CHAPTER 9
Inventories
ASSIGNMENT CLASSIFICATION TABLE
Brief
Exercises
Exercises
4, 5, 6, 7,
8, 9
4
4
Prepare the entries for
purchases and sales of
inventory under a periodic inventory system.
1
1
3.
Determine cost of goods
sold under a periodic inventory system.
2, 3
2, 3
4.
Identify the unique features of the income statement for a merchandising company using a periodic inventory system.
10
5.
Explain the basis of accounting for inventories
and describe the inventory cost flow methods.
8, 9, 11,
12, 13, 14
6.
Explain the financial
statement and tax effects
of each of the inventory
cost flow methods.
15, 16, 21
7.
Explain the lower of
cost or market basis of
accounting for inventories.
17, 18, 19
8
8
8.
Indicate the effects of
inventory errors on the
financial statements.
20
10
9, 10
Study Objectives
Questions
1.
Describe the steps in
determining inventory
quantities.
2.
5, 6, 7
9-1
A
Problems
B
Problems
1
1A
1B
2
1A, 2A
1B, 2B
3
1A, 2A
1B, 2B
5, 6, 7
3A, 4A
3B, 4B
6, 7
3A, 4A
3B, 4B
ASSIGNMENT CLASSIFICATION TABLE (Continued)
Study Objectives
Questions
Brief
Exercises
*09.
Compute and interpret
the inventory turnover
ratio.
22
9
11
*10.
Describe the two
methods of estimating
inventories.
23, 24, 25,
26
11, 12
12, 13
5A, 6A
5B, 6B
*11.
Apply the inventory
cost flow methods to
perpetual inventory
records.
27, 28
13
14
7A
7B
Exercises
A
Problems
B
Problems
*Note: All asterisked Questions, Exercises, and Problems relate to material in the appendix to the
*chapter.
9-2
ASSIGNMENT CHARACTERISTICS TABLE
Problem
Number
Description
Difficulty
Level
Time
Allotted (min.)
1A
Journalize, post, and prepare trial balance and partial
income statement.
Simple
30-40
2A
Prepare an income statement.
Simple
15-20
3A
Determine cost of goods sold and ending inventory
using FIFO, LIFO, and average cost with analysis.
Simple
30-40
4A
Compute ending inventory, prepare income statements
and answer questions using FIFO and LIFO.
Moderate
30-40
*5A
Compute gross profit rate and inventory loss using the
gross profit method.
Moderate
30-40
*6A
Compute ending inventory using the retail inventory
method.
Moderate
20-30
*7A
Determine ending inventory under a perpetual inventory system.
Moderate
40-50
1B
Journalize, post, and prepare a trial balance and partial income statement.
Simple
30-40
2B
Prepare an income statement.
Simple
15-20
3B
Determine cost of goods sold and ending inventory
using FIFO, LIFO, and average cost.
Simple
30-40
4B
Compute ending inventory, prepare income statements
and answer questions using FIFO and LIFO.
Moderate
30-40
*5B
Estimate inventory loss using the gross profit method.
Moderate
30-40
*6B
Compute ending inventory and cost of inventory lost
using the retail inventory method.
Moderate
20-30
*7B
Determine ending inventory under a perpetual inventory system.
Moderate
40-50
9-3
Study Objective
Knowledge Comprehension
9-4
Describe the steps in determining
inventory quantities.
*02.
Prepare the entries for purchases
and sales of inventory under a periodic inventory system.
Q9-1
BE9-1
E9-1
P9-1A
P9-1B
*03.
Determine cost of goods sold under Q9-2
a periodic inventory system.
Q9-3
BE9-2
BE9-3
E9-2 P9-1B P9-2A
P9-1A
P9-2B
*04.
Identify the unique features of the
income statement for a merchandising company using a periodic inventory system.
Q9-10
E9-3
P9-1A
P9-1B
P9-2A
P9-2B
*05.
Explain the basis of accounting for
inventories and describe the inventory cost flow methods.
Q9-9
Q9-11
Q9-13
Q9-8
BE9-6
BE9-7
E9-5
E9-6
E9-7
*06.
Explain the financial statement and
tax effects of each of the inventory
cost flow methods.
Q9-15
Q9-16
Q9-21
E9-6
E9-7
P9-3A
P9-3B
*07.
Explain the lower of cost or market
basis of accounting for inventories.
Q9-17
Q9-18
Q9-19 BE9-8
E9-8
*08.
Indicate the effects of inventory
errors on the financial statements.
*09.
Compute and interpret the inventory
turnover ratio.
*10.
Describe the two methods of estimating inventories.
Q9-23
Q9-24
Q9-25
Q9-26
BE9-12
BE9-13
E9-12 P9-5B
E9-13 P9-6B
P9-5A
P9-6A
*11.
Apply the inventory cost flow methods to perpetual inventory records.
Q9-27
Q9-28
E9-14
P9-7A
P9-7B
Q9-12
Q9-14
BE9-5
Q9-4
Q9-6
Q9-7
Q9-9 Q9-8
BE9-4
Analysis
*01.
Broadening Your Perspective
Q9-5
Application
Synthesis
Evaluation
E9-4
P9-3A P9-4A
P9-3B P9-4B
P9-4A
P9-4B
Q9-20
BE9-9
BE9-9
BE9-11
BE9-10 E9-9
E9-10
Q9-22
Financial Reporting Real-World Focus
Group Decision Case Communication
Research Assign.
Surfing the Net
Ethics Case
Comp. Analysis
Interpreting
Financial Sts.
BLOOM'S TAXONOMY TABLE
Correlation Chart between Bloom's Taxonomy, Study Objectives and End-of-Chapter Exercises and Problems
ANSWERS TO QUESTIONS
01.
02.
July 24
Accounts Payable ($1,700 – $200) . . . . . . . . . . . . . . . . . . . . .
Purchase Discounts ($1,500 X 2%) . . . . . . . . . . . . . . . . .
Cash ($1,500 – $30) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,500
Accounts
Added/Deducted
Normal Balance
Purchase Returns and Allowances
Purchase Discounts
Freight-in
Deducted
Deducted
Added
Credit
Credit
Debit
=
=
=
=
=
30
1,470
03.
(a) X
Y
(b) X
(c) X
(d) X
Purchase returns and allowances and
Purchase discounts, or vice versa.
Freight-in.
Cost of goods purchased.
Ending merchandise inventory.
04.
Agree. Effective inventory management is frequently the key to successful business operations.
Management attempts to maintain sufficient quantities and types of goods to meet expected customer demand. It also seeks to avoid the cost of carrying inventories that are clearly in excess of
anticipated sales.
05.
Inventory items have two common characteristics: (1) they are owned by the company and (2) they
are in a form ready for sale to customers in the ordinary course of business.
06.
Taking a physical inventory involves actually counting, weighing or measuring each kind of inventory
on hand. Retailers, such as a hardware store, generally have thousands of different items to count.
This is normally done when the store is closed. Tom will probably count items, and mark the quantity, description, and inventory number on prenumbered inventory tags.
07.
(a) (1) The goods will be included in Janine Company's inventory if the terms of sale are FOB
destination.
(2) They will be included in Laura Company's inventory if the terms of sale are FOB shipping
point.
(b) Janine Company should include goods shipped to a consignee in its inventory. Goods held by
Janine Company on consignment should not be included in inventory.
08.
Inventoriable costs are $3,020 (invoice cost $3,000 + freight charges $80 – purchase discounts
$60). The amount paid to negotiate the purchase is a buying cost that normally is not included in
the cost of inventory because of the difficulty of allocating these costs. Buying costs are expensed
in the year incurred.
09.
The primary basis of accounting for inventories is cost in accordance with the cost principle. The
major objective of accounting for inventories is the proper determination of net income in accordance with the matching principle.
10.
There are three distinguishing features in the income statement of a merchandising company: (1)
a sales revenues section, (2) a cost of goods sold section, and (3) gross profit.
9-5
Questions Chapter 9 (Continued)
11.
Actual physical flow may be impractical because many items are indistinguishable from one another.
Actual physical flow may be inappropriate because management may be able to manipulate net
income through specific identification of items sold.
12.
The major advantage of the specific identification method is that it tracks the actual physical flow
of the goods available for sale. The major disadvantage is that management could manipulate net
income.
13.
No. Selection of an inventory costing method is a management decision. However, once a method
has been chosen, it should be consistently applied.
14.
(a) FIFO, (b) Average cost, (c) LIFO.
15.
Jim Groat Company is using the FIFO method of inventory costing, and Greg Hanson Company is
using the LIFO method. Under FIFO, the latest goods purchased remain in inventory. Thus, the
inventory on the balance sheet should be close to current costs. The reverse is true of the LIFO
method. Jim Groat Company will have the higher gross profit because cost of goods sold will include a higher proportion of goods purchased at earlier (lower) costs.
16.
Char Lewis Company may experience severe cash shortages if this policy continues. All of its net
income is being paid out as dividends, yet some of the earnings must be reinvested in inventory
to maintain inventory levels. Some earnings must be reinvested because net income is computed
with cost of goods sold based on older, lower costs while the inventory must be replaced at current,
higher costs. Because of this factor, net income under FIFO is sometimes referred to as "phantom
profits."
17.
Bob should know the following:
(a) A departure from the cost basis of accounting for inventories is justified when the utility (revenue-producing ability) of the goods is no longer as great as its cost. The writedown to market
should be recognized in the period in which the price decline occurs.
(b) Market means current replacement cost, not selling price. For a merchandising company, market is the cost at the present time from the usual suppliers in the usual quantities.
18.
Hohenberger Music Center should report the CD players at $320 each for a total of $1,600. $320
is the current replacement cost under the lower of cost or market basis of accounting for inventories. A decline in replacement cost usually leads to a decline in the selling price of the item.
Valuation at LCM is conservative.
19.
The methods that may be used under LCM are (1) individual items, (2) major categories, and (3)
total inventory. The individual items method produces the lowest inventory value.
20.
(a) Elaine Stahl Company's 1998 net income will be understated $5,000; (b) 1999 net income will
be overstated $5,000; and (c) the combined net income for the two years will be correct.
21.
Maureen & Nathan Company should disclose (1) the major inventory classifications, (2) the basis
of accounting (cost or lower of cost or market), and (3) the costing method (FIFO, LIFO, or
average).
9-6
Questions Chapter 9 (Continued)
*22.
An inventory turnover ratio too high may indicate that the company is losing sales opportunities
because of inventory shortages. Inventory outages may also cause customer ill will and result in
lost future sales.
*23.
Inventories must be estimated when (1) management wants monthly or quarterly financial statements but a physical inventory is only taken annually and (2) a fire or other type of casualty makes
it impossible to take a physical inventory.
*24.
In the gross profit method, the average is the gross profit rate, which is gross profit divided by net
sales. The rate is often based on last year's actual rate. The gross profit rate is applied to net sales
in using the gross profit method.
In the retail inventory method, the average is the cost-to-retail ratio, which is the goods available
for sale at cost divided by the goods available for sale at retail. The ratio is based on current year
data and is applied to the ending inventory at retail.
*25.
*26.
The estimated cost of the ending inventory
Net sales . . . . . . . . . . . . . . . . . . . . . . . .
Less: Gross profit ($400,000 X 30%) . . .
Estimated cost of goods sold . . . . . . . . . .
is $20,000:
...........................
...........................
...........................
$400,000
0120,000
$280,000
Cost of goods available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Estimated cost of ending inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$300,000
0280,000
$020,000
The estimated cost of the ending inventory is $21,000:
Cost-to-retail ratio:
Ending inventory at retail:
$30,000 ($120,000 – $90,000).
Ending inventory at cost:
$21,000 ($30,000 X 70%).
*27.
Disagree. The results under the FIFO method are the same but the results under the LIFO method
are different. The reason is that the pool of inventoriable costs (cost of goods available for sale)
is not the same. Under a periodic system, the pool of costs is the goods available for sale for the
entire period, whereas under a perpetual system, the pool is the goods available for sale up to the
date of sale.
*28.
In a periodic system, the average is a weighted average based on total goods available for sale
for the period. In a perpetual system, the average is a moving average of goods available for sale
after each purchase.
9-7
SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 9-1
(a) Purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts Payable . . . . . . . . . . . . . . . . . . .
900,000
(b) Accounts Payable . . . . . . . . . . . . . . . . . . . . . .
Purchase Returns and Allowances . . . . . .
130,000
(c) Accounts Payable ($900,000 – $130,000) . . . . .
Purchase Discounts ($770,000 X 2%) . . . .
Cash ($770,000 – $15,400) . . . . . . . . . . . . .
770,000
900,000
130,000
15,400
754,600
BRIEF EXERCISE 9-2
(a) Purchases . . . . . . . . . . . . . . . . . . . . . . .
Less: Purchase returns and allowances
Purchase discounts . . . . . . . . . .
Net purchases . . . . . . . . . . . . . . . . . . . .
.
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$440,000
$11,000
008,000
(b) Net purchases . . . . . . . . . . . . . . . . . . . . . . . . .
Add: Freight-in . . . . . . . . . . . . . . . . . . . . . . . .
Cost of goods purchased . . . . . . . . . . . . . . . . .
0019,000
$421,000
$421,000
0016,000
$437,000
BRIEF EXERCISE 9-3
Net sales . . . . . . . . . . . . . . . . . . .
Beginning inventory . . . . . . . . . .
Add: Cost of goods purchased*
Cost of goods available for sale .
Ending inventory . . . . . . . . . . . . .
Cost of goods sold . . . . . . . . . . .
Gross profit . . . . . . . . . . . . . . . . .
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*Information taken from Brief Exercise 9-2.
9-8
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$650,000
$060,000
0437,000
497,000
0090,000
0407,000
$243,000
BRIEF EXERCISE 9-4
1.
Ownership of the goods belongs to the consignor (Oriental Press). Thus,
these goods should be included in Oriental Press' inventory.
2.
The goods in transit should not be included in the inventory count because ownership by Oriental Press does not occur until the goods reach
the buyer.
3.
The goods being held belong to the customer. They should not be included in Oriental Press' inventory.
4.
Ownership of these goods rests with the other company (the consignor).
Thus, these goods should not be included in the physical inventory.
BRIEF EXERCISE 9-5
The items that should be included in inventoriable costs are:
(1)
(2)
(3)
(5)
Freight-in
Purchase Returns and Allowances
Purchases
Purchase Discounts
BRIEF EXERCISE 9-6
(1) The ending inventory under FIFO consists of 300 units at $8 + 100 units
at $7 for a total allocation of $3,100 ($2,400 + $700).
(2) The ending inventory under LIFO consists of 300 units at $6 + 100 units
at $7 for a total allocation of $2,500 ($1,800 + $700).
9-9
BRIEF EXERCISE 9-7
Average unit cost is $7.00 computed as follows:
0,300 X $6 = $1,800
0,400 X $7 = 02,800
0,300 X $8 = 02,400
1,000
$7,000
$7,000 ÷ 1,000 = $7.00.
The cost of the ending inventory is $2,800 (400 X $7.00).
BRIEF EXERCISE 9-8
Inventory Categories
Cameras
Camcorders
VCRs
Total valuation
Cost
Market
LCM
$12,000
9,000
14,000
$10,200
9,700
12,800
$10,200
9,000
012,800
$32,000
BRIEF EXERCISE 9-9
Inventory turnover ratio:
Days in inventory:
=
= 3.0
= 121.7 days
BRIEF EXERCISE 9-10
The understatement of ending inventory caused cost of goods sold to be
overstated $7,000 and net income to be understated $7,000. The correct net
income for 1999 is $97,000 ($90,000 + $7,000).
Total assets in the balance sheet will be understated by the amount that ending inventory is understated, $7,000.
9-10
*BRIEF EXERCISE 9-11
(1) Net sales
Less: Estimated gross profit (40% X $300,000)
Estimated cost of goods sold
$300,000
0120,000
$180,000
(2) Cost of goods available for sale
Less: Estimated cost of goods sold
Estimated cost of ending inventory
$230,000
0180,000
$050,000
*BRIEF EXERCISE 9-12
Goods available for sale
Net sales
Ending inventory at retail
At Cost
At Retail
$35,000
$50,000
030,000
$20,000
Cost-to-retail ratio = ($35,000 ÷ $50,000) = 70%
Estimated cost of ending inventory = ($20,000 X 70%) = $14,000
*BRIEF EXERCISE 9-13
(1) FIFO Method
Product E2-D2
Date
May 7
June 1
July 28
Aug. 27
Purchases
(50 @ $10)
Sales
$500
(30 @ $10)
(30 @ $15)
Balance
$300
$450
(20 @ $10)
(13 @ $15)
9-11
$395
(50
(20
(20
(30
@
@
@
@
$10)
$10)
$10)
$15)
$500
$200
(17 @ $15)
$255
$650
*BRIEF EXERCISE 9-13 (Continued)
(2) LIFO Method
Product E2-D2
Date
May 7
June 1
July 28
Purchases
(50 @ $10)
Sales
$500
(30 @ $10)
(30 @ $15)
Balance
$300
$450
Aug. 27
(30 @ $15)
(03 @ $10)
$480
(50
(20
(20
(30
@
@
@
@
$10)
$10)
$10)
$15)
$500
$200
(17 @ $10)
$170
$650
(3) Average Cost
Product E2-D2
Date
May 7
June 1
July 28
Aug. 27
Purchases
(50 @ $10)
(30 @ $15)
Sales
Balance
$500
(30 @ $10)
$300
(33 @ $13)
$429
$450
*$650 ÷ 50
9-12
(50
(20
(50
(17
@
@
@
@
$10)
$10)
$13)*
$13)
$500
$200
$650
$221
SOLUTIONS TO EXERCISES
EXERCISE 9-1
(a) (1) April 5
Purchases . . . . . . . . . . . . . . . . . . .
Accounts Payable . . . . . . . . . .
18,000
Freight-in . . . . . . . . . . . . . . . . . . . .
Cash . . . . . . . . . . . . . . . . . . . .
800
Equipment . . . . . . . . . . . . . . . . . . .
Accounts Payable . . . . . . . . . .
26,000
Accounts Payable . . . . . . . . . . . . .
Purchase Returns and
Allowances . . . . . . . . . . . . .
3,000
Accounts Payable . . . . . . . . . . . . .
($18,000 – $3,000)
Purchase Discounts . . . . . . . .
[($18,000 – $3,000) X 2%]
Cash ($15,000 – $300) . . . . . . .
15,000
Accounts Payable ($18,000 – $3,000) . .
Cash . . . . . . . . . . . . . . . . . . . . . . .
15,000
(2) April 6
(3) April 7
(4) April 8
(5) April 15
(b) May
4
18,000
800
26,000
3,000
300
14,700
15,000
EXERCISE 9-2
Inventory, September 1, 1998 . . . . . . . . .
Purchases . . . . . . . . . . . . . . . . . . . . . . . .
Less: Purchase returns and allowances .
Net purchases . . . . . . . . . . . . . . . . . . . . .
Add: Freight-in . . . . . . . . . . . . . . . . . . .
Cost of goods purchased . . . . . . . . . . . .
Cost of goods available for sale . . . . . . .
Inventory, August 31, 1999 . . . . . . . . . . .
Cost of goods sold . . . . . . . . . . . . . .
9-13
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$017,200
$142,400
0002,000
140,400
0004,000
0144,400
161,600
0027,000
$134,600
EXERCISE 9-3
MEXICO COMPANY
Income Statement
For the Month Ended January 31, 1999
Sales revenues
Sales . . . . . . . . . . . . . . . . .
Less: Sales returns and
allowances . . . . . .
Sales discounts . . .
Net sales . . . . . . . . . . . . . .
Cost of goods sold
Inventory, January 1 . . . . . .
Purchases . . . . . . . . . . . . .
Less: Purchase returns
and allowances . .
Purchase discounts
Net purchases . . . . . . . . . .
Add: Freight-in . . . . . . . . .
Cost of goods purchased .
Cost of goods available for
sale . . . . . . . . . . . . . . . . .
Inventory, January 31 . . . . .
Cost of goods sold . . .
Gross profit . . . . . . . . . . . . . . . .
Operating expenses
Salary expense . . . . . . . . .
Rent expense . . . . . . . . . . .
Insurance expense . . . . . . .
Freight-out . . . . . . . . . . . . .
Total operating
expense . . . . . . . . . .
Net income . . . . . . . . . . . . . . . .
..
$312,000
..
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$013,000
0008,000 0021,000
291,000
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42,000
$200,000
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$6,000
03,000 0009,000
191,000
0010,000
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243,000
0063,000
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61,000
19,000
12,000
0005,000
0201,000
0180,000
111,000
..
..
0097,000
$014,000
9-14
EXERCISE 9-4
Ending inventory——physical count . . . . . . . . . . . . . . . . . . . .
1. No effect—title passes to purchaser upon shipment
when terms are FOB shipping point . . . . . . . . . . . . . . .
2. No effect—title does not transfer to Canada until
goods are received . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3. Add to inventory: Title passed to Canada when goods
were shipped . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4. Add to inventory: Title remains with Canada until
purchaser receives goods . . . . . . . . . . . . . . . . . . . . . .
5. The goods did not arrive prior to year-end. The goods,
therefore, cannot be included in the inventory . . . . . . .
Correct inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.
$297,000)
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0)
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0)
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25,000)
.
40,000)
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0044,000)
(
$318,000
EXERCISE 9-5
FIFO
Beginning inventory (30 X $8) . . . . . . . . . . . . . . .
Purchases
May 15 (25 X $10) . . . . . . . . . . . . . . . . . . . . .
May 24 (35 X $13) . . . . . . . . . . . . . . . . . . . . .
Cost of goods available for sale . . . . . . . . . . . . .
Less: Ending inventory (12 X $13) . . . . . . . . . . .
Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . .
......
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$240
$250
0455
0705
945
0156
$789
Proof
Date
Units
Unit Cost
Total Cost
5/1
5/15
5/24
30
25
23
$08
010
013
$240
0250
0299
$789
LIFO
Cost of goods available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Ending inventory (12 X $8) . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
9-15
$945
0096
$849
EXERCISE 9-5 (Continued)
Proof
Date
Units
Unit Cost
Total Cost
5/24
5/15
5/1
35
25
18
$13
010
008
$455
0250
0144
$849
EXERCISE 9-6
(a)
FIFO
Beginning inventory (200 X $5) . . .
Purchases
June 12 (300 X $6) . . . . . . . . .
June 23 (500 X $7) . . . . . . . . .
Cost of goods available for sale . .
Less: Ending inventory (180 X $7)
Cost of goods sold . . . . . . . . . . . .
...........
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$1,000
$1,800
03,500
05,300
6,300
01,260
$5,040
LIFO
Cost of goods available for sale . . . . . . . . . . . . .
Less: Ending inventory (180 X $5) . . . . . . . . . . .
Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . .
$6,300
00900
$5,400
(b) The FIFO method will produce the higher ending inventory because
costs have been rising. Under this method, the earliest costs are assigned to cost of goods sold, and the latest costs remain in ending
inventory. For Luxenburg Company, the ending inventory under FIFO is
$1,260 (180 X $7) compared to $900 (180 X $5) under LIFO.
(c) The LIFO method will produce the higher cost of goods sold for Luxenburg Company. Under LIFO the most recent costs are charged to cost
of goods sold and the earliest costs are included in the ending inventory. The cost of goods sold is $5,400 [$6,300 – (180 X $5)] compared to
$5,040 ($6,300 – $1,260) under FIFO.
9-16
EXERCISE 9-7
(a)
Cost of Goods
Available for Sale
$6,300
+
Total Units
Available for Sale
1,000
Ending inventory (180 X $6.30)
Cost of goods sold (820 X $6.30)
=
Weighted Average
Unit Cost
$6.30
$1,134
05,166
(b) Ending inventory is lower than FIFO ($1,260) and higher than LIFO
($900). In contrast, cost of goods sold is higher than FIFO ($5,040) and
lower than LIFO ($5,400).
(c) The average cost method uses a weighted average unit cost, not a simple average of unit costs.
EXERCISE 9-8
Lower of Cost or Market by:
Cost
(a)
(b)
(c)
Individual
Major
Total
Market
Items
Categories Inventory
Cameras
Minolta
Canon
Total
$0,850
01,050
01,900
$0,800
01,064
01,864
$0,800
01,050
Light Meters
Vivitar
Kodak
Total
Total inventory
01,500
01,150
02,650
$4,550
01,320
01,350
02,670
$4,534
01,320
01,150
00,000
$4,320
9-17
$1,864
02,650
$4,514
$4,534
EXERCISE 9-9
Beginning inventory . . . . . . . . .
Cost of goods purchased . . . . .
Cost of goods available for sale
Corrected ending inventory . . .
Cost of goods sold . . . . . . . . . .
a
$30,000 – $4,000 = $26,000.
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1999
2000
$020,000
0150,000
0170,000
0026,000a
$144,000
$026,000
0175,000
0201,000
0038,000b
$163,000
b
$35,000 + $3,000 = $38,000.
EXERCISE 9-10
(a)
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of goods sold
Beginning inventory . . . . . . . . . . . .
Cost of goods purchased . . . . . . . .
Cost of goods available for sale . . .
Ending inventory ($40,000 – $6,000)
Cost of goods sold . . . . . . . . .
Gross profit . . . . . . . . . . . . . . . . . . . . . .
1999
2000
..
$210,000
$250,000
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0032,000
0173,000
0205,000
0034,000
0171,000
$039,000
0034,000
0202,000
0236,000
0052,000
0184,000
$066,000
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(b) The cumulative effect on total gross profit for the two years is zero as
shown below:
Incorrect gross profits:
Correct gross profits:
Difference
$45,000 + $60,000 = $105,000
$39,000 + $66,000 = 0105,000
$000,000
(c) Dear Mr./Ms. President:
Because your ending inventory of December 31, 1999 was overstated by
$6,000, this resulted in your net income for 1999 being overstated and
for 2000 being understated by $6,000.
In a periodic system, the cost of goods sold is calculated by deducting
the cost of ending inventory from the total cost of goods you have
available for sale in the period. Therefore, if this ending inventory figure
is overstated, as it was in December 1999, then the cost of goods sold
9-18
EXERCISE 9-10 (Continued)
is understated and therefore net income will be overstated by that
amount. Consequently, this overstated ending inventory figure goes on
to become the next period's beginning inventory amount and is a part
of the total cost of goods available for sale. Therefore, the mistake
repeats itself in the reverse.
The error also affects the balance sheet at the end of 1999. The inventory reported in the balance sheet is overstated; therefore, total assets
are overstated. The overstatement of the 1999 net income results in the
capital account balance being overstated. The balance sheet at the end
of 2000 is correct because the overstatement of the capital account at
the end of 1999 is offset by the understatement of the 2000 net income
and the inventory at the end of 2000 is correct.
Thank you for allowing me to bring this to your attention. If you have
any questions, please contact me at your convenience.
Sincerely,
EXERCISE 9-11
1997
1998
1999
= 3.2
= 2.8
Inventory
turnover
ratio
= 3.6
Days in
inventory
Gross
profit rate
= 114.1 days
= 101.4 days
= .25
= 130.4 days
= .30
= .34
The inventory turnover decreased by approximately 22% from 1997 to 1999
while the days in inventory increased by almost 29% over the same time
period. Both of these changes would be considered negative in nature since
it's better to have a higher inventory turnover ratio with a corresponding lower
days in inventory. However, Wasicsko's gross profit rate increased by 36%
from 1997 to 1999, which is a positive sign.
9-19
*EXERCISE 9-12
(a) Net sales ($51,000 – $1,000) . . . . . . . . . . . . . . . . . . . . . . . .
Less: Estimated gross profit (30% X $50,000) . . . . . . . . . .
Estimated cost of goods sold . . . . . . . . . . . . . . . . . . . . . .
$50,000
015,000
$35,000
Beginning inventory . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of goods purchased ($28,200 – $1,400 + $1,200)
Cost of goods available for sale . . . . . . . . . . . . . . . .
Less: Estimated cost of goods sold . . . . . . . . . . . . .
Estimated cost of merchandise lost . . . . . . . . . . . . .
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$20,000
028,000
48,000
035,000
$13,000
(b) Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Estimated gross profit (25% X $50,000) . . . . . . . . . .
Estimated cost of goods sold . . . . . . . . . . . . . . . . . . . . . .
$50,000
012,500
$37,500
Beginning inventory . . . . . . . . . . . .
Cost of goods purchased . . . . . . . .
Cost of goods available for sale . . .
Less: Estimated cost of goods sold
Estimated cost of merchandise lost
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$25,000
028,000
53,000
037,500
$15,500
*EXERCISE 9-13
Women's
Department
Beginning inventory
Goods purchased
Goods available for sale
Net sales
Ending inventory at retail
Cost
Retail
Cost
Retail
$032,000
0148,000
$180,000
$045,000
0182,000
227,000
0187,000
$040,000
$046,450
0137,300
$183,750
$060,000
0185,000
245,000
0195,000
$050,000
Cost/retail ratio
Estimated cost of
ending inventory
Men's
Department
= 79%
= 75%
$40,000 X 79% = $31,600
$50,000 X 75% = $37,500
9-20
*EXERCISE 9-14
FIFO
(1)
Date
Jan. 1
8
10
Purchases
Sales
(2 @ $600) $1,200
(6 @ $640) $3,840
15
(2 @ $600)
(2 @ $640) $2,480
Balance
(4
(2
(2
(6
@
@
@
@
$600) $2,400
$600) 1,200
$600)
$640) 5,040
(4 @ $640)
2,560
LIFO
(2)
Date
Jan. 1
8
10
Purchases
Sales
(2 @ $600) $1,200
(6 @ $640) $3,840
15
(4 @ $640) $2,560
Balance
(4
(2
(2
(6
(2
(2
@
@
@
@
@
@
$600) $2,400
$600) 1,200
$600)
$640) 5,040
$600)
$640) 2,480
AVERAGE COST
(3)
Date
Jan. 1
8
10
15
Purchases
Sales
(2 @ $600) $1,200
(6 @ $640) $3,840
(4 @ $630) $2,520
*Average cost = $5,040 ÷ 8 = $630
9-21
Balance
(4
(2
(8
(4
@
@
@
@
$600) $2,400
$600) 1,200
$630)* 5,040
$630) 2,520
SOLUTIONS TO PROBLEMS
PROBLEM 9-1A
(a)
General Journal
Date
Apr.
5
7
9
10
12
14
17
20
21
J1
Account Titles and Explanation
Ref.
Debit
Purchases
Accounts Payable
510
201
1,600
Freight-in
Cash
516
101
0,080
Accounts Payable
Purchase Returns and
Allowances
201
0,100
Accounts Receivable
Sales
112
401
0,900
Purchases
Accounts Payable
510
201
0,660
Accounts Payable ($1,600 – $100)
Purchase Discounts
($1,500 X 2%)
Cash
201
514
1,500
Accounts Payable
Purchase Returns and
Allowances
201
Accounts Receivable
Sales
112
401
0,700
Accounts Payable ($660 – $60)
Purchase Discounts
($600 X 1%)
Cash
201
514
0,600
9-22
1,600
0,080
512
0,100
0,900
0,660
0,030
101
1,470
0,060
512
101
Credit
0,060
0,700
0,006
0,594
PROBLEM 9-1A (Continued)
Date
Account Titles and Explanation
Ref.
Debit
Apr. 27
Sales Returns and Allowances
Accounts Receivable
412
112
0,030
Cash
Sales
101
401
0,600
Cash
Accounts Receivable
101
112
1,100
30
30
Credit
0,030
0,600
1,100
(b)
Cash
No. 101
Date
Apr.
Explanation
1
7
14
21
30
30
Balance
Ref.
✓
J1
J1
J1
J1
J1
Debit
Credit
0,080
1,470
0,594
0,600
1,100
Accounts Receivable
Date
Apr.
Explanation
10
20
27
30
Apr.
Explanation
1
Balance
2,500
2,420
0,950
0,356
0,956
2,056
No. 112
Ref.
Debit
J1
J1
J1
J1
0,900
0,700
Credit
Balance
0,030
1,100
0,900
1,600
1,570
0,470
Merchandise Inventory
Date
Balance
No. 120
Ref.
✓
9-23
Debit
Credit
Balance
3,500
PROBLEM 9-1A (Continued)
Accounts Payable
Date
Apr.
Explanation
5
9
12
14
17
21
No. 201
Ref.
J1
J1
J1
J1
J1
J1
Debit
Credit
Balance
1,600
1,600
1,500
2,160
0,660
0,600
0,000
0,100
0,660
1,500
0,060
0,600
C. Lopez, Capital
Date
Apr.
Explanation
1
Balance
No. 301
Ref.
Debit
Credit
✓
06,000
Sales
No. 401
Date
Apr.
Explanation
10
20
30
Ref.
Debit
J1
J1
J1
Credit
Balance
0,900
0,700
0,600
0,900
1,600
2,200
Sales Returns and Allowances
Date
Apr.
Explanation
27
No. 412
Ref.
Debit
J1
0,030
Credit
Date
No. 510
Explanation
5
12
Balance
0,030
Purchases
Apr.
Balance
Ref.
Debit
J1
J1
1,600
0,660
9-24
Credit
Balance
1,600
2,260
PROBLEM 9-1A (Continued)
Purchase Returns and Allowances
Date
Apr.
Explanation
9
17
No. 512
Ref.
Debit
J1
J1
Credit
Balance
100
060
100
160
Purchase Discounts
Date
Apr.
Explanation
14
21
No. 514
Ref.
Debit
J1
J1
Credit
Balance
030
006
030
036
Freight-in
Date
Apr.
(c)
No. 516
Explanation
7
Ref.
Debit
J1
080
Credit
Balance
080
CHI CHI'S PRO SHOP
Trial Balance
April 30, 1999
Debit
Cash . . . . . . . . . . . . . . . . . . . . . . .
Accounts Receivable . . . . . . . . . . .
Merchandise Inventory . . . . . . . . . .
Capital . . . . . . . . . . . . . . . . . . . . . .
Sales . . . . . . . . . . . . . . . . . . . . . . .
Sales Returns and Allowances . . .
Purchases . . . . . . . . . . . . . . . . . . .
Purchase Returns and Allowances
Purchase Discounts . . . . . . . . . . . .
Freight-in . . . . . . . . . . . . . . . . . . . .
9-25
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Credit
$2,056
00,470
03,500
$6,000
02,200
00,030
02,260
00,080
$8,396
00,160
00,036
00,000
$8,396
PROBLEM 9-1A (Continued)
(d)
CHI CHI'S PRO SHOP
Income Statement (Partial)
For the Month Ended April 30, 1999
Sales revenues
Sales . . . . . . . . . . . . . . . . . .
Less: Sales returns and
allowances . . . . . .
Net sales . . . . . . . . . . . . . . .
Cost of goods sold
Inventory, April 1 . . . . . . . .
Purchases . . . . . . . . . . . . . .
Less: Purchase returns and
allowances . . . . . .
Purchase discounts .
Net purchases . . . . . . . . . . .
Add: Freight-in . . . . . . . . .
Cost of goods purchased . .
Cost of goods available for
sale . . . . . . . . . . . . . . . . .
Inventory, April 30 . . . . . . . .
Cost of goods sold . . .
Gross profit . . . . . . . . . . . . . . . .
..
$2,200
..
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00,030
2,170
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9-26
$3,500
$2,260
$160
0036
00,196
2,064
00,080
02,144
5,644
04,200
01,444
$0,726
PROBLEM 9-2A
ASIAN DEPARTMENT STORE
Income Statement
For the Year Ended November 30, 1999
Sales revenues
Sales
Less: Sales returns and
allowances . . . . . . .
Net sales . . . . . . . . . . . . . . .
Cost of goods sold
Inventory, Dec. 1, 1998 . . . . .
Purchases . . . . . . . . . . . . . .
Less: Purchase returns and
allowances . . . . . . .
Purchase discounts .
Net purchases . . . . . . . . . . .
Add: Freight-in . . . . . . . . . .
Cost of goods purchased . .
Cost of goods available
for sale . . . . . . . . . . . . . . .
Inventory, Nov. 30, 1999 . . . .
Cost of goods sold . . . .
Gross profit
Operating expenses
Selling expenses
Salaries expense . . . . . .
($120,000 X 70%)
Sales commissions
expense . . . . . . . . . . .
Depreciation expense—
store equipment . . . . .
Delivery expense . . . . . .
Insurance expense . . . .
($9,000 X 50%)
Depreciation expense—
delivery equipment . .
Total selling
expenses . . . . . .
$860,000
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0010,000
850,000
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.
.
$034,360
$640,000
$3,000
07,000 0010,000
630,000
0005,060
0635,060
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.
.
669,420
0036,200
0633,220
216,780
.
84,000
.
12,000
.
.
.
9,500
8,200
4,500
.
0004,000
.
122,200
9-27
PROBLEM 9-2A (Continued)
ASIAN DEPARTMENT STORE
Income Statement (Continued)
For the Year Ended November 30, 1999
Administrative expenses
Salaries expense . . . . . .
($120,000 X 30%)
Rent expense . . . . . . . .
Utilities expense . . . . . .
Insurance expense . . . .
($9,000 X 50%)
Property tax expense . .
Total administrative
expenses . . . . . .
Total operating
expenses . . .
Net income . . . . . . . . . . . . . . . . .
.
36,000
.
.
.
19,000
10,600
4,500
.
0003,500
.
0073,600
.
.
0195,800
$020,980
9-28
PROBLEM 9-3A
COST OF GOODS AVAILABLE FOR SALE
(a)
Date
Explanation
Units
Unit Cost
Total Cost
1/1
3/15
7/20
9/4
12/2
Beginning inventory
Purchase
Purchase
Purchase
Purchase
Total
0,100
0,300
0,200
0,300
0,100
1,000
$20
024
025
028
030
$02,000
007,200
005,000
008,400
003,000
$25,600
FIFO
(b)
(1)
(2)
Ending Inventory
Date
Units
12/2
9/4
100
050
150
Unit
Cost
Total
Cost
$30
028
$3,000
01,400
$4,400
Proof of Cost of Goods Sold
Date
Units
1/1
3/15
7/20
9/4
100
300
200
250
850
Unit
Cost
Total
Cost
$20
024
025
028
$02,000
007,200
005,000
007,000
$21,200
9-29
Cost of Goods Sold
Cost of goods
available for sale
Less: Ending
inventory
Cost of goods sold
$25,600
004,400
$21,200
PROBLEM 9-3A (Continued)
LIFO
(1)
(2)
Ending Inventory
Date
Units
1/1
3/15
100
050
150
Unit
Cost
Total
Cost
$20
024
$2,000
01,200
$3,200
Cost of Goods Sold
Cost of goods
available for sale
Less: Ending
inventory
Cost of goods sold
$25,600
003,200
$22,400
Proof of Cost of Goods Sold
Date
Units
12/2
9/4
7/20
3/15
100
300
200
250
850
Unit
Cost
Total
Cost
$30
028
025
024
$03,000
008,400
005,000
006,000
$22,400
AVERAGE COST
(1)
(2)
Ending Inventory
$25,600 ÷ 1,000 = $25.60
Units
Unit
Cost
Total
Cost
150
$25.60
$3,840
Cost of Goods Sold
Cost of goods
available for sale
Less: Ending
inventory
Cost of goods sold
$25,600
003,840
$21,760
Proof of Cost of Goods Sold
850 units X $25.60 = $21,760
(c) (1) As shown in (b) above, FIFO produces the highest inventory
amount, $4,400.
(2) As shown in (b) above, LIFO produces the highest cost of goods
sold, $22,400.
9-30
PROBLEM 9-4A
AFRICAN CO.
Condensed Income Statements
For the Year Ended December 31, 1999
(a)
Sales . . . . . . . . . . . . . . . . . . . . . . . .
Cost of goods sold
Beginning inventory . . . . . . . . .
Cost of goods purchased . . . . .
Cost of goods available for sale
Ending inventory . . . . . . . . . . . .
Cost of goods sold . . . . . . . . . .
Gross profit . . . . . . . . . . . . . . . . . . .
Operating expenses . . . . . . . . . . . . .
Income before income taxes . . . . . .
Income tax expense (28%) . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . .
a
b
FIFO
LIFO
.....
$665,000
$665,000
.
.
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.
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.
.
.
0035,000
0460,000
0495,000
0111,000a
0384,000
0281,000
0120,000
0161,000
0045,080
$115,920
0035,000
0460,000
0495,000
0095,000b
0400,000
0265,000
0120,000
0145,000
0040,600
$104,400
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20,000 @ $4.50 + 5,000 @ $4.20 = $111,000.
10,000 @ $3.50 + 15,000 @ $4.00 = $95,000.
(b) Answers to questions:
(1) The FIFO method produces the most meaningful inventory amount
for the balance sheet because the units are costed at the most recent purchases.
(2) The LIFO method produces the most meaningful net income because the costs of the most recent purchases are matched against
sales.
(3) The FIFO method is most likely to approximate actual physical flow
because the oldest goods are usually sold first to minimize spoilage
and obsolescence.
(4) There will be $4,480 additional cash available under LIFO because
income taxes are $40,600 under LIFO and $45,080 under FIFO.
9-31
PROBLEM 9-4A (Continued)
(5) The illusionary profit is $16,000 ($281,000 – $265,000). Under LIFO,
African Co. has recovered the current replacement cost of the units
($400,000), whereas under FIFO, it has only recovered the earlier
costs ($384,000). This means that under FIFO, the company must
reinvest $16,000 of the gross profit to replace the units used.
(b) Answer in business-letter form:
Dear African Co.:
After preparing the comparative condensed income statements for 1999
under FIFO and LIFO methods, we have found the following:
The FIFO method produces the most meaningful inventory amount for
the balance sheet because the units are costed at the most recent purchases. This method is most likely to approximate actual physical flow
because the oldest goods are usually sold first to minimize spoilage and
obsolescence.
The LIFO method produces the most meaningful net income because the
costs of the most recent purchases are matched against sales. There will
be $4,480 additional cash available under LIFO because income taxes
are $45,080 under LIFO and $40,600 under FIFO.
There exists an illusionary profit under FIFO of $16,000 ($281,000 –
$265,000). Under LIFO, you have recovered the current replacement cost
of the units ($400,000) whereas under FIFO you have only recovered the
earlier costs ($384,000). This means that under FIFO, the company must
reinvest $16,000 of the gross profit to replace the units used.
Sincerely,
9-32
*PROBLEM 9-5A
November
(a)
Net sales
Cost of goods sold
Beginning inventory
Purchases
Less: Purchase returns and allowances
Purchase discounts
Add: Freight-in
Cost of goods purchased
Cost of goods available for sale
Ending inventory
Cost of goods sold
Gross profit
Gross profit rate =
$400,000
$022,100
314,975
(11,800)
(8,577)
0004,402
0299,000
321,100
0029,100
0292,000
$108,000
= 27%
(b) Net sales . . . . . . . . . . . . . . . . . . . . . .
Less: Estimated gross profit . . . . . . .
(27% x $300,000)
Estimated cost of goods sold . . . . . .
Beginning inventory . . . . . . . . . .
Purchases . . . . . . . . . . . . . . . . .
Less: Purchase returns and
allowances . . . . . . . . . .
Purchase discounts . . . .
Net purchases . . . . . . . . . . . . . .
Freight-in . . . . . . . . . . . . . . . . . .
Cost of goods purchased . . . . .
Cost of goods available for sale
Less: Estimated cost of goods
sold . . . . . . . . . . . . . . .
Estimated inventory lost in fire .
$300,000
0081,000
$219,000
....
....
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....
....
9-33
$029,100
$236,000
$5,000
06,000
0011,000
225,000
0003,700
0228,700
257,800
0219,000
$038,800
*PROBLEM 9-6A
Hardcovers
(a)
Beginning inventory
Purchases
Freight-in
Purchase discounts
Goods available for sale
Net sales
Ending inventory
Cost
Retail
$0,260,000
01,180,000
00,005,000
(
00,015,000)
$1,430,000
$0,400,000
1,800,000
00,000,000
2,200,000
01,810,000
$0,390,000
Paperbacks
Cost
Retail
$065,000 $090,000
0266,000
380,000
0002,000
(
0004,000)
0000,000
470,000
$329,000
0363,000
$107,000
Cost-to-retail ratio: Hardcovers—($1,430,000 ÷ $2,200,000) = 65%.
Paperbacks—($329,000 ÷ $470,000) = 70%.
Estimated inventory at cost: ($390,000 X 65%) = $253,500—Hardcovers.
($107,000 X 70%) = $74,900—Paperbacks.
(b) Hardcovers—$400,000 X 65% = $260,000
Paperbacks—$100,000 X 70% = $70,000
9-34
*PROBLEM 9-7A
FIFO
(a) (1)
Date
July 1
6
11
Purchases
(5 @ $90)
(3 @ $90)
(4 @ $99)
Balance
$450
$270
$396
14
21
Sales
(2 @ $90)
(1 @ $99)
$279
(3 @ $106) $318
27
(3 @ $99)
$403
(1 @ $106)
(5
(2
(2
(4
@
@
@
@
$90)
$90)
$90)
$99)
$450
$180
$576
(3 @ $99)
(3 @ $99)
(3 @ $106)
$297
(2 @ $106)
$212
$615
Average Cost
(2)
Date
July 1
6
11
14
21
27
Purchases
(5 @ $90)
(4 @ $99)
Sales
Balance
$450
(3 @ $90)
$270
(3 @ $96)
$288
$396
(3 @ $106) $318
(4 @ $101) $404
**$576 ÷ 6 = $96
**$606 ÷ 6 = $101
9-35
(5
(2
(6
(3
(6
(2
@
@
@
@
@
@
$90)
$90)
$96)*
$96)
$101)**
$101)
$450
$180
$576
$288
$606
$202
*PROBLEM 9-7A (Continued)
LIFO
(3)
Date
July 1
6
11
Purchases
(5 @ $90)
(3 @ $90)
(4 @ $99)
27
Balance
$450
$270
$396
14
21
Sales
(3 @ $99)
$297
(3 @ $106) $318
(3 @ $106)
$417
(1 @ $99)0
(5
(2
(2
(4
(2
(1
(2
(1
(3
@
@
@
@
@
@
@
@
@
$90)
$90)
$90)
$99)
$90)
$99)
$90)
$99)
$106)
(2 @ $90)
(b) The highest ending inventory is $212 under the FIFO method.
9-36
$450
$180
$576
$279
$597
$180
PROBLEM 9-1B
(a)
General Journal
Date
Apr.
4
6
8
10
11
13
14
15
17
18
20
J1
Account Titles and Explanation
Ref.
Debit
Purchases
Accounts Payable
510
201
640
Freight-in
Cash
516
101
040
Accounts Receivable
Sales
112
401
900
Accounts Payable
Purchase Returns and
Allowances
201
040
Purchases
Cash
510
101
300
Accounts Payable ($640 – $40)
Purchase Discounts ($600 X 3%)
Cash
201
514
101
600
Purchases
Accounts Payable
510
201
700
Cash
Purchase Returns and
Allowances
101
050
Freight-in
Cash
516
101
030
Accounts Receivable
Sales
112
401
800
Cash
Accounts Receivable
101
112
500
9-37
Credit
640
040
900
512
040
300
018
582
700
512
050
030
800
500
PROBLEM 9-1B (Continued)
Date
Account Titles and Explanation
Ref.
Debit
Apr. 21
Accounts Payable
Purchase Discounts ($700 X 2%)
Cash
201
514
101
700
Sales Returns and Allowances
Accounts Receivable
412
112
030
Accounts Receivable
Sales
112
401
900
Cash
Accounts Receivable
101
112
500
27
30
30
Credit
014
686
030
900
500
(b)
Cash
No. 101
Date
Apr.
Explanation
1
6
11
13
15
17
20
21
30
Balance
Ref.
✓
J1
J1
J1
J1
J1
J1
J1
J1
Debit
Credit
040
300
582
050
030
500
686
500
Accounts Receivable
Date
Apr.
Explanation
8
18
20
27
30
30
Balance
2,500
2,460
2,160
1,578
1,628
1,598
2,098
1,412
1,912
No. 112
Ref.
Debit
J1
J1
J1
J1
J1
J1
900
800
9-38
Credit
Balance
500
030
0,900
1,700
1,200
1,170
2,070
1,570
900
500
PROBLEM 9-1B (Continued)
Merchandise Inventory
Date
Apr.
Explanation
1
Balance
No. 120
Ref.
Debit
Credit
✓
1,700
Accounts Payable
Date
Apr.
Explanation
4
10
13
14
21
No. 201
Ref.
J1
J1
J1
J1
J1
Debit
Credit
Balance
640
0,640
0,600
0,000
0,700
0,000
040
600
700
700
B. J. Evert, Capital
Date
Apr.
Explanation
1
Balance
No. 301
Ref.
Debit
Credit
✓
No. 401
Date
Explanation
8
18
30
Ref.
Debit
J1
J1
J1
Credit
Balance
900
800
900
0,900
1,700
2,600
Sales Returns and Allowances
Date
Apr.
Explanation
27
No. 412
Ref.
Debit
J1
030
Credit
Date
No. 510
Explanation
4
11
14
Balance
0,030
Purchases
Apr.
Balance
4,200
Sales
Apr.
Balance
Ref.
Debit
J1
J1
J1
640
300
700
9-39
Credit
Balance
0,640
0,940
1,640
PROBLEM 9-1B (Continued)
Purchase Returns and Allowances
Date
Apr.
Explanation
10
15
No. 512
Ref.
Debit
J1
J1
Credit
Balance
40
50
40
90
Purchase Discounts
Date
Apr.
Explanation
13
21
No. 514
Ref.
Debit
J1
J1
Credit
Balance
18
14
18
32
Freight-in
Date
Apr.
(c)
No. 516
Explanation
6
17
Ref.
Debit
J1
J1
40
30
Credit
Balance
40
70
B. J.'S TENNIS SHOP
Trial Balance
April 30, 1999
Debit
Cash . . . . . . . . . . . . . . . . . . . . . . .
Accounts Receivable . . . . . . . . . . .
Merchandise Inventory . . . . . . . . . .
Capital . . . . . . . . . . . . . . . . . . . . . .
Sales . . . . . . . . . . . . . . . . . . . . . . .
Sales Returns and Allowances . . .
Purchases . . . . . . . . . . . . . . . . . . .
Purchase Returns and Allowances
Purchase Discounts . . . . . . . . . . . .
Freight-in . . . . . . . . . . . . . . . . . . . .
9-40
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Credit
$1,912
01,570
01,700
$4,200
02,600
00,030
01,640
00,070
$6,922
00,090
00,032
00,000
$6,922
PROBLEM 9-1B (Continued)
(d)
B. J.'S TENNIS SHOP
Income Statement (Partial)
For the Month Ended April 30, 1999
Sales revenues
Sales . . . . . . . . . . . . . . . . . .
Less: Sales returns and
allowances . . . . . .
Net sales . . . . . . . . . . . . . . .
Cost of goods sold
Inventory, April 1 . . . . . . . .
Purchases . . . . . . . . . . . . . .
Less: Purchase returns and
allowances . . . . . .
Purchase discounts .
Net purchases . . . . . . . . . . .
Add: Freight-in . . . . . . . . .
Cost of goods purchased . .
Cost of goods available for
sale . . . . . . . . . . . . . . . . .
Inventory, April 30 . . . . . . . .
Cost of goods sold . . .
Gross profit . . . . . . . . . . . . . . . .
..
$2,600
..
..
00,030
2,570
..
..
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.
9-41
$1,700
$1,640
$90
032
00,122
1,518
00,070
01,588
3,288
01,800
01,488
$1,082
PROBLEM 9-2B
AUSTRIAN DEPARTMENT STORE
Income Statement
For the Year Ended December 31, 1999
Sales revenues
Sales
Less: Sales returns and
allowances . . . . . . .
Net sales . . . . . . . . . . . . . . .
Cost of goods sold
Inventory, January 1 . . . . . .
Purchases . . . . . . . . . . . . . .
Less: Purchase discounts .
Purchase returns and
allowances . . . . . . .
Net purchases . . . . . . . . . . .
Add: Freight-in . . . . . . . . . .
Cost of goods purchased . .
Cost of goods available
for sale . . . . . . . . . . . . . . .
Inventory, December 31 . . . .
Cost of goods sold . . . .
Gross profit
Operating expenses
Selling expenses
Sales salaries
expense . . . . . . . . . . .
Sales commissions
expense . . . . . . . . . . .
Depreciation expense—
equipment . . . . . . . . .
Utilities expense
($11,000 X 60%) . . . . .
Insurance expense
($7,200 X 60%) . . . . . .
Total selling
expenses . . . . . .
$618,000
.
.
0008,000
610,000
.
$040,500
.
$462,000
. $12,000
. 006,400 0018,400
.
443,600
.
0003,600
.
0447,200
.
.
.
487,700
0075,000
0412,700
197,300
.
74,000
.
14,500
.
13,300
.
6,600
.
0004,320
.
112,720
9-42
PROBLEM 9-2B (Continued)
AUSTRIAN DEPARTMENT STORE
Income Statement (Continued)
For the Year Ended December 31, 1999
Administrative expenses
Office salaries expense .
Depreciation expense—
building . . . . . . . . . . .
Property tax expense . .
Utilities expense
($11,000 X 40%) . . . . .
Insurance expense
($7,200 X 40%) . . . . . .
Total administrative
expenses . . . . . .
Total operating
expenses . . .
Net income . . . . . . . . . . . . . . . . .
.
32,000
.
.
10,400
4,800
.
4,400
.
0002,880
.
0054,480
.
.
0167,200
$030,100
9-43
PROBLEM 9-3B
COST OF GOODS AVAILABLE FOR SALE
(a)
Date
Explanation
Units
Unit Cost
Total Cost
1/1
2/20
5/5
8/12
12/8
Beginning inventory
Purchase
Purchase
Purchase
Purchase
Total
0,400
0,700
0,500
0,300
0,100
2,000
$08.00
009.00
010.00
011.00
012.00
$03,200
006,300
005,000
003,300
001,200
$19,000
FIFO
(b)
(1)
(2)
Ending Inventory
Date
Units
12/8
8/12
5/5
100
300
050
450
Unit
Cost
Total
Cost
$12
011
010
$1,200
03,300
00,500
$5,000
Proof of Cost of Goods Sold
Date
Units
1/1
2/20
5/5
0,400
0,700
0,450
1,550
Unit
Cost
Total
Cost
$08
009
010
$03,200
006,300
004,500
$14,000
9-44
Cost of Goods Sold
Cost of goods
available for sale
Less: Ending
inventory
Cost of goods sold
$19,000
005,000
$14,000
PROBLEM 9-3B (Continued)
LIFO
(1)
(2)
Ending Inventory
Date
Units
1/1
2/20
400
050
450
Unit
Cost
Total
Cost
$8
09
$3,200
00,450
$3,650
Cost of Goods Sold
Cost of goods
available for sale
Less: Ending
inventory
Cost of goods sold
$19,000
003,650
$15,350
Proof of Cost of Goods Sold
Date
Units
12/8
8/12
5/5
2/20
0,100
0,300
0,500
0,650
1,550
Unit
Cost
Total
Cost
$12
011
010
009
$01,200
003,300
005,000
005,850
$15,350
AVERAGE COST
(1)
(2)
Ending Inventory
$19,000 ÷ 2,000 = $9.50
Units
Unit
Cost
Total
Cost
450
$9.50
$4,275
Cost of Goods Sold
Cost of goods
available for sale
Less: Ending
inventory
Cost of goods sold
$19,000
004,275
$14,725
Proof of Cost of Goods Sold
1,550 X $9.50 = $14,725
(c) (1) LIFO results in the lowest inventory amount for the balance sheet,
$3,650.
(2) FIFO results in the lowest cost of goods sold, $14,000.
9-45
PROBLEM 9-4B
INDIA CO.
Condensed Income Statement
For the Year Ended December 31, 1999
(a)
Sales . . . . . . . . . . . . . . . . . . . . . . . .
Cost of goods sold
Beginning inventory . . . . . . . . .
Cost of goods purchased . . . . .
Cost of goods available for sale
Ending inventory . . . . . . . . . . . .
Cost of goods sold . . . . . . . . . .
Gross profit . . . . . . . . . . . . . . . . . . .
Operating expenses . . . . . . . . . . . . .
Income before income taxes . . . . . .
Income taxes (32%) . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . .
a
b
FIFO
LIFO
.....
$865,000
$865,000
.
.
.
.
.
.
.
.
.
.
0034,000
0578,500
0612,500
0053,000a
0559,500
0305,500
0147,000
0158,500
0050,720
$107,780
0034,000
0578,500
0612,500
0045,500b
0567,000
0298,000
0147,000
0151,000
0048,320
$102,680
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20,000 X $2.65 = $53,000.
$34,000 + (5,000 X $2.30) = $45,500.
(b) (1) The FIFO method produces the most meaningful inventory amount
for the balance sheet because the units are costed at the most recent purchases.
(2) The LIFO method produces the most meaningful net income because the costs of the most recent purchases are matched against
sales.
(3) The FIFO method is most likely to approximate actual physical flow
because the oldest goods are usually sold first to minimize spoilage
and obsolescence.
(4) There will be $2,400 additional cash available under LIFO because
income taxes are $48,320 under LIFO and $50,720 under FIFO.
(5) Gross profit under the average cost method will be (a) lower than
FIFO and (b) higher than LIFO.
9-46
*PROBLEM 9-5B
February
(a)
Net sales
Cost of goods sold
Beginning inventory
Net purchases
Add: Freight-in
Cost of goods purchased
Cost of goods available for sale
Ending inventory
Cost of goods sold
Gross profit
Gross profit rate =
$270,000
$016,500
200,800
0002,900
0203,700
220,200
0020,400
0199,800
$070,200
= 26%
(b) Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Estimated gross profit . . . . . . . . . . . . . .
(26% X $260,000)
Estimated cost of goods sold . . . . . . . . . . . . .
Beginning inventory . . . . . . . . . . . . . . . . .
Net purchases . . . . . . . . . . . . . . . . . . . . .
Add: Freight-in . . . . . . . . . . . . . . . . . . . .
Cost of goods purchased . . . . . . . . . . . .
Cost of goods available for sale . . . . . . .
Less: Estimated cost of goods sold . . . .
Estimated total cost of ending inventory .
Less: Inventory not lost (20% X $23,000)
Estimated inventory lost in fire . . . . . . . .
(80% X $23,000)
9-47
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$260,000
0067,600
$192,400
$020,400
$191,000
0004,000
0195,000
215,400
0192,400
23,000
0004,600
$018,400
*PROBLEM 9-6B
Sporting
Goods
(a)
Beginning inventory
Purchases
Purchase returns
Purchase discounts
Freight-in
Goods available for sale
Net sales
Ending inventory at retail
Jewelry and
Cosmetics
Cost
Retail
Cost
Retail
$047,360
0670,000
0026,000)
(
0015,360)
(
0006,000
$682,000
$0,074,000
01,066,000
00,040,000)
(
$036,440
0733,000
0012,000)
(
0009,440)
(
0008,000
$756,000
$0,062,000
01,158,000
00,020,000)
(
00,000,000
01,100,000
(
01,020,000)
$0.080,000
Cost-to-retail ratio:
Sporting Goods—($682,000 ÷ $1,100,000) = 62%.
Jewelry and Cosmetics—($756,000 ÷ $1,200,000) = 63%.
Estimated ending inventory at cost:
($80,000 X 62%) = $49,600—Sporting Goods.
($40,000 X 63%) = $25,200—Jewelry and Cosmetics.
(b) Sporting Goods—$75,000 X 60% = $45,000
Jewelry and Cosmetics—$44,000 X 65% = $28,600
9-48
00,000,000
01,200,000
(
01,160,000)
$0,040,000
*PROBLEM 9-7B
(a)
FIFO
(1)
Date
May
Purchases
1
4
8
Sales
(7 @ $150) $1,050
(5 @ $150) $750
(8 @ $170) $1,360
12
15
(2 @ $150)
$810
(3 @ $170)
(5 @ $180) $0,900
20
(4 @ $170) $680
25
(1 @ $170)
$530
(2 @ $180)
Balance
(7
(2
(2
(8
@
@
@
@
$150)
$150)
$150)
$170)
$1,050
$0,300
(5
(5
(5
(1
(5
@
@
@
@
@
$170)
$170)
$180)
$170)
$180)
$0,850
(3 @ $180)
$0,540
$1,660
$1,750
$1,070
AVERAGE COST
(2)
Date
May
1
4
8
12
15
20
25
Purchases
Sales
(7 @ $150) $1,050
(5 @ $150) $750
(8 @ $170) $1,360
(5 @ $166) $830
(5 @ $180) $0,900
(4 @ $173) $692
(3 @ $173) $519
**Average cost = $1,660 ÷ 10
**$1,730 ÷ 10
9-49
Balance
(07
(02
(10
(05
(10
(06
(03
@
@
@
@
@
@
@
$150)
$150)
$166)*
$166)
$173)**
$173)
$173)
$1,050
$0,300
$1,660
$0,830
$1,730
$1,038
$0,519
*PROBLEM 9-7B (Continued)
(3)
LIFO
Date
May
Purchases
1
4
8
(7 @ $150)
Sales
$1,050
(5 @ $150)
(8 @ $170)
20
25
(5 @ $170)
(5 @ $180)
$750
$1,360
12
15
Balance
$850
$0,900
(4 @ $180)
(1 @ $180)
(2 @ $170)
$720
$520
(7
(2
(2
(8
(2
(3
(2
(3
(5
(2
(3
(1
(2
(1
@
@
@
@
@
@
@
@
@
@
@
@
@
@
$150)
$150)
$150)
$170)
$150)
$170)
$150)
$170)
$180)
$150)
$170)
$180)
$150)
$170)
$1,050
$0,300
$1,660
$0,810
$1,710
$0,990
$0,470
(b) (1) The highest ending inventory is $540 under the FIFO method.
(2) The lowest ending inventory is $470 under the LIFO method.
9-50
BYP 9-1
FINANCIAL REPORTING PROBLEM
(a) Inventories
December 31, 1997
December 31, 1996
$434.3 million
$424.9 million
(b) Dollar change in inventories between 1996 and 1997:
$434.3 – $424.9 = $9.4 million increase
Percent change in inventories between 1996 and 1997:
9.4 ÷ $424.9 = 2.2% increase
1997 inventory as a percent of current assets:
$434.3 ÷ $1,467.7 = 29.6%
(c) Inventories are valued at the lower of cost or market using the average
cost method (per Note 1 on Accounting Principles).
(d) Kellogg Company (in millions)
Cost of Goods Sold
1997
1996
1995
$3,270.1
$3,122.9
$3,177.7
1997 cost of goods sold as a percent of sales:
$3,270.1 ÷ $6,830.1 = 47.9%
9-51
BYP 9-2
(a) 1.
COMPARATIVE ANALYSIS PROBLEM
Inventory turnover:
Kellogg:
$3,270.1 ÷
General Mills:
2.
= 7.6 times
$2,328.4 ÷
= 6.1 times
Average days to sell inventory:
Kellogg: 365 ÷ 7.6 = 48 days
General Mills: 365 ÷ 6.1 = 60 days
(b) Kellogg's turnover of 7.6 times is slightly greater than General Mills' 6.1
times resulting in average days to sell of 48 versus 60. Thus, Kellogg's
inventory control is more effective.
9-52
BYP 9-3
RESEARCH ASSIGNMENT
(a) CompUSA estimated a retail value of $7.6 million, while one bidder predicted a selling price less than $1 million.
(b) The computers experienced an excessively high failure rate, leading to
speculation that the units would sell for the value of the parts.
(c) The sealed-bid auction had two major rules: (1) all of the units were to
be sold together for cash, and (2) the buyer had to haul the units away.
(d) The answer depends on the students' opinions.
9-53
BYP 9-4
INTERPRETING FINANCIAL STATEMENTS
NIKE/REEBOK
(a) Both companies have international sales; thus, they must move their
goods around the world. Styles are often cultural, so what sells in one
country may not in another. Because fads in their industry change
quickly, both must manage inventory carefully. If a fad is really hot, you
must make sure you have enough inventory before people's interest in
the product fades. But you don't want to get stuck with a lot of excess
inventory. The best approach is to have very efficient inventory production and distribution systems that allow you to respond to changes in
demand very quickly.
(b) Reebok uses FIFO, Nike uses LIFO for US operations and FIFO for international. Nike probably uses LIFO for US operations to minimize its US
taxes. Many foreign countries do not allow the use of LIFO though, so
for its international operations it uses FIFO. Under the usual circumstances, where prices are rising, FIFO will result in higher reported profits and higher ending inventories than does LIFO.
(c) The format used by Nike is the approach used by manufacturers. It allows the financial statement reader to see how much inventory is in each
stage of production inventory. This can be useful. For example, if the
company is planning to step up production, we would expect to see raw
materials increase, or if it is planning a slow-down in production, we
would expect to see raw materials decline. Both Nike and Reebok hire
contractors to do much of their production (as evidenced by the minor
amounts of raw materials and work-in-process reported by Nike and by
the fact that Reebok reports that "substantially all" of its inventory is
finished goods. Thus, in this case it is not surprising that Reebok did
not provide this information, and probably was not necessary that Nike
did.
(d) Inventory turnover is calculated as (cost of goods sold/average inventory). Average days in inventory is simply 365 days divided by the inventory turnover ratio. This is calculated for each of these companies as
follows:
9-54
BYP 9-4 (Continued)
Nike
Reebok
($5,502,993/($1,338,640 + $931,151)/2)
= 4.85 times
($2,144,422/($544,522 + $635,012)/2)
= 3.64 times
365/4.85 = 75 days
365/3.64 = 100 days
Nike's inventory turnover is substantially higher (and days in inventory
is substantially lower) than that of Reebok, suggesting that Nike is far
more efficient in its use of inventory. It should be noted, however, that
one does not want to get its inventory turnover so high that it is losing
significant sales due to inventory shortages. Given Nike's high profitability, however, this does not appear to be the case. The use of different
inventory methods makes comparability of the ratios for the two firms
less useful. If Reebok uses LIFO and prices are rising, it would report
lower figures for its inventory, which would increase its inventory turnover and reduce the average days to sell its inventory. This would explain part of the difference between Nike's and Reebok's inventory
turnover and days to sell inventory.
9-55
BYP 9-5
REAL-WORLD FOCUS
(a) Most of General Motors’ inventories are reported in the balance sheet at
cost, which is less the inventories’ market value (replacement cost). If
market was less than cost, generally accepted accounting principles
would require that the inventories be reported at lower of cost or market.
(b) If prices are increasing, use of the LIFO cost flow assumption will cause
reported ending inventory to be significantly understated in terms of
current cost because the oldest costs are assigned to ending inventory.
(c) LIFO is often used, primarily due to tax benefits and matching of current
costs to current revenues. However, many companies use LIFO and
other methods, such as FIFO or average, because certain product lines
can be more susceptible to deflation instead of inflation, unwanted involuntary liquidations may result in certain product lines where the
inventory level is unstable, or extensive record keeping cost may result
where inventory turnover is high in certain product lines.
9-56
BYP 9-6
GROUP DECISION CASE
(a) (1) Sales per trial balance . . . . . . . . . . .
Cash sales 4/1–4/10 ($18,500 X 40%) .
Acknowledged credit sales 4/1–4/10 .
Sales made but unacknowledged . . .
Sales as of April 10 . . . . . . . . . . . . . .
(2) Purchases per trial balance
Cash purchases 4/1–4/10 . .
Credit purchases 4/1–4/10 . .
Less: Items in transit . . . . .
Purchases as of April 10 . . .
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$150,000
7,400
28,000
0004,600
$190,000
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.
$084,000
4,200
$012,400
0001,800
1997
1996
..
$600,000
$480,000
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60,000
0416,000
476,000
0080,000
0396,000
$204,000
40,000
0356,000
396,000
0060,000
0336,000
$144,000
34%
30%
(b)
Net sales . . . . . . . . . . . . . . . . . . . . .
Cost of goods sold
Inventory, January 1 . . . . . . . . .
Cost of goods purchased . . . . .
Cost of goods available for sale
Inventory, December 31 . . . . . .
Cost of goods sold . . . . . . . . . .
Gross profit . . . . . . . . . . . . . . . . . . .
.
.
.
.
.
.
Gross profit rate . . . . . . . . . . . . . . . . .
Average gross profit rate . . . . . . .
32%
(c) Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Gross profit ($190,000 X 32%) . . . . . . . . . . . . . . . .
Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventory, January 1 . . . . . . . . . .
Purchases . . . . . . . . . . . . . . . . . .
Cost of goods available for sale .
Cost of goods sold . . . . . . . . . . .
Estimated inventory at time of fire
Less: Inventory salvaged . . . . . .
Estimated inventory loss . . . . . . .
9-57
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0010,600
$098,800
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$190,000
0060,800
$129,200
$080,000
0098,800
178,800
0129,200
49,600
0019,000
$030,600
BYP 9-7
COMMUNICATION ACTIVITY
MEMO
To:
Joe Paisley, President
From:
Student
Re:
1997 ending inventory error
As you know, 1997 ending inventory was overstated by $1 million. Of course,
this error will cause 1997 net income to be incorrect because the ending
inventory is used to compute 1997 cost of goods sold. Since the ending
inventory is subtracted in the computation of cost of goods sold, an overstatement of ending inventory results in an understatement of cost of goods
sold and therefore an overstatement of net income.
Unfortunately, unless corrected, this error will also affect 1998 net income.
The 1997 ending inventory is also the 1998 beginning inventory. Therefore,
1998 beginning inventory is also overstated, which causes an overstatement
of cost of goods sold and an understatement of 1998 net income.
9-58
BYP 9-8
ETHICS CASE
(a) The higher cost of the items ordered, received, and on hand at year-end
will be charged to cost of goods sold, thereby lowering current year's
income and income taxes. If the purchase at year-end had been made in
the next year, the next year's cost of goods sold would have absorbed
the higher cost. Next year's income will be increased if unit purchases
(next year) are less than unit sales (next year). This is because the lower
costs carried from the earlier year as inventory will be charged to next
year's cost of goods sold.
(b) No. The president would not have given the same directive because the
purchase under FIFO would have had no effect on net income of the current year.
(c) The accountant has no grounds for not ordering the goods if the president insists. The purchase is legal and ethical.
9-59
BYP 9-9
SURFING THE NET
The answer to this problem will depend on the fiscal year chosen by the
student. The following solution is provided for the year ended December 31,
1997.
(a) $254,677,000 as of July 26, 1997.
(b) $254,677,000 as of July 26, 1997 versus $301,188,000 as of July 28, 1996,
a decrease of $46,511,000.
(c) $21,733,000 of finished goods inventory.
(d) Standard cost, which approximates FIFO.
9-60