Probem:

Octagon Data Computer Corporation reported a net loss for the year. In its financial statements, the

company noted:

Balance Sheet:

Current Assets:

Inventories (Note 1c and 2)……………………………………….P48,051,000.00

Note 1C: Inventories are stated at the lower of cost or market. Cost is determined on a first-in,

first-out (FIFO) basis.

Note 2: Declining…..market conditions during the fiscal year adversely affected anticipated

sales of the Company's older printing products; Accordingly, the statement of loss…..

includes a (debit) of 9,600,000.

Required:

a. At which amount did Octagon report its inventory, cost or market value? How can you tell?

b. If the reported inventory of P48,051,000 represents market value, what was the cost of inventory?
Solution:

Octagon Data nComputer Corporation

a.) Octagon reported its inventory at market value, because at declining stage, FIFO method would

result to the lowest income or possible loss, and because it’s a period of inflation, when the company

used the market value approach in valuing inventory it would clearly resulted to net loss.

b.) kopya ka nalang di ko na to alam e

Amsterdam Hospital supply Corporation reported using the LIFO inventory method. Its inventory

amount was P490.5 million.

Required:

a. Supposed that during the period covered by this report, the company made an error

that understated its inventory by P15million, What effect would this error have on cost of goods

sold and gross margin of the period? On cost of goods sold and gross margin of the foll.period?

On total gross margin or both periods combined?

b. When amsterdam Hospital Supply reported the above amount for inventory, prices were rising.

Would FIFO or LIFO have shown a higher gross margin? Why?

Solution:

2. Amsterdam Hospital Supply Corporation

a.)

Cost of Goods Sold

Gross Margin

b.) Under the FIFO method during period of inflation or rising prices FIFO method would result

to the higher net income because the ending inventory is expressed in terms of recent or new

prices thus resulting to lower cost of good sold which is expressed at old prices thus giving a

higher profit margin.

However under the LIFO method approach during inflation or rising prices LIFO method would
 result to lower net income because the inventory is expressed in terms of old prices thus giving

a higher cost of goods sold which is expressed at recent or new prices thust resulting to a lower

profit margin.

Glen Retail Store has a beginning inventory of P200,000 at cost and P400,000 at retail, Purchases were 1,200,000 at cost and 2,100,000 at retail

Sales were 2,000,000, How much is ending inventory at cost and at retail?

Solution:

3. Gien Retail Store

Beginning Inventory

Purchases

Goods Available for sale

Less: Cost of Sales (1,400,000/2,500,000=56%)

Net Sales

Multiply by Cost ratio

Ending Inventory

King's beginning inventory was P350,000, purchases were P1,460,000.00 and sales totasled to P2,400,000

With a normal gross margin rate of 35%, how much is ending inventory?
Solution:

4. Kings

Beginning Inventory P 350,000.00

Purchases 1,460,000.00

Goods Available for sale P 1,810,000.00

Less: Cost of Sales

Net Sales P 2,400,000.00

Cost ratio: 100%-35%=65%

Multiply by Cost ratio 65% 1,560,000.00

Ending Inventory P 250,000.00