Posted: August 25th, 2023

MBA 6014 UNIT 6 – Determining and Evaluating the Effects on the Balance Sheet, the Income Statement

Assessment Instructions MBA 6014 UNIT 6
Problem
1: Determining and Evaluating the Effects on the Balance Sheet, the Income
Statement and the Cash Flow Statement of Four Different Cost Flow Assumptions
for Inventory
At the end of January 2012, the
records of Shelton and Blair showed the following for a particular item that
sold at $20 per unit:Problem 1: Records of Sheldon and
BlairTransactionsUnitsTotal AmountInventory, January 1, 2011500 @ $6.00$3,000Purchase, January 12600 @ $7.00$4,200Purchase, January 26200 @ $7.10$1,420Sale(400 units sold for $20 each)Sale(300 units sold for $20 each)Based on the information provided in
the table above, complete the following. To complete this problem, you may wish
to use the Assessment 6, Problem 1 Template, which is linked in the Resources
under the Capella Resources heading.Assuming the use of a periodic
inventory system, prepare a summarized income statement through gross
profit for the month of January under each method of inventory:Average cost.
FIFO.
LIFO.
Specific identification. For
specific identification, assume that the first sale was selected from the
beginning inventory and the second sale was selected from the January 12
purchase. Round the average cost per unit to the nearest cent. Show the
inventory computations in detail.Of FIFO and LIFO, which method
would result in the higher pretax income? Which would result in the higher
EPS?
Of FIFO and LIFO, which method
would result in the lower income tax expense? Explain, assuming a 35
percent average tax rate.
Of FIFO and LIFO, which method
would produce the more favorable cash flow? Explain.Problem
2: Reading Publically Available Financial Statements
Refer to the Lowe's 2011 10-K. You
should have located these statements for previous assessment problems. Use
these statements and your prior knowledge of accounting, supplemented by
textbooks or other references of your choosing, to answer the following
questions:The company must use the lower
of cost or market method to account for its inventory. At the end of the
fiscal year 2012, do you expect the company to write its inventory down to
replacement cost or net realizable value? Explain your answer. You may
need to consult an intermediate accounting textbook or an Internet source.
What method does the company
use to determine the cost of inventory for fiscal year 2012?
If the company overstated
ending inventory by $10 million for the fiscal year ended 2012, what would
be the corrected value for income before income taxes for that year?
Compute the inventory turnover
ratio for the fiscal year 2012. Also compute it for the fiscal year 2011.
What conclusions can you make?Problem
3: Financial Statement and Income Tax Effects of Differing Depreciation Methods
Total Workout, Inc. purchased three
fitness machines from Ace Used Equipment at the beginning of the year. All
three were used machines. The machines had to be overhauled and installed
before they were put into use. The costs of the machines and their renovation
and installation are shown in Table 1 below:Problem 3, Table 1: Equipment
CostsAccountMachine AMachine BMachine CAmount paid for asset$21,000$30,750$8,000Installation cost$500$1,000$200Renovation costs prior to use$2,000$1,000$1,500By the end of the first year, each
machine had been operating 4,800 hours. Depreciation estimates are shown in
Table 2 below:
EstimatesProblem 3, Table 2: Equipment
DepreciationMachineLifeResidual ValueDepreciation MethodA5 years$1,000Straight-lineB60,000 hours$2,000Units-of-productionC4 years$1,500Double-declining-balanceUsing the data provided above,
complete the following:Compute the cost of each
machine.
Give the entry to record
depreciation expense at the end of the first year, using all three
depreciation methods listed in Table 2.Problem
4: Using Publically Available Financial Statements
Refer to the Lowe's 2011 10-K. You
should have located these statements for previous assessment problems. Use
these statements and your prior knowledge of accounting, supplemented by
textbooks or other references of your choosing, including the NOTES to the
financial statements found in the Lowe's 2011 10-K, to answer the following
questions, which all refer to the fiscal year ending 2012. Indicate the source
of each of your answers, including the page number from the Lowe's 2011 10-K:What method of depreciation
does the company use? Does the company use the same method for all fixed
assets, or are different classes of assets depreciated differently?
What is the amount of
accumulated depreciation and amortization at the end of the most recent
reporting year?
For depreciation purposes, what
is the estimated useful life of furniture and fixtures?
What was the original cost of
leasehold improvements owned by the company at the end of the most recent
reporting year?
What amount of depreciation and
amortization was reported as expense for the most recent reporting year?
What is the company's fixed
asset turnover ratio for the most recent year (2012)? What was it for the
previous years of 2010 and 2011? What conclusion can you make from this?

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