Ratio of cost to retail price:
Sales for June (net) 875,000 $ 840,000?70%
$1,200,000
Merchandise inventory, June 30, at retail price $ 325,000 Merchandise inventory, June 30, at estimated cost ($325,000 × 70%) 227,500
$Ex. 9–13
a. Merchandise inventory, Jan. 1
$180,000
$930,000 $1,250,000
$117,500 437,500 812,500
750,000 Purchases (net), Jan. 1–May 17 Merchandise available for sale Sales (net), Jan. 1–May 17
Estimated cost of merchandise sold
Less estimated gross profit ($1,250,000 × 35%) Estimated merchandise inventory, May 17
b. The gross profit method is useful for estimating inventories for monthly or quarterly financial statements. It is also useful in estimating the cost of merchandise destroyed by fire or other disasters.
Ex. 9–14
a. Apple: 147.8 {$4,139,000,000 ÷ [($45,000,000 + $11,000,000) ÷ 2]}
American Greetings: 3.1 {$881,771,000 ÷ [($278,807,000 +
$290,804,000) ÷ 2]}
b. Lower. Although American Greetings’ business is seasonal in nature, with most of its revenue generated during the major holidays, much of its nonholiday inventory may turn over very slowly. Apple, on the other hand, turns its inventory over very fast because it maintains a low inventory, which allows it to respond quickly to customer needs. Additionally, Apple’s computer products can quickly become obsolete, so it cannot risk building large inventories.
Ex. 9–15
Inventory, end of period
Cost of goods sold/365a. Number of days’ sales in inventory =
Albertson’s,
$2,973 = 43 days
$25,242/365
Kroger,
$4,175 = 40 days
$37,810/365$2,558 = 42 days
$22,303/365
Safeway,
Inventory turnover =
Cost of goods sold
Average inventory
Albertson’s,
$25,242 = 8.2
($2,973?$3,196)/2
Kroger,
$37,810 = 9.1
($4,175?$4,178)/2$22,303 = 8.9
($2,558?$2,437)/2
Safeway,
b. The number of days’ sale in inventory and inventory turnover ratios
are consistent. Albertson’s has slightly more inventory than does Safeway. Kroger has relatively less inventory (2–3 days) than does Albertson’s and Safeway.
Ex. 9–21 Concluded
c. If Albertson’s matched Kroger’s days’ sales in inventory, then its
hypothetical ending inventory would be determined as follows,
Number of days’ sales in inventory =
Inventory, end of period
Cost of goods sold/365
40 days =
X
$25,242/365
X = 40 ? ($25,242/365) X = $2,766
Thus, the additional cash flow that would have been generated is the difference between the actual ending inventory and the hypothetical ending inventory, as follows:
Actual ending inventory .......................... Hypothetical ending inventory ................ Positive cash flow potential ....................
$ 2,973 million 2,766 $ 207 million
That is, a lower ending inventory amount would have required less cash than actually was required.
Ex. 10–1
a. No. The $859,600 represents the original cost of the equipment. Its
replacement cost, which may be more or less than $859,600, is not reported in the financial statements.
b. No. The $317,500 is the accumulation of the past depreciation
charges on the equipment. The recognition of depreciation expense has no relationship to the cash account or accumulation of cash funds.
Ex. 10–2
$18,000 [($312,000 – $42,000) ÷ 15]
Ex. 10–3
$345,000 ? $18,00075,000 hours = $4.36 depreciation per hour
1,250 hours at $4.36 = $5,450 depreciation for July
Ex. 10–4
a.
Credit to
Accumulated Truck No. Rate per Mile Miles Operated Depreciation
1 20.0 cents 40,000 $ 8,000
2 21.0 12,000 2,100* 3 4 20.0 21,000
4,200
Total .............................................................................................. $20,600
* Mileage depreciation of $2,520 (21 cents × 12,000) is limited to $2,100, which reduces the book value of the truck to $6,600, its residual value.
b. Depreciation Expense—Trucks ...................................... 20,600
Accumulated Depreciation—Trucks ...................
20,600
Ex. 10–5
First Year Second Year a. 8 1/3% of $84,000 = $7,000 8 1/3% of $84,000 = $7,000
b. 16 2/3% of $84,000 = $14,000
16 2/3% of $70,000* = $11,667
*$84,000 – $14,000
Ex. 10–6
a. Year 1: 9/12 × [($54,000 – $10,800) ÷ 12] = $2,700
Year 2: ($54,000 – $10,800) ÷ 12 = $3,600
b. Year 1: 9/12 × 16 2/3% of $54,000 = $6,750
Year 2: 16 2/3% of ($54,000 – $6,750) = $7,875
17.5
Ex. 10–7
a. Current Preceding
Year Year
Land and buildings
$ 426,322,000 $ 418,928,000 Machinery and equipment 1,051,861,000 1,038,323,000 Total cost
$1,478,183,000 $1,457,251,000 Accumulated depreciation 633,178,000 582,941,000
Book value $ 845,005,000 $ 874,310,000
A comparison of the book values of the current and preceding years indicates that they decreased. A comparison of the total cost and accumulated depreciation reveals that Interstate Bakeries purchased $20,932,000 ($1,478,183,000 – $1,457,251,000) of additional fixed assets, which was offset by the additional depreciation expense of $50,237,000 ($633,178,000 – $582,941,000) taken during the current year.
b. The book value of fixed assets should normally increase during the
year. Although additional depreciation expense will reduce the book value, most companies invest in new assets in an amount that is at least equal to the depreciation expense. However, during periods of economic downturn, companies purchase fewer fixed assets, and the book value of their fixed assets may decline. This is apparently the case with Interstate Bakeries.
Ex. 10–8
Capital expenditures:
New component: 4, 6, 7
Replacement component: 1, 2, 9, 10
Revenue expenditures: 3, 5, 8
Ex. 10–9
a. Mar. 15 Removal Expense ......................................... 1,500
Cash..........................................................
1,500