PRINCIPLE OF ACCOUNTING

Chapter 6
(Inventories and Statement of Cash Flows)

Group 6
JANGAN DI PRINT

Khansa Nur Sabrina

Assifa Winnayu Prameswari
id number: 015202300028
id number: 015202300023

Ni Nyoman Selin Gitaswari

Khalishah Nakhwa Ramadani
id number: 015202300032
id number: 015202300059

December
2023-2024
 PRINCIPLE OF ACCOUNTING

Chapter 6
(Inventories)

Group 6 BA2

Khansa Nur Sabrina

Assifa Winnayu Prameswari
id number: 015202300028
id number: 015202300023

Ni Nyoman Selin Gitaswari

Khalishah Nakhwa Ramadani
id number: 015202300032
id number: 015202300059

December
2023-2024
 PRINCIPLE OF ACCOUNTING

Chapter 13
(Statement of Cash Flows)

Group 6 BA2

Khansa Nur Sabrina

Assifa Winnayu Prameswari
id number: 015202300028
id number: 015202300023

Ni Nyoman Selin Gitaswari

Khalishah Nakhwa Ramadani
id number: 015202300032
id number: 015202300059

December
2023-2024
 QUESTION CHAPTER 6

1. I agree that effective inventory is the key to successful business operations. Management
tries to maintain sufficient quantities and types of goods to meet expected customer
demand and it also tries to avoid the cost of carrying inventories that are clearly in excess
of anticipated sales.
2. Two characteristics to be classified as inventory by a merchandiser:
• Owned by the company.
• Readiness for sale in the ordinary course of business.
3. Art Mega will need to count each kind of inventory on hand. Art Mega will have to
compare the counted inventory with the store’s record to identify any discrepancies or
errors and, she/he needs to provide the regular reports of inventory.
4. A).
• The goods will be included in Hanson Company’s inventory if the terms of sale
are FOB destination.
• They will be included in Fox Company’s inventory if the terms of sale are FOB
shipping point.
B).
• Hanson Company should include goods shipped to another company on
consignment in its inventory. Goods held by Hanson Company on consignment
should not be included in the inventory.
5. Inventory cost = original price – discount + freight charges
Inventory cost = $3.000 - $30 + $80
= $3.050
The amount paid to negotiate the purchase is a buying cost that normally is not included
in the cost of inventory because of the difficulty of allocating these costs, so Top will
record an inventory cost of $3.050 for the hats this is because the cost of the hats after
discount plus the freight charges have been applied is $3.050.
6. The meaning of FOB shipping point and FOB destination:
• FOB shipping point means that ownership of goods in transit passes to the buyer
when the public carrier accepts the goods from the seller.
• FOB destination means that ownership of goods in transit remains with the seller
until the goods reach the buyer.
7. Actual physical flow may be impractical and inappropriate. Allocating costs based on
physical flow may not be practical because it can be difficult to track the physical flow of
goods, especially if there are multiple shipments involved. This can result in delays in
production or excess inventory storage charges. Additionally, having inaccurate inventory
data may also lead to over-ordering which increases procurement costs. Allocating costs
based on physical flow may not be practical because it can be difficult to track the
physical flow of goods, especially if there are multiple shipments involved. This can
result in delays in production or excess inventory storage charges. Additionally, having
 inaccurate inventory data may also lead to over-ordering which increases procurement
costs.
8. The major advantage of the specific identification method is that it tracks the actual
physical flow of the goods available for sale. The major disadvantage is that management
could manipulate net income and it also can be more time-consuming.
9. The statement "The selection of an inventory cost flow method is a decision made by
accountants" is not entirely correct because selection of an inventory costing method is a
management decision. However, once a method has been chosen, it should be used
consistently from one accounting period to another.
10. (A). FIFO (First in, first out).
(B). Average cost.
(C). FIFO (First in, first out).
11. Steve should know that:
• A departure from the cost basis of accounting for inventories is justified when the
value of the goods is lower than its cost. The write down to net realizable value
should be recognized in the period in which the price decline occurs.
• Net realizable value (NRV) is the estimated selling price of the inventory minus
the estimated costs of completion, disposal, and transportation. NRV is estimated
selling price less estimated costs to complete and to make a sale.
12. Steering Music Center should report the DVD players at $90 each for a total of $450 on
the statement of financial position. This is because the net realizable value of each DVD
player is $90, which is lower than the cost of $100 per unit. Therefore, the lower of cost
or net realizable value basis of accounting for inventories requires that the value of the
inventory be reported at the lower of its cost or net realizable value. A decline in net
realizable value usually leads to a decline in the selling price of the item.
13. Maggie Stores should report the toasters at $28 each for a total of $560. The $28 is the
lower of cost or net realizable value. The reason for using the lower of cost or net
realizable value basis is to ensure that the value of the inventories is not overstated.
14. (A). Cohen Company’s 2013 net income will be understated €7,600.
(B). 2014 net income will be overstated €7,600.
(C). The combined net income for the two years will be correct.
15. The additional disclosures that Reglan’s Company should made:
• The major inventory classifications.
• The basis of accounting (cost or lower of cost or net realizable value).
• The costing method (FIFO or average cost).
16. An inventory turnover that is too high may indicate that the company is losing sales
opportunities because of inventory shortages. It can lead to potential issues such as lost
sales and higher carrying costs if it occurs too rapidly.
17. The average-cost method of inventory costing differs between a perpetual inventory
system and a periodic inventory system in terms of when the cost of goods sold (COGS)
is calculated.
 • In a periodic system, the average is a weighted average based on total goods
available for sale for the period.
• In a perpetual system, the average is a moving average of goods available for sale
after each purchase.
18. Inventories must be estimated when:
• Estimating inventories is also necessary when a physical count is impossible, for
example when inventory is destroyed in a fire or other disasters.
• When management wants monthly or quarterly financial statements, but a
physical inventory is only taken annually.
19. Gross profit method
• The gross profit method uses the average gross profit percentage to calculate the
ending inventory value. The gross profit percentage is calculated by dividing
gross profit by net sales. The rate is often based on last year’s actual rate. The
gross profit rate is applied to net sales in using the gross profit method.
• The retail inventory method uses the cost-to-retail ratio to estimate the ending
inventory value. The cost-to-retail ratio is calculated by dividing the cost of goods
available for sale by the retail value of goods available for sale. The ratio is based
on the current year’s data and is applied to the ending inventory at retail.
20. Data:
• Net sales : $400,000
• Gross profit rate : 40%
• Cost of goods available for sale : $300,000
Gross profit = Net sales - Cost of goods sold
Gross profit rate = Gross profit / Net sales
Cost of goods sold = Net sales - Gross profit
Cost of goods sold = $400,000 – ($400,000 x 40%)
= $240,000
Cost of ending inventory = cost of goods available for sale – cost of goods sold
Cost of ending inventory = $300,000 - $240,000
= $60,000
21. Data:
• Cost = €84,000
• Retail price = €12,000
• Sales = €90,000
The estimated cost of the ending inventory is:
Ending inventory at retail = €120,000 – €90,000
= €30,000
Cost-to-retail ratio = €84,000/€120,000
 =0,7 (70%)
Ending inventory at cost =€30,000 X 70%
= €21,000
22. Barto Company is using the FIFO (First-In, First-Out) method of inventory costing,
where the inventory reported in the statement of financial position is close to the current
cost of the inventory and Phelan Company is using the LIFO (Last-In, First-Out) method.
Barto Company will have the higher gross profit because the cost of goods sold will
include a higher proportion of goods purchased at earlier (lower) costs.
23. I don’t agree with the statement that "when perpetual inventory records are kept, the
results under the FIFO and LIFO methods are the same as they would be in a periodic
inventory system" because the results under the FIFO method are the same but the results
under the LIFO method are different. The reason is that the pool of inventoriable costs
(cost of goods available for sale) is not the same. Under a periodic system, the pool of
costs is the goods available for sale for the entire period, whereas under a perpetual
system, the pool is the goods available for sale up to the date of sale.
24. During times of rising prices, using the LIFO method for costing inventories rather than
FIFO or average-cost will result in lower income taxes because of its ability to account
for inflation. Since LIFO uses the most recent, higher, costs to calculate cost of goods
sold, taxable income is lower, and income taxes are also lower.
 BRIEF EXCERCISE

BE6-1
A. Goods shipped on consignment by Dayne to another company: excluded.
B. Goods in transit from a supplier shipped FOB destination: excluded.
C. Goods sold but being held for customer pickup: included.
D. Goods held on consignment from another company: excluded.

BE6-2
The items that should be included in goods available for sale are:
(a) Freight-In.
(b) Purchase Returns and Allowances.
(c) Purchases.
(e) Purchase Discounts.

BE6-3
Rusch Company made three purchases of merchan-
dise in the following sequence: (1) 300 units at $6, (2) 400 units at $7, and (3) 200
units at
$8. Assuming there are 450 units on hand
A. The ending inventory under FIFO consists of :
Unit Cost Total Cost
purchase 200 $8 $1,600 B20*C20
purchase 250 $7 $1,750 B21*C21
total $3,350
SUM(D20:D21
Average cost
Unit Cost Total Cost
purchase 300 $6 $1,800
purchase 400 $7 $2,800
purchase 200 $8 $1,600 D29/B29= $6.89
total 900 $6,200 end inv $3,100.00 450*$6.89

BE6-4
(a) FIFO would result in the higher net income.
(b) FIFO would result in the higher ending inventory.
(c) Average-cost would result in the lower income tax expense.
(d) Average-cost would result in the more stable income over a number
of years because it averages out any big changes in the cost of inventory.

BE6-5

Net Realizable Lower of cost or net

Inventory categories Cost (£) Value (£) realizable value(£)
Cameras 12,000 12,100 12,000
Camcorders 9,500 9,200 9,200
DVD players 14,000 12,800 12,800
Total valuation 35,500 34,100 34,000
BE6-6
The understatment of ending inventory caused cost of goods sold to be overstated
$5000 and net income to be understated $5000. The correct net income for 2014 is $
95000 ( 90,000=+$5,000).
Total assets in the statement of financial position will be understated by the amount
that ending inventory is understated $5,000.

BE6-7
Inventory turnover= COGS /{(Beg inv+end inv):2}
Inv turnover = $300,000/{($60,000+$40,000):2}
Inv turnover = 6,0

Days in inv: 365/6,0 = 60,8.

BE6-8
(a) FIFO Method product E2-D2
Date units price purchases COGS Total inv
7-May 50 $11 $550 $550
1-Jun 30 $11 $330 $220
28-Jul 30 $13 $390 $610 20*$11 =+ 30*$13
27-Aug 20 $11 $220 $195 15*13
15 $13 $195

(b) Average-cost product E2-D2

Date purchases COGS total inv
7-May $550 $550
(50*$11) (50*$11)
1-Jun $330 $220
(30*$11) (20*11)
28-Jul $390 $610
(30*$13) (50*$12.20)
27-Aug $427 $183
(35*$12.20)
(15*$12.20)

BE6-9
Net sales ¥330,000
Less: Estimated gross profit (40% X ¥330,000) ¥132,000
Estimated cost of goods sold ¥198,000

Cost of goods available for sale ¥230,000

Less: Estimated cost of goods sold ¥198000
Estimated cost of ending inventory ¥ 32,000
BE6-10
At cost At retail
Goods available for sale $35,000 $50,000
Net sales $42,000
Ending inventory at retai $8,000

Cost-to-retail ratio = ($35,000 ÷ $50,000) = 70%

Estimated cost of ending inventory = ($8,000 X 70%) = $5,600

BE6-11
Ending inv under LIFO Method
units price purchases
300 $6 $1,800
150 $7 $1,050
total $2,850

The ending inventory under LIFO consists of 300 units at $6 + 150 units at
$7 for a total allocation of $2,850
 DO IT! REVIEW

DO-IT! 6-1

Inventory cost (physical) $300.000,00

Inventory cost (consigment) -$21.000,00
Inventory purchased $20.000,00 (did not include)
Inventory sold -$17.000,00 (did not include)
Inventory December 31 $279.000,00

DO-IT! 6-2
Unit Cost per Unit
Beginning inventory 3.000,00 $5,00
Purchase 8.000,00 $7,00
Sales 9.400,00 $10,00

a.) FIFO
8.000,00
3.000,00 Connor Electronic shows 1.600,00
9.400,00

Income Statement
Revenue $94.000,00
CGS
Beginning $15.000,00 (3000*5)
Purchase $44.800,00 (9400-3000)*7
Total CGS $59.800,00
Profit $34.200,00

b.) AVERAGE COST

Available for sale 11.000,00 (3000+8000)
Cost of production $71.000,00 (3000*5 + 8000*7)
Average Cost $6,45 (71000/11000)
Total CGS $60.672,73 (9400 * 6,45)

DO-IT! 6-3

a.) Company Value (lower-of-cost)

Small $64.000,00
Medium $260.000,00
Large $149.000,00
Inventory Value $473.000,00
b.) Impact of this error
2.013 Ending Inventory Understated by $28000
Cost of Good Sold Overstated by $28000
Equity Understated by $28000
(impacted by net income, and
understated ending inventory
increased the CGS, reducing
net income and equity

2.014 Ending Inventory No Effect

Cost of Good Sold $28000 Understated
Equity No Effect

DO-IT! 6-4
2.013 2.014
Sales CHF3.120.000,00 CHF3.713.000,00
CGS CHF1.200.000,00 CHF1.425.000,00
Beginning Inv CHF180.000,00 CHF220.000,00
Ending Inv CHF220.000,00 CHF100.000,00

2.013 2.014
Inventory Turn
Over 6 8,9
(CGS) / ((Total 1200000 / 1425000 /
Inv) / 2 ((180000 + ((220000
220000) / 2) +100000) / 2)

Days in 365 / 6 = 60.8 365 / 8,9 = 41

Inventory days days

The just-in-time inventory caused the company to witness a very notable decrease
in its ending inventory. Its inventory turnover ratio and days in inventory both
improved as a result of this decline. This seems to be an advantageous circumstance
for Lousanne Company.
 EXERCISES

E6-1
Ending Inventory by physical
$297.000,00
count
1. No effect $0,00
2. No effect $0,00
3. Put to the inventory $19.000,00
4. Put to the inventory $35.000,00
5. No effect $0,00
Correct Inventory $351.000,00

E6-2
Ending inventory €740.000,00
Take out from inventory:
Superior Corporation holds the
-€250.000,00
goods. Platinum is only acting
as a consignee for them.
No effect: Platinum no
€0,00
received until 3rd January
Take out from inventory:
Office supplies should
-€17.000,00
be carried in a separate
account
Put to inventory: Platinum
owns the goods until they are €33.000,00
shipped
Put to inventory: District Sales
placed an £8,000 order for
goods. Platinum should to
document the equivalent sales
income of £10,000. The
decision by Platinum to ship
additional "unordered"
merchandise does not signify a
sale. Platinum is aware that (80000 - 10000
€62.000,00
this over-shipment is not a - 8000)
valid sale, as evidenced by the
manager's comment that
District could ship the goods
back. By over-shipping, the
manager attempted to increase
Platinum's reported income by
acting unethically.
Take out from inventory: there
were parts that the company
no longer use. Obsolete parts -€48.000,00
should be adjusted from cost
to zero
Correct Inventory €520.000,00

E6-3
Priced sell $150,00
DVD Serial Cost Purchased
#1012 $100,00 June 1
#1045 $90,00 November 1
#1056 $84,00 November 30

a.) FIFO CGS of two DVD

CGS of #1012 and #1045
CGS = 100 + 90 $190,00

CGS of #1012 and #1056

CGS = 100 + 84 $184,00

CGS of #1045 and #1056

CGS = 90 + 84 $174,00

b.) If it wanted to influence earnings in a particular way, it could decide to sell particular units
that were bought at particular prices. The cost of goods sold would be $190 if it decided to sell
the units it had bought at a higher price in order to minimize earnings. The cost of goods sold
would be $174 if it decided to sell the units it had bought at a lower price in order to maximize
earnings.

c.) In my opinion, I recommend to use FIFO method since it minimizes the possibility of
manipulating earnings and generates a more suitable Statement of Financial Position valuation.

E6-4
a.) Fifo and Average Method
FIFO
Date Unit Unit Cost Total Cost
Sept 1 23,00 HK$970,00 HK$22.310,00
Sept 12 45,00 HK$1.020,00 HK$45.900,00
Sept 19 20,00 HK$1.040,00 HK$20.800,00
Sept 26 44,00 HK$1.050,00 HK$46.200,00
Total Unit 132,00 HK$135.210,00
Total Sold 121,00
Ending inv 11,00 HK$11.550,00 (1050*11)
 CGS FIFO HK$123.660,00 (135210-11550)

Average Method
Available for sale 132,00
Cost of production HK$135.210,00 Ending inv HK$11.267,50
Average Cost (135210 / 132) HK$1.024,32 (11 * 1.024,32)
CGS (121 * 1024,32) $123.942,50

b.) Ending Inventory and Cost of goods sold

Ending Inventory FIFO HK$11.550,00
Ending Inventory Average-cost HK$11.267,50 (11 * 1.024,32)

Cost of goods available for sale = Ending Inventory + CGS

FIFO HK$135.210,00 (11550 + 123660)
Average Cost HK$135.210,00 (11267,5 + 123942)

Both approaches result in the same cost of goods available for sale (HK$135,210), when the
ending inventory and cost of goods sold are added together.

E6-5
FIFO
Units Cost Total Cost
Inventory 30,00 $9,00 $270,00
Purchases 25,00 $11,00 $275,00
Purchases 35,00 $12,00 $420,00
Total Unit 90,00 $965,00
Total Sold 68,00
Ending inv 22,00 $264,00 (12 * 22)
CGS FIFO $701,00 (965 - 264)

Average-cost Method
Available for sale 90,00
Cost of production $965,00 Ending inv $235,89
Average Cost (965/90) $10,72 (22 * 729,11)
CGS (68*10,72) $729,11

E6-6
a.) FIFO and
Average-cost
1.) FIFO
Units Cost Total Cost
Inventory 200,00 $5,00 $1.000,00
Purchases 300,00 $6,00 $1.800,00
Purchases 500,00 $7,00 $3.500,00
Total Unit 1.000,00 $6.300,00
Sold 840,00
Ending inv 160,00 $1.120,00 (7 * 160)
CGS FIFO $5.180,00 (6300 - 1120)

2.) Average-cost Method

Available for sale 1.000,00
Cost of production $6.300,00 Ending inv $1.008,00
Average Cost (6300/1000) $6,30 (160 * 6,3)
CGS (840*6,3) $5.292,00

b.) Because of rising costs, the FIFO method will result in higher ending inventory. With this
method, the most recent costs are kept in ending inventory while the earliest costs are allocated to
the cost of goods sold.

c.) The average-cost method will produce the higher cost of goods sold for Eastland Company.
The weighted average of all the inventory the business has acquired over a given period of time is
used to determine the cost of goods sold and its value.

E6-7
a.) FIFO AND
Average cost
1.) FIFO
Units Total Cost Unit Cost
Inventory 100,00 $10.000,00 $100,00
Purchases 200,00 $26.000,00 $130,00
Total Unit 300,00 $36.000,00
Sold 225,00
Ending inv 75,00 $9.750,00 (75*130)
CGS FIFO $26.250,00 (36000-26250)

2.) Average-cost Method

Available for sale 300,00
Cost of production $36.000,00 Ending inv $9.000,00
Average Cost (36000/300) $120,00 (75*120)
CGS (225*120) $27.000,00

b.) Given that earlier lower costs are matched with revenues, using FIFO would increase net
income.
c.) The application of FIFO would cause inventories in the statement of financial position to
approximate current cost.

d.) Givens would pay less in taxes in the first year if average-cost accounting was used, as their
taxable income would be reduced.

E6-8
Item Units Units Cost NRV
Cameras:
Minolta 8,00 ₩170.000 ₩156.000
Canon 6,00 ₩150.000 ₩152.000
Light meters:
Vivitar 12,00 ₩125.000 ₩115.000
Kodak 14,00 ₩115.000 ₩135.000

Lower - of -
Item Total Cost Total NRV Cost - or NRV
Cameras:
Minolta ₩1.360.000 ₩1.248.000 ₩1.248.000
Canon ₩900.000 ₩912.000 ₩900.000
Light meters:
Vivitar ₩1.500.000 ₩1.380.000 ₩1.380.000
Kodak ₩1.610.000 ₩1.890.000 ₩1.610.000
Total
₩5.370.000 ₩5.430.000 ₩5.138.000
Inventory

E6-9

Total Cost Total NRV Lower - of -

Item (units * cost (unit * NRV Cost - or NRV
per unit) per unit)
Cameras $6.800,00 $7.000,00 $6.800,00
DVD players $11.250,00 $10.350,00 $10.350,00
ipods $10.000,00 $9.750,00 $9.750,00
Total
$28.050,00 $27.100,00 $26.900,00
Inventory

E6-10
2.013 2.014
Beginning Inventory €20.000,00 €28.000,00
CGS Purchased €150.000,00 €175.000,00
Cost of Good Sale Available for sale €170.000,00 €203.000,00
Corrected Ending Inventory €28.000,00 €41.000,00
Corrected CGS €142.000,00 €162.000,00

#2013 30000 - 2000 = 28000

#2014 35000 + 6000 = 41000

E6-11
a.) 2.013 2.014
Sales Revenue $210.000,00 $250.000,00
CGS:
Beginning Inventory $32.000,00 $50.000,00
Cost of goods purchased $173.000,00 $202.000,00
Cost of goods available for sale $205.000,00 $252.000,00
Ending Inventory, 2013 = 44000 + 6000 $50.000,00 $52.000,00
CGS $155.000,00 $200.000,00
Gross Profit $55.000,00 $50.000,00

b.) The cumulative effect on total gross profit for the two years is zero
Incorrect gross profit 49000 + 56000 $105.000,00
Correct Gross Profit 55000 + 50000 $105.000,00
Difference $0,00

c.) Dear Mr./Ms President of Horner Watch Company,

Your net income for 2013 was understated by $6,000 as a result of your ending inventory being
understated by $6,000 as of December 31, 2013. The net income for 2014 was overstated by
$6,000.

When using a periodic system, the cost of goods sold is computed by subtracting the cost of
ending inventory from the total cost of the goods that are on hand for sale during the given
period. Consequently, the cost of goods sold will be overstated and net income will be
understated by that amount if the ending inventory figure is understated, as it was in December
2013. As a result, this understated ending inventory figure becomes the beginning inventory
amount for the following period and contributes to the total cost of goods that are offered for sale.
Therefore, the error occurs again in reverse

The 2013 end-of-year statement of financial position has been affected by the error. Since of the
understatement of inventory in the statement of financial position, the total assets are also
understated. The Retained Earnings account balance is understated as a result of the
understatement of the 2013 net income. The overstatement of the 2014 net income and the
accuracy of the inventory at the end of 2014 balance the understatement of the Retained Earnings
account at the end of 2013. As a result, the statement of financial position at the end of 2014 is
accurate.

Thank you for your consideration and the attention. If you have any question regarding this topic,
please contact me at your convenience.
Best Regards,

E6-12
2.012 2.013 2.014
900000 / 1120000 / 1300000 /
Inventory ((100000 + ((330000 + ((400000 +
Turonover 330000) / 2) 400000) / 2) 480000) / 2)
4,19 3,07 2,95
Days in 365 / 4,19 365 / 3,07 365 / 2,95
Inventory 87,1 days 118,9 days 123,7 days
(1200000 - (1600000 - (1900000 -
Gross Profit 900000) / 1120000) / 1300000) /
Rate 1200000 1600000 1900000
0,25 0,30 0,32
The decreased of turonver ratio and the increased days in inventory would be considered negative
because it’s better to have a higher inventory turnover with a correspondingly lower days in
inventory. However, Sepia Photo’s gross profit rate increased from 2012-2014

E6-13
Gouda
a.) Edam Company
Company
192000 / 292000 /
Inventory Turonver = CGS / ((47000 + ((71000 +
((Beginning Inventory + 55000) / 2) 69000) / 2)
Ending Inventory) / 2)
€3,76 €4,17
Days in inventory = 365 / 365 / 3,76 = 97 365 / 4,17 = 88
Inventory Turonver days days

b.) Edam Company, because the inventory turnover is higher

1.) FIFO
Total Cost
Date Explanation Unit Cost per unit (Unit * Cost
per unit)
Jan-01 Inventory 3,00 $600,00 $1.800,00
Jan-10 Purchased 6,00 $648,00 $3.888,00

Jan-8 Sold 2,00 $1.200,00 (2 * 600)

(1 * 600) + (3
Jan-15 Sold 4,00 $2.544,00
* 648)
Total Ending
3,00 $1.944,00
Inventory

2.) Moving Average Cost

Date Purchase CGS Total Inventory
(3*600)
Jan-01
 Jan-01
$1.800,00
(2*600) (1*600)
Jan-08
$1.200,00 $600,00
(6*648) (7*641,14)
Jan-10
$3.888,00 $4.488,00
(4*6441,14) (3*641,14)
Jan-15
$2.565,00 $1.923,00 Ending Inventory
Average Cost = (600 + 38888) / 7 = $641,14

E6-15
a.) FIFO and Moving Average Cost
1.) FIFO
Total Cost
Date Explanation Unit Cost per unit (Unit * Cost
per unit)
June-01 Inventory 200,00 $5,00 $1.000,00
June-12 Purchased 300,00 $6,00 $1.800,00
June-23 Purchased 500,00 $7,00 $3.500,00
Total Unit 1.000,00 $6.300,00
June-15 Sold 400,00 $8,00 $3.200,00
June-27 Sold 440,00 $9,00 $3.960,00
Total Sold 840,00 $7.160,00
Ending
June-30 160,00 $1.120,00 (160*7)
Inventory
Total CGS $5.180,00 (6300 - 1120)

2.) Moving Average Cost

Date Purchase CGS Total Inventory
(200*5)
June-01
$1.000,00
(300*6) (500*5,60)
June-12
$1.800,00 $2.800,00
(400*5,6) (100*5,6)
June-15
2.240,00 $560,00
(500*7) (600*6,767)
June-23
$3.500,00 $4.060,00
(440*6,767) (160*6,767)
June-27 Ending
$2.977,00 $1.083,00
Inventory
CGS $5.217,00 (2240+2977)
b.) Under both the periodic and perpetual inventory systems, FIFO provides the same ending
inventory and cost of goods sold values. Due to the fact that the moving average calculation is
based on distinct cost groups, it provides varying ending inventory and cost of goods sold values.

c.) The simple average would be [($5 + $6 + $7) ÷ 3)] = $6. Nevertheless instead of using a
simple average, the moving-average cost method uses a weighted-average unit cost that varies
with each purchase.

E6-16
a.) Fifo and Moving Average Cost
1.) FIFO
Date Unit Unit Cost Total Cost
Sept 1 23,00 HK$970,00 HK$22.310,00
Sept 12 45,00 HK$1.020,00 HK$45.900,00
Sept 19 20,00 HK$1.040,00 HK$20.800,00
Sept 26 44,00 HK$1.050,00 HK$46.200,00
Total Unit 132,00 HK$135.210,00

Sept 5 12,00 HK$1.990,00 HK$23.880,00

Sept 16 50,00 HK$101.500,00 HK$5.075.000,00
Sept 29 59,00 HK$123.310,00 HK$7.275.290,00
Total Sold 121,00 HK$12.374.170,00
Ending inv 11,00 HK$11.550,00 (1050*11)
CGS FIFO HK$123.660,00 (135210-11550)

2.) Moving-Average Cost

Date Purchase CGS Total Inventory
(23 * 970)
Sept 1
HK$22.310
(12 *970) (11 * 970)
Sept 5
HK$11.640 HK$10.670
(45*1.020) (56*1.010,18) (56570 / 56 = 1010,18)
Sept 12
HK$45.900 HK$56.570
(50*1.010,18) (6*1.010,18)
Sept 16
HK$50.509 HK$ 6.061
(20 *1040) (26*1.033,12) (26861 / 26 = 1033,12)
Sept 19
HK$20.800 HK$26.861 (73061 / 70 = 1043,73)
(44*1050) (70*1.043,73)
Sept 26
HK$46.200 HK$73.061
(59*1.043,73) (11*1.043,73)
Sept 29
HK$61.580 HK$11.481 Ending Inventory
b.) Periodic Perpetual
Ending Inventory FIFO HK$11.550 HK$11.550
Ending Inventory Average HK$11.268 HK$11.481

c.) Fifo gives the same ending inventory value, but average cost give different ending inventory
values

E6-17
a.) Gross Profit Rate of November
November
Cost of Goods Purchased Rs5.000.000,00
Inventory, Beginning of month Rs1.000.000,00
Cost of Goods Available for sale Rs6.000.000,00
Inventory, End of the month Rs1.200.000,00
Cost of Good Sold Rs4.800.000,00
Sales Revenue Rs7.500.000,00
Gross Profit Rs2.700.000,00
Gross Profit Rate 36,00% (2700000/7500000)*%

b.) December
Cost of Goods Purchased Rs6.100.000,00
Inventory, Beginning of month Rs1.200.000,00
Cost of Goods Available for sale Rs7.300.000,00
Inventory, End of the month Rs900.000,00 (7300000-6400000)
Cost of Good Sold Rs6.400.000,00 (10000000-3600000)
Sales Revenue Rs10.000.000,00
Gross Profit Rs3.600.000,00 (36%*10000000)
Gross Profit Rate 36,00%

E6-18
a.)
Net Sales (51000-1000) $50.000,00
Gross profit (40%*50000) $20.000,00
Cost of Good Sold (50000-20000) $30.000,00
Beginning Inventory $20.000,00
Cost of Good Purchased (31200-1800+1200) $30.600,00
Cost of Good Available for sale (20000+30600) $50.600,00
Cost of Good Sold (50000-20000) $30.000,00
Estimated cost Merchandisen lost by fire (50600-30000) $20.600,00

b.)
Net Sales (51000-1000) $50.000,00
Gross profit (32%*50000) $16.000,00
Cost of Good Sold (50000-16000) $34.000,00
Beginning Inventory $30.000,00
Cost of Good Purchased (31200-1800+1200) $30.600,00
Cost of Good Available for sale (30000+30600) $60.600,00
Cost of Good Sold (50000-16000) $34.000,00
Estimated cost Merchandisen lost by fire (50600-30000) $26.600,00

E6-19
Women's shoes Men's shoes
Cost Retail Cost Retail
Beginning Inventory $36.500,00 $46.000,00 $45.000,00 $60.000,00
Cost of Good Purchased $148.000,00 $179.000,00 $136.300,00 $185.000,00
Good Available for sale $184.500,00 $225.000,00 $181.300,00 $245.000,00
Net Sales $178.000,00 $185.000,00
Ending Inventory Retail $47.000,00 $60.000,00
Cost to retail Ratio (184500/178000)% = 82% (181300/60000)% = 74%

E6-20
Units Cost Total Cost
Inventory 200,00 $5,00 $1.000,00
Purchases 300,00 $6,00 $1.800,00
Purchases 500,00 $7,00 $3.500,00
Total Unit 1.000,00 $6.300,00
Sold 840,00 (500+300+40)
Ending inv 160,00 $800,00 (160*5)
CGS LIFO $5.500,00 (6300-800)

E6-21
Units Total Cost Unit Cost
Inventory 100,00 $10.000,00 $100,00
Purchases 200,00 $26.000,00 $130,00
Total Unit 300,00 $36.000,00
Sold 225,00
Ending inv 75,00 $7.500,00 (75*100)
CGS LIFO $28.500,00 (36000-7500)

b.) Given that earlier lower costs are matched with revenues, using FIFO would increase net
income.

c.) The application of FIFO would cause inventories in the statement of financial position to
approximate current cost.
d.) Givens would pay less in taxes in the first year if average-cost accounting was used, as their
taxable income would be reduced.
 PROBLEM SET A
Number 1
Transaction in Lira
(a) The goods should not be included in inventory as they were shipped
FOB shipping point and shipped February 26. Title to the goods
transfers to the customer February 26. Anatolia should have recorded
the transaction in the Sales Revenue and Accounts Receivable
accounts.
(b) The amount should not be included in inventory as they were shipped
FOB destination and not received until March 2. The seller still owns
the inventory. No entry is recorded.
(c) Include $620 in inventory.
(d) Include $400 in inventory.
(e) $750 should be included in inventory as the goods were shipped FOB
shipping point.
(f) The sale will be recorded on March 2. The goods should be included
in inventory at the end of February at their cost of $220.
(g) The damaged goods should not be included in inventory. They should
be recorded in a loss account since they are not saleable.

Number 2
Transaction in dollar
A Cost of Good Available to sale
Date Explanation Units Cost Total cost
23-Mar Beginning inventory
1500 7 10500
5-Mar Purchase 3500 8 28000
13-Mar Purchase 4000 9 36000
21-Mar Purchase 2000 10 20000
26-Mar Purchase 2000 11 22000
Total 13000 45 116500

B FIFO Ending Inventory

Date Units Cost Total Cost
26-Mar 2000 11 22000
21-Mar 1000 10 10000
3000 32000

Cost Of Good Sold

CGS Available to sell 116500
Ending Inventory 0
CGS 116500

Proof of CGS
Date Units Cost Total Cost
1-Mar 1500 7 10500
5-Mar 3500 8 28000
 13-Mar 4000 9 36000
21-Mar 1000 10 10000
Total 10000 84500

Avarge cost Ending Invetory

8.961538
Units Cost Total cost
3000 8.961538 26885

Cost of Good Sold

CGS Availeble 116500
Ending iInventory 26885
Total 89615

C FIFO produces the higher inventory amount $32000

Avarage cost produces the higher CGS $89,615

Number 3
Transaction in euro
A CGS Available to sale
Date Explanation Unit Cost Total cost
1-Jan Beginning Inventory400 8 3200
20-Feb Purchase 300 9 2700
5-May Purchase 500 10 5000
18-Aug Purchase 600 11 6600
8-Dec Purchase 200 12 2400
Total 2000 19900

B FIFO
1 Ending Inventory
Date Units Cost Total Cost
8-Dec 200 12 2400
18-Aug 300 11 3300
500 5700

2 CGS
CGS Available to sell
19900
Ending Inv 5700
CGS sold 14200

Proof of CGS
Date Units Cost Total Cost
1-Jan 400 8 3200
20-Feb 300 9 2700
5-May 500 10 5000
 1-Oct 300 11 3300
Total 1500 14200

Avarage cost Ending Inventory

9.95
Unit Unit Cost Total Cost
500 9.95 4975

C 1. Average-cost results in the lower inventory amount for the

statement of financial position, 4,975.
2. FIFO results in the lower cost of goods sold, 14,200

Number 4
Transaction in dollar
RED ROBIN
Condensed Income Statement
For the Year End December 31, 2024

FIFO LIFO
Sales Revenue 865000 865000
CGS
Beginning inv 22800 22800
CGS Purchased 578500 578500
CGS Available 601300 601300
Ending inv 39750 37575
CGS 561550 563725
Gross Profit 303450 301275
Operating exp 147000 147000
Income before tax 156450 154275
Income tax expense (32%) 50064 49368
Net Income 106386 104907

a 39750 b 2.50542
37575

B (1)The FIFO method produces the more meaningful inventory amount

for the statement of financial position because the units are
costed at the most recent purchase prices.
(2) The FIFO method is most likely to approximate actual physical flow
because the oldest goods are usually sold first to minimize spoilage
and obsolescence.
(3) There will be $696 additional cash available under average-cost
because income taxes are $49,368 under average-cost and
$50,064 under FIFO.
Number 5
Transaction in euro
Cost of Goods Available for Sale
Date ExplanationUnit Cost Total Cost
1-Oct Beginning inv 60 24 1440
9-Oct Purchase 120 26 3120
17-Oct Purchase 70 27 1890
25-Oct Purchase 80 28 2240
Total 330 105 8690

Ending inv in units

Units available to sell 330
Sales (10+65+120) 285
Units remaining in ending inv 45

Sales Renenue
Date Unit Unit Cost Total Sales
11-Oct 100 35 3500
22-Oct 65 40 2600
29-Oct 120 40 4800
285 10900

A
FIFO
Ending inv
Date Unit Unit Cost Total Cost
25-Oct 45 28 1260

Cost of Goods Sold

Available to sell 8690
Ending inventory 1260
7430

Gross Provit
Sales Revenue 10900
CGS 7430
Gross Provit 3470

Gross Profit Rate

Goss Profit 3470
31.83%
Net Sale 10900
 Avarage Cost
Weighed Avarage Cost Per Unit
CGS Available
Unit available Total
8690 330 26.3333

Ending inv
Unit Weight ave cost Total
45 26.3333 1185

Cost of Goods Sold

Available to sell 8690
Ending inv 1185
Total 7505

Gross Profit
Sales Revenue 10900
CGS 7505
Total 3395

Gross Provit Rate

Gross Provit 3395
31.15%
Net Sale 10900

B Average-cost produces the lower ending inventory value, gross profit,

and gross profit rate because its cost of goods sold is higher than
FIFO.

Number 6
Transaction in dollar

A 1.
Cost of Goods sold
Date Unit Unit Cost Total cost
25-Mar 150 310 46500
30 350 10500
23-Mar 170 350 59500
230 380 87400
580 203900

Sales Revenue
Date Unit Unit Cost Total Cost
5-Mar 180 600 108000
400 650 260000
total 580 368000
 Gross Profit
Sales Revenue COGS Total
368000 203900 164100

2. To minimize gross profit, Greco Diamonds should sell the diamonds

with the highest cost.

Cost of Goods Sold

Date Unit Cost Total Cost
5-Mar 180 350 63000
25-Mar 350 380 133000
20 350 7000
30 310 9300
Total 580 212300

Sales Revenue
Date Unit Cost Total
5-Mar 180 600 108000
25-Mar 400 650 260000
Total 580 368000

Gross Profit
Sales Revenue COGS Total
368000 212300 155700

B FIFO
Cost of Goods Sold
Date Explanation
Unit Cost Total Cost
1-Mar Beginning inv 150 310 46500
3-Mar Purchase 200 350 70000
10-Mar Purchase 350 380 133000
Total 700 249500

Unit Cost Total Cost

Goods Available to sell 700
Unit sold 580
Ending inv 120 380 45600
Goods Available to sell 249500
Ending inv 45600
203900

Gross Provit
Sales Revenue
COGS Total
368000 203900 164100
C Ave Cost
COGS Available to sale 249500
Ending inv 42771
Total 206729

Gross Profit
Saels Revenue
COGS Available Total
368000 206729 161271

COGS Total UnitTotal

249500 700 356.429

D The choice of inventory method depends on the company’s objectives.

Since the diamonds are marked and coded, the company could use specific
identification. This could, however, result in “earnings management” by
the company because, as shown, it could carefully choose which diamonds
to sell to result in the maximum or minimum income. Employing a cost
flow assumption, such as Average-cost or FIFO, would reduce recordkeeping
costs. FIFO would result in higher income, but Average-cost
would reduce income taxes.

Number 7
Transaction in euro
A FIFO LIFO
Sales Revenue 665000 665000
COGS
Beginning inv 35000 35000
COGS purchased 501000 501000
COGS Avvailable to sell 536000 536000
Ending inv 131000 123690
Cost of good sold 405000 412310
Gross Profit 260000 252690
Opertaing Exp 130000 130000
Income before income tax 130000 122690
Income tax expense (28%) 36400 34353
Net income 93600 88337

€ 131,000.00
€ 4.12
€ 123.69

B Answers to questions:
(1) The FIFO method produces the most meaningful inventory amount
for the statement of financial position because the units are costed
 at the most recent purchase prices.
(2) The FIFO method is most likely to approximate actual physical
flow because the oldest goods are usually sold first to minimize
spoilage and obsolescence.
(3) There will be £2,047 additional cash available under average-cost
because income taxes are £34,353 under average-cost and
£36,400 under FIFO.

Answer in the form of a business letter:

Dear Tudor Ltd.

After preparing a comparative condensed income statement for

2014 with the FIFO method and the average cost method, we have found the following
the following:

The FIFO method results in the most meaningful inventory count

which is most meaningful to the statement of financial position because the units
The FIFO method results in the most meaningful inventory counts for the statement of
financial position because the units are recorded based on the most recent purchase price.
This method is the most
most likely to approximate the actual physical flow because the oldest
oldest items are usually sold first to minimize spoilage and obsolescence.
obsolescence.

There will be £2,047 of additional cash available under average cost

due to income tax of £34,353 under average cost and £36,400 under FIFO.

Sincerely,

Number 8
Transaction in dollar
Date Unit Cost Total
6-Jan 150 40 6000
9-Jan 10 40 400 Return
10-Jan 50 45 2250
30-Jan 160 50 8000
Total 370 15850

FIFO
Date Purchases COGS Balance
1-Jan 2850
4950
2-Jan 2100 2100
 6-Jan 2850 4090
9-Jan 190 4090
1800 3730
10-Jan 360
1030 2700
23-Jan 2600
30-Jan 3740 1650
7430 1650

COGS 7430
Ending inv 1560
Gross Profit 8420

Moving Avarage
Date Purchase COGS Balance
1-Jan 2850
2-Jan 2100 4950
6-Jan 2970 1980
9-Jan 198 2178
1800 3978
10-Jan 360 3618
1064 2554
23-Jan 2600 5154
30-Jan 3748 1406
7548

19.8 21.282
21.503 23.472

COGS 7584
Ending inv 1406
Gross Profit 8266

FIFO LIFO
B Sales 15850 15850
COGS 7430 7584
Gross Profit 8420 8266
Ending inv 1560 1406
In a period of rising costs, the moving-average cost flow assumption
results in the higher cost of goods sold and lower gross profit. FIFO
gives the lower cost of goods sold and higher gross profit.
On the statement of financial position, FIFO gives the higher ending
inventory (representing the most current costs); moving-average gives
the lower ending inventory
Number 9
Transaction in dollar

FIFO
Date Purchase COGS Balance
1-May 1085 1085
4-May 620 465
8-May 1360 1825
1825
12-May
1020
15-May 1110 2130
2130
20-May 510 1620
1620
2t5 may 880 740

Moving Avarge Cost

Date Purchases COGS Balance
1-May 1085 1085
4-May 620 465
8-May 1360 1825
12-May 830 995
15-May 1110
20-May 526 1579
25-May 877 702

B (1) The higher ending inventory is $740 under the FIFO method.
(2) The lower ending inventory is $702 under the moving-average
method.

Number 10
Transaction in Euro

A February
Net Sale 300000
COGS
Beginning inv 4500
Net purchase 197800
Add: Freight in 2900
COGS purchased 200700
COGS Available 205200
Ending inv 25200
COGS 180000
Gross profit 120000
 Gross profit rate 40%

B Net Sale 26000

Less Estimated Gross Profit 104000
Estimated COGS 156000

Beginning Inv 25200

Net Purchased 191000
Add: Freight in 4000
COGS Purchased 195000
COGS Available 220200
Less: Estimated COGS 156000
Estimated Total Cost Ending
Inventory 64200
Less: Inventory not loss 19260
Estimated Inventory Lost in Fire 449490

Number 11
Transation in Dollar
Sorting Goods Jewelry and Cosmetic
Cost Retail Cost Retail
A Beginning inv 47630 74000 39440 62000
Purchases 675000 1066000 741000 1158000
Purchases Returns 26000 40000 12000 20000
Purchase Discount 12630 2440
Freight in 900 14000
GOGS Available to sell 693000 1100000 780000 1200000
Net sell 1010000 1150000
Ending Inventory at retail 90000 50000

Estimated Ending Inv at Cost

Sporting Goods 56700
Jewelry an Cosmetics 32500

Cost to Retail Ratio

Sporting Goods 63%
Jewelry an Cosmetics 65%

B Sporting Goods 51000

Jewelry an Cosmetics 34560

Number 12
Transaction in Euro
Cost of Goods Sold Available For Sale
Date ExplanationUnit Cost Total Cost
1-Oct Beginning inv 60 24 1440
 9-Oct Purchase 120 26 3120
17-Oct Purchase 70 27 1890
25-Oct Purchase 80 28 2240
Total 330 8690

Ending Inv in Units

Units Available to Sell 330
Sales 285
Units Remaining in Ending Inv 45

LIFO Ending Inv

1-Oct 1080
 PROBLEM SET B
Number 1
(a) The sale will be recorded on February 26. The goods (cost, $800) should
be excluded from Banff’s February 28 inventory.
(b) Banff owns the goods once they are shipped on February 26. Include
inventory of $480.
(c) Include $720 in inventory.
(d) Exclude the items from Banff inventory. Title remains with the
consignor.
(e) Title of the goods does not transfer to Banff until March 2. Exclude
this amount from the February 28 inventory.
(f) Title to the goods transferred to the customer on February 28. The $200
cost should be excluded from Banff’s February 28 inventory.

Number 2
Transaction in Euro
A Cost of Goods Available for Sale
Date ExplanationUnits Cost Total Cost
1-Oct Beginning inv 2000 7 14000
3-Oct Purchase 3000 8 24000
9-Oct Purchase 5500 9 49500
19-Oct Purchase 4000 10 40000
25-Oct Purchase 2000 11 22000
Total 16500 149500

B FIFO
1 Ending Inventory
Date Units Cost Total Cost
25-Oct 2000 11 22000
19-Oct 1000 10 10000
total 3000 32000

2 Cost of Goods Sold

COGS Available for sale 149500
Less: Ending Inv 32000
Cost of Goods Sold 117500

Poof of Cost of Goods Sold

Date Units Cost Total Cost
1-Oct 2000 7 14000
3-Oct 3000 8 24000
9-Oct 5500 9 49500
19-Oct 3000 10 30000
total 13500 117500
 Avarage Cost
1 Ending Inventory 2. Cost of Goods Sold
unit Cost Total Cost COGS Available
149500
3000 9.06061 27181.8 Less ending27181.8
inv
COGS Available
122318

C (1) FIFO results in the higher inventory amount for the statement of
financial position, £32,000.
(2) Average-cost results in the higher cost of goods sold, £122,317.

Number 3
Transaction in Dollar
Cost of Goods Available for Sale
A Date ExplanationUnits Cost Total Cost
1-Jan Beginning inv 100 21 2100
15-Mar Purchase 300 24 7200
20-Jun Purchase 200 25 5000
4-Sep Purchase 300 28 8400
2-Dec Purchase 100 30 3000
Total 1000 25700

B FIFO
1 Cost of Goods Available
Date Units Cost Total Cost
2-Dec 100 30 3000
4-Sep 200 28 5600
total 300 8600

2 Cost of Goods Sold

COGS Available for sale 25700
Less: Ending Inv 8600
Cost of Goods Sold 17100

Poof of Cost of Goods Sold

Date Units Cost Total Cost
1-Jan 100 21 2100
15-Mar 300 24 7200
20-Jun 200 25 5000
4-Sep 100 28 2800
total 700 17100

Avarage Cost
1 Ending Inventory 2. Cost of Goods Sold
unit Cost Total Cost COGS Available
25700
300 25.7 7710 Less ending inv7710
COGS Available
17990
C (1) FIFO results in the higher inventory amount, $8,600, as shown in
(b) above.
(2) Average-cost produces the higher cost of goods sold, $17,990 as
shown in (b) above.
Number 4
Transaction in Euro

MUNICH CO
Condense Income Statements
For Year Ended 31 Decemeber 2014

FIFO Ave Cost

Sales Revenue 780000 780000
COGS
Beginning inv 16000 16000
COGS purchased 480500 480500
COGS Avvailable to sell 496500 496500
Ending inv 40500 36690
Cost of good sold 456000 459810
Gross Profit 324000 320190
Opertaing Exp 130000 130000
Income before income tax 194000 190190
Income tax expense (28%) 69840 68468
Net income 124160 121722

40500
2.4458128 Per Unit
36687.192

B (1) The FIFO method produces the more meaningful inventory amount
for the statement of financial position because the units are
costed at the most recent purchase prices.
(2) The FIFO method is more likely to approximate actual physical
flow because the oldest goods are usually sold first to minimize
spoilage and obsolescence.
(3) There will be €1,372 additional cash available under average-cost
because income taxes are €68,468 under average-cost and €69,840
under FIFO.

Number 5
Transaction in Dollar
A Cost of Goods Available for Sale
Date Explanation
Units Cost Total Cost
1-Jun Beginning inv 40 40 1600
4-Jun Purchase 135 43 5805
18-Jun Purchase 55 46 2530
 Purchase Return-10 46 -460
28-Jun Purchase 30 50 1500
Total 250 10975

Ending Inv in Units

Units Available to sell 250
sale 155
Units Remaining in ending inv 95

Sales Renenue
Date Unit Unit Cost Total Sales
10-Jun 110 70 7700
11-Jun -15 70 -1050
25-Jun 60 75 4500
155 11150

FIFO
Ending inv
Date Unit Unit Cost Total Cost
28-Jun 30 50 1500
18-Jun 45 46 2070
4-Jun 20 43 860
95 4430

Cost of Goods Sold

Available to sell 10975
Ending inventory 4430
6545

Gross Provit
Sales Revenue 11150
CGS 6545
Gross Provit 4605

Gross Profit Rate

Goss Profit 4605
41.30%
Net Sale 11150

Average Cost
Weighed Avarage Cost Per Unit
CGS Available
Unit available Total
10975 250 43.9

Ending inventory
 Unit Weight ave cost Total
95 43.9 4170.5

Cost of Goods Sold

Available to sell 10975
Ending inv 4170.5
Total 6804.5

Gross Profit
Sales Revenue 11150
CGS 6804.5
Total 4345.5

Gross Provit Rate

Gross Provit 4345.5
38.97%
Net Sale 11150

B In this period of rising prices, average-cost gives the higher cost of

goods sold and the lower gross profit. FIFO gives the lower cost of
goods sold and the higher gross profit

Number 6
Transaction in Dollar

GAS GUZZLERS
Income Statement (partial)
For the Year Ended December 31, 2014

Specific Identification
FIFO Ave cost
Sales Revenue a 9185 9185 9185
Beginning inv 1320 1320 1320
Purchase b 6505 6505 6505
COGS
For Sale 7825 7825 7825
Ending Inv c 2500 2720 2450
Cost of Good Sold 5325 5105 5375
Gross Profit 3860 4080 3810

a 9185
b 650500
Specific Identification Ending Inventory
Beginnign inventory 650 60 39000
3-Mar Purchase 550 65 35750
10-Mar Purchase 1100 72 79200
20-Mar Purchase 1200 80 96000
 3500 249950

FIFO Ending Inventory Consist of

20-Mar Purchase 2500 80 200000
10-Mar Purchase 1000 72 72000
3500 272000

Avarge Cost Ending Inventory Consist of

3500 70 245000
Weight Avarage Cost per Liter
0.69866

B Companies can choose a cost flow method that produces the highest
possible cost of goods sold and lowest gross profit to justify price
increases. In this example, Average-cost produces the lowest gross
profit and best support to increase selling prices

Number 7
Transaction in Britania Pund sterling
AAR CO
Condense Income Statements
For Year Ended 31 Decemeber 2014

FIFO Ave Cost

Sales Revenue 40000 40000
COGS
Beginning inv 47000 47000
COGS purchased 532000 532000
COGS Avvailable to sell 579000 579000
Ending inv 140000 131600
Cost of good sold 439000 447400
Gross Profit 301000 292600
Opertaing Exp 140000 140000
Income before income tax 161000 152600
Income tax expense (28%) 51520 48832
Net income 109480 103768

140000
5.2636364 Per Unit
131590.91

B (1) The FIFO method produces the more meaningful inventory

amount for the statement of financial position because the units
are costed at the most recent purchase prices.
 (2) The FIFO method is more likely to approximate actual physical flow
because the oldest goods are usually sold first to minimize spoilage
and obsolescence.
(3) There will be CHF2,688 additional cash available under averagecost
because income taxes are CHF48,832 under average-cost and
CHF51,520 under FIFO.

Number 8
Transaction in Dollar
A Sales
Date Unit Cost Total Cost
8-Jan 110 28 3080
10-Jan -10 28 -280
20-Jan 80 30 2400
180 5200

FIFO
Date Purchases COGS Balance
1-Jan 1400
2550
5-Jan 2550 1400
2550
8-Jan 1400 2380
170
10-Jan -170 2550
2550
15-Jan 1045 1045
2550
16-Jan -95 2550
950
20-Jan 1360 1190
950
660
2760
COGS 2760
Ending Inv 2800
Gross Provit 2600

Moving Avarage
Date Purchase COGS Balance
1-Jan 1400
5-Jan 2550 3950
8-Jan 1738 2212
10-Jan -158 2370
15-Jan 1045 3415
16-Jan 95 3320
 20-Jan 1328 1192
25-Jan 660 2652
2908

15.8 16.6
16.659 17.68
COGS 2908
Ending inv 2652
Gross Profit 2452

B FIFO Ave Cost

Sales 5360 5360
COGS 2760 2908
Gross Profit 2600 2452
Ending inv 2800 2652

In a period of rising costs, the moving-average cost flow assumption

results in the higher cost of goods sold and lower gross profit. FIFO gives
the lower cost of goods sold and higher gross profit.
On the statement of financial position, FIFO gives the higher ending
inventory (representing the most current costs); and moving-average cost
results in the lower ending inventory

Number 9
Transaction Hongkong Dollar
FIFO
Date Purchase COGS Balance
1-Jul 600 600
6-Jul 360 240
11-Jul 816 240
816
14-Jul 240 544
272 544
21-Jul 1176 544
1176
27-Jul 544 882
294 882

Moving Avarge Cost

Date Purchases COGS Balance
1-Jul 600 600
6-Jul 360 240
11-Jul 816 1056
14-Jul 528 528
21-Jul 1176 1704
27-Jul 852 852
 132
142

B The higher ending inventory is HK$882 under the FIFO method

Number 10
Transaction in Dollar
A November
Net Sale 600000
COGS
Beginning inv 30000
Purchase 368000
Purchase Return 13300
Discount 8500
Add: Freighr in 4800
COGS purchased 351000
COGS Available 381000
Ending inv 33000
COGS 348000
Gross profit 252000
Gross profit rate 42%

B Net Sale 700000

Less Estimated Gross Profit 294000
Estimated COGS 406000

Beginning Inv 33000

Purchased 420000
Less: Purchased Returns and allowences 14900
Purchased Discount 9500 24400
Net Purchased 395600
Freight in 5900
COGS Purchased 401500
COGS Available 434500
Less: Estimated COGS 406000
Estimated Inventory Lost in Fire 28500
Number 11
Transaction in Euro
A Hardcovers Paperbacks
Cost Retail Cost Retail
Beginning inv 420000 700000 280000 360000
Purchases 2094000 3200000 1155000 1540000
Freight-in 26000 12000
Purchase discount -44000 -22000
Goods Available for Sale 2496000 3900000 1425000 1900000
Net sale 3100000 1570000
Ending inv at Retail 800000 330000

Cost Retail Ratio

Hardcovers 0.64 64%
Paperbacks 0.75 75%
Estimated Ending Inventory
Hardcovers 512000
Ppaperbacks 247500

B Hardcovers 513500
Paperbacks 257950

Number 12
Transaction in Dollar
Cost of Goods Sold Available For Sale
Date Explanation
Unit Cost Total Cost
1-Jun Beginning inv 40 40 1600
4-Jun Purchase 135 43 5805
18-Jun Purchase 55 46 2530
Return -10 46 -460
28-Jun Purchase 30 50 1500
Total 250 10975

Ending Inv in Units

Units Available to Sell 250
Sales 155
Units Remaining in Ending Inv 95

LIFO Ending Inv

Date Unit Cost Total Cost
1-Jun 40 40 1600
4-Jun 55 43 2365
95 3965
COMPHERENSIVE PROBLEM

CP6
Transaction With Dolar
a.) DATE TRANSACTION
DEBIT CREDIT
3-Dec Inventory 2,880 (4,000*$0.72)
Acc Payable 2,880
5-Dec AR 4,048 (4,400*$0.92)
Sales Revenue 4,048
CGS 2,985
Inventory 2,985 (3,000*$0.65)+(1,400*$0.72)
7-Dec Sales Returns 184
and Allowances
AR 184
Inventory 144
CGS 144
17-Dec Inventory 1,716 (2,200*$0.78)
Cash 1,716
22-Dec Acc Receivable
1,900 (2,000*$0.95)
Sales Revenue 1,900
CGS 1,440 (2,000*$0.72)
Inventory 1,440
31-Dec Salaries and Wages
400 Expense
Salaries and Wages Payable 400
Depreciation Expense
200
Acc Dep-Equipment 200

Total 15897 15897

b.) CASH ACCOUNTS RECEIVABLE

DEBIT CREDIT DEBIT CREDIT
Balances 4,650 1,716 Balances 3,900 184
4,048
1,900

Total 4650 1716 Total 9848 184

Balance 2934 Balance 9664
 INVENTORY EQUIPMENT
DEBIT CREDIT DEBIT CREDIT
Balances 1,950 2,958 Balances 21,000
2,880 1,440
144
1,716

Total 6690 4398 Total 21000 0

Balance 2292 Balance 21000

ACCOUNTS PAYABLE ACC DEP-EQUIPMENT

DEBIT CREDIT DEBIT CREDIT
Balances 3,000 Balances 1,500
2,880 200

Total 0 5880 Total 0 1700

Balance 5880 Balance 1700
SALARIES AND WAGES PAY SHARE CAPITAL-ORDINARY
DEBIT CREDIT DEBIT CREDIT
Balances 400 Balances 20,000

Total 0 400 Total 0 20000

Balance 400 Balance 20000

SALES REVENUE RE
DEBIT CREDIT DEBIT CREDIT
Balances 4,048 Balances 7,000
1,900

Total 0 5948 Total 0 7000

Balance 5948 Balance 7000
 CGS SALARIES AND WAGES EXP
DEBIT CREDIT DEBIT CREDIT
Balances 2,958 144 Balances 400
1,440

Total 4398 144 Total 400 0

Balance 4254 Balance 400
SALES RETURNS AND
DEPRECIATION EXP ALLOWANCES
DEBIT CREDIT DEBIT CREDIT
Balances 200 Balances 184

Total 200 0 Total 184 0

Balance 200 Balance 184
c.) Seattle Company
Adjusted Trial Balance
December 31,2014
DEBIT CREDIT
Cash 2,934
Acc Rec 9,664
Inventory 2,292
Equipment 21,000

Acc Dep-
Equipment 1,700
AP 5,880

Salaries
and Wages
Payable 400
Share
capital-
ordinary 20,000
RE 7,000
Sales Rev 5,948

Sales
Returns
and
allowances 184
CGS 4,254

Saleries
and Wages
Exp 400
Dep Exp 200
Total 40928 40928
d.) Seattle Company
Income Statement
For the Month Ending December 31, 2014
DEBIT CREDIT
Sales sales
Less: Revenue
Return and 5948
allowances 184
Net sales 5764
CGS 4254
Gross
Profit 1510
Operating
Expenses
Salaries and Wages Expense 400
Dep Exp 200 600
Net
income 910

Seattle Company
Statement of Financial Position
Dec 31,2014
(in thousands)
Asset
Property
Equiptment 21000
Accum Dep (Equiptment) 1700 19300
Current Asset
Inventory 2292
Accounts Receivable 9664
Cash 2934 14890
Total Assets 34190

Equity & Liabilities

Equity
Share Capital 20000
Retained Earning 7910 27910
Current Liabilities
Accounts Payable 5880
Salaries & Wages Payable 400 6280
Total Equity & Liabilites 34190
CCC6
a.)
CGS AVAILABLE FOR SALE
Date Explanation Units Unit Cost Total Cost
1-Feb Beginning Inv 3 595 1,785
2-Feb Purchase 2 600 1,200
2-Mar Purchase 1 618 618
1-Apr Purchase 2 612 1,224
4-May Purchase 3 625 1,875
Total 11 6702

FIFO
Ending Inventory Cost of Goods Sold
Unit Total
Date Units Cost of Goods Sold
Cost Cost
4-May 3 625 1,875 Available for sale 6,702
1-Apr 1 612 612 Ending Inventory 2,487
4 2487 Cost of Goods Sold 6,702

Gross Profit Gross Profit Rate

Sales 8050 3835 47.64%
Cost of goods sold 4215 8050
Gross Profit 3835

AVERAGE COST
Ending Inventory Cost of Goods Sold
6,702/11 = 609.273 Cost of Goods Sold
Available for sale 6,702
Total
Units Unit Cost
Cost Ending Inventory 2,437
4 609.273 2,437 Cost of Goods Sold 4,265

Gross Profit Gross Profit Rate

Sales 8,050 3,785 47.64%
Cost of goods sold 4,264 8,050
Gross Profit 3,786
CRITICAL THINGKING

BYP 6-4
(a)
1 Sales January1-March 31 180,000
Cash sales 4/1-4/10 (20,500*40%) 8,200
Acknowledged credit sales 4/1–4/10 37,000
Sales made but unacknowledged 5,600
Sales as of April 10 230,800

2 Purchases January 1–March 31 94,000

Cash purchases 4/1–4/10 4,200
Credit purchases 4/1–4/10 12,400
Less: Items in transit 1,900 10,500
Purchases as of April 10 108,700

(b) 2013 2012

Net Sales 600,000 480,000
Cost of Goods Sold
Inventory, january 1 60,000 40,000
CGS Purchased 404,000 346,400
CGS Available for sale 464,000 386,400
Inventory, dec-31 80,000 60,000
CGS 384,000 326,400
Gross profit 216,000 153,600
Gross profit rate 36% 32%
Average gross profit rate 34%

(C) Sales from (a) (1) 230,800

Less: Gross profit ($230,800 X 34%) 78,472
CGS 152,328

Inventory, January 1 80,000

Purchases (from (a) (2)) 108,700
CGS available for sale 188,700
CGS 152,328
Estimated inventory at time of fire 36,372
Less: Inventory salvaged 17,000
Estimated inventory loss 19,372
C.13
CRITICAL THINKING

BYP 13-5

a.) DEL CARPIO COMPANY

Statement of Cash Flows
For the Year Ended January 31, 2014
(in thousands)
Cash flows from operating activities
Net loss -44,000
Dep Exp 75,000
Gain from sale invest -10,000 65,000
Net cash 21,000

Cash flows from investing activities

Sale of investment 85,000
Purchase of investment -75,000
Purchase of fixtures and equipment -320,000
Net Cash -310,000

Cash flows from financing activities

Sale of ordinary shares 405,000
Purchase of treasury shares -15,000
Net cash 390,000
Net increase in cash 101,000
Cash at beginning of period 140,000
Cash at end of period 241,000
Note:
Non-cash investing and financing 25,500

Computation of net income (loss)

Sales of merchandise 350,000
Interest revenue 6,000
Gain on sale of investment
($85,000 – $75,000) 10,000
Total revenues and gains 366,000
Merchandise purchased 245,000
Operating expenses
($160,000 – $75,000) 85,000
Depreciation 75,000
Interest expense 5,000
Total expenses 410,000
Net loss -44,000
 Comprehensive Problem
CP6
e.) Compute ending inventory and cost of goods sold under FIFO, assuming Seattle
Company uses the periodic inventory system.
Answer:
Use FIFO Method
Units Unit Cost CGS
Available
for sale
Beg. inventory 3,000 $0.65 $1,950
Dec. 3 purchase 4,000 $0.72 2,880
Dec.17 purchase 2,200 $0.78 1,716
Total 9,200 $6,546

Ending Inventory CGS

Dec. 17 2,200*$0.78 $1,716 CGS available for sale $6,546
Dec. 3 800*$0.72 576 Less: Ending inventory 2,292
3,000 $2,292 CGS $4,254

*(9,200-4,400+200-2,200)-2,200

f.) Compute ending inventory and cost of goods sold under average-cost, assuming
Seattle Company uses the periodic inventory system.
Answer:
Use Average Cost Method
$6,546
Weighted-average cost per unit 9,200 𝑢𝑛𝑖𝑡𝑠 = $0.712 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡𝑠

Ending CGS
Inventory
3,000*$0.721 $2,136 CGS available for sale $6,546
Less: Ending inventory 2,136
CGS $4,410
 Critical Thinking

BYP 6-1 Financial Reporting Problem: Samsung Electronics Co., Ltd.

a) What did Samsung report for the amount of inventories in its consolidated statement
of financial position at December 31, 2010? At December 31, 2009?

Based on the consolidated statement of financial

https://images.samsung.com/is/content/samsung/assets/global/ir/docs/SECAR2010_E
ng_Final.pdf

The inventories in December 31-2010 = W13,364,524 million

The inventories in December 31-2009 = W9,839,329 million

b) Compute the Korean won amount of change and the percentage change in inventories
between 2009 and 2010. Compute inventory as a percentage of current assets at
December 31, 2010!
Answer:

To compute the Won change and percentage change in inventories

between 2009 and 2010:
• Won Change (W13,364,524 million - W9,839,329 million = W3,525,195 million
increase)
• Percentage Change (W3,525,195 ÷ W9,839,329 = 35.8% increase)

2010 inventory as a percent of current assets (W13,364,524 ÷ W61,402,589 = 21.8%)

c) How does Samsung value its inventories? Which inventory cost fl ow method does
Samsung use? (See Notes to the Consolidated Financial Statements.)
Answer:

In the Notes to the Consolidated Financial Statements, Samsung should provide

information on how they value their inventories and which inventory cost flow
method they use, such as First-In, First-Out (FIFO), Last-In, First-Out (LIFO), or
weighted average cost.

d) What is the cost of sales (cost of goods sold) reported by Samsung for 2010 and
2009? Compute the percentage of cost of sales to net sales in 2010!
Answer:
Samsung (in 2010 2009
millions)
CGS W102,666,824 W94,594,863
 2010 cost of goods sold as a percent of sales (W102,666,824 ÷ W154,630,328 =
66.4%)

BYP 6-2 Comparative Analysis Problem: Nestlé S.A. vs. Zetar plc
a.) Based on the information contained in these fi nancial statements, compute the
following ratios for each company for the most recent year shown.
(1) Inventory turnover ratio. (Round to one decimal.)
(2) Days in inventory. (Round to nearest day.)
Answer:
(1) Inventory turnover ratio.
𝐶𝐻𝐹 7,925+𝐶𝐻𝐹7,732
Nestle: CHF 45,849 ÷ = 5.9 𝑇𝑖𝑚𝑒𝑠
2
£16,453+£16,039
Zetar: £107,677 = 6.6 𝑇𝑖𝑚𝑒𝑠
2

(2) Days in inventory.

Nestle: 365 ÷ 5.9 = 62 days
Zetar: 365 ÷ 6.6 = 55 day

b.) What conclusions concerning the management of the inventory can you draw from
these data?
Answer:
The conclusion regarding inventory management is that Zetar's turnover of 6.6 times
is around 12% higher than Nestlé's 5.9 times, resulting in a number of days in
inventory of 55 versus 62. Thus, Zetar's inventory control is much more effective.

BYP 6-3 Real-World Focus

a.) At Cisco’s fi scal year-end, what was the inventory on the balance sheet (statement of
financial position)?
Answer:

$1,486,000,000, as of July 30, 2011.

b.) How has this changed from the previous fi scal year-end?
Answer:

$1,486,000,000 – $1,327,000,000 = $159,000,000 increase.

c.) How much of the inventory was fi nished goods?

Answer:

64.7% ($962 ÷ $1,486).

d.) What inventory method does Cisco use?

Answer:

Lower of cost or market using standard cost, which approximates FIFO.

BYP 6-5 Communication Activity

a.) You conclude that Kathy is incorrect. Write a brief, tactful memo to Kathy, clarifying
the situation.
Answer:

Subject: Clarification on the 2013 Financial Statements Error

Dear Kathy Mcdonnell, President

I hope this message finds you well. I wanted to address the issue regarding the error
found in the 2013 financial statements, which you mentioned to me recently. After
carefully reviewing the situation, I must respectfully disagree with your assumption
that the error has been corrected and that there is no need for further concern.

Upon further investigation, it has come to my attention that the 2013 ending inventory
was indeed overstated by $1 million. While it is true that the 2014 ending inventory
appears to be correct, it does not necessarily imply that the 2014 income is accurate.
The overstatement in the 2013 ending inventory could have had a cascading effect on
subsequent financial statements, potentially impacting the 2014 income as well.

It is crucial for us to address this issue promptly and accurately. Overstating the
ending inventory in 2013 could have distorted the financial position and performance
of Classic Toys Inc. for that year, as well as subsequent years. It is essential that we
rectify this error to ensure the accuracy and reliability of our financial statements.

I kindly request your cooperation in revisiting the 2014 income statement to verify its
accuracy in light of the 2013 inventory error. Additionally, I recommend that we
conduct a thorough review of the financial statements for the affected years to identify
any other potential discrepancies that may have arisen as a result of the 2013 error.

Please understand that my intention is not to dwell on past mistakes, but rather to
ensure the integrity of our financial reporting moving forward. By addressing this
issue promptly and transparently, we can maintain the trust of our stakeholders and
make informed decisions based on accurate financial information.

Thank you for your attention to this matter. I am available to discuss this further and
provide any assistance necessary to resolve the situation.

Best regards,

[Student]

BYP 6-6 Ethics Case

a.) What is the effect of this transaction on this year’s, and next year’s income statement
and income tax expense? Why?
Answer:
 The effect of this transaction on this year's income statement would be a significant
increase in the CGS due to the large purchase of inventory at the doubled price. This
would result in a decrease in net income for the current year. As a result, the income
tax expense for the current year would also decrease, as it is calculated based on the
net income. Next year, when the corporate tax rate is scheduled to decline
significantly, the effect on the income statement would depend on the timing of the
sale of the inventory. If the inventory is sold at a price higher than its cost, it would
result in higher revenue and potentially higher net income for the next year. However,
the income tax expense for the next year would be lower due to the lower tax rate.

b.) If Paeth Wholesale had been using the FIFO method of inventory costing, would the
president give the same directive?
Answer:

If Paeth Wholesale had been using the FIFO method of inventory costing, the
president may not give the same directive. Under FIFO, the CGS is calculated based
on the cost of the oldest inventory first. In this case, the large purchase of inventory at
the doubled price would not impact the CGS for the current year, as it would be based
on the older, lower-cost inventory. Therefore, the president may not see the same
opportunity to lower the current year's net income and take advantage of the changing
income tax rate.

c.) Should the plant accountant order the inventory purchase to lower income? What are
the ethical implications of this order?
Answer:

The accountant should not order the inventory purely for the purpose of manipulating
net income and taking advantage of the changing income tax rate. Such actions would
be considered unethical and potentially illegal. The primary purpose of ordering
inventory should be to meet the company's operational needs and maintain
appropriate inventory levels.
 GAAP EXERCISES
GAAP6-1
Similarities:
a. The definitions of inventory are essentially the same
b. Provide similar guidelines regarding who owns the goods, goods in transit, consigned
goods, and the costs to include in inventory
c. Specific identification cost flow assumption can be used when appropriate
Difference:
a. While IFRS prohibits its use, GAAP permits the use of LIFO for inventory valuation.
The only two reasonable cost flow assumptions allowed by IFRS are FIFO and average
cost.
b. The lower-of-cost-or-market test for valuing inventory market is defined by IFRS as
net realizable value. In contrast, GAAP defines the market as replacement cost.
c. Inventory write-downs under GAAP: The new basis is now regarded as the inventory's
cost if the inventory is written down using the lower-of-cost or market valuation
method. Consequently, in a later period, the inventory might not be written down to its
initial cost. According to IFRS, the write-down can be undone in a later period up to
the amount of the write-down in question. The income statement should include
information about the write-down as well as any reversal that occurs later.
d. Under IFRS, the standards for inventory accounting and reporting are more grounded
in principles. In addition, GAAP offers more thorough instructions for inventory
accounting.
GAAP6-2
Inventory turnover ratio = CGS : Average Inventory = 578 : 154 = 3,78
Days = 365 : 3,78 = +- 97 days
If the company uses the LIFO cost flow assumption, which is prohibited under IFRS,
difficulties in comparison to a business using GAAP may occur. Since LIFO assumes more
recently purchased items are sold first, it typically results in a lower inventory balance reported
on the balance sheet during periods of rising prices. Higher inventory turnover ratios will be
reported by the GAAP company as a result. To enable a "apples to apples" comparison, the
LIFO reserve can be utilized to convert the reported LIFO numbers to FIFO.
GAAP6-3
Item No. Cost Market Lower-Cost-of
Market
AB $1700 $1400 $1400
TRX $2200 $2300 $2200
NWA $7800 $7100 $7100
SGH $3000 $3700 $3000
Total $14700 $14500 $13700
GAAP6-4
a. Balance sheet
Inventories: 2010 2009
Finished goods and work in
progress $36935 $35570

b. Dollar amount of change = 36935 – 33570 = $1365

36935−35570
Percent change in inventory 2009-2010 = × 100 = 3,8%
35570
36935
Inventory percent in 2010 = 35570 × 100 = 15,5%
c. Product CGS 2010 = $348313
Product CGS 2009 = $318645
Product CGS 2008 = $333314
348313
Product CGS percent for 2010 = 517149 × 100 = 67,4%
 QUESTION CHAPTER 13
1. (a). The statement of cash flows is a financial statement that reports the cash receipts, cash
payments, and net change in cash resulting from the operating, investing, and financing
activities of a company during a period.
(b). I disagree. A statement of cash flows is required. It is the fourth basic financial
statement. This statement enables the company's management to track changes in the cash
or fund balances by categorizing them into different sections, namely operating, investing,
and financing activities.
2. The statement of cash flows answers the following questions about cash:
• Where did the cash come from during the period?
• What was the cash used for during the period?
• What was the change in the cash balance during the period?
3. The three types of activities are:
• Operating activities include the cash effects of transactions that create revenues
and expenses and thus enter the determination of net income. These activities
relate to the daily operations of a company.
• Investing activities include: (a) acquiring and disposing of investments and
property, plant, and equipment and (b) lending money and collecting loans. Cash
flow from investing activities is recorded when the company spends or receive
money.
• Financing activities include: (a) obtaining cash from issuing debt and repaying
amounts borrowed and (b) obtaining cash from shareholders, repurchasing shares,
and paying dividends. Cash flow from financing activities is recorded when a
company raises or pays back capital.
4. (a). Major inflows of cash in a statement of cash flows include:
• Cash from operations.
• Issuance of debt.
• Collection of loans.
• Issuance of ordinary shares.
• Sale of investments.
• The sale of property, plants, and equipment.
(b). Major outflows of cash include:
• Purchase of inventory.
• Payment of wages and other operating expenses.
• Payment of cash dividends.
• Redemption of debt.
• Purchase of investments.
• Making loans.
• Redemption of ordinary shares.
• The purchase of property, plant, and equipment.
5. The statement of cash flows presents investing and financing activities so that even non-
cash transactions of an investing and financing nature are disclosed in the financial
statements. If they affect financial conditions significantly, the IASB requires that they be
disclosed in either a separate note or supplementary schedule to the financial statements.
6. Three examples of significant non-cash transactions:
• Exchanges of plant assets.
• Issuance of ordinary shares for assets.
• Payment of interest on notes payable.
7. It is necessary to use comparative statements of financial position, a current income
statement, and certain transaction data all provide information necessary for preparation
of the statement of cash flows. Comparative statements of financial position indicate how
assets, liabilities, and equities have changed during the period. A current income
statement provides information about the amount of cash provided or used by operations.
Certain transactions provide additional detailed information needed to determine how
cash was provided or used during the period.
8. Both the direct and indirect methods are acceptable for preparing the statement of cash
flows, according to the International Accounting Standards Board (IASB), but the IASB
expressed a preference for the direct method. Yet, the indirect method is the
overwhelming favorite of companies. The advantage of the direct method is that it
presents the major categories of cash receipts and cash payments in a format that is like
the income statement and familiar to statement users. Its principal disadvantage is that the
necessary data can be expensive and time-consuming to accumulate. The advantage of
the indirect method is it is often considered easier to prepare, and it focuses on the
differences between net income and net cash provided by operating activities. It also
tends to reveal less company information to competitors. Its primary disadvantage is the
difficulty in understanding the adjustments that comprise the reconciliation.
9. When total cash inflows exceed total cash outflows, the excess is identified as a “net
increase in cash” near the bottom of the statement of cash flows. This excess cash flow
can be used for various purposes, such as reinvestment, expansion, or distribution to
shareholders. The identification of excess cash flow is essential for effective cash
management and maximizing returns on idle cash.
10. The indirect method involves converting accrual net income to net cash provided by
operating activities. This is done by starting with accrual net income and adding or
subtracting non-cash items included in net income. The indirect method is simpler than
the direct method to prepare because most companies keep their records on an accrual
basis. However, it requires adjustments to net income to arrive at the cash flow from
operating activities. Examples of adjustments include depreciation and other non-cash
expenses, gains, and losses on the sale of non-current assets, and changes in the balances
of current asset and current liability accounts from one period to the next.
11. It is necessary to convert accrual-based net income to cash-basis income because the
unadjusted net income includes items that do not provide or use cash. An example would
be an increase in accounts receivable. If accounts receivable increased during the period,
revenues reported on an accrual basis would be higher than the actual cash revenues
 received. Thus, accrual-basis net income must be adjusted to reflect the net cash provided
by operating activities. conversion is necessary to reconcile the difference between the
timing of revenue and expense recognition under accrual accounting and the actual cash
inflows and outflows.
12. The increase in cash despite a net loss can occur due to various reasons probably because
of high cash revenues relative to low cash expenses, sales of property, plant, and
equipment, sales of investments, issuance of debt or ordinary shares, differences between
cash and accrual accounting. It is important to note that cash flow is different from net
income and understanding a company’s cash situation is crucial to making sound business
decisions.
13. The five items that are adjustments to convert net income to net cash provided by
operating activities under the indirect method are:
• Depreciation, depletion, or amortization of assets, which should be added back to
net income.
• Gains on the sale of plant assets, which should be subtracted from net income.
• Losses on the sale of plant assets, which should be added back to net income.
• Increase in current assets, which should be subtracted from net income.
• Decrease in current liabilities, which should be added back to net income.
14. Depreciation expense is reported in a statement prepared using the indirect method
because, under this method, net income is used as a starting point for measuring cash
flows from operating activities. Since depreciation expense is a non-cash expense, it is
added back to net income to determine the cash flows from operating activities. Under
the indirect method, depreciation is added back to net income to reconcile net income to
net cash provided by operating activities because depreciation is an expense but not a
cash payment.
15. The statement of cash flows is useful because it provides information to the investors,
creditors, and other users about:
• the company’s ability to generate future cash flows.
• the company’s ability to pay dividends and meet obligations.
• the reasons for the difference between net income and net cash provided by
operating activities.
• the cash investing and financing transactions during the period.
16. A worksheet is desirable because it allows the accumulation and classification of data that
will appear on the statement of cash flows. It is an optional but efficient device that aids
in the preparation of the statement of cash flows.
17. Describe the direct method for determining net cash provided by operating activities
under the direct approach is the difference between cash revenues and cash expenses. The
direct approach adjusts the revenues and expenses directly to reflect the cash basis. This
results in cash net income, which is equal to “net cash provided (used) by operating
activities.”
18. The formula:
• Cash receipts from customers = Revenues from sales + decreases in accounts
receivable.
 • Cash receipts from customers = Revenues from sales - increases in accounts
receivable.
• Cash payments to suppliers = Purchases + Decreases in accounts payable
• Cash payments to suppliers = Purchases - Increases in accounts payable
19. Data:
Sales revenue NT$2 million.
A/R decreases NT$140,000.
A/P increases NT$300,000.
Cash receipts from customers = Revenues from sales + decreases in accounts receivable.
Cash receipts from customers = NT $2,000,000 + NT$140,000
= NT $2,140,000
20. In the direct method, depreciation expense is not reported in the cash flow from operating
activities section because depreciation is a non-cash expense It is added back to the net
income in the cash flow statement to account for the fact that it does not involve a cash
outflow
BE 13 -1 Activity Financial Statement
(a) Issued bonds for 150,000 Cash inflow from financing activity 150,000
(b) Purchased equipment for 200,000 Cash outflow from investing activity 200,000
(c) Sold land costing 50,000 for 50,000 cash Cash inflow from investing activity 50,000
(d) Declared and paid a 20,000 cash dividend Cash outflow from financing activity 20,000

BE 13-2 Activity Cash Flow

(a) Purchase of equipment Investing Activity
(b) Sale of building Investing Activity
(c) Redemption of bonds Financing Activity
(d) Depreciation Operating Activity
(e) Payment of dividends Investing Activity
(f) Issuance of ordinary shares Investing Activity

BE 13 -3 Cash flows from financing activities

Proceeds from issuance of bonds payable $ 500.000
Payment of dividends $ (60.000)
Net cash provided by financing activities $ 440.000

BE 13 - 4 Net Income € 2.000.000

Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation expense € 160.000
Accounts receivable increase € (350.000)
Accounts payable increase € 280.000
€ 90.000
Net cash provideed by operating activites € 2.090.000

BE 13 -5 Cash flows from operating activities

Net Income $ 250.000
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation expense $ 70.000
Gain on disposal of plant assets $ (12.000)
$ 58.000
Net cash provided by operating activities $ 308.000

BE 13 - 6 Net Income $ 250.000

Adjustments to reconcile net income to net cash provided by operating activities:
Decrease in prepaid expenses $ 28.000
Decrease inventory $ 30.000
Increase in accounts receivable $ (80.000)
$ (22.000)
Net cash provided by operating activities $ 228.000

BE 13 - 7 Original cost of equipment sold $ 22.000

Less: Accumulated depreciation $ 8.500
Book value of equipment sold $ 13.500
Leess: Loss on disposal of plant assets $ 6.500
Cash received from sale of equipment $ 7.000

BE 13 - 8 Free cash flow = $ 155,397,000 - $ 130,820,000 - $ 0

= $ 24.577.000

BE 13 - 9 Free cash flow = 450,000 - 250,000

= £ 200.000,00

BE 13 - 10 Free cash flow = 45,000,000 - 1,400,000

= $ 43.600.000

BE 13 - 11 Free cash flow is cash provided by operating less capital expenditures and cash divideneds paid.
For Russel Ltd. This would be 283,000 ( 643,000 - 280,000 - 80,000). Since it has
positive free cash flow that far exceeds its dividend, an increase in the
dividend might be possible. However, other factors should be considered.
For example, it must have adequate retained earnings, and it should be
convinced that a larger dividend can be sustained over future years. It
should also use the free cash flow to expand its operations or pay down its debt
BE 13 -12 Balance Reconciling Items Balance
Statement of Financial Positions 01/01/2014 Debit Credit 12/31/14
Prepaid Expenses 18.600 6.500 12.100
Accrued Expense Payable 8.200 2.000 10.200

Statement of Cash Flow Effects

Operating Activities
Decrease in prepaid expenses 6.500
Increase in accrued expenses
payable 2.000
8.500

BE 13 -13 + Decrease in accounts receivable

Receipt from customers = Sales Revenue
- Increase in accounts receivable
$ 1,022,679,000 = $ 1,085,307,000 - $ 62,628,000 (Increase in accounts receivable

BE 13 - 14 + Decrease in income taxes payable

Cash Payments for Income Taxes = Income Tax Expense
- Increase in income taxes payable
$ 112,000,000 = $ 360,000,000 - $ 248,000,000*
*525,000,000 - $ 277,000,000 - $ 248,000,000 (Increase in income taxes payable)
+ Increase in prepaid expenses
BE 13 - 15 - Decrease in prepaid expenes
Cash Payments for Operating Expenses = Operating Expenses, including depreciation
+ Decrease in accrued expenses payable
- Increase in accrued expenses payable

€ 58.700 = 70,000 - 6,800 - 4,500

 DO IT! REVIEW

DO IT! 13-1
1. Financing
2. Operating
3. Financing
4. Investing
5. Investing

DO-IT! 13-2
Net Income R$100.000,00
Adjustments to reconcile net income to net
Cash provided by operating activities:
Depreciation expense R$4.000,00
Amortization expense R$3.000,00
Gain on disposal of equipment -R$3.900,00
Decrease in accounts receivable R$6.000,00
Increase in accounts payable R$3.200,00 R$12.300,00 (SUM)
Net cash provided by operating
Activities R$112.300,00 (100000+12300)

DO-IT! 13-3
a.) Free cash flow = Net cash provided by operating + purchase of equipment +
payment for dividends
Free cash flow = $72400 + (-$26000) + (-$18000)
Free cash flow = $72400 - $26000 - $18000
Free cash flow = $28.400

b.) The cash generated by operations does not account for the realization that a business needs
to make investments in new plant assets in order to continue operating at its current level. To
satisfy investors, companies must continue to pay dividends at the current rates. Free cash flow
measurement offers more information about a company's capacity to generate cash.
 EXERCISE

E13-1
a.) Financing activities
b.) Non-cash investing and financing activities
c.) Non-cash and financing activities
d.) Financing activites
e.) Investing activities
f.) Operating activites
g.) Operating activities

E13-2
a.) Operating activity i.) Operating activity
b.) Non-cash investing and j.) Non-cash investing and
financing activity financing
activity
c.) Investing activity k.) Investing activity
d.) Financing activity l.) Non-cash investing and
financing
activity
e.) Operating activity m.) Operating activity and
nvesting
activity
f.) Operating activity n.) Financing activity
g.) Operating activity
h.) Financing activity

E13-3
1.)
a.) Cash €2.000,00
Loss on disposal plant assets €10.000,00
Land €12.000,00
b.) The investing section contains the £10k cash receipt. The operational section's net income is
increased by the loss of £2,000

2.)
a.) Cash €22.000,00
Share Capital €22.000,00
b.) The financing section contains a report on the cash receipt of £22,000.

3.)
a.) Depreciation Expense €14.000,00
Acc dep - Building €14.000,00
b.) In the operating section, depreciation expense (£14,000) is added to net income.

4.)
a.) Salaries and Wage Expense €7.000,00
 Cash €7.000,00
b.) Salaries on the cash flow statement, expenses are not shown separately. It is included in the
net income amount on the statement of cash flows and is part of the computation of net income
in the income statement

5.)
a.) Equipment €9.000,00
Share Capital - ordinary €1.000,00
Share Premium - Ordinary €8.000,00
b.) A note to the financial statements lists the £9,000 purchase of ordinary shares for equipment
as a non-cash financing and investing activity.

6.)
a.) Cash €3.200,00
Acc dep - Equipment €8.000,00
Equipment €10.000,00
Gain on Disposal of Plant Assets €1.200,00
b.)The investing section contains the £3,200 cash receipt. The operating section deducts the
gain of £1,200 from net income.

E13-4
BRACEWELL COMPANY
Statement of Cash Flows
For the Year Ended Decemeber 31, 2014

Cash flows from operating activities

Net income $195.000,00
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation expense $40.000,00
Gain on disposal of plant assets -$5.000,00
Increase in accounts receivable -$15.000,00
Decrease in prepaid expenses $4.000,00
Increase in accounts payable $17.000,00 $41.000,00
Net cash provided by operating activities $236.000,00

E13-5
NASREEN CO.
Statement of Cash Flow
For the Year Ended December 31, 2014

Cash flows from operating activities

Net income €153.000,00
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation expense €24.000,00
 Increase in accounts receivable. -€31.000,00
Decrease in inventory €14.000,00
Increase in prepaid expenses -€2.000,00
Decrease in accounts payable -€10.000,00
Increase in accrued expenses payable €6.000,00 €1.000,00
Net cash provided by operating activities €154.000,00

E13-6
CHAUDRY CO.
Statement of Cash Flow
For the Year Ended December 31, 2014

Cash flows from operating activities

Net income $67.000,00
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation expense $23.000,00
Loss on disposal of plant assets $5.000,00 $28.000,00
Net cash provided by operating activities $95.000,00

Cash flows from investing activities

Construction of equipment -$53.000,00
Purchase of equipment -$70.000,00
Net cash used by operating activities -$123.000,00

Cash flows from financing activities

Payment of cash dividends -$17.000,00
Cost of equipment sold $49.000,00
Accumulated depreciation -$28.000,00
Book value $21.000,00
Loss on disposal of plant assets -$5.000,00
Cash proceeds $16.000,00

E13-7
a.)
MEERA COMPANY
Statement of Cash Flows
For the Year Ended December 31, 2014

Cash flows from operating activities

Net income €22.630,00
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation expense €5.000,00
Loss on disposal of land €1.000,00
 Decrease in accounts receivable. €2.600,00
Decrease in accounts payable -€15.730,00 -€7.130,00
Net cash provided by operating activities €15.500,00

Cash flows from investing activities

Sale of land €5.000,00

Cash flows from financing activities

Issuance of ordinary shares €3.000,00
Payment of dividends -€19.500,00
Net cash used by financing activities €16.500,00

Net increase in cash €4.000,00

Cash at beginning of period €10.700,00
Cash at end of period €14.700,00

b.) Free cash flow = 15500 - 0 - 19500 = -4000

E13-8
SYAL COMPANY
Statement of Cash Flows
For the Year Ended December 31, 2014

Cash flows from operating activities

Net income $103.000,00
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation expense $32.000,00
Increase in accounts receivable -$14.000,00
Decrease in inventory $17.000,00
Decrease in accounts payable -$12.000,00 $23.000,00
Net cash provided by operating activities $126.000,00

Cash flows from investing activities Find the

Sale of land $27.000,00 difference of
2013 and 2014
Purchase of equipment -$60.000,00
(2014-2013),
Net cash used by investing activities -$33.000,00 to get the flow
cas
Cash flows from financing activities
Issuance of ordinary shares $42.000,00
Payment of cash dividends -$45.000,00
Redemption of bonds -$50.000,00
Net cash used by financing activities -$53.000,00

Net increase in cash $40.000,00

Cash at beginning of period $33.000,00
Cash at end of period $73.000,00

E13-9
a.)
CASSANDRA COMPANY
Statement of Cash Flows
For the Year Ended December 31, 2014

Cash flows from operating activities

Net income €18.300,00
Adjustments to reconcile net income to net
cash provided by operating activities:
(14000-10000-
Depreciation expense €5.800,00 1800)
(10000-1800-
Loss on disposal of plant assets €4.700,00 3500)
Increase in accounts receivable -€2.900,00
Increase in accounts payable €3.500,00 €11.100,00
Net cash provided by operating activities €29.400,00

Cash flows from investing activities

Sale of plant assets €3.500,00
Purchase of investments -€4.000,00
Net cash used by investing activities -€500,00

Cash flows from financing activities

Issuance of ordinary shares €5.000,00
Payment of dividends -€14.600,00
Retirement of bonds -€20.000,00
Net cash used by financing activities -€29.600,00

Net decrease in cash -€700,00

Cash at beginning of period €17.700,00
Cash at end of period €17.000,00

b.) Free Cash Flow = 29400 - 0 - 14600 = 14800

E13-10
ERISSA MAGAMBO COMPANY
Worksheet
Statement of Cash Flows
For the Year Ended December 31, 2014

Balance Reconciling Items Balance

Statement of Financial Position Accounts 12/31/13 Debit Credit 12/31/14
Debits

Land $100.000 (e) $25000 $75.000

Equipment $200.000 (f) $50000 $250.000
Inventory $187.000 (b) $70000 $180.000
Accounts receivable $76.000 (a) $9000 $85.000
Cash $22.000 (k) $36000 $58.000
Total $585.000 $648.000

Credits

Share capital - ordinary $164.000 (i) $50000 $214.000

Retained earnings $134.000 (g) $70000 (j) $12000 $184.000
Bonds payable $200.000 (h) $50000 $150.000
Acc dep - equipment $42.000 (d) $24000 $66.000
Accounts payable $45.000 (c) $11000 $34.000
Total $585.000 $648.000

Statement of Cash Flow Effects

Operating activities
Net income (j) $120000
Increase in accounts receivable (a) $9000
Decrease in inventory (b) $7000
Decrease in accounts payable (c) $11000
Depreciation expense (d) $24000
Investing activities
Sale of land (e) $25000
Purchase of equipment (f) $50000
Financing activities
Payment of dividends (g) $70000
Redemption of bonds (h) $50000
Issuance of ordinary shares (i) $50000
Totals $452.000 $416.000
Increase in cash (k) $36000
Totals $452.000 $452.000

E13-11
Revenues R$195.000,00
Deduct: Increase in accounts receivable R$60.000,00 (195000 -
Cash receipts from customers R$135.000,00 60000)
Operating expenses R$78.000,00
Deduct: Increase in accounts payable R$25.000,00 (78000-53000)
Cash payments for operating expenses -R$53.000,00
Net cash provided by operating activities R$82.000,00
E13-12
(Million)
a.)
Cash payments to suppliers
Cost of goods sold $4.527,80
Add: Increase in inventory $17,10
Cost of purchases $4.544,90
Deduct: Increase in accounts payable $139,60
Cash payments to suppliers $4.405,30

b.)
Cash payments for operating expenses
Operating expenses exclusive of depreciation $9.397,60
(10517,6 -
Add: Increase in prepaid expenses $65,30 1120)
Deduct: Increase in accrued expenses payable $190,60 -$125,30
Cash payments for operating expenses $9.272,30

E13-13
Cash flows from operating activities
Cash receipts from
Customers €240.000,00
Dividend revenue €18.000,00
€258.000,00
Less cash payments:
To suppliers €115.000,00
For salaries and wages €57.000,00
For operating expenses €28.000,00
For income taxes €16.000,00
For interest €10.000,00 €226.000,00
Net cash provided by operating activities €32.000,00

E13-14
Cash payments for rent
Rent expense $40.000,00
Add: Increase in prepaid rent. $3.400,00
Cash payments for rent $43.400,00

Cash payments for salaries

Salaries and wages expense $65.000,00
Add: Decrease in salaries payable $2.000,00
Cash payments for salaries $67.000,00

Cash receipts from customers

Sales revenue $170.000,00
Add: Decrease in accounts receivable. $12.000,00
Cash receipts from customers $182.000,00
 Chapter 13 Problem Statement A

Cash Inflow,
SCF Activity
Transaction Outflow or No
Affected
1 effect
Recorded
No Cash flow
A depreciation expense O
effect
on the plant assets.
ecorded and paid
B O Cash Outlow
interest expense
Recorded cash
C proceeds from a sale I Cash Inflow
of plant assets
Acquired land by
No Cash flow
D issuing ordinary NC
effect
shares.
Paid a cash dividend
to Paid a cash
E dividend to F Cash Outlow
preference
shareholders.
Distributed a share
No Cash flow
F dividend to ordinary NC
effect
shareholders
G Recorded cash sales O Cash Inflow
Recorded sales on No Cash flow
H O
account effect
Purchased inventory
O Cash Outlow
I for cash
Purchased inventory No Cash flow
O
J on account effect

2 Transaction in Dollar
a Net income can be determined by analyzing the retained earning acc
Retained earning
250000
beginning of year
Add: Net income 77200
327200
Cash dividend 16000
Share dividend 11200
Retained earning, end
of year 300000

b Cash inflow from the issue of ordinary share was $13800

Share capital ordinary
130000
Share dividend 11200
 Shares issued for cash 13800
155000
Cash outflow for dividends was $16000. Share dividend does not use cash
c Both of the above activities (issue of ordinary shares for cash and
payment of cash dividends) would be classified as financing activities
on the statement of cash flows

3 Transacation in Euro
Toby Zed co
Partial Statement of Cash Flows
For the year ended 30 november 2014

Cash flows from operating activities net income 1450000

Adjusments to reconcile net income
to net cash provided by operating Activities
Depreciation exp 85000
Increase in acc
-200000
receivable
500000
Decrease in inventory
Increase in prepaid
-175000
expenses
Decrease in acc
-340000
payable
Decrease in accured
-105000 -235000
expenses payable
Net cash provided by
1215000
operating activiteis

4 Transaction in Euro
Toby Zed co
Partial Statement of Cash Flows
For the year ended 30 november 2014

Cash flow operating activities

Cash recipt from
7300000
customer
Less cash payment
To supplier 4740000
For operating exp 1345000 6085000
Net cash provided by
1215000
operating activities

1 Cash receipts from customers

sales 7500000
Deduct: Decrease in
200000
inventory
 Cash receipts from
7300000
customers

2 Cash payment to supplier

Cost of good sold 4900000
Deduct: Decrease in
500000
inventory
Cost of purchases 4400000
Add: Decrease in acc
340000
payable
Cash paayment to
4740000
supplier

3 Cash payment for operating expenses

Operating expenses,
exclusive of 1065000
depreciation
Add: Increase in
175000
prepaid expenses
Decrease in accured
105000 280000
exp payable
Cash payment for
1345000
operating expenses

5 Transaction in Dollar
Rattigan Company
Partial Statement of Cash Flows
For the year ended 31 December 2014

Cash flows from operating activities net income 226000

Adjusments to reconcile net income
to net cash provided by operating Activities
Depreciation exp 55000
Loss on disposal of
25000
plant asset
Increase in accounts
-15000
receivable
Increase in account
14000
payable
Increase in income
6000 85000
taxes payable
Net cash provided by
311000
operating activiteis

6 Transaction in Dollar
Rattigan Company
 Partial Statement of Cash Flows
For the year ended 31 December 2014

Cash flows from operating activities

Cash receipt from
customers 955000
Less cash paymet
For opperating
expenses 610000
Income tax 34000 644000
Net cash provided by
operating activities 311000

Computation of cash receipts for

1
customers
service revenue 970000
Deduct: increase in
15000
acc payable
Cash receipts from
955000
customers

Computation of cash payments for

2
operating expenses
Operating expenses 624000
Deduct: increase in
14000
acc payable
Cash payments for
610000
operating expeses

Computation
3 of cash payments for income taxes
Income tax exp 40000
Deduct: increase in
6000
tax payable
Cash payments for
34000
income tax

7 Transaction in Euro
Rajesh Company
Statement of Cash Flows
For the year ended 31 December 2014

a Cash flows from operating activities net income 32000

Adjusments to reconcile net income
to net cash provided by operating Activities
Depreciation exp 13300
 Increase in acc
-19000
receivable
Increase in inventory -10000
Increase in acc
14000
payable
Decrease in tax
-1000 -2700
payable
Net cash provided by
29300
operating activiteis

Cash flows from investing activities

Sale of equipment 9700

Cash flows from financing activities

issuance of ordinary
4000
shares
Redemption of bonds -6000
Payment of dividends -20000
Net cash used by
-22000
financing activities
Net increase in cash 17000
Cash at beginning of
20000
period
Cash at ended pf
37000
period

b 9300

8 Transaction in Euro
Rajesh Company
Statement of Cash Flows
For the year ended 31 December 2014

a Cash flow operating activities

Cash recipt from
223000
customer
Less cash payment
To supplier 171000
For operating exp 10700
For income tax 9000
For interest 3000 193700
Net cash provided by
29300
operating activities

Cash flows from investing activities

Sale of equipment 9700
 Cash flows from financing activities
issuance of ordinary
4000
shares
Redemption of bonds -6000
Payment of dividends -20000
Net cash used by
-22000
financing activities
Net increase in cash 17000
Cash at beginning of
20000
period
Cash at ended pf
37000
period

1 Cash receipts from customers

sales revenue 242000
Deduct: Decrease in
19000
inventory
Cash receipts from
223000
customers

2 Cash payment to supplier

Cost of good sold 175000
Add: Increase in
10000
invemtory
Cost of purchases 185000
Deduct: Increase in
14000
acc payable
Cash paayment to
171000
supplier

3 Cash payment for operating expenses

Operating expenses 24000
Deduct: Depreciation 13300
Cash payment for
10700
operating expenses

Computation
4 of cash payments for income taxes
Income tax exp 8000
Deduct: increase in
1000
tax payable
Cash payments for
9000
income tax

b 9300

9 Transaction in Dollar
SINJH LTD
 Statement of Cash Flows
For the year ended 31 December 2014

Cash flows from operating activities net income 172900

Adjusments to reconcile net income
to net cash provided by operating Activities
Depreciation exp 45000
Gain on disposal by
-5000
opertaing acrivites
Increase in acc
-59800
receivable
Increase in inventory -9650
Increase in prepaid
-3300
expenses
Increase in acc
44700
payable
Decrease in accured
-500 11450
expenses payable
Net cash provided by
184350
operating activiteis

Cash flows from investing activities

Sale of equipment 12500
Purchased of long
-26000
term invesment
Purchased of
-80000
equipment
Net cash provided by
-93500
operating activities

Cash flows from financing activities

Sale of ordinary
45000
shares
Redemption of bonds -40000
Payment of dividends -43900
Net cash used by
-38900
financing activities
Net increase in cash 51950
Cash at beginning of
48400
period
Cash at ended pf
100350
period

10 Transaction in Dollar
SINJH LTD
Statement of Cash Flows
For the year ended 31 December 2014
 Cash flow operating activities
Cash recipt from
332980
customer
Less cash payment
To supplier 100410
For operating exp 16210
For income tax 27280
For interest 4730 148630
Net cash provided by
184350
operating activities

Cash flows from investing activities

Sale of plant asset 12500
Purchased of long
-26000
term invesment
Purchased of plant
-80000
asset
Net cash provided by
-93500
operating activities

Cash flows from financing activities

Sale of ordinary
45000
shares
Redemption of bonds -40000
Payment of dividends -43900
Net cash used by
-38900
financing activities
Net increase in cash 51950
Cash at beginning of
48400
period
Cash at ended pf
100350
period

1 Cash receipts from customers

sales revenue 392780
Deduct: Increase in
59800
acc receiveble
Cash receipts from
332980
customers

2 Cash payment to supplier

Cost of good sold 135460
Add: Increase in
9650
inventory
Cost of purchases 145110
 Deduct: Increase in
44700
acc payable
Cash paayment to
100410
supplier

Cash payment for operating expenses

Operating expenses,
exclusive of 12410
depreciation
Add: Increase in
3300
prepaid expenses
Decrease in accured
500 3800
exp payable
Cash payment for
16210
operating expenses

11 Transaction in Ringgut Dollar

Amaral Reis Company
Statement of Cash Flows
For the year ended 31 December 2014

Cash flows from operating activities net income 45000

Adjusments to reconcile net income
to net cash provided by operating Activities
Depreciation exp 40000
Loss on disposal of
6000
plant asset
Decrease in accounts
18000
receivable
Increase in inventory -12550
Decrease in prepaid
5720
expenses
Increase in acc
6350 63520
payable
Net cash provided by
108520
operating activiteis

Cash flows from investing activities

Sale of land 20000
Sale of equipment 6000
Purchased of
-95000
equipment
Net cash provided by
-69000
operating activities

Cash flows from financing activities

 Payments of cash
-25000
dividends
Net cash used by
-25000
investing activities
Net increase in cash 14250
Cash at beginning
period 45000
Cash at end of period 59250

Note 1
Non-cash investing
and financing
activities exchange 350000
ordinary shares for
land

12 Transaction in Dollar
JHUTTI Company
Worksheet- Statement of Cash Flows
For the year ended 31 December 2014

Balance Recording Items Balance

Statement of financial
31/12/2013 Debit Credit 31/12/2014
position
Debits
Equipment 205000 92000 47000 250000
Invesment 87000 3000 84000
Inventory 102650 19250 121900
Acc receivable 57000 23900 80900
Cash 47250 43050 90300
Total 498900 627100
Credits
Share capital ordinary 200000 40000 240000
Retained earning 121790 80600 133810 175000
Bonds Payable 70000 30000 100000
Acc depretiation 40000 41300 47900 46600
Acc payable 48280 5120 53400
Accured expenses
payable 18830 6730 12100
Total 498900 627100

Statement of cash flow effects

Opperating acctivities
Net income 133810
Increase in acc
receivable 23900
Increase in inventory 19250
 Increase in acc
payable 5120
Decrease in accured
exp payable 6730
Depretiation
expenses 47900
Gain on disposal of
equipment 8550
Investing activities
sale of invesment 3000
sale of equipment 14250
purchase of
equipmest 92000
Financing activities
sale ordinary shares 40000
issuance of bonds 30000
payment divideds 80600
total 580910 537860
Increase in cash 43050
total 580910 580910
 Chapter 13 Problem Statement B

Cash Inflow,
SCF Activity
Transaction Outflow or No
Affected
effect
Recorded depreciation No Cash flow
A O
1 expense on the plant effect
Incurred
assets. a loss on No Cash flow
B dsiposal of plant O
effect
assets
Acquired a building
C I Cash outflow
by paying cash
Made pricipal
D F Cash outflow
repayments on a
E motorgage
Issued ordinary shares F Cash Inflow
Purchased shares of
another company to be
F I Cash outflow
held as a long-term
equity invesment
Paid dividends to
G F Cash Inflow
ordinary shareholders
Sold inventory on
credit. The company No Cash flow
H O
uses a perpetual effect
inventory system
Purchased inventory No Cash flow
I O
on credit effect
Paid wages to
J O Cash outflow
employees

Transaction in Euro
2 a Cash inflow (outflows) related to plant asset 2014
Equipment purchase -90000
Land purchase -30000
Proceeds from
21000
equipment sold

Cost of equipment sold

40000

Accumulated depereciation removed from acc for sale of plant asset

Accumulated depreciation equipment
93000
Plug 12000 64000
145000

Cash proceeds
21000
 Note to instructure some student may find journal entries helpful in under
standing this exercise
Equipment 90000
cash 90000

Land 30000
cash 30000

Cash (plug) 21000

Accumulated
deperciation
equipment 12000
Loss on dispsosal of
plant asset 7000
Equipment 40000

b Equipment purchase Investing acticities (outflow)

Land purchase Investing acticities (outflow)
Proceeds from
Investing acticities (inflow)
equipment sold

3 Transaction in Dollar
Asquith Company
Paartial Statement of Cash Flows
For the year ended 31 December 2014

Cash flows from operating activities net income 880000

Adjusments to reconcile net income
to net cash provided by operating Activities
Depreciation exp 95000
20000
Amortization expenses
Decrease in acc
230000
payable
Increase in inventory -120000
Increase in prepaid
-125000
expnses
Increase in acc
50000
payable
Increasi in accured
155000 305000
expenses payable
Net cash provided by
1185000
operating activiteis

4 Transaction in Dollar
Asquith Company
 Paartial Statement of Cash Flows
For the year ended 31 December 2014

Cash flow operating activities

Cash recipt from
5480000
customer
Less cash payment
To supplier 3380000
For operating exp 915000 4295000
Net cash provided by
1185000
operating activities

1 Cash receipts from customers

sales revenue 5250000
Deduct: Decrease in
230000
inventory
Cash receipts from
5480000
customers

2 Cash payment to supplier

Cost of good sold 3310000
Add: Increase in
120000
inventory
Cost of purchases 3430000
Deduct: increase in
50000
acc payable
Cash paayment to
3380000
supplier

3 Cash payment for operating expenses

Operating expenses 945000
Add: Increase in
125000
prepaid expenses
Deduct: increase in
155000 -30000
accured exp payable
Cash payment for
915000
operating expenses

5 Transaction in Euro
ANNE DROID CO
Paartial Statement of Cash Flows
For the year ended 31 December 2014

Cash flows from operating activities net income 115000

Adjusments to reconcile net income
to net cash provided by operating Activities
Decrease in acc receivable 15000
 Decrease in acc
-11000
payable
Increase in income
8000 12000
taxes payable
Net cash provided by
127000
operating activiteis

6 Transaction in euro
Anne Droid co
Partial Statement of Cash Flows
For the year ended 31 December 2014

Cash flows from operating activities

Cash receipt from
566000
customers
Less cash payment
For opperating
411000
expenses
Income tax 28000 439000
Net cash provided by
127000
operating activities

1 Computation of cash receipts for customers

service revenue 551000
Add: Decrease in acc
15000
payable
Cash receipts from
566000
customers

Computation of cash payments for

2
operating expenses
Operating expenses 400000
Add: Decrease in acc
11000
payable
Cash payments for
411000
operating expeses

3 Income tax expenses 36000

Deduct: increase in
8000
income taxes payable
Cash payments for
28000
income taxes

7 Trasaction in Dollar
Rocastle Co
 Statement of Cash Flows
For the year ended 31 December 2014

a Cash flows from operating activities net income 28000

Adjusments to reconcile net income
to net cash provided by operating Activities
Depreciation exp 6000
Increase in acc
-11000
receivable
Increase in inventory -20000
Increase in acc
-12000
payable
Decrease in tax
4000 -33000
payable
Net cash provided by
-5000
operating activiteis

Cash flows from investing activities

Sale of equipment 12000
-7000
Purchase of equipment
Net cash provided by
5000
investing activities

Cash flows from financing activities

issuance of bonds 10000
Payment of cash
-25000
dividends
Net cash used by
-15000
financing activities
Net decrease in cash -15000
Cash at beginning of
33000
period
Cash at ended pf
18000
period

b -37000

8 Transation in Dollar

Rocastle Company
Statement of Cash Flows
For the year ended 31 December 2014

a Cash flow operating activities

Cash recipt from
275000
customer
 Less cash payment
To supplier 236000
For operating exp 31000
For income tax 7000
For interest 6000 280000
Net cash provided by
-5000
operating activities

Cash flows from investing activities

Sale of equipment 12000
-7000
Purchase of equipment
Net cash provided by
5000
investing activities

Cash flows from financing activities

issuance of bonds 10000
Payment of cash
-25000
dividends
Net cash used by
-15000
financing activities
Net decrease in cash -15000
Cash at beginning of
33000
period
Cash at ended of
18000
period

1 Cash receipts from customers

sales revenue 286000
Deduct: Increase in
11000
inventory
Cash receipts from
275000
customers

2 Cash payment to supplier

Cost of good sold 204000
Add: Increase in
20000
invemtory
Cost of purchases 224000
Add: Decrease in acc
12000
payable
Cash paayment to
212000
supplier

3 Cash payments for income taxes

Income tax exp 10000
 Deduct: increase in tax
4000
payable
Cash payments for
6000
income tax

b 37000

9 Transaction in euoro

Keller Minden Company

Statement of Cash Flows
For the year ended 31 December 2014

Cash flows from operating activities net income 108160

Adjusments to reconcile net income
to net cash provided by operating Activities
Depreciation exp 25000
Loss on disposal by
5000
opertaing acrivites
Increase in acc
-26200
receivable
Increase in inventory -21850
Increase in acc
8320
payable
Decrease in accured
-3730 -13460
expenses payable
Net cash provided by
94700
operating activiteis

Cash flows from investing activities

Sale of invesment 27500
sale of equipment 10000
Purchased of
-149000
equipment
Net cash provided by
-111500
operating activities

Cash flows from financing activities

issuance of bonds 70000
Sale of ordinary cost 50000
Payment of cash
-43000
dividend
Net cash used by
77000
financing activities
Net increase in cash 60200
Cash at beginning of
33400
period
 Cash at ended of
93600
period

10 Transaction in euro

Keller Minden Co
Statement of Cash Flows
For the year ended 31 December 2014

Cash flow operating activities

Cash recipt from
271300
customer
Less cash payment
To supplier 122900
For operating exp 37270
For income tax 23400
For interest 2940 176600
Net cash provided by
111500
operating activities

Cash flows from investing activities

Sale of invesment 27500
sale of plant asset 10000
Purchased of plant
-149000
asset
Net cash provided by
-111500
operating activities

Cash flows from financing activities

50000
Sale of ordinary shares
Redemption of bonds 70000
Payment of dividends -43000
Net cash used by
77000
financing activities
Net increase in cash 60000
Cash at beginning of
33400
period
Cash at ended pf
93400
period

Cash receipts from customers

sales revenue 297500
Deduct: Increase in
26200
acc receiveble
Cash receipts from
271300
customers
 Cash payment to supplier
Cost of good sold 99460
Add: Increase in
21850
inventory
Cost of purchases 121310
Deduct: Increase in
8320
acc payable
Cash paayment to
112990
supplier

Cash payment for operating expenses

Operating expenses 19670
Add: Increase in
3730
prepaid expenses
Cash payment for
23400
operating expenses

11 Transaction in Dollar

Vernet Company
Statement of Cash Flows
For the year ended 31 December 2014

Cash flows from operating activities net income 50000

Adjusments to reconcile net income
to net cash provided by operating Activities
Depreciation exp 57000
Gain on disposal of
-6000
plant asset
Increase in accounts
-13000
receivable
Increase in inventory -30000
Decrease in prepaid
4400
expenses
Increase in acc
13000 25400
payable
Net cash provided by
75400
operating activiteis

Cash flows from investing activities

Sale of land 35000
Sale of equipment 37000
Purchased of
-95000
equipment
Net cash provided by
-23000
operating activities
 Cash flows from financing activities
Payments of cash
-82940
dividends
Net decrease in cash -15540
Cash at beginning
57000
period
Cash at end of period 41460

Note 1
Non-cash investing
and financing
activities exchange 25000
ordinary shares for
land
 COMPHERESIVE PROBLEM 13
Financial Reporting and Anlysis
BYP 13-1 Financial Reporting Problem: Samsung Electronics Co., Ltd.
a.) What was the amount of net cash provided by operating activities for the year ended
December 31, 2010? For the year ended December 31, 2009?
Answer:

Net cash provided by operating activities:

2010 W23,826,779 million
2009 W18,522,468 million

b.) What was the amount of increase or decrease in cash and cash equivalents for the year
ended December 31, 2010? For the year ended December 31, 2009?
Answer:

The decrease in cash and cash equivalents for the year ended December 31, 2010 was
W358,511 million, and the increase was W3,245,564 million for the year ended
December 31, 2009.

c.) Which method of computing net cash provided by operating activities does Samsung
use?
Answer:

Samsung uses the indirect method of computing and presenting the net cash provided
by operating activities.

d.) From your analysis of the 2010 statement of cash fl ows, did the change in accounts
and notes receivable require or provide cash? Did the change in inventories require or
provide cash? Did the change in accounts payable and other current liabilities require
or provide cash?
Answer:

The change in accounts and notes receivable used cash of W1,512,055 million in
2010. The change in inventories required cash of W3,525,195 million in 2010. The
change in accounts payable (and other current liabilities) provided cash of
W2,507,174 million in 2010.

e.) What was the net outfl ow or infl ow of cash from investing activities for the year
ended December 31, 2010?
Answer:

The net cash used by investing activities in 2010 was W23,984,877 million.
 f.) What was the amount of interest paid in the year ended December 31, 2010? What
was the amount of income taxes paid in the year ended December 31, 2010?
Answer:

Per the adjustments section of cash flows from operating activities interest paid during
2010 amounted to W582,292 million and income taxes paid were W2,135,287
million.

BYP 13-2 Comparative Analysis Problem: Nestlé S.A. vs Zetar plc.

a.) Based on the information contained in these fi nancial statements, compute free cash
flow foreach company for the most recent fi scal year shown.
Answer:

Zetar Nestle
£753 – £3,789 – £0 = £ (3,036)
CHF 13,608 – CHF 4,576 – CHF 5,443 = CHF3,589

Zetar amounts in thousands

Nestle amounts in millions

b.) What conclusions concerning the management of cash can be drawn from these data?
Answer:

Zetar did not produce sufficient cash from operating activities to cover
their capital expenditures nor enough to pay a dividend. As a result,
Zetar generated a negative free cash flow. Nestlé on the other hand,
produced sufficient cash from operating activities to cover both their capital
expenditures and pay a dividend. By generating a positive free
cash flow, they have sufficient cash to invest in other capital
expenditures, pay off debt, repurchase shares, or just improve their liquidity.

BYP 13-3 Real World Focus

a.) How many enforcement actions does the SEC take each year against securities law
violators? What are typical infractions?
Answer:

Crucial to the SEC’s effectiveness is its enforcement authority. Each year, the SEC
brings hundreds of civil enforcement actions against individuals and companies that
break the securities laws. Typical infractions include insider trading, accounting
fraud, and providing false or misleading information about securities and the
companies that issue them.
b.) After the Depression, Congress passed the Securities Acts of 1933 and 1934 to
improve investor confidence in the markets. What two “common sense” notions are
these laws based on?
Answer:

The main purposes of these laws can be reduced to two common-sense notions:
• Companies publicly offering securities for investment dollars must tell the
public the truth about their businesses, the securities they are selling, and the
risks involved in investing.
• People who sell and trade securities brokers, dealers, and exchanges must treat
investors fairly and honestly, putting investors’ interests first.

c.) Who was the President of the United States at the time of the creation of the SEC?
Who was the first SEC Chairperson?
Answer:

President Franklin Delano Roosevelt appointed Joseph P. Kennedy, President John F.

Kennedy’s father, to serve as the first Chairman of the SEC.
BYP 13-5 (critical thinking)

b.) With whom do you agree, Norman or Sara? Explain your position.
Answer:

From the information given, it appears that from an operating standpoint,

Del Carpio Company did not have a superb first year, having suffered a
$44,000 net loss. Sara is correct; the statement of cash flows is not
prepared in correct form. The correct format classifies cash flows from
three activities—operating, investing, and financing; and it also presents
significant non-cash investing and financing activities in a separate
schedule. Sara is wrong, however, about the actual increase in cash not
being $101,000; $101,000 is the correct increase in cash.

Communication Activity

a.) BYP13-6
Instructions:
Write him a brief memo explaining the form and content of the statement of cash
flows as shown in Illustration 13-14 (pages 637–638).
Answer:

To: Bart Sampson

Owner-President, Computer Services Company

From: Student

Subject: Explanation of the Statement of Cash Flows

Dear Bart,
I understand that you have some questions regarding the statement of cash flows that I
prepared for Computer Services Company. I'm happy to provide you with a brief
explanation of the form and content of the statement. The statement of cash flows is a
financial statement that provides information about the cash inflows and outflows of a
company during a specific period. It helps to analyze the company's ability to
generate cash and its cash management practices.

The statement is divided into three main sections,

(Operating Activities) This section reports the cash flows resulting from the
company's primary business operations. It includes cash received from customers,
cash paid to suppliers and employees, and other operating expenses. The net cash
provided or used by operating activities is calculated by adjusting net income for non-
cash items and changes in working capital.

(Investing Activities) This section focuses on the cash flows related to the acquisition
or disposal of long-term assets and investments. It includes cash used for purchasing
 property, plant, and equipment, as well as cash received from the sale of assets or
investments. Investing activities provide insights into the company's capital
expenditure decisions and investment activities.

(Financing Activities) This section presents the cash flows related to the company's
financing activities. It includes cash received from issuing debt or equity instruments,
as well as cash used for debt repayments, dividends, or stock repurchases. Financing
activities reflect the company's capital structure decisions and its ability to raise funds
from external sources.

The statement of cash flows also includes a reconciliation of the beginning and ending
cash balances, which helps to explain the overall change in cash during the period.
By analyzing the statement of cash flows, you can gain a better understanding of how
cash is generated and utilized within the company. It provides valuable insights into
the company's liquidity, solvency, and cash flow management.

I hope this explanation clarifies the form and content of the statement of cash flows. If
you have any further questions or need additional assistance, please don't hesitate to
reach out to me.

Sincerely,

[student]

Ethics Case

BYP 13-7

a.) Who are the stakeholders in this situation?

Answer:

The stakeholders in this situation are:

• Milton Williams, president of Babbit Corporation.
• Jerry Roberts, controller.
• The Board of Directors.
• The shareholders of Babbit Corporation.

b.) Was there anything unethical about the president’s actions? Was there anything
unethical about the controller’s actions?
Answer:

The president’s statement is “We must get that amount above $1 million,”
puts undue pressure on the controller. This statement along with his
statement, “I know you won’t let me down, Jerry,” encourages Jerry to
 do something unethical.

Controller Jerry Roberts’ reclassification (intentional misclassification) of

a cash inflow from a long-term note (financing activity) issuance to an “increase in
payables” (operating activity) is inappropriate and unethical.

c.) Are the board members or anyone else likely to discover the misclassifi cation?
Answer:

It is unlikely that any board members (other than board members who are also officers
of the company) would discover the misclassification. Board members generally do
not have detailed enough knowledge of their company’s transactions to detect this
misstatement. It is possible that an officer of the bank that made the loan would detect
the misclassification upon close reading of Babbit Corporation’s statement of cash
flows. It is also possible that close scrutiny of the statement of financial position
showing an increase in notes payable (long-term debt) would reveal that there is no
comparable financing activity item (proceeds from note payable) in the statement of
cash flows.
 GAAP EXERCISES

GAAP13-1 Discuss the differences that exist in the treatment of bank overdrafts
under GAAP and IFRS.
Answer:

Under GAAP bank overdrafts are treated as part of liabilities on the balance sheet. As
a result, on the statement of cash flows they are classified as financing activities. In
contrast, under IFRS they are treated as part of cash and cash equivalents on the
balance sheet, and as part of the change in cash and cash equivalents on the statement
of cash flows.

GAAP13-2 Describe the treatment of each of the following items under IFRS versus
GAAP.
(a) Interest paid.
(b) Interest received.
(c) Dividends paid.
(d) Dividends received.
Answer:

The treatment of these items under IFRS and GAAP is as follows:

IFRS GAAP
a.) Interest paid Operating Or Financing Operating
b.) Interest received Operating Or Investing Operating
c.) Dividends paid Operating Or Financing Financing
d.) Dividends received Operating Or Investing Operating

GAAP13-3 Explain how the treatment of cash equivalents will probably change in the
future.
Answer:

In the future cash equivalents will probably not be combined with cash. Instead they
will most likely be reported separately, as a type of short-term investment.

GAAP Financial Reporting Problem: Tootsie Roll Industries, Inc.

GAAP13-4

(All amounts in thousands)

a.) What was the amount of net cash provided by operating activities for 2010? For
2009?
Answer:

Net cash provided by operating activities

• 2010 = $82,805
 • 2009 = $76,994

b.) What was the amount of increase or decrease in cash and cash equivalents for the year
ended December 31, 2010?
Answer:

Increase in cash and cash equivalents $24,986

c.) Which method of computing net cash provided by operating activities does Tootsie
Roll use?
Answer:

Tootsie Roll uses the indirect method in preparing its statement of

cash flows.

d.) From your analysis of the 2010 statement of cash fl ows, was the change in accounts
receivable a decrease or an increase? Was the change in inventories a decrease or an
increase? Was the change in accounts payable a decrease or an increase?
Answer:

For 2010, accounts receivable decreased by $717; inventories

increased by $2,468; and accounts payable increased by $2,180.

e.) What was the net cash used by investing activities for 2010?
Answer:

For 2010, net cash used in investing activities was $16,808.

f.) What was the amount of interest paid in 2010? What was the amount of income taxes
paid in 2010?
Answer:

In 2010, interest paid was $49, and income taxes paid were $20,586.