CHAPTER 7
INVENTORIES
DISCUSSION QUESTIONS
1. The receiving report should be reconciled to
the initial purchase order and the vendor’s
invoice before recording or paying for inventory purchases. This procedure will verify
that the inventory received matches the type
and quantity of inventory ordered. It also verifies that the vendor’s invoice is charging the
company for the actual quantity of inventory
received at the agreed-upon price.
2. A physical inventory should be taken periodically to test the accuracy of the perpetual
records. In addition, a physical inventory will
identify inventory shortages or shrinkage.
3. No, they are not techniques for determining
physical quantities. The terms refer to cost
flow assumptions, which affect the determination of the cost prices assigned to items in
the inventory.
4. a. LIFO c. LIFO
b. FIFO d. FIFO
5. FIFO
6. LIFO. In periods of rising prices, the use of
LIFO will result in the lowest net income and
thus the lowest income tax expense.
7. Net realizable value (estimated selling price
less any direct cost of disposition, such as
sales commissions).
8. a. Gross profit for the year was understated by $23,950.
b. Merchandise inventory and owner’s equity were understated by $23,950.
9. Mistletoe Company. Since the merchandise
was shipped FOB shipping point, title
passed to Mistletoe Company when it was
shipped and should be reported in Mistletoe
Company’s financial statements at October
31, the end of the fiscal year.
10. Manufacturer’s; The manufacturer retains
title until the goods are sold. Thus, any unsold merchandise at the end of the year is
part of the manufacturer’s (consignor’s) inventory, even though the merchandise is in
the hands of the retailer (consignee).
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PRACTICE EXERCISES
PE 7–1A
Gross Profit
July
Ending Inventory
July 31
a. First-in, first-out (FIFO)
$65 ($225 – $160)
$344 ($168 + $176)
b. Last-in, first-out (LIFO)
$49 ($225 – $176)
$328 ($160 + $168)
c. Average cost
$57 ($225 – $168)
$336 ($168 × 2)
PE 7–1B
Gross Profit
April
Ending Inventory
April 30
a. First-in, first-out (FIFO)
$19 ($29 – $10)
$26 ($12 + $14)
b. Last-in, first-out (LIFO)
$15 ($29 – $14)
$22 ($10 + $12)
c. Average cost
$17 ($29 – $12)
$24 ($12 × 2)
PE 7–2A
a.
Cost of merchandise sold (August 28):
20 units @ $80
5 units @ $85
25
$1,600
425
$2,025
b. Inventory, August 31: $2,975 = 35 units × $85
PE 7–2B
a.
Cost of merchandise sold (March 24):
12 units @ $15
63 units @ $18
75
$ 180
1,134
$1,314
b. Inventory, March 31: $1,116 = 62 units × $18
458
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PE 7–3A
a. Cost of merchandise sold (November 26):
$5,040 = (84 units × $60)
b. Inventory, November 30:
18 units @ $50
16 units @ $60
34
$ 900
960
$1,860
PE 7–3B
a. Cost of merchandise sold (January 27):
$1,440 = (80 units × $18)
b. Inventory, January 31:
15 units @ $17
$ 255
45 units @ $18
810
60
$1,065
PE 7–4A
a. First-in, first-out (FIFO) method: $594 = 11 units × $54
b. Last-in, first-out (LIFO) method: $495 = 11 units × $45
c. Average cost method: $550 (11 units × $50), where average cost = $50 =
$2,250/45 units
PE 7–4B
a. First-in, first-out (FIFO) method: $2,722 = (20 units × $119) + (3 units × $114)
b. Last-in, first-out (LIFO) method: $2,682 = (10 units × $120) + (13 units × $114)
c. Average cost method: $2,645 (23 units × $115), where average cost = $115 =
$18,400/160 units
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PE 7–5A
A
B
Inventory
Quantity
C
Unit
Cost
Price
D
Unit
Market
Price
3
Commodity
4
IA17
TX24
Total
200
150
$40
55
$38
60
A
B
3
Commodity
Inventory
Quantity
C
Unit
Cost
Price
D
Unit
Market
Price
4
MT22
WY09
Total
1,500
900
$ 7
22
$ 4
25
1
2
5
6
E
Cost
$ 8,000
8,250
$16,250
F
Total
Market
G
Lower
of C or M
$ 7,600 $ 7,600
9,000
8,250
$16,600 $15,850
PE 7–5B
1
2
5
6
E
F
Total
G
Cost
Market
Lower
of C or M
$10,500
19,800
$30,300
$ 6,000
22,500
$28,500
$ 6,000
19,800
$25,800
PE 7–6A
Amount of Misstatement
Overstatement (Understatement)
Balance Sheet:
Merchandise inventory understated* ...........
Current assets understated ..........................
Total assets understated ...............................
Owner’s equity understated ..........................
$(7,525)
(7,525)
(7,525)
(7,525)
Income Statement:
Cost of merchandise sold overstated ..........
Gross profit understated ...............................
Net income understated ................................
$ 7,525
(7,525)
(7,525)
*$90,700 – $83,175 = $7,525
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PE 7–6B
Amount of Misstatement
Overstatement (Understatement)
Balance Sheet:
Merchandise inventory overstated* ..............
Current assets overstated .............................
Total assets overstated .................................
Owner’s equity overstated ............................
$35,000
35,000
35,000
35,000
Income Statement:
Cost of merchandise sold understated ........
Gross profit overstated..................................
Net income overstated ...................................
$(35,000)
35,000
35,000
*($580,000 – $545,000 = $35,000)
PE 7–7A
a. Inventory Turnover
2012
2011
Cost of merchandise sold ...
Inventories:
Beginning of year ............
End of year .......................
$882,000
$680,000
$200,000
$290,000
$140,000
$200,000
Average inventory ...............
$245,000
$170,000
[($200,000 + $290,000) ÷ 2] [($140,000 + $200,000) ÷ 2]
Inventory turnover ...............
b. Number of Days’ Sales in
Inventory
Cost of merchandise sold ...
Average daily cost of
merchandise sold ............
3.6
4.0
($882,000 ÷ $245,000)
($680,000 ÷ $170,000)
2012
2011
$882,000
$680,000
$2,416.4
($882,000 ÷ 365 days)
Average inventory ...............
$245,000
$1,863.0
($680,000 ÷ 365 days)
$170,000
[($200,000 + $290,000) ÷ 2] [($140,000 + $200,000) ÷ 2]
Number of days’ sales in
inventory ..........................
101.4 days
($245,000 ÷ $2,416.4)
91.3 days
($170,000 ÷ $1,863.0)
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PE 7–7A
(Concluded)
c. The decrease in the inventory turnover from 4.0 to 3.6 and the increase in the
number of days’ sales in inventory from 91.3 days to 101.4 days indicate unfavorable trends in managing inventory.
PE 7–7B
a. Inventory Turnover
Cost of merchandise sold ...
Inventories:
Beginning of year ............
End of year .......................
Average inventory ...............
2012
2011
$1,800,000
$1,428,000
$570,000
$630,000
$600,000
$450,000
$570,000
$510,000
[($570,000 + $630,000) ÷ 2] [($450,000 + $570,000) ÷ 2]
Inventory turnover ...............
b. Number of Days’ Sales in
Inventory
Cost of merchandise sold ...
Average daily cost of
merchandise sold ............
Average inventory ...............
3.0
2.8
($1,800,000 ÷ $600,000)
($1,428,000 ÷ $510,000)
2012
2011
$1,800,000
$1,428,000
$4,931.5
$3,912.3
($1,800,000 ÷ 365 days)
($1,428,000 ÷ 365 days)
$600,000
$510,000
[($570,000 + $630,000) ÷ 2] [($450,000 + $570,000) ÷ 2]
Number of days’ sales
in inventory ......................
121.7 days
130.4 days
($600,000 ÷ $4,931.5)
($510,000 ÷ $3,912.3)
c. The increase in the inventory turnover from 2.8 to 3.0 and the decrease in the
number of days’ sales in inventory from 130.4 days to 121.7 days indicate favorable trends in managing inventory.
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EXERCISES
Ex. 7–1
Switching to a perpetual inventory system will strengthen A4A Hardware’s internal controls over inventory, since the store managers will be able to keep track of
how much of each item is on hand. This should minimize shortages of goodselling items and excess inventories of poor-selling items.
On the other hand, switching to a perpetual inventory system will not eliminate
the need to take a physical inventory count. A physical inventory must be taken to
verify the accuracy of the inventory records in a perpetual inventory system. In
addition, a physical inventory count is needed to detect shortages of inventory
due to damage or theft.
Ex. 7–2
a. Appropriate. The inventory tags will protect the inventory from customer
theft.
b. Inappropriate. The control of using security measures to protect the inventory
is violated if the stockroom is not locked.
c. Inappropriate. Good controls include a receiving report, prepared after all inventory items received have been counted and inspected. Inventory purchased should only be recorded and paid for after reconciling the receiving
report, the initial purchase order, and the vendor’s invoice.
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Ex. 7–3
a.
Date
June 1
6
14
Purchases
Unit
Quantity
Cost
90
42
Total
Cost
80
30
Balances
45
60
40
2,400
15
35
20
40
42
42
600
1,470
840
3,780
19
25
30
Portable Video Players
Cost of Merchandise Sold
Unit
Total
Quantity
Cost
Cost
3,600
Inventory
Unit
Quantity
Cost
Total
Cost
75
15
15
90
55
40
40
40
42
42
3,000
600
600
3,780
2,310
35
35
80
42
42
45
1,470
1,470
3,600
5,070
5,310
b. Since the prices rose from $40 for the June 1 inventory to $45 for the purchase on June 30, we would expect
that under last-in, first-out the inventory would be lower.
Note to Instructors: Exercise 7–4 shows that the inventory is $5,040 under LIFO.
464
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Ex. 7–4
Date
June 1
6
14
Purchases
Unit
Quantity
Cost
Total
Cost
Portable Video Players
Cost of Merchandise Sold
Unit
Total
Quantity
Cost
Cost
60
40
2,400
19
50
42
2,100
25
20
42
840
90
30
80
30
Balances
42
45
3,780
3,600
Quantity
Inventory
Unit
Cost
75
15
15
90
15
40
15
20
15
20
80
5,340
465
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40
40
40
42
40
42
40
42
40
42
45
Total
Cost
3,000
600
600
3,780
600
1,680
600
840
600
840
3,600
5,040
Ex. 7–5
a.
Date
July
1
10
Purchases
Unit
Quantity
Cost
500
50
Total
Cost
25,000
12
14
20
450
31
31
52
Prepaid Cell Phones
Cost of Merchandise Sold
Unit
Total
Quantity
Cost
Cost
500
200
300
50
45
45
25,000
9,000
13,500
250
52
13,000
23,400
Balances
Quantity
Inventory
Unit
Cost
Total
Cost
800
800
500
600
45
45
50
45
36,000
36,000
25,000
27,000
300
300
450
300
200
45
45
52
45
52
13,500
13,500
23,400
13,500
10,400
23,900
60,500
b. Since the prices rose from $45 for the July 1 inventory to $52 for the purchase on July 20, we would expect
that under first-in, first-out the inventory would be higher.
Note to Instructors: Exercise 7–6 shows that the inventory is $25,900 under FIFO.
466
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Ex. 7–6
Date
July
1
10
Purchases
Unit
Quantity
Cost
500
50
Total
Cost
Prepaid Cell Phones
Cost of Merchandise Sold
Unit
Total
Quantity
Cost
Cost
25,000
12
700
45
31,500
14
100
200
45
50
4,500
10,000
250
50
12,500
20
450
31
31
52
23,400
Balances
Quantity
Inventory
Unit
Cost
Total
Cost
800
800
500
100
500
45
45
50
45
50
36,000
36,000
25,000
4,500
25,000
300
300
450
50
450
50
50
52
50
52
15,000
15,000
23,400
2,500
23,400
25,900
58,500
467
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Ex. 7–7
a. $15,540 ($84 × 185 units)
b. $15,100 [($80 × 60 units) + ($82 × 100 units) + ($84 × 25 units)] = $4,800 +
$8,200 + $2,100
Ex. 7–8
a. $7,812 (12 units at $495 plus 4 units at $468) = $5,940 + $1,872
b. $6,138 (9 units at $360 plus 7 units at $414) = $3,240 + $2,898
c. $7,056 (16 units at $441; $26,460/60 units = $441)
Cost of merchandise available for sale:
9 units at $360 ........................................................
18 units at $414 ........................................................
21 units at $468 ........................................................
12 units at $495 ........................................................
60 units (at average cost of $441) ..........................
$ 3,240
7,452
9,828
5,940
$26,460
468
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Ex. 7–9
Cost
Inventory Method
Merchandise
Inventory
FIFO .....................
$4,986
$ 9,639
b. LIFO .....................
4,365
10,260
c.
4,680
9,945
a.
Average cost .......
Merchandise
Sold
Cost of merchandise available for sale:
21 units at $180 ........................................................
29 units at $195 ........................................................
10 units at $204 ........................................................
15 units at $210 ........................................................
75 units (at average cost of $195) ..........................
$ 3,780
5,655
2,040
3,150
$14,625
a. First-in, first-out:
Merchandise inventory:
15 units at $210 ........................................................
9 units at $204 ........................................................
24 units .....................................................................
Merchandise sold:
$14,625 – $4,986 .......................................................
$3,150
1,836
$4,986
$9,639
b. Last-in, first-out:
Merchandise inventory:
21 units at $180 ........................................................
3 units at $195 ........................................................
24 units .....................................................................
Merchandise sold:
$14,625 – $4,365 .......................................................
$3,780
585
$4,365
$10,260
c. Average cost:
Merchandise inventory:
24 units at $195 ($14,625/75 units) .........................
Merchandise sold:
$14,625 – $4,680 .......................................................
$4,680
$9,945
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Ex. 7–10
a.
1.
2.
3.
4.
FIFO inventory
FIFO cost of goods sold
FIFO net income
FIFO income tax
> (greater than)
< (less than)
> (greater than)
> (greater than)
LIFO inventory
LIFO cost of goods sold
LIFO net income
LIFO income tax
b. In periods of rising prices, the income shown on the company’s tax return
would be lower than if FIFO were used; thus, there is a tax advantage of using
LIFO.
Note to Instructors: The federal tax laws require that if LIFO is used for tax purposes, LIFO must also be used for financial reporting purposes. This is known as
the LIFO conformity rule. Thus, selecting LIFO for tax purposes means that the
company’s reported income will also be lower than if FIFO had been used. Companies using LIFO believe the tax advantages from using LIFO outweigh any negative impact of reporting a lower income to shareholders.
Ex. 7–11
A
B
Inventory
Quantity
C
Unit
Cost
Price
D
Unit
Market
Price
3
Commodity
4
AL65
CA22
LA98
SC16
UT28
Total
40
50
110
30
75
$28
70
6
40
60
$30
65
5
30
62
1
2
5
6
7
8
9
E
F
Total
G
Cost
Market
Lower
of C or M
$ 1,120
3,500
660
1,200
4,500
$10,980
$ 1,200
3,250
550
900
4,650
$10,550
$ 1,120
3,250
550
900
4,500
$10,320
Ex. 7–12
The merchandise inventory would appear in the Current Assets section, as follows:
Merchandise inventory—at lower of cost (FIFO) or market ........
$10,320
Alternatively, the details of the method of determining cost and the method of
valuation could be presented in a note.
470
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Ex. 7–13
a.
Balance Sheet
Merchandise inventory.............
Current assets ..........................
Total assets ...............................
Owner’s equity ..........................
$11,350* understated
$11,350 understated
$11,350 understated
$11,350 understated
*$11,350 = $451,000 – $439,650
b.
Income Statement
Cost of merchandise sold ........
Gross profit ...............................
Net income ................................
c.
$11,350 overstated
$11,350 understated
$11,350 understated
Income Statement
Cost of merchandise sold ........
Gross profit ...............................
Net income ................................
$11,350 understated
$11,350 overstated
$11,350 overstated
d. The December 31, 2013, balance sheet would be correct, since the 2012 inventory error reverses itself in 2013.
Ex. 7–14
a.
Balance Sheet
Merchandise inventory.............
Current assets ..........................
Total assets ...............................
Owner’s equity ..........................
$12,000* overstated
$12,000 overstated
$12,000 overstated
$12,000 overstated
*$12,000 = $350,000 – $338,000
b.
Income Statement
Cost of merchandise sold ........
Gross profit ...............................
Net income ................................
c.
$12,000 understated
$12,000 overstated
$12,000 overstated
Income Statement
Cost of merchandise sold ........
Gross profit ...............................
Net income ................................
$12,000 overstated
$12,000 understated
$12,000 understated
d. The December 31, 2013, balance sheet would be correct, since the 2012 inventory error reverses itself in 2013.
471
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Ex. 7–15
When an error is discovered affecting the prior period, it should be corrected. In
this case, the merchandise inventory account should be debited and the owner’s
capital account credited for $18,000.
Failure to correct the error for 2011 and purposely misstating the inventory and
the cost of merchandise sold in 2012 would cause the income statements for the
two years to not be comparable. The balance sheet at the end of 2012 would be
correct, however, since the 2011 inventory error reverses itself in 2012.
Ex. 7–16
a. Apple: 48.5 {$23,397,000,000/[($455,000,000 + $509,000,000)/2]}
American Greetings: 3.9 {$809,956,000/[($203,873,000 + $216,671,000)/2]}
b. Lower. Although American Greetings’ business is seasonal in nature, with
most of its revenue generated during the major holidays, much of its nonholiday inventory may turn over very slowly. Apple, on the other hand, turns its
inventory over very fast because it maintains a low inventory, which allows it
to respond quickly to customer needs. Additionally, Apple’s computer products can quickly become obsolete, so it cannot risk building large inventories.
472
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Ex. 7–17
a. Number of Days’ Sales in Inventory =
Kroger,
$4,859  $4,855  / 2  $4,857 
$58,564/36 5
Safeway,
160.4
30 days
$2,591  $2,798  / 2  $2,694.5 
$31,589/36 5
Winn-Dixie,
86.5
$665  $649 / 2  $657 
$5,269/365
Inventory Turnover =
Kroger,
Average Inventory
Cost of Goods Sold/365
14.4
31 days
46 days
Cost of Goods Sold
Average Inventory
$58,564
 12.1
($4,859  $4,855)/2
Safeway,
$31,589
 11.7
($2,591  $2,798)/2
Winn-Dixie,
$5,269
 8.0
($665  $649)/2
b. The number of days’ sales in inventory and inventory turnover ratios are relatively the same for Kroger and Safeway. Winn-Dixie has significantly higher
number of days sales in inventory and significantly lower inventory turnover
than Kroger and Safeway. These results suggest that Kroger and Safeway are
more efficient than Winn-Dixie in managing inventory.
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Ex. 7–17
(Concluded)
c. If Winn-Dixie matched Kroger’s days’ sales in inventory, then its hypothetical
ending inventory would be determined as follows,
Number of Days’ Sales in Inventory =
30 days =
Average Inventory
Cost of Goods Sold/365
X
$5,269/365
X = 30 × ($5,269/365) = 30 × $14.4 per day
X = $432
Thus, the additional cash flow that would have been generated is the difference between the actual average inventory and the hypothetical average inventory, as follows:
Actual average inventory .........................
Hypothetical average inventory...............
Positive cash flow potential ....................
$657 million
432
$225 million
That is, a lower average inventory amount would have required less cash
than actually was required.
Appendix Ex. 7–18
$507,000 ($780,000 × 65%)
Appendix Ex. 7–19
$380,000 ($475,000 × 80%)
Appendix Ex. 7–20
$648,000 ($900,000 × 72%)
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Appendix Ex. 7–21
A
B
Cost
$ 300,000
2,100,000
$2,400,000
1
4
Merchandise inventory, November 1
Purchases in November (net)
Merchandise available for sale
5
Ratio of cost to retail price:
6
Sales for November (net)
Merchandise inventory, November 30, at retail price
Merchandise inventory, November 30,
at estimated cost ($450,000 × 75%)
2
3
7
8
C
Retail
$ 400,000
2,800,000
$3,200,000
$2,400,000
 75%
$3,200,000
2,750,000
$ 450,000
$ 337,500
Appendix Ex. 7–22
a.
A
B
1
7
Merchandise inventory, January 1
Purchases (net), January 1–December 11
Merchandise available for sale
Sales (net), January 1–December 11
Less estimated gross profit ($6,500,000 × 36%)
Estimated cost of merchandise sold
8
Estimated merchandise inventory, December 11
2
3
4
5
6
C
Cost
$ 500,000
4,280,000
$4,780,000
$6,500,000
2,340,000
4,160,000
$ 620,000
b. The gross profit method is useful for estimating inventories for monthly or
quarterly financial statements. It is also useful in estimating the cost of merchandise destroyed by fire or other disasters.
Appendix Ex. 7–23
Merchandise available for sale ..........................................................
Less cost of merchandise sold [$5,260,000 × (100% – 40%)] ..........
Estimated ending merchandise inventory ........................................
$3,380,000
3,156,000
$ 224,000
Appendix Ex. 7–24
Merchandise available for sale ..........................................................
Less cost of merchandise sold [$2,080,000 × (100% – 37%)] ..........
Estimated ending merchandise inventory ........................................
$1,400,000
1,310,400
$ 89,600
475
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part.
PROBLEMS
Prob. 7–1A
1.
Date
Mar.
1
10
Purchases
Unit
Quantity
Cost
500
21
Total
Cost
10,500
28
30
Apr. 5
10
450
22
28
5
175
24
150
30
31
25
20
21
21
21
6,000
2,100
5,250
1,680
70
180
150
21
22
22
1,470
3,960
3,300
120
40
22
24
2,640
960
135
5
24
25
3,240
125
30,725
4,200
14
25
300
100
250
80
9,900
16
May
Cost of Merchandise Sold
Unit
Total
Quantity
Cost
Cost
3,750
Balances
Quantity
Inventory
Unit
Cost
Total
Cost
300
300
500
20
20
21
6,000
6,000
10,500
400
150
70
70
450
21
21
21
21
22
8,400
3,150
1,470
1,470
9,900
270
120
120
175
22
22
22
24
5,940
2,640
2,640
4,200
135
135
150
24
24
25
3,240
3,240
3,750
145
25
3,625
3,625
476
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part.
Prob. 7–1A
(Concluded)
2. Accounts Receivable .................................
Sales ......................................................
59,450
Cost of Merchandise Sold .........................
Merchandise Inventory.........................
30,725
59,450
30,725
3. $28,725 ($59,450 – $30,725)
4. $3,625 (145 units × $25)
5. Since the prices rose from $20 for the March 1 inventory to $25 for the purchase on May 25, we would expect that under last-in, first-out the inventory
would be lower.
Note to Instructors: Problem 7–2A shows that the inventory is $3,110 under
LIFO.
477
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part.
Prob. 7–2A
1.
Date
Mar. 1
10
Purchases
Unit
Quantity
Cost
500
21
Total
Cost
10,500
28
400
21
8,400
100
150
80
21
20
20
2,100
3,000
1,600
16
250
22
5,500
28
150
22
3,300
160
24
3,840
30
Apr.
5
10
May
Cost of Merchandise Sold
Unit
Total
Quantity
Cost
Cost
5
450
175
22
24
9,900
4,200
14
25
150
25
3,750
Inventory
Unit
Quantity
Cost
300
20
300
20
500
21
300
20
100
21
150
70
70
450
70
200
70
50
70
50
175
70
50
15
70
50
15
150
20
20
20
22
20
22
20
22
20
22
24
20
22
24
20
22
24
25
Total
Cost
6,000
6,000
10,500
6,000
2,100
3,000
1,400
1,400
9,900
1,400
4,400
1,400
1,100
1,400
1,100
4,200
1,400
1,100
360
1,400
1,100
360
3,750
Continued
478
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accessible website, in whole or in part.
Prob. 7–2A
Date
(Concluded)
Purchases
Unit
Quantity
Cost
May 30
31
Total
Cost
Cost of Merchandise Sold
Unit
Total
Quantity
Cost
Cost
140
25
Balances
3,500
Inventory
Unit
Quantity
Cost
70
20
50
22
15
24
10
25
31,240
2. Total sales .......................................................................
Total cost of merchandise sold .....................................
Gross profit .....................................................................
Total
Cost
1,400
1,100
360
250
3,110
$59,450
31,240
$28,210
3. $3,110 = [(70 units × $20) + (50 units × $22) + (15 units × $24) + (10 units × $25)] = $1,400 + $1,100 + $360 +
$250
479
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part.
Prob. 7–3A
1. First-In, First-Out Method
Model
Quantity
Unit Cost
AZ09
4
$ 38
1
35
GA85
6
92
1
85
HI71
5
70
KS32
9
259
MS17
13
90
ND52
3
130
2
128
WV63
7
180
1
175
Total ...............................................................
Total Cost
$ 152
35
552
85
350
2,331
1,170
390
256
1,260
175
$6,756
2. Last-In, First-Out Method
Model
Quantity
Unit Cost
AZ09
4
$ 32
1
35
GA85
7
88
HI71
3
75
2
65
KS32
7
242
2
250
MS17
12
80
1
82
ND52
2
108
2
110
1
128
WV63
5
160
3
170
Total ...............................................................
Total Cost
$ 128
35
616
225
130
1,694
500
960
82
216
220
128
800
510
$6,244
480
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part.
Prob. 7–3A
(Concluded)
3. Average Cost Method
Model
Quantity
Unit Cost*
AZ09
5
$ 35
GA85
7
87
HI71
5
69
KS32
9
253
MS17
13
86
ND52
5
121
WV63
8
172
Total ...............................................................
Total Cost
$ 175
609
345
2,277
1,118
605
1,376
$6,505
*Computations of unit costs:
AZ09: $35 = [(4 × $32) + (4 × $35) + (4 × $38)] ÷ (4 + 4 + 4)
GA85: $87 = [(8 × $88) + (4 × $79) + (3 × $85) + (6 × $92)] ÷ (8 + 4 + 3 + 6)
HI71: $69 = [(3 × $75) + (3 × $65) + (15 × $68) + (9 × $70)] ÷ (3 + 3 + 15 + 9)
KS32: $253 = [(7 × $242) + (6 × $250) + (5 × $260) + (10 × $259)] ÷ (7 + 6 + 5 + 10)
MS17: $86 = [(12 × $80) + (10 × $82) + (16 × $89) + (16 × $90)] ÷ (12 + 10 + 16 + 16)
ND52: $121 = [(2 × $108) + (2 × $110) + (3 × $128) + (3 × $130)] ÷ (2 + 2 + 3 + 3)
WV63: $172 = [(5 × $160) + (4 × $170) + (4 × $175) + (7 × $180)] ÷ (5 + 4 + 4 + 7)
4.
a. During periods of rising prices, the LIFO method will result in a lower cost
of inventory, a greater amount of cost of merchandise sold, and a lesser
amount of net income than the other two methods. For Bulldog Appliances, the LIFO method would be preferred for the current year, since it would
result in a lesser amount of income tax.
b. During periods of declining prices, the FIFO method will result in a lesser
amount of net income and would be preferred for income tax purposes.
481
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part.
Prob. 7–4A
A
B
C
Description
Alpha
Inventory
Quantity
38
30
8
1
2
3
4
5
6
7
8
9
Beta
Charlie
20
30
10
20
10
11
12
13
Echo
Frank
125
18
George
Killo
Quebec
Romeo
75
5
375
90
14
10
8
15
16
17
18
19
20
80
10
21
22
Sierra
6
23
5
1
24
25
Whiskey
140
100
40
15
10
5
26
27
28
X-Ray
29
30
31
Total
D
E
Inventory Sheet
December 31, 2012
Unit
Unit
Cost
Market
Price
Price
Cost
$ 60
$ 57
$ 1,800
59
$ 57
472
2,272
175
180
3,500
130
125
2,600
129
125
1,290
3,890
24
26
3,000
565
550
5,650
560
550
4,480
10,130
15
17
1,125
385
390
1,925
8
6
3,000
22
18
1,760
21
18
210
1,970
250
235
1,250
260
235
260
1,510
21
20
2,100
19
20
760
2,860
750
745
7,500
745
745
3,725
11,225
$46,407
F
G
Total
Market
$ 1,710
456
2,166
3,600
2,500
1,250
3,750
3,250
5,500
4,400
9,900
1,275
1,950
2,250
1,440
180
1,620
1,175
235
1,410
2,000
800
2,800
7,450
3,725
11,175
$45,146
Lower
of C or M
$ 2,166
3,500
3,750
3,000
9,900
1,125
1,925
2,250
1,620
1,410
2,800
11,175
$44,621
482
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part.
Prob. 7–5A
Appendix
1.
A
2
5
Merchandise inventory, May 1
Net purchases
Merchandise available for sale
6
Ratio of cost to retail price:
7
Sales
Less sales returns and allowances
Net sales
Merchandise inventory, May 31, at retail
Merchandise inventory, at estimated cost
($250,000 × 70%)
3
4
8
9
10
11
B
C
Cost
$ 130,000
1,382,000
$1,512,000
Retail
$ 185,000
1,975,000
$2,160,000
MYRINA CO.
1
$1,512,000
$2,160,000
 70%
$1,950,000
40,000
1,910,000
$ 250,000
$ 175,000
2.
A
1
2
3
4
5
6
7
8
9
10
11
B
C
LEMNOS CO.
a.
Merchandise inventory, July 1
Net purchases
Merchandise available for sale
Sales
Less sales returns and allowances
Net sales
Less estimated gross profit ($5,200,000 × 35%)
Estimated cost of merchandise sold
Estimated merchandise inventory, September 30
Cost
$ 280,000
3,400,000
$3,680,000
$5,300,000
100,000
$5,200,000
1,820,000
3,380,000
$ 300,000
12
13
14
15
16
b.
Estimated merchandise inventory, September 30
Physical inventory count, September 30
Estimated loss due to theft or damage,
July 1–September 30
$ 300,000
269,750
$
483
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part.
30,250
Prob. 7–1B
1.
Purchases
Unit
Quantity
Cost
Date
July
3
8
150
1,800
Total
Cost
270,000
11
30
Aug. 8
125
2,000
Sept.
100
2,200
180
28
30
2,400
1,500
1,800
1,800
112,500
27,000
81,000
90
20
80
1,800
2,000
2,000
162,000
40,000
160,000
25
35
50
2,000
2,200
2,200
50,000
77,000
110,000
15
75
2,200
2,400
33,000
180,000
1,032,500
220,000
5
16
21
75
15
45
250,000
10
19
28
Cost of Merchandise Sold
Unit
Total
Quantity
Cost
Cost
432,000
Balances
Quantity
Inventory
Unit
Cost
Total
Cost
75
75
150
135
1,500
1,500
1,800
1,800
112,500
112,500
270,000
243,000
90
90
125
105
1,800
1,800
2,000
2,000
162,000
162,000
250,000
210,000
25
25
100
2,000
2,000
2,200
50,000
50,000
220,000
65
15
15
180
2,200
2,200
2,200
2,400
143,000
33,000
33,000
432,000
105
2,400
252,000
252,000
484
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accessible website, in whole or in part.
2. Accounts Receivable ......................................................
Sales ...........................................................................
1,675,000
Cost of Merchandise Sold ..............................................
Merchandise Inventory..............................................
1,032,500
1,675,000
1,032,500
3. $642,500 ($1,675,000 – $1,032,500)
4. $252,000 (105 units × $2,400)
5. Since the prices rose from $1,500 for the July 3 inventory to $2,400 for the purchase on September 21, we
would expect that under last-in, first-out the inventory would be lower.
Note to Instructors: Problem 7–2B shows that the inventory is $238,500 under LIFO.
485
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part.
Prob. 7–2B
1.
Date
July
3
8
Purchases
Unit
Quantity
Cost
150
1,800
Total
Cost
Cost of Merchandise Sold
Unit
Total
Quantity
Cost
Cost
270,000
11
90
1,800
162,000
30
45
1,800
81,000
10
110
2,000
220,000
19
15
15
50
2,000
1,800
1,500
30,000
27,000
75,000
Aug. 8
28
125
100
2,000
2,200
250,000
220,000
Quantity
Inventory
Unit
Cost
75
75
150
75
60
75
15
75
15
125
75
15
15
1,500
1,500
1,800
1,500
1,800
1,500
1,800
1,500
1,800
2,000
1,500
1,800
2,000
112,500
112,500
270,000
112,500
108,000
112,500
27,000
112,500
27,000
250,000
112,500
27,000
30,000
1
25
25
100
1,500
1,500
2,200
37,500
37,500
220,000
Total
Cost
Continued
486
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part.
Prob. 7–2B
Date
(Concluded)
Purchases
Unit
Quantity
Cost
Total
Cost
Cost of Merchandise Sold
Unit
Total
Quantity
Cost
Cost
Sept. 5
60
2,200
132,000
16
40
10
2,200
1,500
88,000
15,000
21
180
28
30
2,400
432,000
90
2,400
Balances
216,000
Quantity
Inventory
Unit
Cost
Total
Cost
25
40
15
1,500
2,200
1,500
37,500
88,000
22,500
15
180
15
90
1,500
2,400
1,500
2,400
22,500
432,000
22,500
216,000
238,500
1,046,000
2. Total sales .......................................................................
Total cost of merchandise sold .....................................
Gross profit .....................................................................
$1,675,000
1,046,000
$ 629,000
3. $238,500 = [(15 units × $1,500) + (90 units × $2,400)] = $22,500 + $216,000
487
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part.
Prob. 7–3B
1. First-In, First-Out Method
Model
Quantity
Unit Cost
AK82
3
$535
2
530
CO62
6
225
6
222
DE03
1
70
1
65
FL12
4
317
ME09
6
542
1
549
NM57
2
232
TN33
5
39
Total .................................................................
Total Cost
$ 1,605
1,060
1,350
1,332
70
65
1,268
3,252
549
464
195
$11,210
2. Last-In, First-Out Method
Model
Quantity
Unit Cost
AK82
3
$520
2
527
CO62
9
213
3
215
DE03
2
60
FL12
4
305
ME09
6
520
1
531
NM57
2
222
TN33
4
35
1
36
Total .................................................................
Total Cost
$ 1,560
1,054
1,917
645
120
1,220
3,120
531
444
140
36
$10,787
488
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part.
Prob. 7–3B
(Concluded)
3. Average Cost Method
Model
Quantity
Unit Cost*
AK82
5
$528
CO62
12
218
DE03
2
63
FL12
4
311
ME09
7
534
NM57
2
227
TN33
5
37
Total .................................................................
Total Cost
$ 2,640
2,616
126
1,244
3,738
454
185
$11,003
*Computations of unit costs:
AK82: $528 = [(3 × $520) + (3 × $527) + (3 × $530) + (3 × $535)] ÷ (3 + 3 + 3 + 3)
CO62 $218 = [(9 × $213) + (7 × $215) + (6 × $222) + (6 × $225)] ÷ (9 + 7 + 6 + 6)
DE03: $63 = [(5 × $60) + (3 × $65) + (1 × $65) + (1 × $70)] ÷ (5 + 3 + 1 + 1)
L100: $311 = [(6 × $305) + (3 × $310) + (3 × $316) + (4 × $317)] ÷ (6 + 3 + 3 + 4)
ME09: $534 = [(6 × $520) + (8 × $531) + (4 × $549) + (6 × $542)] ÷ (6 + 8 + 4 + 6)
NM57: $227 = [(4 × $222) + (4 × $232)] ÷ (4 + 4)
TN33: $37 = [(4 × $35) + (6 × $36) + (8 × $37) + (7 × $39)] ÷ (4 + 6 + 8 + 7)
4.
a.
During periods of rising prices, the LIFO method will result in a lower
cost of inventory, a greater amount of the cost of merchandise sold, and
a lesser amount of net income than the other two methods. For Artic Appliances, the LIFO method would be preferred for the current year, since
it would result in a lesser amount of income tax.
b.
During periods of declining prices, the FIFO method will result in a lesser amount of net income and would be preferred for income tax purposes.
489
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part.
Prob. 7–4B
A
B
C
Description
Alpha
Inventory
Quantity
38
30
8
1
2
3
4
5
6
7
8
9
Beta
Charlie
20
30
10
20
10
11
12
13
Echo
Frank
125
18
George
Killo
Quebec
Romeo
75
5
375
90
14
6
12
15
16
17
18
19
20
75
15
21
22
Sierra
6
23
5
1
24
25
Whiskey
140
100
40
15
10
5
26
27
28
X-Ray
29
30
31
Total
D
E
Inventory Sheet
December 31, 2012
Unit
Unit
Cost
Market
Price
Price
Cost
$ 60
$ 57
$ 1,800
59
57
472
2,272
170
180
3,400
130
125
2,600
128
125
1,280
3,880
25
26
3,125
550
550
3,300
540
550
6,480
9,780
16
17
1,200
395
390
1,975
6
6
2,250
25
18
1,875
26
18
390
2,265
250
235
1,250
260
235
260
1,510
17
20
1,700
16
20
640
2,340
750
745
7,500
740
745
3,700
11,200
$45,197
F
G
Total
Market
$ 1,710
456
2,166
3,600
2,500
1,250
3,750
3,250
3,300
6,600
9,900
1,275
1,950
2,250
1,350
270
1,620
1,175
235
1,410
2,000
800
2,800
7,450
3,725
11,175
$45,146
Lower
of C or M
$ 2,166
3,400
3,750
3,125
9,780
1,200
1,950
2,250
1,620
1,410
2,340
11,175
$44,166
490
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part.
Prob. 7–5B
Appendix
1.
A
2
5
Merchandise inventory, March 1
Net purchases
Merchandise available for sale
6
Ratio of cost to retail price:
3
4
7
8
9
10
11
B
C
Cost
$ 298,000
4,850,000
$5,148,000
Retail
$ 375,000
6,225,000
$6,600,000
SEGAL CO.
1
$5,148,000
 78%
$6,600,000
Sales
Less sales returns and allowances
Net sales
Merchandise inventory, March 31, at retail
Merchandise inventory, at estimated cost
($525,000 × 78%)
$6,320,000
245,000
6,075,000
$ 525,000
$ 409,500
2.
A
1
2
3
4
5
6
7
8
9
10
11
B
C
IROQUOIS CO.
a.
Merchandise inventory, January 1
Net purchases
Merchandise available for sale
Sales
Less sales returns and allowances
Net sales
Less estimated gross profit ($6,725,000 × 40%)
Estimated cost of merchandise sold
Estimated merchandise inventory, March 31
Cost
$ 300,000
4,150,000
$4,450,000
$6,900,000
175,000
$6,725,000
2,690,000
4,035,000
$ 415,000
12
13
14
15
16
b.
Estimated merchandise inventory, March 31
Physical inventory count, March 31
Estimated loss due to theft or damage,
January 1–March 31
$ 415,000
396,500
$
491
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accessible website, in whole or in part.
18,500
CASES & PROJECTS
CP 7–1
Since the title to merchandise shipped FOB shipping point passes to the buyer
when the merchandise is shipped, the shipments made before midnight, July 31,
2012, should properly be recorded as sales for the fiscal year ending July 31,
2012. Hence, Mark Irwin is behaving in a professional manner. However, Mark
should realize that recording these sales in 2012 precludes them from being recognized as sales in 2013. Thus, accelerating the shipment of orders to increase
sales of one period will have the effect of decreasing sales of the next period.
CP 7–2
In developing a response to Gary’s concerns, you should probably first emphasize the practical need for an assumption concerning the flow of cost of goods
purchased and sold. That is, when identical goods are frequently purchased, it
may not be practical to specifically identify each item of inventory. If all the identical goods were purchased at the same price, it wouldn’t make any difference for
financial reporting purposes which goods we assumed were sold first, second,
etc. However, in most cases, goods are purchased over time at different prices,
and, hence, a need arises to determine which goods are sold so that the price
(cost) of those goods can be matched against the revenues to determine operating income.
Next, you should emphasize that accounting principles allow for the fact that the
physical flow of the goods may differ from the flow of costs. Specifically,
accounting principles allow for three cost flow assumptions: first-in, first-out;
last-in, first-out; and average. Each of these methods has advantages and disadvantages. One primary advantage of the last-in, first-out method is that it better
matches current costs (the cost of goods purchased last) with current revenues.
Therefore, the reported operating income is more reflective of current operations
and what might be expected in the future. Another reason that the last-in, first-out
method is often used is that it tends to minimize taxes during periods of price
increases. Since for most businesses prices tend to increase, the LIFO method
will generate lower taxes than will the alternative cost flow methods.
The preceding explanation should help Gary better understand LIFO and its impact on the financial statements and taxes.
492
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accessible website, in whole or in part.
CP 7–3
1.
a. First-in, first-out method:
16,000 units at $16.00 .............................................
16,000 units at $14.95 .............................................
25,600 units at $14.50 .............................................
6,400 units at $14.25 .............................................
64,000 units .............................................................
$256,000
239,200
371,200
91,200
$957,600
b. Last-in, first-out method:
62,000 units at $12.20 .............................................
2,000 units at $13.00 .............................................
64,000 units .............................................................
$756,400
26,000
$782,400
c. Average cost method:
64,000 units at $13.58*............................................
$869,120
*($5,432,000/400,000) = $13.58
2.
Average
FIFO
LIFO
Cost
Sales ..................................................... $5,200,000 $5,200,000 $5,200,000
Cost of merchandise sold* .................
4,474,400
4,649,600
4,562,880
Gross profit .......................................... $ 725,600 $ 550,400 $ 637,120
*Cost of merchandise available
for sale .............................................. $5,432,000 $5,432,000 $5,432,000
Less ending inventory .......................
957,600
782,400
869,120
Cost of merchandise sold ................. $4,474,400 $4,649,600 $4,562,880
3.
a. The LIFO method is often viewed as the best basis for reflecting income
from operations. This is because the LIFO method matches the most current cost of merchandise purchases against current sales. The matching
of current costs with current sales results in a gross profit amount that
many consider to best reflect the results of current operations. For White
Dove Company, the gross profit of $550,400 reflects the matching of the
most current costs of the product of $4,649,600 against the current period
sales of $5,200,000. This matching of current costs with current sales also
tends to minimize the effects of price trends on the results of operations.
The LIFO method will not match current sales and the current cost of merchandise sold if the current-period quantity of sales exceeds the currentperiod quantity of purchases. In this case, the cost of merchandise sold
will include a portion of the cost of the beginning inventory, which may
have a unit cost from purchases made several years prior to the current
period. The results of operations may then be distorted in the sense of the
current matching concept. This situation occurs rarely in most businesses
because of consistently increasing quantities of year-end inventory from
year to year.
493
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CP 7–3
(Continued)
While the LIFO method is often viewed as the best method for matching
revenues and expenses, the FIFO method is often consistent with the
physical movement of merchandise in a business, since most businesses
tend to dispose of commodities in the order of their acquisition. To the extent that this is the case, the FIFO method approximates the results that
will be attained by a specific identification of costs.
The average cost method is, in a sense, a compromise between LIFO and
FIFO. The effect of price trends is averaged, both in determining net income and in determining inventory cost.
Which inventory costing method best reflects the results of operations for
White Dove Company depends upon whether one emphasizes the importance of matching revenues and expenses (the LIFO method) or
whether one emphasizes the physical flow of merchandise (the FIFO
method). The average cost method might be considered best if one emphasizes the matching and physical flow of goods concepts equally.
b. The FIFO method provides the best reflection of the replacement cost of
the ending inventory for the balance sheet. This is because the amount
reported on the balance sheet for merchandise inventory will be assigned
costs from the most recent purchases. For most businesses, these costs
will reflect purchases made near the end of the period. For example, White
Dove Company’s ending inventory on December 31, 2012, is assigned
costs totaling $957,600 under the FIFO method. These costs represent
purchases made during the period of August through December. This
FIFO inventory amount ($957,600) more closely approximates the replacement cost of the ending inventory than either the LIFO ($782,400) or
the average cost ($869,120) figures.
c. During periods of rising prices, such as shown for White Dove Company,
the LIFO method will result in a lesser amount of net income than the other two methods. Hence, for White Dove Company, the LIFO method would
be preferred for the current year, since it would result in a lesser amount
of income tax.
During periods of declining prices, the FIFO method will result in a lesser
amount of net income and would be preferred for income tax purposes.
494
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CP 7–3
(Continued)
d. The advantages of the perpetual inventory system include the following:
(1) A perpetual inventory system provides an effective means of control
over inventory. A comparison of the amount of inventory on hand with
the balance of the subsidiary account can be used to determine the
existence and seriousness of any inventory shortages.
(2) A perpetual inventory system provides an accurate method for determining inventories used in the preparation of interim statements.
(3) A perpetual inventory system provides an aid for maintaining inventories at optimum levels. Frequent review of the perpetual inventory
records helps management in the timely reordering of merchandise,
so that loss of sales and excessive accumulation of inventory are
avoided. An analysis of White Dove Company’s purchases and sales,
as shown below, indicates that the company may have accumulated
excess inventory from May through August because the amount of
month-end inventory increased materially, while sales remained relatively constant for the period.
Month
Purchases
April
May
June
July
August
September
October
November
December
62,000 units
66,000
80,000
80,000
54,400
—
25,600
16,000
16,000
Increase
(Decrease) in
Inventory
Inventory at
End of Month
32,000 units 30,000 units
32,000
34,000
40,000
40,000
48,000
32,000
56,000
(1,600)
56,000
(56,000)
36,000
(10,400)
20,000
(4,000)
16,000
0
30,000 units
64,000
104,000
136,000
134,400
78,400
68,000
64,000
64,000
Sales
Next
Month’s
Sales
32,000 units
40,000
48,000
56,000
56,000
36,000
20,000
16,000
—
It appears that during April through July, the company ordered inventory without regard to the accumulation of excess inventory. A perpetual inventory system might have prevented this excess accumulation
from occurring.
The primary disadvantage of the perpetual inventory system is the
cost of maintaining the necessary inventory records. However, computers may be used to reduce this cost.
495
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accessible website, in whole or in part.
CP 7–4
a. Inventory Turnover =
Cost of Goods Sold
Average Inventory
Number of Days’ Sales in Inventory =
Average Inventory
Cost of Goods Sold/365
Dell
Inventory Turnover:
$50,144
$50,144

 49.0
($1,180  $867)/2 $1,023.5
Days’ Sales in Inventory:
$1,180  $867 / 2
$50,144/36 5

$1,023.5
 7.4 days
137.4
Hewlett-Packard
Inventory Turnover:
$87,524
$87,524

 12.5
($7,879  $6,128)/2 $7,003.5
Days’ Sales in Inventory:
$7,879  $6,128  / 2
$87,524/36 5

$7,003.5
 29.2 days
239.8
b. Dell builds its computers primarily to a customer order, called a build-toorder strategy. Customers place their orders on the Internet. Dell then builds
and delivers the computer, usually in a matter of days. HP, in contrast, builds
computers before actual orders are received. This is called a build-to-stock
strategy. HP must forecast the type of computers customers want before it
receives the orders. This strategy results in greater inventory for HP, since
the computers are built before there is a sale. HP has significant finished
goods inventory, while Dell has less finished goods. It also explains the difference in their inventory efficiency ratios.
Note to Instructors: While Dell sells most of its computers online, it has also
begun selling its computers through Best Buy. As a result, Dell’s inventory
turnover has decreased and its days’ sales in inventory has increased from
prior years.
496
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accessible website, in whole or in part.
CP 7–5
a.
Tiffany Co.
Amazon.com
Inventory Turnover
Number of Days’ Sales
in Inventory
0.85
427.03
11.46
31.84
Computations:
Tiffany Co.
Inventory Turnover =
Cost of Goods Sold
Average Inventory
Inventory Turnover =
$1,215
, or 0.85
$1,601  $1,242 / 2
Number of Days’ Sales in Inventory =
Number of Days’ Sales in Inventory =
Average Inventory
Cost of Goods Sold / 365
$1,601  $1,242 / 2
$1,215 / 365
, or 427.03 days
Amazon.com
Inventory Turnover =
Cost of Goods Sold
Average Inventory
Inventory Turnover =
$14,896
, or 11.46
$1,399  $1,200 / 2
Number of Days’ Sales in Inventory =
Number of Days’ Sales in Inventory =
Average Inventory
Cost of Goods Sold / 365
$1,399  $1,200 / 2
$14,896 / 365
, or 31.84 days
b. Amazon.com has a smaller investment in inventory for its volume than does
Tiffany. Amazon.com’s inventory turnover is faster (larger), and the number of
days’ sales in inventory is shorter (smaller). This is due to the fact that
Amazon.com uses a different business model than Tiffany. That is,
Amazon.com sells through the Internet, while Tiffany uses the traditional retail store model which requires Tiffany to stock more inventory.
497
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accessible website, in whole or in part.
CP 7–6
a.
1. Cost of merchandise sold ....................
Merchandise inventory, beginning .....
Merchandise inventory, ending ...........
Total .................................................
2. Average merchandise inventory
(Total/2) .................................................
Inventory turnover ...............................
Costco
Wal-Mart
JCPenney
$ 62,335
$ 306,158
$ 11,571
$
5,039
5,405
$ 10,444
$ 35,180
34,511
$ 69,691
$ 3,641
3,259
$ 6,900
$ 5,222.0
11.9
$34,845.5
8.8
$ 3,450.0
3.4
Costco
Wal-Mart
JCPenney
$ 5,222.0
$34,845.5
$ 3,450.0
$ 62,335
$ 306,158
$ 11,571
$
$
$
b.
1. Average merchandise inventory
[from part (a)] ........................................
Cost of merchandise sold ....................
2. Average daily cost of merchandise
sold (COMS/365) ...................................
Number of day’s sales in inventory ....
170.8
30.6
838.8
41.5
31.7
108.8
c. Both the inventory turnover ratio and the number of day’s sales in inventory
reflect the merchandising approaches of the three companies.
Costco is a club warehouse. Its approach is to hold only mass appeal items
that are sold quickly off the shelf. Most items are sold in bulk quantities at
very attractive prices. Costco couples thin margins with very fast inventory
turnover.
Wal-Mart has a traditional discounter approach. It has attractive pricing, but
the inventory moves slower than would be the case at a club warehouse. For
example, many purchases made at Wal-Mart would not be packaged in the
same bulk as would be the case at Costco.
JCPenney is a traditional department store with a wider assortment of goods
that will not necessarily appeal to the mass market. That is, some of the merchandise items will be more specialized and unique. As such, its inventory
moves slower, but at a higher price (and margin).
498
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