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Chapter 6: 2SE (page 358)

Question:Ward Hardware does not expect costs to change dramatically and wants to use an inventory costing method that averages cost changes.

Requirements

1. Which inventory costing method would best meet Ward’s goal?

2. Assume Ward wanted to expense out the newer purchases of goods instead.

Which inventory costing method would best meet that need?

Short Answer

Expert verified

The inventory method under the first case is the weighted average. The inventory method under the second case is the LIFO method.

Step by step solution

01

Step-by-Step-SolutionStep1: Inventory costing method for Ward

As given, Ward wants to use an inventory costing method that evaluates the inventory on an average basis. Thus the appropriate costing method would be the weighted average method.

By applying this method the cost would not change irregularly and the change would be based on the average of the old and new inventory costs.

02

Inventory method based on newer purchased inventory

If Ward Hardware wants to utilize newer inventory first and wants to value inventory based on new purchases, the most appropriate method for this purpose would be the LIFO method.

Under this method, the inventories that is purchased first are issued first and the historical inventory is kept on hand for future need.

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Most popular questions from this chapter

Question:Hot Bread Bakery reported Net sales revenue of \(44,000 and cost of goods sold of \)33,000. Compute Hot Bread’s correct gross profit if the company made either of thefollowing independent accounting errors. Show your work.

b. Ending merchandise inventory is understated by $8,000.

Right Now Electronic Center began October with 100 units of merchandise inventory that cost \(70 each. During October, the store made the following purchases:

Oct. 3 35 units @ \) 82 each

12 45 units @ \( 84 each

18 75 units @ \) 90 each

Right Now uses the periodic inventory system, and the physical count at October 31indicates that 130 units of merchandise inventory are on hand.

Requirements

2. Net sales revenue for October totaled $26,000. Compute Right Now’s gross profitfor October using each method.

Question:Empire State Carpets’s books show the following data. In early 2020, auditors foundthat the ending merchandise inventory for 2017 was understated by \(8,000 and thatthe ending merchandise inventory for 2019 was overstated by \)9,000. The ending merchandiseinventory at December 31, 2018, was correct.

2019

2018

2017

Net Sales Revenue

\( 220,000

\) 162,000

\( 176,000

Cost of Goods Sold:

Beginning Merchandise Inventory

\)22,000

\(29,000

\)46,000

Net cost of purchase

132,000

90,000

76,000

Cost of goods available for sale

154,000

119,000

122,000

Less: Ending Merchandise Inventory

32,000

22,000

29,000

Cost of goods sold

122,000

97,000

93,000

Gross Profit

98,000

65,000

83,000

Operating Expenses

72,000

38,000

48,000

Net Income

\( 26,000

\) 27,000

$ 35,000

Requirements

1. Prepare corrected income statements for the three years.

Some of M and C Electronics’s merchandise is gathering dust. It is now December 31, 2018, and the current replacement cost of the ending merchandise inventory is \(24,000 below the business’s cost of the goods, which was \)97,000. Before any adjustments at the end of the period, the company’s Cost of Goods Sold account has a balance of $380,000.

Requirements

3. At what amount should the company report cost of goods sold on the income statement?

What does the lower-of-cost-or-market (LCM) rule require?
See all solutions

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