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Chapter 6 - Inventory and Cost of Goods Sold
Chapter 6
Inventory and Cost of Goods Sold
REVIEW QUESTIONS
Question 6-1 (LO 6-1)
Inventory includes items a company intends for sale to customers. Inventory also includes items that
are not yet finished products. The cost of inventory that has not been sold by the end of the reporting
period is reported in the balance sheet as an asset. The cost of inventory that has been sold during the
reporting period is reported as an expense (cost of goods sold) in the income statement.
Question 6-2 (LO 6-1)
Service companies earn revenues by providing services to their customers. Manufacturing or
merchandising companies earn revenues by selling inventory rather than a service.
Question 6-3 (LO 6-1)
Raw materials inventory includes the cost of components that will become part of the finished
product but have not yet been used in production. Work-in-process inventory refers to the products
that have started the production process but are not yet complete at the end of the period. The cost of
work in process inventory includes the cost of raw materials used in production, the cost of direct
labor that we can trace directly to the goods in process, and an allocated portion of other
manufacturing costs, called overhead. Finished goods inventory is the cost of fully assembled but
unshipped inventory at the end of the reporting period.
Question 6-4 (LO 6-2)
The cost of goods (or inventory) available for sale equals the cost of beginning inventory plus
additional purchases during the reporting period. By subtracting the cost of ending inventory at the
end of the reporting period from the cost of goods available for sale, we calculate cost of goods sold
during the reporting period.
Question 6-5 (LO 6-2)
The balance of cost of goods sold in the income statement represents the cost of inventory sold
during the period. For a company like Radio Shack, this would include inventory sold such as
phones, CD players, portable radios, cameras, camcorders, DVD players, computers, and other
electronic devices and accessories. The balance of inventory in the balance sheet represents the cost
of inventory not sold by the end of the reporting period.
Question 6-6 (LO 6-2)
A multiple-step income statement reports multiple levels of profitability. Gross profit equals net
sales minus cost of goods sold. Operating income equals gross profit minus operating expenses.
Income before income taxes equals operating income plus non-operating revenues and minus nonoperating expenses. Net income equals all revenues minus all expenses.
Solutions Manual, Chapter 6
© The McGraw-Hill Companies, Inc., 2014
6-1
Chapter 6 - Inventory and Cost of Goods Sold
Answers to Review Questions (continued)
Question 6-7 (LO 6-3)
Because of the large number of inventory transactions for most companies and the high volatility in
many inventory costs, it is not possible or cost effective to identify the cost of each item sold.
Therefore, assumptions are made as to which units of inventory are sold.
Question 6-8 (LO 6-3)
The three most common inventory cost flow assumptions are FIFO (first-in, first-out), LIFO (last-in,
first-out), and weighted-average cost. These methods provide assumptions as to which inventory
units are sold, whereas the specific identification method matches or identifies each unit of inventory
with its actual cost.
Question 6-9 (LO 6-4)
FIFO results in the highest reported amount for ending inventory when inventory costs are rising.
The reason is that under the FIFO method, the oldest (or first) items are sold first and these are the
lower-cost items, leaving the higher-cost items to be reported in ending inventory.
Question 6-10 (LO 6-4)
FIFO results in the highest reported amount of net income when inventory costs are rising. The
reason is that under the FIFO method, the oldest (or first) items are sold first and these are the lowercost items. Reporting cost of goods sold based on the lower-cost items results in net income being
higher.
Question 6-11 (LO 6-4)
Since FIFO assumes the first purchases sell first, the amount it reports for ending inventory (in the
balance sheet) better approximates the current cost of inventory. LIFO assumes the last purchases are
sold first, reporting the most recent inventory cost in cost of goods sold (in the income statement).
Thus, LIFO more realistically matches the current costs of inventory needed to produce current
revenues.
Question 6-12 (LO 6-4)
LIFO generally results in lower income taxes payable when inventory costs are increasing because
net income in this case is lower (than if FIFO were used). The LIFO conformity rule requires a
company that uses LIFO for tax reporting to also use LIFO for financial reporting.
Question 6-13 (LO 6-5)
The perpetual inventory system maintains a continual – or perpetual – record of inventory purchased
and sold, while the periodic system periodically adjusts for purchases and sales of inventory at the
end of the reporting period.
Question 6-14 (LO 6-5)
Freight charges add to the cost of inventory, while purchase discounts and purchase returns reduce
the cost of inventory.
© The McGraw-Hill Companies, Inc., 2014
6-2
Financial Accounting, 3e
Chapter 6 - Inventory and Cost of Goods Sold
Answers to Review Questions (continued)
Question 6-15 (LO 6-6)
We report inventory using the lower-of-cost-or-market method, that is, at cost (specific
identification, FIFO, LIFO, or weighted-average cost) or market value (normally, replacement cost),
whichever is lower. When market value falls below cost, we adjust inventory down from cost to
market value.
Question 6-16 (LO 6-6)
The cost of inventory is determined using specific identification, FIFO, LIFO, or weighted-average
cost. Market value is determined using replacement cost. Replacement cost is the cost to replace the
inventory item in its identical form.
Question 6-17 (LO 6-6)
The entry to adjust from cost to market for inventory write-downs includes a debit to cost of goods
sold (increase to expenses) and a credit to inventory (decrease to assets). The adjustment has the
following effects:
(a) assets (inventory) = decrease
(b) liabilities = no effect
(c) stockholders’ equity (or retained earnings) = decrease
(d) revenues = no effect
(e) expenses (cost of goods sold) = increase
(f) net income = decrease
Question 6-18 (LO 6-6)
Firms are required to report the falling value of inventory but not allowed to report the increasing
value of inventory. Conservative accounting implies that there is more potential harm to users of
financial statements if estimated gains turn out to be wrong than if estimated losses turn out to be
wrong. Therefore, companies typically do not report estimated gains.
Question 6-19 (LO 6-7)
The inventory turnover ratio equals cost of goods sold divided by average inventory. The ratio shows
the number of times the firm sells its average inventory balance during a reporting period. The more
frequently a business is able to sell or “turn over” its average inventory balance, the less the company
needs to invest in inventory for a given level of sales. Typically, a higher ratio indicates greater
effectiveness of a company in managing its investment in inventory.
Solutions Manual, Chapter 6
© The McGraw-Hill Companies, Inc., 2014
6-3
Chapter 6 - Inventory and Cost of Goods Sold
Answers to Review Questions (continued)
Question 6-20 (LO 6-7)
Gross profit equals net sales minus cost of goods sold. The gross profit ratio equals gross profit
divided by net sales. The gross profit ratio measures the amount by which the sale price of inventory
exceeds its cost per dollar of sales. The higher the ratio, the higher is the “markup” a company is able
to achieve on its inventories.
Question 6-21 (LO 6-8)
Under the periodic system, the sale of inventory is recorded by increasing an asset account (cash or
accounts receivable) and increasing sales revenue. Under the perpetual system, two transactions are
recorded. The first entry is the same as that under the periodic system. The second entry involves
recording the cost of goods sold and decreasing inventory.
Question 6-22 (LO 6-8)
The purposes of the period-end adjustment are to (1) update the balance of inventory for its ending
amount, (2) record cost of goods sold, and (3) close the temporary purchases accounts to zero.
Question 6-23 (LO 6-9)
Understating ending inventory in the current year will have the following effects in the current year:
(a) assets (inventory) = understated
(b) liabilities = no effect
(c) stockholders’ equity (or retained earnings) = understated
(d) revenues = no effect
(e) expenses (cost of goods sold) = overstated
(f) net income = understated
Question 6-24 (LO 6-9)
Understating ending inventory in the current year will have the following effects in the following
year:
(a) assets (inventory) = no effect
(b) liabilities = no effect
(c) stockholders’ equity (or retained earnings) = no effect
(d) revenues = no effect
(e) expenses (cost of goods sold) = understated
(f) net income = overstated
© The McGraw-Hill Companies, Inc., 2014
6-4
Financial Accounting, 3e
Chapter 6 - Inventory and Cost of Goods Sold
BRIEF EXERCISES
Brief Exercise 6-1 (LO 6-1)
1. b.
2. a.
3. c.
Brief Exercise 6-2 (LO 6-1)
1. c.
2. a.
3. b.
Brief Exercise 6-3 (LO 6-2)
Beginning inventory
+ Purchases
Cost of goods available for sale
− Ending inventory
Cost of goods sold
Solutions Manual, Chapter 6
$ 8,000
23,000
31,000
10,000
$21,000
© The McGraw-Hill Companies, Inc., 2014
6-5
Chapter 6 - Inventory and Cost of Goods Sold
Brief Exercise 6-4 (LO 6-2)
Company
Lennon
Harrison
McCartney
Starr
a
b
Sales
Cost of
revenue goods sold
$18,000 (a) $10,000
20,000
11,000
13,000
9,000
16,000
6,000
Gross Operating
Net
a
profit expenses incomeb
$ 8,000
$3,500 $4,500
6,000
3,000
(b) 9,000
4,000 (c) 2,500
1,500
10,000
6,500 (d) 3,500
Gross profit = Sales revenue − Cost of goods sold
Net income = Gross profit − Operating expenses
© The McGraw-Hill Companies, Inc., 2014
6-6
Financial Accounting, 3e
Chapter 6 - Inventory and Cost of Goods Sold
Brief Exercise 6-5 (LO 6-3)
Date
Nov. 3
Date
Jan. 1
May 5
Nov. 3
a
Transaction
Purchase
Transaction
Beginning inventory
Purchase
Purchase
Number
of units
40
Unit
cost
$90
Ending
Inventory
$3,600
Number
of units
60
250
160
470a
Unit
cost
$82
85
90
Cost of
Goods Sold
$ 4,920
21,250
14,400
$40,570
Number
of units
40
Unit
cost
$82
Ending
Inventory
$3,280
Number
of units
20
250
200
470a
Unit
cost
$82
85
90
Cost of
Goods Sold
$ 1,640
21,250
18,000
$40,890
First 470 units purchased are assumed sold
Brief Exercise 6-6 (LO 6-3)
Date
Jan. 1
Date
Jan. 1
May 5
Nov. 3
a
Transaction
Beginning inventory
Transaction
Beginning inventory
Purchase
Purchase
Last 470 units purchased are assumed sold
Solutions Manual, Chapter 6
© The McGraw-Hill Companies, Inc., 2014
6-7
Chapter 6 - Inventory and Cost of Goods Sold
Brief Exercise 6-7 (LO 6-3)
Date
Jan. 1
May 5
Nov. 3
Transaction
Beginning inventory
Purchase
Purchase
Number
of units
60
250
200
510
Unit
cost
$82
85
90
Total
Cost
$ 4,920
21,250
18,000
$44,170
Weighted-average cost = $44,170 / 510 units = $86.6078 / unit
Ending inventory = 40 × $86.6078 = $3,464.31
Cost of goods sold = 470 × $86.6078 = $40,705.69 (rounded)
Brief Exercise 6-8 (LO 6-3)
Date
May 5
Nov. 3
Date
Jan. 1
May 5
Nov. 3
Transaction
Purchase
Purchase
Number
of units
20
20
40
Unit
cost
$85
90
Ending
Inventory
$1,700
1,800
$3,500
Transaction
Beginning inventory
Purchase
Purchase
Number
of units
60
230
180
470
Unit
cost
$82
85
90
Cost of
Goods Sold
$ 4,920
19,550
16,200
$40,670
Brief Exercise 6-9 (LO 6-4)
Inventory
Costs
Rising
Declining
Higher
total assets
FIFO
LIFO
© The McGraw-Hill Companies, Inc., 2014
6-8
Higher
cost of goods sold
LIFO
FIFO
Higher
net income
FIFO
LIFO
Financial Accounting, 3e
Chapter 6 - Inventory and Cost of Goods Sold
Brief Exercise 6-10 (LO 6-5)
February 2, 2015
Inventory
Accounts Payable
(Purchase inventory on account)
March 17, 2015
Accounts Receivable
Sales Revenue
(Sell inventory on account)
Cost of Goods Sold
Inventory
(Cost of inventory sold)
Debit
Credit
40,000
40,000
Debit
Credit
60,000
60,000
40,000
40,000
Brief Exercise 6-11 (LO 6-5)
February 2, 2015
Inventory
Accounts Payable
(Purchase inventory on account)
February 2, 2015
Inventory
Cash
(Pay freight charges)
Solutions Manual, Chapter 6
Debit
Credit
40,000
40,000
Debit
Credit
600
600
© The McGraw-Hill Companies, Inc., 2014
6-9
Chapter 6 - Inventory and Cost of Goods Sold
Brief Exercise 6-12 (LO 6-5)
February 2, 2015
Inventory
Accounts Payable
(Purchase inventory on account)
February 5, 2015
Debit
Credit
60,000
60,000
Debit
Accounts Payable
4,000
Inventory
(Return inventory purchased on account)
($4,000 = 100 units × $40 unit cost)
Credit
4,000
Brief Exercise 6-13 (LO 6-5)
February 2, 2015
Inventory
Accounts Payable
(Purchase inventory on account)
February 10, 2015
Accounts Payable
Inventory
Cash
(Pay on account with 3% discount)
($1,200 = $40,000 × 3%)
© The McGraw-Hill Companies, Inc., 2014
6-10
Debit
Credit
40,000
40,000
Debit
Credit
40,000
1,200
38,800
Financial Accounting, 3e
Chapter 6 - Inventory and Cost of Goods Sold
Brief Exercise 6-14 (LO 6-6)
Inventory
Ski jackets
Skis
Quantity
20
25
Lower-ofCost-orMarket
$ 95
300
Ending
Inventory
$1,900
7,500
$9,400
Brief Exercise 6-15 (LO 6-6)
Inventory
Optima cameras
Inspire speakers
Solutions Manual, Chapter 6
Quantity
110
50
Lower-ofCost-orMarket
$45
45
Ending
Inventory
$4,950
2,250
$7,200
© The McGraw-Hill Companies, Inc., 2014
6-11
Chapter 6 - Inventory and Cost of Goods Sold
Brief Exercise 6-16 (LO 6-7)
Inventory
turnover ratio
Average days
in inventory
Gross profit
ratio
=
Cost of goods sold
Average inventory
=
3.6 times
=
=
$180,000
($55,000 + $45,000) / 2
365
=
Inventory turnover ratio
=
101.4 days
=
Gross profit
Net sales
=
28%
=
365
3.6
($250,000 − $180,000)
$250,000
Brief Exercise 6-17 (LO 6-8)
February 2, 2015
Purchases
Accounts Payable
(Purchase inventory on account)
March 17, 2015
Accounts Receivable
Sales Revenue
(Sell inventory on account)
Debit
Credit
40,000
40,000
Debit
Credit
60,000
60,000
No entry for cost of goods sold
© The McGraw-Hill Companies, Inc., 2014
6-12
Financial Accounting, 3e
Chapter 6 - Inventory and Cost of Goods Sold
Brief Exercise 6-18 (LO 6-8)
February 2, 2015
Purchases
Accounts Payable
(Purchase inventory on account)
February 2, 2015
Freight-In
Cash
(Pay freight charges)
Debit
Credit
40,000
40,000
Debit
Credit
600
600
Brief Exercise 6-19 (LO 6-8)
February 2, 2015
Purchases
Accounts Payable
(Purchase inventory on account)
February 5, 2015
Debit
60,000
60,000
Debit
Accounts Payable
4,000
Purchase Returns
(Return inventory purchased on account)
($4,000 = 100 units × $40 unit cost)
Solutions Manual, Chapter 6
Credit
Credit
4,000
© The McGraw-Hill Companies, Inc., 2014
6-13
Chapter 6 - Inventory and Cost of Goods Sold
Brief Exercise 6-20 (LO 6-8)
February 2, 2015
Purchase
Accounts Payable
(Purchase inventory on account)
February 10, 2015
Accounts Payable
Purchase Discounts
Cash
(Pay on account with 3% discount)
($1,200 = $40,000 × 3%)
Debit
Credit
40,000
40,000
Debit
Credit
40,000
1,200
38,800
Brief Exercise 6-21 (LO 6-9)
Overstating ending inventory by $15,000 in 2015 has the following effects:
2015
Cost of goods sold is understated by $15,000.
Gross profit is overstated by $15,000.
2016
Cost of goods sold is overstated by $15,000.
Gross profit is understated by $15,000.
© The McGraw-Hill Companies, Inc., 2014
6-14
Financial Accounting, 3e
Chapter 6 - Inventory and Cost of Goods Sold
Brief Exercise 6-22 (LO 6-9)
Overstating ending inventory by $15,000 in 2015 has the following effects:
2015
Inventory is overstated by $15,000.
Retained earnings is overstated by $15,000.
2016
Inventory is not affected.
Retained earnings is not affected.
Solutions Manual, Chapter 6
© The McGraw-Hill Companies, Inc., 2014
6-15
Chapter 6 - Inventory and Cost of Goods Sold
EXERCISES
Exercise 6-1 (LO 6-2)
Beginning inventory
Add: Purchases
Cost of goods available for sale
$ 55,000
910,000
965,000
Less: Ending inventory
Cost of goods sold
(45,000)
$920,000
© The McGraw-Hill Companies, Inc., 2014
6-16
Financial Accounting, 3e
Chapter 6 - Inventory and Cost of Goods Sold
Exercise 6-2 (LO 6-2)
Wayman Corporation
Multiple-step Income Statement
For the year ended December 31, 2015
Sales revenue
$390,000
Cost of goods sold
130,000
$260,000
Gross profit
Salaries expense
40,000
Utilities expense
50,000
Advertising expense
30,000
Total operating expenses
120,000
140,000
Operating income
Interest expense
Income before income taxes
Income tax expense
Net income
Solutions Manual, Chapter 6
20,000
120,000
50,000
$ 70,000
© The McGraw-Hill Companies, Inc., 2014
6-17
Chapter 6 - Inventory and Cost of Goods Sold
Exercise 6-3 (LO 6-2)
Requirement 1
Tisdale Incorporated
Multiple-step Income Statement
For the year ended December 31, 2015
Net sales
$300,000
Cost of goods sold
190,000
$110,000
Gross profit
Selling expenses
60,000
General expenses
50,000
Administrative expenses
40,000
Total operating expenses
150,000
(40,000)
Operating income (loss)
Nonoperating revenue
Income before income taxes
Income tax expense
Net income
110,000
70,000
30,000
$ 40,000
Requirement 2
While Tisdale Incorporated is able to report positive net income ($40,000), the
company does not appear to have much profit-generating potential. For its core
operations, the company reports a negative operat
means that normal operations are not profitable. These are the operations that
continue into the next year. Investors should not count on nonoperating revenue
($110,000) to recur.
© The McGraw-Hill Companies, Inc., 2014
6-18
Financial Accounting, 3e
Chapter 6 - Inventory and Cost of Goods Sold
Exercise 6-4 (LO 6-3)
Requirement 1 FIFO
(a)
Date
Oct. 6
Transaction
Purchase
Number
of units
50
Unit
cost
$48
Ending
Inventory
$2,400
Number
of units
50
130
200
60
440a
Unit
cost
$42
44
47
48
Cost of
Goods Sold
$ 2,100
5,720
9,400
2,880
$20,100
(b)
Date
Jan. 1
Apr. 7
Jul. 16
Oct. 6
a
Transaction
Beginning inventory
Purchase
Purchase
Purchase
First 440 units purchased are assumed sold
(c) Sales revenue = 440 units × $60 = $26,400
(d) Gross profit
= $26,4
Solutions Manual, Chapter 6
20,100 = $6,300
© The McGraw-Hill Companies, Inc., 2014
6-19
Chapter 6 - Inventory and Cost of Goods Sold
Exercise 6-4 (continued)
Requirement 2 LIFO
(a)
Date
Jan. 1
Transaction
Beginning Inventory
Number
of units
50
50
Unit
cost
$42
Ending
Inventory
$2,100
$2,100
Transaction
Purchase
Purchase
Purchase
Number
of units
130
200
110
440a
Unit
cost
$44
47
48
Cost of
Goods Sold
$ 5,720
9,400
5,280
$20,400
(b)
Date
Apr. 7
Jul. 16
Oct. 6
a
Last 440 units purchased are assumed sold
(c) Sales revenue = 440 units × $60 = $26,400
(d) Gross profit = Sales revenue
= $26,4
© The McGraw-Hill Companies, Inc., 2014
6-20
20,400 = $6,000
Financial Accounting, 3e
Chapter 6 - Inventory and Cost of Goods Sold
Exercise 6-4 (concluded)
Requirement 3 Weighted average
Date
Jan. 1
Apr. 7
Jul. 16
Oct. 6
Transaction
Beginning Inventory
Purchase
Purchase
Purchase
Number
of units
50
130
200
110
490
Unit
cost
$42
44
47
48
Total
cost
$ 2,100
5,720
9,400
5,280
$22,500
Weighted-average cost = $22,500 / 490 units = $45.91837
(a) Ending inventory = 50 units × $45.91837 = $2,295.92
(b) Cost of goods sold = 440 units × $45.91837 = 20,204.08
(c) Sales revenue = 440 units × $60 = $26,400
(d) Gross profit = Sales revenue
= $26,4
20,204.08 = $6,195.92
Requirement 4
Gross profit
FIFO
LIFO
Weightedaverage
$6,300
$6,000
$6,195.92
FIFO results in higher profitability when inventory costs are rising.
Solutions Manual, Chapter 6
© The McGraw-Hill Companies, Inc., 2014
6-21
Chapter 6 - Inventory and Cost of Goods Sold
Exercise 6-5 (LO 6-3)
Requirement 1 FIFO
(a)
Date
Transaction
Nov. 11 Purchase
Number
of units
24
Unit
cost
$18
Ending
Inventory
$432
Number
of units
20
25
30
6
81a
Unit
cost
$22
21
20
18
Cost of
Goods Sold
$ 440
525
600
108
$1,673
(b)
Date
Jan. 1
Mar. 4
Jun. 9
Nov. 11
a
Transaction
Beginning inventory
Purchase
Purchase
Purchase
First 81 units purchased are assumed sold
(c) Sales revenue = 81 units × $30 = $2,430
(d) Gross profit = Sales revenue
= $2,43
© The McGraw-Hill Companies, Inc., 2014
6-22
1,673 = $757
Financial Accounting, 3e
Chapter 6 - Inventory and Cost of Goods Sold
Exercise 6-5 (continued)
Requirement 2 LIFO
(a)
Date
Jan. 1
Mar. 4
Transaction
Beginning Inventory
Purchase
Number
of units
20
4
24
Unit
cost
$22
21
Ending
Inventory
$440
84
$524
Number
of units
21
30
30
81*
Unit
cost
$21
20
18
Cost of
Goods Sold
$ 441
600
540
$1,581
(b)
Date
Transaction
Mar. 4 Purchase
Jun. 9
Purchase
Nov. 11 Purchase
* Last 81 units purchased are assumed sold
(c) Sales revenue = 81 units × $30 = $2,430
(d) Gross profit = Sales revenue
= $2,43
Solutions Manual, Chapter 6
1,581 = $849
© The McGraw-Hill Companies, Inc., 2014
6-23
Chapter 6 - Inventory and Cost of Goods Sold
Exercise 6-5 (concluded)
Requirement 3 Weighted average
Date
Jan. 1
Mar. 4
Jun. 9
Nov. 11
Transaction
Beginning Inventory
Purchase
Purchase
Purchase
Number
of units
20
25
30
30
105
Unit
cost
$22
21
20
18
Total
Cost
$ 440
525
600
540
$2,105
Weighted-average cost = $2,105 / 105 units = $20.04762
(a) Ending inventory = 24 units × $20.04762 = $481.14
(b) Cost of goods sold = 81 units × $20.04762 = $1,623.86
(c) Sales revenue = 81 units × $30 = $2,430
(d) Gross profit = Sales revenue
= $2,43
1,623.86 = $806.14
Requirement 4
Gross profit
FIFO
LIFO
Weightedaverage
$757
$849
$806.14
LIFO results in higher profitability when inventory costs are declining.
© The McGraw-Hill Companies, Inc., 2014
6-24
Financial Accounting, 3e
Chapter 6 - Inventory and Cost of Goods Sold
Exercise 6-6 (LO 6-5)
Debit
Inventory
Accounts Payable
(Purchase inventory on account)
310,000
310,000
Debit
Accounts Receivable
Sales Revenue
(Sell inventory on account)
520,000
Cost of Goods Sold
Inventory
(Cost of inventory sold)
335,000
Solutions Manual, Chapter 6
Credit
Credit
520,000
335,000
© The McGraw-Hill Companies, Inc., 2014
6-25
Chapter 6 - Inventory and Cost of Goods Sold
Exercise 6-7 (LO 6-5)
June 5
Debit
Inventory
Accounts Payable
(Purchase inventory on account)
4,000
June 9
Debit
4,000
Accounts Payable
800
Inventory
(Return inventory purchased on account)
($800 = 40 units × $20 unit cost)
June 16
Debit
Accounts Receivable
Sales Revenue
(Sell inventory on account)
($5,600 = 160 units × $35 unit price)
5,600
Cost of Goods Sold
Inventory
(Record cost of inventory sold)
3,200
© The McGraw-Hill Companies, Inc., 2014
6-26
Credit
Credit
800
Credit
5,600
3,200
Financial Accounting, 3e
Chapter 6 - Inventory and Cost of Goods Sold
Exercise 6-8 (LO 6-5)
Requirement 1
June 5
Debit
Inventory
Accounts Payable
(Purchase inventory on account)
3,800
June 12
Debit
Accounts Payable
Inventory
Cash
(Pay on account with 2% discount)
($76 = $3,800 × 2%)
3,800
Requirement 2
June 22
Accounts Payable
Cash
(Pay on account)
Solutions Manual, Chapter 6
Credit
3,800
Credit
76
3,724
Debit
Credit
3,800
3,800
© The McGraw-Hill Companies, Inc., 2014
6-27
Chapter 6 - Inventory and Cost of Goods Sold
Exercise 6-9 (LO 6-5)
Requirement 1
May 2
Debit
Inventory
Accounts Payable
(Purchase inventory on account)
May 3
Credit
3,300
3,300
Inventory
Cash
(Pay freight-in cost)
May 5
200
Accounts Payable
Inventory
(Return inventory on account)
May 10
400
200
400
Accounts Payable
Inventory
Cash
(Pay on account with 1% discount)
($29 = $2,900 × 1%)
2,900
29
2,871
May 30
a
Accounts Receivable
Sales Revenue
(Sell inventory on account)
4,000
Cost of Goods Sold
Inventory
(Record cost of inventory sold)
3,071
$3,300 (purchase) + $200 (freight-
Requirement 2
May 24
Accounts Payable
Cash
(Pay cash on account)
© The McGraw-Hill Companies, Inc., 2014
6-28
4,000
3,071a
4
29 (discount)
Debit
Credit
2,900
2,900
Financial Accounting, 3e
Chapter 6 - Inventory and Cost of Goods Sold
Exercise 6-10 (LO 6-5)
July 5
Debit
Inventory
Accounts Payable
(Purchase inventory on account)
July 8
Accounts Payable
Inventory
(Return inventory on account)
July 13
Credit
100,000
100,000
5,000
5,000
Accounts Payable
Inventory
Cash
(Pay on account with 3% discount)
($2,850 = $95,000 × 3%)
95,000
2,850
92,150
July 28
Accounts Receivable
Sales Revenue
(Sell inventory on account)
Cost of Goods Sold
Inventory
(Record cost of inventory sold)
a
$100,0
Solutions Manual, Chapter 6
5,0
114,000
114,000
92,150
92,150a
2,850 (discount)
© The McGraw-Hill Companies, Inc., 2014
6-29
Chapter 6 - Inventory and Cost of Goods Sold
Exercise 6-11 (LO 6-5)
August 6
Inventory
Accounts Payable
(Purchase inventory on account)
Debit
Credit
14,000
14,000
August 7
Inventory
Cash
(Pay freight-in cost)
400
400
August 10
Accounts Payable
Inventory
(Return inventory on account)
1,200
1,200
August 14
Accounts Payable
12,800
Inventory
Cash
(Pay cash on account with 1% discount)
($128 = $12,800 × 1%)
128
12,672
August 23
Accounts Receivable
Sales Revenue
(Sell inventory on account)
Cost of Goods Sold
Inventory
(Record cost of inventory sold)
© The McGraw-Hill Companies, Inc., 2014
6-30
11,000
11,000
10,212.50
10,212.50
Financial Accounting, 3e
Chapter 6 - Inventory and Cost of Goods Sold
Exercise 6-12 (LO 6-5)
August 6
Accounts Receivable
Sales Revenue
(Sell inventory on account)
14,000
Cost of Goods Sold
Inventory
(Record cost of inventory sold)
12,600
14,000
12,600
August 10
Sales Returns
Accounts Receivable
(Receive return on account)
1,200
1,200
August 14
Cash
12,672
Sales Discounts
128
Accounts Receivable
(Receive cash on account with 1% discount)
($128 = $12,800 × 1%)
Solutions Manual, Chapter 6
12,800
© The McGraw-Hill Companies, Inc., 2014
6-31
Chapter 6 - Inventory and Cost of Goods Sold
Exercise 6-13 (LO 6-6)
Requirement 1
Inventory
Furniture
Electronics
Quantity
200
50
Lower-ofCost-orMarket
$ 85
300
Ending
Inventory
$17,000
15,000
$32,000
Requirement 2
Debit
Cost of Goods Sold
Inventory
(Adjust inventory down to market)
(50 units of electronics × $100)
Credit
5,000
5,000
Requirement 3
The write-down of inventory has the effect of reducing total assets (inventory),
increasing expenses (cost of goods sold), decreasing net income, and decreasing
retained earnings.
© The McGraw-Hill Companies, Inc., 2014
6-32
Financial Accounting, 3e
Chapter 6 - Inventory and Cost of Goods Sold
Exercise 6-14 (LO 6-6)
Requirement 1
Inventory
Shirts
MegaDriver
MegaDriver II
Quantity
35
15
30
Lower-ofCost-orMarket
$ 60
250
350
Ending
Inventory
$ 2,100
3,750
10,500
$16,350
Requirement 2
Debit
Cost of Goods Sold
Inventory
(Adjust inventory down to market)
(15 units of MegaDriver × $110)
Credit
1,650
1,650
Requirement 3
The write-down of inventory has the effect of reducing total assets (inventory),
increasing expenses (cost of goods sold), decreasing net income, and decreasing
retained earnings.
Solutions Manual, Chapter 6
© The McGraw-Hill Companies, Inc., 2014
6-33
Chapter 6 - Inventory and Cost of Goods Sold
Exercise 6-15 (LO 6-2, 6-7)
Requirement 1
Beginning inventory
Add: Purchases
Less: Purchase returns
Cost of goods available for sale
Lewis
$ 24,000
261,000
(15,000)
270,000
Clark
$ 50,000
235,000
(60,000)
225,000
Less: Ending inventory
Cost of goods sold
(18,000)
$252,000
(60,000)
$165,000
Requirement 2
Lewis
Inventory
$252,000
turnover = Cost of goods sold
Average inventory ($24,000 + $18,000) /2
ratio
=
12.0 times
Clark
$165,000
($50,000 + $60,000) /2
3.0 times
Requirement 3
Average
365
days in =
Inventory turnover
inventory
ratio
=
Lewis
Clark
365
12.0
365
3.0
30.4 days
121.7 days
Requirement 4
Lewis seems to be managing its inventory more efficiently. For Lewis, inventory
turns over 12 times per year. In other words, inventory sells every 30.4 days. For
Clark, its inventory turns over only three times per year or every 121.7 days.
© The McGraw-Hill Companies, Inc., 2014
6-34
Financial Accounting, 3e
Chapter 6 - Inventory and Cost of Goods Sold
Exercise 6-16 (LO 6-2, 6-7)
Requirement 1
Gross
Profita
$27,200
10,500
15,200
Henry
Grace
James
Operating
Incomeb
$22,200
(2,600)
12,200
Income Before
Income Taxesc
$20,200
(9,600)
12,200
Net
Incomed
$18,200
(9,600)
9,200
a
Gross profit = Net
Cost of goods sold
Operating income = G
Operating expenses
c
Income before income taxes = O
Nonoperating expenses
d
Net income = I
Income tax expense
b
Requirement 2
Gross
profit
ratio
=
=
Gross profit
Net sales
Henry
Grace
$27,200
$32,000
$10,500
$35,000
0.85
0.30
James
$15,200
$40,000
0.38
Henry has the most favorable gross profit ratio.
Solutions Manual, Chapter 6
© The McGraw-Hill Companies, Inc., 2014
6-35
Chapter 6 - Inventory and Cost of Goods Sold
Exercise 6-17 (LO 6-8)
Requirement 1
May 2
Debit
Purchases
Accounts Payable
(Purchase inventory on account)
May 3
3,300
3,300
Freight-In
Cash
(Pay freight-in cost)
May 5
200
Accounts Payable
Purchase Returns
(Return inventory on account)
May 10
400
200
400
Accounts Payable
2,900
Purchase Discounts
Cash
(Pay cash on account with 1% discount)
(Purchase discount = $2,900 × 1%)
May 30
Accounts Receivable
Sales Revenue
(Sell inventory on account)
Requirement 2
May 31
Cost of Goods Sold
Purchase Returns
Purchase Discounts
Purchases
Freight-In
(Record period-end adjustment)
Credit
29
2,871
4,000
4,000
Debit
3,071
400
29
Credit
3,300
200
Note: Beginning and ending inventory
amounts are zero; no entry required.
© The McGraw-Hill Companies, Inc., 2014
6-36
Financial Accounting, 3e
Chapter 6 - Inventory and Cost of Goods Sold
Exercise 6-18 (LO 6-8)
Requirement 1
July 5
Debit
Purchases
Accounts Payable
(Purchase inventory on account)
July 8
Accounts Payable
Purchase Returns
(Return inventory on account)
July 13
100,000
100,000
5,000
5,000
Accounts Payable
95,000
Purchase Discounts
Cash
(Pay cash on account with 3% discount)
($2,850 = $95,000 × 3%)
July 28
Accounts Receivable
Sales Revenue
(Sell inventory on account)
Requirement 2
July 31
Cost of Goods Sold
Purchase Returns
Purchase Discounts
Purchases
(Record period-end adjustment)
Credit
2,850
92,150
114,000
114,000
Debit
92,150
5,000
2,850
Credit
100,000
Note: Beginning and ending inventory
amounts are zero; no entry required.
Solutions Manual, Chapter 6
© The McGraw-Hill Companies, Inc., 2014
6-37
Chapter 6 - Inventory and Cost of Goods Sold
Exercise 6-19 (LO 6-9)
August 6
Debit
Purchases
Accounts Payable
(Purchase inventory on account)
August 7
14,000
14,000
Freight-In
Cash
(Pay freight-in cost)
August 10
400
400
Accounts Payable
Purchase Returns
(Return inventory on account)
August 14
1,200
1,200
Accounts Payable
12,800
Purchase Discounts
Cash
(Pay cash on account with 1% discount)
($128 = $12,800 × 1%)
August 23
Accounts Receivable
Sales Revenue
(Sell inventory on account)
128
12,672
11,000
11,000
Requirement 2
August 31
Inventory (ending)
Cost of Goods Sold
Purchase Returns
Purchase Discounts
Purchases
Freight-In
(Record period-end adjustment)
Credit
Debit
Credit
2,859.50
10,212.50
1,200.00
128.00
14,000
400
Note: Beginning inventory was zero; no
entry required.
© The McGraw-Hill Companies, Inc., 2014
6-38
Financial Accounting, 3e
Chapter 6 - Inventory and Cost of Goods Sold
Exercise 6-20 (LO 6-9)
Requirement 1
When goods are shipped FOB shipping point, title transfers from the seller to the
buyer at the time of shipment. This means that Mulligan Corporation (buyer) receives
title to the inventory when it is shipped on December 30, 2015. By not including this
inventory in its 2015 ending inventory count, the company has made an error.
Requirement 2
Balance Sheet
Year
Income Statement
Stockholders’
Cost of
Assets Liabilities
Equity
Revenues Goods Sold
Gross
Profit
Current
U
N
U
N
O
U
Following
N
N
N
N
U
O
Solutions Manual, Chapter 6
© The McGraw-Hill Companies, Inc., 2014
6-39
Chapter 6 - Inventory and Cost of Goods Sold
PROBLEMS: SET A
Problem 6-1A (LO 6-3)
Requirement 1 Specific identification
Date
Oct. 1
Oct. 30
Transaction
Beginning inventory
Purchase
Number
of units
1
7
8
Unit
cost
$900
930
Ending
Inventory
$ 900
6,510
$7,410
Number
Unit
Cost of
Date
Transaction
of units
cost
Goods Sold
a
Oct. 1
Beginning inventory
4
$900
$ 3,600
b
Oct. 1
Beginning inventory
1
900
900
b
Oct. 10 Purchase
2
910
1,820
c
Oct. 10 Purchase
3
910
2,730
c
Oct. 20 Purchase
4
920
3,680
14
$12,730
a
b
c
From the October 4 sale; From the October 13 sale; From the October 28 sale.
Requirement 2 FIFO
Date
Oct. 20
Oct. 30
Date
Oct. 1
Oct. 10
Oct. 20
a
Transaction
Purchase
Purchase
Number
of units
1
7
8
Unit
cost
$920
930
Ending
Inventory
$ 920
6,510
$7,430
Transaction
Beginning inventory
Purchase
Purchase
Number
of units
6
5
3
14a
Unit
cost
$900
910
920
Cost of
Goods Sold
$ 5,400
4,550
2,760
$12,710
First 14 units purchased are assumed sold
© The McGraw-Hill Companies, Inc., 2014
6-40
Financial Accounting, 3e
Chapter 6 - Inventory and Cost of Goods Sold
Problem 6-1A (concluded)
Requirement 3 LIFO
Date
Oct. 1
Oct. 10
Date
Oct. 10
Oct. 20
Oct. 30
a
Transaction
Beginning inventory
Purchase
Number
of units
6
2
8
Unit
Cost
$900
910
Ending
Inventory
$5,400
1,820
$7,220
Transaction
Purchase
Purchase
Purchase
Number
of units
3
4
7
14a
Unit
Cost
$910
920
930
Cost of
Goods Sold
$ 2,730
3,680
6,510
$12,920
Last 14 units purchased are assumed sold
Requirement 4 Weighted average
Date
Oct. 1
Oct. 10
Oct. 20
Oct. 30
Transaction
Beginning inventory
Purchase
Purchase
Purchase
Number
of units
6
5
4
7
22
Unit
cost
$900
910
920
930
Total
Cost
$ 5,400
4,550
3,680
6,510
$20,140
Weighted-average cost = $20,140 / 22 units = $915.45 (rounded)
Ending inventory = 8 units × $915.45 = $7,323.60
Cost of goods sold = 14 units × $915.45 = $12,816.30
Solutions Manual, Chapter 6
© The McGraw-Hill Companies, Inc., 2014
6-41
Chapter 6 - Inventory and Cost of Goods Sold
Problem 6-2A (LO 6-3, 6-4, 6-5)
Requirement 1 Specific identification
Date
Mar. 1
Mar. 9
Mar. 22
Mar. 30
Transaction
Beginning inventory
Purchase
Purchase
Purchase
Number
of units
1
2
2
9
14
Unit
cost
$250
270
280
300
Ending
Inventory
$ 250
540
560
2,700
$4,050
Number
Unit
Cost of
Date
Transaction
of units
cost
Goods Sold
a
Mar. 1 Beginning inventory
15
$250
$3,750
b
Mar. 9 Purchase
8
270
2,160
c
Mar. 1 Beginning inventory
4
250
1,000
c
Mar. 22 Purchase
8
280
2,240
35
$9,150
a
b
c
From the March 5 sale; From the March 17 sale; From the March 27 sale.
Requirement 2 FIFO
Date
Transaction
Mar. 22 Purchase
Mar. 30 Purchase
Number
of units
5
9
14
Unit
cost
$280
300
Ending
Inventory
$1,400
2,700
$4,100
Date
Transaction
Mar. 1 Beginning inventory
Mar. 9 Purchase
Mar. 22 Purchase
Number
of units
20
10
5
35a
Unit
cost
$250
270
280
Cost of
Goods Sold
$5,000
2,700
1,400
$9,100
a
First 35 units purchased are assumed sold
© The McGraw-Hill Companies, Inc., 2014
6-42
Financial Accounting, 3e
Chapter 6 - Inventory and Cost of Goods Sold
Problem 6-2A (continued)
Requirement 3 LIFO
Date
Mar. 1
Date
Mar. 1
Mar. 9
Mar. 22
Mar. 30
a
Transaction
Beginning inventory
Transaction
Beginning inventory
Purchase
Purchase
Purchase
Number
of units
14
Unit
cost
$250
Ending
Inventory
$3,500
Number
of units
6
10
10
9
35a
Unit
cost
$250
270
280
300
Cost of
Goods Sold
$1,500
2,700
2,800
2,700
$9,700
Last 35 units purchased are assumed sold
Requirement 4 Weighted average
Date
Mar. 1
Mar. 9
Mar. 22
Mar. 30
Transaction
Beginning inventory
Purchase
Purchase
Purchase
Number
of units
20
10
10
9
49
Unit
cost
$250
270
280
300
Total
Cost
$ 5,000
2,700
2,800
2,700
$13,200
Weighted-average cost = $13,200 / 49 units = $269.3878 (rounded)
Ending inventory = 14 units × $269.3978 = $3,771.43
Cost of goods sold = 35 units × $269.3978 = $9,428.57
Solutions Manual, Chapter 6
© The McGraw-Hill Companies, Inc., 2014
6-43
Chapter 6 - Inventory and Cost of Goods Sold
Problem 6-2A (concluded)
Requirement 5
Sales revenue
Cost of goods sold
Gross profit
Specific
Identification
$15,300
9,150
$ 6,150
FIFO
$15,300
9,100
$ 6,200
LIFO
$15,300
9,700
$ 5,600
Weightedaverage
Cost
$15,300.00
9,428.57
$ 5,871.43
Requirement 6
FIFO provides the more meaningful measure of ending inventory. The amount of
ending inventory reported using FIFO ($4,100) compared to LIFO ($3,500) better
approximates the current cost of inventory at the end of the period ($300 per unit × 14
units = $4,200).
Requirement 7
March 31
Cost of Goods Sold
Inventory
(Record the LIFO adjustment)
Debit
Credit
600
600*
* The LIFO adjustment equals the difference in inventory reported using FIFO
($4,100) versus using LIFO ($3,500). The LIFO adjustment equals $600.
© The McGraw-Hill Companies, Inc., 2014
6-44
Financial Accounting, 3e
Chapter 6 - Inventory and Cost of Goods Sold
Problem 6-3A (LO 6-2, 6-5)
Requirement 1
July 3
Debit
Inventory
Accounts Payable
(Purchase inventory on account)
July 4
2,300
2,300
Inventory
Cash
(Pay freight-in)
July 9
110
Accounts Payable
Inventory
(Return inventory on account)
July 11
200
110
200
Accounts Payable
Inventory
Cash
(Pay on account less 1% discount)
($21 = $2,100 × 1%)
July 12
2,100
Accounts Receivable
Sales Revenue
(Sell inventory on account)
5,800
Cost of Goods Sold
Inventory
(Record cost of inventory sold)
July 15
3,000
Cash
5,800
Accounts Receivable
(Receive cash on account)
Solutions Manual, Chapter 6
Credit
21
2,079
5,800
3,000
5,800
© The McGraw-Hill Companies, Inc., 2014
6-45
Chapter 6 - Inventory and Cost of Goods Sold
Problem 6-3A (concluded)
Requirement 1 (continued)
July 18
Debit
Inventory
Accounts Payable
(Purchase inventory on account)
July 22
3,100
Cash
4,200
3,100
Sales Revenue
(Sell inventory for cash)
Cost of Goods Sold
Inventory
(Record cost of inventory sold)
July 28
Accounts Payable
Inventory
(Return inventory on account)
July 30
Accounts Payable
Cash
(Pay cash on account)
Credit
4,200
2,500
2,500
300
300
2,800
2,800
Requirement 2
CD City
Multiple-step Income Statement (partial)
For the month of July
Net sales
Cost of goods sold
Gross profit
© The McGraw-Hill Companies, Inc., 2014
6-46
$10,000
5,500
$ 4,500
Financial Accounting, 3e
Chapter 6 - Inventory and Cost of Goods Sold
Problem 6-4A (LO 6-6)
Requirement 1
Inventory
items
Vans
Trucks
2-door sedans
4-door sedans
Sports cars
SUVs
Quantity
4
7
3
5
1
6
Cost
Per unit
$27,000
18,000
13,000
17,000
37,000
30,000
Total
Cost
$108,000
126,000
39,000
85,000
37,000
180,000
$575,000
Requirement 2
Inventory
items
Vans
Trucks
2-door sedans
4-door sedans
Sports cars
SUVs
Total
Quantity
4
7
3
5
1
6
Cost
Per unit
$27,000
18,000
13,000
17,000
37,000
30,000
Market
(replacement cost)
per unit
$25,000
17,000
15,000
20,000
40,000
28,000
Lower of
cost or
market
Total
$25,000 $100,000
17,000
119,000
13,000
39,000
17,000
85,000
37,000
37,000
28,000
168,000
$548,000
Requirement 3
Because the total of lower of cost or market ($548,000) is less than total cost
($575,000), inventory is written down for the difference ($27,000).
Debit
Credit
Cost of Goods Sold
27,000
Inventory
27,000
(Write down inventory to market value)
Requirement 4
The write-down of inventory from cost to market value reduces total assets and
increases total expenses, leading to lower net income and lower retained earnings.
Solutions Manual, Chapter 6
© The McGraw-Hill Companies, Inc., 2014
6-47
Chapter 6 - Inventory and Cost of Goods Sold
Problem 6-5A (LO 6-3, 6-6)
Requirement 1 FIFO
Date
Transaction
Mar. 12 Purchase
Sep. 17 Purchase
Number
of units
40
60
100
Unit
cost
$16
9
Number
Unit
Date
Transaction
of units
Cost
Jan. 1
Beginning inventory
120
$21
Mar. 12 Purchase
50
16
a
170
a
First 170 units purchased are assumed sold
Ending
Inventory
$ 640
540
$1,180
Cost of
Goods Sold
$2,520
800
$3,320
Requirement 2 LIFO
Date
Jan. 1
Transaction
Beginning inventory
Number
of units
100
Unit
cost
$21
Number
Unit
Date
Transaction
of units
cost
Jan. 1
Beginning inventory
20
$21
Mar. 12 Purchase
90
16
Sep. 17 Purchase
60
9
a
170
a
Last 170 units purchased are assumed sold
© The McGraw-Hill Companies, Inc., 2014
6-48
Ending
Inventory
$2,100
Cost of
Goods Sold
$ 420
1,440
540
$2,400
Financial Accounting, 3e
Chapter 6 - Inventory and Cost of Goods Sold
Problem 6-5A (concluded)
Requirement 3
Ending Inventory
Cost
Market
Lower-of-costor-market
FIFO
$ 1,180a
$500
$500
LIFO
2,100b
500
500
a
b
Ending inventory from Requirement 1 above.
Ending inventory from Requirement 2 above.
(a) FIFO
Cost of Goods Sold
Inventory
(Adjust inventory to market value)
(b) LIFO
Cost of Goods Sold
Inventory
(Adjust inventory to market value)
Solutions Manual, Chapter 6
Debit
Credit
680
680
1,600
1,600
© The McGraw-Hill Companies, Inc., 2014
6-49
Chapter 6 - Inventory and Cost of Goods Sold
Problem 6-6A (LO 6-2, 6-3, 6-4, 6-5, 6-6)
Requirement 1
October 4
Inventory
Accounts Payable
(Purchase inventory on account)
October 5
Debit
6,500
6,500
Inventory
Cash
(Pay freight-in)
October 9
600
Accounts Payable
Inventory
(Return inventory on account)
October 12
500
Accounts Payable
Inventory
Cash
(Pay on account less 2% discount)
($120 = $6,000 × 2%)
October 15
Accounts Receivable
Sales Revenue
(Sell inventory on account)
600
500
6,000
120
5,880
12,800
12,800
Cost of Goods Sold
8,440
Inventory
(Record cost of inventory sold)
($8,440 = ($50 × 50 units) + ($54 × 110 units))
October 19
Cash
Credit
8,440
12,800
Accounts Receivable
(Receive cash on account)
© The McGraw-Hill Companies, Inc., 2014
6-50
12,800
Financial Accounting, 3e
Chapter 6 - Inventory and Cost of Goods Sold
Problem 6-6A (continued)
Requirement 1 (continued)
October 20
Debit
Inventory
Accounts Payable
(Purchase inventory on account)
October 22
7,000
Cash
8,000
7,000
Sales Revenue
(Sell inventory for cash)
8,000
Cost of Goods Sold
6,840
Inventory
(Record cost of inventory sold)
($6,840 = ($54 × 10 units) + ($70 × 90 units))
Requirement 2
October 31
Cost of Goods Sold
Inventory
(Record LIFO adjustment)
Credit
Debit
6,840
Credit
200
200*
* Ending inventory using LIFO ($500 = $50 × 10 units) is $200 less than ending
inventory using FIFO ($700 = $70 × 10 units).
Solutions Manual, Chapter 6
© The McGraw-Hill Companies, Inc., 2014
6-51
Chapter 6 - Inventory and Cost of Goods Sold
Problem 6-6A (concluded)
Requirement 3
October 31
Debit
Cost of Goods Sold
Inventory
(Adjust inventory down to market)
Credit
150
150*
* The market value of ending inventory ($350 = $35 market value × 10 units) is $150
less than ending inventory after the LIFO adjustment ($500 from Requirement 2).
Requirement 4
Bowser Co.
Multiple-step Income Statement (partial)
For the month of October
Net sales
Cost of goods sold*
Gross profit
$20,800
15,630
$ 5,170
* Cost of goods sold equals the cost of the units sold ($15,280) + LIFO adjustment
($200) + write down to market value ($150).
© The McGraw-Hill Companies, Inc., 2014
6-52
Financial Accounting, 3e
Chapter 6 - Inventory and Cost of Goods Sold
Problem 6-7A (LO 6-2, 6-7)
Requirement 1
Baskin-Robbins
Multiple-step Income Statement
For the month of July, 2015
Net sales:
Total sales revenue
Less: Sales returns
Net sales revenue
Cost of goods sold
Gross profit
Operating expenses:
Salaries
Utilities
Rent
Total
Operating income
Non-operating items:
Interest income
Interest expense
Total
Income before income taxes
Income tax expense
Net income
Solutions Manual, Chapter 6
$69,800
(1,100)
$68,700
28,700
40,000
13,700
3,600
6,700
24,000
16,000
3,300
(400)
2,900
18,900
6,000
$12,900
© The McGraw-Hill Companies, Inc., 2014
6-53
Chapter 6 - Inventory and Cost of Goods Sold
Problem 6-7A (concluded)
Requirement 2
Inventory
turnover
ratio
=
Cost of goods sold
Average inventory
=
$28,700
($1,100 + $2,300) /2
=
16.9
This ratio will likely be lower in December when inventory is being sold at a much
slower pace due to ice cream sales being less popular in colder months.
Requirement 3
Gross
profit
ratio
=
Gross profit
Net sales
=
$40,000
$68,700
0.58
© The McGraw-Hill Companies, Inc., 2014
6-54
Financial Accounting, 3e
Chapter 6 - Inventory and Cost of Goods Sold
Problem 6-8A (LO 6-7)
Requirement 1
Inventory
turnover
ratio
=
Cost of goods sold
Average inventory
Company 1
Company 2
=
$180,000
$40,000
$330,000
$30,000
=
4.5
11
Company 1
Company 2
=
$220,000
$400,000
$70,000
$400,000
=
0.55
0.175
Requirement 2
Gross
profit
ratio
=
Gross profit
Net sales
Requirement 3
Company 1 is likely St. Jude and Company 2 is likely Wawa. The reason is that
convenient stores are likely to sell their inventory quickly, resulting in a higher
inventory turnover ratio. In addition, competition among common goods (such as
grocery-related items) reduces gross profit. Selling highly specialized medical
equipment is likely to result in a higher gross profit ratio but lower inventory
turnover.
Solutions Manual, Chapter 6
© The McGraw-Hill Companies, Inc., 2014
6-55
Chapter 6 - Inventory and Cost of Goods Sold
Problem 6-9A (LO 6-8)
Requirement 1
July 3
Purchases
Accounts Payable
(Purchase inventory on account)
July 4
Debit
2,300
2,300
Freight-In
Cash
(Pay freight-in)
July 9
110
Accounts Payable
Purchase Returns
(Return inventory on account)
July 11
200
110
200
Accounts Payable
Purchase Discounts
Cash
(Pay on account less 1% discount)
($21 = $2,100 × 1%)
July 12
2,100
Accounts Receivable
Sales Revenue
(Sell inventory on account)
July 15
5,800
Cash
5,800
21
2,079
5,800
Accounts Receivable
(Receive cash on account)
July 18
Purchases
Accounts Payable
(Purchase inventory on account)
© The McGraw-Hill Companies, Inc., 2014
6-56
Credit
5,800
3,100
3,100
Financial Accounting, 3e
Chapter 6 - Inventory and Cost of Goods Sold
Problem 6-9A (continued)
Requirement 1 (concluded)
July 22
Cash
Debit
4,200
Sales Revenue
(Sell inventory for cash)
July 28
Accounts Payable
Purchase Returns
(Return inventory on account)
July 30
Accounts Payable
Cash
(Pay cash on account)
Requirement 2
July 31
Inventory (ending)
Cost of Goods Sold
Purchase Returns
Purchase Discounts
Purchases
Freight-In
Inventory (beginning)
(Record period-end adjustment)
Solutions Manual, Chapter 6
Credit
4,200
300
300
2,800
2,800
Debit
Credit
2,889
5,500
500
21
5,400
110
3,400
© The McGraw-Hill Companies, Inc., 2014
6-57
Chapter 6 - Inventory and Cost of Goods Sold
Problem 6-9A (concluded)
Requirement 3
CD City
Multiple-step Income Statement (partial)
For the month of July
Net sales
Cost of goods sold:
Beginning inventory
Add: Purchases
Freight-in
Less: Purchase returns
Purchase discounts
Cost of goods available for sale
Less: Ending inventory
Cost of goods sold
Gross profit
© The McGraw-Hill Companies, Inc., 2014
6-58
$10,000
3,400
5,400
110
(500)
(21)
8,389
(2,889)
5,500
$4,500
Financial Accounting, 3e
Chapter 6 - Inventory and Cost of Goods Sold
Problem 6-10A (LO 6-7. 6-9)
Requirement 1
2012
Gross
profit
ratio
2013
2014
2015
$20,000
$66,000
$46,000
$74,000
$42,000
$90,000
0.47
0.30
0.62
0.47
2012
2013
2014
2015
$31,000a
$66,000
$35,000a
$74,000
$42,000
$90,000
0.47
0.47
0.47
= Gross profit = $28,000
$60,000
Net sales
=
Requirement 2
Gross
profit
ratio
= Gross profit = $28,000
$60,000
Net sales
=
a
0.47
These amounts represent amounts that would have been reported had the $11,000
inventory error not occurred. The understatement of inventory in 2013 has the effect
of understating gross profit in 2013 and overstating gross profit in 2014 by $11,000.
Using the corrected amounts, the trend in gross profit is much more stable over time,
which is to be expected for most companies.
Requirement 3
Corrected gross profit from 2012-2015 = $28,000 + $31,000 + $35,000 + $42,000
= $136,000
The cumulative gross profit over the four-year period is unaffected by the inventory
following the error.
Solutions Manual, Chapter 6
© The McGraw-Hill Companies, Inc., 2014
6-59
Chapter 6 - Inventory and Cost of Goods Sold
PROBLEMS: SET B
Problem 6-1B (LO 6-3)
Requirement 1 Specific identification
Date
Jun. 1
Jun. 12
Jun. 24
Jun. 29
Transaction
Beginning inventory
Purchase
Purchase
Purchase
Number
of units
1
1
3
9
14
Unit
cost
$ 350
340
330
320
Ending
Inventory
$ 350
340
990
2,880
$4,560
Number
Unit
Cost of
Date
Transaction
of units
cost
Goods Sold
a
Jun. 1
Beginning inventory
11
$350
$ 3,850
b
Jun. 1
Beginning inventory
3
350
1,050
b
Jun. 12 Purchase
9
340
3,060
c
Jun. 1
Beginning inventory
1
350
350
c
Jun. 24 Purchase
7
330
2,310
31
$10,620
a
From the June 7 sale; b From the June 15 sale; c From the June 27 sale.
Requirement 2 FIFO
Date
Jun. 24
Jun. 29
Date
Jun. 1
Jun. 12
Jun. 24
a
Transaction
Purchase
Purchase
Number
of units
5
9
14
Unit
cost
$330
320
Ending
Inventory
$1,650
2,880
$4,530
Transaction
Beginning inventory
Purchase
Purchase
Number
of units
16
10
5
31a
Unit
cost
$350
340
330
Cost of
Goods Sold
$ 5,600
3,400
1,650
$10,650
First 31 units purchased are assumed sold
© The McGraw-Hill Companies, Inc., 2014
6-60
Financial Accounting, 3e
Chapter 6 - Inventory and Cost of Goods Sold
Problem 6-1B (concluded)
Requirement 3 LIFO
Date
Jun. 1
Date
Jun. 1
Jun. 12
Jun. 24
Jun. 29
Transaction
Beginning inventory
Transaction
Beginning inventory
Purchase
Purchase
Purchase
Number
of units
14
Unit
cost
$350
Ending
Inventory
$4,900
Number
of units
2
10
10
9
31*
Unit
cost
$350
340
330
320
Cost of
Goods Sold
$ 700
3,400
3,300
2,880
$10,280
* Last 31 units purchased are assumed sold
Requirement 4 Weighted average
Date
Jun. 1
Jun. 12
Jun. 24
Jun. 29
Transaction
Beginning inventory
Purchase
Purchase
Purchase
Number
of units
16
10
10
9
45
Unit
cost
$350
340
330
320
Total
Cost
$ 5,600
3,400
3,300
2,880
$15,180
Weighted-average cost = $15,180 / 45 units = $337.3333 (rounded)
Ending inventory = 14 units × $337.3333 = $4,722.67
Cost of goods sold = 31 units × $337.3333 = $10,457.33
Solutions Manual, Chapter 6
© The McGraw-Hill Companies, Inc., 2014
6-61
Chapter 6 - Inventory and Cost of Goods Sold
Problem 6-2B (LO 6-3, 6-4, 6-5)
Requirement 1 Specific identification
Date
Transaction
Aug. 1 Beginning inventory
Aug. 11 Purchase
Aug. 29 Purchase
Number
of units
2
2
11
15
Unit
cost
$160
150
130
Ending
Inventory
$ 320
300
1,430
$2,050
Number
Unit
Cost of
Date
Transaction
of units
cost
Goods Sold
a
Aug. 1 Beginning inventory
5
$160
$ 800
b
Aug. 11 Purchase
8
150
1,200
c
Aug. 1 Beginning inventory
1
160
160
c
Aug. 20 Purchase
10
140
1,400
24
$3,560
a
b
c
From the August 4 sale; From the August 13 sale; From the August 26 sale.
Requirement 2 FIFO
Date
Transaction
Aug. 20 Purchase
Aug. 29 Purchase
Number
of units
4
11
15
Unit
cost
$140
130
Ending
Inventory
$ 560
1,430
$1,990
Date
Transaction
Aug. 1 Beginning inventory
Aug. 11 Purchase
Aug. 20 Purchase
Number
of units
8
10
6
24*
Unit
cost
$160
150
140
Cost of
Goods Sold
$1,280
1,500
840
$3,620
* First 24 units purchased are assumed sold
© The McGraw-Hill Companies, Inc., 2014
6-62
Financial Accounting, 3e
Chapter 6 - Inventory and Cost of Goods Sold
Problem 6-2B (continued)
Requirement 3 LIFO
Date
Transaction
Aug. 1 Beginning inventory
Aug. 11 Purchase
Number
of units
8
7
15
Unit
cost
$160
150
Ending
Inventory
$1,280
1,050
$2,330
Date
Transaction
Aug. 11 Purchase
Aug. 20 Purchase
Aug. 29 Purchase
Number
of units
3
10
11
24*
Unit
cost
$150
140
130
Cost of
Goods Sold
$ 450
1,400
1,430
$3,280
Unit
cost
$160
150
140
130
Total
Cost
$1,280
1,500
1,400
1,430
$5,610
* Last 24 units purchased are assumed sold
Requirement 4 Weighted average
Date
Aug. 1
Aug. 11
Aug. 20
Aug. 29
Transaction
Beginning inventory
Purchase
Purchase
Purchase
Number
of units
8
10
10
11
39
Weighted-average cost = $5,610 / 39 units = $143.8462 (rounded)
Ending inventory = 15 units × $143.8462 = $2,157.69
Cost of goods sold = 24 units × $143.8462 = $3,452.31
Solutions Manual, Chapter 6
© The McGraw-Hill Companies, Inc., 2014
6-63
Chapter 6 - Inventory and Cost of Goods Sold
Problem 6-2B (concluded)
Requirement 5
Sales revenue
Cost of goods sold
Gross profit
Specific
Identification
$5,795
3,560
$2,235
FIFO
$5,795
3,620
$2,175
Weightedaverage
Cost
$5,795.00
3,452.31
$2,342.69
LIFO
$5,795
3,280
$2,515
Requirement 6
FIFO provides the more meaningful measure of ending inventory. The amount of
ending inventory reported using FIFO ($1,990) compared to LIFO ($2,330) better
approximates the current cost of inventory at the end of the period ($130 per unit × 15
units = $1,950).
Requirement 7
August 31
Inventory
Cost of Goods Sold
(Record the LIFO adjustment)
Debit
Credit
340
340*
The LIFO reserve equals the difference in inventory reported using FIFO ($1,990)
versus using LIFO ($2,330). The LIFO reserve equals −$340.
© The McGraw-Hill Companies, Inc., 2014
6-64
Financial Accounting, 3e
Chapter 6 - Inventory and Cost of Goods Sold
Problem 6-3B (LO 6-2, 6-5)
Requirement 1
June 2
Debit
Inventory
Accounts Payable
(Purchase inventory on account)
June 4
2,700
2,700
Inventory
Cash
(Pay freight-in)
June 8
400
Accounts Payable
Inventory
(Return inventory on account)
June 10
400
400
400
Accounts Payable
Inventory
Cash
(Pay on account less 1% discount)
($23 = $2,300 × 1%)
June 11
2,300
Accounts Receivable
Sales Revenue
(Sell inventory on account)
5,000
Cost of Goods Sold
Inventory
(Record cost of inventory sold)
June 18
3,200
Cash
4,000
Accounts Receivable
(Receive cash on account)
Solutions Manual, Chapter 6
Credit
23
2,277
5,000
3,200
4,000
© The McGraw-Hill Companies, Inc., 2014
6-65
Chapter 6 - Inventory and Cost of Goods Sold
Problem 6-3B (concluded)
Requirement 1 (continued)
June 20
Debit
Inventory
Accounts Payable
(Purchase inventory on account)
June 23
3,800
Cash
5,300
3,800
Sales Revenue
(Sell inventory for cash)
Cost of Goods Sold
Inventory
(Record cost of inventory sold)
June 26
Accounts Payable
Inventory
(Return inventory on account)
June 28
Accounts Payable
Cash
Inventory
(Pay cash on account)
($99 = $3,300 × 3%)
Credit
5,300
3,600
3,600
500
500
3,300
3,201
99
Requirement 2
Circuit Country
Multiple-step Income Statement (partial)
For the month of June
Net sales
Cost of goods sold
Gross profit
© The McGraw-Hill Companies, Inc., 2014
6-66
$10,300
6,800
$ 3,500
Financial Accounting, 3e
Chapter 6 - Inventory and Cost of Goods Sold
Problem 6-4B (LO 6-6)
Requirement 1
Inventory items
Hammers
Saws
Screwdrivers
Drills
1-gallon paint cans
Paint brushes
Quantity
110
60
140
50
170
190
Cost
Per unit
$ 8.00
11.00
3.00
26.00
6.50
7.00
Total
Cost
$ 880
660
420
1,300
1,105
1,330
$5,695
Requirement 2
Market
LowerCost (replacement cost) of–cost-orInventory items Quantity Per unit
per unit
market
Hammers
110 $ 8.00
$ 8.50
$ 8.00
Saws
60
11.00
10.00
10.00
Screwdrivers
140
3.00
3.60
3.00
Drills
50
26.00
24.00
24.00
1-gallon paint cans 170
6.50
6.00
6.00
Paint brushes
190
7.00
7.50
7.00
Total
Total
$ 880
600
420
1,200
1,020
1,330
$5,450
Requirement 3
Because the total of lower-of-cost-or-market ($5,450) is less than total cost ($5,695),
inventory is written down for the difference ($245).
Debit
Cost of Goods Sold
Inventory
(Write down inventory to market value)
Credit
245
245
Requirement 4
The write-down of inventory from cost to market value reduces total assets and
increases total expenses, leading to lower net income and lower retained earnings.
Solutions Manual, Chapter 6
© The McGraw-Hill Companies, Inc., 2014
6-67
Chapter 6 - Inventory and Cost of Goods Sold
Problem 6-5B (LO 6-3, 6-6)
Requirement 1 FIFO
Date
Oct. 4
Transaction
Purchase
Number
of units
9
Unit
cost
$550
Number
Unit
Date
Transaction
of units
cost
Jan. 1
Beginning inventory
20
$500
Apr. 9
Purchase
30
520
Oct. 4
Purchase
2
550
a
52
a
First 52 units purchased are assumed sold
Ending
Inventory
$4,950
Cost of
Goods Sold
$10,000
15,600
1,100
$26,700
Requirement 2 LIFO
Date
Jan. 1
Transaction
Beginning inventory
Number
of units
9
Number
Date
Transaction
of units
Jan. 1
Beginning inventory
11
Apr. 9
Purchase
30
Oct. 4
Purchase
11
52a
a
Last 52 units purchased are assumed sold
© The McGraw-Hill Companies, Inc., 2014
6-68
Unit
cost
$500
Ending
Inventory
$4,500
Unit
cost
$500
520
550
Cost of
Goods Sold
$ 5,500
15,600
6,050
$27,150
Financial Accounting, 3e
Chapter 6 - Inventory and Cost of Goods Sold
Problem 6-5B (concluded)
Requirement 3
Ending Inventory
Cost
Market
Lower-of-costor-market
FIFO
$4,950a
$3,150
$3,150
LIFO
4,500b
3,150
3,150
a
b
Ending inventory from Requirement 1 above.
Ending inventory from Requirement 2 above.
(a) FIFO
Debit
Cost of Goods Sold
Inventory
(Adjust inventory to market value)
1,800
(b) LIFO
Cost of Goods Sold
Inventory
(Adjust inventory to market value)
Solutions Manual, Chapter 6
Credit
1,800
1,350
1,350
© The McGraw-Hill Companies, Inc., 2014
6-69
Chapter 6 - Inventory and Cost of Goods Sold
Problem 6-6B (LO 6-2, 6-3, 6-4, 6-5, 6-6)
Requirement 1
November 2
Inventory
Accounts Payable
(Purchase inventory on account)
November 3
Inventory
Cash
(Pay freight-in)
November 9
Debit
9,000
9,000
231
231
Accounts Payable
Inventory
(Return inventory on account)
November 11
1,300
Accounts Payable
Inventory
Cash
(Pay on account less 3% discount)
($231 = $7,700 × 3%)
November 16
7,700
Accounts Receivable
Sales Revenue
(Sell inventory on account)
1,300
231
7,469
14,000
14,000
Cost of Goods Sold
9,640
Inventory
(Cost of inventory sold)
($9,640 = ($94 × 60 units) + ($100 × 40 units))
November 20
Cash
Credit
9,640
14,000
Accounts Receivable
(Receive cash on account)
© The McGraw-Hill Companies, Inc., 2014
6-70
14,000
Financial Accounting, 3e
Chapter 6 - Inventory and Cost of Goods Sold
Problem 6-6B (continued)
Requirement 1 (continued)
November 21
Inventory
Accounts Payable
(Purchase inventory on account)
November 24
Cash
Debit
Credit
7,280
7,280
12,600
Sales Revenue
(Sell inventory for cash)
12,600
Cost of Goods Sold
9,212
Inventory
9,212
(Record cost of inventory sold)
[$9,160 = ($100 × 37 units) + ($104 × 53 units)]
Requirement 2
November 30
Cost of Goods Sold
Inventory
(Record LIFO adjustment)
Debit
Credit
170
170*
* Ending inventory using LIFO ($1,598 = $94 × 17 units) is $170 less than ending
inventory using FIFO ($1,768 = $104 × 17 units).
Solutions Manual, Chapter 6
© The McGraw-Hill Companies, Inc., 2014
6-71
Chapter 6 - Inventory and Cost of Goods Sold
Problem 6-6B (concluded)
Requirement 3
November 30
Cost of Goods Sold
Inventory
(Adjust inventory down to market)
Debit
Credit
221
221*
* The market value of ending inventory ($1,377 = $81 market value × 17 units) is
$221 less than ending inventory after the LIFO adjustment ($1,598 from Requirement
2).
Requirement 4
Yoshi Inc.
Multiple-step Income Statement (partial)
For the month of November
Net sales
Cost of goods sold*
Gross profit
$26,600
19,243
$ 7,357
* Cost of goods sold equals the cost of the units sold ($18,852) + LIFO adjustment
($170) + write down to market value ($221).
© The McGraw-Hill Companies, Inc., 2014
6-72
Financial Accounting, 3e
Chapter 6 - Inventory and Cost of Goods Sold
Problem 6-7B (LO 6-2, 6-7)
Requirement 1
Toys “R” Us
Multiple-step Income Statement
For the month of March, 2015
Net sales:
Total sales revenue
Less: Sales discounts
Net sales revenue
Cost of goods sold
Gross profit
Operating expenses:
Advertising
Rent
Insurance
Salaries
Total
Operating income
Non-operating items:
Gain on sale of building
Income before income taxes
Income tax expense
Net income
Solutions Manual, Chapter 6
$77,300
(3,000)
$74,300
35,800
38,500
6,400
4,300
2,300
9,400
22,400
16,100
7,500
23,600
4,200
$19,400
© The McGraw-Hill Companies, Inc., 2014
6-73
Chapter 6 - Inventory and Cost of Goods Sold
Problem 6-7B (concluded)
Requirement 2
Inventory
turnover
ratio
=
Cost of goods sold
Average inventory
=
$35,800
($2,800 + $1,000) /2
=
18.8
This ratio will likely be higher in December when inventory is being sold at a much
faster pace due to the holiday season.
Requirement 3
Gross
profit
ratio
=
Gross profit
Net sales
=
$38,500
$74,300
0.52
© The McGraw-Hill Companies, Inc., 2014
6-74
Financial Accounting, 3e
Chapter 6 - Inventory and Cost of Goods Sold
Problem 6-8B (LO 6-7)
Requirement 1
Inventory
turnover
ratio
=
Cost of goods sold
Average inventory
Company 1
Company 2
=
$130,000
$35,000
$165,000
$20,000
=
3.71
8.25
Company 1
Company 2
=
$70,000
$200,000
$35,000
$200,000
=
0.35
0.175
Requirement 2
Gross
profit
ratio
=
Gross profit
Net sales
Requirement 3
common, lower-to-middle priced footwear is likely to sell more quickly than is more
specialized, higher-end footwear. In addition, higher-end footwear is likely to be
more profitable due to less competition.
Solutions Manual, Chapter 6
© The McGraw-Hill Companies, Inc., 2014
6-75
Chapter 6 - Inventory and Cost of Goods Sold
Problem 6-9B (LO 6-8)
Requirement 1
June 2
Debit
Purchases
Accounts Payable
(Purchase inventory on account)
June 4
2,700
2,700
Freight-In
Cash
(Pay freight-in)
June 8
400
Accounts Payable
Purchase Returns
(Return inventory on account)
June 10
400
400
400
Accounts Payable
Purchase Discounts
Cash
(Pay on account less 1% discount)
($23 = $2,300 × 1%)
June 11
2,300
Accounts Receivable
Sales Revenue
(Sell inventory on account)
June 18
5,000
Cash
4,000
Accounts Receivable
(Receive cash on account)
© The McGraw-Hill Companies, Inc., 2014
6-76
Credit
23
2,277
5,000
4,000
Financial Accounting, 3e
Chapter 6 - Inventory and Cost of Goods Sold
Problem 6-9B (concluded)
Requirement 1 (continued)
June 20
Debit
Purchases
Accounts Payable
(Purchase inventory on account)
June 23
3,800
Cash
5,300
3,800
Sales Revenue
(Sell inventory for cash)
June 26
Accounts Payable
Purchase Returns
(Return inventory on account)
June 28
Accounts Payable
Cash
Purchase Discounts
(Pay on account less 3% discount)
($99 = $3,300 × 3%)
Requirement 2
July 31
Inventory (ending)
Cost of Goods Sold
Purchase Returns
Purchase Discounts
Purchases
Freight-In
Inventory (beginning)
(Record period-end adjustment)
Solutions Manual, Chapter 6
Credit
5,300
500
500
3,300
3,201
99
Debit
Credit
2,078
6,800
900
122
6,500
400
3,000
© The McGraw-Hill Companies, Inc., 2014
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Chapter 6 - Inventory and Cost of Goods Sold
Problem 6-9B (concluded)
Requirement 3
Circuit Country
Multiple-step Income Statement (partial)
For the month of July
Net sales
Cost of goods sold:
Beginning inventory
Add: Purchases
Freight-in
Less: Purchase returns
Purchase discounts
Cost of goods available for sale
Less: Ending inventory
Cost of goods sold
Gross profit
© The McGraw-Hill Companies, Inc., 2014
6-78
$10,300
3,000
6,500
400
(900)
(122)
8,878
(2,078)
6,800
$ 3,500
Financial Accounting, 3e
Chapter 6 - Inventory and Cost of Goods Sold
Problem 6-10B (LO 6-3, 6-9)
Requirement 1
Date
Oct. 29
Date
Jan. 1
Apr. 14
Aug. 22
Oct. 29
a
Transaction
Purchase
Transaction
Beginning inventory
Purchase
Purchase
Purchase
Number
of units
60
Unit
cost
$46
Ending
Inventory
$2,760
Number
of units
35
80
130
35
280a
Unit
cost
$40
42
44
46
Cost of
Goods Sold
$ 1,400
3,360
5,720
1,610
$12,090
Number
of units
50
Unit
cost
$46
Ending
Inventory
$2,300
Number
of units
35
80
130
45
290*
Unit
cost
$40
42
44
46
Cost of
Goods Sold
$ 1,400
3,360
5,720
2,070
$12,550
First 280 units purchased are assumed sold
Requirement 2
Date
Oct. 29
Date
Jan. 1
Apr. 14
Aug. 22
Oct. 29
Transaction
Purchase
Transaction
Beginning inventory
Purchase
Purchase
Purchase
* First 290 units purchased are assumed sold (including the 10 lost units)
Requirements 3 and 4
(a) ending inventory
(b) retained earnings
(c) cost of goods sold
(d) net income
Solutions Manual, Chapter 6
2015
Overstate
Overstate
Understate
Overstate
2016
No Effect
No Effect
Overstate
Understate
© The McGraw-Hill Companies, Inc., 2014
6-79
Chapter 6 - Inventory and Cost of Goods Sold
ADDITIONAL PERSPECTIVES
AP6-1
Requirement 1 (a)
Sales Revenue
Date
Jul. 31
Aug. 22
Nov. 20
Dec. 8
Total
Number of units
40
30
90
40
200
Sale price
$300
300
300
300
Total sales
$12,000
9,000
27,000
12,000
$60,000
Cost of Goods Sold*
Date
Jul. 17
Aug. 12
Oct. 27
Dec. 4
Total
Number of units
50
40
80
30**
200a
Unit cost
$150
160
170
180
Total cost
$ 7,500
6,400
13,600
5,400
$32,900
a
First 200 units purchased are assumed sold. Only 30 of the 100 units purchased on
December 4 are sold, as this makes the total number of units sold equal 200. The
remaining 70 units are in ending inventory.
Ending Inventory
Date
Dec. 4
Number of units
70
© The McGraw-Hill Companies, Inc., 2014
6-80
Unit cost
$180
Total cost
$12,600
Financial Accounting, 3e
Chapter 6 - Inventory and Cost of Goods Sold
AP6-1 (continued)
Requirement 1 (b)
Great Adventures, Inc.
Partial Income Statement
For the year ended December 31, 2016
Sales revenue
$60,000
Cost of goods sold
(32,900)
Gross profit
$27,100
Requirement 2 (a)
Inventory
items
MU
watches
Cost
per unit
Market
per unit
Lower-ofcost-ormarket
per unit
$180
$100
$100
Dec. 31, 2016
Cost of Goods Sold
Inventory
(Adjust inventory down to market)
a
Debit
5,600
Quantity
Total
lower-ofcost-ormarket
70
$7,000
Credit
5,600a
The amount of the inventory write-down equals the difference between the cost of
the 70 MU watches ($12,600) and its market value ($7,000)
Requirement 2 (b)
Great Adventures reports its inventory in the balance sheet at the lower-of-cost-ormarket, which equals $7,000, as demonstrated in requirement 2(a).
Solutions Manual, Chapter 6
© The McGraw-Hill Companies, Inc., 2014
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Chapter 6 - Inventory and Cost of Goods Sold
AP6-1 (concluded)
Requirement 2 (c)
Great Adventures, Inc.
Partial Income Statement
For the year ended December 31, 2016
$60,000
Sales revenue
a
(38,500)
Cost of goods sold
$21,500
Gross profit
a
Cost of goods sold includes the write-down of inventory of $5,600 calculated in
requirement 2(a). This amount is added to the original cost of goods sold of
$32,900. The additional cost of goods sold reduces gross profit by $5,600.
© The McGraw-Hill Companies, Inc., 2014
6-82
Financial Accounting, 3e
Chapter 6 - Inventory and Cost of Goods Sold
Additional Perspective 6-2
Requirement 1
The company uses the lower of weighted-average cost or market value.
Requirement 2
The amount of inventory reported in the balance sheet is $332,452. This amount
represents the cost, less any write-downs, of inventory that has not been sold by the
end of the year.
Requirement 3
The company refers to cost of goods sold as cost of sales.
Requirement 4
The amount of cost of goods sold reported in the income statement is $2,085,480.
This amount represents the cost of inventory sold during the year.
Requirement 5
Inventory
=
turnover ratio
Cost of goods sold
Average inventory
$2,085,480
$349,983
= 6.0
365
6.0
= 60.8
2012
2011
2010
0.40
0.37
0.40
=
365
Average days
=
=
in inventory
Inventory turnover ratio
Requirement 6
Gross profit
ratio
=
Requirement 7
Operating expenses
Net sales
Solutions Manual, Chapter 6
Gross profit
Net sales
=
=
$995,716
=
$3,475,802
0.29
© The McGraw-Hill Companies, Inc., 2014
6-83
Chapter 6 - Inventory and Cost of Goods Sold
Additional Perspective 6-3
Requirement 1
The company uses the lower of weighted-average cost or market value.
Requirement 2
The amount of inventory reported in the balance sheet is $103,853. This amount
represents the cost, less any write-downs, of inventory that has not been sold by the
end of the year.
Requirement 3
The company refers to cost of goods sold as cost of sales.
Requirement 4
The amount of cost of goods sold reported in the income statement is $624,692. This
amount represents the cost of inventory sold during the year.
Requirement 5
Inventory
=
turnover ratio
Cost of goods sold
Average inventory
$624,692
$104,031
= 6.0
365
6.0
= 60.8
2012
2011
2010
0.44
0.44
0.44
=
365
Average days
=
=
in inventory
Inventory turnover ratio
Requirement 6
Gross profit
ratio
=
Gross profit
Net sales
Requirement 7
Operating expenses
Net sales
© The McGraw-Hill Companies, Inc., 2014
6-84
=
=
$241,140
=
$1,124,007
0.21
Financial Accounting, 3e
Chapter 6 - Inventory and Cost of Goods Sold
Additional Perspective 6-4
Requirement 1
American Eagle’s percentage of inventory to total assets is 18.9%. Buckle’s
percentage of inventory to total assets is 21.7%.
Requirement 2
American
Eagle
Buckle
=
6.0
6.0
365
Average days
=
=
in inventory
Inventory turnover ratio
60.8
60.8
American
Eagle
Buckle
0.40
0.44
American
Eagle
Buckle
0.29
0.21
Inventory
=
turnover ratio
Cost of goods sold
Average inventory
Requirement 3
Gross profit
ratio
=
Gross profit
Net sales
=
Requirement 4
Operating expenses
Net sales
Solutions Manual, Chapter 6
=
© The McGraw-Hill Companies, Inc., 2014
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Chapter 6 - Inventory and Cost of Goods Sold
Additional Perspective 6-5
What is the issue?
When the market value of inventory falls below its cost, companies are required to
write down inventory, resulting in a loss being reported in the income statement. The
The financial effects of reporting this decline in inventory value will have severe
force the company into bankruptcy. By recording the fictitious sale, the company
avoids having to record the inventory write down, and the company reports additional
revenue from the sale.
Who are the parties involved?
Jim knows the importance to the company of reporting acceptable profits in 2015. If
profits are too low, Jim will lose his job and so will all of his coworkers. However,
reporting the sale would lead to misstated financial statements. Even if creditors are
discovered and likely lead to bankruptcy. The longer the company stays in business,
the more money it could lose and the less creditors would be paid in bankruptcy
proceedings. Therefore, not reporting accurately in 2015 could easily cause larger
losses to creditors in the future. New investors could potentially suffer as well if their
decision to invest in the business is based on financial reports prepared using
misstated amounts.
What factors should Jim consider in making his decision?
their job. If he allows the
other jobs. He will also please his boss, and if the company somehow is able to
continue its existence, this could mean promotions and pay raises.
However, as the person responsible for preparing financial statements, Jim has an
ethical responsibility to investors and creditors to accurately report the financial
position of the company. Jim may face legal penalties for fraudulent reporting. In
addition, by refusing to issue misleading financial statements, Jim sends a strong
signal to upper management that he is someone who can be trusted. This could prove
useful if the company maintains its business or in his career with another employer.
© The McGraw-Hill Companies, Inc., 2014
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Financial Accounting, 3e
Chapter 6 - Inventory and Cost of Goods Sold
Additional Perspective 6-6
(Note to instructor: Amounts are based on annual reports filed December 31, 2012)
Requirement 1
($ in millions)
Gross profit
ratio
=
Gross profit
Net sales
=
=
Coca-Cola
$28,964
$48,017
PepsiCo
$34,201
$65,492
60.3%
52.2%
Coca-Cola
Cost of goods sold
$19,053
Inventory
=
=
turnover ratio
Average inventory ($3,264+$3,092)/2
=
6.0 times
365
Average days
=
=
in inventory
Inventory turnover ratio
=
PepsiCo
$31,291
($3,581+$3,827)/2
8.4 times
365
6.0
365
8.4
60.8 days
43.5 days
Requirement 2
As indicated by the higher gross profit ratio, Coca-Cola is able to generate more
profit selling its inventory (beverages) than PepsiCo is selling its inventory
(beverages and snack foods). However, PepsiCo’s inventory turns over much faster.
On average, PepsiCo sell its inventory 8.4 times per year compared to only 6.0 times
per year for Coca-Cola. This is an average difference of about 17 days, which likely
reflects the shorter shelf-life of snack foods compared to beverages.
Solutions Manual, Chapter 6
© The McGraw-Hill Companies, Inc., 2014
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Chapter 6 - Inventory and Cost of Goods Sold
Additional Perspective 6-7
Students should discuss the following issues.
For FIFO,
- FIFO assumes that the first units purchased are sold first.
- It is likely that FIFO more closely matches the actual flow of inventory.
- By more closely matching actual flow, FIFO results in a better approximate
value of inventory being reported in the balance sheet.
- If inventory costs are rising, which is typically the case for most businesses,
FIFO results in a higher amount being reported for assets and net income.
For LIFO,
- LIFO assumes that the last units purchased are sold first.
- LIFO may better match current inventory costs with current inventory sales,
resulting in a more accurate measure of profitability in the income statement.
- If inventory costs are rising, which is typically the case for most businesses,
LIFO generally results in a lower amount being reported for assets and net
income. The lower amount being reported for net income will reduce the
amount of income taxes payable.
- If inventory costs are declining, LIFO results in a higher amount being reported
for assets and net income.
© The McGraw-Hill Companies, Inc., 2014
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Financial Accounting, 3e
Chapter 6 - Inventory and Cost of Goods Sold
Additional Perspective 6-8
Requirement 1
Date
Transaction
Aug. 22 Purchase
Oct. 29 Purchase
Number
of units
30
80
110
Unit
cost
$600
640
Ending
Inventory
$18,000
51,200
$69,200
Date
Transaction
Jan. 1
Beginning inventory
Mar. 8 Purchase
Aug. 22 Purchase
Number
of units
150
120
70
340*
Unit
cost
$540
570
600
Cost of
Goods Sold
$ 81,000
68,400
42,000
$191,400
* First 340 units purchased are assumed sold
Requirement 2
Date
Oct. 29
Date
Jan. 1
Mar. 8
Aug. 22
Oct. 29
Transaction
Purchase
Transaction
Beginning inventory
Purchase
Purchase
Purchase
Number
of units
50
Unit
cost
$640
Ending
Inventory
$32,000
Number
of units
150
120
100
30
400*
Unit
cost
$540
570
600
640
Cost of
Goods Sold
$ 81,000
68,400
60,000
19,200
$228,600
* First 400 units purchased are assumed sold
Requirements 3 and 4
(a) ending inventory
(b) retained earnings
(c) cost of goods sold
(d) net income
Solutions Manual, Chapter 6
2015
Overstatement
Overstatement
Understatement
Overstatement
2016
No Effect
No Effect
Overstatement
Understatement
© The McGraw-Hill Companies, Inc., 2014
6-89