Chapter 6
Inventory & Cost of Goods Sold
Short Exercises
(10-15 min.) S 6-1
1. (Journal entries)
Inventory ......................................................
Accounts Payable ...................................
120,000
Accounts Receivable ..................................
Sales Revenue .........................................
165,000
Cost of Goods Sold .....................................
Inventory ($120,000 × .70) .......................
84,000
Cash ($165,000 × .35) ..................................
Accounts Receivable ..............................
57,750
120,000
165,000
84,000
57,750
2. (Financial statements)
BALANCE SHEET
Current assets:
Inventory ($120,000 − $84,000) .............................
$ 36,000
INCOME STATEMENT
Sales revenue ..............................................................
$165,000
Cost of goods sold ......................................................
84,000
Gross profit .................................................................
$ 81,000
Copyright © 2015 Pearson Education Inc.
Chapter 6
Inventory & Cost of Goods Sold
6-1
(10-15 min.) S 6-2
City Copy Center
Income Statement
Year Ended December 31
Average
Sales revenue (600 × $19.50)
Cost of goods sold (600 × $9.70*)
$11,700
FIFO
LIFO
$11,700
$11,700
5,820
(100 × $8.40) + (500 × $9.90)
5,790
(600 × $9.90)
5,940
Gross profit
5,880
5,910
5,760
Operating expenses
3,750
3,750
3,750
$ 2,130
$ 2,160
$ 2,010
Net income
_____
*Average cost per unit:
6-2
Inc.
Beginning inventory (100 @ $8.30) ...................................
$ 830
Purchases (700 @ $9.90) ....................................................
6,930
Cost of goods available .....................................................
$7,760
Average cost per unit $7,760 / 800 units .....................
$ 9.70
Financial Accounting 10/e Solutions Manual
Copyright © 2015 Pearson Education
(10-15 min.) S 6-3
City Copy Center
Income Statement
Year Ended December 31
Average
Sales revenue (600 × $19.50)
$11,700
Cost of goods sold (600 × $9.70*)
FIFO
$11,700
$11,700
5,820
(100 × $8.40) + (500 × $9.90)
(600 × $9.90)
LIFO
5,790
______
______
5,940
Gross profit
5,880
5,910
5,760
Operating expenses
3,750
3,750
3,750
Income before income tax
$ 2,130
$ 2,160
$ 2,010
Income tax expense (40%)
$
$
$
852
864
804
Method to maximize reported income (before tax): FIFO (because COGS
is lowest)
Method to minimize income tax expense: LIFO (because COGS is
highest)
*From S 6-2
Copyright © 2015 Pearson Education Inc.
Chapter 6
Inventory & Cost of Goods Sold
6-3
(5 min.) S 6-4
Univision.com managers can purchase a large amount of inventory
before year end. Under LIFO, these high inventory costs go directly to
cost of goods sold in the current year. Higher cost of goods sold creates
lower net income, and lower net income results in lower income taxes.
Saving on taxes is one reason companies want to decrease their
income.
Student responses may vary.
(5-10 min.) S 6-5
BALANCE SHEET
Current assets:
Inventories, at market (which is lower than cost) ...........
$ 52,000
INCOME STATEMENT
Cost of goods sold [$380,000 + ($56,000 − $52,000)] ..........
6-4
Inc.
Financial Accounting 10/e Solutions Manual
$384,000
Copyright © 2015 Pearson Education
(10-15 min.) S 6-6
FIFO
Specific
unit cost
1. Maximizes reported income.
2. Used to account for automobiles, jewelry, and art
objects.
FIFO
3. Results in a cost of ending inventory that is close to
the current cost of replacing the inventory.
LIFO
4. Generally associated with saving income taxes.
LIFO
5. Enables a company to buy high-cost inventory at year
end and thereby to decrease reported income and
income tax.
LIFO
6. Results in an old measure of the cost of ending
inventory.
Average
7. Provides a middle-ground measure of ending inventory
and cost of goods sold.
LIFO
8. Enables a company to keep reported income from
dropping lower by liquidating older layers of inventory.
All
9. Writes inventory down when replacement cost drops
below historical cost.
LIFO
10. Matches the most current cost of goods sold against
sales revenue.
Copyright © 2015 Pearson Education Inc.
Chapter 6
Inventory & Cost of Goods Sold
6-5
(5-10 min.) S 6-7
Dollars in Millions
Gross profit percentage
=
$53,376 − $24,437
$53,376
Inventory turnover
=
$24,437
($2,672 + $2,908) / 2
= 54.2%
= 8.8 times
(5-10 min.) S 6-8
Beginning inventory .................................................
$ 15,000
+ Purchases .................................................................
420,000
= Cost of goods available ...........................................
435,000
− Cost of goods sold:
Sales revenue ........................................ $870,000
Less estimated gross profit (60%) ........ (522,000)
Estimated cost of goods sold ..............................
= Estimated cost of ending inventory ........................
6-6
Inc.
Financial Accounting 10/e Solutions Manual
(348,000)
$ 87,000
Copyright © 2015 Pearson Education
(5 min.) S 6-9
1. Last year’s reported gross profit was understated.
Correct gross profit last year was $3.8 million ($2.7 + $1.1).
2. This year’s gross profit is overstated.
Correct gross profit for this year is $2.5 million ($3.6 − $1.1).
3. Last year’s reported cost of goods sold was overstated.
Correct cost of goods sold last year was $4 million ($5.1 − $1.1).
4. This year’s cost of goods sold is understated.
Correct cost of goods sold for this year is $6.8 million ($5.7 + $1.1).
(5-10 min.) S 6-10
1. Unethical. The company falsified its purchases, cost of goods sold,
and net income in order to evade taxes.
2. Ethical. There is nothing wrong with buying inventory whenever a
company wishes.
3. Ethical. Same idea as 2.
4. Unethical. The company falsified its ending inventory and net income.
5. Unethical. The company falsified its ending inventory in order to
cheat the government (and the people) out of taxes.
Copyright © 2015 Pearson Education Inc.
Chapter 6
Inventory & Cost of Goods Sold
6-7
Exercises
(15-20 min.) E 6-11A
Req. 1
Perpetual System
1.
2.
Purchases:
Inventory ........................................................
Accounts Payable .....................................
68,000
Sales:
Cash ($115,000 × .17) ....................................
Accounts Receivable ($115,000 × .83) .........
Sales Revenue ...........................................
19,550
95,450
Cost of Goods Sold .......................................
Inventory ....................................................
68,000
115,000
57,000
57,000
Req. 2
BALANCE SHEET
Current assets:
Inventory……………………………….
$26,000
INCOME STATEMENT
6-8
Inc.
Sales revenue…………………………….
$115,000
Cost of goods sold………………………
57,000
Gross profit……………………………….
$58,000
Financial Accounting 10/e Solutions Manual
Copyright © 2015 Pearson Education
(15-25 min.) E 6-12A
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
Req. 1
Inventory ($1,248 + $2,145) ..........................
Accounts Payable....................................
3,393
Accounts Receivable (17 @ $600) ...............
Sales Revenue .........................................
10,200
Cost of Goods Sold ......................................
Inventory ..................................................
2,683*
3,393
Req. 2
10,200
2,683
Req. 3
Sales revenue ...........................................
Cost of goods sold ...................................
Gross profit ...............................................
$10,200
2,683
$ 7,517
Ending inventory
($775 + $1,248 + $2,145 − $2,683) .......
$1,485**
_____
*(5 @ $155) + (8 @ $156) + (4 @ $165) = $2,683
**Or, (9 @ $165) = $1,485
Copyright © 2015 Pearson Education Inc.
Chapter 6
Inventory & Cost of Goods Sold
6-9
(10-15 min.) E 6-13A
Req. 1
Beg. bal.
Purchases
Jan. 15
26
End. bal.
Inventory
775
(5 units @ $155)
(8 units @ $156) 1,248
(13 units @ $165) 2,145
(9 units @ $?)
?
Cost of goods sold
(17 units @ $?)
Cost of Goods Sold
(a) Specific
unit cost
(2 @ $155) +
(8 @ $156) +
(7 @ $165)
?
Ending Inventory
= $2,713
(3 @ $155) +
(6 @ $165)
= $1,455
(17 × $160.31*)
= $2,725
(9 × $160.31*)
= $1,443
(c) FIFO
(5 @ $155) +
(8 @ $156) +
(4 @ $165)
= $2,683
(9 @ $165)
= $1,485
(d) LIFO
(13 @ $165) + = $2,769
( 4 @ $156)
(5 @ $155) +
(4 @ $156)
= $1,399
(b)Average
cost
_____
*Average cost per
unit
=
($775 + $1,248 + $2,145)
(5 + 8 + 13)
=
$160.31
Req. 2
LIFO produces the highest cost of goods sold, $2,769.
FIFO produces the lowest cost of goods sold, $2,683.
The increase in inventory cost from $155 to $165 per unit causes the
difference in cost of goods sold.
6-10
Inc.
Financial Accounting 10/e Solutions Manual
Copyright © 2015 Pearson Education
(10 min.) E 6-14A
Cost of goods sold:
LIFO ($2,769) − FIFO ($2,683) .........................................
$ 86
× Income tax rate ............................................................
× .28
Tax savings advantage of LIFO ..........................................
$ 24
Copyright © 2015 Pearson Education Inc.
Chapter 6
Inventory & Cost of Goods Sold
6-11
(15 min.) E 6-15A
Req. 1
a. FIFO
Cost of goods sold:
(11 @ $45)...........................................
$495
Ending inventory:
(4 @ $69) + (3 @ $45) .........................
$411
b. LIFO
Cost of goods sold:
(4 @ $69) + (7 @ $45) .........................
$591
Ending inventory:
(7 @ $45).............................................
$315
Req. 2
MusicWorld.net
Income Statement
Month Ended June 30, 2014
6-12
Inc.
Sales revenue (11 @ $112) ............................................
$1,232
Cost of goods sold ........................................................
495
Gross profit ....................................................................
737
Operating expenses ......................................................
340
Income before income tax.............................................
397
Income tax expense (40%) ............................................
159
Net income .....................................................................
$ 238
Financial Accounting 10/e Solutions Manual
Copyright © 2015 Pearson Education
(15 min.) E 6-16A
Req. 1
FIFO
LIFO
Gross profit:
Sales revenue....................................................
$850,000
$850,000
Cost of goods sold
FIFO: 65,000 × $7 ..........................................
455,000
LIFO: (40,000 × $4.20) + (10,000 × $5.10)
+ (15,000 × $7) ..................................
Gross profit .......................................................
324,000
$395,000
$526,000
Req. 2
Gross profit under FIFO and LIFO differ because inventory costs
decreased during the period.
(5-10 min.) E 6-17A
Debbie’s Garden Supplies
Income Statement (partial)
Year Ended October 31, 2014
Sales revenue ..........................................................................
$246,000
Cost of goods sold [$120,000 + ($33,000 − $31,500)] ............
121,500
Gross profit..............................................................................
$124,500
Note:
Cost is used for beginning inventory because cost is lower than
market. Market (replacement cost) is used for ending inventory
because market is lower than cost at year end.
Copyright © 2015 Pearson Education Inc.
Chapter 6
Inventory & Cost of Goods Sold
6-13
(15-20 min.) E 6-18A
a.
$136,000
$41,000 + $132,000 − $37,000 = $136,000
b.
$117,000
$253,000 − $136,000 = $117,000
c.
Must first solve for d
d.
$ 93,000
$137,000 − $44,000 = $93,000
c.
$ 88,000
$26,000 + c − $93,000 = $21,000;
c = $88,000
e.
$ 97,000
$62,000 + $35,000 = $97,000
f.
$ 32,000
f + $54,000 − $24,000 = $62,000; f = $32,000
g.
$
$9,000 + $29,000 − g = $33,000; g = $5,000
h.
$ 49,000
5,000
$82,000 − $33,000 = $49,000
Req. 1
Cailley Company
Income Statement
Year Ended December 31, 2014
Net sales ..............................................
$253,000
Cost of goods sold
6-14
Inc.
Beginning inventory.......................
$ 41,000
Net purchases ................................
132,000
Cost of goods available .................
173,000
Ending inventory ............................
(37,000)
Cost of goods sold .........................
136,000
Gross profit ..........................................
117,000
Operating and other expenses ...........
72,000
Net income ...........................................
$ 45,000
Financial Accounting 10/e Solutions Manual
Copyright © 2015 Pearson Education
(20-30 min.) E 6-19A
Req. 1
Gross Profit
Percentage
Company
Inventory Turnover
Cailley
$117
$253
= 46.2%
$136
($41 + $37) / 2
=
3.5 times
Durango
$44
$137
= 32.1%
$93
($26 + $21) / 2
=
4 times
Hartt
$35
$97
= 36.1%
$62
($32 + $24) / 2
=
2.2 times
Rosen
$49
$82
= 59.8%
$33
($9 + $5) / 2
=
4.7 times
Req. 2
Rosen has the highest gross profit percentage, 59.8%. Durango has the
lowest gross profit percentage, 32.1%.
Rosen has the highest rate of inventory turnover, 4.7 times. Hartt has
the lowest rate of inventory turnover, 2.2 times.
Based on these data, Rosen looks the most profitable because its gross
profit percentage is higher than the other companies’ gross profit
percentages. And Rosen’s inventory turnover is higher than the other
companies’ turnovers.
Copyright © 2015 Pearson Education Inc.
Chapter 6
Inventory & Cost of Goods Sold
6-15
(15 min.) E 6-20A
Req. 1 and 2
Gross profit percentage =
1
FIFO
$154,000 − $80,900
$154,000
= 47.5%
Inventory turnover
=
2
LIFO
$154,000 − $84,900
$154,000
= 44.9%
$80,900
($18,000 + $23,000) / 2
$84,900
($8,000 + $19,000) / 2
= 3.9 times
= 6.3 times
Req. 3
FIFO produces a higher gross profit percentage.
Req. 4
LIFO produces a higher rate of inventory turnover.
6-16
Inc.
Financial Accounting 10/e Solutions Manual
Copyright © 2015 Pearson Education
(10-15 min.) E 6-21A
Year ended January 31, 2014
Millions
Budgeted cost of goods sold ($6,500 × 1.12).........................
$7,280
Budgeted ending inventory.....................................................
2,100
Budgeted cost of goods available ..........................................
9,380
Actual beginning inventory .....................................................
(1,800)
Budgeted purchases ...............................................................
$7,580
(10-15 min.) E 6-22A
Beginning inventory...............................................
$ 45,700
Net purchases ........................................................
62,300
Cost of goods available .........................................
108,000
Estimated cost of goods sold:
Net sales revenue .............................................
$107,600
Less: estimated gross profit of 45% ................
(48,420)
Estimated cost of goods sold ..........................
59,180
Estimated cost of inventory destroyed.................
$ 48,820
Another reason that managers use the gross profit method to estimate
ending inventory is to test the reasonableness of ending inventory.
Copyright © 2015 Pearson Education Inc.
Chapter 6
Inventory & Cost of Goods Sold
6-17
(10-15 min.) E 6-23A
Lake Anna Marine Supply
Income Statement (Corrected)
Years Ended June 30, 2014 and 2013
2014
Sales revenue
Cost of goods sold:
Beginning inventory
Net purchases
Cost of goods avail.
Ending inventory
Cost of goods sold
Gross profit
Operating expenses
Net income
2013
$216,000
$18,600
105,000
123,600
(18,000)
$191,000
$ 11,500
88,000
99,500
(18,600)*
105,600
110,400
51,000
$ 59,400
80,900
110,100
46,000
$ 64,100
_____
*$15,000 + $3,600 = $18,600
Lake Anna Marina Supply actually performed poorly in 2014, compared
to 2013, with net income down from $64,100 to $59,400.
6-18
Inc.
Financial Accounting 10/e Solutions Manual
Copyright © 2015 Pearson Education
(15-20 min.) E 6-24B
Req. 1
Perpetual System
1.
Purchases:
Inventory ........................................................
Accounts Payable .....................................
2.
72,000
72,000
Sales:
Cash ($108,000 × .21).....................................
Accounts Receivable ($108,000 × .79)..........
Sales Revenue ...........................................
22,680
85,320
Cost of Goods Sold .......................................
Inventory ....................................................
56,000
108,000
56,000
Req. 2
BALANCE SHEET
Current assets:
Inventory ..................................................
$ 28,000
INCOME STATEMENT
Sales revenue ...............................................
$108,000
Cost of goods sold .......................................
56,000
Gross profit ..................................................
$ 52,000
Copyright © 2015 Pearson Education Inc.
Chapter 6
Inventory & Cost of Goods Sold
6-19
(15-25 min.) E 6-25B
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
Req. 1
Inventory ($1,376 + $2,520).............................
Accounts Payable ......................................
3,896
Accounts Receivable (17 @ $575) .................
Sales Revenue ............................................
9,775
Cost of Goods Sold.........................................
Inventory.....................................................
2,936*
Sales revenue ............................................
Cost of goods sold....................................
Gross profit ...............................................
$9,775
2,936
$6,839
3,896
Req. 2
9,775
2,936
Req. 3
Ending inventory
($1,020 + $1,376 + $2,520 − $2,936) .....
$1,980**
_____
*(6 @ $170) + (8 @ $172) + (3 @ $180) = $2,936
**Or, (11 @ $180) = $1,980
6-20
Inc.
Financial Accounting 10/e Solutions Manual
Copyright © 2015 Pearson Education
(10-15 min.) E 6-26B
Req. 1
Beg. bal.
Purchases
Aug. 15
26
Ending bal.
(6 units @ $170)
Inventory
1,020
(8 units @ $172)
(14 units @ $180)
(11 units @ $?)
1,376 Cost of goods sold
2,520
(17 units @ $?)
?
Cost of Goods Sold
?
Ending Inventory
(a) Specific
unit cost
(1 @ $170) +
(8 @ $172) +
(8 @ $180)
= $2,986
(5 @ $170) +
(6 @ $180)
= $1,930
(b)Average
cost
(17 × $175.57*)
= $2,985
(11 × $175.57*) = $1,931
(c) FIFO
(6 @ $170) +
(8 @ $172) +
(3 @ $180)
= $2,936
(11 @ $180)
= $1,980
(d) LIFO
(14 @ $180) +
(3 @ $172)
= $3,036
(6 @ $170) +
(5 @ $172)
= $1,880
_____
*Average cost per
unit
=
($1,020 + $1,376 + $2,520)
(6 + 8 + 14)
=
$175.57
Req. 2
LIFO produces the highest cost of goods sold, $3,036.
FIFO produces the lowest cost of goods sold, $2,936.
The increase in inventory cost from $170 to $180 per unit causes the
difference in cost of goods sold.
Copyright © 2015 Pearson Education Inc.
Chapter 6
Inventory & Cost of Goods Sold
6-21
(10 min.) E 6-27B
Cost of goods sold:
6-22
Inc.
LIFO ($3,036) − FIFO ($2,936) ............................
$ 100
× Income tax rate ................................................
× .40
Tax savings advantage of LIFO .............................
$ 40
Financial Accounting 10/e Solutions Manual
Copyright © 2015 Pearson Education
(15 min.) E 6-28B
Req. 1
a. FIFO
Cost of goods sold:
(12 @ $62) ............................................
$744
Ending inventory:
(5 @ $62) + (3 @ $71) ..........................
$523
b. LIFO
Cost of goods sold:
(3 @ $71) + (9 @ $62) ..........................
$771
Ending inventory:
(8 @ $62) ..............................................
$496
Req. 2
MusicMagic.net
Income Statement
Month Ended September 30, 2014
Sales revenue (12 @ $114) ...........................................
$1,368
Cost of goods sold........................................................
744
Gross profit… ................................................................
624
Operating expenses ......................................................
320
Income before income tax ............................................
304
Income tax expense (35%) ............................................
106
Net income.....................................................................
$ 198
Copyright © 2015 Pearson Education Inc.
Chapter 6
Inventory & Cost of Goods Sold
6-23
(15 min.) E 6-29B
Req. 1
FIFO
LIFO
Gross profit:
Sales revenue ...................................................
$1,235,000 $1,235,000
Cost of goods sold
FIFO: 95,000 × $7.20....................................
684,000
LIFO: (60,000 × $5.20) + (20,000 × $6.10)
+ (15,000 × $7.20) ..............................
Gross profit .......................................................
542,000
$551,000
$693,000
Req. 2
Gross profit under FIFO and LIFO differ because inventory costs
decreased during the period.
(5-10 min.) E 6-30B
Rose Tree Garden Supplies
Income Statement (partial)
Year Ended August 31, 2014
Sales revenue.........................................................................
$251,000
Cost of goods sold [$118,000 + ($34,000 − $32,000)] ..........
120,000
Gross profit ............................................................................
$131,000
Note:
Cost is used for beginning inventory because cost is lower than
market. Market (replacement cost) is used for ending inventory
because market is lower than cost at year end.
6-24
Inc.
Financial Accounting 10/e Solutions Manual
Copyright © 2015 Pearson Education
(15-20 min.) E 6-31B
a.
$ 122,000
$41,000 + $120,000 − $39,000 = $122,000
b.
$ 118,000
$240,000 − $122,000 = $118,000
c.
Must first solve for d
d.
$ 96,000
$137,000 − $41,000= $96,000
c.
$ 88,000
$28,000 + c − $96,000 = $20,000;
c = $88,000
e.
$ 97,000
$60,000 + $37,000 = $97,000
f.
$ 26,000
f + $55,000 − $21,000 = $60,000; f = $26,000
g.
$
$10,000 + $33,000 − g = $35,000; g = $8,000
h.
$ 45,000
8,000
$80,000 − $35,000 = $45,000
Req. 1
Epperson Company
Income Statement
Year Ended December 31, 2014
$240,000
Net sales ...............................................
Cost of goods sold ..............................
Beginning inventory .......................
$ 41,000
Net purchases.................................
120,000
Cost of goods available .................
161,000
Ending inventory ............................
(39,000)
Cost of goods sold .........................
122,000
Gross profit ..........................................
118,000
Operating and other expenses ...........
72,000
Net income ...........................................
$46,000
Copyright © 2015 Pearson Education Inc.
Chapter 6
Inventory & Cost of Goods Sold
6-25
(20-30 min.) E 6-32B
Req. 1
Company
Gross Profit
Percentage
Inventory Turnover
Epperson
$118
$240
= 49.2%
$122
($41 + $39) / 2
=
3.1 times
Griffith
$41
$137
= 29.9%
$96
($28 + $20) / 2
=
4 times
Norse
$37
$97
= 38.1%
$60
($26 + $21) / 2
=
2.6 times
Victory
$45
$80
= 56.3%
$35
($10 + $8) / 2
=
3.9 times
Req. 2
Victory has the highest gross profit percentage, 56.3%. Griffith has the
lowest gross profit percentage, 29.9%.
Griffith has the highest rate of inventory turnover, 4 times. Norse has
the lowest rate of inventory turnover, 2.6 times.
Based on these data, Victory looks the most profitable because its gross
profit percentage is greater than the other companies’ gross profit
percentages. And Victory’s inventory turnover is good compared with
the other companies.
6-26
Inc.
Financial Accounting 10/e Solutions Manual
Copyright © 2015 Pearson Education
(15 min.) E 6-33B
Req. 1 and 2
1
FIFO
2
LIFO
$158,000 − $80,800
$158,000
Gross profit percentage =
= 48.9%
Inventory turnover
=
$158,000 − $90,800
$158,000
= 42.5%
$80,800
($12,000 + $24,000) / 2
$90,800
($7,000 + $14,000) / 2
= 4.5 times
= 8.6 times
Req. 3
FIFO produces a higher gross profit percentage.
Req. 4
LIFO produces a higher rate of inventory turnover.
Copyright © 2015 Pearson Education Inc.
Chapter 6
Inventory & Cost of Goods Sold
6-27
(10-15 min.) E 6-34B
Year ended January 31, 2014:
Millions
Budgeted cost of goods sold ($6,600 × 1.12) ................
$7,392
Budgeted ending inventory ............................................
1,900
Budgeted cost of goods available..................................
9,292
Actual beginning inventory ............................................
(1,600)
Budgeted purchases .......................................................
$7,692
(10-15 min.) E 6-35B
Beginning inventory.........................................
$ 46,500
Net purchases ..................................................
61,500
Cost of goods available ...................................
108,000
Estimated cost of goods sold:
Net sales revenue .......................................
$104,600
Less: estimated gross profit of 40% ..........
(41,840)
Estimated cost of goods sold ....................
62,760
Estimated cost of inventory destroyed...........
$ 45,240
Another reason managers use the gross profit method to estimate
ending inventory is to test the reasonableness of ending inventory.
6-28
Inc.
Financial Accounting 10/e Solutions Manual
Copyright © 2015 Pearson Education
(10-15 min.) E 6-36B
Lake Travis Marine Supply
Income Statement (Corrected)
Years Ended June 30, 2014 and 2013
2014
Sales revenue
2013
$146,000
$124,600
Cost of goods sold:
Beginning inventory
Net purchases
Cost of goods avail.
Ending inventory
$19,000
$ 9,500
82,000
79,000
101,000
88,500
(16,500)
(19,000)*
Cost of goods sold
84,500
69,500
Gross profit
61,500
55,100
Operating expenses
29,000
21,000
$ 32,500
$ 34,100
Net income
_____
*$12,000 + $7,000 = $19,000
Lake Travis Marine Supply actually performed poorly in 2014, compared
to 2013, with net income down from $34,100 to $32,500.
Copyright © 2015 Pearson Education Inc.
Chapter 6
Inventory & Cost of Goods Sold
6-29
Quiz
Q6-37
a
($3,400 + $6,700 − $5,500 = $4,600)
Q6-38
c
($7,700 − $5,500 = $2,200)
Q6-39
d
Q6-40
a
[(700 @ $11.00) + (1,200 @ $11.50) = $21,500]
Q6-41
b
[(1,200 @ $11.50) + (200 @ $11) = $16,000]
Q6-42
d
Q6-43
c
Q6-44
a
Q6-45
b
Q6-46
c
[$627,000 − ($61,000 + $430,000 − $40,000) =
$176,000]
Q6-47
d
($25,000 + X − $17,000 = $92,000; X = $84,000)
Q6-48
b
Q6-49
a
[$310,000 ÷ {($23,000 + $38,000) ÷ 2}] = 10.2 times
Q6-50
b
Net sales = $486,000 ($490,000 − $4,000)
Q6-51
c
Q6-52
a
Q6-53
b
6-30
Inc.
($153,000 + $213,000 = $366,000)
COGS
= $55,000 + ($202,000 + $21,000 −
$4,600 − $6,000) − $44,000
= $223,400
GP%
= ($486,000 − $223,400) / $486,000
= 54%
$56,000 + $79,000 − $95,000 (1 − .40) = $78,000
Financial Accounting 10/e Solutions Manual
Copyright © 2015 Pearson Education
Problems
(20-30 min.) P 6-54A
Req. 1
Inventory ........................................................
Accounts Payable ....................................
9,296,000
Accounts Payable .........................................
Cash ..........................................................
8,968,000
Cash ...............................................................
Accounts Receivable ....................................
Sales Revenue..........................................
5,500,000
10,285,000
Cost of Goods Sold (154,000 × $62.39*) ......
Inventory...................................................
9,608,060
Operating Expenses ......................................
Cash ($3,750,000 × .70) ............................
Accrued Liabilities ($3,750,000 × .30) .....
3,750,000
Income Tax Expense .....................................
Income Tax Payable (see Req. 3) ............
970,776
9,296,000
8,968,000
15,785,000
9,608,060
2,625,000
1,125,000
970,776
_____
*($1,060,000 + $9,296,000) ÷ (20,000 + 32,000 + 52,000 + 62,000) = $62.39
Copyright © 2015 Pearson Education Inc.
Chapter 6
Inventory & Cost of Goods Sold
6-31
(continued) P 6-54A
Req. 2
Beg. bal.
Purchases
End. bal.
Inventory
1,060,000
9,296,000 COGS
747,940
9,608,060
Req. 3
Big Buy Store, Miami
Income Statement
Year Ended January 31, 2014
Sales revenue ..........................................
6-32
Inc.
$15,785,000
Cost of goods sold ..................................
9,608,060
Gross profit ..............................................
6,176,940
Operating expenses… .............................
3,750,000
Income before tax ....................................
2,426,940
Income tax expense (40%) ......................
970,776
Net income ...............................................
$ 1,456,164
Financial Accounting 10/e Solutions Manual
Copyright © 2015 Pearson Education
(20-30 min.) P 6-55A
Req. 1
The store uses FIFO.
This is apparent from the flow of costs out of inventory. For example, the
August 13 sale shows unit cost of $32, which came from the beginning
inventory. This is how FIFO, and only FIFO, works.
Req. 2
Cost of goods sold:
15
×
$32
=
$ 480
29
×
32
=
928
11
×
34
=
374
30
×
34
=
1,020
$2,802
Sales [(44 units × $67) + (41 units x $68)]...........................
$5,736
Cost of goods sold ..............................................................
(2,802)
Gross profit ..........................................................................
$2,934
Req. 3
Cost of August 31 inventory (38 × $34) + (26 × $36)
Copyright © 2015 Pearson Education Inc.
Chapter 6
$2,228
Inventory & Cost of Goods Sold
6-33
(20-30 min.) P 6-56A
Req. 1
Beg. bal.
Purchases:
May 6
18
26
End. bal.
Inventory
(67 units @ $25)
1,675
(101 units @ $27)
(163 units @ $29)
(41 units @ $30)
(49 units @ $?)
2,727
4,727
1,230
?
Cost of goods sold
(323 units @ $?)
Cost of Goods Sold
Ending Inventory
Average cost 323 × $27.85* = $8,996
____
*Average cost
per unit
FIFO
=
LIFO (41 @ $30) + (163 @ $29) +
(101 @ $27) + (18 @ $25)
6-34
Inc.
49 × $27.85* = $1,365
($1,675 + $2,727 + $4,727 + $1,230)
(67 + 101 + 163 + 41)
(67 @ $25) + (101 @ $27)
+ (155 @ $29)
Financial Accounting 10/e Solutions Manual
?
= $27.85
= $8,897
(41 @ $30) +
(8 @ $29)
= $1,462
= $9,134
49 @ $25
= $1,225
Copyright © 2015 Pearson Education
(continued) P 6-56A
Req. 2
LIFO cost of goods sold is highest because (a) prices are rising and (b)
LIFO assigns the cost of the latest inventory purchases to cost of goods
sold. When costs are rising, these latest inventory costs are the highest,
and that makes cost of goods sold the highest under LIFO.
Student responses may vary.
Req. 3
Camp Surplus
Income Statement
Month Ended May 31, 2014
Sales revenue (323 x $51) ..........................................
$16,473
Cost of goods sold .....................................................
8,996
Gross profit .................................................................
7,477
Operating expenses ...................................................
3,250
Income before income taxes......................................
4,227
Income tax expense (30%) .........................................
1,268
Net income ..................................................................
$ 2,959
Copyright © 2015 Pearson Education Inc.
Chapter 6
Inventory & Cost of Goods Sold
6-35
(30-40 min.) P 6-57A
Req. 1 (partial income statements)
Fisher Aviation
Partial Income Statement
Year Ended July 31, 2014
AVERAGE
$128,560
68,652
$ 59,908
Sales revenue
Cost of goods sold
Gross profit
FIFO
$128,560
68,258
$ 60,302
LIFO
$128,560
69,020
$ 59,540
Computations of cost of goods sold:
Average cost
=
per unit
($5,148 + $2,880 + $63,992 + $3,984)
(720 + 400 + 8,420 + 480)
=
$7.59
Average cost COGS = 9,045 × $7.59
=
$68,652
FIFO COGS
= (720 @ $7.15) + (400 @ $7.20) + (7,925 @ $7.60)
=
$68,258
LIFO COGS
= (480 @ $8.30) + (8,420 @ $7.60) + (145 @ $7.20)
=
$69,020
Req. 2
Use the LIFO method to minimize income tax because cost of goods sold is highest (gross profit is
lowest) under LIFO when inventory costs are rising.
6-36
Financial Accounting 10/e Solutions Manual
Copyright © 2015 Pearson Education Inc.
(15-30 min.) P 6-58A
a. Canton Trade Mart should apply the lower-of-cost-or-market rule to
account for inventories. The current replacement cost of ending
inventory is less than Canton’s actual cost, so Canton must write the
inventory down to current replacement cost, with the following
journal entry:
b.
Cost of Goods Sold ..........................
Inventory ....................................
To write inventory down to market value.
7,000
7,000
Canton Trade Mart should report the following amounts in its financial
statements:
c.
BALANCE SHEET
Inventory at market (which is lower than
cost of $98,000) ........................................................
d.
INCOME STATEMENT
Cost of goods sold ($410,000 + $7,000) .....................
_____
$91,000*
$417,000
*$98,000 − $7,000 = $91,000
e. Relevance and Representational faithfulness are the reasons to account
for inventory at the lower of cost or market value. Representational
faithfulness directs accountants to report inventory at the most realistic
and transparent amount. In this case the current replacement cost
(market value) of Canton Trade Mart’s ending inventory is less than cost,
and the lower-of-cost-or-market rule requires a write-down of the
inventory value to current replacement cost.
Student responses may vary.
Copyright © 2015 Pearson Education Inc.
Chapter 6
Inventory & Cost of Goods Sold
6-37
(20-25 min.) P 6-59A
Req. 1
Sweet Treats, Inc.
Coffee Time Corp.
Dollars in Millions
Gross profit percentage:
Sales ...............................
Cost of goods sold ........
Gross profit ....................
Gross profit
percentage:
Inventory turnover:
Cost of goods sold
Average inventory
$542
474
$ 68
$68
$542
=
$7,777
3,180
$4,597
= 12.5%
$474
($36 + $20) / 2
= 16.9 times
$4,597
$7,777
= 59.1%
$3,180
($541 + $625) / 2
= 5.5 times
Req. 2
These statistics are unclear.
The numbers suggest that Coffee Time
Corp. should be more profitable because it has a higher gross profit
percentage. However, Sweet Treats, Inc., turns its inventory over more
rapidly. To evaluate profitability, we should also consider each
company’s selling, general, and administrative expenses.
6-38
Inc.
Financial Accounting 10/e Solutions Manual
Copyright © 2015 Pearson Education
(25-30 min.) P 6-60A
Req. 1 (estimate of ending inventory by the gross profit method)
Beginning inventory......................................
$ 67,200
Purchases ......................................................
$410,800
Less: Purchase discounts ........................
(15,000)
Purchase returns .............................
(10,600)
Net purchases ...........................................
385,200
Cost of goods available ................................
452,400
Cost of goods sold:
Sales revenue ............................................
$695,000
Less: Sales returns ................................
(12,000)
Net sales ....................................................
683,000
Less: Estimated gross profit of 45%........
(307,350)
Estimated cost of goods sold ..................
375,650
Estimated cost of ending inventory .............
$ 76,750
Copyright © 2015 Pearson Education Inc.
Chapter 6
Inventory & Cost of Goods Sold
6-39
(continued) P 6-60A
Req. 2 (income statement through gross profit)
Whitfield Company
Income Statement (partial)
Two Week Period Ending August 15 (date of the fire)
Sales revenue ...................................................
$695,000
Less: Sales returns ...........................................
(12,000)
Net sales revenue ........................................
683,000
Cost of goods sold ...........................................
375,650*
Gross profit .......................................................
$307,350
_____
*Cost of goods sold:
Beginning inventory ...............................................
6-40
Inc.
Purchases ......................................
$410,800
Less: Purchases discounts ..........
(15,000)
Purchase returns .................
(10,600)
$ 67,200
Net purchases ........................................................
385,200
Cost of goods available for sale ...........................
452,400
Less: Ending inventory .........................................
(76,750)
Cost of goods sold ................................................
$375,650
Financial Accounting 10/e Solutions Manual
Copyright © 2015 Pearson Education
(20-25 min.) P 6-61A
Req. 1
Cost of sales, budgeted ($721,000 × 1.05) .............
$ 757,050
+ Ending inventory, budgeted ...................................
86,000
= Cost of goods available ..........................................
843,050
− Beginning inventory ...............................................
(64,000)
= Purchases, budgeted ..............................................
$ 779,050
Req. 2
Shorty’s Convenience Stores
Budgeted Income Statement
Year Ended December 31, 2014
Sales ($986,000 × 1.05)..............................................
$1,035,300
Cost of sales ($721,000 × 1.05) .................................
757,050
Gross profit................................................................
278,250
Operating expenses ($109,000 − $8,750) .................
100,250
Net income .................................................................
$ 178,000
Copyright © 2015 Pearson Education Inc.
Chapter 6
Inventory & Cost of Goods Sold
6-41
(15-20 min.) P 6-62A
Req. 1 (corrected income statements)
Downton Home Store
Income Statement (adapted; amounts in millions)
Years Ended December 31, 2014, 2013, and 2012
2014
2013
Net sales revenue .........................
$47
$44
Cost of goods sold:
Beginning inventory ................
$13
$14
Net purchases ..........................
31
29
Cost of goods available ..........
44
43
Ending inventory .....................
(11)
(13)
Cost of goods sold ..................
33
30
Gross profit ...................................
14
14
Operating expenses......................
8
8
Net income ....................................
$ 6
$ 6
6-42
Financial Accounting 10/e Solutions Manual
Copyright © 2015 Pearson Education Inc.
2012
$41
$ 8
27
35
(14)
21
20
8
$12
(continued) P 6-62A
Req. 2
The corrections did not change total net income over the three-year
period. But the corrections drastically altered the trend of net income —
from an increasing pattern to a decreasing pattern.
Req. 3
The shareholders will not be happy with a declining trend of net income
because the company’s profit decreased from 2012 to 2013 and was
stagnant from 2013 to 2014.
Copyright © 2015 Pearson Education Inc.
Chapter 6
Inventory & Cost of Goods Sold
6-43
(20-30 min.) P 6-63B
Req. 1
Inventory ..........................................................
Accounts Payable .......................................
8,008,000
Accounts Payable ............................................
Cash ............................................................
7,860,000
Cash ..................................................................
Accounts Receivable .......................................
Sales Revenue ............................................
5,400,000
10,282,500
Cost of Goods Sold (153,000 × $58.62*) .........
Inventory .....................................................
8,968,860*
Operating Expenses ........................................
Cash ($4,500,000 × 0.50) ............................
Accrued Liabilities ($4,500,000 × 0.50) ......
4,500,000
Income Tax Expense .......................................
Income Tax Payable (see Req. 3) ..............
774,774
8,008,000
7,860,000
15,682,500
8,968,860
2,250,000
2,250,000
774,774
_____
*($1,196,000 + $8,008,000) ÷ (23,000 + 28,000 + 48,000 + 58,000) = $58.62
6-44
Inc.
Financial Accounting 10/e Solutions Manual
Copyright © 2015 Pearson Education
(continued) P 6-63B
Req. 2
Beg. bal.
Purchases
End. bal.
Inventory
1,196,000
8,008,000 COGS
235,140
8,968,860
Req. 3
Super Buy Store in San Diego
Income Statement
Year Ended June 30, 2014
Sales revenue ..............................................
$15,682,500
Cost of goods sold .....................................
8,968,860
Gross profit .................................................
6,713,640
Operating expenses ....................................
4,500,000
Income before tax .......................................
2,213,640
Income tax expense (35%) .........................
774,774
Net income ..................................................
$ 1,438,866
Copyright © 2015 Pearson Education Inc.
Chapter 6
Inventory & Cost of Goods Sold
6-45
(20-30 min.) P 6-64B
Req. 1
The store uses FIFO.
This is apparent from the flow of costs out of inventory. For example, the
January 11 sale shows a unit cost of $36, which came from the
beginning inventory. This is how FIFO, and only FIFO, works.
Req. 2
Cost of goods sold:
15
×
$36
=
$ 540
27
×
36
=
972
6
×
38
=
228
29
×
38
=
1,102
$2,842
Sales [(42 units × $68) + (35 x $70)]..................................
$5,306
Cost of goods sold ............................................................
(2,842)
Gross profit ........................................................................
$2,464
Req. 3
Cost of January 31 inventory (47 x $38) + (25 × $40) =
6-46
Inc.
Financial Accounting 10/e Solutions Manual
$ 2,786
Copyright © 2015 Pearson Education
(20-30 min.) P 6-65B
Req. 1
Beg. bal.
Purchases:
Mar. 3
17
23
End. bal.
Inventory
(75 units @ $16)
1,200
(95 units @ $18)
(165 units @ $20)
(36 units @ $21)
(53 units @ $?)
1,710
3,300
756
?
Cost of goods sold
(318 units @ $?)
Cost of Goods Sold
Average cost 318 × $18.78* = $5,972
?
Ending Inventory
53 × $18.78*
= $995
FIFO
(75 @ $16) +
(95 @ $18) +
(148 @ $20)
= $5,870
(17 @ $20) +
(36 @ $21)
= $1,096
LIFO
(36 @ $21) +
(165 @ $20) +
(95 @ $18) +
(22 @ $16)
= $6,118
(53 @ $16)
= $848
____
*Average cost
per unit
=
($1,200 + $1,710 + $3,300 + $756)
(75 + 95 + 165 + 36)
Copyright © 2015 Pearson Education Inc.
Chapter 6
= $18.78
Inventory & Cost of Goods Sold
6-47
(continued) P 6-65B
Req. 2
LIFO results in the highest cost of goods sold because (a) the
company’s prices are rising and (b) LIFO assigns the cost of the latest
inventory purchases to cost of goods sold. When costs are rising, these
latest inventory costs are the highest, and that makes cost of goods sold
the highest under LIFO.
Student responses may vary.
Req. 3
Army-Navy Surplus
Income Statement
Month Ended March 31, 2014
6-48
Inc.
Sales revenue (318 × $47) ....................................
$14,946
Cost of goods sold ...............................................
5,972
Gross profit ..........................................................
8,974
Operating expenses .............................................
2,755
Income before income taxes ...............................
6,219
Income tax expense (30%) ...................................
1,866
Net income............................................................
$ 4,353
Financial Accounting 10/e Solutions Manual
Copyright © 2015 Pearson Education
(30-40 min.) P 6-66B
Req. 1 (partial income statements)
Parker Aviation
Income Statement
Year Ended October 31, 2014
AVERAGE
$129,369
71,511
$ 57,858
Sales revenue
Cost of goods sold
Gross profit
FIFO
$129,369
71,168
$ 58,201
LIFO
$129,369
71,971
$ 57,398
Computations of cost of goods sold:
Average cost
=
per case
($5,145 + $2,625 + $66,755 + $4,128)
(700 + 350 + 8,450 + 480)
=
$7.88
Average cost COGS = 9,075 × $7.88
=
$71,511
FIFO COGS
= (700 @ $7.35) + (350 @ $7.50) + (8,025 @ $7.90)
=
$71,168
LIFO COGS
= (480 @ $8.60) + (8,450 @ $7.90) + (145 @ $7.50)
=
$71,971
Req. 2
Use LIFO to minimize income taxes. LIFO reports the highest cost of goods sold and the lowest gross
profit and net income.
Copyright © 2015 Pearson Education Inc.
Chapter 6
Inventory & Cost of Goods Sold
6-49
(15-20 min.) P 6-67B
a. Stillwater Trade Mart should apply the lower-of-cost-or-market rule to
account for inventories. The current replacement cost of ending
inventory is less than Stillwater Trade Mart’s actual cost, so Stillwater
Trade Mart must write the inventory down to current replacement
cost, with the following journal entry:
b.
Cost of Goods Sold .................
8,000
Inventory .............................
To write inventory down to market value.
8,000
Stillwater Trade Mart should report the following in its financial
statements:
c.
BALANCE SHEET
Inventory, at market (which is lower than cost
of $101,000)...............................................................
d.
INCOME STATEMENT
Cost of goods sold ($490,000 + $8,000) ......................
$93,000*
$498,000
*$101,000 − $8,000 = $93,000
e. Relevance and representational faithfulness are the reasons to
account for inventory at the lower of cost or market value.
Representational faithfulness directs accountants to report inventory at
the most realistic amount. In this case the current replacement cost
(market value) of Stillwater Trade Mart’s ending inventory is less than
cost, and the lower-of-cost-or-market rule requires a write-down of the
inventory value to current replacement cost.
Student responses may vary.
6-50 Financial Accounting 9/e Solutions Manual
Copyright © 2015 Pearson Education Inc.
(20-30 min.) P 6-68B
Req. 1
Magic Muffins, Inc.
Millions
Gross profit percentage:
Sales…………………….
Cost of sales…………...
Gross profit…………….
$540
470
$ 70
Gross profit
percentage:
Inventory turnover:
Cost of goods sold
Average inventory
Top Roast Coffee
Corp.
Millions
$7,710
3,170
$4,540
$70
= 13.0%
$540
=
$470
($30 + $18) / 2
$4,540
= 58.9%
$7,710
$3,170
($540+ $630) / 2
= 19.6 times
= 5.4 times
Req. 2
From these statistics, it’s hard to tell whether Magic Muffins or Top
Roast Coffee is more profitable. Magic Muffins has a much faster
inventory turnover, and Top Roast Coffee has a much higher gross profit
percentage. To evaluate profitability, we should also consider each
company’s selling, general, and administrative expenses.
Copyright © 2015 Pearson Education Inc.
Chapter 6
Inventory & Cost of Goods Sold
6-51
(25-30 min.) P 6-69B
Req. 1 (estimate of ending inventory by the gross profit method)
Beginning inventory .......................................
$ 67,300
Purchases .......................................................
$410,700
Less: Purchase discounts .......................
(17,000)
Purchase returns............................
(10,500)
Net purchases .............................................
383,200
Cost of goods available ..................................
450,500
Cost of goods sold:
Sales revenue .............................................
$690,000
Less: Sales returns ................................
(13,000)
Net sales ......................................................
677,000
Less: Estimated gross profit of 44% .........
(297,880)
Estimated cost of goods sold ....................
379,120
Estimated cost of ending inventory ..............
$ 71,380
6-52 Financial Accounting 9/e Solutions Manual
Copyright © 2015 Pearson Education Inc.
(continued) P 6-69B
Req. 2 (income statement through gross profit)
Sternberg Company
Income Statement (partial)
Two Week Period ending March 15 (date of the fire)
Sales revenue .............................................
$690,000
Less: Sales returns ...............................
(13,000)
Net sales revenue .................................
677,000
Cost of goods sold .....................................
379,120*
Gross profit ................................................
$297,880
_____
*Cost of goods sold:
Beginning inventory ..........................................
Purchases ............................................
$410,700
Less: Purchases discounts ...............
(17,000)
Purchase returns .....................
(10,500)
$67,300
Net purchases ....................................................
383,200
Cost of goods available .....................................
450,500
Less: Ending inventory......................................
(71,380)
Cost of goods sold .............................................
$379,120
Copyright © 2015 Pearson Education Inc.
Chapter 6
Inventory & Cost of Goods Sold
6-53
(20-25 min.) P 6-70B
Req. 1
Cost of sales, budgeted ($724,000 × 1.10)..........
$ 796,400
+ Ending inventory, budgeted................................
84,000
= Cost of goods available .......................................
880,400
− Beginning inventory ............................................
(69,000)
= Purchases, budgeted...........................................
$ 811,400
Req. 2
Chuck’s Convenience Stores
Budgeted Income Statement
Year Ended December 31, 2014
Sales ($975,000 × 1.10) ........................................
$1,072,500
Cost of sales ($724,000 × 1.10) ...........................
796,400
Gross profit ..........................................................
276,100
Operating expenses ($113,000 − $2,900)............
110,100
Net income ...........................................................
$ 166,000
6-54 Financial Accounting 9/e Solutions Manual
Copyright © 2015 Pearson Education Inc.
(15-20 min.) P 6-71B
Req. 1 (corrected income statements)
Durango Furniture
Income Statement (adapted; amounts in millions)
Years Ended December 31, 2014, 2013, and 2012
2014
2013
Net sales revenue .........................
$41
$38
Cost of goods sold:
Beginning inventory .................
$ 14
$ 15
Net purchases ...........................
32
30
Cost of goods available............
46
45
Ending inventory ......................
(14)
(14)
Cost of goods sold ...................
32
31
Gross profit ...................................
9
7
Operating expenses......................
6
6
Net income ....................................
$ 3
$ 1
Copyright © 2015 Pearson Education Inc.
Chapter 6
Inventory & Cost of Goods Sold
6-55
2012
$35
$ 11
28
39
(15)
24
11
6
$ 5
(continued) P 6-71B
Req. 2
The corrections did not change total net income over the three-year
period. But the corrections drastically altered the trend of net income —
from an increasing pattern to a decrease and then an increase.
Req. 3
The shareholders will not be as happy with the corrected trend of net
income, since the company’s profit decreased from 2012 to 2013;
however it did increase from 2013 to 2014 (but is still lower than 2012).
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Copyright © 2015 Pearson Education Inc.
Challenge Exercises and Problem
(5-10 min.) E 6-72
a.
Buy inventory late in the year.
b.
Company is using LIFO.
c.
Use average cost.
d.
Use FIFO.
e.
Use FIFO.
f.
Use any method. They all produce the same results because
inventory costs are stable.
Copyright © 2015 Pearson Education Inc.
Chapter 6
Inventory and Cost of Goods Sold
6-57
(20-30 min.) E 6-73
Req. 1
LIFO cost of goods sold =
1. From purchase in December (31 @ $1,200)....................
$ 37,200
2. From purchase in June (55 @ $1,100) ............................
60,500
3. From purchase in February (19 @ $1,050)......................
19,950
4. From beginning inventory (12 @ $975) ...........................
11,700
LIFO cost of goods sold .............................................
$129,350
Req. 2
Cost of goods sold with the additional year-end purchase
(this would have avoided a LIFO liquidation—that is,
kept year-end inventory at the same level it was at the
beginning of the year)
1. From purchase in December (43* @ $1,200) ..................
$ 51,600
2. From purchase in June (55 @ $1,100) ............................
60,500
3. From purchase in February (19 @ $1,050)......................
19,950
Cost of goods sold (with no LIFO liquidation) ...........
$132,050
_____
*Must purchase a total of 43 units in December to keep ending inventory
at 44 units, which was the level of beginning inventory.
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Financial Accounting 9/e Solutions Manual
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(20-30 min.) E 6-74
Sales increased, the gross profit increased then dropped, and net
income slid into a net loss, as shown here:
Dollars in millions
2014
2013
2012
Sales
Cost of sales
Gross profit
$36.6
29.4
7.2
$35.3
27.6
7.7
$34.3
26.8
7.5
(0.4)
0.5
0.8
Net income (net loss)
Gross
profit
=
percentage
Inventory
turnover
$7.2 =
19.7%
$36.6
$7.7 =
$35.3
21.8%
$7.5 =
$34.3
21.9%
$29.4
$27.6
$26.8
= ($8.6 + $7.2) = 3.7 ($7.2 + $7.2) = 3.8 ($7.2 + $6.4) = 3.9
/2
/2
/2
Both the gross profit percentage and the rate of inventory turnover
dropped during this period. The gross profit percentage dropped
significantly.
This suggests that Z Mart was having to discount its
merchandise more and more just to sell the goods. The end result was a
net loss in 2014.
Selling expenses increased significantly, which suggests that Z Mart
was having to advertise heavily in order to sell its inventory.
Copyright © 2015 Pearson Education Inc.
Chapter 6
Inventory and Cost of Goods Sold
6-59
(20-30 min) P 6-75
Req. 1
Beginning inventory
$ 300,000
+ Purchases
?
- Ending inventory
$3,930,000
(330,000)
= Cost of goods sold
$3,900,000
Req. 2
Inventory ...............................
Accounts Payable .......
3,930,000
Accounts Receivable ...........
Sales.............................
6,700,000
Cost of Goods Sold ..............
Inventory ......................
3,900,000
Beg. Bal
3,930,000
6,700,000
3,900,000
Inventory
300,000
Purchases 3,930,000
3,900,000 Cost of
goods sold
End. Bal
6-60
330,000
Financial Accounting 9/e Solutions Manual
Copyright © 2015 Pearson Education Inc.
(continued) P 6-75
Req. 3
Beginning inventory ($20,000 higher under FIFO)
+ Purchases
$ 320,000
3,930,000
- Ending inventory ($22,000 higher under FIFO)
= Cost of goods sold (FIFO)
(352,000)
$3,898,000
Req. 4
HeartStart
$800,000
$2,000,000
= 40.0%
GeneTech
$2,802,000
$6,700,000
= 41.8%
Req. 5
HeartStart
$1,200,000
[($95,000 + $101,000)/2]
= 12.2
GeneTech
$3,898,000
= 11.6
[($320,000 + $352,000)/2]
Req. 6
GeneTech has a higher gross profit percentage which indicates that
GeneTech has a gross profit of $.418 of every sales dollar and HeartStart
has a gross profit of $.40 of every sales dollar. GeneTech has a lower
inventory turnover than HeartStart, although both appear strong.
Copyright © 2015 Pearson Education Inc.
Chapter 6
Inventory and Cost of Goods Sold
6-61
Decision Cases
(50-60 min.) Decision Case 1
Req 1
Duracraft Corporation
Income Statement
FIFO
$1,200,000
585,000*
615,000
200,000
Sales revenue
Cost of goods sold:
Gross profit
Operating expenses
Income before income
tax expense
415,000
Income tax expense
($415,000 × .40)
166,000
($355,000 × .40)
Net income
$ 249,000
_____
*$100,000 + $485,000 = $585,000
**$160,000 + $485,000 = $645,000
LIFO
$1,200,000
645,000**
555,000
200,000
355,000
142,000
$ 213,000
Req. 2
Net income…………
FIFO
$249,000
LIFO
$213,000
FIFO net income is higher because (1) prices are rising (from $100 to
$121.25 to $160), and (2) FIFO and LIFO assign costs to expense (cost of
goods sold) in opposite patterns.
Student responses may vary.
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(15-25 min.) Decision Case 2
Req. 1
This question provides a rich setting for a class discussion. There’s no
single correct answer to this question. Some students may favor Company
B because it reports higher net income than Company A. B may be
preferred because it appears more successful than A, and B’s stock price
may therefore rise more than A’s stock price. Thus it may appear that
Company B would be a better investment than A.
Other students may prefer Company A because it discloses the inventory
method it uses. Company B does not let outsiders know which method it
uses to account for its inventory. These students may trust Company A
more than B because A is more willing to “bare its soul to the public.”
Professors can point out that A, the LIFO company, may be better off
because of the lower income taxes that A pays by using the LIFO method.
We don’t know whether Company B is making the most of this cash-flow
advantage of LIFO.
Student responses will vary.
Req. 2
Yes, the authors would prefer managers to be faithful in representing the
disclosures for inventory — for all the reasons accountants are transparent
and truthful. We would prefer that the financial statements present the
most economically realistic and honest picture of the way assets, liabilities,
revenue, and expenses are measured and reported. It is only then that
financial markets can operate in the way intended.
Copyright © 2015 Pearson Education Inc.
Chapter 6
Inventory and Cost of Goods Sold
6-63
Ethical Issue
Req. 1
Changing accounting methods year after year hurts a company’s
credibility, which makes it hard for the company to borrow or raise
money from outside investors. The question that arises about such a
company is: What is the business trying to hide?
Req. 2
The consistency principle is violated.
Req. 3
Creditors and outside investors could be harmed by accounting
changes year after year. It becomes difficult to tell which changes in the
business are real and which changes result from the shift in the
accounting method. Outsiders find it difficult to track the company’s
operating results and financial position over time. Ultimately the
company suffers because lenders will not want to lend it money, and
outsiders will be reluctant to invest money in the business. This may
deprive the entity of needed funds and hurt its chances for success or
survival.
6-64
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Copyright © 2015 Pearson Education Inc.
Focus on Financials: Amazon.com, Inc.
(30 min.)
Req. 1
Millions
December 31,
December 31,
2012
2011
Inventory (from the balance sheet)
In
addition
to
these
inventories
that
$6,031
$4,992
Amazon.com,
Inc.
owns,
Amazon.com, Inc. handles a significant amount of sellers’ inventory on
consignment.
Note 1 of the Consolidated Financial Statements
(Description of Business and Accounting Policies), under Inventories,
states that “we provide fulfillment-related services in connection with
certain of our sellers’ programs. Third party sellers maintain ownership
of their inventory, regardless of whether fulfillment is provided by us or
the third party sellers, and therefore these products are not included in
our inventories.”
Req. 2
Note 1 of the Consolidated Financial Statements (Description of
Business
and
Accounting
Policies),
under
Inventories,
states:
“Inventories, consisting of products available for sale, are accounted
for…at lower of cost or market value.” The company uses the First-in,
First-out (FIFO) method.
Copyright © 2015 Pearson Education Inc.
Chapter 6
Inventory and Cost of Goods Sold
6-65
(continued) Focus on Financials: Amazon.com, Inc.
Req. 3
Millions
Rearranging,
Beginning Inventory
+ Purchases
+
= Cost of goods available
− Ending Inventory
=
−
= Cost of sales
=
Cost of sales
(2012 income statement)
Ending inventory
(at Dec. 31, 2012)
Cost of goods available
Beginning inventory
(at Dec. 31, 2011)
Purchases
$45,971
6,031
52,002
(4,992)
$47,010
Req. 4
The gross profit percentage decreased slightly during 2012:
Net product sales
Cost of sales
Gross profit
6-66
2012
$51,733 100.0%
45,971
88.9%
$ 5,762
11.1%
Financial Accounting 9/e Solutions Manual
2011
$42,000 100.0%
37,288
88.8%
$ 4,712
11.2%
Copyright © 2015 Pearson Education Inc.
(continued) Focus on Financials: Amazon.com, Inc.
Req. 5
Amazon.com, Inc.’s rate of inventory turnover for 2012 is 8.34 times.
Cost of sales
Average inventory
=
$45,971
($4,992 +
$6,031) / 2
=
8.34
times
On a number-of-days basis, this works out to once about every 44 days
(365/8.34).
Compared to other companies in the retail business,
Amazon.com, Inc.’s inventory turnover is relatively fast, but right in line
with Wal-Mart’s inventory turnover, illustrated in Exhibit 6-12, which is
also 8.3 times per year.
2011 Inventory turnover is 9.1 times.
Cost of sales
Average inventory
=
$37,288
($4,992 +
$3,202) / 2
=
9.10
times
Req. 6
Answers to this question will vary, depending on when the exercise is
completed. In 2013, the retail industry was slowly recovering from a
severe economic recession. This will likely cause gross margins, as
well as inventory turnover statistics, to be improving slowly.
Copyright © 2015 Pearson Education Inc.
Chapter 6
Inventory and Cost of Goods Sold
6-67
Focus on Analysis: YUM! Brands, Inc.
(30-40 min.)
Req. 1
a.
b.
c.
Inventory on hand at fiscal 2012 year end, $313 million.
Cost of sales, $3,874 million.
Purchases
=
+
−
=
Ending inventory .............................
Cost of goods sold ..........................
Beginning inventory ........................
Purchases ........................................
Millions
$ 313
3,874
(273)
$3,914
Req. 2
Purchases are most directly related to cash flow because YUM! Brands,
Inc. must pay for the inventory it purchases.
Req. 3
Millions
+
−
=
Accounts payable, beginning of 2012
(ending balance for fiscal 2011) .......................................
Purchases 2012 (Req. 1) ...................................................
Cash payments on account 2012.....................................
Accounts payable, end of 2012 ........................................
$1,874
3,914
(X)
$1,945
2012 Cash payments (X) = $3,843 million
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Financial Accounting 9/e Solutions Manual
Copyright © 2015 Pearson Education Inc.
(continued) Focus on Analysis: YUM! Brands, Inc.
Req. 4
Note 2 of the Consolidated Financial Statements (Summary of
Significant Accounting Policies), under Inventories, states: “We value or
inventories at the lower of cost…or market”. The company uses the
First-in, First-out (FIFO) method.
Req. 5
(Dollars in millions)
Gross profit
percentage
2012
2011
=
$11,833 − $3,874
$11,833
$10,893 − $3,633
$10,893
=
67.3%
66.6%
This represents a slight incline in gross profit, largely due to a $1,007
million increase in sales accompanied by a proportional increase ($241
million) in cost of sales.
Inventory
turnover
=
$3,874
($313 + $273) / 2
$3,633
($273 + $189) / 2
=
13.2
15.7
Inventory turnover declined slightly. Overall, YUM! Brands’ (a) gross
profit percent improved slightly and (b) rate of inventory turnover
deteriorated during 2012. However, this decline was offset by a moderate
increase in sales. This information helps to explain how income from
operations increased slightly in fiscal 2012.
Copyright © 2015 Pearson Education Inc.
Chapter 6
Inventory and Cost of Goods Sold
6-69
Group Project
Student responses will vary.
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Financial Accounting 9/e Solutions Manual
Copyright © 2015 Pearson Education Inc.
Chapter 6 Appendix
Appendix Short Exercises
(10-15 min.) S6A-1
(Journal entries)
General Journal
1.
2.
Purchases
Accounts Payable
Purchased inventory on account.
1,190
Accounts Receivable
Sales Revenue
Sold inventory on account.
2,900
1,190
2,900
3.
End-of-period entries to update inventory
and record Cost of Goods sold:
a.
Cost of Goods Sold
Inventory (beginning balance)
Transfer beginning inventory to COGS.
580
Inventory (ending balance)
Cost of Goods Sold
Set up ending inventory based on physical
count.
650
b.
c.
Cost of Goods Sold
Purchases
Transfer purchases to COGS.
Copyright © 2015 Pearson Education Inc.
Chapter 6
580
650
1,190
1,190
Inventory and Cost of Goods Sold
6-71
(10-15 min.) S6A-2
Req. 1 Posting general journal entries
Inventory
580*
580
650
650
* Beginning inventory was $580
Cost of Goods Sold
580
1,190
1,120
650
Req. 2
Cost-of-Goods-Sold Model
Beginning inventory
$ 580
+ Purchases
1,190
= Cost of goods available
1,770
- Ending inventory
650
= Cost of goods sold
$1,120
Req. 3
Flexon Technologies
Income Statement (Partial)
Sales revenue
$2,900
Cost of goods sold:
Beginning inventory
Purchases
1,190
Cost of goods available
1,770
Ending inventory
Cost of goods sold
Gross profit
6-72
$ 580
Financial Accounting 9/e Solutions Manual
(650)
1,120
$1,780
Copyright © 2015 Pearson Education Inc.
Appendix Exercises
(10-15 min.) E6A-3A
Begin. Bal.
Purchases
Oct. 8
15
26
Ending Bal.
(5 units @ $60)
Inventory
300
(4 units @ $60)
(10 units @ $70)
(1 unit @ $80)
(7 units @ $?)
240
700
80
?
Cost of
Goods Sold
(1) Specific
unit
cost
(2) Average
cost
(13 × $66*)
(3)
FIFO
(4)
LIFO
=
(13 units @ $?)
?
Ending Inventory
(6 @ $60) + (6 @
$70) + (1 @ $80) =
_____
*Average cost per
unit
Cost of goods sold
=
$860
(3 @ $60) + (4 @
$70)
= $460
$858
(7 × $66*)
= $462
($300 + $240 + $700 + $80)
= $66.00
(5 + 4 + 10 + 1)
(9 @ $60) + (4 @ $70) =
(1 @ $80) + (10 @
$70) + (2 @ $60)
Copyright © 2015 Pearson Education Inc.
=
$820
$900
Chapter 6
(6 @ $70) + (1 @ 80) = $500
(7 @ $60)
= $420
Inventory and Cost of Goods Sold
6-73
(10-15 min.) E6A-4A
Reqs. 1, 2, & 3 (Journal entries)
General Journal
1.
2.
Purchases
Accounts Payable
Purchased inventory on account.
1,020
Accounts Receivable
Sales Revenue
Sold inventory on account.
3,900
1,020
3,900
3.
End-of-period entries to update inventory
and record Cost of Goods Sold:
a.
Cost of Goods Sold
Inventory (beginning balance)
Transfer beginning inventory to COGS.
300
Inventory (ending balance)
Cost of Goods Sold
Set up ending inventory based on physical
count.
420
b.
c.
300
420
Cost of Goods Sold
Purchases
Transfer purchases to COGS.
1,020
1,020
Posting general journal entries
Cost of Goods Sold
Beginning inventory
300 Ending Inventory
Purchases
1,020
Cost of goods sold
900
420
Req. 4 Cost-of-Goods-Sold Model
+
=
=
6-74
Beginning inventory
Purchases
Cost of goods available
Ending inventory
Cost of goods sold
Financial Accounting 9/e Solutions Manual
$ 300
1,020
1,320
420
$ 900
Copyright © 2015 Pearson Education Inc.
Appendix Problems
(20-25 min.) P6A-5A
Req. 1
Begin. Bal.
Purchases
Aug. 8
30
Ending Bal.
Inventory
676
(52 units @ $13)
(78 units @ $14)
(20 units @ $15)
(50 units @ $?)
1,092
300
?
Cost of goods sold
(100 units @ $?)
Cost of Goods Sold
FIFO
?
Ending Inventory
(52 @ $13) + (48 @$14) = $1,348 (20 @ $15) + (30 @
$14)
=
$720
Req. 2
Date
Aug 3
Aug 11
Aug 19
Aug 24
Aug 31
Total
Units Sold
14
38
7
32
9
100
Selling
Price
$67
$67
$69
$69
$69
Total Revenue
$ 938
2,546
483
2,208
621
$6,796
Waverly Outlet
Income Statement (Partial)
Sales revenue
Cost of goods sold:
Beginning inventory
Purchases
Cost of goods available
Ending inventory
Cost of goods sold
Gross profit
Copyright © 2015 Pearson Education Inc.
$6,796
$ 676
1,392
2,068
(720)
1,348
$5,448
Chapter 6
Inventory and Cost of Goods Sold
6-75
(20-30 min.) P6A-6A
Req. 1 (Journal entries)
General Journal
1.
Purchases
Accounts Payable
Purchased inventory on account
2.
Accounts Receivable
Cash
Sales Revenue
Sold inventory for cash and on account
2,550
850
3,400
3.
End-of-period entries to update inventory
and record Cost of Goods Sold:
a.
Cost of Goods Sold
Inventory (beginning balance)
Transfer beginning inventory to COGS
490
Inventory (ending balance)
Cost of Goods Sold
Set up ending inventory based on physical
count
620
b.
c.
6-76
(thousands)
2,000
2,000
Cost of Goods Sold
Purchases
Transfer purchases to COGS
Financial Accounting 9/e Solutions Manual
490
620
2,000
2,000
Copyright © 2015 Pearson Education Inc.
(continued) P6A-6A
Req. 2
Total Desserts, Inc.
Income Statement (Partial)
Sales revenue
Cost of goods sold:
Beginning inventory
Purchases
Cost of goods available
Ending inventory
Cost of goods sold
Gross profit
$3,400
$ 490
2,000
2,490
(620)
1,870
$1,530
Cost-of-Goods-Sold Model
+
=
=
Beginning inventory
Purchases
Cost of goods available
Ending inventory
Cost of goods sold
$ 490
2,000
2,490
620
$1,870
Current asset section of the balance sheet reports:
Inventory, $620
Copyright © 2015 Pearson Education Inc.
Chapter 6
Inventory and Cost of Goods Sold
6-77