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Chapter 6

Inventories
Study Guide Solutions
Fill-in-the-Blank Equations
1. Units available for sale
2. Estimated selling price
3. Inventory turnover
4. Average daily cost of goods sold

Exercises
1. Sunshine Books’ manager would like to review its inventory control procedures. The
company currently utilizes purchase orders and vendors’ invoices. To speed sales, the
company allows all employees access to inventory, although all items with a sales price
over $100 are locked in a cabinet. What control procedures does Sunshine Books use to
safeguard inventory?

Use of purchase orders and vendors’ invoices, locking all high-priced items in a cabinet

2. Tortoise Cleaning Co. is worried about its high loss of inventory. The company is new
and small, so all employees have access to all inventory. Because the company only uses
a few vendors, it trusts that the items received are the same as the items ordered. The
company is yet to implement a security system because the owner is usually present
when the business is open. What inventory control procedures should the company
implement to decrease inventory losses?

Use of purchase orders, receiving reports, and vendors’ invoices; restrict access to
inventory to select employees; lock high-priced items in a cabinet; install a security
system

1
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2 Chapter 6

3. Sierra Sub would like to improve its inventory control procedures. The company
currently ensures that items ordered are received using purchase orders, receiving
reports, and vendors’ invoices. The company has a high-priced security system over the
inventory room, which the owner reviews regularly to ensure no wrongdoing. Because
the owner is comfortable with his system, all employees are allowed access to the
inventory room. Identify which procedures Sierra Sub should implement to safeguard its
inventory.

Restrict access to the inventory room to select employees and lock high-priced items in
a cabinet

Strategy: A company safeguards inventory by restricting physical access to the inventory


and using checks to ensure that amounts at each level are correct. Purchase orders,
receiving reports, and vendors’ invoices allow a company to cross-reference and check
that inventory has not been stolen or misplaced.

4. Using the following information, calculate gross profit and ending inventory using the
(a) FIFO, (b) LIFO, and (c) weighted average cost methods under an inventory system
that uses specific identification. The company sold 2 units for $50 each on August 27.

Date Units Cost/Unit Total Cost


Aug.
10 Purchase 2 $11 $22
12 Purchase 2 $15 30
14 Purchase 2 $22 44
Total 6 $96

Gross Profit Ending Inventory


a. FIFO $78; ($100 – $22) $74; ($30 + $44)
b. LIFO $56; ($100 – $44) $52; ($30 + $22)
c. Weighted average ($16 avg. cost) $68; [$100 – (2 × $16)] $64; (4 × $16)

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Inventories 3

5. Calculate gross profit and ending inventory using the (a) FIFO, (b) LIFO, and (c) weighted
average cost methods under a specific identification inventory cost flow method. The
company sold 3 units for $75 each on September 29.

Date Units Cost


Sept. 6 Purchase 1 $16
9 Purchase 1 20
11 Purchase 1 24
17 Purchase 1 28
Total 4 $88

Gross Profit Ending Inventory


a. FIFO $165; [$225 – ($16 + $20 + $24)] $28
b. LIFO $153; [$225 – ($28 + $24 + $20)] $16
c. Weighted average ($22 avg. cost) $159; [$225 – ($22 × 3)] $22

6. Using the (a) FIFO, (b) LIFO, and (c) weighted average cost methods, calculate gross
profit and ending inventory. The company uses a specific identification inventory cost
flow method. On October 21, the company sold 5 units for $90 each.

Date Units Cost/Unit Total Cost


Oct. Purchas
2 e 2 $21 $ 42
Purchas
7 e 2 $22 44
Purchas
12 e 1 $28 28
Purchas
18 e 4 $30 120
Total 9 $234

Gross Profit Ending Inventory


a. FIFO $336; [$450 – ($42 + $44 + $28)] $120
b. LIFO $302; [$450 – ($120 + $28)] $86; ($42 + $44)
c. Weighted average ($26 avg. cost) $320; [$450 – ($26 × 5)] $104; (4 × $26)

Strategy: Under a specific identification method, the business can track which specific
items were sold and which remain on hand at the end of the period. To calculate gross
profit, determine which items were sold and the cost of each. Subtract the cost from
sales to determine the gross profit. The ending inventory equals the specific products
that were not sold during the period.

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7. With the information below, calculate the cost of goods sold for the month of October.
The company uses a FIFO perpetual inventory system. The company did not have any
beginning inventory.

Date Units Cost/Unit Total Cost


Oct.
1 Purchase 10 $40 $400
5 Purchase 12 $42 504
10 Sale of 7 units
15 Purchase 15 $43 645
22 Sale of 10 units

Cost of goods
sold: 7 units at $40 $280
10 units: 3 at $40 120
7 at $42 294
$694

8. At the beginning of November, Big Zero has an inventory balance of 20 units with a cost
of $20 each. Assuming Big Zero uses a FIFO perpetual inventory system, calculate Big
Zero’s cost of goods sold for the month if the company has the following purchases and
sales:

Date Units Cost/Unit Total Cost


Sale of 15
Nov. 3 units
8 Purchase 6 $22 $132
12 Purchase 3 $27 81
Sale of 10
15 units

Cost of goods sold: 15 units at $20 $300


10 units: 5 at $20 100
5 at $22 110
$510

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Inventories 5

9. PBJ Co. uses a FIFO perpetual inventory system. Calculate PBJ Co.’s cost of goods sold
for the month if the company has the following purchases and sales:

Unit
Date s Cost/Unit Total Cost
May
1 Beginning inventory 14 $10 $140
5 Purchase 16 $14 224
10 Sale of 15 units
18 Sale of 5 units

Cost of goods
sold: 15 units: 14 at $10 $140
1 at $14 14
5 units at $14 70
$224

Strategy: A perpetual inventory system is always up to date. With many purchases and
sales, the company creates “layers” of products from each purchase. Under FIFO, the
company assumes that all of the oldest products (the first layer) are sold first until the
layer is exhausted, even if there are other purchases (layers added) before the sale. Once
the first layer is sold, the company sells the products at the next layer (the second oldest
products), and so on. T accounts are helpful to visualize the layers and the sale of the
layers.

10. Assume that the company in Exercise 7 uses a LIFO perpetual inventory system instead.
Calculate the company’s cost of goods sold.

Cost of goods
sold: 7 units at $42 $294
10 units at $43 430
$724

11. If Big Zero from Exercise 8 uses LIFO instead of FIFO, what will be the new cost of goods
sold for the month?

Cost of goods
sold: 15 units at $20 $300
10 units: 3 at $27 81
6 at $22 132
1 at $20 20
$533

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Inventories 7

12. PBJ Co. decided to switch to a LIFO inventory system. What is the new cost of goods sold
for the month? Use the information from Exercise 9.

Cost of goods
sold: 15 units at $14 $210
5 units: 1 at $14 14
4 at $10 40
$264

Strategy: Under a LIFO perpetual system, the company’s cost of goods comes from the
most recent “layer” added to inventory. If layers are added between sales, the goods
sold are pulled from the most recent purchase until it is completely sold. Once the most
recent layer is diminished, the goods are pulled from the second most recent layer (the
second most recent purchase).

13. Using the weighted average method, calculate cost of goods sold for the company in
Exercise 7 for the month. Round the total cost and unit cost to the nearest cent.

Weighted average unit cost: 10 units at $40 $400


On Oct. 10 12 units at $42 504
$904
$904 ÷ 22 units $41.09

Weighted average unit cost: 15 units at $41.09 $ 616.35


On Oct. 22 15 units at $43.00 645.00
$1,261.35
$1,261.35 ÷ 30 units $42.05

Cost of goods
sold: 7 units at $41.09 $287.63
10 units at $42.05 420.50
$708.13

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8 Chapter 6

14. Assume Big Zero uses a weighted average method. Use the information in Exercise 8 to
calculate the company’s cost of goods sold. Round the total cost and unit cost to the
nearest cent.

Weighted average unit cost: 5 units at $20 $100


On Nov. 15 6 units at $22 132
3 units at $27 81
$313
$313 ÷ 14 units $22.36

Cost of goods
sold: 15 units at $20.00 $300.00
10 units at $22.36 223.60
$523.60

15. If PBJ Co. from Exercise 9 switches to the weighted average method, what will the cost
of goods sold be? Round the total cost and unit cost to the nearest cent.

Weighted average unit cost: 14 units at $10 $140


On May 10 16 units at $14 224
$364
$364 ÷ 30 units $12.13

15 units at
Cost of goods sold: $12.13 $181.95
5 units at $12.13 60.65
$242.60

Strategy: The weighted average unit cost must be recalculated after each purchase. To
find the weighted average unit cost, first find the total cost of each purchase (layer) by
multiplying the number of units purchased by the unit cost. Next, add the total purchase
costs and divide the total cost of inventory by the total number of units. The cost of
goods sold is found by multiplying the weighted average unit cost by the number of units
sold.

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Inventories 9

16. A retail company uses a FIFO periodic inventory method. The company’s physical count
at the end of the month shows a total of 20 units. Calculate the cost of goods sold for
the month.

Unit
Date s Cost/Unit Total Cost
Oct.
1 Purchase 10 $40 $400
5 Purchase 12 $42 504
10 Sale of 7 units
15 Purchase 15 $43 645
22 Sale of 10 units

Ending
inventory: 15 units at $43 $645
5 units at $42 210
$855

Beginning inventory, Oct. 1 $ —


Purchases ($400 + $504 + $645) 1,549
Cost of goods available for sale in October $1,549
Ending inventory, Oct. 31 (855)
Cost of goods sold $ 694

17. Big Zero uses a FIFO periodic inventory method. On November 1, the company has an
inventory balance of 20 units, costing $20 each. The company’s physical count at the
end of the month gives a total of 4 units. Calculate the cost of goods sold for the month.

Date Units Cost/Unit Total Cost


Nov.
3 Sale of 15 units
8 Purchase 6 $22 $132
12 Purchase 3 $27 81
15 Sale of 10 units

Ending
inventory: 3 units at $27 $ 81
1 unit at $22 22
$103

Beginning inventory, Nov. 1 $ 400

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Purchases ($132 + $81) 213


Cost of goods available for sale in November $ 613
Ending inventory, Nov. 30 (103)
Cost of goods sold $ 510

18. PBJ Co. uses a FIFO periodic inventory system. The company shows the following
transactions in its inventory for the month of May. At the end of May, a physical
inventory count gives a total of 10 units on hand. Calculate the company’s cost of goods
sold for the month.

Date Units Cost/Unit Total Cost


Beginning
May 1 inventory 14 $10 $140
5 Purchase 16 $14 224
10 Sale of 15 units
18 Sale of 5 units

Ending
inventory: 10 units at $14 $140

Beginning inventory, May 1 $ 140


Purchases ($224) 224
Cost of goods available for sale in
May $ 364
Ending inventory, May 31 (140)
Cost of goods sold $ 224
Strategy: Under a periodic inventory system, cost of goods sold must be calculated. First,
calculate the cost of goods available for sale, which includes the beginning inventory and
purchases made during the period. A physical inventory count will give the units
remaining at year-end (which will be the most recent items purchased under a FIFO
system because the first units purchased are sold first). The ending inventory is
subtracted from the cost of goods available for sale during the period to calculate the
cost of goods sold during the period.

19. Assume that the retail company in Exercise 16 uses a LIFO periodic inventory system.
Calculate the cost of goods sold for the month.

Ending
inventory: 10 units at $40 $400
10 units at $42 420
$820

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Inventories 11

Beginning inventory, Oct. 1 $ —


Purchases ($400 + $504 + $645) 1,549
Cost of goods available for sale in October $1,549
Ending inventory, Oct. 31 (820)
Cost of goods sold $ 729
20. Big Zero (information in Exercise 17) now uses a LIFO periodic inventory system.
Calculate the cost of goods sold for the month.

Ending
inventory: 4 units at $20 $80

Beginning inventory, Nov. 1 $400


Purchases ($132 + $81) 213
Cost of goods available for sale in November $613
Ending inventory, Nov. 30 (80)
Cost of goods sold $533

21. PBJ Co. (information in Exercise 18) changes to a LIFO periodic inventory system.
Calculate the cost of goods sold for the month of May.

Ending
inventory: 10 units at $10 $100

Beginning inventory, May 1 $ 140


Purchases ($224) 224
Cost of goods available for sale in May $ 364
Ending inventory, May 31 (100)
Cost of goods sold $ 264

Strategy: Under a periodic inventory system, cost of goods sold must be calculated. First,
calculate the cost of goods available for sale, which includes the beginning inventory and
purchases made during the period. A physical inventory count will give the units
remaining at year-end (which will be the oldest items purchased under a LIFO system
because the units purchased most recently are sold first). The ending inventory is
subtracted from the cost of goods available for sale during the period to calculate the
cost of goods sold during the period.

22. The retail company from Exercise 16 changes to a weighted average periodic inventory
system. Calculate the cost of goods sold for the month of October. Round the unit cost
to the nearest cent.

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12 Chapter 6

Weighted average unit cost: $1,549 ÷ 37 units $41.86


20 units at
Ending inventory: $41.86 $837.20

Beginning inventory, Oct. 1 — $


Purchases ($400 + $504 + $645) 1,549.00
Cost of goods available for sale in October $1,549.00
Ending inventory, Oct. 31 (837.20)
Cost of goods sold $ 711.80
23. If Big Zero from Exercise 17 changes to a weighted average periodic inventory system,
what will the company’s cost of goods sold be for the month of November? Round the
unit cost to the nearest cent.

Weighted average unit cost: $613 ÷ 29 units $21.14


Ending inventory: 4 units at $21.14 $84.56

Beginning inventory, Nov. 1 $ 400


Purchases ($132 + $81) 213
Cost of goods available for sale in November $ 613
Ending inventory, Nov. 30 (84.56)
Cost of goods sold $528.44

24. If PBJ Co. from Exercise 18 adopts a weighted average periodic inventory system, what
will the company’s cost of goods sold be for the month of May? Round the unit cost to
the nearest cent.

Weighted average unit cost: $364 ÷ 30 units $12.13


10 units at
Ending inventory: $12.13 $121.30

Beginning inventory, May 1 $ 140


Purchases ($224) 224
Cost of goods available for sale in
May $ 364
Ending inventory, May 31 (121.30)
Cost of goods sold $ 242.70

Strategy: Under a periodic inventory system, a weighted average unit cost is calculated
at the end of the period rather than after each purchase such as under a perpetual
inventory system. First, find the total cost of the entire inventory by multiplying the
number of units by the cost of each unit and adding the sums. To find the unit cost,
divide the total cost of the inventory by the total number of units. Multiply the weighted

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Inventories 13

average unit cost by the number of units in the ending inventory (which is determined by
a physical count). Subtract the cost of the ending inventory from the goods available for
sale during the period to calculate the cost of goods sold for the period.

25. SubSlippers would like to reduce its income tax expense for the upcoming years by
decreasing the company’s net income. What type of inventory cost system should the
company use in each situation?
a. Use LIFO for a low net income
b. Use FIFO for a low net income
26. Sun Cherries is trying to determine which inventory cost system to use. The company
would like to have high current assets on its balance sheet. What type of inventory cost
system would help the company to have high ending inventory balances in each
situation?
a. Use FIFO for a high ending inventory
b. Use LIFO for a high ending inventory

27. Upon inception, Pocket Pals is trying to decide which inventory cost system would be
best to match its goals. The company’s shareholders want to increase their wealth with
high gross profits. What type of inventory cost system would help the company have a
high gross profit in each situation?
a. Use FIFO for a high gross profit
b. Use LIFO for a high gross profit

Strategy: If prices of goods are increasing, LIFO will give a higher cost of goods sold
because the most recent (and most expensive) inventory products are sold first. A high
cost of goods sold yields a lower gross profit and a lower net income. LIFO will cause a
lower ending inventory account balance under rising prices because the oldest (and least
expensive) inventory items remain on hand. If prices of goods are decreasing, FIFO will
give a higher cost of goods sold because the oldest (and most expensive) inventory
products are sold first, creating a lower gross profit and net income. FIFO will give a
lower ending inventory account balance under decreasing prices because the most
recent (and least expensive) inventory items remain on hand.

28. Capital Pets has inventory that has shown a decrease in value. The company purchased
the goods for $490, but expects it can only sell the goods for $400. To make the sale,
Capital Pets expects to incur advertising expenses of $40. Calculate the net realizable
value for the inventory.

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14 Chapter 6

Net realizable value = $360; $400 – $40

29. Capital Pets has recovered select inventory after a recent fire. The inventory had minor
damage that caused the market value to decline from $1,200 to $900. To sell the items,
the company must incur the following: rental expenses of $200 to rent a temporary
sales booth, sales commission of $150, and advertising expenses of $300. What is the
net realizable value of the inventory?
Net realizable value = $250; $900 – ($200 + $150 + $300)

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Inventories 15

30. Moon Shapes has experienced a decrease in market value for its inventory from $2,900
to $2,100. The company expects to incur the following expenses in order to sell the
items: sales commission of $450, advertising expenses of $200, and sales discounts of
$500. What is the net realizable value of the inventory?
Net realizable value = $950; $2,100 – ($450 + $200 + $500)

Strategy: To find net realizable value, or market value, of inventory, subtract all selling
expenses incurred from selling the inventory from the market value. The original selling
price is irrelevant in determining the net realizable value because the company will no
longer receive this amount from the customer.

31. Super Suds purchases 300 units of Product ABC for $8.90 per unit and 250 units of
Product XYZ for $6.75 per unit. At year-end, the market value for Product ABC is $8.55
and Product XYZ is $6.70. Apply the lower-of-cost-or-market method to each inventory
item to determine the value of the total inventory.

Market Value
Product # Units Cost per Unit per Unit Cost Market Value LCM
ABC 300 $8.90 $8.55 $2,670.00 $2,565.00 $2,565.00
XYZ 250 6.75 6.70 1,687.50 1,675.00 1,675.00
Total $4,240.00

32. Super Suds had the inventory items below on hand at year-end. Some items had a
decrease in the market price.
a. $8,292.25
Market Value
Product # Units Cost per Unit per Unit Cost Market Value LCM
DEF 290 $7.75 $7.45 $2,247.50 $2,160.50 $2,160.50
GHI 800 3.45 3.42 2,760.00 2,736.00 2,736.00
KLM 340 6.80 6.81 2,312.00 2,315.40 2,312.00
NOP 255 4.30 4.25 1,096.50 1,083.75 1,083.75
Total $8,292.25

b. $8,295.65
Market
Value
Product # Units Cost per Unit per Unit Cost Market Value
DEF 290 $7.75 $7.45 $2,247.50 $2,160.50
GHI 800 3.45 3.42 2,760.00 2,736.00
KLM 340 6.80 6.81 2,312.00 2,315.40
NOP 255 4.30 4.25 1,096.50 1,083.75
Total $8,416.00 $8,295.65

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16 Chapter 6

33. Super Suds has the following in inventory at year-end. Apply the lower-of-cost-or–
market method to each situation to determine its value.
a. $7,037
Market
Cost per Value
Product # Units Unit per Unit Cost Market Value LCM
S15 400 $2.30 $2.15 $ 920.00 $ 860.00 $ 860.00
S32 450 4.65 4.70 2,092.50 2,115.00 2,092.50
W44 860 3.20 3.00 2,752.00 2,580.00 2,580.00
W90 295 5.15 5.10 1,519.25 1,504.50 1,504.50
Total $7,037.00

b. $7.059.50
Market
Cost per Value
Product # Units Unit per Unit Cost Market Value
S15 400 $2.30 $2.15 $ 920.00 $ 860.00
S32 450 4.65 4.70 2,092.50 2,115.00
W44 860 3.20 3.00 2,752.00 2,580.00
W90 295 5.15 5.10 1,519.25 1,504.50
Total $7,283.75 $7,059.50

Strategy: When determining the lower-of-cost-or-market value, first determine the cost
by multiplying the number of units on hand by the cost per unit. Next, determine the
market value by multiplying the number of units on hand by the market value per unit.
Use the lower-of-the-cost-or-market value, applying to either each inventory item, total
inventory, or each class of inventory.

34. Otter Co. is valuing its inventory at year-end. The company has on hand $22,000 in
inventory in its warehouse. The company purchased $4,500 of inventory, which was
shipped on December 29, 20Y5, with FOB shipping terms. The company didn’t receive
the items until after year-end. The company also shipped $6,900 of inventory to
customers on December 27, 20Y5, with FOB shipping terms. The customers all received
the items after year-end. What should the company record as inventory at year-end?
Inventory = $26,500; ($22,000 + $4,500) Otter Co. should include the goods in the
warehouse and the inventory purchased. Because the inventory sold changes title at the
shipping point, Otter Co. no longer owns the goods at year-end.

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Inventories 17

35. Otter Co. has $16,700 of inventory in its warehouse at year-end. Included in this amount
is $1,400 of consigned inventory, for which Otter Co. acts as a consignee. Otter Co. did
not include $2,400 of inventory that was shipped on December 29, 20Y5, to customers
FOB destination. The customers received the items after year-end. What should the
company record as inventory on its balance sheet?
Inventory = $17,700; ($16,700 – $1,400 + $2,400)
Otter Co. should exclude the consigned inventory from its inventory because the
consignor owns the items until sale. The sold inventory does not change title until it
reaches its destination, so the company should also include this at year-end.
36. Otter Co. acts as a consigner for $5,000 of inventory at retail locations. The company
also has $8,900 of inventory in its warehouse. The company has a purchase with
shipping terms FOB destination in transit as of year-end that includes $1,500 of goods.
The company also has sales of $1,100 of goods in transit at year-end that was shipped
FOB destination. What should the company record as inventory on its balance sheet?
Inventory = $15,000; ($5,000 + $8,900 + $1,100)
Otter Co. should include the consigned goods in its inventory because it is still the owner
until sale. The company also should include the items in the warehouse and the sales in
transit because they have not yet reached their destination.
Strategy: Inventory on the balance sheet at year-end should include all goods the
company has ownership of at year-end. If purchases and sales are in transit at year-end,
the shipping terms determine if the company owns the products. If a business is a
consignor of inventory, the inventory is considered to be owned by the company until the
sale. The consignee never owns consigned inventory and only has possession of the
items.
37. At the beginning of the year, Candle Co. has an inventory balance of $32,000. The
company has net income for the year of $56,000. Later, the accountant discovers an
error that caused the beginning inventory to be understated by $6,000.
a. $50,000 ($56,000 – $6,000)
b. Current and total assets and retained earnings understated by $6,000

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18 Chapter 6

38. Candle Co. performs an inventory count at year-end. The company records an ending
balance of $56,000 for inventory on its balance sheet. During the following year, the
accountant discovers that the ending inventory was miscounted, causing ending
inventory to be overstated by $2,500.
a. Cost of goods sold understated, gross profit and net income overstated by
$2,500
b. Current and total assets and retained earnings overstated by $2,500
39. During 20Y6, Candle Co. realizes that its beginning inventory for 20Y5 was overstated by
$3,200. Net income for 20Y5 was $19,250.
a. $22,450 ($19,250 + $3,200)
b. Current and total assets and retained earnings overstated by $3,200
Strategy: Beginning inventory has a direct relationship with cost of goods sold, meaning
if the beginning inventory is understated, the cost of goods sold will also be understated.
Ending inventory has an indirect relationship with cost of goods sold, meaning if
beginning inventory is understated, the cost of goods sold will be overstated. If cost of
goods sold is overstated, then gross profit will be understated, also causing net income
to be understated. Net income flows to the balance sheet through retained earnings,
which would also be understated. The understatement or overstatement of inventories
will have a direct relationship with current and total assets.
40. Connection Section has the following amounts for 20Y5 and 20Y6. Calculate the
inventory turnover for each year. Round answers to two decimal places. Also determine
if the change is favorable or unfavorable for the company.
20Y6 20Y5
Beginning
inventory $ 2,590 $ 3,200
Ending inventory 2,800 2,590
Cost of goods sold 13,200 15,650
Average inventory 2,695 2,895
Inventory turnover 4.90 5.41
($13,200 ÷ $2,695) ($15,650÷ $2,895)

The number decreased, which is an unfavorable change.

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Inventories 19

41. Connection Section (CS) is comparing its inventory turnover to a competitor (MN) for a
recent year. With the amounts below, calculate the inventory turnover for each
company. Round answers to two decimal places. Also determine if CS is more or less
efficient at managing inventory.

CS MN
Beginning
inventory $2,470 $3,900
Ending inventory 2,200 4,900
Cost of goods sold 7,500 8,900
Average inventory 2,335 4,400
Inventory turnover 3.21 2.02
($7,500 ÷ $2,335) ($8,900 ÷ $4,400)

CS is more efficient than MN at managing inventory because the company shows a


higher inventory turnover for the year.

42. TimeTable has recently implemented new procedures in the hopes of increasing
efficiency in managing inventory. With the information below, calculate the inventory
turnover ratio. Round answers to two decimal places. If the company implemented the
procedures in 20Y5, are they helping the company to improve? Why or why not?

20Y6 20Y5
Beginning
inventory $ 7,900 $ 8,750
Ending inventory 7,120 7,900
Cost of goods sold 14,500 15,200
Average inventory 7,510 8,325
Inventory turnover 1.93 1.83
($14,500 ÷ $7,510) ($15,200 ÷ $8,325)

The procedures are helping to improve the efficiency and effectiveness of managing
inventory because the inventory turnover ratio increased.

Strategy: To calculate inventory turnover, first find the average inventory by averaging
the beginning and ending inventories. Next, divide the cost of goods sold by the average
inventory. A high inventory turnover indicates that the business can sell (or “turn over”)
the total inventory more frequently during the year.

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20 Chapter 6

43. With the following information, determine the number of days’ sales in inventory for
20Y5 and 20Y6, using a 365-day year. Round answers to two decimal places. Is the
change a favorable or an unfavorable trend?

20Y6 20Y5
Cost of goods sold $340,000 $300,000
Beginning inventory 22,350 24,800
Ending inventory 26,900 22,350
Average inventory 24,625 23,575
Average daily cost of goods sold 931.51 821.92
Number of days’ sales in inventory 26.44 28.68
($24,625 ÷ $931.51) ($23,575 ÷ $821.92)

The decrease in the number of days’ sales in inventory is a favorable trend for managing
inventory.

44. Calculate the number of days’ sales in inventory for 20Y5 and 20Y6 for the following
company, using a 365-day year. Round answers to two decimal places. Also indicate if
the change is favorable or unfavorable for managing inventory.

20Y6 20Y5
Cost of goods sold $289,000 $279,000
Beginning inventory 37,800 42,750
Ending inventory 38,600 37,800
Average inventory 38,200 40,275
Average daily cost of goods sold 791.78 764.38
Number of days’ sales in inventory 48.25 52.69
($38,200 ÷ $791.78) ($40,275 ÷ $764.38)

The decrease in number of days’ sales in inventory indicates a favorable trend for the
company.

© 2019 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Inventories 21

45. Using the information in the table below, calculate the company’s number of days’ sales
in inventory for 20Y5 and 20Y6. Round answers to two decimal places. Also indicate if
the company shows a favorable or an unfavorable trend in managing inventory.

20Y6 20Y5
Cost of goods sold $325,000 $322,300
Beginning inventory 68,500 66,200
Ending inventory 73,500 68,500
Average inventory 71,000 67,350
Average daily cost of goods sold 890.41 883.01
Number of days’ sales in inventory 79.74 76.27
($71,000 ÷ $890.41) ($67,350 ÷ $883.01)

The increase in number of days’ sales in inventory indicates an unfavorable trend.

Strategy: The number of days’ sales in inventory represents the number of days that the
company takes to turn inventory into a sale. Companies prefer this number to be low. To
calculate the number of days’ sales in inventory, find the average inventory by averaging
the beginning and ending inventory. Next, calculate the average daily cost of goods sold
by dividing the cost of goods sold by the number of days in the year. The number of
days’ sales in inventory is found by dividing the average inventory by the average daily
cost of goods sold.
46. A business using the retail method of inventory costing determines that inventory at
retail is $626,000. If the ratio of cost to retail price is 56%, what is the amount of
inventory to be reported on the financial statements?

$350,560 ($626,000  56%)

47. A business using the retail method of inventory costing determines that inventory at
retail is $32,900. If the ratio of cost to retail price is 62%, what is the amount of
inventory to be reported on the financial statements?

$20,398 ($32,900  56%)

© 2019 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
22 Chapter 6

48. On the basis of the following data, estimate the cost of the inventory at September 30
by the retail method:

Cost Retail
Sept. 1 Inventory $152,000 $179,000
Sept. 1–30 Purchases 1,367,100 2,836,300
Sept. 1–30 Sales 2,101,650

Cost Retail
Inventory, Sept. 1 $152,000 $179,000
Purchases in September (net) 1,367,100 2,836,300
Merchandise available for sale $1,519,100 $3,015,300
Ratio of cost to retail price:
($1,519,100 ÷ $3,015,300 = 50%)
Sales for September 2,101,650
Inventory, Sept. 30, at retail $913,650
Inventory, Sept. 30, at estimated cost
($456,825  50%) $456,825

Strategy: For the retail method, a ratio of cost to retail price is then used to convert
ending inventory at retail to estimate the ending inventory at cost. First, determine the
total merchandise available for sale at cost and retail by adding beginning inventory to
purchases for the period. Next, determine the ratio of the cost to retail of the
merchandise available for sale by dividing the merchandise available for sale at cost by
merchandise available for sale at retail. Determine the ending inventory at retail by
deducting the sales from the merchandise available for sale at retail. The last step is to
estimate the ending inventory cost by multiplying the ending inventory at retail by the
cost to retail ratio.

© 2019 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Inventories 23

49. The inventory was destroyed by fire on Dec. 31. Estimate the cost of the inventory
destroyed using the gross profit method. The following data were obtained from the
accounting records:

Jan. 1 Inventory $628,000


Jan. 1–Dec. 31 Purchases (net) 3,602,350
Sales 436,000
Estimated gross profit rate 42%

Cost
Inventory, Jan. 1 $628,000
Purchases Jan. 1–Dec. 31 (net) 3,602,350
Merchandise available for sale 4,230,350
Sales for Jan. 1–Dec. 31 $436,000
Estimated gross profit
($436,000  42%) (183,120)
Estimated cost of goods sold (252,880)
Cost of inventory destroyed $3,977,470

50. Based on the following data, estimate the cost of the ending inventory using the gross
profit method:

Sales $9,236,000
Estimated gross profit rate 38%

Beginning inventory $620,000


Purchases (net) 4,830,000
Merchandise available for sale $5,450,000

Cost
Merchandise available for sale $5,450,000
Sales for Jan. 1–Dec. 31 $9,236,000
Estimated gross profit
($9,236,000  38%) (3,509,680)
Estimated cost of goods sold (5,726,320)
Inventory, Dec. 31 $276,320

© 2019 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
24 Chapter 6

51. Based on the following data, estimate the cost of the ending inventory using the gross
profit method:

Sales $7,150,000
Estimated gross profit rate 34%

Beginning inventory $575,000


Purchases (net) 4,250,000
Merchandise available for sale $4,825,000

Cost
Merchandise available for sale $4,825,000
Sales for Jan. 1–Dec. 31 $7,150,000
Estimated gross profit
($7,150,000  34%) (2,431,000)
Estimated cost of goods sold (4,719,000)
Inventory, Dec. 31 $106,000

Strategy: The gross profit method uses the estimated gross profit for the period to
estimate the inventory at the end of the period. The gross profit is estimated from the
preceding year, adjusted for any current-period changes in the cost and sales price. First,
determine the merchandise available for sale at cost by adding purchases to the
beginning inventory. Next, determine the estimated gross profit by multiplying the sales
by the gross profit percentage. Then, determine the estimated cost of goods sold by
deducting the estimated gross profit from the sales. Last, estimate the ending inventory
cost by deducting the estimated cost of goods sold from the merchandise available for
sale.

© 2019 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.