Assignment
• When a company owns inventory, it has to decide how to consistently value the inventory sold and on hand. Four inventory valuation methods are available to help the organization effectively value its inventory. These valuation methods are based on the systematic cash flow of adding and removing inventory, and each has its advantages and disadvantages. When selecting an inventory method, management should select the method that best reflects their operations. Once an inventory valuation method is selected, it must be applied consistently from year to year.
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The four inventory valuation methods are described below:
• Average cost: An average cost is calculated based the total costs for the inventory on hand.
• First in, first out (FIFO): This method assumes that inventory is used in the order it is received.
• Last in, first out (LIFO): This method assumes that the newest inventory is always used first.
• Specific identification: Under this method, the costs and selling price are specified for one particular item. This method is appropriate when each item has a unique identifying characteristic.
When a company purchases a long-term asset such as equipment, the cost of the long-term asset is capitalized. This means the asset will benefit more than one accounting period, so the original cost of the asset is allocated to the accounting periods it benefits. This allocation results in an expense that is recorded over several periods known as depreciation expense. Depreciation is used in accounting to estimate the cost of the fixed asset that is allocated to each period. There are a variety of depreciation methods available to estimate depreciation expense.
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Questions to Consider
To deepen your understanding, you are encouraged to consider the questions below and discuss them with a fellow learner, a work associate, an interested friend, or a member of the business community.
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• What are the acceptable inventory valuation methods under the U.S. Generally Accepted Accounting Principles (GAAP)?
• How does each affect the valuation of inventory?
• How does each affect cost of goods sold?
• What elements might organizational leaders consider when selecting which inventory valuation method to adopt?
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Resources
Suggested Resources
The following optional resources are provided to support you in completing the assessment or to provide a helpful context. For additional resources, refer to the Research Resources and Supplemental Resources in the left navigation menu of your courseroom.
Capella Resources
Resources:
• Assessment, Problem 1 Template.
• Murthy, G. (2009). Financial accounting. Mumbai, India: Himalaya Publishing House.
• Vataliya, K. S. (2009). Practical financial accounting: Advance methods, techniques and practices. Jaipur, India: Paradise Publishers.
• Doran, D. T. (2012). Financial reporting standards: A decision-making perspective for non-accountants. New York, NY: Business Experts Press.
• Libby, R., Libby, P., & Hodge, F. (2017). Financial accounting (9th ed.). New York, NY: Irwin.
• Assessment Instructions
Note: Some of the assessments in this course build upon each other, so you are strongly encouraged to complete them in the order in which they are presented.
For this assessment, complete Problems 1 and 2. You may use Word or Excel to complete the assessments throughout this course, but you will find Excel to be most helpful for creating spreadsheets. Tutorials for using Excel are provided in the Supplemental Resources in the left navigation menu. If you use Excel, submit the assessment in one Excel document, using separate tabs for each spreadsheet.
To complete the first problem, you may choose to use the Assessment 6, Problem 1 Template linked in the Suggested Resources under the Capella Resources heading.
Problem 1: The Effects of Different Cost Flow Assumptions for Inventory
At the end of January 2011, the records of Sheldon and Blair showed the following for a particular item that sold at $20 per unit:
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Problem 1, Table 1: Records of Sheldon and Blair
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Transactions
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Units
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Total Amount
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Inventory, January 1, 2011
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500 @ $6.00
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$3,000
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Purchase, January 12
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600 @ $7.00
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$4,200
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Purchase, January 26
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200 @ $7.10
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$1,420
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Sale
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(400 units sold for $20 each)
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Sale
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(300 units sold for $20 each)
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Based on the information provided in the table above, complete the following. An optional template, Assessment 6, Problem 1 Template, is provided in the Suggested Resources under the Capella Resources heading.
1. Assuming the use of a periodic inventory system, prepare a summarized income statement through gross profit for the month of January under each method of inventory listed below. Show the inventory computations for each method in detail.
• a. Average cost. (Round the average cost per unit to the nearest cent.)
• b. First in, first out (FIFO).
• c. Last in, first out (LIFO).
• d. Specific identification. (Assume that the first sale was selected from the beginning inventory and the second sale was selected from the January 12 purchase.)
2. Of FIFO and LIFO, which method would result in the higher pretax income? Which would result in the higher EPS?
3. Of FIFO and LIFO, which method would result in the lower income tax expense? Explain, assuming a 35 percent average tax rate.
4. Of FIFO and LIFO, which method would produce the more favorable cash flow? Explain.
Problem 2: The Effects of Differing Depreciation Methods
Total Workout, Inc. purchased three ï¬ï¿½tness machines from Ace Used Equipment at the beginning of the year. All three were used machines that had to be overhauled and installed before they were put into use. The costs of the machines and their renovation and installation are shown in Table 1 below:
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Problem 2, Table 1: Equipment Costs
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Account
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Machine A
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Machine B
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Machine C
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Amount paid for asset
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$21,000
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$30,750
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$8,000
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Installation cost
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$500
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$1,000
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$200
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Renovation costs prior to use
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$2,000
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$1,000
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$1,500
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By the end of the first year, each machine had been operating 4,800 hours. Depreciation estimates are shown in Table 2 below:
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Problem 2, Table 2: Equipment Depreciation
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Machine
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Life
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Residual Value
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Depreciation Method
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A
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5 years
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$1,000
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Straight-line
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B
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60,000 hours
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$2,000
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Units-of-production
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C
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4 years
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$1,500
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Double-declining balance
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Using the data provided above, complete the following:
5. Compute the cost of each machine.
6. Give the entry to record depreciation expense at the end of the first year, using all three depreciation methods listed in Table 2.
Attachment:- Problem Template.rar