# ACCT 503 Week 3 Practice Exercise (S6-10, QC6-12, E6-19A, E6-22A, E6-27A, S11-2, S11-3)(Syllabus, 2019)

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S6-10, QC6-12, E6-19A, E6-22A, E6-27A, S11-2, S11-3

This exercise tests your understanding of the four inventory methods. List the name of the inventory method that best fits the description. Assume that the cost of inventory is rising.

1. LIFO                                   Results in an old measure of the cost of ending inventory

2. Average-cost           Provides a middle-ground measure of ending inventory and cost of goods sold

3. LIFO           The method of inventory valuation that is disallowed by IFRS.

4. Applies to all four inventory methods        Writes inventory down when current replacement cost drops below historical cost

5. LIFO           Matches the most current cost of goods sold against sales revenue

6. FIFO           Maximizes reported income

7. Specific-unit-cost    Used to account for automobiles, jewelry, and art objects

8. FIFO           Results in a cost of ending inventory that is close to the current cost of replacing the inventory

9. LIFO           Generally associated with saving income taxes

10.  LIFO        Enables a company to buy high-cost inventory at year-end and thereby decrease reported income and income tax

QC6-12

Putter Company had a 16,000 beginning inventory and \$17,000 ending inventory. Net sales were 153,000; purchases, \$85,000; purchase returns and allowances, \$5,000; and freight in, \$4,000. Cost of goods sold for the period is:

E6-19A

High Life  Inc.'s inventory records for a particular development program show the following at March 31:

At March 31, 99 of these programs are on hand.

Requirements

1.         Compute cost of goods sold and ending inventory, using each of the following methods:

a.         Specific unit cost, with three \$165 units and six \$175 units still on hand at the end

b.         Average cost

c.         First-in, first-out

d.         Last-in, first-out

2.         Which method produces the highest cost of goods sold? Which method produces the lowest cost of goods sold? What causes the difference in cost of goods sold?

E6-19A Continued

Requirement 1. Compute cost of goods sold and ending inventory, using each of the following four inventory methods:

Begin by entering the number of units sold and number of units in ending inventory. Then calculate cost of goods sold and ending inventory using (a) specific unit cost, then (b) average cost, then (c) FIFO, and finally (d) LIFO. (Round the average cost per unit to the nearest cent. Round all final answers to the nearest whole dollar.)

Requirement 2. Which method produces the highest cost of goods sold? Which method produces the lowest cost of goods sold?

What causes the difference in cost of goods sold?

Which method produces the highest cost of goods sold?

LIFO

Which method produces the lowest cost of goods sold?

FIFO

The difference in cost of goods sold under the two methods identified above was caused by

the increase in inventory unit cost

E6-22A

MusicMagic  specializes in sound equipment. Because each inventory item is expensive, MusicMagic uses a perpetual inventory system. Company records indicate the following data for a line of speakers:

Requirements

1.         Determine the amounts that MusicMagic should report for cost of goods sold and ending inventory two ways:

a. FIFO

b. LIFO

E6-27A

Tilton & Taft, a partnership, had the following inventory data:

2015                       2016

Ending inventory at:

FIFO Cost . . . . . . .                           . \$ 21,530              \$ 30,320

LIFO Cost . . . . . . . .                              13,200                 14,000

Cost of goods sold at:

FIFO Cost . . . . . . . .                                                       \$ 82,960

LIFO Cost . . . . . . . .                                                          99,280

Sales revenue . . . . . . . . . . .                                            136,000

Requirements

1.         Tilton & Taft need to know the company's gross profit percentage and rate of inventory turnover for 2016

under (a) FIFO, and (b) LIFO.

2.         Which method produces a higher gross profit percentage? Inventory turnover?

Requirement 1. Tilton & Taft need to know the company's gross profit percentage and rate of inventory turnover for 2016

under (a) FIFO, and (b) LIFO.

Begin by calculating the gross profit percentage. (Enter the percentage to the nearest tenth of a percent, X.X%.)\

Requirement 2. Which method produces a higher gross profit percentage? Inventory turnover?

FIFO   produces a higher gross profit percentage.

LIFO   produces a higher rate of inventory turnover.

S11-2

Study the 2016 income statement of Kathy's Imports, Inc., and answer these questions about the company:

1.         How much gross profit did Kathy's Imports earn on the sale of its products in 2016?

How much was income from continuing operations? Net income?

2.         At the end of 2016, what dollar amount of net income would most sophisticated investors use to predict Kathy's Imports'

net income for 2017 and beyond? Name this item, give its amount, and state your reason.

1. How much gross profit did Kathy's Imports earn on the sale of its products in 2016?

How much was income from continuing operations? Net income?

(Enter amounts in thousands. Use parentheses or a minus sign for losses.)

2. At the end of 2016,what dollar amount of net income would most sophisticated investors use to predict Kathy's Imports'

net income for 2017  and beyond? Name this item, give its amount, and state your reason. (Enter amounts in thousands. Use parentheses or a minus sign for losses.)

Sophisticated investors would use      income from continuing operations    in the amount of          \$          63,110            thousand.

Kathy's Imports' continuing operations will continue from period to period This makes income from continuing operations

a good predictor of future net income.

S11-3

Fabulous Life, Inc., reported the following items, listed in no particular order, at December 31, 2016

(in thousands):

S11-3 Continued

Income tax of 38% applies to all items.  .Prepare Fabulous Life's multistep income statement for the year ended December 31, 2016.  Omit earnings per share. (Use a minus sign or parentheses for losses.)

Fabulous Life, Inc.

Income Statement

Year Ended December 31, 2016

(Thousands)

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