Question.2967 - 1. Fulbright Corp. uses the periodic inventory system. During its first year of operation, Fulbright made the following purchases (listed in chronological order of acquisition): ? 40 units at $100 ? 70 units at $80 ? 170 units at $60 Sales for the year totaled 270 units, leaving 10 units on hand at the end of the year. What is the ending inventory using the FIFO method? (Points : 15) 2. You are the independent accountant assigned to the audit of Neophyte Company. The company's accountant, a graduate of Rival State University, has prepared financial statements that contained the following questionable items: a. The balance sheet reports land at $100,000. Included in this amount is a piece of property held for speculation at a cost of $30,000. b. Current liabilities include $50,000 for long-term debt that comes due in 3 months. The company has received a suitable firm commitment to refinance the debt for 5 years and intends to do so. c. Investments in marketable securities include $20,000 in short-term, high-grade commercial paper which is a cash equivalent. Please discuss how the above items should be classified and accounted for. 3. Briefly describe why companies that use perpetual inventory systems must still perform physical inventories. (Points : 25) 4. Although the net method is theoretically more sound, most companies use the gross method of accounting for cash discounts related to sales on account. Explain this statement. (Points : 25)
Answer Below:
1. Fulbright Corp. uses the periodic inventory system. During its first year of operation, Fulbright made the following purchases (listed in chronological order of acquisition): ? 40 units at $100 ? 70 units at $80 ? 170 units at $60 Sales for the year totaled 270 units, leaving 10 units on hand at the end of the year. What is the ending inventory using the FIFO method? (Points : 15) Ans: $707.10 [(40 x $100) + (70 x $80) + (170 x $60)] = $19,800/280 or $70.71/unit $70.71*10 = $707.10 2. You are the independent accountant assigned to the audit of Neophyte Company. The company's accountant, a graduate of Rival State University, has prepared financial statements that contained the following questionable items: a. The balance sheet reports land at $100,000. Included in this amount is a piece of property held for speculation at a cost of $30,000. The property under speculation is no longer considered part of your land assets, but an investment. Your only other consideration would be if you intend to sell this land within the year or longer than one year to see if it is a current asset or long-term asset. b. Current liabilities include $50,000 for long-term debt that comes due in 3 months. The company has received a suitable firm commitment to refinance the debt for 5 years and intends to do so. Debt to be refinanced under these circumstances should be classified as long-term liabilities. c. Investments in marketable securities include $20,000 in short-term, high-grade commercial paper which is a cash equivalent. These items should be reported with cash under the category of cash and cash equivalents Please discuss how the above items should be classified and accounted for. 3. Briefly describe why companies that use perpetual inventory systems must still perform physical inventories. (Points : 25) Perpetual inventory systems still require periodic physical inventories to verify the clerical accuracy of the data, and to reflect changes in inventories that are not reflected in the accounting records. These include factors like theft, product deterioration and obsolescence. Thus in order to maintain an accurate record of the inventory, companies using perpetual inventory systems should perform physical inventory check. 4. Although the net method is theoretically more sound, most companies use the gross method of accounting for cash discounts related to sales on account. Explain this statement. (Points : 25) The net method is desirable from a theoretical standpoint because it values the sales and receivable at its net realizable value. In addition, recording the sales at net provides a better assessment of the revenue that was earned from the sale of the product. If the purchasing company fails to take the discount, then the company should reflect this amount as income. The gross method for receivables and sales is used in practice normally because it is expedient and its use does not generally have any significant effect on the presentation of the financial statements.More Articles From Finance
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