Acc 202 Module 5 Problem Set

ACC 202 Module 5 Problem Set: A Comprehensive Guide

This comprehensive guide delves into the common challenges encountered in ACC 202 Module 5 Problem Sets, focusing on key concepts and providing detailed solutions. While specific problems vary depending on the curriculum and instructor, the fundamental principles remain consistent. This guide addresses common themes, offering a robust understanding to help you master this module. We'll explore various accounting concepts and demonstrate practical application through example problems. Remember to always consult your textbook and lecture notes for specific details related to your course.

Understanding the Core Concepts of Module 5

Module 5 typically covers intermediate accounting topics, often focusing on areas like:

Inventory Management

First-In, First-Out (FIFO): This method assumes that the oldest inventory items are sold first. This impacts the cost of goods sold (COGS) and the value of ending inventory, significantly influencing the financial statements.

Last-In, First-Out (LIFO): The opposite of FIFO, LIFO assumes that the newest inventory items are sold first. LIFO can result in lower net income during periods of rising prices due to higher COGS. It's important to note that LIFO is not permitted under International Financial Reporting Standards (IFRS).

Weighted-Average Cost: This method calculates the average cost of all inventory items available for sale and applies this average cost to both COGS and ending inventory. This approach smooths out price fluctuations compared to FIFO and LIFO.

Specific Identification: This method tracks the cost of each individual item in inventory. It's most suitable for businesses with unique, easily identifiable inventory items, like high-value automobiles or specialized equipment.

Lower of Cost or Market (LCM)

The LCM rule requires companies to report inventory at the lower of its historical cost or its market value. This principle helps ensure that inventory isn't overstated on the balance sheet, preventing a potential overestimation of assets. Market value typically refers to the current replacement cost of the inventory.

Inventory Errors

Understanding the impact of inventory errors on the financial statements is crucial. Errors in counting inventory or miscalculating the cost of goods sold can affect net income, retained earnings, and the balance sheet's assets. Correcting these errors requires adjusting entries to ensure accuracy.

Working Through Example Problems

Let's tackle some typical problems encountered in ACC 202 Module 5 problem sets. Remember, these examples illustrate the core concepts; your specific problems may differ in details.

Problem 1: FIFO vs. LIFO

ABC Company had the following inventory transactions during the year:

• Beginning inventory: 100 units @ $10 each
• Purchase 1: 200 units @ $12 each
• Purchase 2: 150 units @ $15 each
• Sales: 300 units

Calculate the cost of goods sold (COGS) and ending inventory using FIFO and LIFO.

Solution:

FIFO:

• COGS: (100 units x $10) + (200 units x $12) = $3400
• Ending Inventory: (50 units x $15) = $750

LIFO:

• COGS: (150 units x $15) + (150 units x $12) = $4050
• Ending Inventory: (100 units x $10) = $1000

Notice the significant difference in COGS and ending inventory between FIFO and LIFO. This demonstrates the impact of different inventory costing methods on the financial statements.

Problem 2: Weighted-Average Cost

Using the same inventory transactions from Problem 1, calculate the COGS and ending inventory using the weighted-average cost method.

Solution:

• Total units available for sale: 100 + 200 + 150 = 450 units
• Total cost of goods available for sale: (100 x $10) + (200 x $12) + (150 x $15) = $5550
• Weighted-average cost per unit: $5550 / 450 units = $12.33 (approximately)
• COGS: 300 units x $12.33 = $3699
• Ending Inventory: 150 units x $12.33 = $1849.50

Problem 3: Lower of Cost or Market (LCM)

XYZ Company has 200 units of inventory with a historical cost of $25 per unit. The current market value is $22 per unit. Apply the LCM rule.

Solution:

Since the market value ($22) is lower than the historical cost ($25), the inventory should be reported at the lower of cost or market, which is $22 per unit.

• Inventory Value: 200 units x $22 = $4400

Problem 4: Inventory Errors and their Correction

Assume that at the end of the year, a physical count reveals that XYZ Company (from problem 3) actually only has 180 units of inventory. What adjusting entry is needed?

Solution:

The error understates the cost of goods sold and overstates ending inventory. The adjusting entry would be:

• Debit: Cost of Goods Sold (20 units x $22) = $440
• Credit: Inventory $440

This entry reduces the overstated inventory and increases the understated cost of goods sold, correcting the error in the financial statements.

Advanced Concepts and Considerations

Module 5 might also introduce more advanced topics like:

• Inventory Turnover Ratio: This ratio measures how efficiently a company manages its inventory. It's calculated by dividing the cost of goods sold by the average inventory. A high turnover ratio generally indicates efficient inventory management.

• Gross Profit Method: This method estimates the value of ending inventory using the gross profit percentage. It's often used for interim financial reporting or when a physical inventory count is impractical.

• Specific Identification Method: This method is used when each item in inventory can be specifically identified and tracked. This approach is used less frequently for large inventories of homogenous goods.

• Impact of Inventory Methods on Taxes: The choice of inventory costing method can have significant tax implications, especially in periods of inflation or deflation. LIFO, while not permitted under IFRS, can result in lower taxable income during periods of rising prices in some jurisdictions.

Tips for Success in ACC 202 Module 5

• Thorough Understanding of Concepts: Focus on understanding the underlying principles of each inventory costing method and the LCM rule. Don't just memorize formulas; grasp the logic behind them.

• Practice, Practice, Practice: Work through numerous problems to reinforce your understanding. The more practice you get, the better you'll become at applying the concepts.

• Seek Help When Needed: Don't hesitate to ask your instructor or classmates for clarification on any confusing concepts or problems.

• Use Available Resources: Utilize your textbook, lecture notes, and online resources to supplement your understanding.

• Organize Your Work: When solving problems, show your work clearly and systematically. This will help you identify any errors and make it easier to understand your solutions.

• Review and Reflect: After completing a problem set, review your answers and reflect on any areas where you struggled. This reflective practice will help solidify your understanding of the material.

By diligently studying the core concepts, working through practice problems, and seeking help when needed, you'll successfully navigate the challenges of ACC 202 Module 5 and build a solid foundation in intermediate accounting. Remember that consistent effort and a focused approach are key to mastering this material.