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© The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin1 Review Exercise Chapter 4-6.

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Presentation on theme: "© The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin1 Review Exercise Chapter 4-6."— Presentation transcript:

1 © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin1 Review Exercise Chapter 4-6

2 © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin2 Exercise 1: Closing Process, Post-Closing Trial Balance, & Classified Balance Sheet (Chap 4) The following is Adjusted Trial Balance of Webb Trucking Company Make Closing Entries of Temporary Accounts Prepare Post-Closing Trial Balance Prepare Classified Balance Sheet

3 © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin3

4 © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin4 Exercise 2: Current ratio & Liquidity (Chap 4) 5 Companies in the same Industry Which one is the strongest in liquidity? Is high current ratio better?

5 © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin5 Exercise 2: Current ratio & Liquidity (Chap 4) 5 Companies in the same Industry Which one is the strongest in liquidity? Is high current ratio better? Analysis: Company 1 is in the strongest liquidity position. It has about $2.52 of current assets for each $1 of current liabilities. The only potential concern is that Company 1 may be carrying too much in current assets that could be better spent on more productive assets (note that its remaining competitors current ratios range from 1.39 to 0.61).

6 © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin6 Exercise 3: Purchase Discount, Purchase return and Allowance (Chap 5) Journal Entry for the following transactions Apr.2: Purchase from Blue Co. $3,600, 2/15, n/60, and FOB shipping point Apr.3: Paid $200 shipping charge for Apr.2 Purchase Apr.4: Return $600 merchandise to Blue Co. Apr.17: Pay Blue Co.with purchase discount Apr.18: Purchase from FOX.Co $7,500 2/10,n/30, FOB destination Apr.21: Receive Fox $2,100 allowance for defective merchandise on Apr.18 purchase Apr.28: Pay Fox Co. with purchase discount

7 © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin7 Exercise 3: Purchase Discount, Purchase return and Allowance (Chap 5) Journal Entry for the following transactions Apr.2: Purchase from Blue Co. $3,600, 2/15, n/60, and FOB shipping point Apr.3: Paid $200 shipping charge for Apr.2 Purchase Apr.4: Return $600 merchandise to Blue Co. Apr.17: Pay Blue Co.with purchase discount Apr.18: Purchase from FOX.Co $7,500 2/10,n/30, FOB destination Apr.21: Receive Fox $2,100 allowance for defective merchandise on Apr.18 purchase Apr.28: Pay Fox Co. with purchase discount

8 © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin8 Exercise 4: Sales Discount, Sales return and Allowance (Chap 5) Journal Entry for the following transactions of Spare Parts Co. May.3: Purchase 1000 units with price $10 each unit May.5: Sold 600 units with price $14 per unit to DeSoto Co. with term 2/10,n/60 May.7: DeSoto return 200 units and Spare Parts restore them to inventory May.8: DeSoto keep damaged 50 units with $300 allowance May.15: DeSoto return 100 defective units and Spare Parts discard them

9 © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin9 Exercise 4: Purchase Discount, Purchase return and Allowance (Chap 5) Journal Entry for the following transactions of Spare Parts Co. May.3: Purchase 1000 units with price $10 each unit May.5: Sold 600 units with price $14 per unit to DeSoto Co. with term 2/10,n/60 May.7: DeSoto return 200 units and Spare Parts restore them to inventory May.8: DeSoto keep damaged 50 units with $300 allowance May.15: DeSoto return 100 defective units and Spare Parts discard them

10 © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin10 Exercise 5: Specification Identification, FIFO, LIFO & Weighted Average Costing System (Chap 6) Lakia Corporation has the following purchase and sales report, calculate Cost of Goods Sold & Ending Inventory For Specific Identification, Ending inventory consists of 400 units from July.28 purchase, 100 from Dec.19 purchase Units Acquired Units sold DateActivitiesUnitsCostTotal UnitsPrice Jan.1Beginning Inventory1206720 Jan.10Sales 7015 Mar.7Purchase2005.51100 Mar.15Sales 12515 July.28Purchase50052500 Oct.3Purchase3754.41650 Oct.5Sales 60015 Dec.19Purchase1004.1410 Merchandise Available for Sale 6380

11 © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin11

12 © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin12

13 © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin13 Exercise 6: Current ratio, Inventory turnover, Days sales in Inventory in LIFO & FIFO (Chap 6) Checkers Company Use LIFO and has the following annual financial data, FIFO data also provided, calculate for LIFO & FIFO system Current ratio, Inventory Turnover, Days Sales in Inventory 20052004 LIFO Inventory150100 LIFO COGS730670 FIFO Inventory220125 FIFO COGS685 Current Assets(LIFO)210180 Current Liabbilities190170

14 © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin14 Exercise 6: Current ratio, Inventory turnover, Days sales in Inventory in LIFO & FIFO (Chap 6)

15 © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin15 Exercise 6: Current ratio, Inventory turnover, Days sales in Inventory in LIFO & FIFO (Chap 6) The use of LIFO versus FIFO for Checkers markedly impacts the ratios computed. Specifically, LIFO makes Checkers appear worse in comparison to FIFO numbers on the current ratio (1.1 vs. 1.5) but better on inventory turnover (5.8 vs. 4.0) and days sales in inventory (75 vs. 117.2). These results can be generalized. That is, when costs are rising and quantities are stable or rising, the FIFO inventory exceeds LIFO inventory. This suggests that (relative to FIFO) the LIFO current ratio is understated, the LIFO inventory turnover is overstated, and the days sales in inventory is understated. Overall, users prefer the FIFO numbers for these ratios because they are considered more representative of current replacement costs for inventory.


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