Harrison FA IFRS 11e CH06 SM

Chapter 6
Inventory and Merchandising Operations
Short Exercises
(10 min.) S 6-1

$ Millions
Inventory………………………… 3.6
Cash…………………………... 3.6
Accounts Receivable…………. 19.5

Sales Revenue………………. 19.5
Cost of Goods Sold…………… 4.8

Inventory……………………... 4.8
Cash……………………………… 19.1
Accounts Receivable………. 19.1
424 Financial Accounting: IFRS 11/e Solutions Manual

(10-15 min.) S 6-2
1. (Journal entries)
Inventory………………………………….. 150,000
Accounts Payable……………………. 150,000
Amounts Receivable…………………… 180,000

Sales Revenue………………………... 180,000
Cost of Goods Sold…………………….. 112,500

Inventory ($150,000 × .75)………….. 112,500
Cash ($180,000 × .40)…………………... 72,000

Accounts Receivable………………... 72,000
2. (Financial statements)
BALANCE SHEET
Current assets:
Inventory ($150,000 − $112,500)………… $ 37,500
INCOME STATEMENT
Sales revenue……………………………… $180,000
Cost of goods sold…………………………
112,500
Gross profit………………………………… $67,500
Chapter 6 Inventory and Merchandising Operations 425

(15-20 min.) S 6-3
a b c
Average Cost FIFO LIFO
Cost of goods sold:
Average (26 × $4,871.18
$187.35)
FIFO $1,620 + (17 $4,850
× $190)
LIFO $4,750 + (1 × $4,930
$180)
Ending inventory:
Average (8 × $ 1,237.68
$154.71)
FIFO (8 × $160) $1,280
LIFO (8 × $140) $1,120
Computations:
Units sold = (9 + 25 – 8) = 26
Units in ending inventory = 8
Average cost per unit = ($1,620 + $4,750) ÷ (9 + 25) = $187.35
Cost per unit:

First purchase = $180 ($1,620 ÷ 9 = $180)
Second purchase = $190 ($4,750 ÷ 25 = $190)

(10-15 min.) S 6-4
Jackson’s Copy Center
Income Statement
Year Ended December 31, 20X6
Average FIFO LIFO

Sales revenue (580 × $22.50) $13,050 $13,050 $13,050
Cost of goods sold (580 × $10.17*) 5,898
(92 × $9.20) + (488 × $10.30) 5,873
(580 × $10.30) 5,974
Gross profit 7,152 7,177 7,076
Operating expenses 3,570 3,570 3,570
Net income $ 3,582 $3,607 $ 3,506
_____
*
Average cost per unit:
Beginning inventory (92 @ $9.20)…………….. $ 846.40
Purchases (680 @ $10.30)…………………………
7,004.00
Goods available…………………….……………… $7,850.40
Average cost per unit $7,850.40 / 772 units…… $ 10.17

(10-15 min.) S 6-5
Jackson Copy Center
Income Statement
Average FIFO LIFO

Sales revenue (580 × $22.50) $13,050 $13,050 $13,050
Cost of goods sold (580 × $10.17*) 5,898
(92 × $9.20) + (488 × $10.30) 5,873
(580 × $10.30) ______ ______ 5,974
Gross profit 7,152 7,177 7,076
Operating expenses 3,570 3,570 3,570
Income before income tax $3,582 $ 3,607 $ 3,506
Income tax expense (35%) $ 1,254 $ 1,262 $ 1,227
*From S 6-4 Method to Method to

maximize minimize
reported income tax
income expense.
(before
tax).

(5 min.) S 6-6
Managers at Macrodata.com can purchase lots of inventory
before year end. Under LIFO, these high inventory costs go
directly to cost of goods sold in the current year. As a result,
the current year’s net income drops and that saves on income
tax. Saving on taxes is one reason companies want to decrease
their income.
Student responses may vary.
(5-10 min.) S 6-7

BALANCE SHEET
Current assets:
Inventories, at market (which is lower than cost)……. $ 48,000
INCOME STATEMENT
Cost of goods sold [$470,000 + ($54,000 − $48,000)]…… $476,000

(15-20 min.) S 6-8
DATE: _____________
TO: Jason Stone, President of Stone Saxophone

Company
FROM: [Student Name]
SUBJECT: Proposal for Increasing Net Income
We can increase net income by not buying our normal

quantities of inventory as we make sales. Inventory costs are
rising, and the company uses the LIFO inventory method.
Under LIFO, the high cost of our inventory purchases goes
straight into cost of goods sold. By slowing our purchases of
inventory, we can keep those high costs out of cost of goods
sold this year. That will keep net income from going lower and
will help net income be as high as possible. Also, our inventory
quantities are above normal, so we don’t need to buy a lot of
inventory before year end.
Student responses will vary.

(10-15 min.) S 6-9
LIFO 1. Matches the most current cost of goods sold
against sales revenue.
LIFO 2. Results in an old measure of the cost of ending

inventory.
LCM 3. Writes inventory down when replacement cost

drops below historical cost.
LIFO 4. Enables a company to buy high-cost inventory at

year end and thereby to decrease reported
income and income tax.
FIFO 5. Enables a company to keep reported income

from dropping lower by liquidating older layers of
inventory.
LIFO 6. Generally associated with saving income taxes.
FIFO 7. Results in a cost of ending inventory that is close

to the current cost of replacing the inventory.
Specific
unit cost 8. Used to account for automobiles, jewelry, and art
objects.
Average 9. Provides a middle-ground measure of ending

inventory and cost of goods sold.
FIFO 10. Maximizes reported income.

(5-10 min.) S 6-10
Dollars in Millions
$38,542 − $16,543
Gross profit percentage = = 0.571
$38,542
$16,543
Inventory turnover = = 9.4 times
($1,461 + $2,045) / 2
(5-10 min.) S 6-11

Beginning inventory……………………………... $ 254,000
+ Purchases……………………………………….… 1,580,000
= Goods available…………………………………... 1,834,000
− Cost of goods sold:
Sales revenue………………………. $4,200,000
Less estimated gross profit (60%) (2,520,000)
Estimated cost of goods sold………………. (1,680,000)
= Estimated cost of ending inventory…………... $ 154,000

(5 min.) S 6-12
Correct
Amount
(Thousands)
a. Net sales (unchanged)………………………………. $2,100

b. Inventory ($480 − $14)……………………………….. $ 466
c. Cost of goods sold ($1,150 + $14)………………… $1,164
d. Gross profit ($2,100 − $1,164)……………………… $ 936
(5 min.) S 6-13
1. Last year’s reported gross profit was understated.
Correct gross profit last year was $5.1 million ($3.2 + $1.9).
2. This year’s gross profit is overstated.

Correct gross profit for this year is $3.7 million ($5.6 − $1.9).

(5-10 min.) S 6-14
1. Ethical. There is nothing wrong with buying inventory
whenever a company wishes.
2. Unethical. The company falsified its ending inventory in
order to cheat the government (and the people) out of taxes.
3. Unethical. The company falsified its purchases, cost of
goods sold, and net income in order to cheat the government
(and the people) out of income tax.
4. Unethical. The company falsified its ending inventory and net
income.
5. Ethical. Same analysis as 1.

Exercises
Group A
(15-20 min.) E 6-15A
Req. 1
Perpetual System
1. Purchases:
Inventory…………………….……….… 48,000
Accounts Payable…………………. 48,000
2. Sales:
Cash ($77,000 × .21)…….………… 16,170
Accounts Receivable ($77,000 × .79). 60,830
Sales Revenue…………….………. 77,000
Cost of Goods Sold………………….. 41,000

Inventory………………….……….... 41,000
Req. 2
BALANCE SHEET
Current assets:
Inventory………………………………. $ 16,000
INCOME STATEMENT
Sales revenue……………………………. $77,000
Cost of goods sold……………………… 41,000
Gross profit………………………………. $36,000

(15-25 min.) E 6-16A
Journal
DATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT
1 Inventory ($660 + $2,160)…………….. 2,820

Accounts Payable…………………... 2,820
2 Accounts Receivable (12 × $520)….. 6,240

Sales Revenue………………………. 6,240
Cost of Goods Sold……………………. 2,000*

Inventory……………………………… 2,000
_____
*(5 × $160) + (4 × $165) + (3 × $180) = $2,000
Req. 3
Sales revenue…………………………... $6,240
Cost of goods sold…………………….. 2,000
Gross profit……………………………... $4,240
Ending inventory
($800 + $660 + $2,160 − $2,000)…... $1,620**
**Or, (9 × $180) = $1,620

(10-15 min.) E 6-17A
1.
Inventory
Begin. Bal. (5 units × $160) 800
Purchases
Dec. 15 (4 units × $165) 660 Cost of goods sold
26 (12 units × $180) 2,160 (12 units × $?) ?
Ending bal. (9 units × $?) ?
Cost of Goods Sold Ending Inventory
(a) Specific
unit cost (2 × $160) + (4 × $165) + = $2,060 (3 × $160) + (6 × $180) = $1,560
(6 × $180)
(b) Average
cost 12 × $172* = $2,064 9 × $172* = $1,548
_____
($800 + $660 + $2,160)
*Average cost per unit = = $172
(5 + 4 + 12)
(c) FIFO (5 × $160) + (4 × $165) + = $2,000 (9 × $180) = $1,620

(3 × $180)
(d) LIFO (12 × $180) = $2,160 (5 × $160) + (4 × $165) = $1,460
2. LIFO produces the highest cost of goods sold, $2,160.

FIFO produces the lowest cost of goods sold, $2,000.
The increase in inventory cost from $160 to $180 per unit
causes the difference in cost of goods sold.

(10 min.) E 6-18A
Cost of goods sold:
LIFO ($2,160) − FIFO ($2,000)…………………… $160
× Income tax rate…………………………………… .35
LIFO advantage in tax savings……………………… $ 56
(15 min.) E 6-19A

1.
a. FIFO
Cost of goods sold:
(18 × $34)… ……………............... $612
Ending inventory:
(3 × $34) + (6 × $65)……………... $ 492
b. LIFO
Cost of goods sold:
(6 × $65) + (9 × $34)…................. $696
Ending inventory:
(9 × $34)……………...................... $ 306
Req. 2
MusicSheet.net
Income Statement
Month Ended April 30, 20XX
Sales revenue (18 × $122) ………………………….. $2,196

Cost of goods sold……………………………………. 612
Gross profit…………………………………………….. 1,584
Operating expenses…………………………………... 280
Income before income tax…………………………… 1,304
Income tax expense (32%)…………………………… 417
Net income……………………………………………… $ 887

(15 min.) E 6-20A
Millions
1. Gross profit: FIFO LIFO
Sales revenue…………………………… $5.2 $5.2
Cost of goods sold
FIFO: 600,000 × $5………………….. 3.0
LIFO: (500,000 × $3) + (100,000 × $4)…
1.9
Gross profit……………………………… $2.2 $3.2
2. Gross profit under FIFO and LIFO differ because inventory

costs decreased during the period.
3. Valuing the ending inventory at $5.00 per unit will, result in

an ending inventory valued at $4,500,000 (900,000 @ $5)
while the FIFO inventory was valued at $3,300,000 (500,000 @
$3) + (200,000 @ $4) + (200,000 @ $5). This would amount to
changing the method of accounting for inventories from FIFO
to LIFO. The difference of $1,200,000 between the ending
inventories would reduce cost of goods sold by $1,200,000
and increase net income by the same amount. While
accounting changes like this are permissible under GAAP,
they must be for a business purpose, and not merely to
increase the manager’s bonus. The company’s auditors will
likely view the change unfavorably. In addition, such a
change will likely increase the company’s tax bill, so it is
unlikely that the owners of the company will go along with it
either.
(5-10 min.) E 6-21A
Lush Garden Supply
Income Statement (partial)
Year Ended July 31, 20X6
Sales revenue ……………………………………………… $161,000
Cost of goods sold [$76,000 + ($18,000 − $14,800)]… 79,200
Gross profit………………………………………………… $ 81,800
Note: Cost is used for beginning inventory because cost is

lower than market. Market (replacement cost) is used for
ending inventory because market is lower than cost at
year end.

(15-20 min.) E 6-22A
(Amounts in thousands)
a. $ 67 $21 + $65 − $19 = $67
b. $ 58 $125 − $67 = $58
c. Must first solve for d
d. $ 94 $138 − $44= $94
c. $ 95 $26 + c − $94 = $27; c = $95
e. $ 98 $60 + $38 = $98
f. $ 27 f + $65 − $32 = $60; f = $27
g. $ 5 $11 + $32 − g = $38; g = $5
h. $ 56 $94 − $38 = $56
Chris Company
Income Statement
(Thousands)
Net sales $ 125
Cost of goods sold
Beginning inventory $ 21
Net purchases 65
Goods available 86
Ending inventory (19)
Cost of goods sold 67
Gross profit 58
Operating and other expenses 42
Net income (Net loss) $16

(20-30 min.) E 6-23A
Gross Profit
Company Percentage Inventory Turnover
$58 $67
Chris = 0.464 = 3.4 times
$125 ($21 + $19) / 2
$44 $94
Ford = 0.319 = 3.5 times
$138 ($26 + $27) / 2
$38 $60
Arthur = 0.388 = 2.0 times
$98 ($27 + $32) / 2
$56 $38
Michaels = 0.596 = 4.8 times
$94 ($11 + $5) / 2
Michaels has the highest gross profit percentage, 59.6%.

Michaels has the highest rate of inventory turnover, 4.8 times.
Based on these data, Michaels looks the most profitable
because Michaels gross profit percentage is approximately
1½ times the other companies’ gross profit percentage. And
Michaels’ inventory turnover is about 25% higher than Chris’
turnover.

(15 min.) E 6-24A
Req. 1 and 2
1 2
FIFO LIFO
$148,000 − $82,500 $148,000 − $98,200
Gross profit percentage =
$148,000 $148,000
= 0.443 = 0.336
$82,500 $98,200
Inventory turnover =
($22,000 + $24,000) / 2 ($10,000 + $16,000) / 2
= 3.6 times = 7.6 times
Req. 3
FIFO makes the company look better on the gross profit

percentage.
Req. 4
LIFO makes the company look better on the rate of inventory

turnover.

(10-15 min.) E 6-25A
Year ended January 31, 20X5 Millions
Budgeted cost of goods sold ($6,700 × 1.10)……….. $7,370
Budgeted ending inventory…………………………….. 2,500
Budgeted goods available………….…………………… 9,870
Actual beginning inventory…………………………….. (2,200)
Budgeted purchases…………………………………….. $7,670
(10-15 min.) E 6-26A
Beginning inventory……………………… $ 48,500

Net purchases……………………………… 32,900
Goods available……….…………………... 81,400
Estimated cost of goods sold:
Net sales revenue……………………… $ 64,000
Less estimated gross profit of 35%… (22,400)
Estimated cost of goods sold………... 41,600
Estimated cost of inventory destroyed.. $ 39,800
Another reason managers use the gross profit method to

estimate ending inventory is to test the reasonableness of
ending inventory.

10-15 min.) E 6-27A
Mighty Sea Marine Supply

Income Statement (Corrected)
Years Ended September 30, 20X6 and 20X5
20X6 20X5
Sales revenue $143,000 $120,000

Cost of goods sold:
Beginning inventory $22,000* $ 9,000
Net purchases 74,000 67,000
Goods available 96,000 76,000
Ending inventory (19,000) (22,000)*
Cost of goods sold 77,000 54,000
Gross profit 66,000 66,000
Operating expenses 28,000 24,000
Net income $ 38,000 $ 42,000
*$14,500 + $7,500 = $22,000
Mighty Sea actually performed poorly in 20X6, compared to

20X5, with net income down from $42,000 to $38,000, despite
the increase in sales revenue.

Exercises
Group B
(15-20 min.) E 6-28B
Req. 1
Perpetual System
1. Purchases:
Inventory…………………….……….… 45,000
Accounts Payable…………………. 45,000
2. Sales:
Cash (€72,000 × .24)…….………… 17,280
Accounts Receivable (€72,000 × .76). 54,720
Sales Revenue…………….………. 72,000
Cost of Goods Sold………………….. 40,000

Inventory………………….……….... 40,000
Req. 2
BALANCE SHEET
Current assets:
Inventory………………………………. € 19,000
INCOME STATEMENT
Sales revenue……………………………. € 72,000
Cost of goods sold……………………… 40,000
Gross profit………………………………. € 32,000

(15-25 min.) E 6-29B
Journal
DATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT
1 Inventory ($960 + $1,870)…………….. 2,830

Accounts Payable…………………... 2,830
2 Accounts Receivable (16 × $640)….. 10,240

Sales Revenue………………………. 10,240
Cost of Goods Sold……………………. 2,430*

Inventory……………………………… 2,430
_____
*(13 × $150) + (3 × $160) = $2,430
Req. 3
Sales revenue…………………………... $10,240
Cost of goods sold…………………….. 2,430
Gross profit……………………………... $7,810
Ending inventory
($1,200 + $750 + $2,080 − $2,430)…. $1,600**
**Or, (10 × $160) = $1,600

(10-15 min.) E 6-30B
1.
Inventory
Begin. Bal. (8 units × €150) 1,200
Purchases
May 15 (5 units × €150) 750 Cost of goods sold
26 (13 units × €160) 2,080 (16 units × €?) ?
Ending bal. (10 units × €?) ?
(a) Specific
unit cost (9 × €150) + (7 × €160) = €2,470 (4 × €150) + (6 × €160) = €1,560
(b) Average
cost 16 × €155* = €2,480 10 × €155* = €1,550
_____
(€1,200 + €750 + €2,080)
*Average cost per unit = = €155
(8 + 5 + 13)
(c) FIFO (13 × $150) + (3 × €160) = €2,430 (10 × €160) = €1,600
(d) LIFO (13 × $160) + (3 × €150) = €2,530 (10 × €150) = €1,500
2. LIFO produces the highest cost of goods sold, €2,530.

FIFO produces the lowest cost of goods sold, €2,430.
The increase in inventory cost from €150 to €160 per unit
causes the difference in cost of goods sold.

(10 min.) E 6-31B
Cost of goods sold:

LIFO (€2,530) − FIFO (€2,430)………………………… €100
× Income tax rate……………………………………….. .38
LIFO advantage in tax savings………………………….. € 38
(15 min.) E 6-32B

1.
a. FIFO
Cost of goods sold:
(14 × €38) ……………................... €532
Ending inventory:
(3 × €38) + (5 × €68)…………….. €454
b. LIFO
Cost of goods sold:
(5 × €68) + (9 × €38)…………….. €682
Ending inventory:
(8 × €38) ……………..................... €304
2.
MusicLife.net
Income Statement
Month Ended April 30, 20X6
Sales revenue (9 × €106) + (5 × €92)……………. €1,414

Cost of goods sold……………………………………. 532
Gross profit…………………………………………….. 882
Operating expenses…………………………………... 430
Income before income tax…………………………… 452
Income tax expense (30%)…………………………… 136
Net income……………………………………………… € 316
(15 min.) E 6-33B
Millions
1. Gross profit: FIFO LIFO
Sales revenue……………………………. €14.1 €14.1
Cost of goods sold
FIFO: 1,300,000 × €9……………… 11.7
LIFO: (600,000 × €7) + (100,000 × €8)
+ (600,000 × €9) 10.4
Gross profit……………………………………… €2.4 €3.7
2. Gross profit under FIFO and LIFO differ because inventory

costs decreased during the period.
3. Valuing the ending inventory at €9.00 per unit will result in an

ending inventory valued at €8,100,000 (900,000 × €9) while the
FIFO inventory was valued at €6,800,000 (200,000 × €9) +
(100,000 × €8) + (600,000 × €7). The difference of €1,300,000
between the ending inventories would reduce cost of goods
sold by €1,300,000 and increase net income by the same
amount. While accounting changes like this are permissible
under GAAP, they must be for a business purpose, and not
merely to increase the manager’s bonus. The company’s
auditors will likely view the change unfavorably. In addition,
such a change will likely increase the company’s tax bill, so it
is unlikely that the owners of the company will go along with
it either.

(5-10 min.) E 6-34B
Secret Garden Supply

Year Ended May 31, 20X6
Sales revenue ……………………………………………… €152,000
Cost of goods sold [€63,000 + (€15,300 − €13,400)]… 64,900
Gross profit………………………………………………… € 87,100
Note: Cost is used for beginning inventory because cost is

lower than market. Market (replacement cost) is used for
ending inventory because market is lower than cost at
year end.

(15-20 min.) E 6-35B
(Amounts in thousands)
a. € 65 €18 + €64 − €17 = €65
b. € 56 €121 − €65 = €56
c. Must first solve for d
d. € 87 €135 − €48 = €87
c. € 89 €26 + c − €87 = €28; c = €89
e. € 93 €61 + €32 = €93
f. € 27 f + €56 − €22 = €61; f = €27
g. € 5 €8 + €33 − g = €36; g = €5
h. € 53 €89 − €36 = €53
Frank Company
Income Statement
(Thousands)
Net sales € 121
Cost of goods sold
Beginning inventory € 18
Net purchases 64
Goods available 82
Cost of goods sold 65
Gross profit 56
Operating and other expenses 48
Net income (Net loss) €8

(20-30 min.) E 6-36B
Gross Profit
Company Percentage Inventory Turnover
€56 €65
Frank = 0.463 = 3.7 times
€121 (€18 + €17) / 2
€48 €87
Hill = 0.356 = 3.5 times
€135 (€27 + €22) / 2
€32 €61
Fort = 0.344 = 2.5 times
€93 (€29 + €20) / 2
€53 €36
Orville = 0.596 = 5.5 times
€89 (€8 + €5) / 2
Orville has the highest gross profit percentage, 59.6%.
Orville also has the highest rate of inventory turnover, 5.5

times.
Based on these data, Orville looks the most profitable because
Ogden’s gross profit percentage is greater than 1 ½ times the
other companies’ gross profit percentage. And Orville’s
inventory turnover is about 30% more than the other
companies’ turnover.

(15 min.) E 6-37B
Req. 1 and 2
1 2
FIFO LIFO
€145,000 − €87,500 €145,000 − €95,200
Gross profit percentage =
€145,000 €145,000
= 0.397 = 0.343
€87,500 €95,200
Inventory turnover =
(€19,000 + €22,000) / 2 (€16,000 + €23,000) / 2
Req. 3
FIFO makes the company look better on the gross profit

percentage.
Req. 4
LIFO makes the company look better on the rate of inventory

turnover.

(10-15 min.) E 6-38B
Year ended January 31, 20X6: Millions
Budgeted cost of goods sold (€6,400 × 1.10)… €7,040
Budgeted ending inventory……………………… 2,200
Budgeted goods available………….……………… 9,240
Actual beginning inventory………………………… (1,900)
Budgeted purchases…………………………………….. €7,340

(10-15 min.) E 6-39B
Beginning inventory……………………… € 45,700

Net purchases……………………………… 39,100
Goods available……….…………………... 84,800
Estimated cost of goods sold:
Net sales revenue……………………… €68,400
Less estimated gross profit of 40%… (27,360)
Estimated cost of inventory destroyed.. € 43,760
Another reason managers use the gross profit method to

estimate ending inventory is to test the reasonableness of
ending inventory.

(10-15 min.) E 6-40B
Friendly Harbor Marine Supply

Income Statement (Corrected)
Years Ended September 30, 20X6 and 20X5
20X6 20X5
Sales revenue €139,000 €121,000

Cost of goods sold:
Beginning inventory €19,800* €12,000
Net purchases 74,000 69,000
Goods available 93,800 81,000
Ending inventory (18,500)
(19,800)*
Cost of goods sold 75,300 61,200
Gross profit 63,700 59,800
Net income € 37,700 €40,800
*€13,000 + €6,800 = $19,800
Friendly Harbor actually performed poorly in 20X6, compared to

20X5, with net income down from €40,800 to €37,700, despite
the increase in sales revenue.

Challenge Exercises
(5-10 min.) E 6-41

a. Use average cost.
b. Use FIFO.
c. Use FIFO.
d. Use any method. They all produce the same results
because costs are stable.
e. Buy inventory late in the year.
f. Company is using LIFO.

(20-30 min.) E 6-42
Sales increased, the gross profit dropped, and net income slid
into a net loss, as shown here:
Dollars in millions 20X6 20X5 20X4
Sales $36.2 $35.8 $34.3

Cost of sales 28.6 27.7 26.8
Gross profit 7.6 8.1 7.5
Net income (net loss) (0.4) 0.2 0.7
Gross profit $7.6 $8.1 $7.5

= = 0.210 = 0.226 = 0.219
percentage $36.2 $35.8 $34.3
Inventory $28.6 $27.7 $26.8

= = 3.5 = 3.7 = 3.8
turnover ($8.9 + $7.3) / 2 ($7.3 + $7.8) / 2 ($7.8 + $6.4) / 2
Both the gross profit percentage and the rate of inventory

turnover dropped during this period. This suggests that L Mart
had to discount its merchandise more and more just to sell the
goods. The end result was a net loss in 20X6.
Selling expenses increased significantly, which suggests that L

Mart had to advertise heavily in order to sell its inventory.

Quiz
Q6-43 c ($3,500 + $6,300 − $5,400 = $4,400)
Q6-44 d ($7,600 − $5,400 = $2,200)
Q6-45 a
Q6-46 c (1,100 @ $15.00 + 1,300 @ $15.20 = $36,260)
Q6-47 b (1,300 @ $15.20 + 200 @ $15 = $22,760)
Q6-48 a
Q6-49 a ($154,000 + $213,000 = $367,000)
Q6-50 d
Q6-51 a
Q6-52 c [$632,000 − ($68,000 + $480,000 − $45,000) =
$129,000]
Q6-53 b ($26,000 + X − $14,000 = $103,000; X = $91,000)
Q6-54 c
Q6-55 d [$330,000 ÷ ($29,000 + $34,000) / 2] = 10.5 times
Q6-56 c Net sales = $453,000 ($460,000 − $7,000)
COGS = $57,000 + ($215,000 + $24,000 −
$4,800 − $6,200) − $48,000
= $237,000
GP% = ($453,000 − $237,000) / $453,000
= .477
Q6-57 b $50,000 + $74,000 − $96,000 (1 − .50) = $76,000
Q6-58 a
Q6-59 b

Problems
Group A
(20-30 min.) P 6-60A

Req. 1
Inventory……………………………………. 8,107,000
Accounts Payable……………………… 8,107,000
Accounts Payable…………………………. 7,907,000

Cash………………………………………. 7,907,000
Cash…………………………………………. 4,800,000
Accounts Receivable……………………... 9,900,000
Sales Revenue………………………….. 14,700,000
Cost of Goods Sold (150,000 × $55.77*). 8,365,500

Inventory…………………………………. 8,365,500
_____
*($1,150,000 + $8,107,000) ÷ (23,000 + 31,000 + 51,000 + 61,000)
= $55.77
Operating Expenses………………………. 3,550,000

Cash ($3,550,000 × .70)………………... 2,485,000
Accrued Liabilities ($3,550,000 × .30). 1,065,000
Income Tax Expense……………………… 835,350

Income Tax Payable…………………… 835,350
[($14,700,000 − $8,365,500 − $3,550,000)] × .30 = $835,350

(continued) P 6-60A
Req. 2
Inventory
Beg. bal. 1,150,000
Purchases 8,107,000 COGS 8,365,500
End. bal. 891,500
Req. 3
Nice Buy
Income Statement
Year Ended February 28, 20X6
Sales revenue ……………………………… $ 14,700,000
Cost of goods sold……………………….. 8,365,500
Gross profit………………………………… 6,334,500
Operating expenses………………………. 3,550,000
Income before tax…………………………. 2,784,500
Income tax expense (30%)………………. 835,350
Net income…………………………………. $ 1,949,150

(20-30 min.) P 6-61A
Req. 1
The store uses FIFO.
This is apparent from the flow of costs out of inventory. For

example, the October 11 sale shows unit cost of $35, which
came from the beginning inventory. This is how FIFO, and only
FIFO, works.
Req. 2
Cost of goods sold:

13 × $35 = $ 455
39 × 35 = 1,365
5 × 36 = 180
40 × 36 = 1,440
$3,440
Sales 13 + 39 = 52 units × $70 = $3,640

5 + 40 = 45 units × $71 = 3,195 $6,835
Cost of goods 3,440
sold……………………………………….
Gross $3,395
profit………………………………………………..
Req. 3
Cost of October 31 inventory (39* × $36) + (24 × $2,292

$37).

*Goods remaining from Oct 8 purchase: 84 units - 5 - 40 =39

(20-30 min.) P 6-62A
Req. 1
Inventory
Begin. bal. (78 units × $19) 1,482
Purchases:
Oct. 4 (99 units × $20) 1,980
19 (155 units × $22) 3,410 Cost of goods sold
25 (48 units × $23) 1,104 (334 units × $?) ?
Ending bal. (46 units × $?) ?
Average cost 334 × $20.9895* = $7,010 46 × $20.9895* = $966

____
*Average cost ($1,482 + $1,980 + $3,410 + $1,104)
= = $20.9895
per unit (78+ 99 + 155 + 48)
FIFO (78 × $19) + (99 × $20)

+ (155 × $22) + (2 × $23) = $ 6,918 (46 × $23) = $1,058
LIFO (48 × $23) + (155 × $22)

+ (99 × $20) + (32 × $19) = $7,102 (46 × $19) = $874

(continued) P 6-62A
Req. 2
LIFO results in the highest cost of goods sold because (a) the
company’s prices are rising and (b) LIFO assigns to cost of
goods sold the cost of the latest inventory purchases. When
costs are rising, these latest inventory costs are the highest,
and that makes cost of goods sold the highest under LIFO.
Req. 3
Fatigues Surplus
Income Statement
Month Ended October 31, 20X6
Sales revenue (334 × $52)……………………….. $17,368
Cost of goods sold……………………………….. 7,010
Gross profit………………………………………… 10,358
Operating expenses……………………………… 5,400
Income before income taxes……………………. 4,958
Income tax expense (40%)………………………. 1,983
Net income…………………………………………. $ 2,975

(30-40 min.) P 6-63A
Req. 1 (partial income statements)
Byron Aviation
Income Statement
AVERAGE FIFO LIFO
Sales revenue $132,447 $132,447 $132,447
Cost of goods sold 73,249 72,685 73,553
Gross profit $ 59,198 $ 59,762 $ 58,894
Computations of cost of goods sold:
Average cost ($6,084 + $2,449 + $67,716 + $4,968)

= = $8.1298
per unit (780 + 310 + 8,360 + 540)
COGS at average cost = 9,010 × $8.1298 = $73,249
FIFO COGS = (780 × $7.80) + (310 × $7.90) + (7,920 × $8.10) = $72,685
LIFO COGS = (540 × $9.20) + (8,360 × $8.10) + (110 × $7.90) = $73,553

(continued) P 6-63A
Req. 2
Use the LIFO method to minimize income tax because cost of

goods sold is highest (gross profit is lowest) under LIFO when
inventory costs are rising.

(15-30 min.) P 6-64A
Everything Trade Mart should apply the lower-of-cost-or-market
rule to account for inventories. The current replacement cost of
ending inventory is less than Everything’s actual cost, so
Everything Trade Mart must write the inventory down to current
replacement cost, with the following journal entry:
Cost of Goods Sold……………… 78,000

Inventory………………………... 78,000
To write inventory down to NRV.
Everything should report the following amounts in its financial

statements:
BALANCE SHEET
Inventory at market (which is lower than
cost of $210,000)………………………………... $132,000*
INCOME STATEMENT
Cost of goods sold ($750,000 + $78,000)…… $828,000
_____
*$210,000 − $78,000 = $132,000
Reliability qualitative characteristic is the reason to account

for inventory at the lower of cost or NRV. Not revaluing the
inventory to the lower NRV lends biasness to the ending
inventory which violates the reliability requirement.
The Matching principle (from Chapter 3: Accrual Accounting &

Income) requires costs/losses to be recorded in the period in
which they contributed to revenue/gains. Since the impairment
in inventory occurred during this accounting period, not
recording the impairment would mean a misstatement of both
this year’s and the subsequent year’s net income.

(20-30 min.) P 6-65A
Req. 1
Coffee Shop
Sprinkle Top, Inc. Corp.
Millions Millions
Gross profit percentage:
Sales……………………. $554 $7,720
Cost of sales…………... 487 3,170
Gross profit……………. $ 67 $4,550
Gross profit $67 $4,550

= 12.1% = 58.9%
percentage: $554 $7,720
Inventory turnover:
Cost of goods sold $487 $3,170
=
Average inventory ($29 + $38) / 2 ($629+ $547) / 2
Req. 2
From these statistics, it’s hard to tell whether Sprinkle Top or

Coffee Shop is more profitable. Coffee Shop has a much higher
gross profit percentage but Sprinkle Top has a much faster
inventory turnover. To adequately evaluate profitability, we will
need to also consider the companies’ selling, general, and
administrative expenses.

(25-30 min.) P 6-66A
Req. 1 (estimate of ending inventory by the gross profit
method)
Beginning inventory……………………... $ 57,200

Purchases…………………………………. $490,400
Less: Purchase discounts…………. (11,100)
Purchase returns……………... (70,800)
Net purchases…………………………. 408,500
Goods available………………………….. 465,700
Cost of goods sold:
Sales revenue………………………….. $668,000
Less: Sales returns………………… (11,500)
Net sales…………………………….….. 656,500
Less: Estimated gross profit of 40%. (262,600)
Estimated cost of goods sold………. 393,900
Estimated cost of ending inventory…... $ 71,800

(continued) P 6-66A
Req. 2 (income statement through gross profit)
Theon Company
Month of October, 20X6
Sales revenue………………………………. $668,000
Less: Sales returns…………………….. (11,500)
Net sales revenue………………………. 656,500
Cost of goods sold………………………… 393,900*
Gross profit…………………………….…… $262,600
_____
*Cost of goods sold:
Beginning inventory…………………………... $ 57,200
Purchases………………………. $490,400
Less: Purchases discounts... (11,100)
Purchase returns…….. (70,800)
Net purchases………………………………….. 408,500
Cost of goods available for sale……………. 465,700
Less: Estimated ending inventory…………. (71,800)
Cost of goods sold……………………………. $393,900

(20-25 min.) P 6-67A
Req. 1
Cost of sales, budgeted ($720,000 × 1.08)… $ 777,600

+ Ending inventory, budgeted…………………. 78,000
= Cost of goods available………………………. 855,600
− Beginning inventory………………………….. (68,000)
= Purchases, budgeted ………………………… $ 787,600
Req. 2
Grammy’s Convenience Store

Budgeted Income Statement
Sales ($957,000 × 1.08)……………………….… $1,033,560
Cost of sales ($720,000 × 1.08)……………… 777,600
Gross profit…………………………………… 255,960
Operating expenses ($114,000 − $16,040)… 97,960
Net income…………………………………….… $158,000

(15-20 min.) P 6-68A
Req. 1 (corrected income statements)
R. B. Video Sales
Income Statement (adapted; amounts in millions)
Years Ended 20X6, 20X5, and 20X4
20X6 20X5 20X4
Net sales revenue……………... $43 $40 $37
Cost of goods sold:
Beginning inventory……….. $ 9* $ 8* $ 4
Purchases…………………… 29 27 25
Goods available…………….. 38 35 29
Ending inventory…………… (7) (9)* (8)*
Cost of goods sold………… 31 26 21
Gross profit…………………….. 12 14 16
Operating expenses..…………. 7 7 7
Net income……………………… $ 5 $ 7 $ 9
*Throughout the period from year end 20X4 to year beginning 20X6, inventory was
understated by $3 million.

(continued) P 6-68A
Req. 2
The corrections did not change total net income over the three-
year period. But the corrections drastically altered the trend of
net income — from an increasing pattern to a decreasing
pattern.
Req. 3
The shareholders will not be happy with a declining trend of net

income because the company is losing ground with its profits.

Problems
Group B
(20-30 min.) P 6-69B

Req. 1
Inventory…………………………………… 9,782,000
Accounts Payable…………………… 9,782,000
Accounts Payable……………………… 9,492,000

Cash……………………………………… 9,492,000
Cash………………………………………… 5,400,000
Accounts Receivable……………………… 10,084,000
Sales Revenue…………………………. 15,484,000
Cost of Goods Sold………………………... 10,191,000*

Inventory……………………………… 10,191,000
*(€990,000 + €9,782,000) ÷ (18,000 + 33,000 + 53,000 + 63,000) =
€64.50
€64.50 x 158,000 = €10,191,000
Operating Expenses…………………… 2,860,000

Cash (€2,860,000 × 0.70)…………… 2,002,000
Accrued Liabilities (€2,860,000 × 0.30). 858,000
Income Tax Expense………………………. 851,550

Income Tax Payable………………… 851,550
[(€15,484,000 − €10,191,000 − €2,860,000) × .35 = €851,550]

(continued) P 6-69B
Req. 2
Inventory
Beg. bal. 990,000
Purchases 9,782,000 COGS 10,191,000
End. bal. 581,000
Req. 3
Best Guy
Income Statement
Year Ended February 28, 20X6
Sales revenue …………………………… €15,484,000
Cost of goods sold…………………….. 10,191,000
Gross profit……………………………… 5,293,000
Operating expenses…………………… 2,860,000
Income before tax……………………… 2,433,000
Income tax expense (35%)……………. 851,550
Net income………………………………. € 1,581,450

(20-30 min.) P 6-70B
Req. 1
The store uses FIFO.
This is apparent from the flow of costs out of inventory. For

example, the March 11 sale shows a unit cost of $38, which
came from the beginning inventory. This is how FIFO, and only
FIFO, works.
Req. 2
Cost of goods sold:

18 × $38 = $ 684
30 × 38 = 1,140
12 × 39 = 468
37 × 39 = 1,443
$3,735
Sales 18 + 30 = 48 units × $66 = $3,168

12 + 37 = 49 units × $69 = $3,381 $6,549
Cost of goods sold……………………………………. (3,735)
Gross profit……………………………………………... $2,814
Req. 3
Cost of March 31 inventory (28 × $39 + 17 x $40) = $1,772
*Goods remaining from Oct 8 purchase: 77 - 12 - 37 = 28

(20-30 min.) P 6-71B
Req. 1
Inventory
Begin. bal. (69 units × €24) 1,656
Purchases:
July 4 (108 units × €26) 2,808
12 (153 units × €28) 4,284 Cost of goods sold
25 (38 units × €29) 1,102 (316 units × €?) ?
Ending bal. (52 units × €?) ?
Average cost 316 × €26.7663* €8,458 52× €26.7663* €1,392

____
*Average cost (€1,656 + €2,808 + €4,284 + €1,102) =
=
per unit (69 + 108 + 153 + 38) €26.7663
FIFO (69 × €24) + (108 × €26) (14 × €28) +

+ ( 139 × €28) = €8,356 (38 × €29) = €1,494
LIFO (38 × €29) + (153 × €28) +

( 108 × €26) + (17 × €24) = €8,602 52 × €24 = €1,248

(continued) P 6-71B
Req. 2
LIFO cost of goods sold is highest because (a) prices are rising
and (b) LIFO assigns to cost of goods sold the cost of the latest
inventory purchases. When costs are rising, these latest
inventory costs are the highest, and that makes cost of goods
sold the highest under LIFO.
Req. 3
Swat Team Surplus

Income Statement
Month Ended July 31, 20X6
Sales revenue (316 × €55)…………………….. €17,380
Cost of goods sold……………………………….. 8,458
Gross profit………………………………………… 8,922
Operating expenses……………………………… 3,500
Income before income taxes……………………. 5,422
Income tax expense (32%)………………………. 1,735
Net income…………………………………………. € 3,687

(30-40 min.) P 6-72B
Req. 1 (partial income statements
Bryan Aviation
Income Statement
AVERAGE FIFO LIFO
Sales revenue €128,226 €128,226 €128,226
Cost of goods sold 73,134 72,603 73,637
Gross profit € 55,092 € 55,623 € 54,589
Computations of cost of goods sold:
Average cost (€5,550 + €2,496 + €67,878 + €4,823)

= = €8.0990
per case (740 + 320 + 8,380 + 530)
COGS at average cost = 9,030 × €8.0990 = €73,134
FIFO COGS = (740 × €7.50) + (320 × €7.80) + (7,970 × €8.10) = €72,603
LIFO COGS = (530 × €9.10) + (8,380 × €8.10) + (120 × €7.80) = €73,637

(continued) P 6-72B
Req. 2
Use FIFO to report the highest net income because cost of

goods sold is lowest (gross profit is highest) under FIFO when
inventory costs are rising.

(15-20 min.) P 6-73B
Ariel Trade Mart should apply the lower-of-cost-or-market rule
to account for inventories. The current replacement cost of
ending inventory is less than Ariel Trade Mart’s actual cost, so
Ariel Trade Mart must write the inventory down to current
replacement cost, with the following journal entry:
Cost of Goods Sold………… 72,000
Inventory…………………... 72,000
To write inventory down to NRV.
Ariel Trade Mart should report the following in its financial

statements:
BALANCE SHEET
Inventory, at market (which is lower than cost
of €270,000)……………………………………... €198,000*
INCOME STATEMENT
Cost of goods sold (€830,000 + €72,000)……… €902,000
*€270,000 − €72,000 = €198,000
Faithful representation qualitative characteristic is the reason

to account for inventory at the lower of cost or NRV. Not
revaluing the inventory to the lower NRV lends a biasness to
the ending inventory which violates the reliability requirement.
The Matching principle (from Chapter 3: Accrual Accounting &

Income) requires costs to be recorded in the period in which
they contributed to gains. Since the impairment occurred
during this period, not recording it would mean a misstatement
of both this year’s and the subsequent year’s net income.

(20-25 min.) P 6-74B
Req. 1
Pastry People, Coffee Grind

Inc. Corp.
Dollars in Millions
Gross profit percentage:
Sales…………………… $558 $7,270
Cost of goods sold…. 486 3,290
Gross profit…………… $ 72 $3,980
Gross profit $72 $3,980

= 12.9% = 54.7%
percentage: $558 $7,270
Inventory turnover:
Cost of goods sold $486 $3,290
=
Average inventory ($18 + $31) / 2 ($632 + $548) / 2
Req. 2
From these statistics, it is hard to tell whether Pastry People or

Coffee Grind is more profitable. Coffee Grind Corp. has a
higher gross profit percentage but Pastry People has a much
faster inventory turnover. To adequately evaluate profitability,
we will need to also consider the companies’ selling, general,
and administrative expenses.

(25-30 min.) P 6-75B
Req. 1 (estimate of ending inventory by the gross profit

method)
Beginning inventory……………………… €57,700

Purchases………………………………….. €490,800
Less: Purchase discounts………….. (12,200)
Purchase returns……………… (70,200)
Net purchases…………………………... 408,400
Goods available…………………………… 466,100
Cost of goods sold:
Sales revenue…………………………… €665,000
Less: Sales returns…………………. (16,500)
Net sales…………………………………. 648,500
Less: Estimated gross profit of 45%.. (291,825)
Estimated cost of ending inventory…… €109,425

(continued) P 6-75B
Req. 2 (income statement through gross profit)
Joey Company
For the Period Up to the Fire
Sales revenue………………………….. €665,000
Less: Sales returns………………… (16,500)
Net sales revenue…………………... 648,500
Cost of goods sold……………………. 356,675*
Gross profit…………………………….. €291,825
_____
*Cost of goods sold:
Beginning inventory………………………... €57,700
Purchases……………………... €490,800
Less: Purchases discounts. (12,200)
Purchase returns……. (70,200)
Net purchases……………………………….. 408,400
Goods available……………………………... 466,100
Less: Estimated ending inventory………. (109,425)
Cost of goods sold…………………………. €356,675

(20-25 min.) P 6-76B
Req. 1
Cost of sales, budgeted (€722,000 × 1.10).. € 794,200

+ Ending inventory, budgeted………………... 76,000
= Cost of goods available……………………... 870,200
− Beginning inventory…………………………. (65,000)
= Purchases, budgeted ……………………….. € 805,200
Req. 2
Chris’ Convenience Stores

Budgeted Income Statement
Sales (€964,000 × 1.10)……………………… €1,060,400
Cost of sales (€722,000 × 1.10)……………. 794,200
Gross profit………………………………….... 266,200
Operating expenses (€110,000 − €4,800)… 105,200
Net income…………………………………….. € 161,000

(15-20 min.) P 6-77B
Req. 1 (corrected income statements)
Waterville Video Sales

Income Statement (adapted; amounts in millions)
Years Ended 20X6, 20X5, and 20X4
20X6 20X5 20X4
Net sales revenue……………... €38 €35 €32
Cost of goods sold:
Beginning inventory……….. € 11* € 10* € 7
Purchases…………………… 32 30 28
Goods available…………….. 43 40 35
Ending inventory…………… (10) (11)* (10)*
Cost of goods sold………… 33 29 25
Gross profit…………………….. 5 6 7
Operating expenses…………... 3 3 3
Net income……………………… € 2 € 3 € 4
*Throughout the period from year end 20X4 to year beginning 20X6, inventory was
understated by €2 million.

(continued) P 6-77B
Req. 2
The corrections did not change total net income over the three-
year period. But the corrections made the company’s trend of
net income reflect a downward trend — with 20X5 net income
decreasing from that of 20X4 and then continuing the drop in
20X6.
Req. 3
The shareholders will not be happy with the downward trend,
since it appears to be continuing.
Chapter 6 Inventory and Cost of Goods Sold 489

Decision Cases
(50-60 min.) Decision Case 1
Req 1
Duracraft Corporation
Income Statement
FIFO LIFO
Sales revenue $1,200,000 $1,200,000
Cost of goods sold: 585,000* 645,000**
Gross profit 615,000 555,000
Income before income
tax expense 415,000 355,000
Income tax expense
($415,000 × .40) 166,000
($355,000 × .40) 142,000
Net income $ 249,000 $ 213,000
_____
*$100,000 + $485,000 = $585,000
**$160,000 + $485,000 = $645,000
490 Financial Accounting 7/e Solutions Manual

(continued) Decision Case 1
Req. 2
FIFO LIFO
Net income………… $249,000 $213,000
FIFO net income is higher because (1) prices are rising (from
$100 to $121.25 to $160), and (2) FIFO and LIFO assign costs to
expense (cost of goods sold) in opposite patterns.

(15-25 min.) Decision Case 2
Req. 1
This question provides a rich setting for a class discussion.

There’s no single correct answer to this question. Some
students may favor Company B because it reports higher net
income than Company A. B may be preferred because it
appears more successful than A, and B’s share price may
therefore rise more than A’s share price. Thus it may appear
that Company B would be a better investment than A.
Other students may prefer Company A because it discloses the

inventory method it uses. Company B does not let outsiders
know which method it uses to account for its inventory. These
students may trust Company A more than B because A is more
willing to “bare its soul to the public.”
Professors can point out that A, the LIFO company, may be

better off because of the lower income taxes that A pays by
using the LIFO method. We don’t know whether Company B is
making the most of this cash-flow advantage of LIFO.
Req. 2
Yes, the authors would prefer managers to be conservative in

accounting for inventory — for all the reasons accountants use
conservatism. If any errors occur, we would prefer to be
pleasantly surprised rather than negatively shocked.

Ethical Issue
Req. 1
Changing accounting methods year after year hurts a

company’s credibility, which makes it hard for the company to
borrow or raise money from outside investors. The question
that arises about such a company is: What is the business
trying to hide?
Req. 2
The comparability principle is violated.
Req. 3
Creditors and outside investors could be harmed by

accounting changes year after year. It becomes difficult to tell
which changes in the business are real and which changes
result from the shift in the accounting method. Outsiders find it
difficult to track the company’s operating results and financial
position over time. Ultimately the company suffers because
lenders will not want to lend it money, and outsiders will be
reluctant to invest money in the business. This may deprive the
entity of needed funds and hurt its chances for success or
survival.

Focus on Financials: Nestlé
(30 min.)
Req. 1
Nestlé measures its inventories at the lower of Cost or Net

Realizable Value. Cost is determined using the FIFO (First in
First Out) method for raw materials and purchased finished
goods, while the Weighted average cost method is used for
work in progress, sundry supplies and manufactured finished
goods.
Req. 2
If Nestlé adopted FIFO with rising inventory prices, profit would

rise due to lower COGS. This is because the older, cheaper
inventory would be sold first.
Req. 3
Cost of goods sold: CHF 44,199 million

Cost of inventory purchased: 8,401 – 8,153 + 44,199 = CHF
44,447 million
Ending Inventory – Beginning Inventory + Cost of goods sold
Req. 4
Gross profit margin @ 2015: 88,785 – 44,730 / 88,785 = 49.62%

Gross profit margin @ 2016: 89,469 – 44,199 / 89,469 =50.60%
Gross profit margin improved over the two years
Req. 5

Inventory Turnover Ratio = COGS / Average Inventory
Inventory Turnover Ratio 2015: 5.16x
Inventory Turnover Ratio 2016: 5.34x
The inventory turnover ratio rose over the two years. This
indicates that the company is better at shifting inventory out to
customers and holding less inventory as a result. To get a
picture, we might also compare how Nestlé’s turnover ratio
compares with peers in the same industry.
Group Project

Chapter 6 Appendix
Appendix Short Exercises

(10-15 min.) S6A-1
(Journal entries)
General Journal
1. Purchases 1,270
Accounts Payable 1,270
Purchased inventory on account.
2. Accounts Receivable 3,400

Sales Revenue 3,400
Sold inventory on account.
3. End-of-period entries to update

inventory and record Cost of Goods
sold:
a. Cost of Goods Sold 460

Inventory (beginning balance) 460
Transfer beginning inventory to COGS.
b. Inventory (ending balance) 630

Cost of Goods Sold 630
Set up ending inventory based on physical
count.
c. Cost of Goods Sold 1,270

Purchases 1,270
Transfer purchases to COGS.

(10-15 min.) S6A-2
Req. 1 Posting general journal entries
Inventory
460* 460
630
630
* Beginning inventory was $460
Cost of Goods Sold

460 630
1,270
1,100
Req. 2
Cost-of-Goods-Sold Model
Add: Purchases 1,270
Goods available for sale 1,730
Less: Ending inventory 630
Cost of goods sold $1,100
Req. 3
Paxton Technologies
Income Statement (Partial)
Sales revenue $3,400
Cost of goods sold:
Beginning inventory 460
Purchases 1,270
Goods available 1,730
Cost of goods sold 1,100
Gross profit $2,300

Appendix Exercises
(10-15 min.) E6A-3A
Inventory
Purchases
Jul 1 (3 units × $60) 180 Cost of goods sold
15 (14 units × $70) 980 (18 units × $?) ?
26 (2 units × $80) 160
Ending Bal. (7 units × $?) ?
Cost of
Ending Inventory
Goods Sold
(1) Specific
unit cost (7 × $60) + (9 × $70) + (2 × $60) + (5 × $70) = $470
= $1,210
(2 × $80)
(2) Average
cost (18 × $67.20*) = $1,209.6 (7 × $67.20*) = $470.40
0
_____
($360 + 180 + 980 + 160)
*Average cost per unit = = $67.20
(6 + 3 + 14 + 2)
(3) FIFO
(9 × $60) + (9 × $70) = $1,170 (5 × $70) + (2 × $80) = $510
(4) LIFO (2 × $80) + (14 × $70) +

= $1,260 (7 × $60) = $420
(2 × $60)

(10-15 min.) E6A-4A
Reqs. 1 & 2 (Journal entries)
General Journal
1. Purchases 1,320
Purchased inventory on account.

Sales Revenue 5,066
Sold inventory on account.
3. End-of-period entries to update inventory

and record Cost of Goods Sold:


count.

Purchases 1,320

(continued) E6A-4A
Req.3 Posting general journal entries
Cost of Goods Sold

Beginning Inventory 360 Ending Inventory 420
Purchases 1,320
Req. 4 Cost-of-Goods-Sold Model


(10-15 min.) E6A-5B
Inventory
Purchases
Dec 8 (5 units × $62) 310 Cost of goods sold
15 (14 units × $72) 1,008
26 ( 3 units × $82) 246 (20 units × $?) ?
Ending Bal. ( 9 units × $?) ?
(1) Specific
unit cost (8 × $62) + (9 × $72) + (4 × $62) + (5 × $72) = $608
= $1,390
(3 × $82)
(2) Average
cost (20 × $68.90*) = $1,378 (9 × $68.90*) = $620
_____
($434 + 310 + 1,008 + 246)
*Average cost per unit = = $68.90
(7 + 5 + 14 + 3)
(3) FIFO
(12 × $62) + (8 × $72) = $1,320 (6 × $72) + (3 × $82) = $678
(4) LIFO (3 × $82) + (14 × $72) + (9 × $62) = $558

= $1,440
(3 × $62)

(10-15 min.) E6A-6B
Reqs. 1 & 2 (Journal entries)
General Journal
1. Purchases 1,564
Purchased inventory on account

Sales Revenue 6,360
Sold inventory on account


Transfer beginning inventory to COGS

count

Purchases 1,564
Transfer purchases to COGS

(continued) E6A-6B
Req.3 Posting general journal entries
Cost of Goods Sold

Beginning Inventory 434 Ending Inventory 558
Purchases 1,564
Req. 4 Cost-of-Goods-Sold Model


Appendix Problems
(20-25 min.) P6A-7A

Req. 1
Inventory
Purchases
Jul 8 (80 units × $19) 1,520 Cost of goods sold
30 (21 units × $20) 420 (95 units × $?) ?
FIFO
(50 × $18) + (45 × $19) = $1,755 (21 × $20) + (35 × $19) = $1,085
Req. 2
Date Units Sold Selling Price Total Revenue
July 3 18 $70 $1,260
July 11 32 $70 $2,240
July 19 4 $72 $ 288
July 24 36 $72 $2,592
July 30 5 $72 $ 360
Total 95 $6,740
Watercress Outlet
Cost of goods sold:
Purchases 1,940
Ending inventory (1,085)
Gross profit $4,985

(20-30 min.) E6A-8A
Req. 1 (Journal entries)
General Journal (Amounts in

Thousands)
1. Purchases $2,240

Cash 1,080
Sales Revenue 3,600
Sold inventory for cash and on
account
3. End-of-period entries to update

inventory and record Cost of Goods
Sold:

Transfer beginning inventory to COGS

Set up ending inventory based on
physical count

Purchases 2,240
Transfer purchases to COGS

(continued) E6A-8A
Req. 2
Decadent Desserts, Inc.

Cost of goods sold:
Beginning inventory $580
Purchases 2,240
Gross Profit $1,480
Beginning inventory $580


(20-25 min.) P6A-9B
Req. 1
Inventory
Begin. Bal. (52 units × $20) 1,040
Purchases
Jan 8 (75 units × $21) 1,575 Cost of goods sold
30 (20 units × $22) 440 (102 units × $?) ?
FIFO (52 × $20) + (50 × $21) = $2,090 (20 × $22) + (25 × $21) = $965
Req. 2
Date Units Sold Selling Price Total Revenue
Jan 3 19 $75 $1,425
Jan 11 33 $75 $2,475
Jan 19 3 $77 $ 231
Jan 24 40 $77 $3,080
Jan 31 7 $77 $ 539
Total 102 $7,750
Trendy Outlet
Cost of goods sold:
Beginning inventory $1,040
Purchases 2,015
Gross profit $5,660

(20-30 min.) E6A-10B
Req. 1 (Journal entries)
General Journal (thousands)

1. Purchases 2,100

Cash 1,200
Sales Revenue 4,000
Sold inventory for cash and on account



count.

Purchases 2,100

(continued) E6A-10B
Req. 2
Sinful Desserts, Inc.

Sales revenue $ 4,000

Cost of goods sold:
Purchases 2,100
Gross Profit $ 2,060


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Chapter 6

Inventory and Merchandising Operations

(10 min.) S 6-1

Accounts Receivable…………. 19.5

Cost of Goods Sold…………… 4.8

424 Financial Accounting: IFRS 11/e Solutions Manual

Amounts Receivable…………………… 180,000

Cost of Goods Sold…………………….. 112,500

Cash ($180,000 × .40)…………………... 72,000

Chapter 6 Inventory and Merchandising Operations 425

Cost per unit:

426 Financial Accounting: IFRS 11/e Solutions Manual

Average FIFO LIFO

Chapter 6 Inventory and Merchandising Operations 427

Average FIFO LIFO

*From S 6-4 Method to Method to

428 Financial Accounting: IFRS 11/e Solutions Manual

Student responses may vary.

(5-10 min.) S 6-7

Chapter 6 Inventory and Merchandising Operations 429

TO: Jason Stone, President of Stone Saxophone

FROM: [Student Name]

SUBJECT: Proposal for Increasing Net Income

We can increase net income by not buying our normal

Student responses will vary.

430 Financial Accounting: IFRS 11/e Solutions Manual

LIFO 2. Results in an old measure of the cost of ending

LCM 3. Writes inventory down when replacement cost

LIFO 4. Enables a company to buy high-cost inventory at

FIFO 5. Enables a company to keep reported income

LIFO 6. Generally associated with saving income taxes.

FIFO 7. Results in a cost of ending inventory that is close

Average 9. Provides a middle-ground measure of ending

FIFO 10. Maximizes reported income.

Chapter 6 Inventory and Merchandising Operations 431

(5-10 min.) S 6-11

432 Financial Accounting: IFRS 11/e Solutions Manual

a. Net sales (unchanged)………………………………. $2,100

2. This year’s gross profit is overstated.

Chapter 6 Inventory and Merchandising Operations 433

434 Financial Accounting: IFRS 11/e Solutions Manual

Cost of Goods Sold………………….. 41,000

Chapter 6 Inventory and Merchandising Operations 435

1 Inventory ($660 + $2,160)…………….. 2,820

2 Accounts Receivable (12 × $520)….. 6,240

Cost of Goods Sold……………………. 2,000*

**Or, (9 × $180) = $1,620

436 Financial Accounting: IFRS 11/e Solutions Manual

Cost of Goods Sold Ending Inventory

(c) FIFO (5 × $160) + (4 × $165) + = $2,000 (9 × $180) = $1,620

(d) LIFO (12 × $180) = $2,160 (5 × $160) + (4 × $165) = $1,460

2. LIFO produces the highest cost of goods sold, $2,160.

Chapter 6 Inventory and Merchandising Operations 437

(15 min.) E 6-19A

Sales revenue (18 × $122) ………………………….. $2,196

438 Financial Accounting: IFRS 11/e Solutions Manual

2. Gross profit under FIFO and LIFO differ because inventory

3. Valuing the ending inventory at $5.00 per unit will, result in

Note: Cost is used for beginning inventory because cost is

440 Financial Accounting: IFRS 11/e Solutions Manual

Chapter 6 Inventory and Merchandising Operations 441

Michaels has the highest gross profit percentage, 59.6%.

442 Financial Accounting: IFRS 11/e Solutions Manual