Accounting Principles 7Th Canadian Edition
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Accounting Principles 7Th Canadian Edition Volume 1
By Jerry J. Weygandt,Test Bank
Sample Test
CHAPTER 6
INVENTORY costing
CHAPTER STUDY OBJECTIVES
1. Describe the steps in determining inventory quantities. The steps in
determining inventory quantities are (1) taking a physical inventory of
goods on hand, and (2) determining the ownership of goods in transit,
on consignment, and in similar situations.
2. Calculate cost of goods sold and ending inventory in a perpetual
inventory system using the specific identification, FIFO, and
weighted average methods of cost determination. Costs are
allocated to the Cost of Goods Sold account each time a sale occurs in
a perpetual inventory system. The cost is determined by specific
identification or by one of two cost formulas: FIFO (first-in, first-out) and
weighted average.
Specific identification is used for goods that are not ordinarily interchangeable.
T is method tracks the actual physical flow of goods, allocating the exact cost
of each merchandise item to cost of goods sold and ending inventory.
The FIFO cost formula assumes a first-in, first-out cost flow for sales. Cost of
goods sold consists of the cost of the earliest goods purchased. Ending
inventory is determined by allocating the cost of the most recent purchases to
the units on hand.
The weighted average cost formula is used for goods that are homogeneous
or non-distinguishable. Under weighted average, a new weighted (moving)
average unit cost is calculated after each purchase and applied to the number
of units sold. Inventory is updated by subtracting cost of goods sold for each
sale from the previous ending inventory balance.
3. Explain the financial statement effects of inventory cost
determination methods. Specific identification results in the best
match of costs and revenues on the income statement. When prices are
rising, weighted average results in a higher cost of goods sold and lower
profit than FIFO. Weighted average results in a better match on the
income statement because it results in an expense amount made up of
more current costs. On the balance sheet, FIFO results in an ending
inventory that is closest to the current (replacement) value and the best
balance sheet valuation. All three methods result in the same cash flow.
4. Determine the financial statement effects of inventory errors. An
error in beginning inventory will have a reverse effect on profit in the
current year (e.g., an overstatement of beginning inventory results in an
overstatement of cost of goods sold and an understatement of prof t).
An error in the cost of goods purchased will have a reverse effect on
profit (e.g., an overstatement of purchases results in an overstatement
of cost of goods sold and an understatement of profit). An error in
ending inventory will have a similar effect on profit (e.g., an
overstatement of ending inventory results in an understatement of cost
of goods sold and an overstatement of profit). If ending inventory errors
are not corrected in the following period, their effect on profit for the
second period is reversed and total prof t for the two years will be
correct. On the balance sheet, ending inventory errors will have the
same effects on total assets and total owner’s equity, and no effect on
liabilities.
5. Value inventory at the lower of cost and net realizable value. The
cost of the ending inventory is compared with its net realizable value. If
the net realizable value is lower, a write-down is recorded, which results
in an increase in cost of goods sold, and a reduction in inventory. The
write-down is reversed if the net realizable value of the inventory
increases, but the value of the inventory can never be higher than its
original cost.
6. Demonstrate the presentation and analysis of inventory. Ending
inventory is reported as a current asset on the balance sheet at the
lower of cost and net realizable value. Cost of goods sold is reported as
an expense on the income statement. Additional disclosures include the
cost determination method.
The inventory turnover ratio is a measure of liquidity. It is calculated by
dividing the cost of goods sold by average inventory. It can be converted to
days sales in inventory by dividing 365 days by the inventory turnover ratio.
7. Calculate ending inventory and cost of goods sold in a periodic
inventory system using FIFO and weighted average inventory cost
formulas (Appendix 6A). Under the FIFO cost formula, the cost of the
most recent goods purchased is allocated to ending inventory. The cost
of the earliest goods on hand is allocated to cost of goods sold. Under
the weighted average cost formula, the total cost available for sale is
divided by the total units available to calculate a weighted average unit
cost. The weighted average unit cost is applied to the number of units
on hand at the end of the period to determine ending inventory. Cost of
goods sold is calculated by subtracting ending inventory from the cost of
goods available for sale.
The main difference between applying cost formulas in a periodic inventory
system and applying cost formulas in a perpetual inventory system is the
timing of the calculations. In a periodic inventory system, the cost formula is
applied at the end of the period. In a perpetual inventory system, the cost
formula is applied at the date of each sale to determine the cost of goods sold.
8. Estimate ending inventory using the gross profit and retail
inventory methods (Appendix 6B). Two methods of estimating
inventories are the gross profit method and the retail inventory method.
Under the gross prof t method, the gross profit margin is applied to net
sales to determine the estimated cost of goods sold. The estimated cost
of goods sold is subtracted from the cost of goods available for sale to
determine the estimated cost of the ending inventory. Under the retail
inventory method, a cost-to-retail ratio is calculated by dividing the cost
of goods available for sale by the retail value of the goods available for
sale. This ratio is then applied to the ending inventory at retail to
determine the estimated cost of the ending inventory.
Exercises
Exercise 1
Workman Art Sales uses the perpetual inventory system. On September 30,
2017, the company’s year end, a physical count was taken of the inventory on
hand. The cost of the inventory on hand was determined to be $325,400.
However, the accountant has questions about the following items:
1. On the store shelves, the staff counted 7 paintings held by Workman on
consignment from a local artist. The paintings are included on the
inventory count at a cost of $4,200.
2. On September 30, a shipment of goods was sent to a customer, FOB
destination. The cost of the goods shipped is $7,800, and freight, which
is to be paid by Workman, will cost $200. These items are not included
in the inventory count. Delivery is expected to take three days.
3. On October 2, a freight company delivered goods that cost $10,000 to
Workman’s warehouse. The goods had been shipped by the vendor on
September 29, FOB shipping point. Freight on this shipment will amount
to $500 and will be paid by the appropriate party. The goods are not
included on the inventory count.
4. On September 30 a loyal customer visited Workman’s retail shop and
asked that certain items be set aside for him. The goods set aside have
a cost of $1,300. The customer intends to let Workman know no later
than October 2 whether or not he wishes to finalize the sale and have
the goods shipped to his home. The freight will cost $50 and will be paid
by Workman. The sales person was fairly sure the customer will take
the items; and so prepared the sales invoice on September 30. The
items are not included on the inventory count.
5. Residing in Workman’s warehouse is merchandise costing $5,000 that
was purchased in September and found to be defective. Workman’s
purchasing manager has arranged with the vendor to accept return of
the goods and has packaged them for return shipment. The vendor
processed a credit to Workman’s account on September 28, and has
arranged to have the goods picked up on October 1. The items are
included on the inventory count.
Instructions
Calculate the correct inventory balance at September 30, 2017. For each of
the above items, explain the basis of your treatment of the item.
Solution 1 (15 min.)
List
$325,400
Unadjusted inventory balance
1. (4,200) The goods on consignment do not belong to Workman.
2. 7,800 Because they were sent FOB destination, the goods belong to
Workman
until delivered.
3. 10,500 The goods are the responsibility of Workman from the shipping
point.
Include freight-in in the merchandise inventory cost.
4. 1,300 Because the sale is not final, the goods belong to Workman, not
the customer.
5. (5,000) Because the vendor has approved the return and processed the
credit,
______
$335,800
these goods should not be included in Workman’s inventory.
Adjusted inventory balance.
Bloomcode: Analysis
Difficulty: Medium
Learning Objective: Describe the steps in determining inventory quantities.
Section Reference: Determining Inventory Quantities
CPA: Financial Reporting
Exercise 2
Helsinki Furniture Sales uses the periodic inventory system. On April 30,
2017, the company’s year end, a physical count was taken of the inventory on
hand in both the warehouse and the retail store area for the purpose of
determining cost of goods sold and ending inventory value. The preliminary
inventory list prepared by the warehouse manager shows a total inventory on
hand of $738,000. The following are items that the warehouse manager noted
on a separate sheet. None of these items are currently part of the final
inventory listing because the manager was not sure how they should be
treated for inventory purposes.
1. On April 30, Helsinki shipped an order to a customer, FOB shipping
point. The cost of the goods shipped is $9,650. Freight, which is to be
paid by the appropriate party, will cost $375.
2. On April 30, a customer visited Helsinki’s shop and selected a desk that
she wanted to purchase and paid for it in full. The sales price of the
desk was $3,500, and the cost was $2,200. The customer intends to
send a truck to pick up the desk no later than May 2. The freight will
cost $50 and will be paid by the customer. A “Sold” sign has been
placed on the desk but it is still on display in the store.
3. Residing in Helsinki’s warehouse is furniture costing $21,000 that was
purchased in April and needs to be returned. The goods were special
ordered for a customer who has since decided not to buy them after all.
Helsinki’s supplier has agreed to accept return of the goods and will
allow a full credit on Helsinki’s account as soon as they are received. A
freight company is scheduled to pick up the merchandise on the
morning of May 1, and so they have been set aside near the loading
dock. The freight, which will be paid by the customer as a fee for the
cancellation, is to cost $300.
4. Helsinki sells some of its merchandise in smaller towns by placing
samples on consignment with local hardware stores. The manager
noted that 15 desks at a cost of $1,200 each and 30 chairs at $75 each
are currently out on consignment.
5. On May 2, a freight company delivered goods that cost $65,000 to
Helsinki’s warehouse. The goods had been shipped by the vendor on
April 29, FOB destination. Freight on this shipment will amount to $400
and will be paid by the appropriate party.
Instructions
Calculate the correct inventory balance at April 30, 2017. For each of the
above items, explain the basis of your treatment of the item.
Solution 2 (15 min.)
List
$738,000
Unadjusted inventory balance
1. 0 Because the sale is FOB shipping point, the customer has already
taken
title at April 30. The freight is the customer’s responsibility.
2. 0 The sale was completed on April 30, so the desk does not belong to
Helsinki and should not be included in their inventory.
3. 21,000 The goods are in Helsinki’s possession, and at this point they
have not
yet received a credit from the vendor, so the goods should be included in
inventory.
4. 20,250 The goods belong to Helsinki even though they are not in their
possession. Total cost is ($1,200 x 15) + ($75 x 30) = $20,250
5. 0 Because the goods are shipped FOB destination, Helsinki does not
get
title until they arrive. The vendor is responsible for the freight.
______
$779,250
Adjusted inventory balance
Bloomcode: Analysis
Difficulty: Medium
Learning Objective: Describe the steps in determining inventory quantities.
Section Reference: Determining Inventory Quantities
CPA: Financial Reporting
Exercise 3
Fyodorov Company, using a periodic inventory system, has just completed a physical inventory count at
year end, December 31, 2017. Only the items on the shelves, in storage, and in the receiving area were
counted. The inventory amounted to $60,000. During the audit, the independent CPA discovered the
following additional information:
1. There were goods in transit on December 31, 2017, from a supplier with
terms FOB destination, costing $8,000. Because the goods had not
arrived, they were excluded from the physical inventory count.
2. On December 27, 2017, a regular customer purchased goods for cash
amounting to $1,000 and left them for pickup on January 4, 2018.
Fyodorov Company had paid $500 for the goods and, because they
were on hand, included them in the physical inventory count.
3. Fyodorov Company, on the date of the inventory count, received notice
from a supplier that goods ordered earlier, at a cost of $4,000, had been
delivered to the transportation company on December 28, 2017; the
terms were FOB shipping point. Because the shipment had not arrived
on December 31, 2017, it was excluded from the physical inventory.
4. On December 31, 2017, there were goods in transit to customers, with
terms FOB shipping point, amounting to $800 (expected delivery on
January 8, 2018). Because the goods had been shipped, they were
excluded from the physical inventory count.
5. On December 31, 2017, Fyodorov Company shipped $2,500 worth of
goods to a customer, FOB destination, in Thunder Bay. The goods
arrived in Thunder Bay on January 5, 2018. Because the goods were
not on hand, they were not included in the physical inventory count.
6. Fyodorov Company, as the consignee, had goods on consignment that
cost $8,000. Because these goods were on hand as of December 31,
2017, they were included in the physical inventory count.
Instructions
Analyze the above information for Fyodorov Company and calculate a
corrected amount for the ending inventory. Explain the basis for your
treatment of each item.
Solution 3 (20 min.)
List:
$60,000
Unadjusted inventory balance
1. 0 Because the goods were shipped FOB destination,
the title will pass to Fyodorov upon arrival. Properly excluded.
2. 500 Goods should be excluded. The customer owns them.
3. + 4,000 Goods belong to Fyodorov. Title passed when supplier
delivered the goods to the transportation company.
4. 0 Because the goods were shipped FOB shipping point,
Fyodorov no longer has title to these goods. Properly excluded.
5. + 2,500 Goods were shipped FOB destination.
Fyodorov retains title until the customer receives them.
6. – 8,000 These goods are owned by the consignor, not the consignee,
and should not be included in Fyodorov’s inventory.
______
$58,000
Corrected inventory
Bloomcode: Analysis
Difficulty: Medium
Learning Objective: Describe the steps in determining inventory quantities.
Section Reference: Determining Inventory Quantities
CPA: Financial Reporting
Exercise 4
Dark Matter Coffee is a sole proprietorship owned by Evan Fantom. The
company is in its second year of operations and only has one coffee blend
available in one size. Evan does not have any background in accounting and
would like your expertise to determine the individual and total impact of the
following items on the ending inventory balance for the company’s December
31, 2017 year end.
1. Evan keeps all inventory in his basement which he claims has a total
cost of $40,000 (500 units). Of this amount, 50 units costing $3,000
spilled and could not be salvaged or sold.
2. Evan has 80 units with a cost of $5,500 loaded in a delivery van ready
to be shipped to customers. The terms of these sales are FOB
destination.
3. Evan has decided to try and sell goods on consignment for the first time.
At year end, Evan has shipped out 100 units on consignment for a total
cost of $7,750. These goods have not yet been sold by the consignee at
year end and Evan has not received any proceeds.
Solution 4 (10 min.)
1. The damaged goods (50 units) costing $3,000 should not be included in
the ending inventory balance. This leaves 450 units with a cost of
$37,000 to be included in ending inventory.
2. The terms FOB destination implies that title to the goods remain with
Dark Matter until the goods have reached the destination and delivery is
complete. All 80 units costing $5,500 should be included in ending
inventory.
3. Legal title to the goods on consignment remains with Dark Matter until
ultimate sale to the end consumer since the consignee is only acting as
an agent to facilitate the sale. As a result the 100 units costing $7,750
should be included in ending inventory.
Total impact on the December 31, 2017 ending inventory = 450 + 80 + 100
= 630 units; $37,000 + 5,500 + $7,750 = $50,250
Bloomcode: Analysis
Difficulty: Easy
Learning Objective: Describe the steps in determining inventory quantities.
Section Reference: Determining Inventory Quantities
CPA: Financial Reporting
Exercise 5
Olynik Company uses the perpetual inventory system and the weighted
average cost formula. The following information is available for the month of
June:
Date
Explanation
Units
Unit Cost
Jun 1
Beginning Inventory
200
$10
Jun 15
Purchase
300
11
Jun 17
Sale
250
?
Jun 24
Purchase
400
12
Instructions
Prepare a schedule to show cost of goods sold and the value of the ending
inventory for the month of June.
Solution 5 (10 min.)
Purchases
Date
Cost of Goods Sold
Units
Cost
Total
300
$11
$3,300
Units
Cost
Total
250
$10.60
$2,650
Jun 1
Jun 15
Jun 17
Jun 24
400
12
700
4,800
$8,100
250
Cost of Goods Sold: $2,650
Ending Inventory:
$7,450
Check:
Beginning Inventory + Purchases − Cost of Goods Sold = Ending Inventory:
$2,650
$2,000 + $8,100 – $2,650 = $7,450
Bloomcode: Application
Difficulty: Medium
Learning Objective: Calculate cost of goods sold and ending inventory in a
perpetual inventory system using the specific identification, FIFO, and
weighted average methods of cost determination.
Section Reference: Inventory Cost Determination Methods
CPA: Financial Reporting
Exercise 6
Gabbins Company uses the perpetual inventory system and the FIFO cost
formula.
Purchases
Units
Sales
Unit Cost
Units Selling
Price/Unit
Mar
3
1
Beginning inventory
Purchase
100
60
$50
$60
4
Sales
$100
10
Purchase
70
200
$70
16
Sales
$110
80
19
Sales
$110
80
25
Sales
$110
50
30
Purchase
Instructions
40
$75
31.
a) Using the inventory and sales data above, calculate the value
assigned to cost of goods sold in March and to the ending inventory at
March 31.
32.
b) Prepare the journal entries to record the sales on March 4 and
March 19. All sales are made on credit.
Solution 6 (20 min.)
a)
Purchases
Date
Cost of Goods Sold
Units
Cost
Total
60
$60
$ 3,600
Units
Cost
Total
70
$50
$3,500
30
50
50
60
10
60
70
70
50
70
Mar 1
Mar 3
Mar 4
Mar 10
200
70
14,000
Mar 16
Mar 19
Mar 25
Mar 30
40
75
3,000
4,500
5,500
3,500
300
Ending Inventory:
Cost of Goods Sold:
$20,600
280
$17,000
$8,600
$17,000
Check:
Beginning Inventory + Purchases − Cost of Goods Sold = Ending Inventory:
$5,000 + $20,600 − $17,000 = $8,600
b)
Mar
4 Accounts
Receivable…………………………………………………..
7,000
Sales (70 x
$100)………………………………………………….
Cost of Goods
Sold……………………………………………………..
7,000
3,500
Inventory (70 x
$50)………………………………………………
3,500
Mar 19 Accounts
Receivable…………………………………………………..
8,800
Sales (80 x
$110)………………………………………………….
Cost of Goods
Sold……………………………………………………..
Inventory [(10 x $60) + (70 x
$70)]………………………….
5,500
8,800
5,500
Bloomcode: Application
Difficulty: Hard
Learning Objective: Calculate cost of goods sold and ending inventory in a
perpetual inventory system using the specific identification, FIFO, and
weighted average methods of cost determination.
Section Reference: Inventory Cost Determination Methods
CPA: Financial Reporting
Exercise 7
Starshine Coffee Equipment sells European style coffee makers and uses a
perpetual inventory system. Its inventory records show that on June 1,
Starshine had 12 units on hand at a cost of $220 each. Transactions related
to purchase and sale of coffee makers in June were as follows:
Per
Date
Transaction
Units
June 10
Sale
3
June 15
Sale
4
June 20
Purchase
5
$23
June 22
Purchase
6
$24
June 30
Sale
10
Instructions
Cos
For each of the following cost formulas, calculate the ending inventory as at
June 30 and the cost of goods sold for the month of June. Prove the cost of
goods sold calculations.
1. a) FIFO
2. b) Weighted Average
Solution 7 (25 min.)
1. a) FIFO
Purchases
Date
Units
Cost of goods sold
Cost
Total
Units
Cost
Total
Jun 1
Jun 10
3
$220
$660
Jun 15
4
220
880
5
220
1,100
5
230
1,150
Jun 20
5
$230
$1,150
Jun 22
6
240
1,440
Jun 30
$2,590
$3,790
Check: $2,640 + $2,590 − $3,790 = $1,440
1. b) Weighted Average
Purchases
Date
Units Cost
Total
Cost of goods sold
Balance
Units Cost
Units Cost
Total
12
$220
$2,640
Total
Jun 1
Jun
10
3
$220
$ 660
9
220
1,980
Jun
15
4
220
880
5
220
1,100
2,250
Jun
20
5
$230 1,150
10
225
Jun
22
6
240
16
230.63 3,690
6
230.63 1,384
1,440
Jun
30
10
230.63 2,306
$2,590
Check: $2,640 + $2,590 − $3,846 = $1,384
Bloomcode: Application
Difficulty: Hard
$3,846
Learning Objective: Calculate cost of goods sold and ending inventory in a
perpetual inventory system using the specific identification, FIFO, and
weighted average methods of cost determination.
Section Reference: Inventory Cost Determination Methods
CPA: Financial Reporting
Exercise 8
In July, Brilliant Jewellers Company purchased the following items:
Date Purchased
# Rings
Jul. 2
1
Jul 5
2
Jul 10
1
Jul 19
3
Jul 20
4
On July 22, one ring from the July 2 purchase was sold for $19,500 and 2
rings from the July 20 purchase were sold for $1,520 each. All sales and
purchases are made on credit.
Instructions
1. a) Calculate ending inventory and cost of goods sold using specific
identification.
2. b) Prepare the journal entry to record the July 22 sale.
Solution 8
1. a) Specific Identification
Purchases
Date
Cost of Goods Sold
Units
Cost
Total
1
$15,000
$15,000
Jul 5
2
$9,250
18,500
Jul 10
1
$750
$750
Jul 19
3
$12,500
$37,500
Jul 20
4
$945
$3,780
Jul 2
Jul 22
Units
Cost
Total
1
$15,000
$15,000
2
$945
$1,890
Total
11
$75,530
3
$16,890
Cost of Goods Sold = $16,890
Ending Inventory = $58,640
b)
Jul
22 Accounts
Receivable…………………………………………………..
Sales [($19,500 + (1,520 x
2)]…………………………………
22,540
22,540
Cost of Goods
Sold……………………………………………………..
16,890
Inventory (15,000 +
1,890)……………………………………..
16,890
Bloomcode: Application
Difficulty: Medium
Learning Objective: Calculate cost of goods sold and ending inventory in a
perpetual inventory system using the specific identification, FIFO, and
weighted average methods of cost determination.
Section Reference: Inventory Cost Determination Methods
CPA: Financial Reporting
Exercise 9
Gabi’s Boutique Company uses a perpetual inventory system. Beginning
Inventory is 2,500 T-shirts at a cost $2.50 per shirt. During the year Gabi’s
Boutique purchased the following shirts:
Jan 12
Purchased
500 un
Feb 18
Sold
1,350
Jul 1
Purchased
1,000
Aug 29
Sold
1,475
Dec 19
Purchased
500 un
All purchases and sales are on account.
Instructions
1. a) Calculate the cost of goods sold and ending inventory using weighted
average.
2. b) Prepare journal entries to record the February 18 and the August 29
sales. All sales and purchases are made in cash only.
Solution 9
1. a) Weighted Average
Purchases
Date
Units
Cost of Goods Sold
Cost
Total
$2.15
$1,075
Units
Cost
Total
1350
$2.4418
$3,296
Jan 1
Jan 12 500
Feb 18
Jul 1
1,000 $2.65
$2,650
Aug
29
1,475
Dec
19
500
Total
2,000
$3.05
$2.5203
$1,525
$5,250
2,825
$7,013
Check: $6,250 + $5,250 = $7,013 + $4,487
Cost of Goods sold = $7,013
Ending Inventory = $4,487
b)
Feb 18
…….
$3,717
Cash……………………………………………………………………
8,775
Sales (1,350 x
$6.50)…………………………………………….
Cost of Goods
Sold……………………………………………………..
Inventory (1,350 x
$2.4418)……………………………………
8,775
3,296
3,296
Aug 29 Cash……………………………………………………………………
……. 11,062.50
Sales (1,475 x
$7.50)…………………………………………….
Cost of Goods
Sold……………………………………………………..
11,062.50
3,717
Inventory (1,475 x
$2.5203)……………………………………
3,717
Bloomcode: Application
Difficulty: Easy
Learning Objective: Calculate cost of goods sold and ending inventory in a
perpetual inventory system using the specific identification, FIFO, and
weighted average methods of cost determination.
Section Reference: Inventory Cost Determination Methods
CPA: Financial Reporting
Exercise 10
The Lighting Showcase sells many different light bulbs and uses a perpetual
inventory system. During February, the company had beginning inventory,
purchases, and sales for bulb 101 as follows:
Date
Transaction
Beginning Inventory
February 5
Sale
February 10
Purchase
February 15
Sale
February 25
Sale
Instructions
Prepare a schedule to determine the cost of goods sold and ending inventory
using the FIFO cost formula for the period ended February 28, 2017.
Solution 10 (10 min.)
Purchases
Date
Units
Cost of goods sold
Cost
Total
Units
Cost
Tot
50
$15
$7
Feb 15
25
15
375
Feb 25
25
15
375
10
13
130
Feb 1
Feb 5
Feb 10
70
$13
$910
$ 910
Check: $1,500 + $910 − $1,630 = $780
Bloomcode: Application
Difficulty: Medium
Learning Objective: Calculate cost of goods sold and ending inventory in a
perpetual inventory system using the specific identification, FIFO, and
weighted average methods of cost determination.
$
Section Reference: Inventory Cost Determination Methods
CPA: Financial Reporting
Exercise 11
The Lighting Showcase sells many different light bulbs and uses a perpetual
inventory system. During February, the company had beginning inventory,
purchases, and sales for bulb 101 as follows:
Date
Transaction
Beginning Inventory
February 5
Sale
February 10
Purchase
February 15
Sale
February 25
Sale
Instructions
2017. a) Prepare a schedule to determine the cost of goods sold and
ending inventory using the weighted average cost formula for the period
ended February 28, 2017.
2018. b) Assuming Lighting Showcase used FIFO cost formula, what
balance would be reported for inventory at February 28, 2017? What
impact would this have on the profit/loss?
Solution 11 (10 min.)
1. a) Weighted Average
Purchases
Date
Units
Cost of goods sold
Cost
Total
Units
Cost
Total
Feb 1
Feb 5
50
$15
$750
Feb 15
25
13.83
346
Feb 25
35
13.83
484
Feb 10
70
$13
$910
$ 910
Check: $1,500 + $910 − $1,580 = $830
1. b) FIFO = 60 units in ending inventory x $13 per unit = $780
The difference between the two methods will be transferred to cost of goods
sold = $830 – $780 = $50 increase in cost of goods sold resulting in a
reduction in profit by the same amount. Proof: $1,500 + $910 = $2,410 (goods
available for sale) – $780 (FIFO ending inventory) = $1,630 vs. $1,580 (cost of
goods sold) per part a).
Bloomcode: Application
Difficulty: Medium
Learning Objective: Calculate cost of goods sold and ending inventory in a
perpetual inventory system using the specific identification, FIFO, and
weighted average methods of cost determination.
Section Reference: Inventory Cost Determination Methods
$ 1,580
Learning Objective: Explain the financial statement effects of inventory cost
determination methods.
Section Reference: Financial Statement Effects
CPA: Financial Reporting
Exercise 12
O’Meara Sales sells golf bags and uses a perpetual inventory system.
O’Meara’s inventory records show that at March 1, there were 30 units on
hand at a cost of $135 each. Transactions related to purchase and sale of golf
bags in March were as follows:
Per u
Date
Transaction
Units
Cost
Mar 2
Purchase
17
$127
Mar 5
Sale
10
Mar 15
Purchase
12
$125
Mar 20
Purchase
5
$120
Mar 30
Sale
50
Instructions
1. a) For each of the following cost formulas, calculate the ending
inventory as at March 31 and the cost of goods sold for the month of
March.
2. FIFO
3. Weighted Average
4. b) Calculate the gross profit and gross profit margin that will be reported
under each of the two cost formulas.
5. c) Assume that O’Meara is motivated to report the highest profit
possible. Which method will they prefer? Would your answer be
different if the cost of golf bags was increasing, instead of decreasing?
What if the cost was fluctuating randomly? Assume the selling price of
the golf bags is the same regardless of which cost formula is used.
Solution 12 (30 min.)
1. a) (i) FIFO
Purchases
Date
Units
Cost of goods sold
Cost
Total
Units
Cost
Total
Mar 1
Mar 2
17
$127
$2,159
Mar 5
10
Mar 15
12
125
1,500
Mar 20
5
120
600
$135
$1,35
Mar 30
20
135
17
127
12
125
1
120
$4,259
6,479
$7,82
a)(ii) Weighted Average
Purchases
Date
Units
Cost of goods sold
Cost
Total
Units
Cost
Total
10
$132.11
$1,321
50
129.41
$6,470
Mar 1
Mar 2 17
$127.00
$2,159
Mar 5
Mar
15
12
125.00
1,500
Mar
20
5
120.00
600
Mar
30
$4,259
$7,791
b)
FIFO
Weighted Average
Sales revenue (A) 60 x $150
$9,000
$9,000
Cost of goods sold
(7,829)
(7,791)
Gross profit (B)
$1,171
$1,209
Gross profit margin (B ÷ A)
13.0%
13.4%
1. c) To report the highest profit possible, O’Meara must use the cost
formula that produces the lowest cost of goods sold. When costs are
decreasing, this is weighted average. If costs were steadily increasing,
FIFO would produce the highest profit. If costs were fluctuating, the
choice of cost formulas would not produce a consistently higher or lower
profit.
Bloomcode: Application
Difficulty: Hard
Learning Objective: Calculate cost of goods sold and ending inventory in a
perpetual inventory system using the specific identification, FIFO, and
weighted average methods of cost determination.
Section Reference: Inventory Cost Determination Methods
Learning Objective: Explain the financial statement effects of inventory cost
determination methods.
Section Reference: Financial Statement Effects
CPA: Financial Reporting
Exercise 13
Windsor Company reported the following summarized information at the end
of 2017:
Sales revenue……………………………………………………… $1,200,000
Cost of goods sold*……………………………………………….
Gross profit…………………………………………………………..
Operating expenses………………………………………………
800,000
400,000
150,000
Profit…………………………………………………………………… $ 250,000
*Calculated using ending FIFO inventory of $250,000.
The controller of the company is considering a switch from FIFO to weighted
average. He has determined that under weighted average, the ending
inventory would have been $150,000.
Instructions
1. a) Restate the above summarized information using weighted average.
2. b) What effect, if any, would the proposed change have on Windsor’s
profit and cash flows?
3. c) If you were an owner of this business, what would your reaction be to
this proposed change?
Solution 13 (20 min.)
1. a) Restate to weighted average cost formula:
Sales revenue……………………………………………………… $1,200,000
Cost of goods sold*……………………………………………….
Gross profit…………………………………………………………..
Operating expenses………………………………………………
900,000
300,000
150,000
Profit…………………………………………………………………… $ 150,000
*Ending inventory would be $100,000 less ($250,000 – $150,000 = $100,000)
under weighted average, thereby increasing cost of goods by $100,000.
1. b) Switching to the weighted average cost formula would result in
$100,000 less profit. Profit is $150,000 under the weighted average cost
formula, compared to $250,000 profit reported under FIFO.
No impact to cash is caused by his change. The cash impact comes when
purchases and sales are made, and not from the choice of cost formula
allocating cost of goods available for sale between cost of goods sold and
ending inventory.
c)… Reporting more profit may appear to be desirable when reporting the
company’s financial results, or when seeking additional financing. On the
other hand, reporting less profit reduces the amount of income tax.
Nonetheless, a smart reader of these financial results would realize that there
is no substantive difference between the financial results when using the two
cost formulas. In total, over the life of the inventory, both cost formulas will
result in the same financial position. The difference in each year is a timing
difference only, resulting only from the method used to allocate the cost of
goods available for sale between cost of goods sold and ending inventory.
There is no cash impact. Changes to the costing method can only be
undertaken if the physical flow of the goods changes.
Bloomcode: Analysis
Difficulty: Medium
Learning Objective: Calculate cost of goods sold and ending inventory in a
perpetual inventory system using the specific identification, FIFO, and
weighted average methods of cost determination.
Section Reference: Inventory Cost Determination Methods
Learning Objective: Explain the financial statement effects of inventory cost
determination methods.
Section Reference: Financial Statement Effects
CPA: Financial Reporting
Exercise 14
Pete’s Packaging reported its cost of goods sold as follows:
2017
Beginning inventory
$
26,000
Cost of goods purchased
195,000
Ending inventory
(34,500)
Cost of goods sold
$ 186,500
The ending inventory at September 30, 2016 was overstated by $6,500.
Instructions
1. a) Calculate the correct cost of goods sold for both years.
2. b) Describe how the error has affected the financial statements for 2016
and for 2017, and for the two years combined.
Solution 14 (10 min.)
a)
2017
Beginning inventory
$ 19,500
Cost of goods purchased
195,000
Ending inventory
(34,500)
Cost of goods sold
$ 80,000
1. b) The balance sheet for 2016 will have been incorrect, with current
assets overstated by $6,500 due to the incorrect inventory amount. This
will have resulted in an incorrect working capital ratio. Owner’s equity
will also be overstated; if cost of goods sold is too low, then profit and
owner’s equity will also be overstated.
The profit for 2016 was overstated by $6,500 due to cost of goods sold being
calculated incorrectly, while 2017’s profit was understated by a corresponding
amount. When both years are added together, the total profit is correct.
However, due to the error affecting both years, a greater variability in cost of
goods sold and profit has been reported.
Bloomcode: Analysis
Difficulty: Medium
Learning Objective: Calculate cost of goods sold and ending inventory in a
perpetual inventory system using the specific identification, FIFO, and
weighted average methods of cost determination.
Section Reference: Inventory Cost Determination Methods
Learning Objective: Determine the financial statement effects of inventory
errors.
Section Reference: Inventory Errors
CPA: Financial Reporting
Exercise 15
Winston Auto Parts reported the following information in its income statement for 2016 and 2017:
2017
Sales
Cost of goods sold
Gross profit
Additional Information:
$ 126,000
88,000
$ 38,000
2017
Beginning inventory
8,000
Cost of goods purchased
90,00
Cost of goods available for sale
98,00
Ending inventory
(10,00
88,00
While completing Winston’s 2018 financial statements, the accountant
realized that errors had been made in previous years’ inventory calculations.
The correct ending inventory at December 31, 2015 was $6,000, the correct
ending inventory at December 31, 2016 was $4,000, and the correct ending
inventory at December 31, 2017 was $7,000.
Instructions
2017. a) Calculate the correct cost of goods sold and gross profit for
2016 and for 2017.
2018. b) Calculate the inventory turnover for 2016 and 2017:
(i) using the originally reported information; and
(ii) using the corrected information.
1. c) Calculate the gross profit margin for 2016 and 2017:
(i) using the originally reported information; and
(ii) using the corrected information.
1. d) Explain how the errors will have caused management performance to
be improperly evaluated.
Solution 15 (25 min.)
a)
Corrected COGS & GP
2017
Sales
$ 126,000
Cost of goods sold
87,000
Gross profit
$ 39,000
COGS calculated as follows:
2017
Beginning inventory
4,000
Cost of goods purchased
90,000
Cost of goods available for sale
94,000
Ending inventory
(7,000)
Cost of goods sold
87,000
1. b) (i) Inventory turnover using the originally reported information:
Turnover:
2017
Average inventory
(8,000+10,000) ÷ 2 =9,000
(5,0
Turnover
88,000 ÷ 9,000 = 9.78 times
67
1. b) (ii) Inventory turnover using the corrected information:
2016
Turnover:
2017
201
Average inventory
(4,000+7,000) ÷ 2 = 5,500
(6,
Turnover
87,000 ÷ 5,500 = 15.82 times
72
1. c) (i) Gross profit margin using the originally reported information:
2017
$38,000 ÷ $126,000
Gross profit margin
30.2%
1. c) (ii) Gross profit margin using the corrected information:
2017
$39,000 ÷ $126,000
Gross profit margin
31.0%
10.
Based on the incorrect figures, inventory turnover appears to have
decreased (from 10.31 times to 9.78), while the corrected figures show
that inventory turnover has in fact increased (from 14.40 to 15.82) which
is an improvement, rather than the deterioration shown using the
incorrect data.
Based on the incorrect figures, the gross profit margin had decreased
significantly, dropping by 13.5% from 2010 to 2011 (43.7% – 30.2%). The
gross profit margin has in fact decreased, but only by 8.5% (39.5% – 31.0%)
which is not as great a drop as the incorrect figures suggest.
Both of the performance measures when based on incorrect figures would
result in a more negative evaluation of management’s performance than is
warranted.
Bloomcode: Application
Difficulty: Hard
Learning Objective: Calculate cost of goods sold and ending inventory in a
perpetual inventory system using the specific identification, FIFO, and
weighted average methods of cost determination.
Section Reference: Inventory Cost Determination Methods
Learning Objective: Determine the financial statement effects of inventory
errors.
Section Reference: Inventory Errors
Learning Objective: Demonstrate the presentation and analysis of inventory.
Section Reference: Reporting and Analyzing Inventory
CPA: Financial Reporting
Exercise 16
Labco Company reported the following partial income statement for the
previous two years of operations:
2017
2018
Sales……………………………………………………………………………………
…….. $340,000 $360,000
Cost of goods
sold………………………………………………………………………..
0
187,000
181,00
Gross
Profit…………………………………………………………………………………
$159,000 $173,000
Additional Information:
Beginning
Inventory……………………………………………………………………..
000
37,000
Cost of goods
purchased……………………………………………………
00
Cost of goods available for
sale…………………………………………..
218,000
182,000
196,0
233,000
Ending
inventory………………………………………………………………..
(46,000)
Cost of goods
sold……………………………………………………………..
000
36,
(37,000)
181,000
187,
Labco uses a perpetual inventory system. The company accountant, while
reviewing the financial records of the company noticed that the December 31,
2017 ending inventory was understated by $5,000.
Instructions
2018. a) Prepare the correct partial income statement data for 2017 and
2018.
2019. b) What is the cumulative effect of the inventory error on total
gross profit for the two years?
Solution 16 (10 min.)
1. a) 2017
2018
Sales……………………………………………………………………………………
…….. $340,000 $360,000
Cost of goods
sold………………………………………………………………………..
0
192,000
176,00
Gross
profit………………………………………………………………………………….
$164,000 $168,000
Additional Information
Beginning
inventory………………………………………………………………..
42,000
Cost of goods
purchased………………………………………………………..
6,000
Cost of goods available for
sale……………………………………………….
218,000
36,000
182,000
238,000
Ending
inventory……………………………………………………………………
0)
(46,000)
Cost of goods
sold………………………………………………………………….
192,000
19
(42,00
176,000
1. b) The cumulative effect on total gross profit is zero. Total gross profit
over the two years equals $332,000 regardless of whether or not the
error is corrected.
Bloomcode: Application
Difficulty: Easy
Learning Objective: Determine the financial statement effects of inventory
errors.
Section Reference: Inventory Errors
CPA: Financial Reporting
Exercise 17
O’Neil’s Hardware Store, in St. John’s, NL, prepared the following analysis of
cost of goods sold for the previous three years:
2016
Beginning inventory, Jan.
1……………………..
$40,000
$18,000
Cost of goods
purchased…………………………
Deduct Ending inventory, Dec.
31…………….
(18,000)
50,000
2018
$25,000
97,000
(25,000)
Cost of goods
sold………………………………….
2017
70,000
(40,000)
$72,000
$90,000
$55,000
Profit for the years 2016, 2017, and 2018 was $83,000, $32,000, and
$67,000, respectively. Since income had declined so much from 2016 to
2018, Mr. O’Neil hired an accountant to investigate the cause(s) for the
declines.
The accountant determined the following:
1. Purchases of $42,000 that occurred in 2016 were not recorded until
2017.
2. The December 31 2016 inventory should have been $23,000.
3. The 2017 ending inventory included inventory costing $6,000 that was
purchased FOB destination point and was in transit at year end.
4. The 2018 ending inventory did not include goods costing $3,000 that
were shipped on December 29 to Rosewell Plumbing Company, FOB
shipping point. The goods were still in transit at the end of the year.
Instructions
Determine the correct income for each year. (Show all calculations.)
Solution 17 (25 min.)
2016
2017
2018
Beginning inventory, Jan.
1…………………….. $ 40,000
(2) $23,000
(4) $19,000
Cost of goods purchased…………………………
(1) 92,000 (3) 55,000
70,000
Deduct Ending inventory, Dec. 31…………….
(2) (23,000) (4) (19,000) (5) (40,000)
Cost of goods
sold………………………………….
2016
2017
$109,000
$59,000
2018
Income previously reported……………………..
83,000
$32,000
$67,000
Add: Prior cost of goods
sold……………………
$49,000
72,000
Less: Revised cost of goods
sold…………….. (109,000)
$
90,000
(59,000)
55,000
(49,000)
Corrected income…………………………………..
46,000
$63,000
$73,000
$
(1) Additional purchases $50,000 + $42,000 = $92,000
(2) Correct ending 2016 inventory given = $23,000
(3) Correct 2017 purchases $97,000 – $42,000 = $55,000
(4) 2017 ending inventory should not include goods in transit $25,000 –
6,000 = $19,000
(5) The goods in transit were correctly excluded from inventory, as title
passed to the customer after the goods left O’Neil’s premises.
Bloomcode: Application
Difficulty: Easy
Learning Objective: Determine the financial statement effects of inventory
errors.
Section Reference: Inventory Errors
CPA: Financial Reporting
Exercise 18
For each of the independent events listed below, using a perpetual inventory
system, analyze the impact on the indicated items at the end of the current
year by placing the appropriate code letter in the box under each item.
Code: O
U
= item is overstated
= item is understated
NA = item is not affected
Owner’s
Cost of
Net
Events
Sold Income
Assets
Equity
Goods
——————————————————————————————————
————————
1. The ending inventory in the previous period was overstated.
——————————————————————————————————
————————
2. A physical count of goods on hand at the
end of the current year resulted in some
goods being counted twice.
——————————————————————————————————
————————
3. Goods purchased on account in December of the current year and
shipped FOB destination were recorded as purchases, but were not
included in the count of goods on hand on December 31 because they
had not arrived by December 31.
——————————————————————————————————
————————
4. Goods purchased on account in December of the current year and
shipped FOB shipping point were recorded as purchases, but were not
included in the count of goods on hand on December 31 because they
had not arrived by December 31.
——————————————————————————————————
————————
5. The internal auditors discovered that the
ending inventory in the previous period
was understated $15,000 and that the
ending inventory in the current period
was overstated $25,000.
Solution 18 (15 min.)
Owner’s
Events
ds Sold
Cost of
Net
Assets
Equity
Goo
Income
——————————————————————————————————
————————
1. NA
NA
2. O O
3. NA
U
U
4. U U
5. O
O
O
O
O
O
U
U
U
U
O
Bloomcode: Comprehension
Difficulty: Medium
Learning Objective: Determine the financial statement effects of inventory
errors.
Section Reference: Inventory Errors
CPA: Financial Reporting
Exercise 19
Roxanna’s Wigs reported cost of goods sold as follows:
2017
Beginning inventory
2018
$ 54,000
$ 64,000
Cost of goods purchased
847,000
891,000
Deduct Ending inventory
(64,000)
( 55,000)
$837,000
$900,000
Cost of goods sold
Roxanna made two errors:
1. 2017 ending inventory was overstated by $3,000.
2. 2018 ending inventory was understated by $9,000.
Instructions
Assuming the errors had not been corrected; indicate the dollar effect that the
errors had on the items appearing on the financial statements listed below.
Also indicate if the amounts are overstated (O) or understated (U).
2017
Overstated/
Amount
Overstated/
Understated
Amount
Understated
2018
Total
assets
______
$______
Owner’s
equity
____
______
$______
Cost of goods
sold
$______
______
______
Profit
$______
$______
__
$______
$______
______
______
$______
______
Solution 19 (15 min.)
2017
Overstated/
Amount
2018
Overstated/
Understated
Amount
Total
assets…………………………..
U
Owner’s
equity………………………
U
Cost of goods
sold…………………
Understated
$3,000
O
$3,000
$3,000
Profit……………………………………
000
U
$9,000
O
U
$3,000
$9,000
$12,000
O
Correct cost of goods sold:
2017
Beginning
inventory……………….
Cost of goods
purchased………..
2018
$ 54,000
847,000
$ 61,000
891,000
O
$12,
Deduct Ending inventory………..
Cost of goods
sold…………………
(61,000)
$840,000
(64,000)
$888,000
Bloomcode: Application
Difficulty: Medium
Learning Objective: Determine the financial statement effects of inventory
errors.
Section Reference: Inventory Errors
CPA: Financial Reporting
Exercise 20
For each of the independent events listed below, using a perpetual inventory
system, analyze the impact on the indicated items at the end of the current
year by placing the appropriate code letter in the box under each item.
Code: O
U
= item is overstated
= item is understated
NA = item is not affected
Cost of
Gross
Events
Sold Profit
Operating
Net
Goods
Expenses
Income
——————————————————————————————————
————————
1. Overstating beginning inventory.
——————————————————————————————————
————————
2. Understating beginning inventory.
——————————————————————————————————
————————
3. Overstating ending inventory.
——————————————————————————————————
————————
4. Understating ending inventory.
——————————————————————————————————
————————
Solution 20 (10 min.)
Cost of
Gross
Events
Sold Profit
Operating
Net
Goods
Expenses
Income
——————————————————————————————————
————————
1. O
U
NA
U
2. U
O
NA
O
3. U
O
NA
O
4. O
U
NA
U
Bloomcode: Comprehension
Difficulty: Easy
Learning Objective: Determine the financial statement effects of inventory
errors.
Section Reference: Inventory Errors
CPA: Financial Reporting
Exercise 21
The controller of Lawn-Man Company is applying the lower of cost and net
realizable value of valuing ending inventory. The following information is
available:
Cost
Net Realizable Value
Lawnmowers:
Self-propelled……………………..
Push type……………………………
Total…………………………….
$ 19,000
$ 21,000
25,000
44,000
20,000
41,000
Snowblowers:
Manual……………………………….
Self-start…………………………….
38,000
37,000
24,000
26,000
Total…………………………….
62,000
63,000
Total inventory…………………….
$106,000
$104,000
Instructions
1. a) Prepare a schedule which shows the value of the inventory by
applying the lower of cost and net realizable value to each item in
inventory.
2. b) Prepare the journal entry to record any inventory write-down required.
Solution 21 (10 min.)
a)
Cost
Lawnmowers:
Self-propelled………………………….
$ 19,000
$ 21,000
$ 19,000
NRV
LCNRV
Push
type……………………………….
25,000
Total…………………………………..
000
20,000
44,000
20,000
41,000
39,
Snowblowers:
Manual………………………………………
38,000
37,000
37,000
Selfstart………………………………..
0
Total………………………………….
000
24,000
26,000
62,000
Total
inventory………………………… $106,000
24,00
63,000
$104,000
61,
$100,000
1. b) Cost of Goods
Sold……………………………………………………………….. 6,000
Merchandise
Inventory…………………………………………………….
00
To record decline in inventory value to net realizable value
Bloomcode: Application
Difficulty: Medium
Learning Objective: Value inventory at the lower of cost and net realizable
value.
Section Reference: Presentation and Analysis of Inventory
CPA: Financial Reporting
Exercise 22
6,0
Benjaha Company is preparing the annual financial statements dated
December 31, 2017. Information about inventory stocked for regular sale
follows:
Item
Quantity
Unit Cost
Net Realizable Value
on Hand
When Acquired
at year end
A
25
$25
$22
B
100
55
55
C
20
60
88
D
80
50
46
Instructions
1. a) Calculate the correct value for the December 31, 2017 ending
inventory using the lower of cost and net realizable value.
2. b) Assume Benjaha uses a perpetual inventory system. Prepare the
journal entry to record any inventory write-down required.
Solution 22 (10 min.)
1. a) Quantity
Item
On Hand
Cost
$
625
NRV
A
25
B
100
5,500
5,500
5,500
C
20
1,200
1,760
1,200
D
80
4,000
3,680
3,680
$11,325
$11,490
$10,930
1. b) Cost of Goods Sold ($11,325 –
$10,930)………………………………….. 395
$
550
LCNRV
$
550
Merchandise
Inventory…………………………………………………….
95
3
To adjust inventory to lower of cost and realizable value
Bloomcode: Application
Difficulty: Medium
Learning Objective: Value inventory at the lower of cost and net realizable
value.
Section Reference: Presentation and Analysis of Inventory
CPA: Financial Reporting
Exercise 23
The following information is available about the inventory of Read’s Ski House
at the company’s year end, December 31:
Product line
Item
Units on hand
Unit cost
Downhill skis
Brand A
40
$300
Brand B
50
$260
Brand G
80
$190
Brand H
75
$140
Snowboards
Instructions
31.
a) Calculate the total cost of the ending inventory at December
31.
32.
b) Calculate the total net realizable value of the ending inventory
at December 31.
33.
c) What amount would be reported on Read’s December 31
balance sheet?
Solution 23 (15 min.)
1. a) Total cost
Product line
Item
Units
Unit cost
Downhill skis
Brand A
40
$300
Brand B
50
$260
Brand G
80
$190
Brand H
75
$140
Snowboards
1. b) Total net realizable value
Product line
Item
Units on hand
NRV/Unit
Downhill skis
Brand A
40
$280
Brand B
50
$275
Brand G
80
$250
Brand H
75
$138
Snowboards
1. c) Reported inventory value based on applying lower of cost or net
realizable value by item:
Product line
Item
Units
Unit cost
NRV
Downhill skis
Brand A
40
$300
$280
Brand B
50
$260
$275
Brand G
80
$190
$250
Brand H
75
$140
$138
Snowboards
Bloomcode: Application
Difficulty: Easy
Learning Objective: Value inventory at the lower of cost and net realizable
value.
Section Reference: Presentation and Analysis of Inventory
CPA: Financial Reporting
Exercise 24
The following data was compiled from the physical inventory count for Vortex
Watch Company’s June 30, 2017 year end.
Net Realizable
Cost
Value
Luxury Watches:
Model A………………………………
$ 9,200
$ 12,800
Model B……………………………..
14,100
11,600
Model C……………………………..
8,900
Total…………………………….
32,200
9,900
34,300
Sports Watches:
Model A………………………………
14,000
13,600
Model B……………………………..
8,500
8,500
Model C……………………………..
17,200
22,000
Total…………………………….
39,700
44,100
Casual Watches:
Model A………………………………
Model B……………………………..
22,000
25,000
16,000
14,000
Total…………………………….
38,000
39,000
Total inventory…………………….
$109,900
$117,400
Instructions
1. a) Prepare a schedule which shows the value of the inventory by
applying the lower of cost and net realizable value to each item in
inventory.
2. b) Prepare the journal entry to record any inventory write-down required.
Solution 24 (15 min.)
a)
Cost
NRV
LCNRV
Luxury Watch:
Model A……………………………………
$ 9,200
$ 12,800
$ 9,200
Model B…………………………………….
14,100
11,600
11,600
Model
C…………………………………..
8,900
9,900
8,900
Total…………………………………..
700
32,200
34,300
29,
Sport Watches:
Model A……………………………………..
14,000
13,600
13,600
Model B……………………………………….
8,500
8,500
8,500
Model
C…………………………………
17,200
Total………………………………….
300
22,000
39,700
17,200
44,100
39,
Casual Watches:
Model A……………………………………..
22,000
25,000
22,000
Model
B………………………………….
16,000
Total………………………………….
000
14,000
38,000
Total
inventory………………………… $109,900
14,000
39,000
$117,400
36,
$105,000
1. b) Cost of Goods
Sold……………………………………………………………….. 4,900
Merchandise
Inventory…………………………………………………….
00
To record decline in inventory value to net realizable value. ($105,000 –
$109,900)
Bloomcode: Application
Difficulty: Medium
4,9
Learning Objective: Value inventory at the lower of cost and net realizable
value.
Section Reference: Presentation and Analysis of Inventory
CPA: Financial Reporting
Exercise 25
The following information is available from the financial statements of
Complete Home Furnishings. The company is a manufacturer of home
furnishings, and its sales are mainly on credit.
(In millions)
2018
2017
Sales………………………………………………………………….
$76,704
$69,656
Cost of goods sold…………………………………………………
49,761
47,257
Beginning inventory……………………………………………….
26,031
14,816
Ending inventory……………………………………………………
34,162
26,031
Total current assets………………………………………………..
87,246
76,857
Total current liabilities……………………………………………..
33,589
33,671
Instructions
Evaluate the company’s liquidity position for 2018. As part of your analysis,
you will have to calculate the current ratio, inventory turnover ratio, and days
in inventory for the company for 2018 and 2017.
Solution 25 (10 min.)
2018
2
Current Ratio
$87,246 ÷ $33,589 = 2.60:1
$
Inventory Turnover
$49,761 ÷ [($26,031+$34,162) ÷ 2] = 1.65 times
$
Days in Inventory
365 ÷ 1.65 = 221 days
3
The company’s current ratio has improved, which would indicate that the
company is more liquid. However, the company’s inventory turnover has
decreased, indicating that it is taking Complete Home Furnishings longer to
sell its inventory, which has resulted in higher inventory balances. This would
have a negative impact on the company’s liquidity.
Bloomcode: Application
Difficulty: Easy
Learning Objective: Demonstrate the presentation and analysis of inventory.
Section Reference: Reporting and Analyzing Inventory
CPA: Financial Reporting
Exercise 26
The following information is available for Dahlia’s Deli for three recent years:
2018
Sales
Cost of goods sold
Inventory
$
2017
500,000
$
490,000
325,000
323,400
42,000
40,000
The ending inventory at December 31, 2015 was $36,000.
Instructions
Calculate the inventory turnover, the days sales in inventory, and gross profit
margin for Dalhia’s Deli for each of the three years, and comment on any
trends.
Solution 26 (15 min.)
2018
2017
Sales
$
Cost of goods sold
325,000
323,400
Gross profit
175,000
166,600
Gross profit margin
35.0%
34.0%
Average inventory
Inventory turnover
Days sales in inventory
500,000
$
490,000
(42,000 + 40,000) ÷ 2
(40,000 + 37,800)
= 41,000
= 38,900
(325,000 ÷ 41,000)
(323,400 ÷ 38,900
= 7.9
= 8.3
(365 ÷ 7.9)
(365 ÷ 8.3)
= 46.2
= 43.98
The Deli’s gross profit margin is increasing year by year, so it appears that the
management is keeping costs down, or has increased prices sufficiently to
cover any increased costs.
However, the decreasing inventory turnover (and increased number of days sales in inventory) suggest
that management is not doing as well at managing inventory, by allowing it to build up.
Bloomcode: Application
Difficulty: Easy
Learning Objective: Demonstrate the presentation and analysis of inventory.
Section Reference: Reporting and Analyzing Inventory
CPA: Financial Reporting
Exercise 27
Data relating to Jaso Jerseys’ cost of goods sold and inventory balances are
as follows:
2018
Cost of goods sold
2017
$ 352,800
$ 377,500
82,000
89,900
Ending Inventory
The beginning inventory at January 1, 2016 was $92,200.
Instructions
Calculate the inventory turnover and the days sales in inventory for Jaso
Jerseys for each of the three years. (Round ratios to two decimal places)
Solution 27 (10 min.)
2018
2017
2016
Average inventory
Inventory turnover
Days sales in inventory
(89,900 + 82,000) ÷ 2
(95,600 + 89,900)
= 85,950
= 92,750
(352,800 ÷ 85,950)
(377,500 ÷ 92,750
= 4.10
= 4.07
(365 ÷ 4.10)
(365 ÷ 4.07)
= 89.02
= 89.68
Bloomcode: Application
Difficulty: Easy
Learning Objective: Demonstrate the presentation and analysis of inventory.
Section Reference: Reporting and Analyzing Inventory
CPA: Financial Reporting
*Exercise 28
Willets Coffee Equipment sells European style coffee makers and uses a
periodic inventory system. Its inventory records show that at July 1, Willets
had 12 units on hand at a cost of $220 each. Transactions related to purchase
and sale of coffee makers in July were as follows:
Per uni
Date
Transaction
Units
Jul 10
Sale
3
Cost
Jul 15
Sale
4
Jul 20
Purchase
5
$230
Jul 22
Purchase
6
$240
Jul 30
Sale
10
Instructions
For each of the following cost formulas, calculate the ending inventory as at
July 31 and the cost of goods sold for the month of July. Prove the cost of
goods sold calculations.
1. a) FIFO
2. b) Weighted Average
*Solution 28 (20 min.)
1. a) FIFO
Beginning inventory (12 x
$220)………………………………………………
$2,640
Purchases:
5x
$230………………………………………………………………………………..
$1,150
6x
$240………………………………………………………………………………..
1,440
2,590
Goods available for
sale………………………………………………………….
0
Ending inventory
Units (12 + 11 – 17 = 6)
5,23
6 units at
$240……………………………………………………………….
1,440)
(
Cost of goods
sold………………………………………………………………….
$3,790
Check of cost of goods sold:
July 1 (12 @
$220)…………………………………………………………………
$2,640
July 20 (5 @
$230)…………………………………………………………………
1,150
Total…………………………………………………………………………………….
.
$3,790
1. b) Weighted Average
Beginning inventory (12 x
$220)………………………………………………
$2,640
Purchases:
5x
$230………………………………………………………………………………..
$1,150
6x
$240………………………………………………………………………………..
1,440
2,590
Goods available for
sale………………………………………………………….
0
Units available: 12 + 5 + 6 = 23
Weighted average cost per unit: $5,230 ÷ 23 = $227.39
Ending inventory
Units: 12 + 11 – 17 = 6
5,23
6 units at
$227.39…………………………………………………………..
1,364)
(
Cost of goods
sold………………………………………………………………….
$3,866
Check of cost of goods sold:
3 + 4 + 10 = 17 Units sold at $227.39 weighted average
cost………
$3,866
Bloomcode: Application
Difficulty: Medium
Learning Objective: Calculate ending inventory and cost of goods sold in a
periodic inventory system using FIFO and weighted average inventory cost
formulas.
Section Reference: Inventory Cost Formulas in Periodic Systems (Appendix
6A)
CPA: Financial Reporting
*Exercise 29
Garcia Sales sells golf bags and uses a periodic inventory system. Garcia’s
inventory records show that at April 1, there were 30 units on hand at a cost of
$135 each. Transactions related to purchase and sale of golf bags in April
were as follows:
Per un
Date
Transaction
Units
Cost
Apr 2
Purchase
17
$127
Apr 5
Sale
10
Apr 15
Purchase
12
$125
Apr 20
Purchase
5
$120
Apr 30
Sale
50
Instructions
1. a) For each of the following cost formulas, calculate the ending
inventory as at April 30 and the cost of goods sold for the month of April.
Prove the cost of goods sold calculations.
2. FIFO
3. Weighted Average
4. b) Calculate the gross profit and gross profit margin that will be reported
under each of the two cost formulas.
5. c) Assume that Garcia is motivated to report the highest profit possible.
Which method will they prefer? Would your answer be different if the
cost of golf bags was increasing, instead of decreasing? What if the cost
was fluctuating randomly? Assume Garcia cannot change the selling
price of their product.
*Solution 29 (25 min.)
1. a) (i) FIFO
Beginning inventory (30 x
$135)………………………………………………
$4,050
Purchases:
17 x
$127………………………………………………………………………………
$2,159
12 x
$125………………………………………………………………………………
1,500
5x
$120………………………………………………………………………………..
600
4,259
Goods available for
sale………………………………………………………….
9
8,30
Ending inventory
Units (30 + 17 + 12 + 5) – (10 + 50)
4 units at
$120……………………………………………………………….
(480)
Cost of goods
sold………………………………………………………………….
$ 7,829
Check of cost of goods sold:
Apr 1 (30 @
$135)………………………………………………………………….
$4,050
Apr 2 (17 @
$127)………………………………………………………………….
2,159
Apr 15 (12 @
$125)………………………………………………………………..
1,500
Apr 20 (1 @
$120)………………………………………………………………….
120
Total…………………………………………………………………………….
7,829
1. a) (ii) Weighted Average
Beginning inventory (30 x
$135)………………………………………………
Purchases:
$4,050
$
17 x
$127………………………………………………………………………………
$2,159
12 x
$125………………………………………………………………………………
1,500
5x
$120………………………………………………………………………………..
600
4,259
Goods available for
sale………………………………………………………….
9
8,30
Units available (30 + 17 + 12 + 5) = 64
Weighted average cost per unit ($8,309 ÷ 64 = $129.83)
Ending inventory
Units (30 + 17 + 12 + 5) – (10 + 50)
4 units at
$129.83…………………………………………………………..
(519)
Cost of goods
sold………………………………………………………………….
$7,790
Check of cost of goods sold:
(10 + 50) = 60 Units sold at $129.83 weighted average cost per
unit
$7,790
b)
FIFO
Sales revenue (A)
60 x $150
$9,0
Cost of goods sold
(7,8
Gross profit (B)
$1,1
Gross profit margin (B ÷ A)
13.0
1. c) To report the highest profit possible, Garcia must use the cost
formula that produces the lowest cost of goods sold. When costs are
decreasing, this is weighted average. If costs were steadily increasing,
FIFO would produce the highest profit. If costs were fluctuating, the
choice of cost formulas would not produce a consistently higher or lower
profit.
Bloomcode: Analysis
Difficulty: Medium
Learning Objective: Calculate ending inventory and cost of goods sold in a
periodic inventory system using FIFO and weighted average inventory cost
formulas.
Section Reference: Inventory Cost Formulas in Periodic Systems (Appendix
6A)
CPA: Financial Reporting
*Exercise 30
Chico Company uses the periodic inventory method and had the following
inventory information available:
Units
Jan 1
Inventory
Unit Cost
Beginning
200
Total Cost
$4
$ 800
Jan
20
Purchase
400
$5
2,000
Jul
25
Purchase
300
$7
2,100
Oct
20
Purchase
400
$8
3,200
1,300
$8,100
A physical count of inventory on December 31 revealed that there were 600
units on hand.
Instructions
Answer the following independent questions and show calculations supporting
your answers.
1. a) Assume that the company uses the FIFO cost formula. The value of
the ending inventory at December 31 is $______.
2. b) Assume that the company uses the weighted average cost formula.
The value of the ending inventory on December 31 is $______.
3. c) Determine the difference in the amount of income that the company
would have reported if it had used FIFO instead of Weighted Average.
Would income have been greater or less?
*Solution 30 (20 min.)
1. a) FIFO: Ending inventory $4,600
400 units @ $8
=
$3,200
200 units @ $7
=
1,400
600 units
$4,600
1. b) Weighted Average: Ending inventory $3,738
$8,100 ÷ 1,300 = $6.23 per unit × 600 units = $3,738 (rounded)
1. c) FIFO: Cost of goods sold $3,500
Cost of goods available for sale:
Less: ending inventory:
Cost of goods sold:
$8,100
4,600
$3,500
Weighted Average: Cost of goods sold $4,362
Cost of goods available for sale:
Less: ending inventory:
Cost of goods sold:
$8,100
3,738
$4,362
Income would have been $862 ($4,362 cost of goods sold vs.
$3,500) greater if the company used FIFO instead of weighted average.
Bloomcode: Application
Difficulty: Medium
Learning Objective: Calculate ending inventory and cost of goods sold in a
periodic inventory system using FIFO and weighted average inventory cost
formulas.
Section Reference: Inventory Cost Formulas in Periodic Systems (Appendix
6A)
CPA: Financial Reporting
*Exercise 31
Hixenbaugh Company uses the periodic inventory system to account for
inventories. Information related to Hixenbaugh Company’s inventory at
October 31 is given below:
Oct
=
1
Beginning inventory
$ 3,000
8
Purchase
300
800
units @ $10.00
units @ $10.40 =
8,320
16
Purchase
700
units @ $10.80 =
7,560
24
Purchase
200
units @ $11.60 =
2,320
Total units and cost
2,000
units
$21,200
On October 31 there were 500 units on hand.
Instructions
1. a) Show calculations to value the ending inventory using FIFO.
2. b) Show calculations to value the ending inventory using weighted
average.
*Solution 31 (20 min.)
1. a) Under FIFO, the cost of the units remaining in inventory is
determined using the cost of the units purchased most recently.
200 units @ $11.60 =
$2,320
300 units @ 10.80 =
3,240
500 units
$5,560
1. b) Under weighted average, the weighted average cost per unit must be
calculated.
$21,200 ÷ 2,000 units = $10.60 weighted average cost per unit
500 units × $10.60 = $5,300
Bloomcode: Application
Difficulty: Medium
Learning Objective: Calculate ending inventory and cost of goods sold in a
periodic inventory system using FIFO and weighted average inventory cost
formulas.
Section Reference: Inventory Cost Formulas in Periodic Systems (Appendix
6A)
CPA: Financial Reporting
*Exercise 32
Kavenja Company sells many products. Whamo is one of its popular items.
Below is an analysis of the inventory purchases of Whamo for the month of
March. At the end of the month, there were 120 units on hand. Kavenja
Company uses the periodic inventory system.
Purchases
Units
Mar 1
Beginning inventory
Mar 3
Unit Cost
100
$60
Purchase
60
$75
Mar 10
Purchase
200
$82
Mar 30
Purchase
40
$90
Instructions
1. a) Using the FIFO cost formula, calculate the cost of goods sold for
March. (Show calculations.)
2. b) Using the weighted average cost formula, calculate the inventory on
hand on March 31. (Show calculations.)
*Solution 32 (20 min.)
Cost of goods available for sale:
Purchases
Units
Mar 1
Beginning inventory
Mar 3
Mar 10
Unit Cost Total Cost
100
$60
$ 6,000
Purchase
60
$75
4,500
Purchase
200
$82
16,400
Mar 30
Purchase
400
40
$90
3,600
$30,500
1. a) Using FIFO – the earliest units purchased were the first sold.
3/1
100
@ $60
=
$ 6,000
3/3
60
@
75
=
4,500
3/10
120
@
82
=
9,840
280 units
$20,340 = the cost of goods sold
1. b) Calculate the weighted average unit cost:
$30,500 ÷ 400 = $76.25
$76.25 × 120 units in ending inventory (400 available less 280 sold = 120)
$76.25 × 120 = $9,150
Bloomcode: Analysis
Difficulty: Hard
Learning Objective: Calculate ending inventory and cost of goods sold in a
periodic inventory system using FIFO and weighted average inventory cost
formulas.
Section Reference: Inventory Cost Formulas in Periodic Systems (Appendix
6A)
CPA: Financial Reporting
*Exercise 33
At the end of April, Greenland Company reports the following for the month:
Date
Apr
Explanation
1
Beginning Inventory
Units
Unit Cost
200
Total Costs
$9
$1,800
12
Purchase
300
$12
$3,600
23
Purchase
500
$15
$7,500
30
Ending Inventory
180
Instructions
1. a) Assuming Greenland uses a periodic inventory system, calculate the
cost of ending inventory and the cost of goods sold under (1) FIFO, (2)
weighted average.
2. b) Which cost assumption results in the highest ending inventory? Why?
3. c) Which cost assumption results in the highest cost of goods sold?
4. d) Which cost assumption results in the highest cash flow? Why?
*Solution 33 (25 min.)
1. a) Cost of goods available for sale:
Date
Explanation
Units
Beginning Inventory
Unit Cost
Apr
1
12
Purchase
300
$12
3,600
23
Purchase
500
$15
7,500
Total
200
Total Costs
1,000
$9
$1,800
$12,900
(1) FIFO
Ending inventory (180 ×
$15)…………………………………………………………
$ 2,700
Cost of Goods Sold:
Cost of goods available for
sale……………………………………………….
$12,900
Less: ending
inventory……………………………………………………………
2,700
Cost of goods
sold………………………………………………………………….
$10,200
Check:
(200 ×
$9)……………………………………………………………………………..
,800
$ 1
(300 ×
$12)……………………………………………………………………………
600
3,
(320 ×
$15)……………………………………………………………………………
800
4,
Cost of Goods
Sold………………………………………………………………………
$10,200
(2) Weighted Average
Weighted average cost per unit = $12,900 ÷ 1,000 units = $12.90 per unit
Ending Inventory = 180 units × $12.90 per unit = $2,322
Cost of Goods Sold:
Cost of goods available for
sale……………………………………………….
$12,900
Less: ending
inventory……………………………………………………………
2,322
Cost of goods
sold………………………………………………………………….
$10,578
Check:
Cost of Goods Sold = (1,000 – 180) × $12.90 = $10,578
1. b) The FIFO cost formula will produce the highest ending inventory
because costs have been rising. Under FIFO, the earliest costs are
assigned to cost of goods sold, and the latest costs remain in ending
inventory.
1. c) The weighted average-cost cost formula will produce the highest cost
of goods sold for Greenland Company.
1. d) The selection of a cost formula does not affect cash flow. Cash flow
is determined by purchases and payments, not the allocation of costs
between cost of goods sold and ending inventory.
Bloomcode: Application
Difficulty: Hard
Learning Objective: Calculate ending inventory and cost of goods sold in a
periodic inventory system using FIFO and weighted average inventory cost
formulas.
Section Reference: Inventory Cost Formulas in Periodic Systems (Appendix
6A)
CPA: Financial Reporting
*Exercise 34
The Lighting Showcase sells many different light bulbs and uses a periodic
inventory system. During February, the company had beginning inventory,
purchases, and sales for bulb 101 as follows:
Date
Beginning Inventory
Transaction
February 5
Sale
February 10
Purchase
February 15
Sale
February 25
Sale
Instructions
Prepare a schedule to determine the cost of goods sold and ending inventory
using the FIFO cost formula for the period ended February 28, 2017.
*Solution 34 (10 min.)
Cost of goods available for sale:
Date
Explanation
Apr
1
10
Purchase
Units
Beginning Inventory
Total
Unit Cost
100
70
170
Total Costs
$15
$13
$1,500
910
$2,410
FIFO
Ending inventory (60 ×
$13)…………………………………………………………..
$ 780
Cost of Goods Sold:
Cost of goods available for
sale……………………………………………….
$2,410
Less: ending
inventory……………………………………………………………
780
Cost of goods
sold………………………………………………………………….
$1,630
Check:
(50 ×
$15)……………………………………………………………………………..
$ 750
(25 ×
$15) …………………………………………………………………………….
375
(25 ×
$15) …………………………………………………………………………….
375
(10 ×
$13) …………………………………………………………………………….
130
Cost of Goods
Sold………………………………………………………………………
$1,630
Bloomcode: Application
Difficulty: Medium
Learning Objective: Calculate ending inventory and cost of goods sold in a
periodic inventory system using FIFO and weighted average inventory cost
formulas.
Section Reference: Inventory Cost Formulas in Periodic Systems (Appendix
6A)
CPA: Financial Reporting
*Exercise 35
The Lighting Showcase sells many different light bulbs and uses a periodic
inventory system. During February, the company had beginning inventory,
purchases, and sales for bulb 101 as follows:
Date
Transaction
Beginning Inventory
February 5
Sale
February 10
Purchase
February 15
Sale
February 25
Sale
Instructions
Prepare a schedule to determine the cost of goods sold and ending inventory
using the weighted average cost formula for the period ended February 28,
2017.
*Solution 35 (10 min.)
Cost of goods available for sale:
Date
Explanation
Apr
1
10
Purchase
Units
Beginning Inventory
Total
Unit Cost
100
70
Total Costs
$15
$13
170
$1,500
910
$2,410
Weighted Average
Weighted average cost per unit = $2,410 ÷ 170 units = $14.18 per unit
Ending Inventory = 60 units × $14.18 per unit = $850
Cost of Goods Sold:
Cost of goods available for
sale……………………………………………….
$2,410
Less: ending
inventory……………………………………………………………
850
Cost of goods
sold………………………………………………………………….
$1,560
Check:
Cost of Goods Sold = (170 – 60) × $14.18 = $1,560
Bloomcode: Application
Difficulty: Medium
Learning Objective: Calculate ending inventory and cost of goods sold in a
periodic inventory system using FIFO and weighted average inventory cost
formulas.
Section Reference: Inventory Cost Formulas in Periodic Systems (Appendix
6A)
CPA: Financial Reporting
*Exercise 36
Passarant Company reports goods available for sale at cost, $156,000. Beginning inventory at retail is
$60,000 and goods purchased during the period at retail were $180,000. Sales for the period amounted to
$90,000.
Instructions
Determine the estimated cost of the ending inventory using the retail inventory
method.
Solution 36 (10 min.)
At Cost
Beginning inventory
At Retail
$ 60,000
Goods purchased
Goods available for sale
180,000
$156,000
Net sales
240,000
90,000
Ending inventory
$150,000
First calculate the cost to retail ratio. $156,000 ÷ $240,000 = 65%
Apply this ratio to the ending inventory at retail. $150,000 × 65% = $97,500
Therefore, $97,500 is the estimated cost of the ending inventory.
Bloomcode: Application
Difficulty: Medium
Learning Objective: Estimate ending inventory using the gross profit and retail
inventory methods.
Section Reference: Estimating Inventories (Appendix 6B)
CPA: Financial Reporting
*Exercise 37
Sudbury Department Store prepares monthly financial statements but only
takes a physical count of merchandise inventory at the end of the year. The
following information has been developed for the month of July:
At Cost
Beginning inventory
Merchandise purchases
$ 50,000
$ 60,000
125,000
190,000
The net sales for July amounted to $150,000.
Instructions
At Retail
Use the retail inventory method to estimate the ending inventory at cost for
July. Show all calculations to support your answer.
*Solution 37 (10 min.)
At Cost
Beginning inventory
At Retail
$ 50,000
$ 60,000
Merchandise purchases
125,000
190,000
Goods available for sale
$175,000
250,000
Net sales
150,000
Ending inventory at retail = $100,000
Cost to retail ratio = 70% ($175,000 ÷ $250,000).
Ending inventory at cost = ($100,000 × 70%) = $70,000.
Bloomcode: Application
Difficulty: Medium
Learning Objective: Estimate ending inventory using the gross profit and retail
inventory methods.
Section Reference: Estimating Inventories (Appendix 6B)
CPA: Financial Reporting
*Exercise 38
Chris’s Electronics uses the retail method to determine inventory cost. The following information is
available for the month of January, 2017:
Beginning inventory, at
cost…………………………………………………….
Goods purchased at cost (net of
allowances)……………………………
168,000
$64,000
Net
sales……………………………………………………………………………….
295,000
Beginning inventory, at
retail……………………………………………………
Goods purchased, at
retail………………………………………………………
110,000
315,000
Instructions
Calculate the estimated cost of the January 31, 2017 inventory using the retail
inventory method.
*Solution 38 (10 min.)
Cost
Beginning inventory
$ 64,000
Purchases
168,000
Available for sale
$ 232,000
Net sales
Ending inventory at retail
Cost to retail ratio
232,000
425,000
Estimated cost of ending inventory
$130,000
X 54.6%
$ 70,965
Bloomcode: Application
Difficulty: Medium
Learning Objective: Estimate ending inventory using the gross profit and retail
inventory methods.
Section Reference: Estimating Inventories (Appendix 6B)
CPA: Financial Reporting
*Exercise 39
North Bay Company suffered a loss of its inventory on March 28 due to a fire in its warehouse. As a basis
for filing a claim with its insurance company, North Bay Company developed the following information:
March net sales through March
28…………………………………………..
$500,000
Beginning Inventory, March
1………………………………………………….
190,000
Merchandise purchases through March
28……………………………….
225,000
The company has experienced an average gross profit margin of 30% in the
past and this margin appears to be appropriate in the current period.
Instructions
Using the gross profit method, prepare an estimate of the cost of the inventory
destroyed by fire on March 28. Show all calculations in good form.
Solution 39 (10 min.)
Net
sales…………………………………………………………………………………….
. $500,000
Less: Estimated gross profit ($500,000 ×
30%)………………………………..
150,000
Estimated cost of goods
sold…………………………………………………………
$350,000
Beginning
inventory………………………………………………………………………
0,000
Merchandise
purchases………………………………………………………………..
0
Goods available for
sale………………………………………………………………..
Less: Estimated cost of goods
sold…………………………………………………
$19
225,00
415,000
350,000
Estimated cost of ending inventory destroyed by
fire………………………. $ 65,000
Bloomcode: Application
Difficulty: Medium
Learning Objective: Estimate ending inventory using the gross profit and retail
inventory methods.
Section Reference: Estimating Inventories (Appendix 6B)
CPA: Financial Reporting
*Exercise 40
The inventory of Schooler Company was destroyed by fire on April 1. From an examination of the
accounting records, the following data for the first three months of the year are obtained:
Sales……………………………………………………………………………………
. $155,000
Sales Returns and
Allowances…………………………………………………
5,000
Purchases…………………………………………………………………………….
85,000
Freight
In………………………………………………………………………………
,500
Purchase Returns and
Allowances…………………………………………..
3
4,000
Instructions
Determine the merchandise lost by fire, assuming a beginning inventory of
$60,000 and a gross profit margin of 40% on net sales.
*Solution 40 (10 min.)
Net Sales ($155,000 –
$5,000)………………………………………………..
Less: Estimated gross profit (40% ×
$150,000)………………………….
$150,000
60,000
Estimated cost of goods
sold…………………………………………………..
$ 90,000
Beginning
inventory………………………………………………………………..
Cost of goods purchased ($85,000 – $4,000 +
$3,500)………………
84,500
Cost of goods available for
sale……………………………………………….
144,500
$ 60,000
Less: Estimated cost of goods
sold…………………………………………..
Estimated cost of merchandise
lost………………………………………….
90,000
$ 54,500
Bloomcode: Application
Difficulty: Hard
Learning Objective: Estimate ending inventory using the gross profit and retail
inventory methods.
Section Reference: Estimating Inventories (Appendix 6B)
CPA: Financial Reporting
*Exercise 41
Featherstone Dollar Stores uses the periodic inventory, and completes a
physical count of inventory annually and adjusts inventory to actual at each
year end. For quarterly (interim) financial statements, they use the gross profit
method to estimate inventory. The average of the actual gross profit margin
for the most recent two years is used to estimate the quarter-end inventory.
The average gross profit margin for the years ending December 31, 2015 and
2016 was 26%.
For Quarter 1, 2017, the following sales and purchases data is available:
Sales
Sales allowances and discounts
Purchases
Purchase returns
Freight in
Inventory, December 31, 2016
Operating expenses
Interest income
Instructions
Prepare Featherstone’s multi-step income statement for the three months
ended March 31, 2017, and calculate the estimated inventory at March 31,
2017.
*Solution 41 (15 min.)
FEATHERSTONE DOLLAR STORES
Income Statement
Three months ended March 31, 2017
Sales revenue
Sales……………………………………………………………………………………
.
$420,000
Sales allowances and
discounts………………………………………………
Cost of goods sold ($417,500 x (1 –
0.26)……………………………………….
2,500
$417,500
308,950
Gross
profit………………………………………………………………………………….
108,550
Operating
expenses……………………………………………………………………..
50,000
Income from
operations………………………………………………………………..
58,550
Other income
Interest………………………………………………………………………………….
2,800
Profit……………………………………………………………………………………
……..
$ 61,350
Estimated inventory:
Inventory, December 31,
2016………………………………………………………
$ 69,000
Purchases……………………………………………………………………………
……..
$326,400
Purchase
returns………………………………………………………………………….
,000)
(10
Freight
in……………………………………………………………………………………..
9,800
326,200
Goods available for
sale………………………………………………………………..
95,200
Estimated cost of goods sold (see
above)……………………………………….
Estimated ending inventory, Mar 31,
2017………………………………………
3
(308,950)
$ 86,250
Bloomcode: Application
Difficulty: Hard
Learning Objective: Estimate ending inventory using the gross profit and retail
inventory methods.
Section Reference: Estimating Inventories (Appendix 6B)
CPA: Financial Reporting
*Exercise 42
John’s Menswear uses the retail method and has the following information relating to the December 31,
2017 year end:
Cost
Beginning inventory
222,860
$ 345,000
Net
purchases
Net
sales
0
Retail
$
589,500
1,220,800
1,250,00
Instructions
Calculate the estimated cost of the December 31, 2017 inventory using the
retail inventory method. (Round cost-to-retail ratio to one decimal place)
*Solution 42 (10 min.)
Cost
Beginning inventory
$ 222,860
Net purchases
589,500
Available for sale
Net sales
Ending inventory at retail
$ 812,360
Cost to retail ratio
812,360
1,565,800
Estimated cost of ending inventory
$315,800
X 51.9%
$ 163,900
Bloomcode: Application
Difficulty: Medium
Learning Objective: Estimate ending inventory using the gross profit and retail
inventory methods.
Section Reference: Estimating Inventories (Appendix 6B)
CPA: Financial Reporting
*Exercise 43
Hot Garage Company needs to estimate the value of the inventory destroyed by a flood in order to
properly file the claim with the insurance company. The following data was gathered:
Beginning
inventory………………………………………………………………..
$105,500
Purchases…………………………………………………………………………….
450,050
Purchase returns and
allowances…………………………………………….
6,800
Sales……………………………………………………………………………………
.
625,850
Sales returns and
allowances………………………………………………….
10,660
The company has experienced a consistent gross profit margin of 35% in past
years which is also considered reasonable for the current period.
Instructions
Using the gross profit method, prepare an estimate of the cost of the inventory
destroyed by flood. Show all calculations in good form. (Round all amounts to
nearest whole dollar)
*Solution 43 (10 min.)
Net sales ($625,850 –
$10,660)……………………………………………………..
$615,190
Less: Estimated gross profit ($615,190 ×
35%)………………………………..
215,317
Estimated cost of goods
sold…………………………………………………………
$399,873
Beginning
inventory………………………………………………………………………
5,500
Net purchases ($450,050 –
$6,800)………………………………………………..
443,250
Goods available for
sale………………………………………………………………..
Less: Estimated cost of goods
sold…………………………………………………
Estimated cost of ending inventory destroyed by
flood…………………….. $148,877
Bloomcode: Application
Difficulty: Medium
399,873
548,750
$10
Learning Objective: Estimate ending inventory using the gross profit and retail
inventory methods.
Section Reference: Estimating Inventories (Appendix 6B)
CPA: Financial Reporting
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