What method does the company use to determine the cost of its inventory?

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What method does the company use to determine the cost of its inventory?

P7-3

P7-3 Evaluating Four Alternative Inventory Methods Based on Income and Cash Flow LO7-2, 7-3
At the end of January 2014, the records of Donner Company showed the following for a particular item that sold at $16 per unit:
Transactions     Units Amount
  Inventory, January 1, 2014 500 $ 2,365
  Purchase, January 12 600 3,600
  Purchase, January 26 160 1,280
  Sale (370)
  Sale (250)
Required:
1a. Compute Cost of Goods Sold under each method of inventory: average cost, FIFO, LIFO, and specific identification. For specific
identification, assume that the first sale was selected from the beginning inventory and the second sale was selected from the
January 12 purchase. (Round unit price to 2 decimal places. Input all amounts as positive values.)
Input areas are shaded.
Average Cost Cost of Good Available for Sale Cost of Goods Sold
# of Units Cost per Unit Cost of Goods Available for Sale # of Units Sold Cost per Unit Cost of Goods Sold
Beginning inventory
Purchases:
January 12, 2014
January 26, 2014
Total
FIFO Cost of Goods Available for Sale Cost of Goods Sold
# of Units Cost per Unit Cost of Goods Available for Sale # of Units Sold Cost per Unit Cost of Goods Sold
Beginning inventory
Purchases:
January 12, 2014
January 26, 2014
Total
LIFO Cost of Goods Available for Sale Cost of Goods Sold
# of Units Cost per Unit Cost of Goods Available for Sale # of Units Sold Cost per Unit Cost of Goods Sold
Beginning inventory
Purchases:
January 12, 2014
January 26, 2014
Total
Specific Identification Cost of Goods Available for Sale Cost of Goods Sold
# of Units Cost per Unit Cost of Goods Available for Sale # of Units Sold Cost per Unit Cost of Goods Sold
Beginning inventory
Purchases:
January 12, 2014
January 26, 2014
Total
Required:
1b. Prepare a partial income statement under each method of inventory: (a) average cost, (b) FIFO, (c) LIFO, and (d) specific identification. For specific identification, assume that the first sale was selected from the beginning inventory and the second sale was selected from the January 12 purchase.
DONNER COMPANY
Partial Income Statement
For the Month Ended January 31, 2014
(a) (b) ( c ) (d)
Average Cost FIFO LIFO Specific Identification
Required:
2a. FIFO and LIFO, which method would result in the higher pretax income?
2b. FIFO and LIFO, which would result in the higher EPS?
3 FIFO and LIFO, which method would result in the lower income tax expense? Assume a 30 percent average tax rate.
4 FIFO and LIFO, which method would produce the more favorable cash flow?

P7-3 Check Figures

P7-3 Evaluating Four Alternative Inventory Methods Based on Income and Cash Flow LO7-2, 7-3
At the end of January 2014, the records of Donner Company showed the following for a particular item that sold at $16 per unit:
Transactions     Units Amount
  Inventory, January 1, 2014 500 $ 2,365
  Purchase, January 12 600 3,600
  Purchase, January 26 160 1,280
  Sale (370)
  Sale (250)
Required:
1a. Compute Cost of Goods Sold under each method of inventory: average cost, FIFO, LIFO, and specific identification. For specific
identification, assume that the first sale was selected from the beginning inventory and the second sale was selected from the
January 12 purchase. (Round unit price to 2 decimal places. Input all amounts as positive values.)
Input areas are shaded.
Average Cost Cost of Good Available for Sale Cost of Goods Sold
# of Units Cost per Unit Cost of Goods Available for Sale # of Units Sold Cost per Unit Cost of Goods Sold
Beginning inventory
Purchases:
January 12, 2014
January 26, 2014
Total
FIFO Cost of Goods Available for Sale Cost of Goods Sold
# of Units Cost per Unit Cost of Goods Available for Sale # of Units Sold Cost per Unit Cost of Goods Sold
Beginning inventory 500 $0
Purchases:
January 12, 2014 600 $0
January 26, 2014 160 $0
Total 1,260 $0 0
LIFO Cost of Goods Available for Sale Cost of Goods Sold
# of Units Cost per Unit Cost of Goods Available for Sale # of Units Sold Cost per Unit Cost of Goods Sold
Beginning inventory 500
Purchases:
January 12, 2014 600
January 26, 2014 160
Total 1,260 $ – 0 0 $ 4,040
Specific Identification Cost of Goods Available for Sale Cost of Goods Sold
# of Units Cost per Unit Cost of Goods Available for Sale # of Units Sold Cost per Unit Cost of Goods Sold
Beginning inventory 500
Purchases:
January 12, 2014 600
January 26, 2014 160
Total 1,260 $ – 0 0
Required:
2a. FIFO and LIFO, which method would result in the higher pretax income?
2b. FIFO and LIFO, which would result in the higher EPS?
3 FIFO and LIFO, which method would result in the lower income tax expense? Assume a 30 percent average tax rate.
4 FIFO and LIFO, which method would produce the more favorable cash flow?

CP7-2

CP7-2 Finding Financial Information LO7-2, 7-4, 7-5, 7-7
Refer to the financial statements of Urban Outfitters given in Appendix C at the end of this book.
Required:
1. The company uses lower of cost or market to account for its inventory. At the end of the year, do you expect the company to write its
inventory down to replacement cost or net realizable value? Explain your answer.
2. What method does the company use to determine the cost of its inventory?
Where did you find this information?
3. If the company overstated ending inventory by $10 million for the year ended January 31, 2012, what would be
the corrected value for Income before Income Taxes?
4. Compute the inventory turnover ratio for the current year.
Fiscal Year Ended Cost of Goods Sold / Average Inventory = Inventory Turnover
1/31/12
What does an inventory turnover ratio tell you?

CP7-2 Check Figures

CP7-2 Finding Financial Information LO7-2, 7-4, 7-5, 7-7
Refer to the financial statements of Urban Outfitters given in Appendix C at the end of this book.
Required:
1. The company uses lower of cost or market to account for its inventory. At the end of the year, do you expect the company to write its
inventory down to replacement cost or net realizable value? Explain your answer.
2. What method does the company use to determine the cost of its inventory?
Where did you find this information?
3. If the company overstated ending inventory by $10 million for the year ended January 31, 2012, what would be
the corrected value for Income before Income Taxes?
If the company had overstated its ending inventory by $10 million, its income before income taxes would be overstated by $10 million.
4. Compute the inventory turnover ratio for the current year.
Fiscal Year Ended Cost of Goods Sold / Average Inventory = Inventory Turnover
1/31/12
What does an inventory turnover ratio tell you?

Sheet2

List1
FIFO
LIFO

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