BMGT 220, Chapter 6 Discussion
Kristian Sooklal
kristiansooklal@yahoo.com
443-797-4588 (cell) | 410-575-4719 (text)
Plan for today
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Quiz 5 back --- 
Finish lecture material
Practice Problem
Practice Quiz
Quiz 6
Key Topics in Chapter 6
• Inventory Operations
• Merchandising Inventory (more in BMGT220) vs. Manufacturing
inventory (more in BMGT221)
• Periodic vs. Perpetual
• Goods in transit
• FOB Shipping: buyer owns goods
• FOB Destination: seller owns goods
• Consignment Goods: ex. Bookholders
• Inventory Methods (aka cost flow assumptions):
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Specific ID: most accurate, least practical
FIFO: earliest purchased goods are sold first
LIFO: latest purchased goods are sold first
Average Cost: average the costs of goods purchased
Key Topics in Chapter 6 (Continued)
• Effects of LIFO vs. FIFO on:
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Income
Tax
Cost of Goods Sold
Balance Sheet
Consistency Principle
Lower of Cost or Market
Inventory Errors
Inventory Errors:
• Understatement or overstatement of:
• Beginning Inventory
• Cost of Goods Sold
• Ending Inventory
• Effect on:
• Income Statement
• Balance Sheet
• Inventory Turnover/Days in Inventory
Useful Equations
• Beginning Inventory + Cost of Goods Purchased – Ending
Inventory = Cost of Goods Sold
• Cost of Goods Available for Sale / Total Units Available for
Sale = Weighted-Average Unit Cost
• Cost of Goods Sold / Average Inventory = Inventory
Turnover
• Average Inventory = Beginning Inventory + Ending
Inventory / 2
• Days in Inventory = 365 days / Inventory Turnover ratio
• Net Sales – Cost of Goods Sold = Gross Profit
• Beginning Inventory + Goods Purchased = Cost of Goods
Available for Sale
• Ending Inventory + Cost of Goods Sold = Cost of Goods
Available for Sale
Knowledge Check:
On hand, January 1: 10 units @$20 each
Purchases
January 8: 25 units @ $23 each
Sales
January 4: 8 units @$75 each
January 22: 50 units @$26 each January 15: 20 units @$75 each
January 28: 15 units @ $29 each January 26: 52 units @ $75 each
Calculate the company’s Cost of Goods Sold using FIFO for the
month of January:
1.
2.
3.
4.
$1,930
$1,945
$1,966
$2,080
Knowledge Check:
On hand, January 1: 10 units @$20 each
Purchases
January 8: 25 units @ $23 each
Sales
January 4: 8 units @$75 each
January 22: 50 units @$26 each January 15: 20 units @$75 each
January 28: 15 units @ $29 each January 26: 52 units @ $75 each
Calculate the company’s Ending Inventory on January 31
using LIFO:
1.
2.
3.
4.
$430
$454
$544
$565
Knowledge Check:
On hand, January 1: 10 units @$20 each
Purchases
January 8: 25 units @ $23 each
Sales
January 4: 8 units @$75 each
January 22: 50 units @$26 each January 15: 20 units @$75 each
January 28: 15 units @ $29 each January 26: 52 units @ $75 each
Calculate the company’s Cost of Goods Sold using Weighted
Average for the month of January (round to the nearest cent):
1.
2.
3.
4.
$1,946
$1,966
$1,972
$2,008
Knowledge Check:
Using the information below for a sporting goods store, calculate the
amount of inventory adjustment using the Lower of Cost or market method
applied to the inventory on an individual item basis:
Football items
Baseball items:
1.
2.
3.
4.
$450
$825
$1,275
$1,150
Units
Cost/unit
Market
value/unit
Helmets
20
$30
$25
Cleats
10
$50
$20
Pads
30
$20
$25
Gloves
40
$10
$15
Jerseys
50
$40
$25
Exercise 6-12
My Solution
• Ending Inventory Overstated in 2011  Cost of
goods sold is understated
– Ending Inventory should be $39,000
– Cost of Goods sold should be $166,000
– Gross Profit should be $44,000
• Ending Inventory Overstatement in 2011 
Beginning Inventory Overstatement in 2012
– Beginning Inventory should be $39,000
– Cost of Goods Available should be $241,000
– Cost of Goods Sold should be $189,000
– Gross Profit should be $61,000
My Income Statements
2011
2012
$210,000
$250,000
$32,000
$39,000
+ Cost of Goods Purchased
$173,000
$202,000
= Cost of Goods Available for Sale
$205,000
$241,000
-
$39,000
$52,000
$166,000
$189,000
$44,000
$61,000
Sales
Cost of Goods Sold:
Beginning Inventory
Ending Inventory
=
Gross Profit
Cost of Goods Sold
Answer
• The original gross profit before correcting the
mistake was $49,000 + $56,000 = $105,000
• The new gross profit after correcting the
mistake is $44,000 + $61,000 = $105,000
• Note that the cumulative gross profit over 2
years is the same
– Mistakes in inventory affect 2 years
– Mistakes in one year’s inventory are balanced by
the equal but opposite mistake in the next year’s
inventory
Letter to Staley Company
• An error in ending inventory of the current period
will have a reverse effect on the net income of
the next accounting period
• Over two years, the mistake in the current period
is offset by the effect in the next year
• However, this mistake caused Staley Company to
have $5,000 of gross profit overstated in 2011,
and $5,000 of gross profit understated in 2012
• Thus, mistakes in ending inventory effect two
accounting periods
Practice Quiz #5