Inventory Transactions and Periodic Inventory Costing Methods Culture Music Store had the following selected account balances on October 1.
|
Merchandise inventory (1,000 units) |
$7,000 |
|
Accounts receivable |
15,000 |
|
Allowance for doubtful accounts |
1,200 |
|
Warranty obligations |
500 |
Goods are sold with a 60 day money back guarantee against defects. During October, the following transactions occurred.
1. The store purchased 4,000 units of inventory on credit at a total invoice cost of $32,000. The goods, which were received in October, were purchased FOB destination and the seller paid freight costs of $250.
2. During the first week of the month, 700 units were sold on credit at prices averaging $12 each.
3. A clerk noticed that 50 recordings purchased in part 1 were mislabeled. These units were returned to the vendor for full credit.
4. During the second week, a cash only sale was held and 1,200 units sold at an average price of $10 each.
5. Customers returned a total of 53 units that had been sold in part 2. The goods were in salable condition and returned to the shelf.
6. The vendor was paid in full for the goods purchased in part 1.
7. Checks were received from customers who purchased goods in part 2. All took the 2% discount that was offered for paying within 10 days.
8. A total of 1,600 units were sold during the rest of the month at prices averaging $13. Three quarters of the sales were on credit.
9. At month end, management estimated that 10% of the goods sold in parts 4 and 8 would be returned as defective.
10. Also at month end, management estimated that $344 of this period’s credit sales would be uncollectible.
Required
A. Show how each of the transactions would be entered into the accounting system assuming the firm uses the periodic FIFO inventory method.
B. Prepare an income statement for the month of October assuming that operating expenses (other than warranty expense and doubtful accounts expense) totaled $2,500 and the company’s tax rate is 35%.
C. By what amount would net income have been different if the periodic LIFO method had been used? Prepare a schedule that proves your solution.
D. By what amount would net cash flow from operating activities have been different if the periodic LIFO method has been used? Explain your solution.