Review Exercises

Exercise 1: Analyzing Inventories

For each of the independent events listed below, analyze the impact on the indicated items at
the end of the current year by placing the appropriate code letter in the box under each item.

Code: O = item is overstated

U = item is understated

NA = item is not affected

Items
Stockholders’ Cost of Net

Events Assets Equity Goods Sold Income

1. The ending inventory in the previous period
was overstated.
_________________________________________________________________________________________________________________________

2. A physical count of goods on hand at the

end of the current year resulted in some
goods being counted twice.
_________________________________________________________________________________________________________________________

3. Goods purchased on account in December

of the current year and shipped FOB
shipping point were recorded as
purchases, but were not included in the
count of goods on hand on December 31
because they had not arrived by December
31.
_________________________________________________________________________________________________________________________

4. Goods purchased on account in December

of the current year and shipped FOB
destination were recorded as purchases,
but were not included in the count of goods
on hand on December 31 because they
had not arrived by December 31.
_________________________________________________________________________________________________________________________

5. The internal auditors discovered that the

ending inventory in the previous period was
understated $15,000 and that the ending
inventory in the current period was
overstated $25,000.

Exercise 2: The Botton Company

The Botton Company sells many products. Gizmo is one of its popular items. Below is
an analysis of the inventory purchases and sales of Gizmo for the month of March.
Cotton Company uses the perpetual inventory system.

Purchases Sales

Units Unit Cost Units Selling Price/Unit

3/1 Beginning inventory 100 $70

3/3 Purchase 60 $75

3/4 Sales 60 $120

3/10 Purchase 200 $80

3/16 Sales 70 $130

3/19 Sales 80 $130

3/25 Sales 50 $130

3/30 Purchase 40 $95

Instructions

(a) Using the FIFO assumption, calculate the amount charged to cost of goods sold for March.
(Show computations)

(b) Using the FIFO assumption, calculate the value of ending inventory for March.

(c) Using the moving average cost method, calculate the amount assigned to the inventory on
hand on March 31. (Show computations)

(d) Using the LIFO assumption, calculate the amount assigned to the inventory on hand on
March 31. (Show computations)
(e) Using the LIFO assumption, calculate the amount charged to cost of goods sold for March.
(Show computations)
 Exercise 3: Moosa Merchandising Co.
The following information pertains to Moosa Merchandising Company:
Merchandise inventory at end of the year $33,000
Accounts receivable at the beginning of the year 24,000
Cash sales made during the year 15,000
Gross profit on sales 27,000
Accounts receivable written off during the year 1,000
Purchases made during the year 60,000
Accounts receivable collected during the year 78,000
Merchandise inventory at the beginning of the year 36,000

Instructions:
(a) Calculate the amount of credit sales made during the year. (Hint: You will need to use
income statement relationships in order to determine this.)

Sales
Cost of goods sold
Merchandise inventory at the beginning of the year
Add: Purchases made during the year 60,000
Goods available for sale
Less: Merchandise inventory at end of the year
Cost of goods sold
Gross profit on sales

Total sales =
Cash sales =
Credit sales =

(b) Calculate the balance of accounts receivable at the end of the year.
Accounts receivable at December 31st are as shown:

Accounts Receivable
$24,000

Exercise 4: Holland Co.

Information related to Holland Company for 2002 is summarized below.

Total credit sales $2,100,000

Accounts receivable at December 31 840,000
Accounts receivable written off 38,000
Instructions:
(a) What amount of bad debts expense will Holland Company report if it uses the direct write-
off method of accounting for bad debts?

(b) Assume that Holland Company estimates its bad debts expense to be 3% of credit sales.
What amount of bad debts expense will Holland record if it has an Allowance for Doubtful
Accounts credit balance of $4,000?

(c) Assume that Holland Company estimates its bad debts expense based on 6% of accounts receivable.
What amount of bad debts expense will Holland record if it has an Allowance for Doubtful Accounts
credit balance of $3,000?

(d) Assume the same facts as in (c), except that there is a $3,000 debit balance in Allowance
for Doubtful Accounts.
What amount of bad debts expense will Holland record?

(e) What is the weakness of the direct write-off method of reporting bad debts expense?