Inventory Analysis and Depreciation Methods

For this assessment, complete Problems 1 and 2. You may use Word or
Excel to complete the assessments throughout this course, but you will
find Excel to be most helpful for creating spreadsheets. Tutorials for
using Excel are provided in the Supplemental Resources in the left
navigation menu. If you use Excel, submit the assessment in one Excel
document, using separate tabs for each spreadsheet.
assessment_6.doc

cf_assessment_6_problem_1_template.xls

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Inventory Analysis and Depreciation Methods
Complete a problem involving inventory analysis and a problem involving the use of
depreciation methods.
Note: Some of the assessments in this course build upon each other, so you are strongly
encouraged to complete them in the order in which they are presented.
Assessment Instructions
Note: Some of the assessments in this course build upon each other, so you are strongly
encouraged to complete them in the order in which they are presented.
For this assessment, complete Problems 1 and 2. You may use Word or Excel to complete the
assessments throughout this course, but you will find Excel to be most helpful for creating
spreadsheets. Tutorials for using Excel are provided in the Supplemental Resources in the left
navigation menu. If you use Excel, submit the assessment in one Excel document, using separate
tabs for each spreadsheet.
To complete the first problem, you may choose to use the Assessment 6, Problem 1 Template
linked in the Suggested Resources under the Capella Resources heading.
Problem 1: The Effects of Different Cost Flow Assumptions for Inventory
At the end of January 2011, the records of Sheldon and Blair showed the following for a
particular item that sold at $20 per unit:
Problem 1, Table 1: Records of Sheldon and Blair
Transactions
Units
Total Amount
Inventory, January 1, 2011
500 @ $6.00
$3,000
Purchase, January 12
600 @ $7.00
$4,200
Purchase, January 26
200 @ $7.10
$1,420
Sale
(400 units sold for $20 each)
Sale
(300 units sold for $20 each)
Based on the information provided in the table above, complete the following. An optional
template, Assessment 6, Problem 1 Template, is provided in the Suggested Resources under the
Capella Resources heading.
1. Assuming the use of a periodic inventory system, prepare a summarized income
statement through gross profit for the month of January under each method of inventory
listed below. Show the inventory computations for each method in detail.
• a. Average cost. (Round the average cost per unit to the nearest cent.)
• b. First in, first out (FIFO).
• c. Last in, first out (LIFO).
• d. Specific identification. (Assume that the first sale was selected from the
beginning inventory and the second sale was selected from the January 12
purchase.)
2. Of FIFO and LIFO, which method would result in the higher pretax income? Which
would result in the higher EPS?
3. Of FIFO and LIFO, which method would result in the lower income tax expense?
Explain, assuming a 35 percent average tax rate.
4. Of FIFO and LIFO, which method would produce the more favorable cash flow? Explain.
Problem 2: The Effects of Differing Depreciation Methods
Total Workout, Inc. purchased three ï¬ï¿½tness machines from Ace Used Equipment at the
beginning of the year. All three were used machines that had to be overhauled and installed
before they were put into use. The costs of the machines and their renovation and installation are
shown in Table 1 below:
Problem 2, Table 1: Equipment Costs
Account
Machine A
Machine B
Machine C
Amount paid for
asset
$21,000
$30,750
$8,000
Installation cost
$500
$1,000
$200
Renovation costs
prior to use
$2,000
$1,000
$1,500
By the end of the first year, each machine had been operating 4,800 hours. Depreciation
estimates are shown in Table 2 below:
Problem 2, Table 2: Equipment Depreciation
Machine
Life
Residual Value
Depreciation Method
A
5 years
$1,000
Straight-line
B
60,000 hours
$2,000
Units-of-production
4 years
$1,500
Double-declining
balance
C
Using the data provided above, complete the following:
1. Compute the cost of each machine.
2. Give the entry to record depreciation expense at the end of the first year, using all three
depreciation methods listed in Table 2.
Inventory Analysis and Depreciation
Methods Scoring Guide
Criteria
Proficient
Distinguished
Apply average cost, FIFO, LIFO,
and specific identification
inventory methods to a
summarized income statement.
Correctly applies
average cost, FIFO,
LIFO, and specific
Applies average cost, FIFO, LIFO,
identification
and specific identification
inventory methods
inventory methods to a
to a summarized
summarized income statement.
income statement
using appropriate
computations.
Analyze the effects of LIFO and
FIFO inventory methods on an
income statement.
Analyzes the effects of LIFO and
FIFO inventory methods on an
income statement.
Evaluates the
effects of LIFO and
FIFO inventory
methods on an
income statement
using appropriate
computations.
Records depreciation transactions
pertaining to equipment.
Correctly records
depreciation
transactions
pertaining to
equipment using
appropriate
computations.
Record depreciation transactions
pertaining to equipment.
Template for a summarized income statement through gross profit for the month ended January 31, 2011, under four inventory valuation methods: (a) weighted average, (b) FIFO, (c)
LIFO, and (d) specific identification. For Sheldon and Blair.
Learner:
Sheldon and Blair
Partial Income Statement
For the Month Ended January 31, 2011
(a) Weighted
(b) FIFO
(c) LIFO
Average
$14,000
$14,000
$14,000
Sales revenue1
Cost of goods sold2
Gross profit
$3,000
$11,000
$200
$13,800
$2,300
$11,700
(d) Specific
Identification
$14,000
($1,120)
$15,120
Sheldon and Blair
Computations
1
Sales revenue:
700 units @ $20 =
2
$14,000
Cost of goods sold:
Units
Beginning inventory
3
Purchases (net)
Goods available for sale
Ending inventory4
Cost of goods sold
500
0
500
500
Weighted Average
$3,000
$0
$3,000
$0
$3,000
FIFO
$3,000
$0
$3,000
$2,800
$200
3
Purchases (net)
Purchase, January 12
Purchase, January 26
Totals
0
$0
$0
$0
LIFO
$3,000
$0
$3,000
$700
$2,300
Specific Identification
$3,000
$0
$3,000
$4,120
($1,120)
4
Ending inventory
(a) Weighted-average cost:
Beginning inventory
Purchases
3
Units
Amount
500 @$6
$3,000
0
500
$0
$3,000
Average cost:
$8,620 ÷ 1,300 units =
Ending inventory:
600 units × $6.63 =
6.00
$0
(b) FIFO:
units @ $7.10
units @ $7.00
600
(c) LIFO:
units @ $6.00
units @ $7.00
600
(d) Specific identification:
units @ $6.00
units @ $7.00
units @ $7.10
600
$2,800
$2,800
$700
$700
$1,420
$4,120
Of FIFO and LIFO, which method would result in the higher pretax income? Which would result in the higher EPS?
Of FIFO and LIFO, which method would result in the lower income tax expense? Explain, assuming a 35 percent average tax rate.
FIFO = Gross profit × .35
LIFO = Gross profit × .35
Of FIFO and LIFO, which method would produce the more favorable cash flow? Explain.
End of worksheet

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