Inventory Solution Manual (1)

8/13/2019 Inventory Solution Manual (1)

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Copyright 2005 by McGraw-Hill Ryerson Limited. All rights reserved.

Solutions Manual for Chapter 7 50

Chapter 7 Merchandise Inventories andCost of Sales

Questions

1. Incidental costs often are ignored in pricing an inventory because the expense ofcomputing costs on such a precise basis usually outweighs any benefit gained from theextra accuracy. The principle of materiality permits such practices when the effect on thefinancial statements is not significant.

2. a. First items into the inventory are assumed to be the first items sold.

b. Last items into the inventory are assumed to be the first items sold.

c. The invoice price, less trade discounts , plus any addit ional incidental costs to putgoods in to place and condition for sale.

3. LIFO will result in the lower cost of goods sold because the more recent costs are used.

4. Merchandise inventory is disc losed on the balance sheet as a current asset. It also mayappear in the income statement as part of the calculation of cost of goods sold.

5. No, changing the inventory pricing method each period would violate the accountingprinciple of consistency.

6. A change from one acceptable method to another is allowed if the company justifies thechange as an improvement in financial reporting.

7. The full-disclosure principle requires that the nature of the change, justification for thechange and the effect of the change on net income be disclosed in the notes to the

companys financial statements.8. The principle of conservatism says when faced with a choice of two or more equally

likely amounts, the least optimistic value should be selected as is the case with lower ofcost or market for inventory valuation.

9. Market can mean either net realizable value or replacement cost .

10. An inventory error that causes an understatement (or overstatement) of net income oneaccounting period, if not corrected, will cause an overstatement (or understatement) thenext. Therefore, since the understatement (overstatement) of one period offsets theoverstatement (understatement) of the next, such errors are said to correct themselves.

11. Many people make important decisions based on the fluctuations in a companys netincome from period to period. Therefore, inventory errors should not be permitted to causesuch fluctuations.

12. WestJets inventory would be equivalent to 0.25% of total assets. This is notmerchandise inventory because WestJet is not a merchandiser.

13. Leons cost of goods sold figure for the year ended December 31, 2002 is $261,265,000.


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508 Fundamental Accounting Principles, Eleventh Canadian Edition

QUICK STUDY

Quick Study 7-1

1. The title will pass at the destination, which is Stark Companys receiving dock.Carefree should show the $500 in its inventory at year-end as Carefree retains titleuntil the goods reach Stark Company.

2. The consignor is Carefree Company. The consignee is Stark Company. The consignor,Carefree Company, should include the consigned goods in inventory.

Quick Study 7-2

1,500 30 + 250 + 70 = 1,790 units in ending inventory

Quick Study 7-3

Cost .................................... $3,000

Add:Transportation-In .............. 150Import dut ies ..................... 200Insurance ........................... 50Inventory Cost ................... $3,400

Quick Study 7-4

$37,500 + $1,200 + $150 + $490 = $39,340

Quick Study 7-5Beginning Inventory ........................ 10 uni ts @ $50 $ 500

Add:1st week purchase ........................... 10 units @ $51 $ 5102nd week purchase .......................... 10 units @ $52 5203rd week purchase........................... 10 units @ $55 5504th week purchase ........................... 10 units @ $60 600

Units Available .................. 50 uni tsCost of Goods Available for Sale ... $2,680


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Quick Study 7-6

(a) FIFO perpetual

Date Purchases Sales (at cost) Inventory Balance

UnitsUnitCost

TotalCost Units

UnitCost

Cost ofGoodsSold Units

UnitCost

Total

Cost

Jan. 1 Beginning inventory310 @ $3.00 = $930.00 310 @ $3.00 = $ 930.00

310 @ $3.00 = $ 930.009 75 @ $3.20 = $240.00 75 @ 3.20 = 240.00

310 @ $3.00 = $ 930.0025 100 @ $3.35 = $335.00 75 @ 3.20 = 240.00

100 @ 3.35 = 335.0028 310 @ $3.00 = $ 930.00 40 @ $3.20 = $ 128.00

35 @ 3.20 = 112.00 100 @ 3.35 = 335.00Total 485 $1,505.00 345 $1,042.00 140 $463.00

Cost of goods available for sale = Cost of goods sold + Ending inventory

(b) LIFO perpetual


UnitsUnitCost

TotalCost Units

UnitCost


UnitCost

Total

Cost


310 @ $3.00 = $ 930.009 75 @ $3.20 = $240.00 75 @ 3.20 = 240.00

310 @ $3.00 = $ 930.0025 100 @ $3.35 = $335.00 75 @ 3.20 = 240.00

100 @ 3.35 = 335.0028 100 @ $3.35 = $ 335.00

75 @ 3.20 = 240.00170 @ 3.00 = 510.00 140 @ $3.00 = $ 420.00

Total 485 $1,505.00 345 $1,085.00 140 $420.00 Cost of goods available for sale = Cost of goods sold + Ending inventory


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Quick Study 7-6 (continued)

(c) Moving weighted average perpetual

Inventory Balance

Date Purchases Sales (at cost) (a) (b) (a) (b)

UnitsUnitCost

TotalCost Units

UnitCost

Cost ofGoodsSold

Total

Units

Average

Cost/Unit

Total

Cost

Inventory BalanceCalculations

Beginning inventoryJan. 1 310 @ $3.00 = $930.00 310 $3.00 $930.00

310 $ 930.009 75 @ $3.20 = $240.00 75 @ $3.20 = 240.00

385 $3.04 $1,170.00 385 $1,170.00385 $1,170.00

25 100 @ $3.35 = $335.00 100 @ $3.35 = 335.00485 $3.10 $1,505.00 485 $1,505.00

485 $1,505.0028 345 @ $3.10 = $1,069.50 345 @ $3.10 = 1,069.50

140 $3.11* $435.50 140 $ 435.50

Total 485 $1,505.00 345 $1,069.50 140 $435.50Cost of goods available for sale = Cost of goods sold + Ending inventory

* cost/unit changed due to rounding

Quick Study 7-7

Date Purchases Sales (at cost ) Inventory Balance

UnitsUnitCost

TotalCost Units

UnitCost


UnitCost

Total

Cost


310 @ $3.00 = $ 930.009 75 @ $3.20 = $240.00 75 @ 3.20 = 240.00

310 @ $3.00 = $ 930.0025 100 @ $3.35 = $335.00 75 @ 3.20 = 240.00

100 @ 3.35 = 335.0028 250 @ $3.00 = $ 750.00 60 @ $3.00 = $ 180.00

50 @ 3.20 = 160.00 25 @ 3.20 = 80.0045 @ 3.35 = 150.75 55 @ 3.35 = 184.25

Total 485 $1,505.00 345 $1,060.75 140 $ 444.25



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Quick Study 7-8

a. LIFO b. LIFO c. FIFO d. Specific identification

Quick Study 7-9

a. and b.

Per Unit LCM applied to:a. b.

InventoryItems

Units onHand Cost Market

TotalCost

TotalMarket

Inventoryas a Whole

EachProduct

Aprons 9 $6.00 $5.50 $ 54.00 $ 49.50 $ 49.50Bott les 12 3.50 4.25 42.00 51.00 42.00Candles 25 8.00 7.00 200.00 175.00 175.00

$296.00 $275.50 $275.50 $266.50

c.

2005Dec. 31 Cost of Goods Sold ............................................. 20.50

Merchandise Inventory .................................. 20.50To write inventory down to market.

Quick Study 7-10

a. Understates cost of goods sold.

b. Overstates gross prof it.c. Overstates 2005 net income.

d. Understates 2006 net income.

e. The overstated net income for 2005 and the understated net income for 2006 combineto a correct total income for the two year period.

f. The error in 2005 will not affect years subsequent to 2006.

Quick Study 7-11

Goods available for sale:Inventory, January 1 .................................................. $180,000Purchases (net) .......................................................... 342,000Goods available for sale............................................ $522,000

Less: Estimated cost of goodssold [$675,000 (1 42%)] ........................................ 391,500

Estimated September 10 inventorydest royed in the fi re ................................................... $130,500


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Quick Study 7-12

a. Since gross profit for prior periods has been 30%, then Cost of Goods Sold must be70%. So, 70% x $565,000 net sales for July = $395,500 estimated cost of goods soldfor July.

Julys beginning inventory (Junes ending inventory) of........ $ 65,000Plus: July purchases ................................................................. 385,500Equals: Cost of goods available for sale ................................. $450,500Less: Estimated cost of goods sold for July ........................... 395,500Equals: Estimated ending inventory for July .......................... $ 55,000

b. The estimated shrinkage is $7,000 ($55,000 - $48,000).

Quick Study 7-13

At Cost At Retai l

Goods avai lable for sale .............................................................. $67,600 $104,000Deduct: Net sales at retai l .......................................................... 82,000Ending inventory at retail ............................................................ $ 22,000

Cost to retail ratio : $67,600 $104,000 = 65%

Estimated ending inventory at cost: $22,000 65% = $ 14,300

Quick Study 7-14

September October

Cost Retail Cost RetailBeginning inventory ....................................... $ 74,950 $112,000 $ 70,850 $109,000Cost of goods purchased .............................. 395,000 611,000 461,590 674,000Goods available for sale ................................ $469,950 $723,000 $532,440 $783,000Less: Net sales at retai l . ................................ 614,000 700,000Ending inventory at retai l ............................... $109,000 $ 83,000Cost to retai l rat io........................................... x 65%1 x 68%2Estimated ending inventory........................... $ 70,850 $ 56,440

1. 469,950/723,000 = .65 or 65%2. 532,440/783,000 = .68 or 68%


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*Quick Study 7-15

a) FIFO periodic

Ending Inventory = 100 @ $3.35 = $33540 @ $3.20 = $128

b) LIFO periodic

Ending Inventory = 140 @ $3.00 = $420

c)Average cost per iodic

$1,505/485 units = $3.10 average cost per unit140 units in ending inventory @ $3.10/unit = $434 Cost of Ending Inventory

*Quick Study 7-16Both companies are improving their turnover rates for merchandise. However, HuffCompany has a higher turnover which suggests lower levels of inventory selling morerapidly than Mesa Company. It appears that Huff Company is managing inventory moreefficiently provided they have enough merchandise to satisfy the needs of theircustomers (not turning them away because of lack of adequate inventory).

= $463 Cost o f Ending Inventory

= $420 Cost o f Ending Inventory


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*Quick Study 7-17

a) Days sales in inventory2005:

$56,195

$410,225

365 = 50.00 days

2004:$82,500

$344,500 365 = 87.41 days

The change from 2004 to 2005 is generally considered to be favourable.

b) Merchandise turnover2005:

$410,225

($56,195 + $82,500)/2

= 5.92 times

2004:$344,500

($82,500 + $111,500)/2= 3.55 times

The change from 2004 to 2005 is generally considered to be favourable.


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EXERCISES

Exercise 7-1 (45 minutes)

(a) FIFO perpetual

Date Purchases Sales (at cos t) Inventory Balance

UnitsUnitCost

TotalCost Units

UnitCost


UnitCost

Total

Cost

Jan. 1 Beginning inventory100 @ $10.00 = $1,000 100 @ $10.00 = $ 1,000

10 90 @ $10.00 = $ 900 10 @ $10.00 = $ 10010 @ $10.00 = $ 100

Mar. 14 250 @ $15.00 = $3,750 250 @ 15.00 = 3,75010 @ $10.00 = $ 100

15 130 @ 15.00 = 1,950 120 @ $15.00 = $ 1,800120 @ $15.00 = $ 1,800

Jul. 30 400 @ $20.00 = $8,000 400 @ 20.00 = 8,000120 @ $15.00 = $ 1,800

Oct. 5 180 @ 20.00 = 3,600 220 @ $20.00 = $ 4,400Total 750 $12,750 530 $8,350 220 $4,400 Cost of goods available for sale = Cost of goods sold + Ending inventory

Gross prof it calculation under FIFO:

Sales (530 uni ts $40) ......... $21,200Cost of goods sold ............... 8,350Gross prof it ........................... $12,850


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Exercise 7-1 (continued)

(b) Moving weighted-average perpetual

Inventory Balance

Date Purch ases Sales (at cost ) (a) (b) (a) (b)

UnitsUnitCost

TotalCost Units

UnitCost

Cost ofGoodsSold

Total

Units

Average

Cost/Unit

Total

Cost Inventory Balance CalculationsBeginning inventory

Jan. 1 100 @ $10 = $1000 100 $10.00 $ 1,000.00100 $ 1,000.00

10 90 @ $10.00 = $ 900.00 90 @ $10.00 = 900.0010 $10.00 $ 100.00 10 $ 100.00

10 $ 100.00Mar. 14 250 @ $15 = $3,750 250 @ $15.00 = 3,750.00

260 $14.81 $ 3,850.00 260 $ 3,850.00260 $ 3,850.00

15 140 @ $14.81 = $ 2,073.40 140 @ $14.81 = 2,073.40120 $14.81 $ 1,776.60 120 $ 1,776.60

120 $ 1,776.60July 30 400 @ $20 = $8,000 400 @ $20.00 = 8,000.00

520 $18.80 $ 9,776.60 520 $ 9,776.60520 $ 9,776.60Oct. 5 300 @ $18.80 = $ 5,640.00 300 @ $18.80 = 5,640.00

220 $18.80 $ 4,136.60 220 $ 4,136.60Total 750 $12,750 530 $8,613.40 220 $ 4,136.60


Gross prof it calculation under Weighted-average:

Sales (530 units $40)........ $21,200.00Cost of goods sold ............. 8,613.40Gross pro fit ......................... $12,586.60


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Exercise 7-1 (concluded)

(c) LIFO perpetual


UnitsUnitCost

TotalCost Units

UnitCost


UnitCost

Total

Cost

Jan. 1 Beginning inventory100 @ $10.00 = $ 1,000 100 @ $10.00 = $ 1,000

10 90 @ $10.00 = $ 900 10 @ $10.00 = $ 10010 @ $10.00 = $ 100

Mar. 14 250 @ $15.00 = $ 3,750 250 @ 15.00 = 3,75010 @ $10.00 = $ 100

15 140 @ $15.00 = $ 2,100 110 @ 15.00 = 1,65010 @ $10.00 = $ 100

110 @ 15.00 = 1,650Jul. 30 400 @ $20.00 = $ 8,000 400 @ 20.00 = 8,000

10 @ $10.00 = $ 100110 @ 15.00 = 1,650

Oct. 5 300 @ $20.00 = $ 6,000 100 @ 20.00 = 2,000Total 750 $12,750 530 $9,000 220 $3,750 Cost of goods available for sale = Cost of goods sold + Ending inventory

Gross profit calculation under LIFO:

Sales (530 uni ts $40) ....... $21,200Cost of goods sold ............. 9,000Gross pro fit ......................... $12,200


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Specific identification


UnitsUnitCost

TotalCost Units

UnitCost


UnitCost

Total

Cost


10 90 @ $10.00 = $ 900 10 @ $10.00 = $ 10010 @ $10.00 = $ 100

Mar. 14 250 @ $15.00 = $ 3,750 250 @ 15.00 = 3,75010 @ $10.00 = $ 100

15 130 @ 15.00 = 1,950 120 @ $15.00 = $ 1,800120 @ $15.00 = $ 1,800

Jul. 30 400 @ $20.00 = $ 8,000 400 @ 20.00 = 8,00060 @ $15.00 = $ 900 60 @ $15.00 = $ 900

Oct. 5 240 @ 20.00 = 4,800 160 @ 20.00 = 3,200Total 750 $12,750 530 $8,650 220 $4,100 Cost of goods available for sale = Cost of goods sold + Ending inventory

Gross profit calculation under Specific Identification:

Sales (530 units $40)........ $21,200Cost of goods sold ............. 8,650

Gross pro fit ......................... $12,550


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(a) Moving weighted-average perpetual

Inventory Balance


UnitsUnitCost

TotalCost Units

UnitCost

Cost ofGoods Sold

Total

Units

Average

Cost/

Unit

Total

Cost

Inventory BalanceCalculations

Beginning inventoryJan. 1 120 @ $6.00 = $ 720.00 120 $6.00 $ 720.00

120 $ 720.0010 70 @ $6.00 = $ 420.00 70 @ $6.00 = 420.00

50 $6.00 $ 300.00 50 $ 300.0050 $ 300.00

Mar. 7 250 @ $5.60 = $ 1,400.00 250 @ 5.60 = 1,400.00300 $5.67 $ 1,700.00 300 $1,700.00

300 $1,700.0015 125 @ $5.67 = $ 708.75 125 @ 5.67 = 708.75

175 $5.66* $ 991.25 175 $ 991.25

175 $ 991.25July 28 500 @ $5.00 = $ 2,500.00 500 @ 5.00 = 2,500.00675 $5.17 $ 3,491.25 675 $3,491.25

675 $3,491.25Oct. 3 450 @ $4.60 = $ 2,070.00 450 @ 4.60 = 2,070.00

1,125 $4.94 $ 5,561.25 1,125 $5,561.251,125 $5,561.25

5 600 @ $4.94 = $ 2,964.00 600 @ 4.96 = 2,964.00525 $4.95* $ 2,597.25 525 $2,597.25

Total 1,320 $6,690.00 795 $4,092.75 525 $2,597.25Cost of goods available for sale = Cost of goods sold + Ending inventory

*cost/unit changed due to rounding


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Exercise 7-3(continued)

(b) FIFO perpetual


UnitsUnitCost

TotalCost Units

UnitCost


UnitCost

Total

Cost

Jan. 1 Beginning inventory120 @ $6.00 = $ 720 120 @ $6.00 = $ 720

10 70 @ $6.00 = $ 420 50 @ $6.00 = $ 30050 @ $6.00 = $ 300

Mar. 7 250 @ $5.60 = $ 1,400 250 @ 5.60 = 1,40050 @ $6.00 = $ 300

15 75 @ 5.60 = 420 175 @ $5.60 = $ 980175 @ $5.60 = $ 980

Jul. 28 500 @ $5.00 = $ 2,500 500 @ 5.00 = 2,500175 @ $5.60 = $ 980500 @ 5.00 = 2,500

Oct. 3 450 @ $4.60 = $ 2,070 450 @ 4.60 = 2,070175 @ $5.60 = $ 980 75 @ $5.00 = $ 375

5 425 @ 5.00 = 2,125 450 @ 4.60 = 2,070Total 1,320 $6,690 795 $4,245 525 $2,445 Cost of goods available for sale = Cost of goods sold + Ending inventory


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Exercise 7-3 (concluded)

(c) LIFO perpetual


UnitsUnitCost

TotalCost Units

UnitCost


UnitCost

Total

Cost


10 70 @ $6.00 = $ 420 50 @ $6.00 = $ 30050 @ $6.00 = $ 300

Mar. 7 250 @ $5.60 = $ 1,400 250 @ 5.60 = 1,40050 @ $6.00 = $ 300

15 125 @ $5.60 = $ 700 125 @ 5.60 = 70050 @ $6.00 = $ 300

125 @ 5.60 = 700Jul. 28 500 @ $5.00 = $ 2,500 500 @ 5.00 = 2,500

50 @ $6.00 = $ 300125 @ 5.60 = 700500 @ 5.00 = 2,500

Oct. 3 450 @ $4.60 = $ 2,070 450 @ 4.60 = 2,07050 @ $6.00 = $ 300

450 @ $4.60 = $ 2,070 125 @ 5.60 = 7005 150 @ 5.00 = 750 350 @ 5.00 = 1,750

Total 1,320 $6,690 795 $3,940 525 $2,750 Cost of goods available for sale = Cost of goods sold + Ending inventory


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Specific identification perpetual


UnitsUnitCost

TotalCost Units

UnitCost


UnitCost

Total

Cost


10 70 @ $6.00 = $ 420 50 @ $6.00 = $ 30050 @ $6.00 = $ 300

Mar. 7 250 @ $5.60 = $ 1,400 250 @ 5.60 = 1,40025 @ $6.00 = $ 150 25 @ $6.00 = $ 150

15 100 @ 5.60 = 560 150 @ 5.60 = 84025 @ $6.00 = $ 150

150 @ 5.60 = 840Jul. 28 500 @ $5.00 = $ 2,500 500 @ 5.00 = 2,500

25 @ $6.00 = $ 150150 @ 5.60 = 840500 @ 5.00 = 2,500

Oct. 3 450 @ $4.60 = $ 2,070 450 @ 4.60 = 2,07025 @ $6.00 = $ 150

150 @ 5.60 = 840320 @ $5.00 = $ 1,600 180 @ 5.00 = 900

5 280 @ 4.60 = 1,288 170 @ 4.60 = 782Total 1,320 $6,690 795 $4,018 525 $2,672



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TROUT COMPANYIncome Statement

For year ended December 31, 2005

MovingSpecific Weighted

Identification Average FIFO LIFO

Sales ..................................... $11,925 $11,925.00 $11,925 $11,925(795 units $15 selling price)Cost of goods sold ................... 4,018 4,092.75 4,245 3,940Gross prof it ............................... $ 7,907 $ 7,832.25 $ 7,680 $ 7,985Operat ing expenses.................. 1,250 1,250.00 1,250 1,250Net income................................. $ 6,657 $ 6,582.25 $ 6,430 $ 6,735

1) The LIFO method results in the highest net income with $6,735.2) The weighted average net income of $6,582.25 does fall between FIFO net income

($6,430) and LIFO net income ($6,735).

3) If costs were rising instead of falling then the FIFO method would probably result inthe highest net income.


a. and b.

Per Unit LCM applied to:a. b.

Inventory Units Total Total Inventory EachItems on Hand Cost NRV Cost NRV as a Whole Product

BB 22 $50 $54 $1,100 $1,188 $1,100FM 15 78 72 1,170 1,080 1,080MB 36 95 91 3,420 3,276 3,276SL 40 36 36 1,440 1,440 1,440

$7,130 $6,984 $6,984 $6,896

c. 2005Dec. 31 Cost of Goods Sold .................................................. 146

Merchandise Inventory ................................... 146To write inventory down to market;7,130 6,984 = 146.


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1. $900,000 $500,000 = $400,000

2.For years ended

December 31, 2005, 2006, and 2007

income statement information

Income statement information

actually reported foryears ended December 31,

shou ld have been reported as: 2005 2006 2007

Sales $900,000 $900,000 $900,000 $900,000

Cost of goods sold:

Beginning inventory $200,000 $200,000 $180,000 $200,000

Add: Purchases 500,000 500,000 500,000 500,000

Less: Ending inventory 200,000 180,000 200,000 200,000

Cost of goods sold 500,000 520,000 480,000 500,000

Gross profit $400,000 $380,000 $420,000 $400,000


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Goods available for sale:Inventory, January 1 ....................................................... $ 450,000Purchases ........................................................................ $1,590,000Purchase returns ............................................................. (23,100)Transpor tat ion-in ............................................................ 37,600 1,604,500Goods available for sale ................................................. $2,054,500

Less: Estimated cost of goods sold:Sales ................................................................................ $2,000,000Estimated cost of goods sold

[$2,000,000 (1 30%)] .............................................. (1,400,000)

Estimated March 31 inventory $ 654,500


At Cost At Retail

Goods available for sale:Beginning inventory .......................................... $31,900.00 $ 64,200.00Net purchases .................................................... 57,810.00 98,400.00Goods available for sale .................................... $89,710.00 $162,600.00

Deduct net sales at retail ...................................... 130,000.00Ending inventory at retail ...................................... $ 32,600.00Cost ratio: ($89,710/$162,600) 100 = 55.17%Ending inventory at cost ($32,600 55.17%) ...... $17,985.42


a. $27,300 55.17% = $15,061.41

b.

At Cost At Retail

Estimated inventory that should havebeen on hand ............................................... $17,985.42 $32,600.00

Physical inventory ...................................................... 15,061.41 27,300.00Inventory shrinkage .................................................... $ 2,924.01 $ 5,300.00


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*Exercise 7-11 (20 minutes)

Ending Cost ofInventory Goods Sold

a. Weighted-average cost ($3,300/1,320 = $2.50):$2.50 50 .................................................................. 125$3,300 $125 ............................................................ 3,175

b. FIFO:50 $2.20 .................................................................. 110$3,300 $110 ............................................................ 3,190

c. LIFO:50 $3.00 .................................................................. 150$3,300 $150 ............................................................ 3,150

FIFO prov ides the lowest net income because it has the highest cost of goods so ld due todecreasing unit costs.


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Ending Cost ofInventory Goods Sold

a. FIFO:(50 $2.86) + (100 $2.50) ...................................... 393(120 $2.00) + (250 $2.30) + (400 $2.50) ........... 1,815

b. LIFO:(120 $2.00) + (30 $2.30) ...................................... 309(50 $2.86) + (500 $2.50) + (220 $2.30) ............ 1,899

c. Weighted-average cost ($2,208/920 = $2.40):$2.40 150 ................................................................ 360$2.40 770 ................................................................ 1,848

LIFO provides the lowest net income because it has the highest cost of goods sold due torising unit costs.


Ending inventory:Units Cost/Unit Total Cost

Beginning inventory 80 @ $2.00 = $160.00March 7 purchase 22 @ 2.30 = 50.60July 28 purchase 48 @ 2.50 = 120.00

150 $330.60Cost of goods sold:

Cost of goods available for sale lessEnding inventory = Cost of goods sold

$2,208.00 $330.60 = $1,877.40


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Merchandise turnover2006:

$ 643,825($96,400 + $86,750)/2

= 7.0 times

2005:$ 426,650

($86,750 + $91,500)/2= 4.8 times

Days sales in inventory2006:

$ 96,400$643,825

365 = 54.7 days

2005:$ 86,750$426,650

365 = 74.2 days

It appears that Russo has lower levels of merchandise inventory on hand which isgenerally favourable provided customers are not being turned away because ofout-of-stock items.


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PROBLEMS

Problem 7-1A (40 minutes )

1) (a) FIFO perpetualDate Purchases Sales (at cost ) Inventory Balance

UnitsUnitCost

TotalCost Units

UnitCost


UnitCost

Total

Cost


500 @ $45.00 = $ 22,500Feb. 10 250 @ $42.00 = $ 10,500 250 @ 42.00 = 10,500Mar. 15 330 @ $45.00 = $ 14,850 170 @ $45.00 = $ 7,650

250 @ 42.00 = 10,500170 @ $45.00 = $ 7,650250 @ 42.00 = 10,500

Aug. 21 130 @ $50.00 = $ 6,500 130 @ 50.00 = 6,500Sept. 10 170 @ $45.00 = $ 7,650 185 @ $42.00 = $ 7,770

65 @ 42.00 = 2,730 130 @ 50.00 = 6,500Total 880 $39,500 565 $25,230 315 $14,270



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Problem 7-1A (continued)

1) (b) LIFO perpetual


UnitsUnitCost

TotalCost Units

UnitCost


UnitCost

Total

Cost


500 @ 45.00 = 22,500Feb. 10 250 @ $42.00 = $ 10,500 250 @ 42.00 = 10,500Mar. 15 250 @ $42.00 = $ 10,500

80 @ 45.00 = 3,600 420 @ $45.00 = $ 18,900420 @ $45.00 = $ 18,900

Aug. 21 130 @ $50.00 = $ 6,500 130 @ 50.00 = 6,500Sept. 10 130 @ $50.00 = $ 6,500

105 @ 45.00 = 4,725 315 @ $45.00 = $ 14,175Total 880 $39,500 565 $25,325 315 $14,175 Cost of goods available for sale = Cost of goods sold + Ending inventory

1) (c) Moving weighted-average perpetual

Inventory Balance

Date Purch ases Sales (at cos t) (a) (b) (a) (b)

UnitsUnitCost

TotalCost Units

UnitCost

Cost ofGoods

SoldTotal

Units

Average

Cost/

Unit

Total


Jan. 1 500 @ $45.00 = $ 22,500.00 500 $45.00 $ 22,500.00 500 $22,500.00Feb. 10 250 @ $42.00 = $ 10,500.00 250 @ 42.00 = 10,500.00

750 $44.00 $ 33,000.00 750 $33,000.00750 $33,000.00

Mar. 15 330 @ $44.00 = $ 14,520.00 330 @ 44.00 = 14,520.00420 $44.00 $ 18,480.00 420 $18,480.00

420 $18,480.00Aug . 21 130 @ $50.00 = $ 6,500.00 130 @ 50.00 = 6,500.00

550 $45.42 $ 24,980.00 550 $24,980.00550 $24,980.00

Sept. 10 235 @ $45.42 = $ 10,673.70 235 @ 45.42 = 10,673.70315 $45.42 $ 14,306.30 315 $14,306.30

Total 880 $39,500.00 565 $25,193.70 315 $14,306.30Cost of goods available for sale = Cost of goods sold + Ending inventory


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2) Specific Identification


UnitsUnitCost

TotalCost Units

UnitCost


UnitCost

Total

Cost


500 @ $45.00 = $ 22,500Feb. 10 250 @ $42.00 = $ 10,500 250 @ 42.00 = 10,500Mar. 15 170 @ $45.00 = $ 7,650 330 @ $45.00 = $ 14,850

160 @ 42.00 = 6,720 90 @ 42.00 = 3,780330 @ $45.00 = $ 14,850

90 @ 42.00 = 3,780

Aug. 21 130 @ $50.00 = $ 6,500 130 @ 50.00 = 6,500Sept. 10 165 @ $45.00 = $ 7,425 165 @ $45.00 = $ 7,42520 @ 42.00 = 840 70 @ 42.00 = 2,94050 @ 50.00 = 2,500 80 @ 50.00 = 4,000

Total 880 $39,500 565 $25,135 315 $14,365 Cost of goods available for sale = Cost of goods sold + Ending inventory


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Problem 7-1A (concluded)

3)

FIFO LIFOMoving We

AveraFeb. 10 Merchandise Inventory ............ 10,500 10,500 10,500

Accounts Payable ............. 10,500 10,500

To record the purchase ofinventory on credit.

Sept. 10 Accounts Receivable ............... 17,625 17,625 17,625 Sales................................... 17,625 17,625

To record a credit sale;$75/unit x 235 units =$17,625.00.

10 Cost of Goods Sold ................. 10,380 11,225 10,673.70Merchandise Inventory. .... 10,380 11,225

To record the sale ofmerchandise.

Copyright

2005byMcGraw-HillRyersonLimited.Allrightsreserved.

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Problem 7-2A (40 minutes)

Preparation:

Calculate cost of goods available for sale and units available for sale:

Beg. 300 units @ $40 = $12,000Feb. 10 200 units @ 42 = 8,400Mar. 13 300 units @ 39 = 11,700Sep. 5 250 units @ 32 = 8,000Units

Available 1,050 units $40,100 Cost of goodsavailablefor sale

Units in ending inventory:

Units available 1,050 Less: Units sold 850 Ending Inventory 2001) (a) FIFO perpetual


UnitsUnitCost

TotalCost Units

UnitCost


UnitCost

Total

Cost

Jan. 1 Beginning inventory

300 @ $40.00 = $ 12,000 300 @ $40.00 = $ 12,000300 @ $40.00 = $ 12,000

Feb. 10 200 @ $42.00 = $ 8,400 200 @ 42.00 = 8,40020 300 @ $40.00 = $ 12,000

50 @ 42.00 = 2,100 150 @ $42.00 = $ 6,300150 @ $42.00 = $ 6,300

Mar. 13 300 @ $39.00 = $ 11,700 300 @ 39.00 = 11,700150 @ $42.00 = $ 6,300300 @ 39.00 = 11,700

Sept. 5 250 @ $32.00 = $ 8,000 250 @ 32.00 = 8,000Oct. 10 150 @ $42.00 = $ 6,300

300 @ 39.00 = 11,70050 @ 32.00 = 1,600 200 @ $32.00 = $ 6,400

Total 1,050 $40,100 850 $33,700 200 $6,400 Cost of goods available for sale = Cost of goods sold

+

Ending inventory


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Problem 7-2A(continued)



UnitsUnitCost

TotalCost Units

UnitCost


UnitCost

Total

Cost

Jan. 1 Beginning inventory300 @ $40.00 = $ 12,000 300 @ $40.00 = $12,000

300 @ $40.00 = $12,000Feb. 10 200 @ $42.00 = $ 8,400 200 @ 42.00 = 8,400

20 200 @ $42.00 = $ 8,400150 @ 40.00 = 6,000 150 @ $40.00 = $ 6,000

150 @ $40.00 = $ 6,000Mar. 13 300 @ $39.00 = $ 11,700 300 @ 39.00 = 11,700

150 @ $40.00 = $ 6,000

300 @ 39.00 = 11,700Sept. 5 250 @ $32.00 = $ 8,000 250 @ 32.00 = 8,000Oct. 10 250 @ $32.00 = $ 8,000 150 @ $40.00 = $ 6,000

250 @ 39.00 = 9,750 50 @ 39.00 = 1,950Total 1,050 $40,100 850 $32,150 200 $7,950


(c) Moving weighted-average perpetual

Inventory Balance


UnitsUnitCost

TotalCost Units

UnitCost

Cost ofGoods Sold

Total

Units

AverageCost/

Unit

Total


Jan. 1 300 @ $40.00 = $ 12,000.00 300 $40.00 $ 12,000.00300 $12,000.00

Feb. 10 200 @ $42.00 = $ 8,400.00 200 @ 42.00 = 8,400.00500 $40.80 $ 20,400.00 500 $20,400.00

500 $20,400.0020 350 @ $40.80 = $ 14,280.00 350 @ 40.80 = 14,280.00

150 $40.80 $ 6,120.00 150 $ 6,120.00150 $ 6,120.00

Mar. 13 300 @ $39.00 = $ 11,700.00 300 @ 39.00 = 11,700.00450 $39.60 $ 17,820.00 450 $17,820.00

450 $17,820.00Sept. 5 250 @ $32.00 = $ 8,000.00 250 @ 32.00 = 8,000.00

700 $36.89 $ 25,820.00 700 $25,820.00

700 $25,820.00Oct. 10 500 @ $36.89 = $ 18,445.00 500 @ 36.89 = 18,445.00

200 $36.88* 200 $ 7,375.00Tot al 1,050 $40,100.00 850 $32,725.00 200 $7,375.00


*cost per unit changed due to rounding


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2)

FIFO LIFO

MovingWeightedAverage

Sales (850 x $80)............ $68,000 $68,000 $68,000Cost of goods sold ........ 33,700 32,150 32,725Gross profit .................... $34,300 $35,850 $35,275

3) If Lukich Company had been experiencing increasing prices in the acquisit ion ofadditional inventory, gross profit would have been highest using a FIFO inventorycosting method and lowest under a LIFO inventory costing method. The gross profitunder the moving weighted average costing method would have fallen between FIFOand LIFO.


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Problem 7-3A (50 minutes) Part 1

GREEN JEANS COMPANYIncome Statement Comparing FIFO, LIFO and

Moving Weighted-Average Inventory Costing MethodsFor Year Ended December 31, 2005

FIFO LIFOMovingWeightedAverageCost

Sales (5,500 units sold x $45/unit) ................................. $247,500 $247,500 $247,500Cost of goods sold .......................................................... 112,700 113,900 112,850Gross profit ...................................................................... $134,800 $133,600 $134,650Operating expenses (5,500 units sold x $6/unit)......... 33,000 33,000 33,000Net income........................................................................ $101,800 $100,600 $101,650

Supporting calculations:Calculate units and cost of goods available for sale:

Beginning inventory............................ 600 @ $18 = $ 10,800Purchases:

Feb. 20............................................... 1,500 @ $19 = 28,500May 16 ............................................... 700 @ $20 = 14,000Dec. 11............................................... 3,300 @ $22 = 72,600

Units available for sale........................ 6,100Cost of goods available for sale........ $125,900


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1) (a) FIFO perpetual


UnitsUnitCost

TotalCost Units

UnitCost


UnitCost

Total

Cost


600 @ $18.00 = $ 10,80Feb. 20 1,500 @ $19.00 = $ 28,500 1,500 @ 19.00 = 28,50

600 @ $18.00 = $ 10,801,500 @ 19.00 = 28,50

May 16 700 @ $20.00 = $ 14,000 700 @ 20.00 = 14,00Sept. 20 600 @ $18.00 = $ 10,800 300 @ $20.00 = $ 6,00

1500 @ 19.00 = 28,500400 @ 20.00 = 8,000

300 @ $20.00 = $ 6,00Dec. 11 3,300 @ $22.00 = $ 72,600 3,300 @ 22.00 = 72,60

22 300 @ $20.00 = $ 6,0002,700 @ 22.00 = 59,400 600 @ $22.00 = $ 13,20

Total 6,100 $125,900 5,500 $112,700 600 $13,20 Cost of goods available for sale = Cost of goods sold + Ending inventory

(b) LIFO perpetual


UnitsUnitCost

TotalCost Units

UnitCost


UnitCost

Total

Cost


600 @ $18.00 = $ 10,800Feb. 20 1,500 @ $19.00 = $ 28,500 1,500 @ 19.00 = 28,500

600 @ $18.00 = $ 10,8001,500 @ 19.00 = 28,500

May 16 700 @ $20.00 = $ 14,000 700 @ 20.00 = 14,000Sept. 20 700 @ $20.00 = $ 14,000 300 @ $18.00 = $ 5,400

1500 @ 19.00 = 28,500

300 @ 18.00 = 5,400300 @ $18.00 = $ 5,400

Dec. 11 3,300 @ $22.00 = $ 72,600 3,300 @ 22.00 = 72,60022 3,000 @ $22.00 = $ 66,000 300 @ $18.00 = $ 5,400

300 @ 22.00 = 6,600Total 6,100 $125,900 5,500 $113,900 600 $12,000



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1(c ) Moving weighted-average perpetual

Inventory Balance


UnitsUnitCost

TotalCost Units

UnitCost

Cost ofGoodsSold

Total

Units

Average

Cost/Unit

Total


Jan. 1 600 @ $18.00 = $ 10,800.00 600 $18.00 $ 10,800.00600 @ 1 8.00 = $ 10,800

Feb. 20 1,500 @ $19.00 = $ 28,500.00 1,500 @ 19.00 = 28,5002,100 $18.71 $ 39,300.00 2,100 $ 39,300

2,100 $ 39,300May 16 700 @ $20.00 = $ 14,000.00 700 @ 20.00 = 14,000

2,800 $19.04 $ 53,300.00 2,800 $ 53,3002,800 $ 53,300

Sept.

20 2,500 @ $19.04 = $ 47,600.00 2,500 @ 19.04 = 47,600

300 $19.00* $ 5,700.00 300 $ 5,700300 $ 5,700

Dec. 11 3,300 @ $22.00 = $ 72,600.00 3,300 @ 22.00 = 72,6003,600 $21.75 $ 78,300.00 3,600 $ 78,300

3,600 $ 78,300

22 3,000 @ $21.75 = $ 65,250.00 3,000 @ 21.75 = 65,250600 $21.75 $ 13,050.00 600 $ 13,050Total 6,100 $125,900.00 5,500 $112,850.00 600 $13,050.00

Cost of goods available for sale

=

Cost of goods sold + Ending inventory


Part 2

If Green Jeans Companys manager earns a bonus based on a percentage of gross profi t,she will prefer the FIFO inventory costing method since it has produced the highest grossprof it. FIFO will always produce a higher gross profit than either LIFO or Moving weightedaverage when the unit costs of merchandise inventory are increasing.


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Cost of goods sold: 2005 2006 2007Reported ........................................................... $ 715,000 $ 847,000 $ 770,000

Adjustments: Dec. 31, 2005 error ............... 66,000 + 66,000Dec. 31, 2006 error ............... + 30,000 30,000

Corrected .......................................................... $ 649,000 $ 943,000 $ 740,000

Net income: 2005 2006 2007Reported ........................................................... $ 220,000 $ 275,000 $ 231,000

Adjustments: Dec. 31, 2005 error ............... + 66,000 66,000Dec. 31, 2006 error ................ 30,000 + 30,000

Corrected .......................................................... $ 286,000 $ 179,000 $ 261,000

Total current assets: 2005 2006 2007Reported ........................................................... $1,155,000 $1,265,000 $1,100,000

Adjustments: Dec. 31, 2005 error ................ + 66,000Dec. 31, 2006 error ............... 30,000

Corrected .......................................................... $1,221,000 $1,235,000 $1,100,000

Owners equity: 2005 2006 2007Reported ........................................................... $1,287,000 $1,430,000 $1,232,000

Adjustments: Dec. 31, 2005 error ............... + 66,000Dec. 31, 2006 error ............... 30,000

Corrected .......................................................... $1,353,000 $1,400,000 $1,232,000

Part 2

These errors are self-correcting in the year following the error. Each overstatement (or

understatement) of net income is offset by a matching understatement (or overstatement)in the following year. Thus, aggregate net income for the three-year period is not affectedby the errors.

The understatement of inventory by $66,000 results in an overstatement of cost of goodssold by that same amount. The $66,000 overstatement of cost of goods sold results in anunderstatement of gross profit by the same amount. This understatement of gross profitcarries through to an understatement of net income. Since the understated net income isclosed to capital, the final equity figure is understated by the amount of the inventoryunderstatement.


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2005 2006 2007Corrected Ending Inventory $ 345,000

+ $ 55,000

$ 400,000

$ 420,000 $ 16,000

$ 404,000

$392,000(no change)

Corrected Cost of Goods Sold $1,300,000 $ 55,000

$1,245,000

$1,750,000+ $ 55,000+ $ 16,000

$1,821,000

$2,100,000 $ 16,000

$2,084,000


Per Unit LCM applied to:

InventoryItems

Unitson

Hand Cost MarketTotalCost

TotalMarket

a.Whole

b.Major

Category

c.Separately

to EachProduct

Audio equipment :Receivers 335 $ 90 $ 98 $ 30,150 $ 32,830 $ 30,150CD players 250 111 100 27,750 25,000 25,000Casset te decks 316 86 95 27,176 30,020 27,176Turntables 194 52 41 10,088 7,954 7,954Subtotal $ 95,164 $ 95,804 $ 95,164

Video:

Televisions 470 150 125 $ 70,500 $ 58,750 58,750VCRs 281 93 84 26,133 23,604 23,604Video cameras 202 310 322 62,620 65,044 62,620Subtotal $159,253 $147,398 147,398

Car Audio:Casset te radios 175 70 84 $ 12,250 $ 14,700 12,250CD radios 160 97 105 15,520 16,800 15,520Subtotal $ 27,770 $ 31,500 27,770

Totals $282,187 $274,702 $274,702 $270,332 $263,024


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2004 Gross margin ratio:Sales ........................................................ $3,200,225Cost of sales ........................................... 1,760,575Gross margin.......................................... $1,439,650

Gross margin ratio ................................. 45%*

Estimated inventory:Goods available for sale:

Inventory, December 31, 2004.............. $294,100Net purchases, 2005 ............................. 182,400Goods available for sale ....................... $476,500

Less estimated cost of goods sold:Sales ........................................................ $350,600Estimated cost of goods sold ..............

[$350,600 (1 45%)] ........................ 192,830Estimated February 10, 2005 inventory ...... $283,670

Less: inventory salvaged...................... 106,200Estimated inventory lost in fire.................... $177,470

*rounded to nearest whole percentage


WALKER COMPANY

Estimated InventoryMarch 31, 2005

Goods available for sale:Inventory, January 1, 2005 ............................ $ 300,260Purchases ....................................................... $945,200Less: Purchase returns ................................ 13,050

Add: Transpor tat ion-in ................................ 6,900Net cost of goods purchased ....................... 939,050Goods available for sale ................................ $1,239,310

Less: Estimated cost of goods sold:Sales ................................................................ $1,191,150

Less: Sales returns ........................................ 9,450Net sales ......................................................... $1,181,700Estimated cost of goods sold

[$1,181,700 (1 35%)] ............................. 768,105Estimated March 31, 2005 inventory ................ $ 471,205


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BASICS COMPANYEstimated InventoryDecember 31, 2005

At Cost At RetailGoods available for sale:Beginning inventory ........................................ $ 471,350 $ 927,150Purchases ......................................................... 3,328,830 6,398,700Purchase returns ............................................. (52,800) (119,350)Goods available for sale .................................. $3,747,380 $7,206,500Net sales ($5,495,700 $44,600)...................... 5,451,100Ending inventory at retail ................................. $1,755,400Cost to retail ratio ($3,747,380 $7,206,500) . 52%Ending inventory at cost .................................. $ 912,808

Part 2Estimated physical inventory at cost: $1,675,800 52% = $871,416

BASICS COMPANYInventory ShortageDecember 31, 2005

At Cost At Retail

Estimated inventory, December 31 ...................... $912,808 $1,755,400Physical inventory ................................................. 871,416 1,675,800Inventory shortage ................................................ $ 41,392 $ 79,600


Part 1 At Cost At Retai lGoods available for sale:

Beginning inventory ............................................. $ 300,000 $ 375,000Purchases .............................................................. 5,100,000 6,925,000Less: Purchase returns and allowances............ 60,000 80,000

Add: Transpor tat ion-in ........................................ 75,000Goods available for sale ....................................... $5,415,000 $7,220,000

Deduct net sales at retail ($6,570,000 $72,000) .... 6,498,000Ending inventory at retail .......................................... $ 722,000

Cost to retail ratio ($5,415,000 $7,220,000): ......... x 75%

Estimated ending inventory at cost ($722,000 75%): $ 541,500


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Part 2

The estimated cost of the stolen inventory is $541,500 $234,000 = $307,500

*Problem 7-11A (25 minutes) Part 1Cost of uni ts available for sale:

20,000 uni ts in beginning inventory @ $15 ... $ 300,00028,000 units purchased @ $18 ........................ 504,00030,000 units purchased @ $22 ........................ 660,00020,000 units purchased @ $24 ........................ 480,00033,000 units purchased @ $27 ........................ 891,000

131,000 units for sale ......................................... $2,835,000

Part 2

a) FIFO basis :

Total cost of the 131,000 uni ts for sale .......... $2,835,000Less: Ending inventory on a FIFO basis:

33,000 units @ $27 ........................................ $891,0002,000 units @ $24 ........................................ 48,000 939,000

Cost of units sold ............................................. $1,896,000

b) LIFO basis :

Total cost of the 131,000 uni ts for sale .......... $2,835,000Less: Ending inventory on a LIFO basis:

20,000 beginning inventory units @ $15 ..... $300,00015,000 units @ $18 ........................................ 270,000 570,000

Cost of units sold ............................................. $2,265,000

c) Weighted-average cost basis:

Total cost of the 131,000 uni ts for sale .......... $2,835,000Less: Ending inventory at weighted-average cost:

($2,835,000/131,000 = $21.64) 35,000 ....... 757,400*Cost of units sold ............................................. $2,077,600*

*These amounts may vary if the unit cost/unit was not rounded to two decimal places.


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*Problem 7-12A (25 minutes)

a) FIFO basis :

Total cost of the 880 uni ts for sale ................. $39,500Less: Ending inventory on a FIFO basis:

130 units @ $50 ............................................. $6,500185 units @ $42 ............................................. 7,770 14,270Cost of units sold ............................................. $25,230

b) LIFO basis:

Total cost of the 880 uni ts for sale ................. $39,500Less: Ending inventory on a LIFO basis:

315 beginning inventory uni ts @ $45 ........ 14,175Cost of units sold ............................................. $25,325


Total cost of the 880 units for sale ................. $39,500.00Less: Ending inventory at weighted-average cost:

($39,500/880 = $44.89) 315 ........................ 14,140.35*Cost of units sold ............................................. $25,359.65*



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a) FIFO basis :

Total cost of the 1,050 uni ts for sale .............. $40,100Less: Ending inventory on a FIFO basis:

200 units @ $32 ............................................. 6,400Cost of units sold ............................................. $33,700

b) LIFO basis :

Total cost of the 1,050 uni ts for sale .............. $40,100Less: Ending inventory on a LIFO basis:

200 @ $40 ....................................................... 8,000Cost of units sold ............................................. $32,100


Total cost of the 1,050 uni ts for sale .............. $40,100Less: Ending inventory at weighted-average cost:

($40,100/1,050 = $38.19) 200 ..................... 7,638*Cost of units sold ............................................. $32,462*



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GREEN JEANS COMPANYIncome Statement Comparing FIFO, LIFO andWeighted Average Inventory Costing Methods

For Year Ended December 31, 2005

FIFO LIFOWeightedAverage

Sales ............................. $247,500 $247,500 $247,500COGS............................ 112,700 115,100 113,516Gross Profit ................. $134,800 $132,400 $133,984Operating Expenses ... 33,000 33,000 33,000Net Income................... $101,800 $ 99,400 $100,984

Supporting calculations:Cost of goods available for sale:600 units in beginning inventory @ $18 ...... $ 10,800

1,500 @ $19.......................................................... 28,500700 @ $20 ......................................................... 14,000

3,300 @ $22 ......................................................... 72,6006,100 units available for sale ............................ $125,900

a) FIFO basis :

Total cost of the 6,100 units ...................................... $125,900Less: Ending inventory on a FIFO basis:

600 @ $22 ............................................................... 13,200Cost of units sold ...................................................... $112,700

b) LIFO basis:

Total cost of the 6,100 units ...................................... $125,900Less: Ending inventory on a LIFO basis:

600 @ $18 ............................................................... 10,800Cost of units sold ...................................................... $115,100

c) Weighted-average:

Total cost of the 6,100 units ...................................... $125,900Less: Ending inventory at weighted-average cost:($125,900/6,100) = $20.64 600.......................... 12,384*

Cost of units sold ...................................................... $113,516*



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ALTERNATE PROBLEMS

Problem 7-1B (40 minutes)

1) (a) FIFO perpetual


UnitsUnitCost

TotalCost Units

UnitCost


UnitCost

Total

Cost


600 @ $55.00 = $ 33,000Feb. 13 200 @ $57.00 = $ 11,400 200 @ 57.00 = 11,400

15 300 @ $55.00 = $16,500 300 @ $55.00 = $ 16,500200 @ 57.00 = 11,400

300 @ $55.00 = $ 16,500200 @ 57.00 = 11,400

Aug. 5 345 @ $59.00 = $ 20,355 345 @ 59.00 = 20,35510 300 @ $55.00 = $ 16,500 165 @ 57.00 = 9,405

35 @ 57.00 = 1,995 345 @ 59.00 = 20,355Total 1,145 $64,755 635 $34,995 510 $29,760




UnitsUnitCost

TotalCost Units

UnitCost


UnitCost

Total

Cost


600 @ $55.00 = $ 33,000Feb. 13 200 @ $57.00 = $11,400 200 @ 57.00 = 11,400

15 200 @ $57.00 = $11,400 500 @ $55.00 = $ 27,500100 @ 55.00 = 5,500

500 @ $55.00 = $ 27,500Aug. 5 345 @ $59.00 = $20,355 345 @ 59.00 = 20,355

10 335 @ $59.00 = $19,765 500 @ $55.00 = $ 27,500

10 @ 59.00 = 590Total 1,145 $64,755 635 $36,665 510 $28,090



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Problem 7-1B (continued)


Inventory Balance

Date Purchases Sales (at cos t) (a) (b) (a) (b)

Units

Unit

Cost

Total

Cost Units

Unit

Cost

Cost ofGoods

Sold

Total

Units

Average

Cost/

Unit

Total

CostBeginning inventoryJan. 1 600 @ $55.00 = $ 33,000.00 600 $55.00 $ 33,000.00

Feb. 13 200 @ $57.00 = $ 11,400.00 800 $55.50 $ 44,400.00

15 300 @ $55.50 = $ 16,650.00 500 $55.50 $ 27,750.00

Aug. 5 345 @ $59.00 = $ 20,355.00 845 $56.93 $ 48,105.00

10 335 @ $56.93 = $ 19,071.55 510 $56.93 $ 29,033.45

Total 1,145 $64,755.00 635 $35,721.55 510 $29,033.45


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2) Specific identification


UnitsUnitCost

TotalCost Units

UnitCost


UnitCost

Total

Cost


600 @ $55.00 = $ 33,00Feb. 13 200 @ $57.00 = $11,400 200 @ 57.00 = 11,40

15 175 @ $55.00 = $ 9,625 425 @ $55.00 = $ 23,37125 @ 57.00 = 7,125 75 @ 57.00 = 4,27

425 @ $55.00 = $ 23,3775 @ 57.00 = 4,27

Aug. 5 345 @ $59.00 = $20,355 345 @ 59.00 = 20,35

10 15 @ $55.00 = $ 825 410 @ $55.00 = $22,55320 @ 59.00 = 18,880 75 @ 57.00 = 4,27

25 @ 59.00 = 1,47Total 1,145 $64,755 635 $36,455 510 $28,30



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Problem 7-1B (concluded)

3)

FIFO LIFOMoving We

Avera

Feb. 15 Accounts Receivable................. 27,000 27,000 27,000

Sales ..................................... 27,000 27,000 To record a credit sale;$90/unit x 300 units =$27,000.

15 Cost of Goods Sold ................... 16,500 16,900 16,650Merchandise Inventory ....... 16,500 16,900

To record the sale ofmerchandise.

Aug. 5 Merchandise Inventory .............. 20,355 20,355 20,355

Accounts Payable ............... 20,355 20,355 To record the purchase ofinventory on credit.

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Problem 7-2B (40 minutes)1) (a) FIFO perpetual


UnitsUnitCost

TotalCost Units

UnitCost


UnitCost

TotalCost


Feb. 20 150 @ $60.00 = $9,000 50 @ $60.00 = $3,00050 @ $60.00 = $ 3,000

Apr. 30 320 @ $58.00 = $18,560 320 @ 58.00 = 18,56050 @ $60.00 = $ 3,000

320 @ 58.00 = 18,560Oct. 5 250 @ $50.00 = $12,500 250 @ 50.00 = 12,500

10 50 @ $60.00 = $ 3,000320 @ 58.00 = 18,560

130 @ 50.00 = 6,500 120 @ 50.00 = $ 6,000Total 770 $43,060 650 $37,060 120 $6,000 Cost of goods available for sale = Cost of goods sold + Ending inventory

1)(b) LIFO perpetual


UnitsUnitCost

TotalCost Units

UnitCost


UnitCost

Total

Cost

Jan. 1 Beginning inventory

200 @ $60.00 = $ 12,000 200 @ $60.00 = $ 12,000Feb. 20 150 @ $60.00 = $9,000 50 @ $60.00 = $ 3,000

50 @ $60.00 = $ 3,000Apr. 30 320 @ $58.00 = $ 18,560 320 @ 58.00 = 18,560

50 @ $60.00 = $ 3,000320 @ 58.00 = 18,560

Oct. 5 250 @ $50.00 = $ 12,500 250 @ 50.00 = 12,50010 250 @ $50.00 = $ 12,500 50 @ $60.00 = $ 3,000

250 @ 58.00 = 14,500 70 @ 58.00 = 4,060Total 770 $43,060 650 $36,000 120 $7,060



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Problem 7-2B (continued)1) c) Moving weighted-average perpetual

Inventory Balance


UnitsUnitCost

TotalCost Units

UnitCost

Cost ofGoodsSold

Total

Units

Average

Cost/Unit

Total


Jan. 1 200 @ $60.00 = $ 12,000.00 200 $60.00 $ 12,000.00200 $12,000.00

Feb. 20 150 @ $60.00 = $ 9,000 -150 @ 60.00 = - 9,00050 $60.00 $ 3,000.00 50 $ 3,000.00

50 $ 3,000.00Apr . 30 320 @ $58.00 = $ 18,560.00 320 @ 58.00 = 18,560.00

370 $58.27 $ 21,560.00 370 $21,560.00370 $21,560.00

Oct. 5 250 @ $50.00 = $ 12,500.00 250 @ 50.00 = 12,500.00620 $54.94 $ 34,060 620 $34,060.00

620 $34,060.0010 500 @ $54.94 = $ 27,470.00 500 @ 54.94 = -27,470.00

120 $54.92* $ 6,590.00 120 $ 6,590.00Total 770 $43,060 650 $36,470.00 120 $6,590.00

Cost of goods available for sale

=

Cost of goods sold + Ending inventory

*unit cost changed due to rounding

2)

FIFO LIFOMoving Weighted-

AverageSales (650 $80)...................... $52,000 $52,000 $52,000Less: Cost of goods sold ....... 37,060 36,000 36,470Gross profit .............................. $14,940 $16,000 $15,530

3) Gross profits calculated in Part 2 would increase under FIFO and decrease underLIFO if Moran Company had been experiencing increasing prices in the purchase ofadditional inventory. The moving weighted-average costing method would fallbetween FIFO and LIFO.


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Problem 7-3B (40 minutes) Part 1

THE DENNEY COMPANYIncome Statement Comparing FIFO, LIFO,

and Moving Weighted-Average Inventory Costing MethodsFor Year Ended December 31, 2005

FIFO LIFO

MovingWeighted

AverageSales ($98 x 2,500 units) ............................ $245,000 $245,000 $245,000Cost of goods sold ..................................... 138,440 138,200 138,363Gross prof it ................................................. $106,560 $106,800 $106,637Operating expenses ($14 x 2,500 uni ts) ... 35,000 35,000 35,000Net income .................................................. $ 71,560 $ 71,800 $ 71,637

Calculations:

Calculate units and cost of goods available for sale:

Beginning inventory 740 @ $58 = $ 42,920Purchases:

Apr. 2 ........................ 700 @ $56 = 39,200Jun. 14 ........................ 600 @ $54 = 32,400Aug. 29 ........................ 500 @ $52 = 26,000

Units available 2,540Cost of goods available $140,520


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Problem 7-3B (continued)1) (a) FIFO perpetual


UnitsUnitCost Total Cost Units

UnitCost


UnitCost

Total

Cost

Jan. 1 Beginning inventory740 @ $58.00 = $42,920 740 @ $58.00 = $42,920

740 @ $58.00 = $42,920Apr. 2 700 @ $56.00 = $39,200 700 @ 56.00 = 39,200

740 @ $58.00 = $42,920 240 @ $56.00 = $13,440May 20 460 @ 56.00 = 25,760

240 @ $56.00 = $13,440Jun . 14 600 @ $54.00 = $32,400 600 @ 54.00 = 32,400

240 @ $56.00 = $13,440600 @ 54.00 = 32,400

Aug. 29 500 @ $52.00 = $26,000 500 @ 52.00 = 26,000Oct. 25 240 @ $56.00 = 13,440 40 @ 52.00 = 2,080

600 @ 54.00 = 32,400460 @ 52.00 = 23,920

Total 2,540 $140,520 2,500 $138,440 40 @ 52.00 = $2,080 Cost of goods available for sale = Cost of goods sold + Ending inventory


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Problem 7-3B (continued)1) (b) LIFO perpetual


UnitsUnitCost

TotalCost Units

UnitCost


UnitCost

Total

Cost

Jan. 1 Beginning inventory740 @ $58.00 $ 42,920 740 @ $58.00 = $ 42,920

740 @ $58.00 = $ 42,920Apr. 2 700 @ $56.00 $ 39,200 700 @ 56.00 = 39,200

700 @ $56.00 = $ 39,200 240 @ $58.00 = $ 13,920May 20 500 @ 58.00 = 29,000

240 @ $58.00 = $ 13,920Jun. 14 600 @ $54.00 $ 32,400 600 @ 54.00 = 32,400

240 @ $58.00 = $ 13,920

600 @ 54.00 = 32,400Aug. 29 500 @ $52.00 $ 26,000 500 @ 52.00 = 26,000Oct. 25 500 @ $52.00 = $ 26,000 40 @ $58.00 = $ 2,320

600 @ 54.00 = 32,400200 @ 58.00 = 11,600

Total 2,540 $140,520 2,500 $138,200 40 $2,320 Cost of goods available for sale = Cost of goods sold + Ending inventory


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Inventory Balance

Date Purchases Sales (at cost ) (a) (b) (a) (b)

Units Unit Cost

Total

Cost Units

Unit

Cost

Cost ofGoods

Sold

Total

Units

Average

Cost/

Unit

Total

CostBeginning inventory

Jan. 1 740 @ $58.00 = $ 42,920.00 740 $58.00 $ 42,920.00

Apr. 2 700 @ $56.00 = $ 39,200.00 1,440 $57.03 $ 82,120.00

May 20 1,200 @ $57.03 = $ 68,436.00 240 $57.02 $ 13,684.00

Jun. 14 600 @ $54.00 = $ 32,400.00 840 $54.86 $ 46,084.00

Aug. 29 500 @ $52.00 = $ 26,000.00 1,340 $53.79 $ 72,084.00

Oct. 25 1,300 @ $53.79 = $ 69,927.00 40 $53.93* $ 2,157.00

Total 2,540 $140,520.00 2,500 $138,363.00 40 $2,157.00Cost of goods available for = Cost of goods sold + Ending inventory


Copyright


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Problem 7-3B (concluded)

Part 2

If The Denney Company manager earns a bonus based on a percentage of gross profit,

she will prefer the LIFO inventory costing method when the unit costs of merchandiseinventory are decreasing.

Problem 7-4B (25 minutes) Part 1

Cost of goods sold 2005 2006 2007Reported ............................................................ $205,200 $212,800 $196,030

Adjustments: Dec. 31, 2005 error .................... + 17,000 17,000Dec. 31, 2006 error .................... 25,000 + 25,000

Corrected ........................................................... $222,200 $170,800 $221,030

Net income: 2005 2006 2007Reported ............................................................ $174,800 $211,270 $183,910

Adjustments: Dec. 31, 2005 error ................... 17,000 + 17,000Dec. 31, 2006 error .................... + 25,000 25,000

Corrected ........................................................... $157,800 $253,270 $158,910

Total current assets: 2005 2006 2007Reported ............................................................ $266,000 $276,500 $262,950

Adjustments: Dec. 31, 2005 error .................... 17,000Dec. 31, 2006 error .................... + 25,000

Corrected ........................................................... $249,000 $301,500 $262,950

Owners equity: 2005 2006 2007Reported ............................................................ $304,000 $316,000 $336,000

Adjustments: Dec. 31, 2005 error .................... 17,000Dec. 31, 2006 error .................... + 25,000

Corrected ........................................................... $287,000 $341,000 $336,000

Part 2

These errors are self-correcting in the year following the error. Each overstatement (orunderstatement) of net income is offset by a matching understatement (or overstatement)in the following year. Thus, aggregate net income for the three-year period is not affectedby the errors.


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1)Incorrect

Income Statement Information

For Years Ended December 31

Corrected

Income Statement Information

For Years Ended December 31

2005 % 2006 % 2005 % 2006 %

Sales ............................ $1,350,000 100 $1,690,000 100 $1,350,000 100 $1,690,000 100

Cost o f goods sold ..... 810,000 60 845,000 50 735,000* 54 937,000** 55

Gross profit ................. $ 540,000 40 $ 845,000 50 $ 615,000 46 $ 753,000 45* $810,000 $75,000 = $735,000** $845,000 + $75,000 $32,000 + $49,000 = $937,000

2) The gross profit information now reflects the increasing cost of goods sold of whichthe owner was aware.

Problem 7-6B (50 minutes)Per Unit LCM applied to:

Inventory

Items

Units on

Hand Cost Market

Total

Cost

Total

Market

a.

Whole

b.

Major

Category

c.

Separately

to Each

Product

Office furniture:Desks 436 $261 $305 $113,796 $132,980 $113,796Credenzas 295 227 256 66,965 75,520 66,965Chairs 587 49 43 28,763 25,241 25,241

Bookshelves 321 93 82 29,853 26,322 26,322Subtotals $239,377 $260,063 $239,377

Filing cabinets:Two-drawer 214 81 70 $ 17,334 $ 14,980 14,980Four-drawer 398 135 122 53,730 48,556 48,556Lateral 175 104 118 18,200 20,650 18,200Subtotals $ 89,264 $ 84,186 84,186

Office Equip.:Fax mach ines 430 168 200 $ 72,240 $ 86,000 72,240Copiers 545 317 288 172,765 156,960 156,960

Typewriters 352 125 117 44,000 41,184 41,184Subtotals $289,005 $284,144 284,144

Totals $617,646 $628,393 $617,646 $607,707 $584,444


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2004 Gross margin ratio:Sales ................................................ $4,245,100Cost of sales ................................... 2,674,350Gross margin.................................. $1,570,750

Gross margin ratio ......................... 37.0%

Estimated inventory:Goods available for sale:

Inventory, December 31, 2004...... $262,400Net purchases, 2005 ..................... 829,800Goods available for sale ............... $1,092,200

Less: Estimated cost of goods sold:Sales ................................................ $1,475,300Estimated cost of goods sold

[$1,475,300 (1 37%)] ............. 929,439Estimated July 5, 2005 inventory lost

in the flood ...................................... $162,761


FOUR CORNERS EQUIPMENT CO.Estimated Inventory

March 31, 2005

Goods available for sale:

Inventory, January 1, 2005 ............................ $ 752,880Purchases ....................................................... $2,132,100Less: Purchase returns ................................. 38,370

Add: Transpor tat ion-in .................................. 65,900Net cost of goods purchased ....................... 2,159,630Goods available for sale ................................ $2,912,510

Less: Estimated cost of goods sold:Sales ................................................................ $3,710,250Less: Sales returns ........................................ 74,200Net sales ......................................................... $3,636,050

Estimated cost of goods sold[$3,636,050 (1 30%)] ............................. 2,545,235Estimated March 31, 2005, inventory ............... $ 367,275


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Part 1THE R.E. McFADDEN CO.

Estimated InventoryDecember 31, 2005

At Cost At Retail

Goods available for sale:Beginning inventory ................................... $ 81,670.00 $ 114,610.00Purchases ..................................................... 502,990.00 767,060.00Purchase returns ........................................ (10,740.00) (15,330.00)Goods available for sale ............................. $573,920.00 $ 866,340.00

Sales ....................................................................... $786,120.00Sales returns .......................................................... (4,480.00)Net sales ................................................................. $781,640.00

Ending inventory at retail ($866,340 $781,640) $ 84,700.00Cost ratio: ($573,920 $866,340).......................... 66.25%Ending inventory at cost ($84,700 66.25%) ...... $ 56,113.75

Part 2

Estimated physical inventory at cost: $78,550 66.25% = $52,039.38

THE R.E. McFADDEN CO.Inventory ShortageDecember 31, 2005

At Cost At Retail

Estimated inventory, December 31, 2005 ..... $56,113.75 $84,700.00Phys ical inventory ($78,550 66.25%) .......... 52,039.38 78,550.00Inventory shortage ......................................... $ 4,074.37 $ 6,150.00


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At Cost At Retai lGoods available for sale:

Beginning inventory ................................................. $ 150,000 $ 250,000Purchases .................................................................. 2,100,000 3,500,000Less: Purchase returns and allowances ............... 250,000 400,000

Add: Transpor tat ion-in ............................................ 10,000 -Goods available for sale.......................................... . $2,010,000 $3,350,000

Deduct net sales at retail ($2,715,000 $35,000) ........ 2,680,000Ending inventory at retail .............................................. $ 670,000

Cost to retail rat io ($2,010,000 $3,350,000): ........... 60%

Estimated ending inventory at cost ($670,000 60%): $ 402,000

Inventory loss = $402,000 20%* = $80,400

*Because the insurance company covers 80% of theloss, JavCos estimated loss is 20% (100% 80%).

*Problem 7-11B (25 minutes) Part 1

Cost of units available for sale:6,300 uni ts in beginning inventory @ $35 ..... $ 220,500

10,500 units purchased @ $33 ......................... 346,50013,000 units purchased @ $32 ......................... 416,000

12,000 units purchased @ $29 ......................... 348,00015,500 units purchased @ $26 ......................... 403,00057,300 units for sale .......................................... $1,734,000

Part 2

a) FIFO basis :Total cost of the 57,300 units for sale ............. $1,734,000Less: Ending inventory on a FIFO basis:

15,500 units @ $26 ......................................... $403,0001,000 units @ $29 ........................................... 29,000 432,000

Cost of units sold .............................................. $1,302,000

b) LIFO basis :Total cost of the 57,300 units for sale ............. $1,734,000Less: Ending inventory on a LIFO basis:

6,300 beginning inventory units @ $35 . ...... $220,50010,200 units @ $33 ......................................... 336,600 557,100

Cost of units sold .............................................. $1,176,900


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*Problem 7-11B (concluded) Part 2

c) Weighted-average cost basis:Total cost of the 57,300 units for sale ...................... $1,734,000Less: Ending inventory at weighted-average cost:

($1,734,000/57,300) = $30.26 16,500 units .......... 499,290*Cost of units sold ...................................................... $1,234,710*


*Problem 7-12B (25 minutes)

a) FIFO basis :

Total cost of the 1,145 uni ts for sale .............. $64,755Less: Ending inventory on a FIFO basis:

345 units @ $59 ............................................. $20,355

165 units @ $57 ............................................. 9,405 29,760Cost of units sold ............................................. $34,995

b) LIFO basis:

Total cost of the 1,145 uni ts for sale .............. $64,755Less: Ending inventory on a LIFO basis:

510 beginning inventory uni ts @ $55 ........ 28,050Cost of units sold ............................................. $36,705


Total cost of the 1,145 units for sale .............. $64,755.00

Less: Ending inventory at weighted-average cost:($64,755/1,145 = $56.55) 510 ..................... 28,840.50*

Cost of units sold ............................................. $35,914.50*



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a) FIFO basis :

Total cost of the 770 uni ts for sale ................. $43,060Less: Ending inventory on a FIFO basis:

120 units @ $50 ............................................. 6,000Cost of units sold ............................................. $37,060

b) LIFO basis :

Total cost of the 770 uni ts for sale ................. $43,060Less: Ending inventory on a LIFO basis:

120 @ $60 ....................................................... 7,200Cost of units sold ............................................. $35,860


Total cost of the 770 uni ts for sale ................. $43,060.00Less: Ending inventory at weighted-average cost:

($43,060/770 = $55.92) 120 ........................ 6,710.40*Cost of units sold ............................................. $36,349.60*



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The Denney CompanyIncome Statement Comparing FIFO, LIFO and Weighted-

Average Inventory Cost ing MethodsFor Year Ended December 31, 2005

FIFO LIFOWeightedAverage

Sales (2,500 x $98/unit) ............................. $245,000.00 $245,000.00 $245,000.00COGS.......................................................... 138,440.00 138,200.00 138,307.20Gross Prof it ................................................ $106,560.00 $106,800.00 $106,692.80Operating Expenses (2,500 x $14/unit ).... 35,000.00 35,000.00 35,000.00Net Income ................................................. $ 71,560.00 $ 71,800.00 $ 71,692.80

Supporting calculations:

Cost of uni ts available for sale:740 units in beginning inventory @ $58 = $ 42,920.00700 units purchased Apr il 2 @ $56 = $ 39,200.00600 units purchased June 14 @ $54 = $ 32,400.00500 units purchased August 29 @ $52 = $ 26,000.00

2,540 $140,520.00

a) FIFO periodicTotal cost of the 2,540 units for sale......................... $140,520.00

Less: Ending inventory on a FIFO basis:40 units @ 52 = ............................................ 2,080.00

Cost of units sold ...................................................... $138,440.00

b) LIFO periodicTotal cost of the 2,540 units for sale ......................... $140,520.00

Less: Ending inventory on a LIFO basis:40 units @$58.................................................... 2,320.00

Cost of units sold ........................................................... $138,200.00


Total cost of the 2,540 units for sale ......................... $140,520.00 Less: Ending inventory at weighted-average cost:($140,520/2,540) = $55.32 40 units = ................. 2,212.80*

Cost of units sold ........................................................ $138,307.20*



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Ethics Challenge

1. In an environment of rising prices the use of FIFO results in a lower cost of goodssold than LIFO. If cost of goods sold is lower, net income will be higher. A highernet income will improve the profit margin ratio which is calculated as netincome/net sales.

With rising prices FIFO also resul ts in the most recent, higher prices becoming partof ending inventory. This means that the balance sheet inventory figure will belarger than under LIFO. In the numerator of the current ratio, inventory is includedas part of the current asset total. A larger inventory, therefore, results in a biggernumerator and therefore a larger current ratio than under LIFO.

2. It is true that managers have discretion in choosing an inventory costing method.It appears, however, that Diversions owner does not understand that changingmethods can only be done very selectively over time. Furthermore a change inmethod must be justified by management as improving the financial reporting forthe company. The consistency principle does not allow frequent changes ininventory costing methods by management. If Diversions owner can justify themethod change as improving the financial reporting for the company her action isnot unethical. However, she must realize that changing methods can only be aninfrequent occurrence given that consistency in financial reporting is required.

Also, the full disclosure pr inciple requ ires that the owner disclose to the bank thatshe has implemented a change in inventory costing method from LIFO to FIFO.


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Focus on Financial Statements

FFS 7-1

1.

FIFO LIFOMoving

AverageMerchandise inventory, December 31, 2004 11,000 11,000 11,000Purchases 156,000 156,000 156,000Merchandise inventory, December 31, 2005 19,000 31,000 24,000Cost of goods sold 148,000 136,000 143,000

2. (a) FIFO

Fardan Stereo SalesIncome Statement

For Year Ended December 31, 2005Revenues

Net sales (449,000 6,000)............................................................. $443,000Expenses:

Cost of goods so ld ...........................................................

Documents

Inventory Solution Manual (1)