Inventories: Measurement: Questions Aacsb Tags Exercises (Cont.) Aacsb Tags

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Chapter 8
Inventories: Measurement
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Questions
AACSB Tags
Exercises (cont.)
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Intermediate Accounting, 7/e
QUESTIONS FOR REVIEW OF KEY TOPICS

Question 81
Inventory for a manufacturing company consists of (1) raw materials, (2) work in process, and
(3) finished goods. Raw materials represent the cost, primarily purchase price plus freight charges,
of goods purchased from other manufacturers, that will become part of the finished product. Workin-process inventory represents the products that are not yet complete. The cost of work in process
includes the cost of raw materials used in production, the cost of labor that can be directly traced to
the goods in process, and an allocated portion of other manufacturing costs, called manufacturing
overhead. When the manufacturing process is completed, these costs that have been accumulated in
work in process are transferred to finished goods.
Question 82
Beginning inventory plus net purchases for the period equals cost of goods available for sale.
The main difference between a perpetual and a periodic system is that the periodic system allocates
cost of goods available for sale to ending inventory and cost of goods sold only at the end of the
period. The perpetual system accomplishes this allocation by decreasing inventory and increasing
cost of goods sold each time goods are sold.
Question 83
Perpetual System
Periodic System
(1) Purchase of merchandise
debit inventory
debit purchases
(2) Sale of merchandise
debit cost of goods sold;

credit inventory
no entry
(3) Return of merchandise
credit inventory
credit purchase returns
(4) Payment of freight
debit inventory
debit freight-in
Question 84
Inventory shipped f.o.b. shipping point is included in the inventory of the purchaser when the
merchandise reaches the common carrier. Laetner Corporation records the purchase in 2013 and
includes the shipment in its ending inventory. Bockner Company records the sale in 2013.
Inventory shipped f.o.b. destination is included in the inventory of the seller until it reaches the
purchasers location. Bockner would include the merchandise in its 2013 ending inventory and the
sale/purchase would be recorded in 2014.

83
Answers to Questions (continued)

Question 85
A consignment is an arrangement under which goods are physically transferred to another
company (the consignee), but the transferor (consignor) retains legal title. If the consignee cant
find a buyer, the goods are returned to the consignor. Goods held on consignment are included in
the inventory of the consignor until sold by the consignee.
Question 86
By the gross method, purchase discounts not taken are viewed as part of inventory cost. By the
net method, purchase discounts not taken are considered interest expense because they are viewed as
compensation to the seller for providing financing to the buyer.
Question 87
1. Beginning inventory
2. Purchases
3. Ending inventory
4. Purchase returns
5. Freight-in
increase
increase
decrease
decrease
increase
Question 88
Four methods of assigning cost to ending inventory and cost of goods sold are (1) specific
identification, (2) first-in, first-out (FIFO), (3) last-in, first-out (LIFO), and (4) average cost. The
specific identification method requires each unit sold during the period or each unit on hand at the
end of the period to be traced through the system and matched with its actual cost. First-in, first-out
(FIFO) assumes that units sold are the first units acquired. The last-in, first-out (LIFO) method
assumes that the units sold are the most recent units purchased. The average cost method assumes
that cost of goods sold and ending inventory consist of a mixture of all the goods available for sale.
The average unit cost applied to goods sold or ending inventory is an average unit cost weighted by
the number of units acquired at the various unit prices.
Question 89
When costs are declining, LIFO will result in a lower cost of goods sold and higher income
than FIFO. This is because LIFO will include in cost of goods sold the most recently purchased
lower-cost merchandise. LIFO also will provide a higher ending inventory in the balance sheet.

84
Answers to Questions (continued)

Question 810
Proponents of LIFO argue that it provides a better match of revenues and expenses because
cost of goods sold includes the costs of the most recent purchases. These are matched with sales that
reflect a current selling price. On the other hand, inventory costs in the balance sheet generally are
out of date because they are derived from old purchase transactions. It is conceivable that a
companys LIFO inventory balance could be based on unit costs actually incurred several years
earlier. When inventory quantity declines during a period, then these out-of-date inventory layers
will be liquidated and cost of goods sold will match noncurrent costs with current selling prices.
Question 811
Many companies choose the LIFO inventory method to reduce income taxes in periods when
prices are rising. In periods of rising prices, LIFO results in a higher cost of goods sold and
therefore a lower net income than the other methods. The companies income tax returns will report
lower taxable incomes using LIFO and lower taxes will be paid currently. If a company uses LIFO
to measure its taxable income, IRS regulations require that LIFO also be used to measure income
reported to investors and creditors.
Question 812
The gross profit, inventory turnover, and average days in inventory ratios are designed to
monitor inventories. The gross profit ratio is calculated by dividing gross profit (net sales minus
cost of goods sold) by net sales. Inventory turnover is calculated by dividing cost of goods sold by
average inventory, and we compute average days in inventory by dividing the number of days in the
period by the inventory turnover ratio.
Question 813
A LIFO inventory pool groups inventory units into pools based on physical similarities of the
individual units. The average cost for all of a pools beginning inventory and for all of a pools
purchases during the period is used instead of individual unit costs. If the quantity of ending
inventory for the pool increases, then ending inventory will consist of the beginning inventory plus a
layer added during the period at the average acquisition cost for the pool.
Question 814
The dollar-value LIFO method has important advantages. First, it simplifies the recordkeeping
procedures compared to unit LIFO because no information is needed about unit flows. Second, it
minimizes the probability of the liquidation of LIFO inventory layers, even more so than the use of
pools alone, through the aggregation of many types of inventory into larger pools. In addition, firms
that do not replace units sold with new units of the same kind can use the method.

85
Answers to Questions (concluded)

Question 815
After determining ending inventory at year-end cost, the following steps remain:
1. Convert ending inventory valued at year-end cost to base year cost.
2. Identify the layers in ending inventory with the years they were created.
3. Convert each layers base year cost measurement to layer year cost measurement using the
layer years cost index and then sum the layers.
Question 816
The primary difference between U.S. GAAP and IFRS in the methods allowed to value
inventory is that IFRS does not allow the use of the LIFO method.

86
BRIEF EXERCISES
Brief Exercise 81
Beginning inventory
Plus: Purchases
Less: Cost of goods sold
Ending inventory
$186,000
945,000
(982,000)
$149,000
Brief Exercise 82
To record the purchase of inventory on account.
Inventory ......................................................................... 845,000
Accounts payable........................................................
845,000
To record sales on account and cost of goods sold.

Accounts receivable........................................................ 1,420,000
Sales revenue ..............................................................
1,420,000
Cost of goods sold .......................................................... 902,000
Inventory.....................................................................
902,000

87
Brief Exercise 83
Both shipments should be included in inventory. The goods shipped to a
customer f.o.b. destination did not arrive at the customers location until after the
fiscal year-end. They belong to Kelly until they arrive at the customers location.
Title to the goods shipped from a supplier to Kelly on December 30, f.o.b. shipping
point, changed hands on December 30.
Brief Exercise 84
Purchase price = 10 units x $25,000 = $250,000
December 28, 2013
Inventory ......................................................................... 250,000
Accounts payable ........................................................
250,000
January 6, 2014
Accounts payable ............................................................ 250,000
Cash (99% x $250,000) ...................................................
247,500
Inventory (1% x $250,000) .............................................
2,500

88
Brief Exercise 85
December 28, 2013

Inventory (99% x $250,000) ............................................... 247,500
Accounts payable .......................................................
247,500
January 6, 2014
Accounts payable............................................................ 247,500
Cash ............................................................................
247,500

89
Brief Exercise 86
Cost of goods available for sale:
Beginning inventory (200 x $25)
Purchases:
100 x $28
200 x $30
Cost of goods available (500 units)
$5,000
$2,800
6,000
8,800
$13,800
First-in, first-out (FIFO)

Cost of goods available for sale (500 units)
Less: Ending inventory (determined below)
Cost of goods sold
$13,800
(8,100)
$5,700
Cost of ending inventory:

Date of
purchase
January 8
January 19
Total
Units
75
200
Unit cost
$28
30
Total cost
$2,100
6,000
$8,100
Average cost
Cost of goods sold
$13,800
(7,590)
$6,210 *

$13,800
Weighted-average unit cost =
= $27.60
500 units
275 units x $27.60 = $7,590

* Alternatively, could be determined by multiplying the units sold by the average
cost: 225 units x $27.60 = $6,210

810
Brief Exercise 87
Cost of goods sold:
Date of
Sale
January 10
January 25
Total
Cost of
Units Sold
Units Sold
125 (from Beg. Inv.)
75 (from Beg. Inv.)
25 (from 1/8 purchase)
225
Ending inventory:
Date of
Purchase
Units
January 8
75
January 19
200
Total
Unit Cost
$28
30
$25
25
28
Total Cost
$3,125
1,875
700
$5,700
Total Cost
$2,100
6,000
$8,100

811
Brief Exercise 87 (concluded)

Average cost
Date
Purchased
Beginning
inventory
200 @ $25
$5,000
January 8
100 @ $28
$2,800
Available
Sold
Balance
200 @ $25
$5,000
125 @ $26 = $3,250 175 @ $26
$4,550
$7,800
= $26/unit
300 units
January 10
January 19
200 @ $30 =
Available
$10,550
$6,000
= $28.133/unit
375 units
100 @ $28.133 = $2,813 275 @ $28.133
January 25
Total cost of goods sold

812
$7,737
Ending
inventory
= $6,063
Brief Exercise 88
Beginning inventory (20,000 x $25)
Purchases:
80,000 x $30
Cost of goods available (100,000 units)
Less: Ending inventory (15,000 units)
Cost of goods sold
$ 500,000
2,400,000
2,900,000
375,000*
$2,525,000
*15,000 units x $25 each = $375,000
Brief Exercise 89
64,000 units were sold.
Cost of goods sold without year-end purchase:
Units purchased during the year: 60,000 x $18
Plus units from beginning inventory: 4,000 x $15
Cost of goods sold
$1,080,000
60,000
1,140,000
Cost of goods sold with year-end purchase:

64,000 units x $18
Difference
1,152,000
$ 12,000
Cost of goods sold would be $12,000 higher and income before income taxes
$12,000 lower if the year-end purchase is made.
If FIFO were used instead of LIFO, the year-end purchase would have no effect
on income before income taxes. FIFO cost of goods sold with or without the purchase
would consist of the 10,000 units from beginning inventory and 54,000 units
purchased during the year at $18:
10,000 units x $15
Plus: 54,000 units x $18
Cost of goods sold
$ 150,000
972,000
$1,122,000
813
Brief Exercise 810

Units liquidated
Difference in cost ($30 25)
Before-tax LIFO liquidation profit
Tax effect ($25,000 x 40%)
LIFO liquidation profit
5,000
x $5
$25,000
(10,000)
$15,000
Brief Exercise 811

Cost of goods sold for the fiscal year ended February 26, 2011, would have been
$18 million lower had SuperValue used FIFO for its LIFO inventory. While
beginning inventory would have been $264 million higher, ending inventory also
would have been higher by $282 million. An increase in beginning inventory causes
an increase in cost of goods sold, but an increase in ending inventory causes a
decrease in cost of goods sold. Purchases for the year are the same regardless of the
inventory valuation method used.
Cost of goods sold as reported
Decrease if FIFO
Cost of goods sold, FIFO instead of LIFO

814
$29,124 million
(18) million
$29,106 million
Brief Exercise 812

Average inventory = ($60,000 + 48,000) y 2 = $54,000
Cost of goods sold y Average inventory = Inventory turnover
Cost of goods sold y $54,000 = 5
Cost of goods sold = $54,000 x 5
Cost of goods sold = $270,000
Gross profit ratio = 40%, therefore cost percentage = 60%
Sales x .60 = $270,000
Sales = $270,000 y .60 = $450,000
Brief Exercise 813

Date
Ending Inventory
at Base Year Cost
1/1/13
$1,400,000
Inventory Layers
at Base Year Cost
Inventory Layers
Converted to Cost
Inventory
DVL Cost
= $1,400,000
$1,400,000 (base)
$1,400,000 x 1.00 =$1,400,000
$1,400,000
$1,664,000
= $1,600,000
1.04
$1,400,000 (base)
200,000 (2013)
$1,400,000 x 1.00 = $1,400,000

200,000 x 1.04 =
208,000
$1,608,000
1.00
12/31/13

815
EXERCISES
Exercise 81
1.
2.
To record the purchase of inventory on account and the payment of freight

charges.
Inventory .........................................................................
5,000
Inventory .........................................................................
Cash .............................................................................
300
300
To record purchase returns.

Accounts payable ............................................................
Inventory .....................................................................
3.
5,000
600
600
To record cash sales and cost of goods sold.

Cash .................................................................................
Sales revenue...............................................................
5,200
Cost of goods sold ...........................................................

Inventory .....................................................................
2,800

816
5,200
2,800
Exercise 82
1.
2.

charges.
Purchases ........................................................................
5,000
Freight-in ........................................................................
Cash ............................................................................
300
300

Accounts payable............................................................
Purchase returns..........................................................
3.
5,000
600
600
To record cash sales.

Cash ................................................................................
Sales revenue ..............................................................
5,200
5,200
NO ENTRY IS MADE FOR THE COST OF GOODS SOLD.

817
Exercise 83
Requirement 1
Beginning inventory
Plus net purchases:
Purchases
Less: Purchase discounts
Less: Purchases returns
Plus: Freight-in
Cost of goods available for sale
Less: Ending inventory
Cost of goods sold
$ 32,000
$240,000
(6,000)
(10,000)
17,000
241,000
273,000
(40,000)
$233,000
Requirement 2
Cost of goods sold (above) ............................................... 233,000
Inventory (ending) ............................................................ 40,000
Purchase discounts ..........................................................
6,000
Purchase returns .............................................................. 10,000
Inventory (beginning) ...................................................
32,000
Purchases .....................................................................
240,000
Freight-in .....................................................................
17,000

818
Exercise 84
PERPETUAL SYSTEM
PERIODIC SYSTEM
($ in 000s)
Purchases
Inventory
Accounts payable
155
155
Freight
Inventory
Cash
10
Returns
Accounts payable
Inventory
12
Sales
Accounts receivable
Sales revenue
Cost of goods sold
Inventory
End of period
No entry
Purchases
Accounts payable
155
10
10
Freight-in
Cash
12
12
Accounts payable
Purchase returns
250
250
Accounts receivable
Sales revenue
250
148
10
12
250
No entry
148
Cost of goods sold (below)
Inventory (ending)
Purchase returns
Inventory (beginning)
Purchases
Freight-in
Cost of goods sold:
Beginning inventory
Purchases
Less: Returns
Plus: Freight-in
Net purchases
Cost of goods available
Cost of goods sold
155
148
30
12
25
155
10
$25
$155
(12)
10
153
178
(30)
$148

819
Exercise 85
Beginning inventory
Cost of goods sold
Ending inventory
Purchases (gross)
Purchase discounts
Purchase returns
Freight-in
2013
275 (1)
627
249 (2)
876
630
18
24
13
2014
249 (3)
621
225
846 (4)
610 (5)
15
30
32
2015
225
584 (6)
216
800
585
12 (7)
14
16
Net purchases = Purchases (gross) Purchase returns Purchase discounts + Freight-in

Beginning inventory + Net purchases = Cost of goods available for sale
Cost of goods available for sale Ending inventory = Cost of goods sold
2013:
(1) Cost of goods available for sale Net purchases = Beginning inventory
876 (630 18 24 + 13) = 275 = Beginning inventory
(2) Cost of goods available for sale Cost of goods sold = Ending inventory
876 627 = 249 = Ending inventory
2014:
(3) 2014 beginning inventory = 2013 ending inventory = 249
(4) Cost of goods sold + Ending inventory = Cost of goods available for sale
621 + 225 = 846 = Cost of goods available for sale
(5) Cost of goods available for sale Beginning inventory = Net purchases
846 249 = 597 = Net purchases
Net purchases + Purchases discounts + Purchase returns Freight-in = Purchases(gross)
597 + 15 + 30 32 = 610 = Purchases (gross)
2015:
(6) Cost of goods available for sale Ending inventory = Cost of goods sold
800 216 = 584 = Cost of goods sold

820
Exercise 85 (concluded)
(7) Cost of goods available for sale Beginning inventory = Net purchases
800 225 = 575 = Net purchases
Purchases (gross) Purchase returns + Freight-in Net purchases = Purchase discounts
585 14 + 16 575 = 12 = Purchase discounts

821
Exercise 86
Inventory balance before additional transactions
Add:
Goods shipped to Kwok f.o.b. shipping point on Dec. 28
Goods shipped to customer f.o.b. destination on December 27
Correct inventory balance
$165,000
17,000
22,000
$204,000
Exercise 87
Inventory balance before additional transactions
Add:
Merchandise on consignment with Joclyn Corp.
Deduct:
Merchandise shipped to Raymond f.o.b. destination on December 26
Merchandise held on consignment from the Harrison Company
Correct inventory balance
$210,000
15,000
(30,000)
(14,000)
$181,000
Exercise 88
1.
2.
3.
4.
5.
6.
7.
Excluded
Included
Included
Excluded
Included
Excluded
Included

822
Exercise 89
Requirement 1
Purchase price = 1,000 units x $50 = $50,000
July 15, 2013
Purchases ........................................................................
July 23, 2013

Cash (98% x $50,000) ....................................................
Purchase discounts (2% x $50,000) ...............................
50,000
50,000
50,000
49,000
1,000
Requirement 2
August 15, 2013
Cash ............................................................................
50,000
50,000
Requirement 3
The July 15 entry would include a debit to the inventory account instead of to
purchases, and the July 23 entry would include a credit to the inventory account
instead of to purchase discounts.

823
Exercise 810
Requirement 1
July 15, 2013
Purchases (98% x $50,000) ................................................
49,000
July 23, 2013

Cash .............................................................................
49,000
49,000
49,000
Requirement 2
August 15, 2013
Interest expense ...............................................................
Cash .............................................................................
49,000
1,000
50,000
Requirement 3
The July 15 entry would include a debit to the inventory account instead of to
purchases.

824
Exercise 811
Requirement 1
Purchases: $500 x 70% = $350 per unit.
100 units x $350 = $35,000
November 17, 2013
Purchases ........................................................................
November 26, 2013

Accounts payable ...........................................................
Purchase discounts (2% x $35,000) ...............................
Cash (98% x $35,000) ....................................................
35,000
35,000
35,000
700
34,300
Requirement 2
December 15, 2013
Cash ............................................................................
35,000
35,000

825

Requirement 3
Requirement 1:
November 17, 2013
Purchases (98% x $35,000) ................................................
34,300
November 26, 2013

Cash .............................................................................
34,300
34,300
34,300
Requirement 2:
December 15, 2013
Interest expense (2% x $35,000) ........................................
Cash .............................................................................

826
34,300
700
35,000
Exercise 812
The FASB Accounting Standards Codification represents the single source of
authoritative U.S. generally accepted accounting principles. The specific
citation for each of the following items is:
1. Define the meaning of cost as it applies to the initial measurement of
inventory.
FASB ASC 33010301: InventoryOverallInitial Measurement.
The primary basis of accounting for inventories is cost, which has been
defined generally as the price paid or consideration given to acquire an
asset. As applied to inventories, cost means in principle the sum of the
applicable expenditures and charges directly or indirectly incurred in
bringing an article to its existing condition and location. It is understood
to mean acquisition and production cost, and its determination involves
many considerations.
2. Indicate the circumstances when it is appropriate to initially measure
agricultural inventory at fair value.
FASB ASC 905330301: AgricultureInventoryInitial
Measurement.
Exceptional cases exist in which it is not practicable to determine an
appropriate cost basis for products. A market basis is acceptable if the
products meet all of the following criteria:
x
a. They have immediate marketability at quoted market prices that

cannot be influenced by the producer.
b. They have characteristics of unit interchangeability.
c. They have relatively insignificant costs of disposal.
The accounting basis of those kinds of inventories shall be their

realizable value, calculated on the basis of quoted market prices less
estimated direct costs of disposal. An example is freshly dressed meats
produced in meat packing operations.

827

3. What is a major objective of accounting for inventory?
FASB ASC 33010101: InventoryOverallObjectives.
A major objective of accounting for inventories is the proper
determination of income through the process of matching appropriate
costs against revenues.
4. Are abnormal freight charges included in the cost of inventory?
FASB ASC 33010307: InventoryOverallInitial Measurement.
Unallocated overheads shall be recognized as an expense in the period in
which they are incurred. Other items such as abnormal freight, handling
costs, and amounts of wasted materials (spoilage) require treatment as
current period charges rather than as a portion of the inventory cost.

828
Exercise 813
Beginning inventory (2,000 x $6.10)
Purchases:
10,000 x $5.50
$55,000
6,000 x $5.00
30,000
$12,200
85,000
$97,200

Cost of goods available for sale (18,000 units)
Cost of goods sold
$97,200
(15,000)
$82,200

Date of
purchase
August 18
Units
3,000
Unit cost
$5.00
Total cost
$15,000
Last-in, first-out (LIFO)

Cost of goods sold
$97,200
(17,700)
$79,500

Date of
purchase
Beg. Inv.
August 8
Units
2,000
1,000
Total
Unit cost
$6.10
5.50
Total cost
$12,200
5,500
$17,700

829

Average cost
Cost of goods sold
$97,200
(16,200)
$81,000 *

$97,200
= $5.40
18,000 units
3,000 units x $5.40 = $16,200

cost: 15,000 units x $5.40 = $81,000

830
Exercise 814
Cost of goods sold:
Date of
Sale
Aug. 14
Aug. 25
Total
Cost of
Units Sold
Units Sold
2,000 (from Beg. Inv.)
6,000 (from 8/8 purchase)
15,000
Total Cost
$6.10
5.50
5.50
5.00
$12,200
33,000
22,000
15,000
$82,200
Ending inventory = 3,000 units x $5.00 = $15,000

Date
Purchased
Sold
Balance
Beginning
inventory
2,000 @ $6.10 =
$12,200
2,000 @ $6.10
$12,200
August 8
10,000 @ $5.50 =
$55,000
2,000 @ $6.10
10,000 @ $5.50
$67,200
2,000 @ $6.10
2,000 @ $5.50
$23,200
8,000 @ $ 5.50 =
August 14
August 18
6,000 @ $5.00 =
$30,000
August 25
$44,000
2,000 @ $6.10
2,000 @ $5.50
6,000 @ $5.00
6,000 @ $5.00 =
1,000 @ $5.50 =
$30,000
$ 5,500
$79,500
2,000 @ $6.10
1,000 @ $5.50
$53,200
$17,700
Ending
inventory

831

(Note: the perpetual inventory LIFO results in this exercise are the same as
periodic LIFO results, due to the timing of sales and purchases. The same LIFO
layers are on hand at the end of the period under each method. This is unusual. LIFO
perpetual and LIFO periodic normally produce different results for ending inventory
and cost of goods sold.)
Average cost
Date
Beginning
inventory
August 8
Available
Purchased
2,000 @ $6.10 =
$12,200
10,000 @ $5.50 =
$55,000
Sold
Balance
2,000 @ $6.10
$12,200
8,000 @ $5.60 =
$44,800 4,000 @ $5.60
$22,400
7,000 @ $5.24 =
$36,680 3,000 @ $5.24
$15,720
Ending
inventory
$67,200
= $5.60/unit
12,000 units
August 14
August 18
Available
6,000 @ $5.00 =
$30,000
$52,400
= $5.24/unit
10,000 units
August 25

832
$81,480
Exercise 815
Requirement 1
LIFO will result in the highest cost of goods sold figure because both the cost of
merchandise and the quantity of merchandise rose during the period. FIFO will result
in the highest ending inventory balance for the same reasons.
Requirement 2
Beginning inventory (600 x $80)
Purchases:
1,000 x $ 95
$95,000
800 x $100
80,000
$ 48,000
175,000
$223,000

Less: Ending inventory (below)
Cost of goods sold
$223,000
(80,000)
$143,000

Date of
purchase
January 21
Units
800
Unit cost
$100
Total cost
$80,000

Cost of goods sold
$223,000
(67,000)
$156,000

Date of
purchase
Beg. Inv.
January 15
Total
Units
600
200
Unit cost
$80
95
Total cost
$48,000
19,000
$67,000
833
Exercise 816
Requirement 1
Purchases:
3,000 x $10.40
$31,200
8,000 x $10.75
86,000
Cost of goods sold
$ 50,000
117,200
$167,200
$167,200
(73,150)
$ 94,050*

$167,200
= $10.45
16,000 units
7,000 units x $10.45 = $73,150

cost:
9,000 units x $10.45 = $94,050

834

Requirement 2
Date
Purchased
Beginning
inventory
5,000 @ $10.00 =
$50,000
September 7
3,000 @ $10.40 =
$31,200
Available
Sold
Balance
5,000 @ $10.00
$50,000
4,000 @ $10.15 =
$40,600 4,000 @ $10.15
$40,600
5,000 @ $10.55 =
$52,750 7,000 @ $10.55
$73,850
Ending
inventory
$81,200
= $10.15/unit
8,000 units
September 10
September 25
8,000 @ $10.75 =
Available
$126,600
$86,000
= $10.55/unit
12,000 units
September 29
$93,350

835
Exercise 817
Requirement 1
FIFO cost of goods sold:
10,000 units @ $5.00
+ 10,000 units @ $6.00 (determined below)
= $50,000
= 60,000
$110,000
Requirement 2
LIFO cost of goods sold:
20,000 units @ $6.00 (determined below)
= $120,000
Calculations to determine cost per unit of year 2013 purchases:

Cost of goods sold
= Weighted-average cost per unit
Number of units sold
$115,000
= $5.75 per unit
20,000 units
$5.75 x 40,000 units = $230,000 = Cost of goods available for sale
$230,000 50,000 (beginning inventory) = $180,000 = Cost of purchases
$180,000
= $6 = Cost per unit of year 2013 purchases
30,000 units purchased
Purchases (30,000 x $6.00)
836
$ 50,000
180,000
$230,000
Exercise 818
Requirement 1
February 25, 2011
LIFO reserve ($21.3 20.9) ..............................................
Cost of goods sold ......................................................
($ in millions)
.4
.4
Requirement 2
$1,693.8 + .4 = $1,694.2 million cost of goods sold under FIFO.
Requirement 3
$20.9 x 35% = $7.315 million in tax savings.

837
Exercise 819
Requirement 1
Cost of goods sold:
50,000 units x $8.50 =
4,000 units x $7.00 =
$425,000
28,000
$453,000
Requirement 2
When inventory quantity declines during a reporting period, liquidation of LIFO
inventory layers carried at different costs prevailing in prior years results in
noncurrent costs being matched with current selling prices. If the resulting effect on
income is material, it must be disclosed. In this case, the effect of the LIFO layer
liquidation is to increase income (ignoring taxes) by $6,000 [4,000 units liquidated x
$1.50 ($8.50 current year cost per unit $7 LIFO layer cost per unit)].
Exercise 820
Requirement 2
The specific citation that describes the disclosure requirements that must be made
by publicly traded companies for a LIFO liquidation is FASB ASC 33010S993:
InventoryOverallSEC MaterialsLIFO Liquidations.
Requirement 3
When a company using LIFO liquidates a substantial portion of its LIFO
inventory and as a result includes a material amount of income in its income statement
that otherwise would not have been recorded, it must disclose the amount of income
realized as a result of the inventory liquidation.
Such disclosure would be required in order to make the financial statements not
misleading. Disclosure may be made either in a footnote or parenthetically on the face
of the income statement.

838
Exercise 821
($ in millions)
HOME DEPOT
LOWES
Gross profit ratio
= 23,304 = 34.3%
67,997
17,152
48,815
= 35.1%
Inventory turnover
= 44,693 = 4.29 times

10,406.5
31,663
8,285
= 3.82 times
Average days
in inventory
365
3.82
= 96 days
365
4.29
= 85 days
The gross profit ratios for the two companies are similar and both exceed the
industry average of 27%. On average, Lowes turns over its inventory eleven days
slower than does Home Depot and both companies turn over their inventories much
faster than the industry average.
Exercise 822
Date
1/1/13
12/31/13
12/31/14
Inventory Layers
at Base Year Cost
$660,000
= $660,000
1.00
$660,000 (base)
$660,000 x 1.00 = $660,000
$660,000
$660,000 (base)
3,462 (2013)
$660,000 x 1.00 = $660,000

3,462 x 1.04 =
3,600
663,600
$660,000 (base)
3,462 (2013)
40,242 (2014)
$660,000 x 1.00 = $660,000

3,462 x 1.04 =
3,600
40,242 x 1.08 =
43,461
707,061
$690,000
= $663,462
1.04
$760,000
= $703,704
1.08
Inventory Layers
Converted to Cost
Ending
Inventory
DVL Cost
Ending Inventory
at Base Year Cost

839
Exercise 823
Date
12/31/13
12/31/14
Ending Inventory
at Base Year Cost
Inventory Layers
at Base Year Cost
$200,000
= $200,000
1.00
$200,000 (base)
Ending
Inventory
DVL Cost
Inventory Layers
Converted to Cost
$200,000 x 1.00 = $200,000
$200,000
$200,000 x 1.00 = $200,000

20,000 x 1.05 =
21,000
221,000
$200,000 x 1.00 = $200,000

20,000 x 1.05 =
21,000
40,000 x 1.15 =
46,000
267,000
$200,000 x 1.00 = $200,000

20,000 x 1.05 =
21,000
30,000 x 1.15 =
34,500
255,500
$231,000
= $220,000
Index = 1.05
Index
$200,000 (base)
20,000 (2014)
12/31/15
$299,000
= $260,000
Index = 1.15
Index
$200,000 (base)
20,000 (2014)
40,000 (2015)
12/31/16
$300,000
= $250,000
Index = 1.20
Index
$200,000 (base)
20,000 (2014)
30,000 (2015)

840
Exercise 824
List A
i
l
1. Perpetual inventory
system
2. Periodic inventory system
a 3. F.o.b. shipping point

c
4. Gross method
g
h
k
5. Net method
6. Cost index
7. F.o.b. destination
8. FIFO
9. LIFO
b 10. Consignment
j 11. Average cost
d 12. IRS conformity rule
List B
a. Legal title passes when goods are
delivered to common carrier.
b. Goods are transferred to another company
but title remains with transferor.
c. Purchase discounts not taken are included
in inventory cost.
d. If LIFO is used for taxes, it must be used
for financial reporting.
e. Items sold are those acquired first.
f. Items sold are those acquired last.
g. Purchase discounts not taken are
considered interest expense.
h. Used to convert ending inventory at yearend cost to base year cost.
i. Continuously records changes in
inventory.
j. Items sold come from a mixture of goods
acquired during the period.
k. Legal title passes when goods arrive at
location.
l. Adjusts inventory at the end of the period.

841
CPA / CMA REVIEW QUESTIONS

CPA Exam Questions
1. d.
2. c. Under the net method, purchases are recorded net of the discount:
$3,600 x 98% = $3,528
3. b. Average Cost = $4,950 / 140 units = $35.36 per unit
Ending Inventory = $35.36 x 5 = $176.79
4. a. 5 units x $30 = $150
5. c. 5 units x $50 = $250
6. b. If the inventory balance was lower using FIFO than LIFO, then prices during
the period were moving downward. By using FIFO during such a period, the
higher priced items are sold first with lower-priced goods remaining in the
ending inventory.
7. b.
Date
1/1/13
12/31/13
12/31/14
Inventory
at Base
Year Cost
$100,000
120,000
128,000
Layer
Layer
at Base Cost
at Current
Ending
Year Cost Index
Year Cost Inventory
1.00
$100,000
$20,000
1.05
$21,000
121,000
8,000
1.10
8,800
129,800
8. a. IAS No. 2 does not permit the use of LIFO.

842
CMA Exam Questions

1. c. The company began March with 3,200 units in inventory at $64.30 each.
The March 4 purchase added 3,400 additional units at $64.75 each. Under
FIFO, the 3,600 units sold on March 14 were the oldest units. That sale
eliminated all of the 3,200 units priced at $64.30 and 400 of the units priced
at $64.75, leaving an inventory of 3,000 units at $64.75 prior to the March
25 purchase. On March 25, 3,500 units were acquired at $66. The 3,450
units sold on March 28 were the 3,000 remaining units priced at $64.75 and
450 units priced at $66. The ending inventory consists of 3,050 units at $66
each, or $201,300. The answer would have been the same under the periodic
FIFO method.
2. a. The ending inventory consists of 3,050 units (beginning inventory plus
purchases, minus sales). Under the periodic LIFO method, those units are
valued at the oldest prices for the period, which is $64.30 of the beginning
inventory. Multiplying $64.30 times 3,050 units produces a total inventory
value of $196,115.
3.
a. Under the perpetual LIFO method, the company begins with 3,200 units
at $64.30. Added to this is the March 4 purchase of 3,400 units at $64.75.
The March 14 sale uses all of the March 4 purchase and 200 of the original
inventory units. Thus, the firm is left with 3,000 units at $64.30. The March
25 purchase of 3,500 at $66 is added to the previous 3,000 units. The March
28 sale of 3,450 units comes entirely from the March 25 purchase, leaving
just 50 of those units at $66 each. Thus, at the end of the month, the
inventory consists of two layers: 3,000 units at $64.30 ($192,200), and 50
units at $66 ($3,300). Adding the two together produces a total ending
inventory of $196,200.

843
PROBLEMS
Problem 81
Requirement 1
a. To record the purchase of inventory on account and the payment of freight
charges.
October 12, 2013
Purchases (98% x $22,000) ................................................
Freight-in .........................................................................
Cash .............................................................................
b.
21,560
500
500

October 18, 2013
Purchase returns ..........................................................
c.
21,560
3,000
3,000
To record payment of accounts payable.

October 31, 2013
Cash .............................................................................

844
21,560
440
22,000
Problem 81 (continued)
d.
To record sales on account.

October 2013
Accounts receivable........................................................
Sales revenue ..............................................................
No entry is made for the cost of goods sold.
28,000
28,000
Cost of goods sold:

Beginning inventory
Plus net purchases:
Purchases
$21,560
Less: Purchases returns
(3,000)
Plus: Freight-in
500
Cost of goods sold
$15,000
19,060
34,060
(16,060)
$18,000
Adjusting entry:
October 31, 2013
Cost of goods sold (above) ...............................................
Inventory (ending) ............................................................
Purchase returns..............................................................
Inventory (beginning)....................................................
Purchases ....................................................................
Freight-in ....................................................................
18,000
16,060
3,000
15,000
21,560
500

845
Problem 81 (concluded)
Requirement 2
a.

charges.
October 12, 2013
Inventory (98% x $22,000) .................................................
Inventory .........................................................................
Cash .............................................................................
b.
500
500
3,000
3,000
To record payment of accounts payable.

October 31, 2013
Cash .............................................................................
d.
21,560

October 18, 2013
Inventory .....................................................................
c.
21,560
21,560
440
22,000
To record sales on account.

October 2013
Accounts receivable ........................................................
Sales revenue...............................................................
Cost of goods sold ...........................................................
Inventory .....................................................................

846
28,000
28,000
18,000
18,000
Problem 82
1. The transaction is not correctly accounted for. Inventory held on consignment by
another company should be included in the inventory of the consignor. Rasul
should include this merchandise in its 2013 ending inventory.
2. The transaction is not correctly accounted for. Legal title to merchandise shipped
f.o.b. shipping point changes hands when the goods are shipped. Rasul should
record the purchase and corresponding account payable in 2013 and include the
merchandise in its 2013 ending inventory.
3. The transaction is not correctly accounted for. Since the merchandise was shipped
f.o.b. destination and did not arrive at the customer's location until 2014, it should
be included in Rasuls 2013 ending inventory. The sale should be recorded in
2014.
4. The transaction is correctly accounted for. Merchandise held on consignment from
another company belongs to the consignor and should be excluded from the
inventory of the consignee.
5. The transaction is correctly accounted for. Since the merchandise was shipped
f.o.b. destination and did not arrive at Rasuls location until 2014, it should not be
included in Rasuls 2013 ending inventory. The purchase is correctly recorded in
2014.
Problem 83
Inventory
$1,250,000
Initial amounts
Adjustments - increase (decrease):
1.
(155,000)
2.
(22,000)
3.
NONE
4.
210,000
5.
25,000
6.
2,000
7.
(5,300)
Total adjustments
54,700
Adjusted amounts
$1,304,700
Accounts
Payable
$1,000,000
Sales
$9,000,000
(155,000)
NONE
NONE
NONE
25,000
2,000
(5,300)
(133,300)
$ 866,700
NONE
NONE
40,000
NONE
NONE
NONE
NONE
40,000
$9,040,000

847
Problem 84
Requirement 1
Net purchases:
Purchases (50,000* units x $10.00)
Less: Returns (1,000 units x $10.50)
Less: Purchase discounts
($490,000 x 2%)
Plus: Freight-in (50,000 units x $.50)
$ 80,000
$500,000
(10,500)
(9,800)
25,000
Cost of goods sold
504,700
584,700
(121,200)
$463,500
* The 5,000 units purchased on December 28 are not included. The

merchandise was shipped f.o.b. destination and did not arrive at Johnsons
warehouse until 2014.
Date of
purchase
Beg. Inv.
2013
Total
Units
10,000
4,000
14,000
Unit cost Total cost

$ 8.00
$ 80,000
10.30**
41,200
$121,200
**$10 x 98% = $9.80 + .50 in freight charges = $10.30

Requirement 2
Sales (45,000 units x $18.00)
Less:
Cost of goods sold (above)
Other operating expenses
Income before income taxes

848
$810,000
$463,500
150,000
(613,500)
$196,500
Problem 85
Cost of goods available for sale for periodic system:
Purchases:
5,000 x $ 9.00
$45,000
6,000 x $10.00
60,000
$ 48,000
105,000
$153,000
1. FIFO, periodic system

Cost of goods sold
$153,000
(78,000)
$ 75,000

Date of
purchase
Jan. 10
Jan. 18
Totals
Units
2,000
6,000
8,000
Unit cost
$ 9.00
10.00
Total cost
$18,000
60,000
$78,000
Alternatively, cost of goods sold can be determined by adding the cost of the 6,000
units in beginning inventory ($48,000) and the 3,000 units from the January 10
purchase ($27,000) = $75,000.

849
2. LIFO, periodic system
Cost of goods sold
$153,000
(66,000)
$ 87,000

Date of
purchase
Beg. Inv.
Jan. 10
Totals
Units
6,000
2,000
8,000
Unit cost
$8.00
9.00
Total cost
$48,000
18,000
$66,000
Alternatively, cost of goods sold can be determined by adding the cost of the 6,000
units from the January 18 purchase ($60,000) and the 3,000 units from the January
10 purchase ($27,000) = $87,000.

850
3. LIFO, perpetual system
Date
Beginning
inventory
Purchased
6,000 @ $8.00 =
3,000 @ $8.00 =
5,000 @ $9.00 =
2,000 @ $9.00 =
6,000 @ $10.00 =
6,000 @ $8.00
$48,000
$24,000 3,000 @ $8.00
$24,000
3,000 @ $8.00
5,000 @ $9.00
$69,000
$18,000 3,000 @ $8.00

3,000 @ $9.00
$51,000
$45,000
January 12
January 18
Balance
$48,000
January 5
January 10
Sold
$60,000
3,000 @ $8.00
3,000 @ $9.00
6,000 @ $10.00
4,000 @ $10.00 =
January 20
$40,000 3,000 @ $8.00

3,000 @ $9.00
2,000 @ $10.00
$111,000
$71,000
Ending
inventory
$82,000
4. Average cost, periodic system

Cost of goods sold
$153,000
(72,000)
$ 81,000

$153,000
= $9.00
17,000 units
8,000 units x $9.00 = $72,000

Alternatively, cost of goods sold could be determined by multiplying the units
sold by the average cost: 9,000 units x $9.00 = $81,000.

851
5. Average cost, perpetual system
Date
Beginning
inventory
Purchased
6,000 @ $8.00 =
Available
5,000 @ $9.00 =
Balance
$48,000
January 5
January 10
Sold
6,000 @ $8.00
$48,000
3,000 @ $8.00 =
$24,000 3,000 @ $8.00
$24,000
2,000 @ $8.625 =
$17,250 6,000 @ $8.625
$51,750
$45,000
$69,000
= $8.625/unit
8,000 units
January 12
January 18
Available
6,000 @ $10.00 =
$60,000
$111,750
= $9.3125/unit
12,000 units
4,000 @ $9.3125 = $37,250 8,000 @ $9.3125
January 20

852
$74,500
Ending
inventory
= $78,500
Problem 86
Requirement 1
Cost of goods available for sale for periodic system:
Purchases:
5,000 x $4.00
12,000 x $4.50
17,000 x $5.00
$20,000
54,000
85,000
$159,000
a. FIFO
Cost of goods sold
$159,000
(70,000)
$ 89,000

Date of
purchase
March 22
Units
14,000
Unit cost
5.00
Total cost
70,000
b. LIFO
Cost of goods sold
$159,000
(60,500)
$ 98,500

Date of
purchase
Jan. 7
Feb. 16
Totals
Units
5,000
9,000
14,000
Unit cost
$4.00
4.50
Total cost
$20,000
40,500
$60,500

853
c. Average cost
Cost of goods sold
$159,000
(65,471)
$ 93,529*

$159,000
= $4.6765
34,000 units
14,000 units x $4.6765 = $65,471

cost: 20,000 units x $4.6765 = $93,530 (rounding)
Gross Profit ratio:
FIFO:
$51,000* $140,000** = 36%
LIFO:
$41,500* $140,000** = 30%
Average:
$46,471* $140,000** = 33%
*Sales less cost of goods sold

**20,000 units x $7 sales price = sales
Requirement 2
In situations when costs are rising, LIFO results in a higher cost of goods sold
and, therefore, a lower gross profit ratio than FIFO.

854
Problem 87
Requirement 1
Beginning inventory ($60,000 + 60,000 + 63,000)
Purchases:
211
$63,000
212
63,000
213
64,500
214
66,000
215
69,000
216
70,500
217
72,000
218
72,300
219
75,000
Cost of goods available
Ending inventory:
213
$64,500
216
70,500
219
75,000
Cost of goods sold
$183,000
615,300
798,300
(210,000)
$588,300
Requirement 2
Cost of goods sold
$798,300
(219,300)
$579,000
Cost of ending inventory (3 autos):

Car ID
219
218
217
Total
Cost
$ 75,000
72,300
72,000
$219,300

855
Requirement 3
Cost of goods sold
$798,300
(183,000)
$615,300
Cost of ending inventory (3 autos):

Car ID
203
207
210
Total
Cost
$ 60,000
60,000
63,000
$183,000
Requirement 4
Cost of goods sold
$798,300
(199,575)
$598,725*

$798,300
= $66,525
12 units
3 units x $66,525 = $199,575

cost: 9 units x $66,525 = $598,725

856
Problem 88
Requirement 1
The note indicates that if the company had used FIFO, inventory would have
been higher by $2,575 million and $3,022 million at the end of 2010 and 2009,
respectively. Therefore, 2010 cost of goods sold would have been higher (and income
before tax lower) by $447 million ($3,022 2,575).
The information provided also states that net income for 2010 would have been
lower by $331 million if FIFO had been used. This means that the tax effect of the
difference between LIFO and FIFO was $116 million ($447 331). The effective tax
rate is therefore approximately 26% ($116 $447).
Requirement 2
The information might be useful to a financial analyst interested in comparing
Caterpillars performance with another company using the FIFO inventory method
exclusively.
Requirement 3
Retained earnings would have been higher by approximately $1,906 million
[$2,575 million x (1 .26)]. This analysis assumes a constant 26% income tax rate
throughout Caterpillars corporate life.

857
Problem 89
Requirement 1
Beginning inventory
Purchases:
30,000 units @ $25
Cost of goods sold
$ 450,000
750,000
1,200,000
(250,000)
$ 950,000

Date of
purchase
Units
Beg. Inv.
10,000
Beg. Inv.
5,000
Totals 15,000
Unit cost
$15
20
Total cost
$150,000
100,000
$250,000
Requirement 2
Cost of goods sold assuming all units purchased at the year 2013 price:
40,000 units x $25.00 =
$1,000,000
Less: LIFO cost of goods sold
(950,000)
LIFO liquidation profit before tax
50,000
Multiplied by 1 .40
x .60
LIFO liquidation profit
$ 30,000
Requirement 3
$50,000 x 40% = $20,000

858
Problem 810
Requirement 1
Cost of goods sold:
2013:
1,000 x $16 = $ 16,000
10,000 x $18 = 180,000
11,000
$196,000
2014:
1,500 x $16 = $ 24,000

13,000 x $18 = 234,000
14,500
$258,000
2015:
1,000 x $12 = $ 12,000

12,000 x $18 = 216,000
13,000
$228,000
Requirement 2
LIFO liquidation before-tax profit or loss:
2013:
1,000 units x $2 ($18 16) =
2014:
1,500 units x $2 ($18 16) =
2015:
1,000 units x $6 ($18 12) =
$2,000 profit
$3,000 profit
$6,000 profit
Requirement 3
Disclosure note:
During fiscal 2015, 2014, and 2013, inventory quantities in certain LIFO layers were
reduced. These reductions resulted in a liquidation of LIFO inventory quantities
carried at lower costs prevailing in prior years as compared with the cost of fiscal
2015, 2014, and 2013 purchases. As a result, cost of goods sold decreased by $6,000,
$3,000, and $2,000 in fiscal 2015, 2014, and 2013, respectively, and net income
increased by approximately $3,600, $1,800, and $1,200, respectively.

859
Problem 811
Requirement 1
Sales (27,000 units x $2,000)
Less: Cost of goods sold (27,000 units x $1,000)
Gross profit
$54,000,000
(27,000,000)
$27,000,000
Gross profit ratio = $27,000,000 y $54,000,000 = 50%

Requirement 2
Sales (27,000 units x $2,000)
Less: Cost of goods sold*
Gross profit
$54,000,000
(25,000,000)
$29,000,000
Gross profit ratio = $29,000,000 y $54,000,000 = 53.7%

*Cost of goods sold:
15,000 units x $1,000
6,000 units x $ 900
4,000 units x $ 800
2,000 units x $ 700
27,000 units

860
=
=
=
=
$15,000,000
5,400,000
3,200,000
1,400,000
$25,000,000

Requirement 3
The gross profit and gross profit ratio are higher applying the requirement 2
assumption of 15,000 units purchased because of the LIFO liquidation profit that
results. When inventory quantity declines during a reporting period, LIFO inventory
layers carried at costs prevailing in prior years are liquidated or assumed sold in the
cost of goods sold calculation. This results in noncurrent costs being matched with
current selling prices. If the company had purchased at least 27,000 units during
2014, there would be no LIFO liquidation.
The profit difference ($2,000,000 in this case), if material, must be disclosed in a
note. The difference can be arrived at by comparing the current replacement cost of
$1,000 with each inventory layer from prior years that was included in this years cost
of goods sold, as follows:
6,000 units x $100 ($1,000 900)
4,000 units x $200 ($1,000 800)
2,000 units x $300 ($1,000 700)
Total LIFO liquidation profit
Requirement 4
Sales (27,000 units x $2,000)
Cost of goods sold:
5,000 units x $700
$ 3,500,000
4,000 units x $800
3,200,000
6,000 units x $900
5,400,000
12,000 units x $1,000
12,000,000
27,000 units
Gross profit
=
$ 600,000
800,000
600,000
$2,000,000
$54,000,000
24,100,000
$29,900,000
Gross profit ratio = $29,900,000 y $54,000,000 = 55.4%

If only 15,000 units are purchased, cost of goods sold, gross profit, and the gross
profit ratio would be exactly the same as when 28,000 units are purchased.
Requirement 5
The number of units purchased has no effect on FIFO cost of goods sold. When
applying the first-in, first-out approach, beginning inventory costs are included in cost
of goods sold first, regardless of the quantities of inventory purchased in the new
reporting period.

861
Problem 812
Requirement 1
Allowance for uncollectible accounts
Balance, beginning of year
Add: Bad debt expense for 2013
Less: End-of-year balance
Accounts receivable written off
$7
8
(10)
$5
Requirement 2
Accounts receivable analysis:
Balance, beginning of year ($583 + 7)
Add: Credit sales
Less: write-offs (from Requirement 1)
Less: Balance end of year ($703 + 10)
Cash collections
$ 590
6,255
(5)
(713)
$6,127
Requirement 3
Cost of goods sold for 2013 would have been $130 million lower had Inverness
used the average cost method for its entire inventory. While beginning inventory
would have been $350 million higher, ending inventory also would have been higher
by $480 million. An increase in beginning inventory causes an increase in cost of
goods sold, but an increase in ending inventory causes a decrease in cost of goods
sold. Purchases for the year are the same regardless of the inventory valuation method
used. Therefore, cost of goods sold would have been $5,060 ($5,190 130).
Requirement 4
a. Receivables turnover ratio
b. Inventory turnover ratio
c. Gross profit ratio

862
$6,255
($703 + 583)/2
9.73 times
$5,190
($880 + 808)/2
6.15 times
= ($6,255 5,190)
$6,255
17%

Requirement 5
If inventory costs are increasing, when inventory quantity declines during a
period, liquidation of LIFO inventory layers carried at lower costs prevailing in prior
years results in noncurrent costs being matched with current selling prices. The
income generated by this liquidation is known as LIFO liquidation profit.
The liquidation caused 2013 cost of goods sold to be lower by $9.23 million [$6
million y (1 .35)]

863
Problem 813
Date
Ending Inventory
at Base Year Cost
1/1/13
$400,000
Inventory Layers
at Base Year Cost
Ending
Inventory
DVL Cost
Inventory Layers
Converted to Cost
= $400,000
$400,000 (base)
$400,000 x 1.00 =
$400,000
$400,000
= $420,000
$400,000 (base)
20,000 (2013)
$400,000 x 1.00 =
20,000 x 1.05 =
$400,000
21,000
421,000
$400,000 (base)
20,000 (2013)
15,000 (2014)
$400,000 x 1.00 =
20,000 x 1.05 =
15,000 x 1.12 =
$400,000
21,000
16,800
437,800
$400,000 (base)
20,000 (2013)
5,000 (2014)
$400,000 x 1.00 =
20,000 x 1.05 =
5,000 x 1.12 =
$400,000
21,000
5,600
426,600
1.00
12/31/13
$441,000
1.05
12/31/14
$487,200
= $435,000
1.12
12/31/15
$510,000
= $425,000
1.20
Problem 814
Date
Ending Inventory
at Base Year Cost
1/1/13
$150,000
Inventory Layers
at Base Year Cost
Ending
Inventory
DVL Cost
Inventory Layers
Converted to Cost
= $150,000
$150,000 (base)
$150,000 x 1.00 =
$150,000
$150,000
= $185,185
$150,000 (base)
35,185 (2013)
$150,000 x 1.00 =
35,185 x 1.08 =
$150,000
38,000
188,000
$150,000 (base)
35,185 (2013)
24,815 (2014)
$150,000 x 1.00 =
35,185 x 1.08 =
24,815 x 1.17 =
$150,000
38,000
29,034
217,034
$150,000 (base)
35,185 (2013)
21,815 (2014)
$150,000 x 1.00 =
35,185 x 1.08 =
21,815 x 1.17 =
$150,000
38,000
25,524
213,524
$150,000 (base)
35,185 (2013)
21,815 (2014)
1,000 (2016)
$150,000
35,185
21,815
1,000
$150,000
38,000
25,524
1,100
214,624
1.00
12/31/13
$200,000
1.08
12/31/14
$245,700
= $210,000
1.17
12/31/15
$235,980
= $207,000
1.14
12/31/16
$228,800
= $208,000
1.10

864
x 1.00
x 1.08
x 1.17
x 1.10
=
=
=
=
Problem 815
Date
Ending Inventory
at Base Year Cost
1/1/13
$260,000
Inventory Layers
at Base Year Cost
Inventory Layers
Converted to Cost
Ending
Inventory
DVL Cost
= $260,000
$260,000 (base)
$260,000 x 1.00 =
$260,000
$260,000
= $333,333
$260,000 (base)
73,333 (2013)
$260,000 x 1.00 =
73,333 x 1.02 =
$260,000
74,800
334,800
$260,000 (base)
70,189 (2013)
$260,000 x 1.00 =
70,189 x 1.02 =
$260,000
71,593
331,593
$260,000 (base)
70,189 (2013)
43,643 (2015)
$260,000 x 1.00 =
70,189 x 1.02 =
43,643 x 1.07 =
$260,000
71,593
46,698
378,291
$260,000 (base)
70,189 (2013)
43,643 (2015)
17,077 (2016)
$260,000
70,189
43,643
17,077
$260,000
71,593
46,698
18,785
397,076
1.00
12/31/13
$340,000
1.02
12/31/14
$350,000
= $330,189
1.06
12/31/15
$400,000
= $373,832
1.07
12/31/16
$430,000
= $390,909
1.10
x 1.00
x 1.02
x 1.07
x 1.10
=
=
=
=

865
Problem 816
Date
Ending Inventory
at Base Year Cost
1/1/13
$84,000
Inventory Layers
at Base Year Cost
Ending
Inventory
DVL Cost
Inventory Layers
Converted to Cost
= $84,000
$84,000 (base)
$84,000
x 1.00 =
$84,000
$84,000
= $96,000
$84,000 (base)
12,000 (2013)
$84,000
12,000
x 1.00 =
x 1.05 =
$84,000
12,600
96,600
$84,000 (base)
12,000 (2013)
24,000 (2014)
$84,000
12,000
24,000
x 1.00 =
x 1.05 =
x 1.14 =
84,000
12,600
27,360
123,960
$84,000 (base)
12,000 (2013)
24,000 (2014)
5,000 (2015)
$84,000
12,000
24,000
5,000
x 1.00
x 1.05
x 1.14
x 1.20
=
=
=
=
$84,000
12,600
27,360
6,000
129,960
$84,000 (base)
12,000 (2013)
24,000 (2014)
5,000 (2015)
3,000 (2016)
$84,000
12,000
24,000
5,000
3,000(3)
x 1.00
x 1.05
x 1.14
x 1.20
x 1.25
=
=
=
=
=
1.00
12/31/13
$100,800
1.05
12/31/14
$136,800
= $120,000
1.14
12/31/15
$150,000
= $125,000
1.20 (1)
12/31/16
(1)
(2)
(3)
(4)
(5)
$160,000(5)
= $128,000(4)
1.25
84,000
12,600
27,360
6,000
3,750(2)
133,710
$150,000 y $125,000 = 1.20 (2015 cost index)

$133,710 129,960 = $3,750
$3,750 y 1.25 = $3,000
$125,000 + 3,000 = $128,000 (2016 inventory at base-year cost)
$128,000 x 1.25 = $160,000 (2016 inventory at year-end costs)

866
CASES
Judgment Case 81
Advance warning of the company's impending bankruptcy existed at the date of
the financial statements. As a rule, inventories should rise in tandem with sales. If
inventories rise faster, it may be because the goods simply aren't selling. This is
particularly true of companies in faddish or seasonal businessesMerry-Go-Round's
world.
The company's report showed that inventories on January 30 were $82.2 million,
up 37 percent from $60 million a year earlier. That's well above the 15 percent sales
growth in the same period, to $877.5 million from $761.2 million. This alone should
have been a major cause for concern. It indicated the company's goods simply weren't
selling as rapidly as it expected, causing its inventories to bulge. The increase in
receivables from $6,195 to over $6 million should also have been cause for concern.

867
Real World Case 82

Requirement 1
Identifying items that should be included in inventory is difficult due to goods in
transit, goods on consignment, and sales returns.
Goods in transit. Inventory shipped f.o.b. shipping point is included in the
purchasers inventory as soon as the merchandise is shipped. On the other hand,
inventory shipped f.o.b. destination is included in the purchasers inventory only after
it reaches the purchasers location.
Goods on consignment. Goods held on consignment are included in the
inventory of the consignor until sold by the consignee.
Sales returns. When the right of return exists, a seller must be able to estimate
those returns. As a result, a company includes in inventory the cost of merchandise it
anticipates will be returned.
Requirement 2
In addition to the direct acquisition costs such as the price paid and transportation
costs to obtain inventory, the costs of unloading, unpacking, and preparing inventory
for sale or raw materials for use, if material in amount, also should be included in the
cost of inventory.
Requirement 3
Sport Chalet considers cost to include the direct cost of merchandise and inbound
freight, plus internal costs associated with merchandise procurement, storage, and
handling.

868
Judgment Case 83
1.
a. The specific identification method requires each unit to be clearly
distinguished from similar units either by description, identification number, location,
or other characteristic. Costs are accumulated for specific units and expensed as the
units are sold. Thus, the specific identification method results in recognized cost
flows being identical to actual physical flows. Ideally, each unit is relatively
expensive and the number of units relatively few so that recording costs is not
burdensome. Under the specific identification method, if similar items have different
costs, cost of goods sold is influenced by the specific units sold.
b. It is appropriate for Happlia to use the specific identification method
because each appliance is expensive, and easily identified by number and description.
The specific identification method is feasible because Happlia already maintains
records of its units held by individual retailers. Managements ability to manipulate
cost of goods sold is minimized because once the inventory is in the retailers hands,
Happlias management cannot influence the units selected for sale.
2.
a. Happlia should include in inventory carrying amounts all necessary and
reasonable costs to get an appliance into a useful condition and place for sale.
Common (or joint) costs should be allocated to individual units. Such costs exclude
the excess costs incurred in transporting refrigerators to Minneapolis and their
reshipment to Kansas City. These unit costs should only include normal freight costs
from Des Moines to Kansas City. In addition, costs incurred to provide time utility to
the goods, that is, ensuring that they are available when required, will also be included
in inventory carrying amounts.
b. Examples of inventoriable costs include the unit invoice price, plus an
allocated proportion of the port handling fees, import duties, freight costs to Des
Moines and to retailers, insurance costs, repackaging, and warehousing costs.
3.
The 2013 income statement should report in cost of goods sold all
inventory costs related to units sold in 2013, regardless of when cash is received from
retailers. Excess freight costs incurred for shipping the refrigerators from Minneapolis
to Kansas City should be included in determining operating income.

869
Communication Case 84
Suggested Grading Concepts and Grading Scheme:
Content (70%)
_______ 20 Describes the differential effect on ending inventory
and cost of goods sold of using FIFO versus LIFO
when
_____ Prices are increasing.
_____ Prices are decreasing.
_______ 25 Discusses the various motivating factors that
might influence the choice of inventory method.
______ The actual physical flow of product.
______ The better match of expenses with revenues
provided by LIFO.
______ The effect on the balance sheet.
______ The effect on reported income and income
taxes.
______ The cost of implementation of LIFO.
_______ 10 Discusses briefly the methods available to
simplify LIFO.
_______ 15 Discusses the IRS conformity rule with respect to
LIFO and the relaxation of the rule that allows a
a company using LIFO to present supplemental
non-LIFO disclosures.
______
_______ 70 points
Writing (30%)
_______ 6
Terminology and tone appropriate to the audience of
a company president.
_______
12
_______
12
Organization permits ease of understanding.

_____ Introduction that states purpose.
_____ Paragraphs that separate main points.
English
_____ Sentences grammatically clear and well organized,
concise.
_____ Word selection.
_____ Spelling.
_____ Grammar and punctuation.
______
_______ 30 points

870
LIFO produces a higher cost of goods sold, lower taxable income, and therefore
lower income taxes currently payable than FIFO only in periods when the costs of the
companys products are rising. When costs are decreasing, LIFO results in lower cost
of goods sold, higher taxable income, and a higher current tax liability than FIFO. In
the case of the electronics client, you would explain this to the intern concluding that
the costs of the client's products must be decreasing, as frequently occurs in this
industry.
Judgment Case 86
At the end of a reporting period it is important to ensure that a proper inventory
cutoff is made. A proper cutoff involves the determination of the ownership of goods
that are in transit between the company and its customers as well as the company and
its suppliers. If the shipment is made f.o.b. shipping point, then ownership is
transferred to the buyer when the goods reach the common carrier. If the shipment is
made f.o.b. destination, then ownership is transferred to the buyer when the goods
arrive at the buyers location.
In this case, John is incorrect if the goods were shipped f.o.b. destination. If so,
even though the company is not in physical possession of the goods, they should be
included in ending inventory because the shipment had not reached the buyer's
location by the end of the reporting period.

871
Ethics Case 87
Requirement 1
Without purchase of the additional units:
Sales (35,000 @ $60)
Cost of goods sold (35,000 x $30)
Gross profit
$2,100,000
(1,050,000)
$1,050,000
Due Jim Lester ($1,050,000 x 20%) = $210,000

With purchase of the additional units:
Sales
Cost of goods sold:
20,000 x $40
$800,000
15,000 x $30
450,000
Gross profit
$2,100,000
(1,250,000)
$ 850,000
Due Jim Lester ($850,000 x 20%) = $170,000

Requirement 2
Discussion should include these elements.
Facts:
If Moncrief purchases the additional units at the end of the year under a periodic
LIFO inventory system, the transaction results in a reduced payment to Jim Lester,
reduced profits to shareholders, and reduced income tax payments to government
entities. By purchasing the additional units of Zelenex, Moncrief reduces Jim Lester's
payment by $40,000 ($210,000 170,000) and decreases gross profit by $200,000
($1,050,000 850,000). The net effect on before-tax income is a decrease of
$160,000 ($200,000 40,000). Since Moncrief does not intend to sell the units until
2014, the only logical reason for purchasing more costly inventory at year-end is
profit manipulation.
Ethical Dilemma:
Should Moncrief exercise its right to purchase inventory at will, resulting in a
reduction in net income, or recognize the rights of Jim Lester to receive profit for the
sale of his product, shareholders' rights to have their investment appreciate through
positive earnings, and government entities' rights to collect tax on economic net
income?
872
Real World Case 88

Requirement 1
The LIFO conformity rule permits LIFO users to present designated
supplemental disclosures. These disclosures allow a company using LIFO to report,
in a note, the difference between inventories valued using LIFO and inventory valued
as if another method had been used. Kroger's note provides this supplemental
information.
Requirement 2
1/29/11
Ending
Beginning
Inventory
Inventory
($ in millions)
Inventory as stated
Add: Increase in LIFO inventory
FIFO inventory balances
$4,966
827
$5,793
$4,935
770
$5,705
Requirement 3
Cost of goods sold for the fiscal year ended January 29, 2011, would have been
$57 million lower had Kroger used FIFO for its entire inventory. While beginning
inventory would have been $770 million higher, ending inventory also would have
been higher by $827 million. An increase in beginning inventory causes an increase
in cost of goods sold, but an increase in ending inventory causes a decrease in cost of
goods sold. Purchases for the year are the same regardless of the inventory valuation
method used.

873
Real World Case 89

Requirement 3
The following is based on Whole Foods 2010 financial statements. Answers
will vary depending on the financial statement dates chosen.
a. Whole Foods uses the last-in, first-out (LIFO) method for approximately 93.9%
of its inventories at the end of 2010 and 93.6% of its inventories at the end of
2009 and FIFO for the remainder.
b. Assuming that current cost approximates FIFO cost, the inventory disclosure
note indicates that, if FIFO had been used to value LIFO inventories,
inventories would have been higher than reported by $19.4 million at the end of
2010 and $27.1 million at the end of 2009. Cost of goods sold for 2010 would
have been $7.7 million higher ($27.1 19.4) had Whole Foods used FIFO.
Beginning inventory would have been $27.1 million higher and ending
inventory also would have been higher by $19.4 million. An increase in
beginning inventory causes an increase in cost of goods sold, while an increase
in ending inventory causes a decrease in cost of goods sold. Purchases for 2010
are the same regardless of the inventory valuation method used.
c. Inventory turnover = cost of goods sold divided by average inventory
($ rounded to millions)
Inventory turnover =
$5,870 = 18.52 times

$317 *
*($323 + 311) 2

874

The dollar-value LIFO inventory estimation technique begins with the
determination of the current years ending inventory valued in terms of year-end costs.
It is not necessary for a company using DVL to track the cost of purchases during the
year. All that is needed is to take the physical quantities of goods on hand at the end
of the year and apply year-end costs.
The next step is to convert the ending inventory from year-end costs to base year
costs. This usually is accomplished by dividing the ending inventory at year-end costs
by the years cost index. The cost index reflects the change in cost from a base year to
the current year. The ending inventory has been deflated for cost changes from the
base year to the end of the current year.
The next step in the procedure is to identify the layers in ending inventory with
the years they were created by comparing ending inventory at base year cost to the
beginning inventory at base year cost. Applying the LIFO concept, if inventory has
increased, ending inventory at base year cost consists of the beginning inventory layer
plus a current year layer.
The final step converts the layers identified to cost by multiplying the layers at
base year cost by the layers cost index. The costs are totaled to obtain ending
inventory at DVL cost.

875
Research Case 811

Requirement 1
The FASBs codification citation that provides guidance for determining whether
an arrangement involving the sale of inventory is in substance a financing
arrangement is FASB ASC 47040052: DebtProduct Financing Arrangements
Overview and Background.
Requirement 2
The FASBs codification citation that addresses the recognition of a product
financing arrangement is FASB ASC 47040251: DebtProduct Financing
ArrangementsRecognition.
Requirement 3
The appropriate accounting treatment for this type of arrangement is for the
sponsor to record a liability at the time the proceeds are received from the other entity.
The sponsor does not record the transaction as a sale and does not remove the product
from its inventory. The cost of the repurchase amount in excess of the originally
recorded liability represents financing and holding costs. These costs are accounted
for in accordance with the sponsors accounting policies applicable to other financing
and holding costs. Notice that this is an example of substance (a loan) over form (a
sale).
Requirement 4
Journal entry to record the sale (cash receipt):
Cash ................................................................................. 160,000
Liabilityproduct financing arrangement .................
160,000
Journal entry to record the repurchase:
Liabilityproduct financing arrangement .................... 160,000
Holding and financing costs* .........................................
4,000
Cash .............................................................................
164,000
876
Research Case 811 (concluded)

*The treatment of these costs depends on the accounting policies of the sponsor. For
example, if these costs normally are expensed as period costs, then the debit in this
case would be to an expense account (or accounts).

877
Analysis Case 812

Requirement 1
($ in millions)
SAKS
DILLARDS
Gross profit ratio
1,098
2,786
= 39%
2,145
6,121
= 35%
Inventory turnover
1,688
660
= 2.56 times
3,976
1,295.5
= 3.07 times
Average days
in inventory
= 143 days
365
3.07
= 119 days
365
2.56
The gross profit ratios for the two companies are similar, and both are higher than
the industry average. The inventory turnover ratios for the two companies reveal that,
on average, it takes Saks 24 more days to sell its inventory than Dillards. This could
be a reflection of more higher-end merchandise sold at Saks, which would also
explain the slightly higher gross profit ratio of 39% compared to 35% for Dillards.
Saks turns its inventory over 14 days slower than the industry average, Dillards 10
days faster.
Requirement 2
The objective of this requirement is to motivate students to obtain hands-on
familiarity with actual annual reports and to apply the techniques learned in the
chapter. You may wish to provide students with multiple copies of the same annual
reports and compare responses. Another approach is to divide the class into teams
who evaluate reports from a group perspective.

878
Air FranceKLM Case

Per note 3.15, AF uses the weighted-average method to value its inventory.
Under IFRS, the FIFO (first-in, first-out) method also can be used. However, the
LIFO (last-in, first-out) method, which can be used under U.S. GAAP in addition to
the average cost method and the FIFO method, is prohibited under IFRS.

879

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Solutions Manual, Vol.1, Chapter 8

The McGraw-Hill Companies, Inc., 2013

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The McGraw-Hill Companies, Inc., 2013

Intermediate Accounting, 7/e

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QUESTIONS FOR REVIEW OF KEY TOPICS

(1) Purchase of merchandise

(2) Sale of merchandise

debit cost of goods sold;

(3) Return of merchandise

credit purchase returns

(4) Payment of freight

Solutions Manual, Vol.1, Chapter 8

The McGraw-Hill Companies, Inc., 2013

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Answers to Questions (continued)

The McGraw-Hill Companies, Inc., 2013

Intermediate Accounting, 7/e

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Answers to Questions (continued)

Solutions Manual, Vol.1, Chapter 8

The McGraw-Hill Companies, Inc., 2013

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Answers to Questions (concluded)

The McGraw-Hill Companies, Inc., 2013

Intermediate Accounting, 7/e

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To record sales on account and cost of goods sold.

Solutions Manual, Vol.1, Chapter 8

The McGraw-Hill Companies, Inc., 2013

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The McGraw-Hill Companies, Inc., 2013

Intermediate Accounting, 7/e

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December 28, 2013

Solutions Manual, Vol.1, Chapter 8

The McGraw-Hill Companies, Inc., 2013

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First-in, first-out (FIFO)

Cost of ending inventory:

Cost of ending inventory:

275 units x $27.60 = $7,590

The McGraw-Hill Companies, Inc., 2013

Intermediate Accounting, 7/e

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Solutions Manual, Vol.1, Chapter 8

The McGraw-Hill Companies, Inc., 2013

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Brief Exercise 87 (concluded)

125 @ $26 = $3,250 175 @ $26

The McGraw-Hill Companies, Inc., 2013

Intermediate Accounting, 7/e

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*15,000 units x $25 each = $375,000

Cost of goods sold with year-end purchase:

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Brief Exercise 810

Brief Exercise 811

The McGraw-Hill Companies, Inc., 2013

Intermediate Accounting, 7/e