Question 1—Deaken Company
Units / $$$ / Average PriceBeginning Inventory / 80,000 / $48,000 / .60
March 24 / 44,000 / $26,840 / .61
May 11 / 60,000 / $37,200 / .62
July 14 / 50,000 / $32,500 / .65
November 8 / 96,000 / $63,360 / .66
December 20 / 72,000 / $48,240 / .67
Total / 402,000 / $256,140
Average Price Paid / $256,140/402,000 / $0.63716417
Rounded / $0.637
1a Wtd Ave inventory
Total units available402,000
Units sold277,000
Ending Inventory125,000 @ .0637 = $79,625
1b FIFO or LISH
Start at bottom (most recent purchase) and work backwards.
72,000$48,240
53,000 @ .66$34,980
125000$83,220
1c LIFO or FISH
Start at top (oldest purchase) and work forwards.
80,000 from beg inv$48,000
44,000$26,840
1,000 @ .62$ 620
125,000$75,460
2.
Weighted Average / FIFO / LIFOSales (277 @ $1) / $277,000 / $277,000 / $277,000
COGS
Beg Inv / 48,000 / 48,000 / 48,000
Purchases / 208,140 / 208,140 / 208,140
Avail 4 Sale / 256,140 / 256,140 / 256,140
Ending Inv. / 79,625 / 83,220 / 75,460
COGS / 176,515 / 172,920 / 180,680
Gross Margin / 100,485 / 104,080 / 96,320
Expenses / 40,000 / 40,000 / 40,000
Net Income / $60,485 / $64,080 / $56,320
Question 2 Eddy Distributors
Net income previously reported$40,000+
1. Add capital assets added into purchases by mistake 11,200+
2. Subtract—sale not made during the year 5,000-
Add—must count inventory from above sale 3,500+
3. Subtract—purchase made during the year but not recorded 7,000-
4. Subtract—freight bill not recorded 200-
5. Subtract—sale return not recorded 3,000-
Add—must count inventory from above returned sale 1,750+
Revised net income$41,250
Further explanation. You may want to draft up a very simple income statement with sales, detailed COGS, gross margin, and net income. Then try and follow each item.
1. If the capital assets were included in purchases, that makes COGS too high. Which makes gross margin too low. Which makes net income too low.
2. The sale was recorded as a sale, but it wasn’t a sale of this year. Therefore sales are too high, gross margin is too high, and net income is too high. The second part is that because the sale wasn’t a real sale, the inventory should have been counted. If ending inventory is too low, that makes COGS too high, which makes gross margin too low, which makes net income too low.
3. The purchases are too low, which make COGS too low, which makes gross margin too high, which makes net income too high.
4. If freight in is too low, then COGS is too low, which makes gross margin too high, which makes net income too high.
5. Sales returns and allowances are too low, which makes net sales too high, which makes gross margin too high, which makes net income too high. We have to count the returned sale as ending inventory. If ending inventory is too low, then COGS is too high, gross margin is too low, and net income is too low.
Question 1—Match Distributors
Net income previously reported$40,000+
1. Add capital assets added into purchases by mistake 11,200+
2. Subtract—sale not made during the year 5,000-
Add—must count inventory from above sale 3,500+
3. Subtract—purchase made during the year but not recorded 7,000-
4. Subtract—freight bill not recorded 200-
5. Subtract—sale return not recorded 3,000-
Add—must count inventory from above returned sale 1,750+
Revised net income$41,250
Further explanation. You may want to draft up a very simple income statement with sales, detailed COGS, gross margin, and net income. Then try and follow each item.
1. If the capital assets were included in purchases, that makes COGS too high. Which makes gross margin too low. Which makes net income too low.
2. The sale was recorded as a sale, but it wasn’t a sale of this year. Therefore sales are too high, gross margin is too high, and net income is too high. The second part is that because the sale wasn’t a real sale, the inventory should have been counted. If ending inventory is too low, that makes COGS too high, which makes gross margin too low, which makes net income too low.
3. The purchases are too low, which make COGS too low, which makes gross margin too high, which makes net income too high.
4. If freight in is too low, then COGS is too low, which makes gross margin too high, which makes net income too high.
5. Sales returns and allowances are too low, which makes net sales too high, which makes gross margin too high, which makes net income too high. We have to count the returned sale as ending inventory. If ending inventory is too low, then COGS is too high, gross margin is too low, and net income is too low.
Question 2—Hieden Company
Units / $$$ / Average PriceBeginning Inventory / 80,000 / $48,000 / .60
March 24 / 72,000 / $48,240 / .67
May 11 / 96,000 / $63,360 / .66
July 14 / 50,000 / $32,500 / .65
November 8 / 60,000 / $37,200 / .62
December 20 / 44,000 / $26,840 / .61
Total / 402,000 / $256,140
Average Price Paid / $256,140/402,000 / $0.63716417
Rounded / $0.637
1a Wtd Ave inventory
Total units available402,000
Units sold277,000
Ending Inventory125,000 @ .0637 = $79,625
1b FIFO or LISH
Start at bottom (most recent purchase) and work backwards.
44,000$26,840
60,000$37,200
21,000 @ .65$13,650
125000$77,690
1c LIFO or FISH
Start at top (oldest purchase) and work forwards.
80,000 from beg inv$48,000
45,000 @ .67$30,150
125,000$78,150
2.
Weighted Average / FIFO / LIFOSales (277 @ $1) / $277,000 / $277,000 / $277,000
COGS
Beg Inv / 48,000 / 48,000 / 48,000
Purchases / 208,140 / 208,140 / 208,140
Avail 4 Sale / 256,140 / 256,140 / 256,140
Ending Inv. / 79,625 / 77,690 / 78,150
COGS / 176,515 / 178,450 / 177,990
Gross Margin / 100,485 / 98,550 / 99,010
Expenses / 40,000 / 40,000 / 40,000
Net Income / $60,485 / $58,550 / $59,010