ee Chapter 3 Chapter 8 Inventory Estimation Learning Objective 1. Apply the methods of inventory estimation. Inventory estimation There may be instances where the value of inventories must be estimated, such as when it is not practicable to take a physical count. For example, in the interest of timeliness and cost consideration, an entity may elect to rely on estimates of inventory at interim dates. Another instance is when records of inventories are incomplete and inventories must be approximated. PAS 2 permits the use of inventory estimates only when they reasonable approximate cost. Generally, inventory estimation is made only for interim reporting. For, annual reporting, physical count of inventories on hand is more appropriate. The cost of inventories may be estimated using either the (a) gross profit method or the (b) retail method. Gross profit method The gross profit method can be used to estimate ending inventory and cost of goods sold when a physical count is not possible. It can also be used to evaluate the reasonableness of a given inventory amount and in reconstructing financial records. The gross profit method may be used to estimate inventories for interim reporting purposes but is generally not acceptable for annual financial reporting. Under the gross profit method, gross profit is assumed to be relatively constant from period to period. Thus, the gross profit is used to compute for the gross profit rate (GPR) which in turn is used to determine the cost ratio. The cost ratio is used in estimating the cost of inventory and cost of goods sold. Scanned with CamScannerInventory Estimation 459 Gross profit rate (GPR) Gross profit rate can be expressed as a percentage (a) based on sales or (b) based on cost of goods sold. Example: The gross profit rates of an entity with sales of P1,000 and cost of goods sold of P800 are computed as follows: GPR based on sales | GPR based on cost Net sales 1,000 | (200 gross profit + | (200 gross profit + Cost of goods sold (800) 1,000 net sales) 800 COGS) Gross profit 200 20% 25% Gross profit rate based on sales is computed by dividing gross profit by the net sales, while gross profit rate based on cost is computed by dividing gross profit by the cost of goods sold. There may be instances where one would need to translate gross profit rates, such as when GPR based on cost is translated to GPR based on sales, or vice-versa. Illustration: Gross profit rates 1. IfGPR based on cost is 25%, what is the GPR based on sales? Net sales (squeeze) 125% Cost of sales (constant) (100%)* Gross profit rate based on cost (given) 25% * Gross profit rate base on sales (25 + 125) 20% “Cost of sales is 100% because the gross profit rate given is based on cost. | 2 IEGPR based on sales is 20%, what is the GPR based on cost? Net sales (constant) 100%** Cost of sales (squeeze) (80%) __ Gross profit on sales (given) 20%, Scanned with CamScanner460 - _ Chapters —___Shapterg + Gross profit rate base on cost (20 + 80) 25% "Sales is 100% because the gross profit rate given is based on sales, Cost ratio Cost ratio may be derived from the gross profit rate. The following may provide guidance in deriving cost ratios from gross profit rates. © Cost ratio from GPR based on sales = 100% Net sales - GPR based on sales © Cost ratio from GPR based on cost = 100% Cost of goods sold + Net sales (100% + GPR based on cost) Illustration: Cost ratio 1. Ifthe GPR based on sales is 20%, what is the cost ratio? Cost ratio from GPR based on sales = 100% - GPR based on sales Cost ratio from GPR based on sales = 100% - 20% Cost ratio from GPR based on sales = 80% Alternatively, the cost ratio may be computed as follows: Net sales (constant) 100% Cost of sales (squeeze) — cost ratio (80%) Gross profit on sales (given) 20% 2. If the GPR based on cost is 25%, what is the cost ratio? Cost ratio from GPR based on cost = 100% + Sales (100% + GPR based on cost) Cost ratio from GPR based on cost = 100% + (100% + 25%) Cost ratio from GPR based on cost = 80% Alternatively, the cost ratio may be computed as follows: Net sales (squeeze) . 125% Cost of sales (constant) (100%) Gross profit rate based on cost (given) 23h Scanned with CamScannerCost ratio (100 + 125) 80% Regardless of whether the GPR is based on sales or based on est, the related cost ratio is the same. What varies is the way the cost ratio is computed. Net sales For the purpose of estimating inventory, only sales returns are deducted from gross sales in computing for net sales. Sales discounts and allowances are not deducted. This is because sales discounts and allowances do not affect the physical inventory of goods; they are only decreases in selling prices. On the other hand, sales returns affect the physical inventory of goods because goods are physically returned to the seller. It should be noted though that when answering CPA board exam problems, an account that is described as “sales tetums and discounts” or “sales returns and allowances” is nevertheless deducted from gross sales when computing for net sales under the gross profit and retail methods. Estimating inventories under Gross profit method Before we illustrate how the gross profit method works, let us Study first the relationship between accounts payable and inventory, Accounts payable xx beg. bal. _| beg. bal. Paes xx Net Purchases | Net Purchases xx ae xx Freight in cocs bal x end. bal. Scanned with CamScannereed Chapter & Notes: The amount of “Net purchases” that is placed on the T-accounts above is equal to gross purchases less purchase returns and discounts only. “Freight-in” is excluded and placed separately on the Inventory T-account, but not on the Accounts payable T. account. This is because freight costs are normally paid to the shipper and not to the supplier. Alternatively, the T-accounts may be modified to include “Gross purchases” and “Purchase returns and discounts.” In such case, “Purchase returns and discounts” is placed both on the debit side of the Accounts payable T-account and on the credit side of the Inventory T-account. The formula below is derived from the T-accounts above. Inventory, beg. Pxx Net Purchases Xx Freight-in xx Total goods available for sale xx Inventory, end. (xx) Cost of goods sold (COGS) Bx Illustration 1: Gross profit based on sales On October 1, 20x1, a flood destroyed the warehouse of ABC Co. and all the inventories contained therein. Off-site back up of data base shows the following information: Inventory, Jan. 1 Leh Accounts payable, Jan. 1 on Accounts payable, Sept. 30 orn Payments to suppliers ps Freight-in oa Purchase returns and discounts at Sales from Jan. to Sept, a Sales returns sm Scanned with CamScanner463 Jes discounts 2,000 Gross profit rate based on sales 20% Additional information: Goods in transit on October 1, 20x1 amounted to P2,000 while s out on consignment were P1,200. Damaged materials can be sold ata salvage value of P500. Requirement: Compute for the inventory loss due to the flood. Solution: Step 1: Compute for the net purchases using the accounts payable T-account. Accounts payable 6,000 Beginning balance 47,000 Net purchases (squeeze) Payments to suppliers _ 50,000 Ending balance Notice that we have ignored the purchase returns and discounts. This is the short-cut. Alternatively, you may consider the purchase returns and discounts (long-cut version) by placing it on the debit side of the accounts Payable T-account. In this case, what you will be squeezing is the gross Purchases. When squeezing for the ending inventory, you will need to place the purchase returns and discounts on the credit side of the inventory T- account. Step 2: Extend the net purchases computed in Step 1 to the ‘Wentory T-account and squeeze for the ending inventory. ‘Accounts payable 7 Te 6000 Jan.1 Jan.t 74500 ‘Net purchases| Net ois “ a7) Prmens 7000 (equeeze) _| purchases “ess 50000 Freight-in 5,000 | _56000_ COGS* Ser 30 . 3000 10500 __ Sept.30 (squeeze) Scanned with CamScanner464 Chapter 8 *Cost of goods sold is computed as follows: Gross sales 75,000 Sales returns _(5,000) | Net sales 70,000 Multiply by: Cost ratio (100% - 20% GPR based on sales) 80% Cost of goods sold 56,000 Notice that the P2,000 sales discount is ignored, i.e., not deducted from gross sales. “The inventory loss due to flood is computed as follows: Inventory, Sept. 30 (see T-account above) 10,500 Goods in transit (2,000) Goods out on consignment (1,200) Salvage value (500) Inventory loss due to flood 6,800 The goods in transit and the goods out on consignment are deducted from the computed ending inventory because they are presumed not to have been damaged, i.e., the goods are not in the warehouse during the flood. The salvage value is also deducted to determine the net loss due to the flood. Illustration 2: Gross profit rate based on cost On October 1, 20x1, a fire razed the warehouse of ABC Co. and all the inventories contained therein. Off-site back up of data base shows the following information: Inventory, Jan. 1 14,500 Net purchases 75,000 Net sales from Jan. to Sept. 96,000 Gross profit rate based on cost 20% Scanned with CamScannerInventory Estimation 10s Requirement: Compute for the inventory loss due to the fire. Solution: Inventory Jan.1 14,500 Net purchases 75,000 80,000_ Cost of goods sold* 9,500_ Sept. 30 (squeeze) * Cost of goods sold is computed as follows: Net sales : 96,000 Multiply by: Cost ratio (100% + (100%+GPR based on cost)] 100/120 Cost of goods sold : 80,000 Alternatively, the cost ratio may be determined by translating first the GPR based on cost to GPR based on sale. The cost ratio is then determined by deducting the derived GPR based on sale from 100%. Net sales (squeeze) 120% Cost of sales (constant) (100% Gross profit rate based on cost (given) —20% Gross profit rate based on sales (20+ 120) 16.67% Cost ratio (100% - 16.67%) 83.33% Net sales : 96,000 Multiply by: Cost ratio 83.33% Cost of goods sold 80,000 * Inventory loss due to fire is P9,500 represented by the ending inventory, Scanned with CamScanner406 Chapters Hlustration 3; Coat of goods nold You were engaged to assist in reconstructing, ABC Co/s records after an operating, system erashed on August 1, ABC Co, does not have on established business continuity plan or a disaster recovey program and only the following, information has been determined: Increave in inventory 16,000 Decrease in accounts payable 8,000 Payments to suppliers « 70,000 Requirement: Compute for the cost of goods sold. Solution: Place the given information in the T-accounts then squeeze for the missing information, bee Net purchases (squeere) % Notes: The “decrease in accounts payable” is shown in the T-account as 8,000 in the beginning balance and zero in ending balance in order to reflect the 8,000 decrease. ” The “increase in inventory” is shown in the T-account as 16,000 in the ending balance and zero in beginning balance in order to reflect the P16,000 increase. Accounts of a manufacturing entity The inventory accounts of a manufacturing entity include Raw materials, Work in process and Finished goods. The relationship® between these accounts and accounts payable are depicted below: Scanned with CamScannerfire patersis eed Cont el goods Costel goods smaredaceered | tas peters | Tetat goods = alex | Eakin = % Notes: e “Net purchases” is squeezed from the accounts payable T- account and extended to the Raw materials T-account, similar to what we have performed earlier. “Raw materials issued to production” is squeezed in the “Raw materials” T-account and extended to the “Work in process” T-account. The sum of “Beginning Work in process”, “Raw materials issued to production,” “Direct labor,” and “Production overhead” (or sum of “Cost of goods manufactured” and “Ending Work-in-process") represents the “Total goods put into process.” The sum of “Raw materials issued to production,” “Direct labor,” and “Production overhead” represents the “Total manufacturing or production costs for the period.” The “Cost of goods manufactured” is squeezed in the Work in process T-account and extended to the Finished goods T-account. The “Cost of goods sold” (or “Ending Finished goods inventory”) is Squeezed in the Finished goods T-account. The sum of “Beginning Finished goods” and “Cost of goods manufactured” (or sum of “Cost goods sold” and “Ending Finished g00ds”) represents the “Total goods available for sale.” Scanned with CamScanner468 Chapter §, The formula below is derived from the T-accounts above. Raw materials, beg. P xx Purchases xx Freight-in aoe Purchase returns and discounts (ox) Total raw materials available for use xX Raw materials, end. Raw materials issued to production Work in process, beg. Direct labor Production overhead Total goods put into process Work in process, end Cost of goods manufactured Finished goods, beg. Total goods available for sale Finished goods, end Cost of goods sold PERK ESRRREE Illustration: On June 1, 20x1, a fire completely destroyed the work in process inventories of ABC Manufacturing, Inc. The following amounts were determined: January 1, 20x1 June 1, 20x1 Accounts payable 78,000 90,000 Raw materials 10,000 7,000 Work in process . 40,000 ? Finished goods 46,000 58,000 The following additional information was determined: ¢ Payments to suppliers for purchases on account, P40,000. ¢ Freight on purchases, P5,000. «© Purchase returns, P5,000. Scanned with CamScannerInventory Estimation 469 Direct labor, P32,000. Production overhead, P12,000. « Sales from January 1 to May 31, P150,000. « Sales returns, P30,000. e Sales discounts, P10,000. « Gross profit rate based on sales, 25%. Requirement: Compute for the work in process destroyed by fire. Solution: Step 1: Place the given information in the T-accounts. “Accounts payable Raw materials 78,000 beg. bal. beg, bal. 10,000 7 NetPurchases | Net Purchases Paymentsto suppliers _40,000 Freightin Cost ot goods | Cost of goods manufactured gad. bal, Step 2: Squeeze for missing amounts starting from the accounts payable T-account. Extend the squeezed amount to the next T- account. Scanned with CamScannerChapter g bes bal $2,.000__ Net Purchases Raw materia issued to We cannot squeeze for the Cost of goods manufactured (COGM) because the ending balance of Work in process is unknown. Therefore, we will squeeze for the COGM using the Finished goods T-account. Step 3: Compute for the Cost of goods sold. Place the computed amount in the Finished Goods T-account then squeeze for COGM. Extend the COGM to the Work in process T-account and squeeze for the ending balance of Work in process. > The Cost of goods sold is computed as follows: . Gross sales 150,000 Sales returns (30,000) Net sales 120,000 Multiply by: Cost ratio (100% - 25% GPR based on sales) 5% Cost of goods sold 90,000 cted Again, sales discount is simply ignored, i.e., not dedu' from gross sales when computing for the net sales. Scanned with CamScannerventory Estimation 471 Tecounte payatie 73000 beg bat | beg bal 52,000 Net Purcha oe Rave materials me | Bet issued to yeestompto 1000 Freightin 60900. production Pr 50,000 000_ end. bal. Work a process tes tl 40,000 beg, bal. pavaaterbsisued ost of goods. | Cost of goods barons 60,000 | 102,000 manutactured | manufactured 102,00 | 90000 Cost of goods sold enn | seetactet g2 Direct labor 32,000 productionoverhead _ 12,000 22,000 end. bal. 58,000 end. bal. Answer: Work in process destroyed by fire — 42,000. Retail method The retail method is often used in the retail industry (e.g., supermarkets and department stores) for measuring large quantities of inventories with rapidly changing items and with similar margins and for which it is impracticable to use other costing methods. The retail method is similar to the gross profit method. Actually, the gross profit method is a variation of the retail method. The following are peculiar to the retail method: a. The cost ratio is computed directly without regard to the 8ross profit rate, unlike in gross profit method. b. Net mark-ups and net mark-downs are considered. * Net markups (markups less markup cancellations) are net increases above the original retail price, which are generally caused by changes in supply and demand. Markup refers to increase above the original retail price. Original retail price refers to the selling price at which the 800ds are first offered for sale. larkup cancellation refers to decrease in selling price that does Not reduce the selling price below the original retail price. Scanned with CamScanner472 Chapter * Net markdowns (markdowns less markdown cancellations) are net decreases below the original retail price. > Mark-down refers to the decrease below the original retail price. > Markdown cancellation refers to increase in selling price that does not raise the selling price above the original retail price. Application of the retail method The retail method is applied using either the 1. Average cost method, or 2. FIFO cost method. Average cost method Under the average cost method, the Total goods available for sale at cost (beginning inventory + net purchases) is determined and divided by the Total goods available for sale at sales price to come up with the cost ratio. Total goods avail. for sale at cost Total goods avail. for sale at sales price or at retail Cost ratio 7 (Average cost method) The cost ratio is then multiplied with net sales to compute for the cost of goods sold (much like under the gross profit method) or multiplied with the ending inventory at sales price or at retail to compute for the ending inventory at cost. © Cost of goods sold = Net sales x Cost ratio © Ending inventory at cost = Ending inventory at retail x Cost ratio When determining Total goods available for sale at sales price, net markups are added while net markdowns are deducted. PAS 2 requires that the cost ratio to be used in estimating inventory under the retail method should be marked down below its original retail price. Scanned with CamScannernventory Estimation A738 _ eto Et Illustration: Retail method presented below is information pertaining to ABC Co. Cost Retail Inventory, January 1 8,700 14,000 Purchases 55,300 80,300 Freight-In 2,000 - Purchase discounts 500 . Purchase returns 5,200 8,600 Departmental Transfers-In (Debit) 1,000 1,500 Departmental Transfers-Out (Credit) 800 1,200 Markups 6,000 Markup cancellations 2,000 Markdowns 12,000 Markdown cancellations 3,000 Abnormal spoilage (theft and casualty loss) 5,000 7,000 Sales 43,800 Sales returns 2,500 Sales discounts 1,000 Employee discounts 500 Normal spoilage (shrinkage and breakages) 200 Requirement; Compute for (a) cost of goods sold and (b) ending inventory using the Average cost method. Solution: Cost Retail Inventory, January 1 8,700 14,000 Net purchases (a) 51,600 71,700 Departmental transfers-in (debit)(b) 1,000 1,500 Departmental transfers-out (credit) (800) (1,200) Net markups (c) (6,000 - 2,000) 4,000 Net markdowns (c) (12,000 - 3,000) (9,000) Abnormal spoilage (e) —(5.000) __(7,000) Total goods available for sale (d) wwt5500 = 74,000 Net sales (e) (42,000) Ending inventory at retail 32,000 SS Scanned with CamScanner474 ——— $$ $$_——_____Shepeers (a) Net purchases are computed as: the sum of purchases and freight-in less purchase returns and discounts. Note that purchase discounts and freight-in affect only the cost column, They do not affect the retail column. Purchases 55,300 80,300 Freight-In 2,000 = Purchase discounts (500) “ Purchase returns (5,200) (8,601 Net purchases 51,600 71,700 (b) Departmental transfers refer to transfers of goods between departments within an entity. © Departmental transfers-in or debit refers to inventory received by a department from another department. It is added to purchases at cost and at retail. © Departmental transfers-out or credit refers to inventory transferred out by a department to another department. It is deducted from purchases at cost and retail. (c) Net markups is markups less markup cancellations. Net markdowns is markdowns less markdown cancellations. (d) The Average cost ratio is computed as follows: Cost ratio Total goods avail. for sale at cost (Average cost = Total goods avail. for sale at sales price method) . or at retail Average cost ratio = (55,500 = 74,000) = 25% (e) Net sales is computed as follows: Scanned with CamScannerncentory Estimation 45 sic 43,800 sales returns ea Employee discounts aa Normal spoilage me 42,000 Net sales 4 Notice that only the sales returns are deducted. The rest are added. > Employee discounts are special discounts that are not recorded in the sales discounts account but rather treated as direct deductions from selling price. Employee discounts are added back to sales because these discounts decrease sales but do not affect physical inventory. As discussed earlier, sales discounts should be ignored or not deducted from gross sales. Employee discounts are directly deducted from sales, so they are added back. > Normal spoilage is generally allowed in a firm's pricing policies. For this reason, it is deducted from the retail column after calculation of the cost ratio. Normal spoilage is charged to cost of goods sold, thus, it is added to sales when computing for net sales. Normal spoilages usually arise from shrinkage or breakage. > Abnormal spoilage, on the other hand, should be deducted from both the cost and retail columns before the calculation of the cost ratio, as abnormal spoilage could distort the ratio. Abnormal spoilage is reported as loss, separate from cost of goods sold. Abnormal spoilages usually arise from theft or casualty. The ending inventory at cost is estimated under the Average cost Method as follows: Ending inventory at retail (or at selling price) 32,000 lultiply by: Average cost ratio 75% 24,000 ‘nding inventory at cost Scanned with CamScanner476 Chapter g Cost of goods sold is estimated under the Average cost method as follows: Total goods available for sale at cost 55,500 Ending inventory at cost (_24,000) Cost of goods sold 31,500 Alternatively, cost of goods sold may also be computed as follows: Net sales (at selling price) 42,000 Multiply by: Average cost ratio 75% Cost of goods sold —31,500 FIFO cost method The application of the FIFO cost method is very similar to the application of the Average cost method. The only difference lies on the computation of the cost ratio. Under the FIFO cost method, the beginning inventories at cost and at retail are simply excluded from TGAS when computing for the cost ratio. Cost ratio = —IGAS at cost less beg. inventory at cost (FIFO cost method) TGAS at retail less beg. inventory at retail Using the previous illustration, the cost ratio under the FIFO cost method is computed as follows: (d) The FIFO cost ratio is computed as follows: Cost ratio é TGAS at cost less beg. inventory at cost (FIFO cost method) TGAS at retail less beg. inventory at retail FIFO cost ratio = {(55,500 - 8,700) + (74,000 - 14,000)] = 78% The ending inventory at cost is estimated under the FIFO cost method as follows: Scanned with CamScannerInventory Estimation ” Ending inventory at retail 32,000 Multiply by: FIFO cost ratio 78% Ending inventory at cost "24,960 Cost of goods sold is estimated under the FIFO cost method as follows: Total goods available for sale at cost 55,500 Ending inventory at cost 24,960) Cost of goods sold 30,540 Alternatively, cost of goods sold may also be computed as follows: Net sales 42,000 Beginning inventory at retail (14,000)* Total 28,000 Multiply by: FIFO cost ratio 78% Total 21,840 Beginning inventory at cost 8,700* Cost of goods sold 30,540 “Beginning inventories were excluded in the computation of the FIFO cost ratio. Thus, net sales is adjusted first for the beginning inventory at retail before applying the FIFO cost ratio. The beginning inventory at cost is then added back to compute for cost of goods sold. Separate cost ratios for each department When applying the retail method, separate computations should be made for departments that experience significantly higher or lower profit margins. These separate computations for each department necessitate the consideration for departmental transfers-in and out. Distortions arise in the retail method when a department sells goods with varying margins in a proportion different from that purchased. In which case, the cost-to-retail percentage would Rot be representative of the mix of goods in ending inventory. Scanned with CamScanner478 Chapter g Also, manipulations of income are possible by planning the timing of markups and markdowns. Chapter 8: Summary e Inventory may be estimated using the (a) gross profit method or the (b) retail method. ¢ Cost ratio under average cost method = TGAS at cost + TGAS at retail. ¢ Cost ratio under FIFO cost method = (TGAS at cost less BI at cost) + (TGAS at retail less BI at retail). Bl is beginning inventory. Scanned with CamScannerinventory Estimation 479 pROBLEMS PROBLEM 1: TRUE OR FALSE 1. If the gross profit rate based on sales is 36%, the gross profit rate based on cost is 26.47%. 2, If the gross profit rate based on cost is 40%, the gross profit rate based on sales is 28.57%. 3. If the gross profit rate based on sales is 25%, the cost ratio is 75%. 4. If the gross profit rate based on cost is 35%, the cost ratio is 62.46%. 5. During the year, an entity had net purchases of P100. If inventories increased by P20 at the end of the year, the cost of goods sold must be P120. PROBLEM 2: FOR CLASSROOM DISCUSSION Gross profit rate 1. The following data relate to the records of Powell Corp. for the month of September: Sale: 2160,000 Beginning inventory P 20,000 Purchases . 180,000 Goods available for sale 200,000 Requirements: Using these data, estimate the cost of ending ‘ventory for each situation below: a) Markup is 50 percent on cost. b) Markup is 60 percent on sales. 9 Markup is 25 percent on cost. tras, 4) Markup is 40 percent on sales. Scanned with CamScanner480 Chapter g Gross profit method 2. Northstar Sales Corp. was organized on January 1, 2001. On December 31, 2002, the company lost most of its inventory in g warehouse fire just before the year-end count of inventory was to take place. Data from the records disclosed the followin 2001 2002 Inventory, January 1 P 0 P173,129 Purchases during year 860,000 692,000 Purchase returns and allowances during 46,120 64,600 year Sales during year 788,000 836,000 Sales returns and allowances during year 16,000 20,000 On January 1, 2002, Northstar's pricing policy was changed so that the gross profit rate would be 3 percentage points higher than the one earned in 2001. Salvaged undamaged merchandise was marked to sell at P24,000, while damaged merchandise marked to sell at P16,000 had an estimated net realizable value of P3,600. Requirement: Determine the company's inventory loss due to the fire that occurred on December 31, 2002. (Adapted) Retail method 3. Gibb's Department Store uses the retail inventory method. Information relating to the computation of the inventory at December 31, 2002, is as follows: Cost Retail Inventory at January 1, 2002 P 45,000 75,000 Sales ‘i 600,000 Purchases 270,000 590,000 Freight-in 6,750 Markups 50,000 Markdowns 20,000 Scanned with CamScannerInventory Estimation «et Estimated normal shrinkage 2% of sales Requirements: Compute for (1) ending inventory and (2) cost of goods sold under the following methods: a, Average cost method b. FIFO cost method PROBLEM 3: EXERCISES 1, On May 17, it was discovered that a material amount of inventory had been stolen. A physical count discloses that 55,000 of merchandise was on hand as of May 17. The following additional data is available from the accounting records: ¢ Inventory, January 1 P 62,000 * Purchases, January 1 - May 17 (includes 4,000 shipped FOB shipping point May 16, received May 19) 114,000 * Sales (goods delivered to customers), Jan. 1 - May 17 90,000 Records indicate that the company's gross profit has averaged 40% Of selling prices. Requirement: Estimate the amount of loss due to theft. vy The Steelers Company had its entire inventory destroyed when a fire swept through the company's warehouse. Fortunately, the accounting records were locked in a fireproof Safe and were not damaged. The following information for the Period up to the date of the fire was taken from the accounting, Tecords: ‘486,400 295,000 147,800 16,600 8,200 Scanned with CamScanner482 Chapter g Requirements: (1) Assuming that the gross profit has averaged 25 percent of selling price, what is the estimated value of the inventory destroyed in the fire? (2) Assuming that the markup percentage on cost is 28 percent, what is the estimated value of the inventory destroyed in the fire? PROBLEM 4: CLASSROOM ACTIVITY Scenario: You are the accountant of Entity A. On January 7, 20x1, a fire razed your warehouse. You were able to gather the following information. Entity A Inventory Count Sheet December 31, 20x0 Unit Cost Total Cost 12.50 1,064,352.00 Purchases Journal Date _|_ Supplier Invoice No. Jan. 3,20x1_| ABC Co. Jan. 4, 20x1 XYZ, Inc. 2341 Jan. 6, 20x1 Entity B 07801 Entity A Sales Journal Date Customer _|_ Invoice No. Amount Jan.3,20x1_| Entity D 0001 82,520.00) Jan.4,20x1_| DEF Co. 002 408,500.00 Scanned with CamScannerstory Estimation __ 483 ———_—— a jun. 5, 20x1 | WxY, Ine. | 0003 | 296,040.00 ian. 6, 20x1_| Rainy Co. | 113,860.00 Entity A Inventory Count Sheet January 7, 20x1 Description Qty. Unit Cost Total Cost 119204 Talong (partially damaged) 354 15.00 5,310.00 #29332__Itlog (undamaged) 2 10,000.00 _ 20,000.00 Total 356 25,310.00 Additional information: « The goods purchased on January 6, 20x1 were received on January 8, 20x1. «The partially damaged goods can be sold for ®2.00 each. «The average gross profit rate is 30% based on sales. Requirement: Estimate the inventory loss. PROBLEM 5: MULTIPLE CHOICE 1, Which of the following may not result to the amount of cost of sales? a. Net purchases less net increase in inventory. b. Net decrease in inventory plus net purchases. © Total goods available for sale less beginning inventory. 4. Total goods available for sale less ending inventory. : whieh of the following is equal to the cost of goods sold? Net purchases plus the excess of ending inventory over beginning inventory total goods available for sale plus ending inventory net purchases minus the increase in inventory * Net purchases minus the decrease in inventory sii deli ili Scanned with CamScannerae Chapters nd 3. Cost of goods sold is equal to a. total goods available for sale minus ending inventory, b. total goods available for sale plus beginning inventory, c. sum of ending inventory and cost of inventory charged to expense minus net purchases. d. net purchases minus ending inventory. 4. Total goods available for sale is equal to a. the sum of ending inventory and net purchases. b. the sum of beginning inventory and cost of goods sold. cc. the sum of ending inventory and cost of goods sold. d._ net purchases minus the increase in inventory. 5. The records of ABC Co. show the following information: Increase in accounts payable 10,000 Payments to suppliers 80,000 Decrease in inventory 30,000 How much is the cost of goods sold? a. 120,000 c. 60,000 b. 100,000 d. 40,000 6. The following information is available for Hudson Company: Disbursements for purchases .. 290,000 Increase in trade accounts payable 25,000 Decrease in merchandise inventory ..... 10,000 Cost of goods sold was a. 325,000 b. 305,000 c. 275,000 d, 255,000 (Adapted) 7. Holdaway Co., a manufacturer, had inventories at the beginning and end of its current-year as follows: Beginning End Raw materials 11,000 15,000 Work in process 20,000 24,000 Finished goods 12,500 9,000 Scanned with CamScannerInventory Estimation es During the year, the following costs and expenses were incurred: Raw materials purchased 150,000 Direct labor cost 60,000 Indirect factory labor 30,000 Taxes and depreciation on factory building 10,000 Taxes and depreciation on sales room and office 7,500 Sales salaries 20,000 Office salaries 12,000 Utilities (60% applicable to factory, 20% to sales room, and 20% 25,000 to office) Holdaway's cost of goods sold for the year is a. 257,000 b. 260,500 cc. 261,000 d. 269,500 (Adapted) 8. The following information was taken from Frandsen Company's accounting records: Increase in raw materials inventory . P 7,500 Decrease in finished goods inventory 17,500 Raw materials purchase ... 215,000 Direct-labor payroll 100,000 Factory overhead ... 150,000 Freight-out.... 22,500 There was no work-in-process inventory at the beginning or end Of the year. Frandsen's cost of goods sold is a, 497,500 b. 487,500 cc. 482,500 d. 475,000 (Adapted) 9. The cost ratio under average cost method is computed as a. (total goods available for sale at cost less beginning inventory at cost) divided by (total goods available for sale at retail less beginning inventory at retail) b. (total goods available for sale at cost) divided by (total 800ds available for sale at retail) © 100% less gross profit rate based on sales Scanned with CamScanner486 Chapter g d. 100% less gross profit rate based on cost 10. Hardy Company is a wholesale electronics distributor. On December 31, 2002, it prepared the following partial income statement: Gross sales Sales returns and discounts Net sales Cost of goods sold: Beginning inventory .. Net purchases .... 600,400 —400 P600,000 200,000 300,000 Given this information, if Hardy Company's gross margin is 30 percent of net sales, what is the correct ending inventory balance? a. P80,000 c. P180,000 b. P120,000 d. P500,000 (Adapted) 11. The Ashby Sporting Goods Store uses the retail inventory method. Information relating to the computation of the inventory at December 31, 2002, is as follows: Cost Retail Inventory at January 1, 2002.... P 32,000 P 80,000 Sales .... 580,000 Purchase: 270,000 600,000 Freight-in .. 7,600 Net markups e 40,000 Net markdowss ......sssssssssessesssees 20,000 What is the ending inventory at cost at December 31, 2002, using the retail inventory method and the FIFO cost estimation? a. 43,000 cc. P51,600 b. 45,000 iaepead d. P53,724 Scanned with CamScannerInventory Estimation er 12. The Saturn Department Store uses the retail inventory method to approximate ending inventory. The following information js available for the month of August: Cost Retail Cost of goods available for sale P720,000 — P900,000 Net markups (not included above) 100,000 Net markdowns 40,000 680,000 What was the approximate inventory using the average cost estimate for inventory? a. P201,600 c. P224,000 b. P210,000 d. P230,400 (Adapted) Scanned with CamScanner