Week Three Exercise Assignment: Inventory Specific Identific

Week Three Exercise Assignmentinventory1specific Identification Metho

Determine the firm’s cost of goods sold, gross profit, and ending inventory using specific identification. Use inventory data for oil paintings, including costs and sales during the year, where Woods and Moon paintings were sold for a total of $35,000.

Compare inventory valuation methods—FIFO, LIFO, and weighted average—using White Company's data, which includes beginning inventory, purchases, sales, and unit costs, and fill in a comparison chart for goods available for sale, ending inventory, and cost of goods sold.

Given transactions under a perpetual inventory system at Beehler Company, duplicate the journal entries, compute the ending inventory balance, and explain the absence of a Purchases account after initial transactions.

Calculate the cost of goods sold, ending inventory, and gross profit for Wave Riders Surfboard Company using FIFO, LIFO, and weighted average methods, based on their purchase and sales data. Discuss which method best suits different management goals, like up-to-date valuation, physical flow, or tax reporting.

Calculate depreciation expenses for Betsy Ross Enterprises’ delivery van for 20X8 using units-of-output, straight-line, and double-declining-balance methods, based on miles driven, service life, and residual value.

Compute depreciation for Alpha Alpha Alpha’s washing machine from purchase in 20X3, including book value at the end of 20X5 using straight-line, units-of-output, and double-declining-balance methods, considering cycles used and residual value.

Calculate depreciation for Aussie Imports’ machinery over 5 years using three methods, then adjust depreciation based on a revised remaining service life. Additionally, consider costs like freight, setup, and insurance in initial valuation computations.

Paper For Above instruction

Inventory valuation is a fundamental aspect of financial accounting, impacting the reported profitability and asset valuation of a company. Among various methods, the specific identification method is particularly relevant when dealing with unique and high-cost items such as art collections. This paper explores the application of this method and compares it with other valuation techniques such as FIFO, LIFO, and weighted average, providing a comprehensive analysis through illustrative examples. Additionally, the paper discusses the implications of inventory systems—perpetual and periodic—on journal entries and inventory management, as well as calculations and concepts related to depreciation methods, including straight-line, units-of-output, and double-declining-balance, highlighting their impact on asset valuation and expense recognition. Changes in depreciation estimates, as demonstrated in case studies, underscore the necessity for flexibility and accuracy in financial reporting. The integration of these concepts fosters a detailed understanding of inventory and depreciation accounting, essential for accurate financial statement preparation and strategic decision-making.

Introduction

Inventory valuation methods play a crucial role in financial accounting, affecting both the balance sheet and income statement. The chosen method influences net income, taxable income, and asset values, thus impacting managerial decision-making and external perceptions. This paper examines specific identification, FIFO, LIFO, weighted average, and various depreciation methods, illustrating the concepts with practical examples and computations. Understanding these methods enables accountants and managers to select the most appropriate approach based on business nature, physical flow, and fiscal objectives.

Specific Identification Method and Inventory Valuation

The specific identification method attributes the actual cost of each specific item in inventory directly to cost of goods sold (COGS). This method is particularly suited for high-value, differentiated items, such as art pieces, luxury cars, or custom machinery. For example, Boston Galleries employs this method for its art inventory, which includes unique paintings with distinct costs.

Applying this method to the oil paintings inventory—Woods, Sunset, Earth, and Moon—requires tracking individual costs and sales. Woods and Moon paintings, sold during the year for $35,000, are matched to their specific costs to compute COGS and gross profit. The initial costs and purchases influence the calculation, emphasizing the importance of detailed record-keeping. The cost of Woods ($11,000) and Moon ($4,000) are directly assigned to COGS when sold, affecting gross profit calculations.

This method provides precise profit margins for each sold item but is labor-intensive and best suited for businesses dealing with high-value, unique goods.

Comparison of Inventory Valuation Methods

The FIFO (First-In, First-Out) method assumes that the oldest inventory items are sold first, resulting in lower COGS during inflationary periods and higher ending inventory values. Conversely, LIFO (Last-In, First-Out) assigns the most recent costs to COGS, often reducing taxable income in times of rising prices. The weighted average smooths out price fluctuations by averaging costs over all units available for sale.

Using White Company's data—beginning inventory, purchase history, and sales volume—we calculate ending inventory, COGS, and gross profit under each method. FIFO assigns the earliest costs to COGS and the latest to ending inventory, while LIFO does the opposite. The weighted average calculates a mean cost per unit, leading to a balanced view. These calculations reveal significant variances, illustrating how each method influences reported earnings and inventory valuation.

Perpetual Inventory System and Journal Entries

The implementation of a perpetual inventory system involves real-time tracking of inventory movements. When Beehler Company purchases stock, the Journal entry debits Inventory directly, omitting a separate Purchases account—a characteristic feature of perpetual systems. Sales entries involve reducing inventory and recognizing revenue, with returns adjusting inventory balances appropriately.

Specifically, the initial purchase includes a debit to Inventory for 500 units at $4 each. Sale of 300 units involves decreasing Inventory and recording sales revenue. Returns of 75 units are similarly adjusted. The absence of a Purchases account simplifies recording, relying on detailed inventory records maintained electronically. The ending inventory balance reflects purchases minus sales and returns, aligning with the company's inventory management practices.

Inventory Valuation Computations

Wave Riders Surfboard Company’s inventory consists of multiple purchase batches, with sales of 710 boards at an average price of $250 each. Calculating COGS, ending inventory, and gross profit under FIFO, LIFO, and weighted average involves summing costs based on purchase chronology and averaging prices.

FIFO assigns the oldest costs to COGS, providing an up-to-date inventory valuation on the balance sheet, suited for firms prioritizing current asset values. LIFO assigns the latest costs to COGS, beneficial for tax strategies during inflation. Weighted average balances both approaches, offering a middle ground. The calculations demonstrate how each method impacts profitability and inventory values differently, informing managerial and tax decisions.

Depreciation Methods and Applications

Depreciation expense calculation is fundamental for allocating asset costs over their useful lives. Betsy Ross Enterprises’ delivery van exemplifies straight-line, units-of-output, and double-declining-balance methods. The van’s original cost, residual value, and estimated miles drive inform the computations, affecting net income and asset valuations.

The units-of-output method calculates depreciation based on miles driven, assuming 17,000 miles driven in 20X8. The straight-line method evenly allocates costs over five years, while the double-declining-balance accelerates depreciation early in the asset’s life. These methods produce different expense profiles, influencing financial ratios and tax liabilities.

Depreciation Computations and Changes in Estimates

Alpha fraternity’s washing machine provides a case for depreciation calculations under different methods, including book value at year-end and accumulated depreciation, considering cycles used over different years. Changes in estimates, such as revised useful life, directly impact depreciation expense calculations. When management shortens the remaining useful life, depreciation expenses must be adjusted accordingly. The scenario with additional costs like freight, setup, and insurance underscores the importance of correctly capitalizing costs for accurate depreciation.

Adjustments in estimates and initial costs significantly influence financial statements. Properly accounting for these changes ensures compliance with accounting standards and provides stakeholders with reliable information.

Conclusion

The choice of inventory valuation and depreciation methods greatly affects financial reporting. Specific identification provides precise profit margins for unique items, while FIFO, LIFO, and weighted average offer trade-offs between simplicity, tax implications, and balance sheet relevance. Similarly, depreciation methods vary in expense recognition, with accelerative methods like double-declining-balance providing front-loaded expenses beneficial for tax purposes, and straight-line giving consistent expenses suitable for financial reporting.

Understanding these methods enables managers and accountants to optimize financial strategies, comply with standards, and present an accurate picture of the company's financial health. Regular reassessment of estimates and assumptions is essential to maintain the integrity of financial statements and support strategic business decisions.

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