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    Change in inventory accounting method to average cost

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    The management of Kreiter Instrument Company had concluded, with the concurrence of its independent auditors, that results of operations would be more fairly presented if Kreiter changed its method of pricing inventory
    from last-in, first-out (LIFO) to average cost in 2007.

    Given below is the 5-year summary of income under LIFO and a schedule of what the inventories would be if stated on the average cost method.

    KREITER INSTRUMENT COMPANY
    STATEMENT OF INCOME AND RETAINED EARNINGS
    FOR THE YEARS ENDED MAY 31
    2003 2004 2005 2006 2007
    Sales-net $13,964 $15,506 $16,673 $18,221 $18,898
    Cost of goods sold
    Beginning inventory 1,000 1,100 1,000 1,115 1,237
    Purchases 13,000 13,900 15,000 15,900 17,100
    Ending inventory (1,100) (1,000) (1,115) (1,237) (1,369)
    Total 12,900 14,000 14,885 15,778 16,968
    Gross profit 1,064 1,506 1,788 2,443 1,930
    Administrative expenses 700 763 832 907 989
    Income before taxes 364 743 956 1,536 941
    Income taxes (50%) 182 372 478 768 471
    Net income 182 371 478 768 470
    Retained earnings-beginning 1,206 1,388 1,759 2,237 3,005
    Retained earnings-ending $ 1,388 $ 1,759 $ 2,237 $ 3,005 $ 3,475
    Earnings per share $1.82 $3.71 $4.78 $7.68 $4.70

    SCHEDULE OF INVENTORY BALANCES USING AVERAGE COST METHOD
    FOR THE YEARS ENDED MAY 31
    2002 2003 2004 2005 2006 2007
    $950 $1,124 $1,091 $1,270 $1,480 $1,699

    Instructions

    Prepare comparative statements for the 5 years, assuming that Kreiter changed its method of inventory
    pricing to average cost. Indicate the effects on net income and earnings per share for the years involved.
    Kreiter Instruments started business in 2002. (All amounts except EPS are rounded up to the nearest dollar.)

    © BrainMass Inc. brainmass.com October 10, 2019, 1:29 am ad1c9bdddf
    https://brainmass.com/business/purchases-inventory-and-cogs/change-inventory-accounting-method-average-cost-336421

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    Solution Summary

    The solution recalculates ending inventory for Kreiter Instrument based on average cost and shows its effect on net income & eps.

    $2.19