Speed World Cycles sells high-performance motorcycles and motocross racers. One
ID: 2370533 • Letter: S
Question
Speed World Cycles sells high-performance motorcycles and motocross racers. One of Speed World's most popular models is the Kazomma 900 dirt bike. During the current year, Speed World purchased eight of these cycles at the following costs:
On July 28, Speed World sold four Kazomma 900 dirt bikes to the Vince Wilson racing team. The remaining four bikes remained in inventory at September 30, the end of Speed World's fiscal year.
Compute the cost of goods sold relating to the sale on July 28 and the ending inventory of Kazomma 900 dirt bikes at September 30, using the following cost flow assumptions:
Show the number of units and unit costs in each cost layer of the ending inventory. You may determine the cost of goods sold by deducting ending inventory from the cost of goods available for sale. (Omit the "$" sign in your response.)
Speed World Cycles sells high-performance motorcycles and motocross racers. One of Speed World's most popular models is the Kazomma 900 dirt bike. During the current year, Speed World purchased eight of these cycles at the following costs:
Explanation / Answer
There are two methods for estimating ending inventory:
1. Gross Profit Method. The gross profit method for estimating inventory uses the information contained in the top portion of a merchandiser's multiple-step income statement:
Let's assume that we need toestimatethe cost of inventory on hand on June 30, 2012. From the 2011 income statement shown above we can see that the company's gross profit is 20% of the sales and that the cost of goods sold is 80% of the sales. If those percentages are reasonable for the current year, we can use those percentages to help us estimate the cost of the inventory on hand as of June 30, 2012.
While an algebraic equation could be constructed to determine the estimated amount of ending inventory, we prefer to simply use the income statement format. We prepare a partial income statement for the period beginning after the date when inventory was last physically counted, and ending with the date for which we need the estimated inventory cost. In this case, the income statement will go from January 1, 2012 until June 30, 2012.
Some of the numbers that we need are easily obtained from sales records, customers, suppliers, earlier financial statements, etc. For example, sales for the first half of the year 2012 are taken from the company's records. The beginning inventory amount is the ending inventory reported on the December 31, 2011 balance sheet. The purchases information for the first half of 2012 is available from the company's records or its suppliers. The amounts that we have available are written in italics in the following partial income statement:
We will fill in the rest of the statement with the answers to the following calculations. The amounts initalicscome from the statement above. The bold amount is the answer or result of the calculation.
ABC Company
Income Statement (partial)
For the Year Ended Dec. 31, 2011
Sales $100,000 100.0%
Cost of Goods Sold Beginning Inventory $ 22,000 Purchases - net 83,000 Cost of Goods Available 105,000 Less: Ending Inventory 25,000 Cost of Goods Sold 80,000 80.0%
Gross Profit $ 20,000 20.0%
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