3. Choose the correct answer

1. Which of the following depreciation methods is NOT an accelerated method?

a) Double-declining balance

b) Straight-line

c) Sum-of-the-years' digits

2. The book value of an asset is defined as

a) Cost minus Salvage Value

b) Cost minus Accumulated Depreciation

c) Cost minus Salvage Value minus Accumulated Depreciation

d) Estimated fair market value

5. Inventories

1. Read the article and discuss

1) Inventory and Cost of Goods Sold

A retailer's inventory is its merchandise that has not yet been sold. The cost of the inventory is reported on the balance sheet as a current asset. When merchandise is sold, the cost of the items sold is reported on the income statement as the cost of goods sold.

The formula for the retailer's cost of goods sold is the cost of its net purchases minus the increase in inventory, or its cost of net purchases plus the decrease in inventory. This formula assures the matching of costs with revenues. 

A manufacturer reports three inventory amounts:

raw materials (at cost),

work-in-process (at cost),

and unsold finished goods (at cost).

The cost of these three inventories is reported on the balance sheet as a current asset. The cost of the finished goods that were sold in the current period is reported on the income statement as the cost of goods sold.

The formula for a manufacturer's cost of goods sold is the cost of goods manufactured minus the increase in the finished goods inventory, or the cost of goods manufactured plus the decrease in finished goods inventory. Again, this formula assists in the matching of costs with revenues. 

Costs for inventory include all costs that were necessary to get the items into inventory and ready for sale. For a retailer, the cost of a product is the vendor's invoice amount plus any freight-in on goods purchased FOB shipping point. A manufacturer's cost of finished goods and work-in-process will be the cost of direct material, direct labor, and manufacturing overhead. 

When costs of items are increasing, one must decide which costs will be reported as inventory and which costs will be reported as the cost of goods sold. Under the first-in, first-out (FIFO) cost flow assumption, the older (lower) costs will be leaving inventory first and the most recent costs will remain in inventory. The last-in, first-out (LIFO) cost flow assumption has the recent higher costs flowing out of inventory first (and will become the cost of goods sold). The older lower costs will remain in inventory (unless the quantity is drastically reduced). 

The LIFO cost flow can be different from the physical movement of goods. In other words, a company can diligently rotate its stock by moving the oldest goods to customers and yet flow the most recent costs to the cost of goods sold on its income statement. 

Example 1

The ABC Stationery Company bought 20 boxes of photocopier paper at $5 per box. Following a flood in their stockroom 5 of the boxes were damaged. They were offered for sale at $3 per box. All were unsold at the end of the company’s financial year.

At what price will they be valued in the annual accounts?

_____ boxes will be valued at their cost of $____ per box, a total of $____.

_____ boxes will be valued at $_____ per box, a total of $______.

The total stock value will be $_________.

Example 2

The Good Look Clothing Company carries a variety of stocks. At their year end they produce the following data in respect of it:

Item	Cost Price $	Net Realisable Value $	Selling Price (when new) $
New dresses	1,000	1,500	2,000
Children’s clothes	2,000	3,000	3,000
Bargain Fashions*	1,200	900	2,000

What will be the total stock value for the accounts?

New dresses $ ___________

Children’s clothes $ _________

Bargain fashions $ ________

Total Stock Value $ __________

Example 3

The XYZ Manufacturing Company manufactures wooden doors for the building trade. For the period under review it manufactured and sold 10,000 doors. At the end of the trading period there were 1,000 completed doors ready for despatch to customers and 200 doors which were half completed as regards direct material, direct labour and production overheads.

Cost for the period under review were, $

Direct material used 20,000

Direct labour 5,000

Production overheads 8,300

Non-production overheads 10,000

Total Costs for the period 43,300

Calculate the value of work in progress and finished goods.

Total units sold 10,000

Finished goods units 1,000

Half completed units (200 x 0.5) 100

Production for the period _________

Attributable costs $____________

Cost per unit __________________