1 Class Problem Dallas Company had the following inventory transactions at the end of Indicate whether Dallas should show the inventory in its financials as of 12/31/ On 12/28, purchased inventory, FOB Destination. Shipped 12/28, did not arrive until Jan. 2. Not part of Dallas inventory 2. On Dec. 29, purchased inventory, FOB Shipping Point. Shipped 12/29, did not arrive until Jan. 2 Part of Dallas inventory 3. On 12/28, sold inventory to Houston Company, FOB Destination. Shipped 12/28; Houston received on Jan. 2. Part of Dallas inventory

2 Class Problem Dallas Company had the following inventory transactions at the end of Indicate whether Dallas should show the inventory in its financials as of 12/31/ On 12/28, sold inventory to Amarillo Company, FOB Shipping Point. Shipped 12/28; Amarillo received on Jan. 2. Not part of Dallas inventory. 5. On 12/28, sold inventory to Amarillo Company, FOB Shipping Point. Shipped 12/28; Amarillo received on Dec. 29. Not part of Dallas inventory.

3 Class Problem - Cost Flows Given the following activity for January: Cost Total Units per Unit Cost Begin Inventory 20 $ 9.00 $180 Purchase 1/ Purchase 1/ Total available 90 units $910 Sales - 55 units Ending inventory? 35 units

4 FIFO(LISH) FIFO for COGS (top down) 55 units $9 = $180 $10 = $350 Total = $530 LISH for EI (bottom up) 35 units $11 = $330 $10 = $ 50 Total $380

5 LIFO(FISH) LIFO for COGS (bottom up) 55 units $11 = $330 $10 = $250 Total =$580 FISH for EI (top down) 35 units $ 9 = $180 $10 = $150 Total = $330

6 Average First calculate average: Goods available cost = $910 Goods available units = 90 units Avg. = $10.11 per unit Now COGS: 55 units x $10.11 per unit = $ 556 Now EI: 35 units x $10.11 per unit = $354

Comparison of FIFO, LIFO, and Average In times of rising prices: highest COGS: lowest COGS highest EI lowest EI highest Net Income lowest Net Income LIFO FIFO

9 Class Problem-Inventory Error Assume that the ending inventory of 2007 was undervalued by $9,000. If the error goes undetected in 2008, what effect would the error have on the balance sheet and income statement accounts for 2007 and Analyze using the following relationships: BI + P - EI = COGS NI A = L + SE Note that the asset account in inventory error analysis is ending inventory, and the equity effect is retained earnings, specifically the effect on net income.

10 Class Problem Analysis (O = overstated, U = understated): BI + P - EI = COGS NI A = L + SE 07:9u9o9u 08:9u 9oXX Why no effect on 2008 ending SE? NI 2007 understated by $9,000 NI 2008 overstated by $9,000 Both closed to RE, so no net effect at end.

5. Journal Entries - Periodic System Part 1: What is the value of Cost of Goods Sold? BI + P (net) + TI = EI + COGS 2,600 + [12, ,400] + 500= 1,900 + COGS 10,900 = COGS Part 2, AJE: Cost of Goods Sold10,900 Inventory - Ending 1,900 Purchase Discounts 900 Purchase Rt. & Allow. 1,400 Purchases12,000 Transportation-in 500 Inventory - Beginning 2,600

Exercise 5-6 Note: terms 1/10, n/30 7/3: Purchases3,500 A/P-Wildcat3,500 7/6: Purchases7,000 A/P-Cyclone7,000 7/12:Cash paid? $3,500 x.99 = $3,465 A/P-Wildcat3,500 Cash3,465 Purchase discounts 35

Exercise 5-6 8/5: A/P-Cyclone7,000 Cash7,000 Hints for E5-7: 3/3: Shipping costs: Transportation-In 250 Cash 250 3/15: A/P-Boilermaker 500 Purchase Allowance 500 3/22:A/P-Gopher 400 Purchase Returns 400 (For Returns & Allowances, remember to reduce A/P for these items before calculating amount due or discount.)

Exercise 5-11 Part 1 in class: First: Calculate dollar amount of Goods Available for Sale (GAS): BI $20 = $1,300 P $22 = 1,100 P $23 = 1,380 P $24 = 1,080 Tot.220 units $4,860 Sold 140 units So EI = 220 – 140 = 80 units

Exercise 5-11 Part 1 in class: This is Specific Identification: $20 = $1,100 $22 = $ 770 $23 = $1,035 $24 = $ 120 Total $3,025 COGS EI = GAS – COGS EI = $4,860 - $3,025 = $1,835 (You do Average, FIFO, LIFO.)

Problem 5-11 Note, you do not need individual sales for periodic system - just total sales: In units: =2,000 units Sales in dollars (only for Part 3): $10) + $11) = $20,800 Now cost layers for all techniques: BI $5.00 = $3,000 P $5.40 = 4,320 P $5.76 = 4,032 P $5.90 = 4,720 GAS 2,900 units $16,072 Sold 2,000 units So EI=900 units (For Wt. AVG: $16,072/2,900 =$5.542 per unit)

Problem 5-11 LIFO EI (900 units)= FISH (first) BI $5.00 = $3,000 10/8 $5.40 = $1,620 Total $4,620 LIFO COGS (2000 units) = LIFO (last) 10/29 $5.90 = $ 4,720 10/18 $5.76 = $ 4,032 10/8 $5.40 = $ 2,700 Total$11,452 Or COGS = GAS – EI = 16,072 – 4,620 = 11,452

Problem 5-11 Income Statement Sales$ 20,800 COGS 11,452 Gross Margin$ 9,348 Operating Expenses 3,000 Income before Taxes$ 6,348 Income Tax Expense 1,904 Net Income$ 4,444