CH 08

CHAPTER 8
DISCUSSION QUESTIONS
1. A manufacturing firm has three types of 6. With good internal control procedures, a
inventories: (1) raw materials, (2) work-in- perpetual inventory record provides better
process, and (3) finished goods. Raw control over inventory because it always
materials are goods acquired in an shows the amount of inventory that should
undeveloped state that compose a major be in the warehouse (except for theft). A
part of a finished product. Work-in-process periodic inventory record shows only the
inventory is the partly finished products. amount of inventory that was on hand at the
Finished goods are the completed products beginning of the period. With the periodic
waiting for sale. method, the inventory account is not
adjusted until the next physical count is
2. The cost of inventory consists of all the
taken, usually at the end of an accounting
costs involved in buying and preparing
period.
merchandise for sale. For a manufacturing
company, inventory cost for raw materials 7. Purchase discounts and purchase returns
generally includes the purchase price paid are accounted for differently with the two
for the materials, freight costs, and receiving methods. With the periodic method, both
and storage costs. The cost of work-in- discounts and returns are accounted for by
process inventory includes the cost of raw using separate accounts (Purchase
materials, the cost of production labor, and Discounts and Purchase Returns); these are
some share of the cost of the manufacturing contra accounts to the purchases account.
overhead required to keep the factory With the perpetual method, discounts and
running. The cost of finished goods returns are accounted for by crediting
inventory is the total of the materials, labor, Inventory directly. Since a perpetual
and manufacturing overhead costs used in inventory account always shows the amount
the production process for those items. of inventory that should be on hand, when
inventory is returned to suppliers, the
3. It is more difficult to account for the
inventory account must be decreased.
inventory of a manufacturing firm than for a
merchandising firm because the former has 8. The costs of transporting inventory into a
three different types of inventories: raw firm are not treated in the same way as the
materials, work-in-process, and finished costs of transporting inventory out. The
goods. In addition, the work-in-process and costs of transporting inventory into the firm
finished goods inventories are composed of are treated as an addition to the costs of
raw materials, labor, and manufacturing inventory, whereas costs of transporting
overhead. Often, it is difficult to measure the inventory out of the firm are delivery
amount of labor and manufacturing expenses (operating expenses). The reason
overhead that should be included in the for the different treatments is that the total
inventory amounts. cost of inventory is the amount paid for the
inventory plus those costs necessary to get
4. The buyer owns merchandise being shipped
it ready for sale. For example, if a company
under the terms FOB shipping point; thus,
located in San Francisco buys inventory in
the buyer would generally pay the shipping
Chicago, that inventory will not be worth
costs and be responsible for any other
anything to the firm until it is in San
ownership costs during shipping.
Francisco and ready for sale. Thus, the total
5. The cost of inventory is transferred from an cost of the inventory is the sum of the
asset to an expense when the inventory is purchase price and the shipping costs
sold. Until sold, inventory is a current asset (freight in).
on the balance sheet. When sold, it
9. Missing a purchase discount raises the cost
becomes part of the cost of goods sold on
of inventory. Increased inventory cost
the income statement.
259
260 Chapter 8
ultimately means higher cost of goods sold 15. The LIFO inventory costing alternative
and lower net income. results in paying the lowest taxes when
prices are rising. With LIFO, the most
10. With a perpetual system, Inventory is
current costs (and the most expensive when
already adjusted to its ending balance
prices are rising) flow to the income
(unless there is theft or shrinkage) because
statement.
the inventory account is adjusted with the
recording of every sale and purchase 16. A firm cannot always use one inventory
transaction. With a periodic system, the costing alternative for tax purposes and
inventory account must be adjusted at the another for financial reporting purposes; the
end of the period because no adjustments IRS has ruled that firms using LIFO for tax
have been made to the inventory account purposes generally must use it for financial
throughout the period. The closing process, reporting purposes as well.
under a periodic method, involves closing
17. It is necessary to know which inventory cost
Net Purchases to Inventory and then
flow alternative firms are using before
adjusting Inventory to the appropriate
comparing their financial records because
amount. Through this process, the
the costing method can indicate how closely
purchases and purchase-related accounts
the reported inventory amounts reflect
are closed, the inventory account is adjusted
current inventory costs. For example, a firm
to its ending balance, and the cost of goods
using LIFO during inflationary periods will
sold amount ends up in the cost of goods
probably have very old inventory costs on its
sold account.
balance sheet, but its income statement will
11. Even though perpetual inventory records quite accurately reflect the amount of real
should always reflect the amount of net income earned. On the other hand, a
inventory actually on hand, the inventory still firm that uses FIFO will show relatively
needs to be counted to discover the extent accurate current costs of inventory on the
of theft, spoilage, and clerical errors. Also, a balance sheet, but its income statement will
physical count is a good way to identify show net income that is unrealistically high
which inventory is obsolete, broken, because the cost of goods sold does not
damaged, or slow selling. consist of current costs. In trying to compare
two firms, one using FIFO and one using
12. The only adjusting entry required to account
LIFO, the differences in the inventory and
for inventory with the perpetual method is
net income amounts might result more from
the entry to reflect any shortage or overage
how inventory costs are handled than from
from theft, obsolescence, and accounting
differences in amounts of inventory on hand
errors. All other entries to the inventory
or the profitability of the company.
account are made when merchandise is
purchased, sold, or returned, or when 18. The inventory turnover ratio reveals how fast
discounts are granted. inventory is sold—how long inventory is
being held before it is sold. Holding other
13. When goods being held on consignment are
things constant, the inventory turnover ratio
included in the ending inventory balance,
can provide a preliminary indication of how
inventory is overstated. When ending
well the organization is managing its
inventory is overstated, cost of goods sold is
inventory.
understated, and the result is an
overstatement of both gross margin and net 19.* When inventory is not recorded as a
income. purchase but is included in the inventory
balance, the amount of net income is
14. “Movement of goods” refers to the flow of
overstated. As shown here, an
the actual inventory through the firm; “cost
understatement of the purchase amount
flow” refers to the flow of the costs of the
results in an understatement of cost of
inventory. A firm may have a FIFO physical
goods sold and a corresponding
flow pattern for the inventory, but may use
overstatement of both gross margin and net
FIFO, LIFO, or average cost for costing the
income.
inventory.
Beginning inventory xxx (OK)
+ Net purchases xxx (understated)
Chapter 8 261
= Cost of goods amount that could be realized from the sale of the
available for sale xxx (understated) merchandise. Writing inventory down to its
– Ending inventory xxx (OK) net realizable value before its sale is the
= Cost of goods sold xxx (understated) conservative approach because it
Gross margin xxx (overstated) recognizes losses on inventory when they
Net income xxx (overstated) occur instead of when the inventory is sold.
It also guarantees that inventories will not be
*Relates to expanded material.
carried on the books at amounts that exceed
20.* When inventory is sold and shipped but not their future economic benefits.
recorded as a sale, net income will be
23.* Inventory is always valued at the lower of
understated. As shown below, when sales
cost or market. If the replacement price of
are understated and net cost of goods sold
inventory drops significantly below the cost,
is correct, the gross margin and net income
it must be written down to market
will be understated.
(replacement cost) so that the normal profit
Sales revenue xxx (understated) can be realized when the merchandise is
Cost of goods sold: finally sold. This approach is required under
Beginning inventory xxx (OK) generally accepted accounting principles
+ Net purchases xxx (OK) because it writes off any expired economic
= Cost of goods benefits of assets in a timely manner.
available for sale xxx (OK)
24.* When firms cannot count their inventory,
– Ending inventory xxx (OK)
they may use various methods to estimate
= Cost of goods sold xxx (OK)
the value of inventory. If a company uses
Gross margin xxx (understated
the perpetual method of accounting for
because
inventory and is preparing monthly or
of sales)
quarterly financial statements, the perpetual
Net income xxx (understated
inventory balance is assumed to be correct.
because
However, with the periodic method an
of sales)
estimate must be made. The most common
21.* Although the costs of the units on hand and method of estimating inventory is the gross
sold after each transaction are the same margin method. This method uses beginning
under FIFO perpetual and FIFO periodic, inventory, purchases, sales, and the
computation of average cost and LIFO historical gross margin percentage to
under a perpetual system changes every estimate cost of goods sold and ending
time a purchase is made. With a perpetual inventory.
system, the exact timing of these purchases
is tracked throughout the period; with a
periodic system, the computations are made
only at the end of the period.
22.* Inventory should be valued at its net
realizable value when it is damaged, used,
or obsolete. The net realizable value is the
262 Chapter 8
PRACTICE EXERCISES
PRACTICE 8–1 Inventory Identification
The correct answer is A. Cranes at a construction site have not been purchased
with the intent of being resold to customers. The answer is not D because the
screws would be considered part of the overhead cost involved in the
manufacturing of inventory.
PRACTICE 8–2 Costs Included in Inventory
The correct answer is C. The company president’s salary is an example of an

administrative expense that does not relate directly to the cost of inventory. The
answer is not E because the factory supervisor’s salary is part of manufacturing
overhead, which is included in the cost of manufactured inventory.
PRACTICE 8–3 Goods in Transit
Collin Wholesale owns the inventory on December 31, year 1. With shipping
terms of FOB destination, the seller owns the inventory during transit because
ownership does not transfer until the goods reach their destination.
PRACTICE 8–4 Computing Cost of Goods Sold
Beginning inventory.................................................................................... $ 52,000

Add: Purchases............................................................................................ 255,000
Cost of goods available for sale................................................................ $307,000
Less: Ending inventory............................................................................... 45,000
Cost of goods sold...................................................................................... $262,000
PRACTICE 8–5 Perpetual and Periodic Inventory Systems
Perpetual Periodic
a. Automobile dealer X
b. Summer snow-cone stand X
c. Supermarket X
d. Large appliance retailer X
e. Newsstand X
f. Discount clothing retailer X
Both the summer snow-cone stand and the newsstand involve busy (hopefully)
locations where the sales price of the merchandise is substantially greater than
the cost of the merchandise. Thus, it doesn’t make economic sense to potentially
lose customers by making them wait while you do detailed accounting to track
inventory that has a relatively low cost.
Chapter 8 263
PRACTICE 8–5 (Concluded)
A supermarket also has many low-cost items. However, management of the

diverse array of items in a supermarket requires a good information system to
tell the manager which items need to be reordered, which items are not selling,
and so forth.
With the cost of computing continuing to decline, the number of businesses for
which a perpetual inventory system makes economic senses increases every
year.
PRACTICE 8–6 Inventory Purchases
1. and 2.
Perpetual Periodic
Inventory........................ 25,000 Purchases................... 25,000
Accounts Payable. . . Accounts Payable.
25,000 25,000
PRACTICE 8–7 Transportation Costs
1. and 2.
Perpetual Periodic
Inventory........................ 690 Freight In........................ 690
Cash.......................... 690 Cash.......................... 690
PRACTICE 8–8 Purchase Returns
1. and 2.
Perpetual Periodic
Accounts Payable......... 2,000 Accounts Payable......... 2,000
Inventory.................. 2,000 Purchase Returns.... 2,000
Returned 20 tables costing $100 each; 20  $100 = $2,000.
PRACTICE 8–9 Purchase Discounts
1. and 2.
Perpetual Periodic
Accounts Payable......... 23,000 Accounts Payable......... 23,000
Inventory.................. 460 Purchase Discounts 460
Cash.......................... Cash..........................
22,540 22,540
Paid for 230 tables [(250 purchased – 20 returned)  $100 = $23,000] with a 2%
discount ($23,000  0.02 = $460).
264 Chapter 8
PRACTICE 8–10 Sales
1. and 2.
Perpetual Periodic
Accounts Receivable.... 8,000 Accounts Receivable.... 8,000
Sales (50  $160)...... 8,000 Sales......................... 8,000
Cost of Goods Sold...... 5,050
Inventory (50  $101) 5,050
Cost per table

Initial cost $100 per table
Transportation $690/(250 tables – 20 tables returned) = $690/230 tables =
$3 per table
Discount $460/230 tables = $2 per table
Total $100 + $3 – $2 = $101 per table
PRACTICE 8–11 Sales Returns
1. and 2.
Perpetual Periodic
Sales Returns (8  $160). . 1,280 Sales Returns.................... 1,280
Accounts Receivable. . 1,280 Accounts Receivable. . 1,280
Inventory (8  $101).......... 808
Cost of Goods Sold..... 808
For computation of the cost per table, refer to Practice 8–10.
PRACTICE 8–12 Closing Inventory Entries for a Periodic System
1. Inventory......................................................................... 23,230
Purchase Returns.......................................................... 2,000
Purchase Discounts...................................................... 460
Freight In................................................................. 690
Purchases............................................................... 25,000
2. Cost of Goods Sold....................................................... 4,400

Inventory ($23,230 – $18,830)............................... 4,400
PRACTICE 8–13 Inventory Shrinkage
Inventory Shrinkage.............................................................. 3,500

Inventory ($182,000 – $178,500)................................... 3,500
Chapter 8 265
PRACTICE 8–14 Computing Cost of Goods Sold with a Periodic System
Beginning inventory.................................................................................... $ 6,000

Plus: Net purchases.................................................................................... 23,000
Cost of goods available for sale................................................................ $29,000
Less: Ending inventory............................................................................... (7,500)
Cost of goods sold...................................................................................... $21,500
PRACTICE 8–15 Errors in Ending Inventory
Net income is overstated by $20,000. An ending inventory overstatement reduces

the reported cost of goods sold. If cost of goods sold is understated by $20,000,
gross margin and net income will both be overstated by $20,000.
PRACTICE 8–16 Specific Identification Inventory Cost Flow
Cameras Costs
Beginning inventory 8 $ 800
Net purchases 34 4,000
Goods available for sale 42 $4,800
Ending inventory 16 1,755
Cost of goods sold 26 $3,045
1. Cost of goods sold calculation:

4 cameras from beginning inventory, $100 each............................. $ 400
5 cameras purchased October 3, $110 each.................................... 550
3 cameras purchased on October 14, $115 each............................. 345
14 cameras purchased on October 20, $125 each........................... 1,750
Total cost of goods sold (26 units)................................................... $3,045
2. Ending inventory calculation:

7 cameras purchased on October 3, $110 each............................... 770
1 camera purchased on October 20, $125........................................ 125
Total ending inventory (16 units)....................................................... $1,755
266 Chapter 8
PRACTICE 8–17 FIFO Cost Flow Assumption
Cameras Costs
1. FIFO Cost of goods sold calculation (oldest 26 units):

12 cameras purchased October 3, $110 each.................................. 1,320
2. FIFO Ending inventory calculation (newest 16 units):

1 camera purchased on October 14, $115........................................ $ 115
PRACTICE 8–18 LIFO Cost Flow Assumption
Cameras Costs
1. LIFO Cost of goods sold calculation (newest 26 units):

4 cameras purchased October 3, $110 each.................................... $ 440
7 cameras purchased October 14, $115 each.................................. 805
2. LIFO Ending inventory calculation (oldest 16 units):

8 cameras purchased October 3, $110 each.................................... 880
Chapter 8 267
PRACTICE 8–19 Average Cost Flow Assumption

Cameras Costs
($4,800/42 units) = $114.286 per unit
1. Average cost of goods sold: 26 units  $114.286 per unit = $2,971 (rounded)
2. Average ending inventory: 16 units  $114.286 per unit = $1,829 (rounded)
PRACTICE 8–20 Inventory Turnover
Cost of Goods Sold $295,000

Inventory Turnover = Average Inventory = = 6.15
($51,000 + $45,000)/2
PRACTICE 8–21 Number of Days’ Sales in Inventory
365 365
Number of Days’ Sales in Inventory = Inventory Turnover = = 59.35 days
6.15 *
*For computation of inventory turnover, refer to Practice 8-20.
PRACTICE 8–22 Number of Days’ Purchases in Accounts Payable
Number of Days’ Purchases in Accounts Payable =

365 365
= = 49.13 days
(Purchases/Average Accounts Payable) (364,000/$49,000*)
*Average Accounts Payable = ($52,000 + $46,000)/2 = $49,000
PRACTICE 8–23 Inventory Errors—Multiple Years*

Year 1
Beginning inventory $ XXX (OK)
+ Purchases XXX (OK)
= Cost of goods available for sale $ XXX (OK)
– Ending inventory 2,000 (understated)
= Cost of goods sold $2,000 (overstated)
Net income $2,000 (understated)
Correct net income: $3,000 + $2,000 = $5,000
268 Chapter 8
PRACTICE 8–24 Inventory Errors—Multiple Years*

Year 2
Beginning inventory $2,000 (understated)
+ Purchases XXX (OK)
= Cost of goods available for sale $2,000 (understated)
– Ending inventory 450 (overstated)
= Cost of goods sold $2,450 (understated)
Net income $2,450 (overstated)
Correct net income: $3,000 – $2,450 = $550
PRACTICE 8–25 LIFO and a Perpetual Inventory System*
LIFO 1. Cost of Goods Sold 2. Ending Inventory

January 16 (200 units) 200  $17.50 = $3,500 100  $17.50 = $1,750
July 23 (600 units) 600  $18.00 = $10,800 100  $17.50 = $1,750
300  $18.00 = $5,400
November 1 (1,300 units) 1,200  $18.25 = $21,900 100  $17.50 = $1,750
100  $18.00 = $1,800 200  $18.00 = $3,600
Total = $38,000 Total = $5,350
PRACTICE 8–26 Average Cost and a Perpetual Inventory System*
Average Cost 1. Cost of Goods Sold 2. Ending Inventory

January 16 (200 units) 200  $17.50 = $3,500 100  $17.50 = $1,750
July 23 (600 units)
100  $17.50 = $ 1,750
900  $18.00 = 16,200
1,000 $17,950
$17,950/1,000 = $17.95 per unit
600  $17.95 = $10,770 400  $17.95 = $7,180
November 1 (1,300 units)
400  $17.95 = $ 7,180
1,200  $18.25 = 21,900
1,600 $29,080
$29,080/1,600 = $18.175 per unit
1,300  $18.175 = $23,627.5 300  $18.175 = $5,452.5
Total = $37,898 Total = $5,452

Chapter 8 269
PRACTICE 8–27 Lower of Cost or Market*
A: Ceiling = $650, Replacement cost = $600, Floor = $550; Market = $600.

B: Ceiling = $740, Replacement cost = $550, Floor = $590; Market = $590.
C: Ceiling = $1,150, Replacement cost = $1,120, Floor = $850; Market = $1,120.
Lower of Cost or Market:

Item A $ 560
Item B 590
Item C 1,120
Total $2,270
PRACTICE 8–28 Recording an Inventory Write-Down*
Loss on Write-Down of Inventory........................................ 300

Inventory......................................................................... 300
PRACTICE 8–29 Estimating Inventory*
1. and 2.
Last Year % Two Years Ago %
Sales $5,000,000 $5,000,000
Cost of goods sold (estimated) 1,750,000 1,500,000
Gross profit (estimated) $3,250,000 $3,500,000
Beginning inventory $1,000,000 $1,000,000

+ Purchases 3,700,000 3,700,000
= Cost of goods available for sale $4,700,000 $4,700,000
– August 17 inventory (estimated) 2,950,000 3,200,000
= Cost of goods sold (estimated) $1,750,000 $1,500,000

270 Chapter 8
EXERCISES
EXERCISE 8–1 Goods on Consignment
1. $ 30,000 counted
– 8,000 on consignment from suppliers
+ 10,000 on consignment to customers
$ 32,000 ending inventory
2. $ 27,000 beginning inventory
+ 59,000 net purchases
$ 86,000 cost of goods available for sale
– 32,000 ending inventory (determined in question 1)
$ 54,000 cost of goods sold
3. $ 36,000 counted
+ 4,000 on consignment to customers
– 10,000 on consignment from suppliers
$ 30,000 ending inventory
4. $ 24,000 beginning inventory
X net purchases
$ 77,500 cost of goods available for sale
– 30,000 ending inventory (determined in question 3)
$ 47,500 cost of goods sold
X = $47,500 + $30,000 – $24,000 = $53,500
EXERCISE 8–2 Recording Sales Transactions—Perpetual Inventory Method
June 24 Accounts Receivable............................................ 80,000

Sales Revenue.................................................. 80,000
Cost of Goods Sold............................................... 56,000
Inventory........................................................... 56,000
Sold merchandise to Jill Selby, terms 2/10,
n/30 (cost is $80,000  0.70 = $56,000).
30 Cash........................................................................ 39,200
Sales Discounts..................................................... 800
Accounts Receivable....................................... 40,000
Received partial payment from Jill Selby
(discount is $40,000  0.02 = $800).
30 Sales Returns......................................................... 16,000
Inventory................................................................. 11,200
Cost of Goods Sold.......................................... 11,200
Accepted return of merchandise that originally
sold for $16,000 (cost is $16,000  0.70 = $11,200).
Chapter 8 271
EXERCISE 8–3 Perpetual Inventory Method
Oct. 2 Inventory................................................................. 27,650

Accounts Payable............................................ 27,000
Cash................................................................... 650
5 Accounts Receivable............................................ 8,250
Sales Revenue.................................................. 8,250
Inventory........................................................... 4,900
10 Accounts Payable.................................................. 13,950*
Inventory........................................................... 279
Cash................................................................... 13,671
*($13,671/0.98)
14 Accounts Payable.................................................. 1,100
Inventory........................................................... 1,100
19 Cash........................................................................ 4,560
20 Accounts Payable.................................................. 11,950*
Cash................................................................... 11,950
*($27,000 – $13,950 – $1,100)
22 Accounts Receivable............................................ 5,200
Sales Revenue.................................................. 5,200
Inventory........................................................... 3,800
24 Sales Returns......................................................... 3,250
Cash................................................................... 3,250
Inventory................................................................. 1,800
Cost of Goods Sold.......................................... 1,800
Beginning inventory.............................................. $ 12,000
27,650
(4,900)
(279)
(1,100)
(3,800)
1,800
Ending inventory................................................... $31,371
272 Chapter 8
EXERCISE 8–4 Adjusting Inventory (Perpetual Method)
Inventory Shrinkage.............................................................. 28,000

Inventory............................................................................ 28,000
To adjust the inventory account balance to current
amount per physical count. ($120,000 – $92,000 = $28,000)
EXERCISE 8–5 Recording Sales Transactions—Periodic Inventory Method
June 24 Accounts Receivable............................................ 80,000

Sales Revenue.................................................. 80,000
Sold merchandise to Jack Simpson,
terms 2/10, n/30.
30 Cash........................................................................ 39,200
Sales Discounts..................................................... 800
Received partial payment from Jack Simpson
(discount is $40,000  0.02 = $800).
30 Sales Returns and Allowances............................ 16,000
Accepted return of $16,000 of merchandise.
EXERCISE 8–6 Adjusting Inventory and Closing Entries (Periodic Method)
Inventory................................................................................. 216,000
Purchase Returns.................................................................. 4,000
Purchases....................................................................... 220,000
Closed temporary inventory accounts.
Cost of Goods Sold............................................................... 244,000
Inventory......................................................................... 244,000
To adjust the inventory account to the appropriate
balance of $92,000. ($120,000 beginning inventory
+ $216,000 net purchases – $92,000 ending inventory
= $244,000)
Chapter 8 273
EXERCISE 8–7 Cost of Goods Sold Calculation
Cost of goods sold:

Inventory January 1, 2006..................................................... $ 80,000
Purchases............................................................................... $520,000
Less: Purchase returns...................................................... (15,280)
Purchase discounts................................................. (1,760)
Add: Freight in................................................................... 24,800
Net purchases........................................................................ 527,760
Cost of goods available for sale.......................................... $607,760
Less inventory, December 31, 2006..................................... (96,000)
Cost of goods sold................................................................ $511,760
EXERCISE 8–8 Cost of Goods Sold Calculations
Able Baker Carter Delmont Eureka

Company Company Company Company Company
Beginning inventory.... $16,000 $24,800 (5)$17,100 (7)$32,900
$19,200
Purchases..................... 26,500 (3) 65,600 43,000 89,500 (9) 64,500
Purchase returns......... (1) 400 1,000 1,800 200 2,200
Cost of goods
available for sale.... 42,100 (4) 89,400 58,300 (8)122,200 81,500
Ending inventory.......... (2) 8,700 22,200 15,200 28,800 (10) 13,100
Cost of goods sold...... 33,400 67,200 (6) 43,100 93,400 68,400
Calculations (in the following order):

(1) $16,000 + $26,500 – $42,100 = $400
(2) $42,100 – $33,400 = $8,700
(4) $22,200 + $67,200 = $89,400
(3) $89,400 + $1,000 – $24,800 = $65,600
(5) $58,300 + $1,800 – $43,000 = $17,100
(6) $58,300 – $15,200 = $43,100
(8) $28,800 + $93,400 = $122,200
(7) $122,200 + $200 – $89,500 = $32,900
(9) $81,500 + $2,200 – $19,200 = $64,500
(10) $81,500 – $68,400 = $13,100
274 Chapter 8
EXERCISE 8–9 Journalizing Inventory Transactions
1. Jan. 24 Purchases.................................................... 12,000

Accounts Payable................................. 12,000
30 Accounts Payable....................................... 12,000
Purchase Discounts ($12,000  0.02). 240
Cash........................................................ 11,760
Mar. 14 Purchases.................................................... 165,000
Freight In...................................................... 650
Accounts Payable................................. 165,000
Cash........................................................ 650
Apr. 1 Accounts Payable....................................... 35,000
Purchase Returns.................................. 35,000
13 Accounts Payable....................................... 130,000
Cash........................................................ 130,000
2. Beginning inventory...................................................... $ 18,500

Purchases....................................................................... $177,000
Less: Purchase returns................................................. (35,000)
Purchase discounts............................................ (240)
Add: Freight in.............................................................. 650
Net purchases................................................................ 142,410
Cost of goods available for sale.................................. $160,910
Less: Ending inventory................................................. 25,750
Cost of goods sold........................................................ $135,160
EXERCISE 8–10 Adjusting Inventory Records for Physical Counts
(a) = $150, (b) = $3.40, (c) = 24, (d) = $1.15
Inventory................................................................................. 12.25
Inventory Shrinkage/Growth........................................ 12.25
To adjust inventory after physical count.
($150.00 + $54.40 + $60.00 + $52.90 = $317.30;
$317.30 – $305.05 = $12.25)
Chapter 8 275
EXERCISE 8–11 Specific Identification Method
1. Cost of goods sold:

Ring A 2 units at $600 = $1,200
Ring A 3 units at 600 = 1,800
Ring A 1 unit at 650 = 650
Ring B 2 units at 450 = 900
Ring B 2 units at 350 = 700
Ring C 4 units at 200 = 800
Ring C 1 unit at 250 = 250
$7,050
Beginning inventory................................................................. $ 19,650

Net purchases........................................................................... 4,800
Cost of goods available for sale............................................. $ 24,450
Ending inventory...................................................................... (17,400)
Cost of goods sold................................................................... $ 7,050
Purchases:
4 Type A rings at $600 = $2,400
2 Type B rings at 450 = 900
5 Type C rings at 300 = 1,500
$4,800
Ending inventory:
Ring A 7 units at $600 = $ 4,200
Ring A 9 units at 650 = 5,850
Ring B 5 units at 300 = 1,500
Ring C 4 units at 250 = 1,000
$17,400
276 Chapter 8
EXERCISE 8–11 (Concluded)
2. Sales:
Ring A 2 units at $1,000 = $ 2,000
Ring A 3 units at 1,050 = 3,150
Ring A 1 unit at 1,200 = 1,200
Ring C 1 unit at 550 = 550
$13,500
Sales revenue............................................................................ $13,500

Cost of goods sold................................................................... 7,050
Gross margin............................................................................. $ 6,450
EXERCISE 8–12 Inventory Costing Methods
1. LIFO
2. LIFO
3. FIFO
4. Average cost
5. LIFO
Chapter 8 277
EXERCISE 8–13 FIFO and LIFO Inventory Costing
FIFO
Cost of Goods Sold
Ring Type Units Cost Total Cost
A 6 $600 $3,600
B 4 300 1,200
C 7 200 1,400
C 1 250 250
$6,450
Beginning inventory...................................................... $19,650
Net purchases................................................................ 4,800*
Cost of goods sold........................................................ 6,450
Ending inventory............................................................ $18,000
*4  $600 = $2,400; 2  $450 = $900; 5  $300 = $1,500;
$2,400 + $900 + $1,500 = $4,800
LIFO
Cost of Goods Sold
Ring Type Units Cost Total Cost
A 4 $600 $2,400
A 2 650 1,300
B 2 450 900
B 2 450 900
C 5 300 1,500
C 3 250 750
$7,750
Beginning inventory...................................................... $19,650

Net purchases................................................................ 4,800
Cost of goods sold........................................................ 7,750
Ending inventory............................................................ $16,700
278 Chapter 8
EXERCISE 8–14 FIFO, LIFO, and Average Cost Calculations (Periodic Inventory
Method)
(a) FIFO
Cost of goods sold....................42 computers at $1,100 = $46,200
Cost of goods available for sale........................................................ $110,950
Less cost of goods sold..................................................................... 46,200
Ending inventory................................................................................. $ 64,750
Cost of goods available for sale:
Beginning inventory....................................50 computers at $1,100 = $ 55,000
Nov. 5 Purchase....................................12 computers at $1,250 = 15,000
11 Purchase....................................17 computers at $1,300 = 22,100
24 Purchase....................................13 computers at $1,450 = 18,850
(b) LIFO
Cost of goods sold................13 computers at $1,450 = $18,850
17 computers at $1,300 = 22,100
12 computers at $1,250 = 15,000
$55,950
Less cost of goods sold..................................................................... 55,950
Ending inventory................................................................................. $ 55,000
(c) Average Cost
Units
Model J computers available for sale.......................... 92 (50 + 12 + 17 + 13)
Model J computers sold................................................ 42
Model J computers ending inventory.......................... 50
$110,950
Average cost = = $1,205.98 per computer (rounded)
92
Cost of goods sold.................................42 computers at $1,205.98 = $50,651
Ending inventory....................................50 computers at $1,205.98 = $60,299
Chapter 8 279
EXERCISE 8–15 Inventory Ratios
Atkins Inventory turnover: $690,000/$44,000 = 15.7 times

Number of days’ sales in inventory: 365/15.7 = 23.2 days
Burbank Inventory turnover: $910,000/$87,500 = 10.4 times
Number of days’ sales in inventory: 365/10.4 = 35.1 days
Atkins Computers is handling its inventory more efficiently, as shown by its
higher inventory turnover and its lower days’ sales in inventory.
EXERCISE 8–16 Analysis of the Operating Cycle
1. Inventory turnover = [$600,000  (1 – 0.37)]/[($114,000 + $87,000)/2] = 3.8

Number of days’ sales in inventory = 365/3.8 = 96 days
2. Average collection period: 44 days = 365/accounts receivable turnover

Accounts receivable turnover = 8.3 times
Accounts receivable turnover: 8.3 = $600,000/[($68,000 + ending accounts
receivable)/2]
Ending accounts receivable = $76,578 (rounded)
3. Beginning inventory............................................................................ $114,000

Purchases............................................................................................. ?
Ending inventory................................................................................. (87,000)
Cost of goods sold [$600,000  (1 – 0.37)]........................................ $378,000
Purchases = $351,000
Purchases turnover = $351,000/[($36,000 + $42,000)/2] = 9.0 times
Number of days’ purchases in accounts payable = 365/9.0 = 41 days
4. Dallen pays its suppliers in 41 days, on average. Dallen collects cash from
customers in 140 days (96 days + 44 days). So, on average, 99 days (140
days – 41 days) elapse between the time suppliers are paid and the time
cash is received from customers.
280 Chapter 8
EXERCISE 8–16 (Concluded)
5. (1) Inventory turnover = [$600,000  (1 – 0.37)]/$87,000 = 4.3

Number of days’ sales in inventory = 365/4.3 = 85 days
(2) Average collection period: 44 days = 365/accounts receivable turnover
Accounts receivable turnover = 8.3 times
Accounts receivable turnover: 8.3 = $600,000/ending accounts
receivable
Ending accounts receivable = $72,289
(3) Beginning inventory.................................................................... $114,000
Purchases..................................................................................... ?
Cost of goods available for sale................................................ $465,000
Ending inventory......................................................................... (87,000)
Cost of goods sold...................................................................... $378,000
Purchases = $351,000
Purchases turnover = $351,000/$42,000 = 8.4
Number of days’ purchases in accounts payable = 365/8.4 = 43 days
(4) Dallen pays its suppliers in 43 days, on average. Dallen collects cash
from customers in 129 days (85 days + 44 days). So, on average, 86
days (129 days – 43 days) elapse between the time suppliers are paid
and the time cash is received from customers.
EXERCISE 8–17 Inventory Errors*
1. a b c
Sales revenue................................ $ 84,000 $ 84,000 $ 80,000
Beginning inventory..................... $ 18,000 $ 18,000 $ 18,000
Net purchases................................ 44,000 44,000 44,000
Cost of goods available for sale.. $ 62,000 $ 62,000 $ 62,000
Ending inventory........................... (13,000) (11,000) (11,000)
Cost of goods sold....................... $ 49,000 $ 51,000 $ 51,000
Gross margin................................. $ 35,000 $ 33,000 $ 29,000
2. The proper method is (b): recording the sale and not counting the inventory.
3. Method (a) overstates gross margin and net income.

Chapter 8 281
EXERCISE 8–18 FIFO, LIFO, and Average Cost Calculations (Perpetual

Inventory Method)*
1. (a) FIFO
Cost of goods sold:
First sale................................. 4,000 units at $2.00 = $ 8,000
Second sale............................. 3,000 units at 2.00 = 6,000
Third sale................................. 5,000 units at 2.00 = 10,000
$24,000
Remaining Inventory
Number Unit Total Number of Units Total
Date Transaction of Units Cost Cost and Cost Cost
July 1 Beg. inventory 28,000 $2.00 $56,000 28,000 @ $2.00 $56,000
5 Sold (4,000) 2.00 (8,000) 24,000 @ $2.00 48,000
13 Purchased 6,000 2.25 13,500 24,000 @ $2.00 61,500
6,000 @ $2.25
17 Sold (3,000) 2.00 (6,000) 21,000 @ $2.00 55,500
6,000 @ $2.25
25 Purchased 8,000 2.50 20,000 21,000 @ $2.00 75,500
6,000 @ $2.25
8,000 @ $2.50
27 Sold (5,000) 2.00 (10,000) 16,000 @ $2.00 $65,500
6,000 @ $2.25 ending
8,000 @ $2.50
inventory (b) LIFO
Cost of goods sold:
First sale........................ 4,000 units at $2.00 = $ 8,000
Second sale................... 3,000 units at 2.25 = 6,750
Third sale....................... 5,000 units at 2.50 = 12,500
$27,250
Remaining Inventory
Number Unit Total Number of Units Total
July 1 Beg. inventory 28,000 $2.00 $56,000 28,000 @ $2.00 $56,000
5 Sold (4,000) 2.00 (8,000) 24,000 @ $2.00 48,000
13 Purchased 6,000 2.25 13,500 24,000 @ $2.00 61,500
6,000 @ $2.25
17 Sold (3,000) 2.25 (6,750) 24,000 @ $2.00 54,750
3,000 @ $2.25
25 Purchased 8,000 2.50 20,000 24,000 @ $2.00 74,750
3,000 @ $2.25
8,000 @ $2.50
27 Sold (5,000) 2.50 (12,500) 24,000 @ $2.00 $62,250
3,000 @ $2.25 ending
3,000 @ $2.50
inventory
282 Chapter 8

EXERCISE 8–18* (Concluded)
(c) Average Cost

July 1 Beginning inventory.......... 28,000 units at $2.00 = $56,000
5 Cost of goods sold............. 4,000 units at $2.00 = $ 8,000
24,000 units at $2.00 = $48,000

13 New unit cost...................... 6,000 units at $2.25 = 13,500
30,000 units $61,500
$61,500/30,000 = $2.05 per unit
17 Cost of goods sold............. 3,000 units at $2.05 = $ 6,150
27,000 units at $2.05 = $55,350

25 New unit cost...................... 8,000 units at $2.50 = 20,000
35,000 units $75,350
$75,350/35,000 = $2.15† per unit
27 Cost of goods sold............. 5,000 units at $2.15 = $10,750
Total cost of goods sold.......... $ 8,000
6,150
10,750
$24,900
†
Rounded
Ending inventory $89,500 – $24,900 = $64,600
2. Any of the three costing alternatives can be “best,” depending on the

objectives of the firm (such as high earnings or low taxes).

Chapter 8 283
EXERCISE 8–19 Lower of Cost or Market*
1. Purchases.................................................................................. 400
Accounts Payable............................................................... 400
Purchased 50 standard widgets at $8 each.
2. Purchases.................................................................................. 300
Accounts Payable............................................................... 300
Purchased 15 deluxe widgets at $20 each.
3. There is no entry to write up the inventory. Inventory can never be valued

above cost.
4. Loss on Write-Down of Inventory to LCM.............................. 150

Inventory.............................................................................. 150
To write down deluxe widgets to lower of cost or market
[15 at ($20 – $10)]. Ceiling is $12 ($16 – $4), floor is $6
($16 – $4 – $6 = $6), and replacement cost is $10.
5. Loss on Write-Down of Inventory to LCM.............................. 100

Inventory.............................................................................. 100
To write down standard widgets inventory [50 at ($8 – $6)].
Ceiling is $7 ($8 – $1), floor is $5 ($8 – $1 – $2), and replace-
ment cost is $6.
6. No entry. The floor of $10 is now above the replacement cost, and the
widgets were written down to $10 in transaction 4. (Ceiling is $16, floor is
$10, and replacement cost is $9.)

284 Chapter 8
EXERCISE 8–20 Lower of Cost or Market*
1. The inventory items should be written down to the following amounts:

Item Write-Down
Plywood.................... 25 units at $100 ($600 – $500) = $2,500
Oak............................ 20 units at $150 ($2,000 – $1,850) = 3,000
Pine........................... 43 units at $100 ($800 – $700) = 4,300
Redwood.................. Not written down —
$9,800
2. a. Applied to each item

Item Write-Down
Plywood.................... $2,500
Oak............................ 3,000
Pine........................... 4,300
$9,800
Loss on Write-Down of Inventory to LCM................... 9,800
Inventory................................................................. 9,800
b. Applied to total inventory

Item Cost Market Difference
Plywood......... 25  $ 600 = $ 15,000 25  $ 500 = $12,500
Oak................. 20  2,000 = 40,000 20  1,850 = 37,000
Pine................ 43  800 = 34,400 43  700 = 30,100
Redwood........ 12  1,400 = 16,800 12  1,600 = 19,200
$106,200 $98,800 $7,400
Loss on Write-Down of Inventory to LCM................... 7,400
Inventory................................................................. 7,400
EXERCISE 8–21 Gross Margin Method of Estimating Inventory*
1. Sales revenue................................................................. $400,000

Cost of goods sold:
Beginning inventory................................................. $ 80,000
Net purchases........................................................... 280,000
Cost of goods available for sale............................. $360,000
Less ending inventory ($360,000 – $240,000)....... 120,000
Cost of goods sold ($400,000 – $160,000).................. 240,000
Gross margin (0.40  $400,000).................................... $160,000

Chapter 8 285
EXERCISE 8–21* (Concluded)
2. The missing inventory could be a result of the following:

a. Theft.
b. A gross margin percentage lower than 40%. For example, if the gross
margin percentage has fallen to 30%, the ending inventory would be
only $80,000.
c. Physical inventory counting mistakes.
d. Accounting errors.
EXERCISE 8–22 Estimating Inventory Amounts*
Sales........................................................................................ $91,300
Cost of goods sold:
Beginning inventory......................................................... $ 5,750
Net purchases................................................................... 58,000
Cost of goods available for sale..................................... $63,750
Ending inventory.............................................................. 4,405†
Cost of goods sold................................................................ 59,345
Gross margin (0.35  $91,300).............................................. $31,955
†
$63,750 – $59,345
EXERCISE 8–23 Estimating Inventory*
Sales............................................................................. $2,000,000
Cost of goods sold:
Beginning inventory.............................................. $ 300,000
Net purchases........................................................ 1,600,000
Cost of goods available for sale.......................... $1,900,000
Ending inventory................................................... 500,000**
Cost of goods sold..................................................... 1,400,000
Gross margin (0.30  $2,000,000).............................. $ 600,000
**$1,900,000 – $1,400,000
Computed ending inventory...................................... $ 500,000
Actual ending inventory............................................. 450,000
Missing inventory........................................................ $ 50,000

286 Chapter 8
PROBLEMS
PROBLEM 8–1 What Should Be Included in Inventory?
1. $ 52,600
+ 3,000 a
– 800 b
+ 2,000 c
+ 6,000 d
+ 600 e (2)
+ 4,600 e (4)
$ 68,000 Ending inventory
2. $ 86,400 Net purchases (as stated)

– 1,800 e (1)
$ 84,600 Corrected net purchases
$ 31,600 Beginning inventory
+ 84,600 Net purchases
$ 116,200 Cost of goods available for sale
– 68,000 Ending inventory
$ 48,200 Cost of goods sold
PROBLEM 8–2 Perpetual and Periodic Journal Entries
1. Periodic Inventory Method 2. Perpetual Inventory Method

a. Purchases............................... 20,000 a. Inventory................................. 20,000
Accounts Payable.............. 20,000 Accounts Payable.............. 20,000
Purchased 500 automobile Purchased 500 automobile
tires on account at $40 each. tires on account at $40 each.
b. Purchases............................... 24,000 b. Inventory................................. 24,000
Accounts Payable.............. 24,000 Accounts Payable.............. 24,000
Purchased 300 truck tires Purchased 300 truck tires
on account at $80 each. on account at $80 each.
c. Accounts Payable.................. 480 c. Accounts Payable.................. 480
Purchase Returns............... 480 Inventory............................. 480
Returned 12 automobile Returned 12 automobile
tires to supplier. tires to supplier.
d. Accounts Payable.................. 19,520 d. Accounts Payable.................. 19,520
Cash..................................... 19,520 Cash..................................... 19,520
Paid for automobile tires. Paid for automobile tires.
e. Accounts Payable.................. 12,000 e. Accounts Payable.................. 12,000

Cash..................................... 12,000 Cash..................................... 12,000
Paid for half of truck tires Paid for half of truck tires
purchased. purchased.
f. Accounts Payable.................. 12,000 f. Accounts Payable.................. 12,000
Cash..................................... 12,000 Cash..................................... 12,000
Paid remaining amount Paid remaining amount
owed on truck tires. owed on truck tires.
PROBLEM 8–2 (Continued)
Periodic Inventory Method Perpetual Inventory Method

g. Accounts Receivable............. 36,000 g. Accounts Receivable............. 36,000
Sales.................................... 36,000 Sales.................................... 36,000
Sold 400 automobile tires Cost of Goods Sold................ 16,000
on account at $90 each. Inventory............................. 16,000
Sold 400 automobile tires
that cost $40 each for $90
each, on account.
h. Accounts Receivable............. 30,000 h. Accounts Receivable............. 30,000
Sales.................................... 30,000 Sales.................................... 30,000
Sold 200 truck tires on Cost of Goods Sold................ 16,000
account at $150 each. Inventory............................. 16,000
Sold 200 truck tires that
cost $80 each for $150
each, on account.
i. Sales Returns......................... 630 i. Sales Returns......................... 630
Accounts Receivable......... 630 Accounts Receivable......... 630
Accepted 7 automobile Inventory................................. 280
tires back from customers, Cost of Goods Sold............ 280
$90 each. Accepted 7 automobile
tires (sold for $90 each)
back from customers;
cost $40 each.
3. It is helpful to first look at the inventory and related accounts to see what adjustments are needed.
PERIODIC PERPETUAL
Inventory Inventory
Auto tires Auto tires
beg. inv. 4,000 beg. inv. 4,000
Truck tires Truck tires
beg. inv. 5,600 beg. inv. 5,600 (c) 480
(a) 20,000
(b) 24,000
Purchases
(g) 16,000
(a) 20,000
(i) 280 (h) 16,000
(b) 24,000
21,400
Purchase Returns
After posting entries (a)–(i), the inventory
(d) 480
account has a balance of $21,400.
Periodic Inventory Method Perpetual Inventory Method

We now need to make entries to eliminate the Because the physical count of inventory of $20,480
balances in all accounts (except Inventory) and add was less than the balance in the inventory account, an
“net purchases” to inventory. The entry is: adjustment for shrinkage must be made. The entry is:
Inventory.............................................. 43,520 Inventory Shortage.......................... 920
Purchase Returns............................... 480 Inventory...................................... 920
Purchases...................................... 44,000 Adjusted Inventory for shrinkage
Closed Net Purchases to Inven- ($21,400 – $20,480). Adjustment
tory. Closing of temporary inven- of Inventory balance to reflect
tory accounts. inventory shrinkage.
After this entry the inventory account includes the The accuracy of this entry can be determined by
beginning inventory and net purchases, so its total examining the physical number of tires on hand as
is cost of goods available for sale as follows: follows:
Inventory Automobile Truck
Auto tires Tires Tires
beg. inv. 4,000 Beg. inv. 100 70
Truck tires Transaction (a) 500
beg. inv. 5,600 Transaction (b) 300
Net purchases 43,520 Transaction (c) (12)
Goods available Transaction (g) (400)
for sale 53,120 Transaction (h) (200)
Transaction (i) 7
Now we need to adjust for ending inventory. We know
Ending inventory 195 170
from the physical count that the ending inventory is:
Per count 184 164
Auto tires 184  $40 = $ 7,360 Shrinkage 11 6
Truck tires 164  $80 = 13,120 Cost  $40  $80
Total $20,480 $ 440 $ 480
$920
PROBLEM 8–2 (Concluded)
Periodic Inventory Method

To adjust Inventory to the correct amount, it must be credited for $32,640
($53,120 – $20,480). The entry is:
Cost of Goods Sold............................................................... 32,640

Inventory......................................................................... 32,640
Adjustment of Inventory to appropriate ending balance.
The inventory account balance is now $20,480 as shown below.

Inventory
Auto tires
beg. inv. 4,000 Adjust end. inv. 32,640
Truck tires
beg. inv. 5,600
Net purchases 43,520
End. inv. 20,480
The cost of goods sold account will be closed with other closing entries.
PROBLEM 8–3 Income Statement Calculations
The easiest way to solve this problem is to set up the known data in income
statement format as follows:
Criddle Company
Income Statement
For the Year Ended December 31, 2006
Revenues:
Gross sales............................................... $ (1)
Less sales returns.................................... 3,250
Net sales.................................................... $101,750
Cost of goods sold:
Inventory, January 1, 2006...................... $25,000
Gross purchases...................................... $ (2)
Less purchase returns............................ (1,250)
Add freight in............................................ 500 (2)
Cost of goods available for sale............ $75,000
Less inventory, December 31, 2006....... (4)
Cost of goods sold........................................... (3)
Gross margin.................................................... $ (5)
Operating expenses......................................... 6,750
Net income........................................................ $ (6)
Given the above statement, the calculations can be completed in the following
order:
(1) Gross sales (3) Cost of goods sold

$101,750 + $3,250 = $105,000 $105,000 = 175% (X)
X = $60,000
(2) Net purchases
$ 75,000 Cost of goods (4) Ending inventory
available for sale $75,000 – $60,000 = $15,000
– 25,000 Beginning
inventory (5) Gross margin
$ 50,000 Net purchases $101,750 – $60,000 = $41,750
Gross purchases
(6) Net income
$ 50,000 Net purchases
$41,750 – $6,750 = $35,000
+ 1,250 Purchase returns
– 500 Less freight in
$ 50,750 Gross purchases
PROBLEM 8–4 Income Statement Calculations
Company Company Company Company

A B C D
Sales revenue............................. $2,000 (4) $499 $480
$1,310
Beginning inventory................... 200 76 0 600
Purchases.................................... (1) 1,320 423 480 249
Purchase returns........................ (20) (19) (0) (8) (19)
Cost of goods available
for sale.................................... 1,500 480 480 830
Ending inventory........................ 300 110 (6) 155 195
Cost of goods sold..................... 1,200 370 (7) 325 (9) 635
Gross margin.............................. (2) 800 (5) 129 155 (10) 675
Operating expenses................... 108 22 34 129
Net income.................................. (3) 692 107 121 546
The individual missing numbers are computed as follows, in the order given. Note:
Cost of goods available for sale has been inserted to simplify the calculation.
Company A:
(1) Since ending inventory is $300 and cost of goods sold is $1,200, goods
available for sale must be $1,500. The beginning inventory of $200 and net
purchases must total $1,500. Purchases is therefore $1,320 ($200 + $1,320
minus purchase returns of $20 total $1,500).
(2) Sales revenue ($2,000) minus cost of goods sold ($1,200) equals gross
margin ($800).
(3) Gross margin ($800) minus operating expenses ($108) equals net income
($692).
Company B:
(5) Operating expenses ($22) plus net income ($107) equals gross margin
($129).
(4) Gross margin ($129) plus cost of goods sold ($370) equals sales revenue
($499).
Company C:
(7) Sales revenue ($480) minus gross margin ($155) equals cost of goods sold
($325).
(6) Goods available for sale ($480) minus cost of goods sold ($325) equals
ending inventory ($155).
Company D:
(10) Net income ($546) plus operating expenses ($129) equals gross margin
($675).
(9) Sales revenue ($1,310) minus gross margin ($675) equals cost of goods sold
($635).
(8) Cost of goods sold ($635) plus ending inventory ($195) equals goods
available for sale ($830). Goods available for sale ($830) equals beginning
inventory ($600) plus purchases ($249) minus purchase returns ($19).
PROBLEM 8–5 Inventory Cost Flow Alternatives
1. a. FIFO
Beginning inventory units...... 460
Purchase, January 16.............. 110
Purchase, February 16............ 105
Purchase, March 10................. 150
Total units available................ 825
Units sold:
January 25........................... (216)
February 27......................... (307)
March 30.............................. (190)
Total units sold........................ (713)
Ending inventory..................... 112
Units Total Cost
Ending inventory................................ 112 (at $28) $3,136
Cost of goods sold: Units Total Cost
Beginning inventory........................... 460 (at $30) $13,800
Purchase, January 16......................... 110 (at $32) 3,520
Purchase, February 16....................... 105 (at $36) 3,780
Purchase, March 10............................ 38 (at $28) 1,064
713 $22,164
Or:
Cost of goods available for sale....... $25,300
Less ending inventory....................... 3,136
Cost of goods sold............................. $22,164
Gross margin:
Sales revenue...................................... $31,500*
Less cost of goods sold.................... 22,164
Gross margin....................................... $ 9,336
*Sales revenue:
216 at $45 = $ 9,720
307 at 40 = 12,280
190 at 50 = 9,500
$31,500
b. LIFO
Units Total Cost
Ending inventory................................ 112 (at $30) $3,360
Cost of goods sold: Units Total Cost
Purchase, March 10............................ 150 (at $28) $ 4,200
Beginning inventory........................... 348 (at $30) 10,440
713 $21,940
Or:
Gross margin:
Sales revenue...................................... $31,500
Gross margin....................................... $ 9,560
c. Average cost
Units Total Cost
Beginning inventory........................... 460 (at $30) $13,800
Purchase, March 10............................ 150 (at $28) 4,200
825 $25,300
$25,300
= $30.67 average cost (rounded)
825
Ending inventory:
112 at $30.67 = $3,435
Cost of goods sold:
Gross margin:
Sales revenue...................................... $31,500
Gross margin....................................... $ 9,635
PROBLEM 8–5 (Concluded)
2. In this case, the average cost alternative results in the highest gross margin.
The reason for this unusual result is that prices are neither going up nor
going down consistently, but are moving randomly in both directions. Since
the highest costs are the average costs (not the earliest or latest), the
average cost alternative keeps more of these costs in inventory than do the
other two alternatives.
PROBLEM 8–6 Periodic Inventory Cost Flow Method
1. FIFO
Cases remaining.................................................................................. 4,120
4,250 at $9.50.................................................................................. $40,375
1,350 at $10.00............................................................................... 13,500
980 at $10.50............................................................................... 10,290
1,830 at $11.00............................................................................... 20,130
8,410 $84,295
Cost of goods sold:
4,250 cases at $9.50 = $40,375
40 cases at $10.00 = 400
$40,775
Cost of goods sold.............................................................................. 40,775
Ending inventory................................................................................. $43,520
2. LIFO
Cost of goods sold:
1,830 cases at $11.00 = $20,130
980 cases at $10.50 = 10,290
1,350 cases at $10.00 = 13,500
130 cases at $9.50 = 1,235
$45,155
3. Average cost
Total units available............................................................................ ÷ 8,410
Average cost per unit.......................................................................... $ 10.02
Cost of goods sold: $10.02  4,290 = $42,986
Ending inventory: $84,295 – $42,986 = $41,309
PROBLEM 8–7 Calculating and Interpreting Inventory Ratios
1. Number of Days’
Inventory Turnover Sales in Inventory
$1,578 M 365
Captain Geech Boating
( $462 M + $653 M) /2 = 2.83 times 2.83
= 129 days
$1,100 M 365
Merchant Marine = 10.48 times = 35 days
( $120 M + $90 M) /2 10.48
2. The results of the ratios show that Captain Geech Boating has more than a
third of the year’s inventory on hand, while Merchant Marine has just over
one month’s inventory on hand. Captain Geech could be holding inventory
longer because it is selling expensive boats, or the company could be
carrying too much inventory. Both ratios show that Merchant Marine is
managing its inventory more efficiently with a smaller amount of money tied
up in inventory.
PROBLEM 8–8 The Effect of Inventory Errors*
1. Net Ending
Purchases Inventory
$ 80,800 $29,800
+ 1,800 + 800
– 3,000 – 300
$ 79,600 $30,300
2. Beginning inventory............................................................................ $ 20,200

Net purchases...................................................................................... + 79,600
Cost of goods available for sale........................................................ $ 99,800
Ending inventory................................................................................. – 30,300
Cost of goods sold.............................................................................. $ 69,500
3. Beginning inventory............................................................................ $ 20,200

Net purchases (before correcting).................................................... + 80,800
Ending inventory (before correcting)................................................ – 29,800
Cost of goods sold (overstated)........................................................ $ 71,200
Cost of goods sold (correct).............................................................. – 69,500
Overstatement...................................................................................... $ 1,700

PROBLEM 8–9 Correction of Inventory Errors*
The best way to solve this problem is to remember that inventory overstatements at the beginning of the year
reduce net income, and overstatements at the end of the year increase net income as shown below.
(Understatements have the opposite effect.)
Overstatement—Beginning of Year Overstatement—End of Year

Revenue....................................... OK Revenue....................................... OK
Cost of goods sold: Cost of goods sold:
Beginning inventory............. Too high Beginning inventory............. OK
Purchases.............................. OK Purchases.............................. OK
Goods available.................... Too high Goods available.................... OK
Ending inventory................... OK Ending inventory................... Too high
Cost of goods sold..................... Too high Cost of goods sold..................... Too low
Gross margin.............................. Too low Gross margin.............................. Too high
Expenses..................................... OK Expenses..................................... OK
Net income.................................. Too low Net income.................................. Too high
The correct amount of net income can be calculated by subtracting overstatements of ending inventory and
adding overstatements of beginning inventory. Remember that the ending inventory of one period becomes the
beginning inventory of the next period.
2003 2004 2005 2006
Reported net income........................................................................ $30,000 $40,000 $35,000 $45,000
Inventory overstatement, beginning of year................................. 3,000
Inventory understatement, beginning of year............................... (4,000) (1,000)
Inventory overstatement, end of year............................................ (3,000) (2,000)
Inventory understatement, end of year.......................................... 4,000 1,000
Correct net income........................................................................... $34,000 $33,000 $39,000 $42,000

PROBLEM 8–10 The Effect of Inventory Errors*
1. The effect of each of these errors on gross margin is as follows:

(a) No effect (liabilities are understated).
(b) Ending inventory is understated, $3,500.
(c) Net purchases are overstated, $900.
(d) Net purchases are understated, $500.
(e) Net purchases are overstated, $1,200.
(f) Ending inventory is overstated, $400.
The following analysis shows how these errors affect cost of goods sold:
Beginning Net Goods Ending Cost of

Error Inventory + Purchases = Available – Inventory = Goods Sold
(a) No effect No effect No effect No effect No effect

(b) No effect No effect No effect $3,500 understated $3,500 overstated
(c) No effect $900 overstated $900 overstated No effect $900 overstated
(d) No effect $500 understated $500 understated No effect $500 understated
(e) No effect $1,200 overstated $1,200 overstated No effect $1,200 overstated
(f) No effect No effect No effect $400 overstated $400 understated
Totals No effect $1,600 overstated $1,600 overstated $3,100 understated $4,700 overstated
If cost of goods sold is overstated by $4,700, gross margin is understated by $4,700. The correct gross
margin is $14,700 ($10,000 + $4,700).
2. Since the ending inventory of 2006 becomes the beginning inventory of 2007, net income would be $3,100
overstated.

PROBLEM 8–11 Unifying Concepts: Inventory Cost Flow Alternatives*
1. FIFO
Total cases available........................................................................... 8,300
Total cases sold................................................................................... 4,300
Total cases remaining......................................................................... 4,000
4,100 at $10.50 = $43,050
1,500 at 11.00 = 16,500
1,000 at 11.00 = 11,000
1,700 at 11.50 = 19,550
$90,100
Cost of goods sold:
First sale.............................. 950 cases at $10.50 = $ 9,975
Second sale........................ 1,450 cases at 10.50 = 15,225
Third sale............................. 1,700 cases at 10.50 = 17,850
200 cases at 11.00 = 2,200
$45,250
2. LIFO
Cost of goods sold:
First sale.............................. 950 cases at $11.00 = $10,450
Second sale........................ 1,000 cases at 11.00 = 11,000
450 cases at 11.00 = 4,950
Third sale............................. 1,700 cases at 11.50 = 19,550
100 cases at 11.00 = 1,100
100 cases at 10.50 = 1,050
$48,100

PROBLEM 8–11* (Concluded)
3. Average cost
4,100 at $10.50 = $43,050
Aug. 4 New cost per unit = 1,500 at 11.00 = 16,500
5,600 $59,550
$59,550/5,600 units = $10.63 per unit
4,650 at $10.63 = $49,430
5,650 $60,430
$60,430/5,650 units = $10.70 per unit
4,200 at $10.70 = $44,940
5,900 $64,490
$64,490/5,900 units = $10.93 per unit
Cost of goods sold:
$ 90,100
– 43,720 (4,000 cases at $10.93 per case) Ending inventory
$ 46,380 Cost of goods sold
PROBLEM 8–12 Perpetual Inventory Cost Flow Alternatives*
Cost of goods available for sale (Same under all alternatives)

Unit Number
Cost of Units Amount
Beginning inventory $30 460 $13,800
Purchases 32 110 3,520
36 105 3,780
28 150 4,200
825 $25,300

PROBLEM 8–12* (Continued)
1. a. FIFO
Remaining Inventory
Number
Number Unit Total of Units Total
Jan. 1 Beg. inventory 460 $30 $13,800 460 @ $30 $13,800
16 Purchase 110 32 3,520 460 @ $30 17,320
110 @ $32
25 Sale (216) 30 (6,480) 244 @ $30 10,840
110 @ $32
Feb. 16 Purchase 105 36 3,780 244 @ $30 14,620
110 @ $32
105 @ $36
27 Sale (307) 244 @ $30 (9,336) 47 @ $32 5,284
63 @ $32 105 @ $36
Mar. 10 Purchase 150 28 4,200 47 @ $32 9,484
105 @ $36
150 @ $28
30 Sale (190) 47 @ $32 (6,348) 112 @ $28 $ 3,136
105 @ $36
38 @ $28
Sales (Same under all assumptions)

216 @ $45 = $ 9,720
307 @ $40 = 12,280
190 @ $50 = 9,500
$31,500
Sales....................................................... $31,500
Cost of goods available for sale.......... $25,300
Ending inventory................................... 3,136
Cost of goods sold................................ 22,164
Gross margin......................................... $ 9,336

PROBLEM 8–12* (Continued)
b. LIFO
Remaining Inventory
Number
Number Unit Total of Units Total
Jan. 1 Beg. inventory 460 $30 $13,800 460 @ $30 $13,800
16 Purchase 110 32 3,520 460 @ $30 17,320
110 @ $32
25 Sale (216) 110 @ $32 (6,700) 354 @ $30 10,620
106 @ $30
Feb. 16 Purchase 105 36 3,780 354 @ $30 14,400
105 @ $36
27 Sale (307) 105 @ $36 (9,840) 152 @ $30 4,560
202 @ $30
Mar. 10 Purchase 150 28 4,200 152 @ $30 8,760
150 @ $28
30 Sale (190) 150 @ $28 (5,400) 112 @ $30 $ 3,360
40 @ $30
Sales....................................................... $31,500
Gross margin......................................... $ 9,560
c. Average cost
Number of Total
Average
Date Transaction Units and Cost Cost† Cost
Jan. 1 Beg. inventory 460 @ $30 $13,800
16 Purchase 110 @ $32 3,520
Average cost ($17,320 ÷ 570 units) $17,320 $30.39
25 Sale (216 @ $30.39) (6,564)
Remaining inventory 354 @ $30.39 $10,756
Feb. 16 Purchase 105 @ $36 3,780
459 @ $31.67 $14,536 $31.67
27 Sale (307 @ $31.67) (9,723)
Remaining inventory 152 @ $31.67 $ 4,813
Mar. 10 Purchase 150 @ $28 4,200
302 @ $29.84 $ 9,013 $29.84
30 Sale (190 @ $29.84) (5,670)
Remaining inventory 112 @ $29.84 $ 3,343
†
Differences due to rounding.
PROBLEM 8–12* (Concluded)
Sales....................................................... $31,500
Gross margin......................................... $ 9,543
2. LIFO results in the highest gross margin because it includes the full amount
of the lowest cost ($28) in Cost of Goods Sold.
PROBLEM 8–13 Unifying Concepts: Inventory Estimation Method*
1. Gross Margin Method:

Sales revenue................................................................. $230,000
Cost of goods sold:
Beginning inventory................................................. $ 70,000
Net purchases........................................................... 135,000
Cost of goods available for sale............................. $205,000
Ending inventory ($205,000 – $149,500)................ 55,500
Cost of goods sold ($230,000 – $80,500).................... 149,500
Gross margin ($230,000  0.35).................................... $ 80,500
The cost of the ending inventory using the gross margin method is $55,500.
2. The gross margin method uses a historical (and maybe outdated) gross
margin ratio. To the extent the ratio changes from period to period, it could
be inaccurate.

DISCUSSION CASES
CASE 8–1 Why Use a Perpetual System?
You should strongly recommend that Mr. Eddie switch inventory methods. Explain to him that the
perpetual inventory method provides for continually updated inventory and cost of goods sold amounts,
whereas the periodic inventory method calculates cost of goods sold and the amount of inventory actually
on hand only at the end of the period. You should advise Mr. Eddie that although the perpetual inventory
method is more time-consuming and probably more expensive, it will assist him in identifying shrinkage
by continuously tracking inventory; also it will aid in determining how much shoplifting and other theft is
occurring. You should tell him that perhaps small businesses with small amounts of inventory can get by
with the periodic inventory method, but that a business like his with large amounts of inventories would
greatly benefit from the additional information the perpetual method provides. You should stress to him
that, with the technology available today, the perpetual inventory records can easily be maintained and he
can minimize inventory holding costs while maximizing customer satisfaction.
CASE 8–2 Should We Reduce Inventory?
Your advice to Mr. Eddie should include the important point that although his business makes its profit by
selling inventory, having too much inventory on hand can be very costly. Holding inventory costs money.
If, for example, you make $10 by selling one unit of inventory, but it costs $3 to order and store the
inventory, the profit shrinks to $7. Assuming customer satisfaction, it is wise to hold just enough inventory
to serve those customers. Wasting money on holding inventory is like any other kind of waste and should
be eliminated.
JUDGMENT CALL
JUDGMENT 8–1
You Decide: Should inventory be recorded at cost or fair market value?
Issues to be discussed with this question are:

1. Unfortunately for Bill, inventory must be recorded at cost. He can provide note disclosure that states
the nature of the inventory, what he believes the current market value is, and his methodology for
determining that market value. However, for the financial statements to be presented in accordance
with GAAP, only historical costs of inventory can be recorded.
2. The issue of at what levels to report inventory is akin to the question of how to value marketable
securities on the balance sheet. With marketable securities, sometimes market values can be used
depending on the purpose for which the securities are being held. Such flexible accounting standards
have not been issued for inventory.
3. If the market value of the inventory drops below its cost, however, the inventory must be written down
to the lower of cost or market.
COMPETENCY ENHANCEMENT OPPORTUNITIES
ANALYZING 8–1 Microsoft
1. Microsoft’s inventory consists of unsold software packages, disks, CDs, manuals, and other software-
related materials.
2. As of June 30, 2002, Microsoft reports having $673 million in inventory—less than 1% of total assets
($673/$67,646). In Note 5 of its financial statements, Microsoft discloses that this amount consists of
$505 million in finished goods inventory and $168 million in raw materials and work-in-process
inventory.
3. Microsoft mentions various costs that comprise inventory in its discussion of operating expenses. The
cost of revenue portion of management’s discussion of operating expenses mentions costs related to
Xbox, support and service costs associated with the MSN Internet access and MSN network
services, organizational licensing, WebTV Networks’ operations, and hardware peripherals.
ANALYZING 8–2 General Electric
1. a. Number of days’ sales in inventory using FIFO

$35,951/[($9,645 + $8,971)/2] = 3.86 times
365 days/3.86 = 94.6 days
b. Number of days’ sales in inventory using LIFO
$35,951/[($9,039 + $8,295/2] = 4.15 times
365 days/4.15 = 88 days
In periods of low inflation, the differences between LIFO and FIFO may not result in large differences
in inventory computations. However, in periods of sharply rising prices, the differences can be
dramatic.
2. If it takes GE approximately 90 days to sell its inventory while vendors expect payment in 30 days,
then GE is going to have to finance the remaining 60 days out of its own pocket or by borrowing. If
GE sells inventory on account, then the firm must wait even longer before it receives money to pay
for the inventory, thereby making the problem even more severe.
ANALYZING 8–3 La-Z-Boy and McDonald’s
1. Hopefully students will realize that McDonald’s number of days’ sales in inventory should be very
short (after all, we don’t want to be fed lettuce and tomatoes that have been sitting around for 60
days), and that La-Z-Boy’s number of days’ sales in inventory is probably much longer.
2. Number of days’ sales in inventory for McDonald’s:
$3,917.4/[($105.5 + $111.7)/2] = 36.1 times
365 days/36.1 = 10.1 days
Number of days’ sales in inventory for La-Z-Boy:
$1,647.33/[($257.89 + $208.66)/2] = 7.1 times
365 days/7.1 = 51.4 days
3. The two companies deal with entirely different types of inventories. McDonald’s inventory is
perishable, so 10 days seems reasonable. La-Z-Boy, on the other hand, deals with furniture.
Furniture is meant to last a long time, and changes in fashion make holding large furniture inventories
risky. Fashion changes quickly, but not as quickly as hamburger can spoil.
INTERNATIONAL CASE: Why No LIFO?
Students often think the American way is the way of the world. If inventory is accounted for a certain way
in the United States, it must be accounted for the same way around the world. Not so with LIFO. With this
case, students are forced to think about the consequences of using the LIFO inventory method.
This case asks students to think about specific issues. In periods of rising prices, a LIFO method will
result in older inventory being disclosed on the balance sheet. In periods of prolonged rising prices, it is
possible for very old inventory to be carried on the books even though that inventory was sold long ago.
In addition, should the company ever dip down into those old inventory layers, the result will be artificially
high profits. This result would relate solely to accounting methods and not to firm performance.
As a result of this case, students should become familiar with the risks associated with LIFO and the care
that must be taken in comparing financial statements of companies using different accounting methods.
ETHICS CASE: Shipping Bricks
The company would make a journal entry debiting Accounts Receivable and crediting Sales. If the
company was using a perpetual inventory system, it would also have to fabricate the purchase of
inventory. Then, when the fictitious inventory was sold, an entry would be made debiting Cost of Goods
Sold and crediting Inventory.
A fraud like this could not go on forever because the receivables would build up on the balance sheet.
Without a real customer to pay the bill, the receivables balance would just get larger and larger.
Eventually, someone would perform an analysis of the accounts receivable and determine that a large
number of accounts were uncollectible.
In reviewing the financial statements, users would analyze changes in relationships among accounts. For
example, cost of goods sold as a percentage of sales may be decreasing if fictitious inventory is being
sold. Also, receivables as a percentage of total assets would be increasing at a faster than expected rate.
WRITING ASSIGNMENT: Estimating Inventory
The gross margin method of estimating inventory is just that, an estimate. It is used to approximate
inventory values and is commonly used for interim reporting. If the gross margin percentage used differs
significantly from prior periods, then the results may be unreliable. Thus, the difference between the
amount computed using the gross margin method and the inventory count may be a result of estimation
problems inherent in the gross margin method. There may be no theft at all.
The point-of-sale scanners track all inventory that goes through the checkout stands. The scanners do
not account for inventory that is damaged. Thus, the difference in inventory amounts between the point-
of-sale scanners and the inventory count may relate to damaged inventory.
Before investigating the possible theft of inventory, the assumptions and limitations of the point-of-sale
scanners and the gross margin method must be evaluated to determine if the missing inventory amount
relates to actual theft or could be partially accounted for by the limitations of the other methods.
THE DEBATE: One Method for All
The objective of this debate is to require students to think about the pros and cons of the various
inventory methods. The following points should be made by the groups involved in this debate:
What’s Good for One Is Good for All

1. A single method allows for comparability across companies.
2. The average cost method is a compromise between LIFO and FIFO.
3. Extensive note disclosure relating to other methods would no longer be required.
It’s OK to Be Different
1. For many firms, the use of LIFO or FIFO makes a great deal of sense.
2. Note disclosure allows for comparability.
CUMULATIVE SPREADSHEET PROJECT
The solutions to the Cumulative Spreadsheet Project can be found in the Solutions Manual files in the
Instructor's Resource section of the Albrecht Web site at http://albrecht.swlearning.com. In addition,
the solutions can be found on the Instructor’s Resource CD-ROM, ISBN 0-324-20672-0.
INTERNET SEARCH: Sears
(Internet information changes often. For an updated Internet Search solution, check the text Web site at
http://albrecht.swlearning.com.)
1. Sears devotes a section of its Web site to the company’s history. This material is located in the
“about Sears” section. The site begins with a discussion of how Sears got its start. Sears provides a
time line indicating that the first catalog was issued in 1896.
2. Using the 2002 annual report, inventories remained relatively constant—10.1% in 2002, 11.1% in
2001.
3. Using the 2002 annual report, Sears’ number of days’ sales in inventory for 2002 and 2001 were:
2002—$25,646/[($5,115 + $4,912)/2] = 5.12 times

365 days/5.12 =71.3 days
2001—$26,234/[($4,912 + $5,618)/2] = 4.98 times
365 days/4.98 = 73.3 days
Sears’ number of days’ sales in inventory decreased by two days from 2001 to 2002.
4. Sears values the majority of its inventory (89% in 2002) using LIFO. Note that Sears uses a method
not discussed in this text, the retail method. This method is covered in more advanced accounting
textbooks.
SOLUTIONS TO "STOP & THINK"
Stop & Think (p. 352): The clear separation between product and service companies is disappearing.
For example, does Microsoft sell a product or a service? What about McDonald’s—product or service?
Microsoft sells both a product and a service. We normally think of Microsoft’s products (software
packages), but Microsoft’s business and reputation are also linked to the continuing service given to
customers. McDonald’s sells products (food), but the reason we are willing to buy the product is the fast
and clean service associated with the “production” process.
Stop & Think (p. 358): If you buy your groceries with a credit card or a bank debit card, what kind of
information can the supermarket accumulate about you?
The supermarket already knows each item you have purchased. If you use a credit card or bank debit
card, the supermarket’s database computer can then match the list of purchases with your name. Over
time, the supermarket can construct a detailed record of your personal buying habits.
Stop & Think (p. 361): Should the returned inventory be recorded at its original cost of $10 per shirt?
The original cost of the shirts was $10. However, the fact that customers have returned them may mean
that something is wrong with the shirts. If the shirts are damaged and can be sold for, say, $6, then they
should be recorded at no more than this $6 amount. Recording inventory at less than its original cost is
discussed in the expanded material section of this chapter.
Stop & Think (p. 369): Over the entire life of a company—from its beginning with zero inventory until its
final closeout when the last inventory item is sold—is aggregate cost of goods sold more, less, or the
same as aggregate purchases? How is this relationship affected by the inventory cost flow assumption
used?
Over the entire life of a company, total cost of goods sold is equal to total inventory purchased. This
mathematical fact is not affected by the inventory cost flow assumption (FIFO, LIFO, or average cost)
used by the company. The inventory cost flow assumption affects only the timing of reported cost of
goods sold, not the total lifetime amount.
SOLUTION TO "NET WORK"
Please check the text Web site at http://albrecht.swlearning.com for an updated solution to the Net
Work exercise.

CH 08

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CHAPTER 8

PRACTICE 8–1 Inventory Identification

PRACTICE 8–2 Costs Included in Inventory

The correct answer is C. The company president’s salary is an example of an

PRACTICE 8–3 Goods in Transit

PRACTICE 8–4 Computing Cost of Goods Sold

Beginning inventory.................................................................................... $ 52,000

PRACTICE 8–5 Perpetual and Periodic Inventory Systems

PRACTICE 8–5 (Concluded)

A supermarket also has many low-cost items. However, management of the

PRACTICE 8–6 Inventory Purchases

PRACTICE 8–7 Transportation Costs

PRACTICE 8–8 Purchase Returns

PRACTICE 8–9 Purchase Discounts

PRACTICE 8–10 Sales

Cost per table

PRACTICE 8–11 Sales Returns

PRACTICE 8–12 Closing Inventory Entries for a Periodic System

2. Cost of Goods Sold....................................................... 4,400

PRACTICE 8–13 Inventory Shrinkage

Inventory Shrinkage.............................................................. 3,500

PRACTICE 8–14 Computing Cost of Goods Sold with a Periodic System

Beginning inventory.................................................................................... $ 6,000

PRACTICE 8–15 Errors in Ending Inventory

Net income is overstated by $20,000. An ending inventory overstatement reduces

PRACTICE 8–16 Specific Identification Inventory Cost Flow

1. Cost of goods sold calculation:

2. Ending inventory calculation:

PRACTICE 8–17 FIFO Cost Flow Assumption

1. FIFO Cost of goods sold calculation (oldest 26 units):

2. FIFO Ending inventory calculation (newest 16 units):

PRACTICE 8–18 LIFO Cost Flow Assumption

1. LIFO Cost of goods sold calculation (newest 26 units):

2. LIFO Ending inventory calculation (oldest 16 units):

PRACTICE 8–19 Average Cost Flow Assumption

PRACTICE 8–20 Inventory Turnover

Cost of Goods Sold $295,000

PRACTICE 8–21 Number of Days’ Sales in Inventory

PRACTICE 8–22 Number of Days’ Purchases in Accounts Payable

Number of Days’ Purchases in Accounts Payable =

*Average Accounts Payable = ($52,000 + $46,000)/2 = $49,000

PRACTICE 8–23 Inventory Errors—Multiple Years*

PRACTICE 8–24 Inventory Errors—Multiple Years*

PRACTICE 8–25 LIFO and a Perpetual Inventory System*

LIFO 1. Cost of Goods Sold 2. Ending Inventory

PRACTICE 8–26 Average Cost and a Perpetual Inventory System*

Average Cost 1. Cost of Goods Sold 2. Ending Inventory

*Relates to expanded material.

PRACTICE 8–27 Lower of Cost or Market*

A: Ceiling = $650, Replacement cost = $600, Floor = $550; Market = $600.

Lower of Cost or Market:

PRACTICE 8–28 Recording an Inventory Write-Down*

Loss on Write-Down of Inventory........................................ 300

PRACTICE 8–29 Estimating Inventory*

Beginning inventory $1,000,000 $1,000,000

*Relates to expanded material.

EXERCISE 8–1 Goods on Consignment

EXERCISE 8–2 Recording Sales Transactions—Perpetual Inventory Method

June 24 Accounts Receivable............................................ 80,000

EXERCISE 8–3 Perpetual Inventory Method

Oct. 2 Inventory................................................................. 27,650

EXERCISE 8–4 Adjusting Inventory (Perpetual Method)

Inventory Shrinkage.............................................................. 28,000