The document outlines problem assignments for a Financial Accounting I course, focusing on inventory costing methods (FIFO, LIFO, WAC) and their impact on income statements and taxes. It includes specific cases for analysis, such as evaluating the effects of inventory methods on income and ethical decision-making in a corporate context. Students are required to prepare income statements and analyze the implications of different cost-flow assumptions on financial outcomes.
The document outlines problem assignments for a Financial Accounting I course, focusing on inventory costing methods (FIFO, LIFO, WAC) and their impact on income statements and taxes. It includes specific cases for analysis, such as evaluating the effects of inventory methods on income and ethical decision-making in a corporate context. Students are required to prepare income statements and analyze the implications of different cost-flow assumptions on financial outcomes.
The document outlines problem assignments for a Financial Accounting I course, focusing on inventory costing methods (FIFO, LIFO, WAC) and their impact on income statements and taxes. It includes specific cases for analysis, such as evaluating the effects of inventory methods on income and ethical decision-making in a corporate context. Students are required to prepare income statements and analyze the implications of different cost-flow assumptions on financial outcomes.
The document outlines problem assignments for a Financial Accounting I course, focusing on inventory costing methods (FIFO, LIFO, WAC) and their impact on income statements and taxes. It includes specific cases for analysis, such as evaluating the effects of inventory methods on income and ethical decision-making in a corporate context. Students are required to prepare income statements and analyze the implications of different cost-flow assumptions on financial outcomes.
Case 9.1. P9.5. Costs of sales and inventory under alternative cost-flow assumptions, from the Sutton's book (pages 265-266).
Case 9.2. P9.6. Effect of cost-flow assumptions on income and tax, from the Sutton's book (page 266).
Case 9.3. Evaluating the effects of inventory methods on income from operations, income taxes, and net income1.
Coimbra company uses a periodic inventory system. Data for 2012: beginning merchandise inventory (December 31, 2011), 2,000 units at $35; purchases, 8,000 units at $38; operating expenses (excluding income taxes), $142,000; ending inventory per physical count at December 31, 2012, 1,800 units; sales price per unit $70; and average income tax rate, 30%. Required:
1. Prepare income statements under the FIFO, LIFO, and WAC costing methods. Use a format similar to the following:
Inventory costing method
Income statement Units FIFO LIFO WAC Sales revenue ------ ------ ------ ------ Cost of goods sold Beginning inventory ------ ------ ------ ------ Purchases ------ ------ ------ ------ Goods available for sale Ending inventory ------ ------ ------ ------ Cost of goods sold ------ ------ ------ ------ Gross profit ------ ------ ------ Operating expenses ------ ------ ------ Income from operations ------ ------ ------ Income tax expense ------ ------ ------ Net income ------ ------ ------
1 Adapted from Phillips, F., Libby, R. and Libby, P.A.(2013): Fundamentals of Financial Accounting, Fourth Edition, McGraw-Hill International Edition, New York. 2. Between FIFO and LIFO, which method is preferable in terms of a) maximizing income from operations or b) minimizing income taxes? Explain your answer.
3. What would be your answer to requirement 2 if costs were falling? Explain your answer.
Case 9.4. Making ethical decisions2.
David Exler is the CEO of AquaGear Enterprises, a seven-year old manufacturer of boats. After many long months of debate with the company’s board of directors, David obtained the board’s approval to expand into water ski sales. David firmly believed that AquatGear could generate significant profits in this market, despite recent increases in the cost of skis. A board meeting will be held later this month for David to present the financial results for the first quarter of ski sales. As AquaGear’s corporate controller, you reported to David that the results were not great. Although sales were better than expected at $165,000 (3,000 units at $55 per unit), the cost of goods sold was $147,500. This left a gross profit of $17,500. David knew this amount would not please the board. Desperate to save the ski division, David asks you to “take another look at the cost calculations to see if there’s any way to reduce the cost of goods sold. I know you accountants have different methods for figuring things out, so maybe you can do your magic now when I need it most.” You dig out your summary of inventory purchases for the quarter t recheck your calculations, using the LIFO method that has always been used for the company’s inventory of boats.
Date Units Unit cost Total cost
Beginning inventory of water skis January 1 --- --- Purchases January 15 1,500 $30 $45,000 Purchases February 18 2,000 45 90,000 Purchases February 27 2,500 50 125,000
Required:
1) Calculate cost of goods sold using the LIFO method (Assume all sales took place in March). Does this confirm the statement you made to David about the gross profit earned on water ski sales in the first quarter?
2) Without doing any calculations, is it likely that any alternative inventory costing method will produce a lower cost of goods sold?
3) Calculate cost of goods sold using the FIFO method. Would use of this method solve David’s current dilemma?
4) Do you think it is acceptable within accounting rules to report the water skis using one inventory costing method and the boats using a different method?
5) Do you see any problems with using the FIFO numbers for purposes of David’s meeting with the board?
2 Adapted from Libby, P.A., Libby, R., Phillips, F., and Whitecotton, S. (2009): Principles of Accounting, McGraw-Hill Irwin, New York.
