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    Accounting: Inventory Cost, Stock Value, and Cost of Goods

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    (1)-P9-9-(Statement and Note Disclosure, LCM, and Purchase commitment)
    Garth Brooks Specially Company, a division of Fresh Horses Inc., manufactures three models of gearshift components for bicycles that are sold to bicycle manufactures, retailers, and catalog outlets. Since beginning operations in 1975, Brooks has used normal absorption costing and has assumed a first-in, first out cost flow in its perpetual inventory system. The balances of the inventory accounts at the end of Brook's fiscal year, November 30 2007, are show below. The inventories are stated at cost before any year-end adjustments.

    Finish Goods.....................$647,000 Work in Process.................. 112,500
    Raw materials.....................240,000
    Factory Supplies.................. 69,000

    The following information relates to Brook's inventory and operations.
    1- The finish goods inventory consists of the items analyzed below.

    Down tube shifter Cost Market
    Standard Model $67,500 $67,000
    Click adjustment model 94,500 87,000
    Deluxe Model 108,000 110,000
    Total Down Shifter 270,000 264,000
    Bar end Shifter
    Standard Model 83,000 90,050
    Click adjustment model 99,000 97,550
    Total bar en shifter 182,000 187,600
    Head Tube Shifter
    Standard model 78,000 77,650
    Click adjustment model 117,000 119,300
    Total head tube shifter 195,000 196,950
    Total finish goods $647,000 $648,550

    2- One half of the tube shifter finished goods inventor is held by catalog outlets on consignment.
    3- Three quarters of the bar end shifter finished goods inventory has been pledged as collateral for a bank loan.
    4- One half of the raw materials balance represents derailleurs acquired at a contracted price 20 percent above the current market price. The market value of the rest of the raw materials is $127,400.
    5- The total market value of the work in process inventory is $108,700
    6- Included in the cost of factory supplies are obsolete items with an historical cost of $4,200. The market value of the remaining factory supplies is $65,900.
    7-Brook's applies the lower of cost of market method to each of three types of shifters in finished goods inventory. For each of the other three inventory accounts. Brook's applies the lower of cost or market method to the total of each inventory account.
    8- Consider all amounts presented above to be material in relation to Brook's financial statements taken as a whole.

    A-Prepare the inventory section of Brook's balance sheet as of November 30, 2007, including any required note(s).
    B- Without prejudice to your answer to (a) assume that the market value of Brook's inventory is less than the cost. Explain how this decline would be presented in Brook's income statement for the fiscal year ended November 30, 2007.
    C-Assume that Brook's has a firm purchase commitment for the same type of derailleur included in the raw materials inventory as of November 30, 2007, and that the purchase commitment is at a contracted price 15% greater than the current market price. These derailleurs are to be delivered to Brook's after November 30, 2007. Discuss the impact, if any, that this purchase commitment would have on Brook's financial statement prepared for the fiscal year ended November 30, 2007.

    Bimini Inc. had beginning inventory of $12,000 at cost and $20,000 at retail. Net purchases were $120,000 at cost and $170,000 at retail. Net markups were $10,000, net markdowns were $7,000, and sales were $157,000. Compute ending inventory at the cost using the conventional retail method.

    Winger uses the dollar value LIFO method of computing its inventory. Data for the past 3 years follow:
    Year December 31, Inventory at current year cost Price Index
    2005 $19,750 100
    2006 21,708 108
    2007 25,935 114
    Compute the value of the 2006 and 2007 inventories using the dollar-value LIFO method.

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    Solution Summary

    This solution provides calculations in Excel for finding inventory cost, stock value, and cost of goods.