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Chapter 8: Q4CA. (page 436)

Shawnee Corp., a household appliances dealer, purchases its inventories from various suppliers. Shawnee has consistently stated its inventories at FIFO cost.

Instructions

Shawnee is considering alternate methods of accounting for the cash discounts it takes when paying its suppliers promptly.From a theoretical standpoint, discuss the acceptability of each of the following methods.

(a) Financial income when payments are made.

(b) Reduction of cost of goods sold for the period when payments are made.

(c) Direct reduction of the purchase cost.

Short Answer

Expert verified

a) Acceptable

b) Not acceptable

c) Note acceptable

Step by step solution

01

Step1: Financial income when payments are made

A cash discount is like an income for the business. It is earned when obligations are paid off. So this is an acceptable way of recording the cash discount received.

02

Step 2: Reduction of cost of goods sold for the period when payments are made.

This is not an acceptable way of recognizing the cash discount. A cash discount is received on the selling price and is earned when the obligation is paid. On the other hand cost of goods sold is based on inventory acquisition costs. So this is not a GAAP-acceptable practice.

03

Step 3: Direct reduction of the purchase cost.

This is also not an acceptable method. Cash discounts are received on the selling price. In contrast, the purchase cost is incurred at the time of purchasing goods. So the income earned is not matched with the expense incurred.

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Most popular questions from this chapter

As compared with the FIFO method of costing inventories, does the LIFO method result in a larger or smaller net income in a period of rising prices? What is the comparative effect on net income in a period of falling prices?

Question:In your audit of Jose Oliva Company, you find that a physical inventory on December 31, 2017, showed merchandise with a cost of \(441,000 was on hand at that date. You also discover the followingitems were all excluded from the \)441,000.

1. Merchandise of \(61,000 which is held by Oliva on consignment. The consignor is the Max Suzuki Company.

2. Merchandise costing \)38,000 which was shipped by Oliva f.o.b. destination to a customer on December 31, 2017. The customerwas expected to receive the merchandise on January 6, 2018.

3. Merchandise costing \(46,000 which was shipped by Oliva f.o.b. shipping point to a customer on December 29, 2017. Thecustomer was scheduled to receive the merchandise on January 2, 2018.

4. Merchandise costing \)83,000 shipped by a vendor f.o.b. destination on December 30, 2017, and received by Oliva on January4, 2018.

5. Merchandise costing $51,000 shipped by a vendor f.o.b. shipping point on December 31, 2017, and received by Oliva onJanuary 5, 2018.

Instructions

Based on the above information, calculate the amount that should appear on Oliva’s balance sheet at December 31, 2017, for inventory.

Question:Data for Amsterdam Company are presented in BE8-4. Compute the April 30 inventory and the April cost of

goods sold using the FIFO method.

The net income per books of Linda Patrick Company was determined without knowledge of the errors indicated.

Net Income Error in Ending

Year per Books Inventory

2012 \(50,000 Overstated \) 3,000

2013 52,000 Overstated 9,000

2014 54,000 Understated 11,000

2015 56,000 No error

2016 58,000 Understated 2,000

2017 60,000 Overstated 8,000

Instructions

Prepare a worksheet to show the adjusted net income figure for each of the 6 years after taking into account the inventoryerrors.

What is the dollar-value method of LIFO inventory valuation? What advantage does the dollar-value method have over the specific goods approach of LIFO inventory valuation? Why will the traditional LIFO inventory costing method and the dollar-value LIFO inventory costing method produce different inventory valuations if the composition of the inventory base changes?
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