BRIEF EXERCISE 6-4
(a) FIFO would result in the highest net income.
(b) FIFO would result in the highest ending inventory.
(c) LIFO would result in the lowest income tax expense (because it
would result in the lowest taxable income).
(d) Average cost would result in the most stable income over a
number of years because it averages out any big changes in the
cost of inventory.
EXERCISE 6-3
(a) Do not include—Trinh does not own items held on consignment.
(b) Include in inventory—Trinh still owns the items as they were only
shipped on consignment.
(c) Include in inventory—Shipping terms FOB destination means that
Trinh owns the items until they reach the customer.
(d) Do not include in inventory—Because the shipping terms are FOB
shipping point, ownership has transferred to the customer. Trinh
should record this amount as a sale on the income statement.
(e) Do not include in inventory—Because the shipping terms are FOB
destination, Trinh does not own the goods until they arrive at
Trinh’s premises.
(f) Include in inventory—Shipping terms FOB shipping point means
that ownership transferred at the time of shipping and therefore,
Trinh owns the goods in transit.
(g) Do not include in inventory. Record as Office Supplies on the
balance sheet.
EXERCISE 6-5
(a)
FIFO
Beginning inventory (30 X $9)..........................................
Purchases
May 15 (25 X $10) .......................................................
May 24 (38 X $11) .......................................................
Cost of goods available for sale (93 units) .....................
Less: Ending inventory [(93 – 74) X $11]........................
Cost of goods sold ...........................................................
$270
$250
418
668
938
209
$729
PROOF
Date
5/1
5/15
5/24
Units
30
25
19
74
Unit Cost
$ 9
10
11
Total Cost
$270
250
209
$729
(b)
AVERAGE-COST
$938 ÷ 93 = $10.086 weighted-average unit cost
Cost of goods available for sale ..................................................
Less: Ending inventory (19 X $10.086) ........................................
Cost of goods sold .......................................................................
$938.00
191.63
$746.37
PROOF
Units
74
*$.01 rounding difference.
Unit Cost
$10.086
Total Cost
$746.36*
EXERCISE 6-5 (Continued)
(c)
LIFO
Cost of goods available for sale .................................................
Less: Ending inventory (19 X $9) ...............................................
Cost of goods sold ......................................................................
$938
171
$767
PROOF
Date
5/24
5/15
5/1
Units
38
25
11
74
Unit Cost
$11
10
9
Total Cost
$418
250
99
$767
EXERCISE 6-9
Inventory at
Market
Lower-of-CostLower-of-CostCost/Unit Value/Unit
or-Market
Units
or-Market
Cameras:
Minolta
Canon
Light Meters:
Vivitar
Kodak
Total
$170
145
$158
152
$158
145
5
7
$ 790
1,015
125
120
114
135
114
120
12
10
1,368
1,200
$4,373
PROBLEM 6-2A
(a)
COST OF GOODS AVAILABLE FOR SALE
Date
March 1
5
13
21
26
Explanation
Units Unit Cost
Beginning inventory 2,500
$ 7
Purchase
2,000
8
Purchase
3,500
9
Purchase
5,000
10
Purchase
2,000
11
Total
15,000
Total Cost
$ 17,500
16,000
31,500
50,000
22,000
$137,000
(b)
FIFO
(1)
Ending Inventory
Unit
Total
Date
Units Cost
Cost
March 26 2,000
$11 $22,000
21 1,000
10
10,000
3,000*
$32,000
(2)
Cost of Goods Sold
Cost of goods
available for sale
$137,000
Less: Ending
inventory
32,000
Cost of goods sold
$105,000
*15,000 – 12,000 = 3,000
Proof of Cost of Goods Sold
Unit
Total
Date
Units
Cost
Cost
March 1
2,500
$7
$ 17,500
5
2,000
8
16,000
13
3,500
9
31,500
21
4,000
10
40,000
12,000
$105,000
PROBLEM 6-2A (Continued)
LIFO
(1)
Ending Inventory
Unit
Total
Date
Units Cost
Cost
March 1 2,500
$7 $17,500
5
500
8
4,000
3,000
$21,500
(2)
Cost of Goods Sold
Cost of goods
available for sale
$137,000
Less: Ending
inventory
21,500
Cost of goods sold
$115,500
Proof of Cost of Goods Sold
Unit
Total
Date
Units Cost
Cost
March 26 2,000 $ 11 $ 22,000
21 5,000
10
50,000
13 3,500
9
31,500
5 1,500
8
12,000
12,000
$115,500
AVERAGE-COST
(1)
Ending Inventory
(2)
Cost of Goods Sold
Cost of goods
$137,000 ÷ 15,000 = $9.133
available for sale
$137,000
Less: Ending
Unit
Total
inventory
27,399
Units
Cost
Cost
Cost of goods sold
$109,601
3,000
$9.133
$27,399
Proof of Cost of Goods Sold 12,000 X $9.133 = $109,596 ($5 rounding error)
(c) (1) As shown in (b), FIFO produces the highest inventory
amount, $32,000.
(2) As shown in (b), LIFO produces the highest cost of goods
sold, $115,500.
BYP 6-2
COMPARATIVE ANALYSIS PROBLEM
(a)
Tootsie Roll
1. Inventory turnover
$318, 645
*($55, 584 + $56,387)** ÷ 2
$318, 645
= 5.7 Times
$55, 985.5
*($34,862 + $20,722)
2. Days in inventory
Hershey Foods
365
= 64.0 days
5.7
$3, 245, 531
($592,530 + $519, 712) ÷ 2
$3, 245, 531
= 5.8 Times
$556,121
**($35,570 + $20,817)
365
= 62.9 days
5.8
(b) Generally, companies that are able to keep their inventory at lower
levels and higher turnovers and still satisfy customer needs are
the most successful. Tootsie Roll’s and Hershey Foods’ days in
inventory are approximately the same at about 63-64 days. This
means that both companies maintain more than two months of
inventory on hand.