Financial Accounting Solution CH09(2)

9.5 continued.

credits both the Merchandise Inventory and Finished Goods Inventory

accounts for the cost of units sold and reports the inventory accounts as current assets on the balance sheet.

Accounting reports cost flows, not flows of physical quantities. Cost-flow assumptions trace costs, not physical flows of goods. With specific identification, management can manipulate cost flows by controlling physical flow of goods.

Rising Purchase Prices

Higher Inventory Amount:

Lower Inventory Amount:

Higher Cost of Goods

Sold Amount:

Lower Cost of Goods

Sold Amount: FIFO LIFO LIFO FIFO 9.6 9.7

9.8 Suppliers often grant a discount if customers pay within a certain number

of days after the invoice date, in which case this source of funds has an explicit interest cost. Suppliers who do not offer discounts for prompt payment often include an implicit interest change in the selling price of the product. Customers in this second category should delay payment as long as possible because they are paying for the use of the funds. Firms should not delay payment to such an extent that it hurts their credit rating and raises their cost of financing.

The Parker School should accrue the salary in ten monthly installments of $360,000 each at the end of each month, September through June. It will have paid $300,000 at the end of each of these months, so that by the end of the reporting year, it reports a current liability of $600,000 [= $3,600,000 – (10 X $300,000)].

It is cheaper (and, therefore, more profitable) to repair a few sets than to have such stringent quality control that the manufacturing process produces zero defectives. An allowance is justified when firms expect to have warranty costs. Manufacturers of TV sets for use on space ships or heart pacemakers should strive for zero defects. 9.9 9.10

Solutions 9-2

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