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Chapter 9: Q11Q (page 474)
Question:What are the major uses of the gross profit method?
The major uses of the gross profit method are as follows:
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Robots, Inc. Robots, Inc. reported the following information regarding 2016–2017 inventory. Robots, Inc. 2017 2016 Current assets Cash \( 153,010 \) 538,489 Accounts receivable, net of allowance for doubtful accounts of \(46,000 in 2017 and \)160,000 in 2016 1,627,980 2,596,291 Inventories (Note 2) 1,340,494 1,734,873 Other current assets 123,388 90,592 Assets of discontinued operations — 32,815 Total current assets 3,244,872 4,993,060 Notes to Consolidated Financial Statements Note 1 (in part): Nature of Business and Significant Accounting Policies Inventories—Inventories are stated at the lower-of-cost-or-market. Cost is determined by the last-in, first-out (LIFO) method. Note 2: Inventories consist of the following. 2017 2016 Raw materials \(1,264,646 \)2,321,178 Work in process 240,988 171,222 Finished goods and display units 129,406 711,252 Total inventories 1,635,040 3,203,652 Less: Amount classified as long-term 294,546 1,468,779 Current portion \(1,340,494 \)1,734,873 Inventories are stated at the lower of cost determined by the LIFO method or market for Robots, Inc. If the FIFO method had been used for the entire consolidated group, inventories after an adjustment to the lower-of-cost-ormarket would have been approximately \(2,000,000 and \)3,800,000 at October 31, 2017 and 2016, respectively. Inventory has been written down to estimated net realizable value, and results of operations for 2017, 2016, and 2015 include a corresponding charge of approximately \(868,000, \)960,000, and \(273,000, respectively, which represents the excess of LIFO cost over market. Inventory of \)294,546 and \(1,468,779 at October 31, 2017 and 2016, respectively, shown on the balance sheet as a noncurrent asset represents that portion of the inventory that is not expected to be sold currently. Reduction in inventory quantities during the years ended October 31, 2017, 2016, and 2015 resulted in liquidation of LIFO inventory quantities carried at a lower cost prevailing in prior years as compared with the cost of fiscal 2014 purchases. The effect of these reductions was to decrease the net loss by approximately \)24,000, \(157,000, and \)90,000 at October 31, 2017, 2016, and 2015, respectively. Instructions (a) Comment on why Robots, Inc., might disclose how its LIFO inventories would be valued under FIFO. (b) Why does the LIFO liquidation reduce operating costs? (c) Comment on whether Robots, Inc. would report more or less income if it had been on a FIFO basis for all its inventory
Kemper Company signed a long-term noncancelable purchase commitment with a major supplier to purchase raw materials in 2018 at a cost of \(1,000,000. At December 31, 2017, the raw materials to be purchased have a market value of \)950,000. Prepare any necessary December 31, 2017, entry.
The records for the Clothing Department of Sharapova’s Discount Store are summarized below for the month of January. Inventory, January 1: at retail \(25,000; at cost \)17,000 Purchases in January: at retail \(137,000; at cost \)82,500 Freight-in: \(7,000 Purchase returns: at retail \)3,000; at cost \(2,300 Transfers in from suburban branch: at retail \)13,000; at cost \(9,200 Net markups: \)8,000 Net markdowns: \(4,000 Inventory losses due to normal breakage, etc.: at retail \)400 Sales revenue at retail: \(95,000 Sales returns: \)2,400 Instructions (a) Compute the inventory for this department as of January 31, at retail prices. (b) Compute the ending inventory using lower-of-average-cost-or-market
Mark Price Company uses the gross profit method to estimate inventory for monthly reporting purposes. Presented below is information for the month of May. Inventory, May 1 $ 160,000 Purchases (gross) 640,000 Freight-in 30,000 Sales revenue 1,000,000 Sales returns 70,000 Purchase discounts 12,000 Instructions (a) Compute the estimated inventory at May 31, assuming that the gross profit is 30% of sales. (b) Compute the estimated inventory at May 31, assuming that the gross profit is 30% of cost.
Ogala Corporation purchased a significant amount of raw materials inventory for a new product that it is manufacturing. Ogala uses the LCNRV rule for these raw materials. The net realizable value of the raw materials is below the original cost. Ogala uses the FIFO inventory method for these raw materials. In the last 2 years, each purchase has been at a lower price than the previous purchase, and the ending inventory quantity for each period has been higher than the beginning inventory quantity for that period. Instructions (a) At which amount should Ogala’s raw materials inventory be reported on the balance sheet? Why? (b) In general, why is the LCNRV rule used to report inventory? (c) What would have been the effect on ending inventory and cost of goods sold had Ogala used the average-cost inventory method instead of the FIFO inventory method for the raw materials? Why?
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