ACC 113 Lecture Notes - Lecture 31: Deferral, Income Statement, Equity Method
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Background: This is a continuation of the activities at TECHNOGYM in January, 2017. As in past activities, TECHNOGYM uses a Jan. 1 â Dec. 31 financial year.
Exercise for Inventory:
TECHNOGYM uses a periodic inventory system for its normal operations. Following are the unadjusted account balances as of Dec. 31, 2016 for all accounts related to sales and inventory of TechTone products.
Account Debit Credit
Accounts Receivable 17,607,500
Allowance for Doubtful Accounts 20,000
Purchases 85,832,500
Inventory 2,500,000
TechTone Sales Revenue 134,500,000
TechTone Sales Returns 2,017,500
Cost of TechTone Equipment Sold 0
Upper management is contemplating changing the method used to report the cost of goods sold. They will choose the method (either FIFO or DVLIFO) that maximizes operating cash flow. The general ledger has historically been kept on a FIFO basis. Following is the inventory purchases information for 2016:
Purchases for 2016 (normal operations) | |||||
Beginning: | 5,000 | units @ | $500 | each | |
Purchases: | |||||
Apr-May | 40,000 | units @ | $500 | each | |
Jun-Jul | 35,000 | units @ | $505 | each | |
Aug-Sep | 48,500 | units @ | $515 | each | |
Oct | 24,000 | units @ | $520 | each | |
Nov-Dec | 20,000 | units @ | $535 | each | |
Year-End Physical Inventory Count | 38,000 | units |
Note: For full credit, you must show documentation for both DVLIFO and FIFO calculations, with indication and reasoning for your choice.
Requirement 1: Develop a detailed schedule showing the calculation of Ending Inventory and Cost of Goods Sold using FIFO for 2016.
Requirement 2: Show the adjusting journal entry(ies) (if any) that is/are needed on Dec. 31, 2016 related to FIFO inventory. Remember to show the journal entry in proper form!
Requirement 3: Develop a detailed schedule showing the calculation of Ending Inventory and Cost of Goods Sold using DVLIFO for 2016. Hint: DVLIFO adjustments are calculated at the end of the year, using annual layersânot based on each individual purchase. TECHNOGYM used 1.07 as its DVLIFO index.
DV LIFO | Ending Inventory at Year-End Cost | Index | Ending Inventory at Base-Yr Cost | Inventory Layers at | Inventory Layers at | Ending Inventory at DV LIFO Cost | LIFO Reserve Adjustment |
2015 | |||||||
2016 | |||||||
Requirement 4: Show the adjusting journal entry(ies) (if any) that would be needed on Dec. 31, 2016 if management decides to adopt the DVLIFO inventory method. Remember to show the journal entry in proper form!
Requirement 5: Using the table below, show the amounts that would appear on indicated line items of the Income Statement and Balance Sheet under the two methods.
FIFO Method | DVLIFO Method | ||
Income Statement | Cost of TechTone Equipment Sold | ||
Balance Sheet | Inventory |
Which method gives higher net income?
Which method gives higher assets?
Produce a balance sheet for a company that distinguishes betweencurrent and non- current assets and liabilities.
Create a balance sheet from a trial balance.
Create a comparison of net income based on different methods ofinventory accounting.
Analyze a statement of cash flows and show where each line itemcan be found or
calculated from the other financial statements.
Prepare a full analysis of key financial ratios for a companyand state conclusions about
the financial strength of the company compared to industryratios.
PROJECT SUBMISSION PLAN
Project Part | Description/Requirements of Project Part | Evaluation Criteria |
1 | Title: Creating a Balance Sheet and Evaluating Inventory Task 1: Create a balance sheet from a trial balance for a givenscenario. Make sure you classify the accounts appropriately ascurrent or non-current. Click here to download the trialbalance. |
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AC1420: Project
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Task 2: Perform inventory valuations using LIFO, FIFO, andweighted average methods based on the following information.Explain the impact of each method on the cost of goods sold andending inventory. The company imports microwaves from a supplier in China for theUS market. At the end of the first quarter, 100 microwaves are instock. The company purchased a total of 400 microwaves during thequarter at various prices: January: 100 units @ $75 February: 250 units @ $83
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