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# Inventory Valuation and Accounts Receivables

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4. The Howard Swatch Company had 300 swatches in its July 1 inventory. The company uses periodic inventory system and made the following purchases of swatches during July and August.

July 8 40 swatches for \$20 each
July 27 100 swatches for \$21 each
Aug 18 50 swatches for \$22 each
Aug 24 60 swatches for \$23 each

Sales during July and August were 200 and 150 swatches respectively. The FIFO, Average, and LIFO costs of the swatches in the July 1 inventory were \$19, \$18, and \$13 respectively.
Calculate the ending inventory, and cost of goods sold for each month if Howard uses the FIFO, Average, and LIFO cost flow assumption.

In addition, which cost flow assumption provides the most realistic balance sheet amount for the ending inventory? Why? Which provided the most realistic measure of income? Why?

5. The NO More Snow (NMS) Company sells one type of snow melting machine and uses a perpetual inventory method. The January 1st balance in its cash account was \$2,100 and the inventory records indicated 8 snow melting machines costing \$\$150 each. During January NMS made the following purchases and sales of snow melting machines.

January 5 purchase 5 units @ \$165 each
January 12 sales 11 units @ \$225 each
January 18 purchase 12 units @ \$175 each
January 25 purchase 6 units @ \$170 each
January 29 sales 13 units @ \$235 each

All purchases were made on credit and one-half of the sales were on credit. No collections of accounts receivable were made during the month. Sales from January 12 were 8 units from the beginning inventory and 3 units from the January 5th purchase. The January 29th sales were comprised of 9 units from the January 18th purchase and 4 from the January 25th purchase.

a. A physical count after the January 29th sale indicated 8 snow melting machines on hand. Does this agree with the information given above? If there is a difference between the accounting system (from the information given above) indicate two possible reasons for the discrepancy.
b. Compute the NMS gross profit for the month of January.
c. What is the balance in NMS cash account and accounts receivable at the end of January? Please explain how the cash balance can be different from the sales total.

#### Solution Preview

4. The Howard Swatch Company had 300 swatches in its July 1 inventory. The company uses periodic inventory system and made the following purchases of swatches during July and August.

8-Jul 40 swatches for \$20 each
27-Jul 100 swatches for \$21 each
18-Aug 50 swatches for \$22 each
24-Aug 60 swatches for \$23 each

Sales during July and August were 200 and 150 swatches respectively. The FIFO, Average, and LIFO costs of the swatches in the July 1 inventory were \$19, \$18, and \$13 respectively.

Calculate the ending inventory, and cost of goods sold for each month if Howard uses the FIFO, Average, and LIFO cost flow assumption.

Shown in tables below

In addition, which cost flow assumption provides the most realistic balance sheet amount for the ending inventory? Why? Which provided the most realistic measure of income? Why?

FIFO provides the best method for ending inventory.
In most of the cases the operating managers practise this. This avoids spoilage
and obsolensce.Thus accounting treatment follows what is actually done in factories.
LIFO provides the most realistic measure of income.
This is because inventory is valued at its most recent cost.

FIFO

Cost of Sales

Date Description Beginning inventory Purchase Sale Ending inventory Per Unit Cost Beginning inventory Purchase Cost of Sale Ending inventory (value)
Beginning Inventory 300 300 \$19.00 \$5,700 \$0 \$0 \$5,700
8-Jul Purchase 300 40 340 \$20.00 \$5,700 \$800 \$0 \$6,500
27-Jul Purchase 340 100 440 \$21.00 \$6,500 \$2,100 \$0 \$8,600
July Sales 440 200 240 n/a \$8,600 \$0 \$3,800 \$4,800 Cost of sale= 200X 19
18-Aug Purchase ...

#### Solution Summary

The solution provides answers to 2 question- one on inventory valuation, the other on accounts receivables.

\$2.49