SOLUTIONS TO EXERCISES
EXERCISE 6-1
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 Novotna until
goods are received ................................................................
3. Add to inventory: Title passed to Novotna when
goods were shipped ..............................................................
4. Add to inventory: Title remains with Novotna until
purchaser receives goods ....................................................
5. No effect: Title does not transfer to Novotna until goods
are received ...........................................................................
Correct inventory ..............................................................................
6-1
$297,000
0
0
25,000
40,000
0
$362,000
EXERCISE 6-3
LEBLANC COMPANY
Income Statement (Partial)
For the Year Ended August 31, 2003
Cost of goods sold:
Inventory, September 1, 2002 .........................
Purchases ........................................................
Less: Purchase returns and allowances ......
Net purchases .................................................
Add: Freight in ...............................................
Cost of goods purchased ...............................
Cost of goods available for sale .....................
Inventory, August 31, 2003 .............................
Cost of goods sold ..........................................
6-2
$017,200
$142,400
2,000
140,400
4,000
144,400
161,600
0 26,000
$135,600
EXERCISE 6-5
(a)
OKANAGAN COMPANY
Income Statement
For the Year Ended January 31, 2003
Sales revenues
Sales ...........................................................................
Less: Sales returns and allowances .........................
Net sales .........................................................................
Cost of goods sold
Inventory, February 1, 2002 .......................................
Purchases .................................................. $200,000
Less: Purchase returns and allowances .
6,000
Net purchases ........................................... 194,000
Add: Freight in...........................................
10,000
Cost of goods purchased ..........................................
Cost of goods available for sale ...............................
Inventory, January 31, 2003.......................................
Cost of goods sold ........................................................
Gross profit ....................................................................
Operating expenses
Salary expense ...........................................................
Rent expense ..............................................................
Insurance expense .....................................................
Freight out ..................................................................
Total operating expenses ....................................
Net income .....................................................................
6-3
$312,000
13,000
$299,000
$ 42,000
204,000
246,000
63,000
183,000
116,000
$ 61,000
20,000
12,000
7,000
100,000
$ 16,000
EXERCISE 6-5 (Continued)
(b)
Jan. 31
Sales ...............................................................
Merchandise Inventory (Jan. 31, 2003) .........
Purchase Returns and Allowances...............
Capital .....................................................
312,000
63,000
6,000
Capital .............................................................
Merchandise Inventory (Feb. 1, 2002) ...
Purchases ...............................................
Freight In ................................................
Salary Expense ......................................
Rent Expense .........................................
Insurance Expense ................................
Freight Out..............................................
Sales Returns and Allowances .............
365,000
6-4
381,000
42,000
200,000
10,000
61,000
20,000
12,000
7,000
13,000
EXERCISE 6-8
Beginning inventory (200 X $5) .........................................
$1,000
Purchases: June 12 (300 X $6) ........................................... $1,800
June 23 (500 X $7)........................................... 03,500 5,300
Cost of goods available for sale (1,000 units) ..................
6,300
Less: Ending inventory (180 units)
Cost of goods sold (820 units)
(a)
(1) FIFO
Cost of Goods Sold:
Date
Units
Unit Cost
6/1
6/12
6/23
200
300
320
820
$5
6
7
Date
Units
Unit Cost
6/23
180
$7
Total Cost
$1,000
1,800
2,240
$5,040
Ending Inventory:
Total Cost
$1,260
Proof: CGS
+ EI
= GAS
$5,040 + $1,260 = $6,300
(2) LIFO
Cost of Goods Sold:
Date
Units
6/23
6/12
6/1
Unit Cost
500
300
20
820
$7
6
5
Total Cost
$3,500
1,800
100
$5,400
Ending Inventory:
Date
6/1
Proof: CGS
+ EI
Units
Unit Cost
180
$5
= GAS
6-5
Total Cost
$900
$5,400 + $900 = $6,300
6-6
EXERCISE 6-8 (Continued)
(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 Dene Company, the ending
inventory under FIFO is $1,260 compared to $900 under LIFO.
(c) The LIFO method will produce the higher cost of goods sold for
Dene 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 compared to
$5,040 under FIFO.
6-7
EXERCISE 6-9
(a)
Cost of Goods
Available for Sale
$6,300
÷
Total Units
Available for Sale
1,000
=
Weighted Average
Unit Cost
$6.30
Ending Inventory:
180 X $6.30 = $1,134
Cost of Goods Sold:
820 X $6.30 = $5,166
Proof: CGS + EI
= GAS
$5,166 + $1,134 = $6,300
(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). When prices are changing, the
average cost method will always produce this type of result. That
is, average results will fall somewhere between those of FIFO and
LIFO.
(c) The average cost method uses a weighted average unit cost, not a
simple average of unit costs ($5 + $6 + $7 = $18 ÷ 3 = $6).
6-8
EXERCISE 6-10
(a)
Periodic Inventory Method
Purchases (100 x $10) ........................................
Accounts Payable ......................................
1,000
Accounts Receivable (70 x $15).........................
Sales ...........................................................
1,050
1,000
1,050
Perpetual Inventory Method
(b)
Merchandise Inventory (100 x $10) ....................
Accounts Payable ......................................
1,000
Accounts Receivable (70 x $15).........................
Sales ...........................................................
1,050
Cost of Goods Sold (70 x $10) ...........................
Merchandise Inventory..............................
700
1. FIFO
2. LIFO
3. Specific Identification
4. LIFO
6-9
1,000
1,050
700
EXERCISE 6-13
Cameras
Minolta
Canon
Total
Light Meters
Vivitar
Kodak
Total
Total inventory
Cost
Market
$ 875
1,050
1,925
$ 800
1,064
1,864
1,500
1,150
2,650
1,428
1,350
2,778
$4,575
$4,642
LCM
$4,575
Since the market value of the total inventory is higher than its cost, the
lower of cost and market value is the inventory’s cost, $4,575.
6-10
*EXERCISE 6-14
(1)
Date
FIFO
Sold
Purchased
Balance
Jan. 1
8
10
(2 X $600)
$1,200
(6 X $700) $4,200
15
(2 X $600)
(2 X $700)
$2,600
(4 X $600)
$2,400
(2 X $600)
1,200
(2 X $600)
(6 X $700)
5,400
(4 X $700)
2,800
Cost of goods sold: $1,200 + $2,600 = $3,800
Ending inventory: $2,800
Proof: CGS + EI
= GAS
$3,800 + $2,800 = $6,600
(2)
MOVING AVERAGE COST
Purchased
Date
Sold
Jan. 1
8
10
15
(2 X $600)
$1,200
(6 X $700) $4,200
(4 X $675)
$2,700
*Average unit cost = $5,400 ÷ 8 = $675
Cost of goods sold: $1,200 + $2,700 = $3,900
Ending inventory: $2,700
Proof: CGS + EI
= GAS
$3,900 + $2,700 = $6,600
6-11
Balance
(4 X $600)
$2,400
(2 X $600)
1,200
(8 X $675)*
5,400
(4 X $675)
2,700
*EXERCISE 6-15
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 .................................................
$25,000
028,000
53,000
035,000
$18,000
*EXERCISE 6-16
Women's
Department
Cost
Retail
Cost
$032,000
0148,000
$180,000
Cost to retail ratio
$180,000 = 80%
$225,000
$183,750 = 75%
$245,000
$40,000 X 80%
= $32,000
$50,000 X 75%
= $37,500
6-12
$046,450
0137,300
$183,750
Retail
Beginning inventory
Goods purchased
Goods available for sale
Net sales
Ending inventory at retail
Estimated cost of
ending inventory
$045,000
0 180,000
225,000
0 185,000
$ 40,000
Men's
Department
$060,000
185,000
245,000
195,000
$ 50,000
PROBLEM 6-2A
(a)
GENERAL JOURNAL
Account Titles and Explanation
Date
Apr.
5
7
9
10
12
14
17
20
21
27
30
30
Debit
Purchases .........................................................
Accounts Payable .....................................
1,600
Freight In...........................................................
Cash ...........................................................
80
Accounts Payable ............................................
Purchase Returns and Allowances..........
100
Accounts Receivable .......................................
Sales ..........................................................
900
Purchases .........................................................
Accounts Payable .....................................
660
Accounts Payable ($1,600  $100) ..................
Cash ...........................................................
1,500
Accounts Payable ............................................
Purchase Returns and Allowances..........
60
Accounts Receivable .......................................
Sales ..........................................................
700
Accounts Payable ($660  $60) .......................
Cash ...........................................................
600
Sales Returns and Allowances .......................
Accounts Receivable ................................
30
Cash ..................................................................
Sales ..........................................................
600
Cash ..................................................................
Accounts Receivable ................................
1,100
6-13
J1
Credit
1,600
80
100
900
660
1,500
60
700
600
30
600
1,100
PROBLEM 6-2A (Continued)
(b)
Cash
Date
Apr.
1
7
14
21
30
30
Explanation
Ref.
Balance

J1
J1
J1
J1
J1
Debit
Credit
80
1,500
600
600
1,100
Balance
2,500
2,420
920
320
920
2,020
Accounts Receivable
Date
Explanation
Apr. 10
20
27
30
Ref.
Debit
J1
J1
J1
J1
Credit
900
700
30
1,100
Balance
900
1,600
1,570
470
Merchandise Inventory
Date
Apr.
Explanation
1
Balance
Ref.
Debit
Credit

Balance
3,500
Accounts Payable
Date
Apr.
Explanation
5
9
12
14
Ref.
J1
J1
J1
J1
6-14
Debit
Credit
1,600
100
660
1,500
Balance
1,600
1,500
2,160
660
17
21
J1
J1
6-15
60
600
600
0
PROBLEM 6-2A (Continued)
(b) (Continued)
Kane, Capital
Date
Apr.
1
Explanation
Ref.
Balance

Debit
Credit
Balance
6,000
Sales
Date
Explanation
Apr. 10
20
30
Ref.
Debit
J1
J1
J1
Credit
900
700
600
Balance
900
1,600
2,200
Sales Returns and Allowances
Date
Explanation
Apr. 27
Ref.
J1
Debit
Credit
30
Balance
30
Purchases
Date
Apr.
Explanation
5
12
Ref.
J1
J1
Debit
Credit
1,600
660
Balance
1,600
2,260
Purchase Returns and Allowances
Date
Apr.
Explanation
9
17
Ref.
J1
J1
Freight In
6-16
Debit
Credit
100
60
Balance
100
160
Date
Apr.
Explanation
7
Ref.
J1
6-17
Debit
80
Credit
Balance
80
PROBLEM 6-2A (Continued)
(c)
KANE’S PRO SHOP
Trial Balance
April 30, 2003
Cash ..............................................................................
Accounts Receivable ...................................................
Merchandise Inventory ................................................
Kane, Capital ................................................................
Sales .............................................................................
Sales Returns and Allowances ...................................
Purchases ....................................................................
Purchase Returns and Allowances ............................
Freight In ......................................................................
Totals .....................................................................
(d)
Debit
$2,020
470
3,500
Credit
$6,000
2,200
30
2,260
160
80
$8,360
$8,360
KANE’S PRO SHOP
Income Statement (Partial)
For the Month Ended April 30, 2003
Sales revenues
Sales .........................................................
Less: Sales returns and allowances ....
Net sales ..................................................
Cost of goods sold
Inventory, April 1 .....................................
Purchases ................................................
Less: Purchase returns and allowances
Net purchases..........................................
Add: Freight in .....................................
Cost of goods purchased .......................
Cost of goods available for sale .............
Inventory, April 30 ...................................
Cost of goods sold.............................
Gross profit ...................................................
6-18
$2,200
30
$2,170
$3,500
$2,260
160
2,100
80
2,180
5,680
4,200
1,480
$ 690
PROBLEM 6-4A
(a)
COST OF GOODS AVAILABLE FOR SALE
Date
Cost
Jan. 1
Mar. 15
July 20
Sept. 4
Dec. 2
Explanation
Units
Beginning inventory
Purchase
Purchase
Purchase
Purchase
Total
100
300
200
300
100
1,000
(b)
FIFO
(1)
Date
Sept.
Dec.
Ending Inventory
Unit
Total
Units Cost
Cost
4
150
$ 28 $4,200
2
100
30
3,000
250*
$7,200
*1,000 – 750 = 250
(2)
Cost of Goods Sold
Unit
Total
Date
Units Cost
Cost
Jan.
1
100
$ 20 $ 2,000
Mar. 15
300
24
7,200
July 20
200
25
5,000
Sept. 4
150
28
4,200
750
$18,400
Check: EI
+ CGS
= GAS
$7,200 + $18,400 = $25,600
6-19
Unit Cost
$20
24
25
28
30
Total
$ 2,000
7,200
5,000
8,400
3,000
$25,600
PROBLEM 6-4A (Continued)
(b) (Continued)
WEIGHTED AVERAGE COST
Weighted average unit cost: $25,600  1,000 = $25.60
(1)
Units
250
Ending Inventory
Unit
Total
Cost
Cost
$25.60
$6,400
(2)
Cost of Goods Sold
Unit
Total
Units
Cost
Cost
750
$25.60
$19,200
Check: EI
+ CGS
= GAS
$6,400 + $19,200 = $25,600
LIFO
(1)
Date
Jan.
Mar.
(2)
Date
Mar.
July
Sept.
Dec.
Ending Inventory
Unit
Total
Units Cost
Cost
1
100
$ 20 $2,000
15
150
24
3,600
250
$5,600
Cost of Goods Sold
Unit
Total
Units Cost
Cost
15
150
$ 24 $ 3,600
20
200
25
5,000
4
300
28
8,400
2
100
30
3,000
750
$20,000
Check: EI
+ CGS
= GAS
$5,600 + $20,000 = $25,600
6-20
PROBLEM 6-4A (Continued)
(c) FIFO produces the highest inventory cost for the balance sheet,
$7,200. LIFO produces the highest cost of goods sold for the
income statement, $20,000.
(d) The choice of inventory cost method does not affect cash flow. It is
an allocation of costs between inventory and cost of goods sold.
6-21
PROBLEM 6-5A
(a)
RÉAL NOVELTY
Condensed Income Statements
For the Year Ended December 31, 2003
FIFO
Sales ........................................................ $865,000
Cost of goods sold
Beginning inventory ........................
34,000
Cost of goods purchased................
591,500
Cost of goods available for sale .....
625,500
Ending inventory .............................
55,000a
Cost of goods sold ..........................
570,500
Gross profit .............................................
294,500
Operating expenses................................
147,000
Net income .............................................. $147,500
a
20,000 x $2.75 = $55,000
b
[($34,000 + $591,500) ÷ (15,000 + 230,000) = $2.55]
20,000 x $2.55 = $51,000
6-22
Weighted
Average
$865,000
34,000
591,500
625,500
51,000b
574,500
290,500
147,000
$143,500
PROBLEM 6-5A (Continued)
(b) Dear Sir/Madame:
I would like to bring the following inventory related points to your
attention to assist you in making a choice between the FIFO and
weighted average cost flow assumptions:
1.
Gross profit under the weighted average cost flow assumption
will be lower than the gross profit reported under the FIFO
cost flow assumption. Costs are rising, and in such instances,
FIFO will always result in the higher gross profit.
2.
The choice of inventory cost flow assumption will impact the
balance sheet (through inventory) and income statement
(through cost of goods sold) of the company. It will not impact
the company’s cash flow. While purchases and sales have a
cash effect, the choice of cost flow assumption does not affect
cash as it only allocates costs between inventory and cost of
goods sold.
3.
In selecting a cost flow assumption management should
consider their circumstances—the type of inventory and the
flow of costs throughout the period. Management should
select the method that will best match their costs with their
revenues.
The FIFO cost flow assumption produces the more meaningful
inventory amount for the balance sheet because the units are
costed at the most recent purchases. The FIFO method is
most likely to approximate actual physical flow because the
oldest goods are usually sold first to minimize spoilage and
obsolescence.
The weighted average cost flow assumption produces the
more meaningful gross profit / net income because the cost of
more recent purchases are matched against sales. At least,
more so than occurs with FIFO, which matches the cost of the
earliest purchases against sales revenue. Average also
smoothes these costs, using an average of all costs during
6-23
the period rather than matching the cost of any specific time
period.
Sincerely,
6-24
PROBLEM 6-8A
(a) Amelia Company—Purchaser
GENERAL JOURNAL
Account Titles and Explanation
Date
July
5
8
10
15
16
20
25
Debit
Purchases .........................................................
Cash ...........................................................
540
Cash ..................................................................
Sales ..........................................................
495
Sales Returns ...................................................
Cash ...........................................................
110
Purchases .........................................................
Cash ...........................................................
200
Accounts Payable ............................................
Purchase Returns and Allowances..........
40
Cash ..................................................................
Sales ..........................................................
540
Purchases .........................................................
Cash ...........................................................
65
6-25
Credit
540
495
110
200
40
540
65
PROBLEM 6-8A (Continued)
(b) Karina Company—Seller
GENERAL JOURNAL
Account Titles and Explanation
Date
July
5
15
16
25
Debit
Cash ..................................................................
Sales ..........................................................
540
Cash ..................................................................
Sales ..........................................................
200
Sales Returns and Allowances .......................
Cash ...........................................................
40
Cash ..................................................................
Sales ..........................................................
65
(c)
COST OF GOODS AVAILABLE FOR SALE
Date
Cost
July 1
July 5
July 15
July 16
July 25
Explanation
Units
Beginning inventory
Purchase
Purchase
Purchase return
Purchase
Total
25
60
25
(5)
10
115
Unit Cost
$10.00
9.00
8.00
8.00
6.50
Credit
540
200
40
65
Total
$ 250
540
200
(40)
65
$1,015
Weighted average unit cost = $1,015 ÷ 115 = $8.83
Ending inventory = 201 x $8.83 = $176.60
1
115 – 45 + 10 - 60 = 20
(d) Ending inventory:
Cost: 20 x $8.83 = $176.60
Market: 20 x $7 = $140
The ending inventory should be valued at $140, the lower of cost
and market.
6-26
BYP 6-1 FINANCIAL REPORTING PROBLEM
(a) The categories of inventory include merchandise held for
resale, and supplies.
(b)
Inventory
June 24, 2000
$107 thousand
June 30, 1999
$103 thousand
(1) 2000: $107 ÷ $5,416 = 2.0%
1999: $103 ÷ $24,990 = 0.4%
(2) 2000: $107 ÷ $20,844 = 0.5%
1999: $103 ÷ $21,465 = 0.5%
Inventory as a percentage of current assets was higher in 2000
than in 1999. Inventory as a percentage of total revenue was
substantially unchanged between 1999 and 2000. The company
had smaller inventories, in both absolute and relative terms, at
the end of 1999 than it did in 2000.
(c) Inventories are valued at the lower of cost or net realizable
value, with cost being determined substantially on a first-in
first-out basis. A different cost flow assumption would affect
The Second Cup’s results, if the price of coffee increases or
decreases greatly during the course of the year. Although given
the low level of inventory in relation to total revenue, the effect
may not be material.
(d) The Second Cup does not disclose any information regarding
its cost of goods sold, other than indirectly through its
inventory valuation disclosure–as indicated in part (c) above.
6-27
BYP 6-2 INTERPRETING FINANCIAL STATEMENTS
(a) Using a perpetual system will enable the coffee chain to keep its
gross profit and inventory up-to-date in a time of changing
prices.
(b) In a period of changing prices, the cost flow assumption can
have a significant impact on income and on evaluations based
on income. By using an average cost flow assumption,
variations in price will be smoothed and therefore net income
will be smoothed as well. Using the average cost flow
assumption allows the coffee chain to average its changing
inventory prices and avoid a distortion of net income in any one
period.
6-28
BYP 6-3 INTERPRETING FINANCIAL STATEMENTS
(a) General Motors’ inventories are reported in the balance sheet at
their cost, which is less than their market value (replacement
cost or net realizable value). If their market value was less than
their cost, generally accepted accounting principles would
require that the inventories be reported at the lower of cost and
market value.
(b) GM presents their inventory information using both LIFO and
FIFO for several reasons:
 U.S. accounting standards require companies to disclose the
current (or replacement) cost of ending inventory because of
their concerns that inventory under LIFO may be
substantially undervalued;
 converting the information into FIFO shows the inventory at a
figure closer to its replacement cost, which may be more
meaningful to some decision makers. It also allows more
meaningful analysis, including calculations of the current
and inventory turnover ratios; and
 because GM reports throughout the world, presenting
inventories using both FIFO and LIFO makes comparisons
easier for its users.
(c) The LIFO cost flow assumption means that the oldest costs are
assigned to ending inventory. If its inventory under LIFO is less
than under FIFO, prices must be rising.
6-29
BYP 6-3 (Continued)
(d) LIFO is often used primarily because of income tax benefits in
the U.S. (where it is permitted for tax purposes). In addition, it
is used to better match current costs to current revenues. Many
companies also use other cost flow assumptions, such as FIFO
or average cost, for reasons such as:
 extensive record keeping costs may result under LIFO, where
inventory turnover is very high in certain product lines;
 unwanted involuntary liquidations may result under LIFO in
certain product lines, where inventory levels are unstable;
and
 certain product lines can be more susceptible to deflation
instead of inflation.
(e) This may be due to income tax regulations, which differ
between countries. For example, LIFO is acceptable for tax
purposes in the U.S., but not in Canada. It may also be due to
different economic situations (inflationary conditions, etc.) from
country to country, which affect the appropriateness of
alternative inventory cost flow assumptions.
6-30
(a)
BYP 6-5 COLLABORATIVE LEARNING ACTIVITY
(1) Sales .........................................................
Cash sales ($18,500 x 40%) ....................
Acknowledged credit sales April 1 – 10 .
Sales made but not acknowledged ........
Sales as of April 10 ..................................
(2)
Purchases ................................................
Cash purchases April 1-10......................
Credit purchases .....................................
Less: Items in transit ...............................
Purchases as of April 10 .........................
(b)
Gross profit margin ........................................
Average gross profit margin (34% + 30%) ÷ 2
(c)
(d)
$94,000
4,200
$12,400
1,800
2002
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 .....................................................
$180,000
7,400
28,000
4,600
$220,000
10,600
$108,800
2001
$600,000 $480,000
60,000
40,000
416,000 356,000
476,000 396,000
80,000
60,000
396,000 336,000
$204,000 $144,000
34%
30%
32%
Sales .................................................................
Less: Gross profit ($220,000 x 32%) ..............
Cost of goods sold ..........................................
$220,000
70,400
$149,600
Inventory, January 1 ........................................
Purchases ........................................................
Cost of goods available for sale .....................
Cost of goods sold (68% of $220,000)............
Estimated inventory at the time of fire ...........
$ 80,000
108,800
188,800
149,600
$ 39,200
Estimated inventory at the time of the fire ....
Less: Inventory salvaged ................................
Estimated inventory loss ................................
$39,200
19,000
$20,200
6-31
BYP 6-8
ETHICS CASE
(a) 1. Maximize gross profit–select lowest cost inventory for cost of
goods sold
Sales [(500 x $650) + (180 x $600)] .................
Cost of goods sold
[(150 x $300) + (200 x $350) + (330 x $375)] .
Gross profit .....................................................
$433,000
238,750
$194,250
2. Minimize gross profit–select highest cost inventory for cost of
goods sold
(b)
Sales [(500 x $650) + (180 x $600)] .................
Cost of goods sold
[(130 x $300) + (200 x $350) + (350 x $375)] .
Gross profit .....................................................
$433,000
Difference ........................................................
$1,500
Reconciliation of difference
20 x ($375 - $300) ...........................................
$1,500
240,250
$192,750
Average cost flow assumption
Sales [(500 x $650) + (180 x $600)] .................
Cost of goods sold [((150 x $300) +
(200 x $350) + (350 x $375)) ÷ 700 x 680] .....
Gross profit .....................................................
$433,000
239,214
$193,786
(c)
The stakeholders are the investors and creditors of Quality
Diamonds. Choosing which diamonds to sell in a month is
unethical because it is managing income–it is not based on fact
as the diamonds are all identical.
(d)
Quality Diamonds should select the weighted average cost flow
assumption. The specific identification method is not appropriate
because all items are identical. Using the weighted average cost
flow assumption in a time of rising prices will smooth out
variations in prices and result in reasonable values for both the
income statement and balance sheet.
6-32