchases invoice of the year and the next-to-the-last purchases invoice are summarized as follows: Instructions Determine the inventory at cost as well as at the lower of cost or market, using the first-in, first-out method. Record the appropriate unit costs on the inventory sheet and complete the pricing of the inventory. When there are two different unit costs applicable to an item, proceed as follows: 1. Draw a line through the quantity and insert the quantity and unit cost of the last purchase. 2. On the following line, insert the quantity and unit cost of the next-to-the-last purchase. 3. Total the cost and market columns and insert the lower of the two totals in the Lower of C or M column. The first item on the inventory sheet has been completed as an example.arrow_forwardThe following data were extracted from the accounting records of Harkins Company for the year ended April 30, 2019: a. Prepare the cost of merchandise sold section of the income statement for the year ended April 30, 2019, using the periodic inventory system. b. Determine the gross profit to be reported on the income statement for the year ended April 30, 2019. c. Would gross profit be different if the perpetual inventory system was used instead of the periodic inventory system?arrow_forwardData on the physical inventory of Katus Products Co. as of December 31 follow: Quantity and cost data from the last purchases invoice of the year and the next-to-the-last purchases invoice are summarized as follows: Instructions Determine the inventory at cost as well as at the lower of cost or market, using the first-in, first-out method. Record the appropriate unit costs on the inventory sheet and complete the pricing of the inventory. When there are two different unit costs applicable to an item: 1. Draw a line through the quantity and insert the quantity and unit cost of the last purchase. 2. On the following line, insert the quantity and unit cost of the next-to-the-last purchase. 3. Total the cost and market columns and insert the lower of the two totals in the LCM column. The first item on the inventory sheet has been completed as an example.arrow_forward
- The accountant for Murphy Company prepared the following analysis of its inventory at year end: Required:1. Compute the carrying value of the ending inventory using the lower of cost or market method applied on an item-by-item basis.2. Prepare the journal entry required to value the inventory at lower of cost or market.arrow_forwardIn an annual report, Dozer International, Inc., describes its inventory accounting policies as follows: Inventories are stated at the lower-of-cost-or-net-realizable value, with inventory cost determined using the first-in, first-out (FIFO) method. The cost of inventory includes freight-in and duties on imported goods. Also in an annual report, Moo Metal Corporation made the following statement in discussing its inventories: The company recorded pretax charges of approximately $19.4 million because of a reduction in the carrying values of its inventories caused principally by prevailing lower prices for alumina, primary aluminum, and fabricated products. What accounting principle did Dozer International follow when it included the costs of freight-in and duties on imported goods in its Inventory account? Briefly describe how a firm determines which costs to include in its inventory account. What accounting principle did Moo Metal follow when it recorded the $19.4 million pretax charge?…arrow_forwardRequired:a. Complete a subsidiary ledger record for the computer using each of the three inventory valuation methods listed below 1. Average cost.2. FIFO.3. LIFO. Your inventory records should show both purchases of this product, the sale on Mar 31, and the balance on hand on Mar 31, 2020. b. Which of the three cost flow assumptions will result in reporting the lowest net income for the current year? Explainarrow_forward
- which of the three methods of costing-FIFO, LIFO, or average cost-will yield (a) cause an overstatement or an understatement of the gross profit for the year? (b) the highest inventory cost, (b) the lowest inventory cost, (c) the highest gross profit, 2. The inventory at the end of the year was understated by $12,750. (a) Did the error Which items on the balance sheet at the end of the year were overstated or understated Part One: Explanation and (d) the lowest gross profit? Show using example? as a result of the error? Show it numerically? 3. If ending inventory is misstated, it will not have an effect in the owners' equity of the following period. Why? 4. In periods of declining prices, which costing method are not preferable income tax purposes? Why? 5. Under what situation is the production method of depreciation appropriate? State and describe the drawback of the production method of depreciation? 6. Write the required data for preparing employee payroll?arrow_forwardSmart Company prepared its annual financial statements dated December 31. The company reported its inventory using the FIFO inventory costing method and failed to evaluate its net realizable value at December 31. The preliminary income statement follows: Sales Revenue Cost of Goods Sold Beginning Inventory Purchases Goods Available for Sale Ending Inventory Cost of Goods Sold Gross Profit $ 296,000 $ 38,000 198,000 236,000 131,900 104,100 191,900 Operating Expenses Income from Operations Income Tax Expense (30%) Net Income 69,000 122,900 36,870 $ 86,030 Assume you have been asked to restate the financial statements to incorporate LCM/NRV. You have developed the following data relating to the ending inventory: Purchase Cost Net Realizable Per Value per Item Quantity Unit Total Unit A 2,700 $ 8 $ 21,600 B 1,700 5 8,500 $ 9 3 C D 7,800 3,400 10 78,000 12 7 23,800 4 $ 131,900 TIP: Inventory write-downs do not affect the cost of goods available for sale. Instead, the effect of the…arrow_forwardFollowing is partial information for the income statement of Audio Solutions Company under three different inventory costing methods assuming the use of a periodic inventory system: Required: 1. Compute cost of goods sold under the FIFO, LIFO, and average cost inventory costing methods. 2. Prepare an income statement through pretax income for each method. Sales, 316 units; unit sales price, $51; Expenses, $1,590 3. Rank the three methods in order of income taxes paid (favorable cash flow). Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3 Compute cost of goods sold under the FIFO, LIFO, and average cost inventory costing methods. Note: Round intermediate calculations to 2 decimal places. Round your answers to the nearest whole dollar amount. FIFO LIFO Average Cost Cost of goods sold Beginning inventory (392 units @ $28) $ 10,976 $ 10,976 $ 10,976 Purchases (464 units @ $36) 16,704 16,704 27,680 27,680 16,704 27,680 Goods available for…arrow_forward
- Lower of Cost or Market Garcia Company's inventory at the end of the year was recorded in its accounting records at $17,800. Due to technological changes in the market, Garcia would be able to replace its inventory for $16,500. Required: 1. Using the lower of cost or market method, what amount should Garcia report for inventory on its balance sheet at the end of the year?$ Hide 2. Prepare the journal entry required to value the inventory at the lower of cost or market. Dec. 31 (Reduced inventory to market value)arrow_forwardBelow is the net income of New Girl Instrument AG, a private company, computed under the two inventory methods using a periodic system. FIFO Average-Cost 2017 $26,000 $23,000 2018 30,000 25,000 2019 29,000 27,000 2020 34,000 30,000 (ignore tax considerations) Required: a. Assume that in 2020 New Girl decided to change from the FIFO method to the average-cost method of pricing inventories. Prepare the journal entry necessary for the change that took place during 2020, and show net income reported for 2017, 2018, 2019, and 2020. b. Assume that in 2020 New Girl, which had been using the average-cost method since beginning operations in 2017, changed to the FIFO method of pricing inventories. Prepare the journal entry necessary to record the change in 2020, and show net income reported for 2017, 2018, 2019, and 2020.arrow_forwardThe management of Milque Corp. is considering the effects of various inventory-costing methods on its financial statements and its income tax expense. Assuming that the price the company pays for inventory is increasing, which method will: (a) provide the highest net income? Select the inventory-costing method that will provide the highest net income (b) provide the highest ending inventory? Select the inventory-costing method that will provide the highest ending inventory (c) result in the lowest income tax expense? Select the inventory-costing method that will result in the lowest income tax expense (d) result in the most stable earnings over a number of years? Select the inventory-costing method that will result in the most stable earnings over a number of yearsarrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
Financial AccountingAccountingISBN:9781337272124Author:Carl Warren, James M. Reeve, Jonathan DuchacPublisher:Cengage Learning
Financial Accounting
Accounting
ISBN:9781337272124
Author:Carl Warren, James M. Reeve, Jonathan Duchac
Publisher:Cengage Learning
IAS 29 Financial Reporting in Hyperinflationary Economies: Summary 2021; Author: Silvia of CPDbox;https://www.youtube.com/watch?v=55luVuTYLY8;License: Standard Youtube License