Inventories and Cost of Sales: Questions

Chapter 06 - Inventories and Cost of Sales
Chapter 6
Inventories and Cost of Sales
QUESTIONS
1. (a) FIFO: The cost of the first (earliest) items purchased in inventory flow to cost of
goods sold first. (b) LIFO: The cost of the last (most recent) items purchased in
inventory flow to cost of goods sold first.
2. Merchandise inventory is disclosed on the balance sheet as a current asset. It is
also sometimes reported in the income statement as part of the calculation of cost
of goods sold.
3. Incidental costs sometimes are ignored in computing the cost of inventory because
the expense of tracking such costs on a precise basis can outweigh the benefits
gained from the increased accuracy. The accounting constraint of materiality
permits such practices when the effects on the financial statements are not
significant (that is, when such practices do not impact business decisions).
4. LIFO will result in the lower cost of goods sold when costs are declining because it
assigns the most recent, lower cost purchases to cost of goods sold.
5. The full-disclosure principle requires that the nature of the accounting change, the
justification for the change, and the effect of the change on net income be disclosed
in the notes or in the body of a company's financial statements.
6. No; changing the inventory method each period would violate the accounting
concept of consistency.
7. No; the consistency concept does not preclude changes in accounting methods
from ever being made. Instead, a change from one acceptable method to another is
allowed if the company justifies the change as an improvement in financial
reporting.
8. Many people make important business decisions based on period-to-period
fluctuations in a company's financial numbers, including gross profit and net
income. As such, inventory errors—which can substantially impact gross profit, net
income, current assets, and cost of sales—should not be permitted to cause such
fluctuations and impair business decisions. (Note: Since such errors are “self-
correcting,” they will distort net income in only two consecutive accounting periods
—the period of the error and the next period.)
9. An inventory error that causes an understatement (or overstatement) for net income
in one accounting period, if not corrected, will cause an overstatement (or
understatement) in the next. Since an understatement (overstatement) of one period
offsets the overstatement (understatement) in the next, such errors are said to
correct themselves.
6-1
10. Market usually means replacement cost of inventory when applied in the LCM.
11. The accounting constraint of conservatism guides preparers of accounting reports
to select the less optimistic estimate in uncertain situations where two estimates of
amounts are about equally likely. Users of information must also be cognizant of
the potential conservatism in accounting reports when making business decisions.
12. Factors that contribute to inventory shrinkage are breakage, loss, deterioration,
decay, and theft.
13.A Accounts that are used only in a periodic inventory system include Purchases,
Purchase Discounts, Purchase Returns and Allowances, and Transportation-In.
14. On February 27, 2010, inventory as a percent of current assets is ($ in thousands):
$622 / $5,813 = 10.7%.
15. Cost of goods available for sale equals ending inventory plus cost of sales. As of
September 26, 2009, this is computed as ($ millions):
Ending Inventory of $455 + Cost of Sales of $25,683 = $26,138
16. Cost of goods available for sale equals ending inventory plus cost of sales. As of
December 31, 2009, this is computed as (in EUR millions):
Ending Inventory of 1,865 + Cost of Sales of 27,720 = 29,585
17. Merchandise inventory ($ thousands) comprises 5.6% ($19,716 / $353,579) of Palm’s
current assets as of May 31, 2009, and 12.5% ($67,461 / $540,086) of its current
assets as of May 31, 2008.
18.B For interim reporting, companies can estimate costs of goods sold and ending
inventory by either the retail inventory method or the gross profit method.
6-2
QUICK STUDIES
Quick Study 6-1 (10 minutes)
FIFO
Date Goods Purchased Cost of Goods Sold Inventory Balance
1/ 1 320 @ $6.00 = $1,920
1/ 9 85 @ $6.40 320 @ $6.00
= $2,464
85 @ $6.40
1/25 110 @ $6.60 320 @ $6.00
85 @ $6.40 = $3,190
110 @ $6.60
1/26 320 @ $6.00 = $1,920 45 @ $6.40
= $1,014
40 @ $6.40 = 256 110 @ $6.60
360 $2,176
Alternate solution format
FIFO: 110 @ $6.60 = $ 726

45 @ $6.40 = 288
155 $1,014 Ending inventory cost
6-3
LIFO

1/ 1 320 @ $6.00 = $1,920
1/ 9 85 @ $6.40 320 @ $6.00
= $2,464
85 @ $6.40
1/25 110 @ $6.60 320 @ $6.00
85 @ $6.40 = $3,190
110 @ $6.60
1/26 110 @ $6.60 = $ 726 155 @ $6.00 = $ 930
85 @ $6.40 = 544
165 @ $6.00 = 990
360 $2,260

LIFO: 155 @ $6.00 = $ 930 Ending inventory cost
Weighted Average

1/ 1 320 @ $6.00 = $1,920
1/ 9 85 @ $6.40 320 @ $6.00
85 @ $6.40 = $2,464
(avg. cost is $6.084*)
1/25 110 @ $6.60 320 @ $6.00
85 @ $6.40 = $3,190
110 @ $6.60
1/26 360 @ $6.194 = $2,230* 155 @ $6.194 = $ 960*

*rounded
6-4

Weighted average:
320 @ $6.00 = $1,920
85 @ $6.40 = 544
110 @ $6.60 = 726
515 $3,190 Cost of goods available for sale
$3,190/515 = $6.194 (rounded) weighted average cost per unit
155 units @ $6.194 = $ 960 Ending inventory cost (rounded)
6-5
Beginning inventory..................................... 10 units @ $50 $ 500

Plus:
1st week purchase........................................ 10 units @ $51 510
2nd week purchase....................................... 10 units @ $52 520
3rd week purchase....................................... 10 units @ $55 550
4th week purchase........................................ 10 units @ $60 600
Units available for sale................................. 50 units
Cost of goods available for sale.................. $2,680
FIFO
12/ 7 10 @ $ 9 = $ 90 10 @ $ 9 = $ 90
12/14 20 @ $10 = $200 10 @ $ 9
20 @ $10 = $290
12/15 10 @ $ 9 12 @ $10 = $120

8 @ $10 = $170
12/21 15 @ $12 = $180 12 @ $10
= $300
____ 15 @ $12
$170
6-6
LIFO
12/ 7 10 @ $ 9 = $ 90 10 @ $ 9 = $ 90
12/14 20 @ $10 = $200 10 @ $ 9
20 @ $10 = $290
12/15 18 @ $10 = $180 10 @ $ 9

2 @ $10 = $110
12/21 15 @ $12 = $180 10 @ $ 9

2 @ $10 = $290
____ 15 @ $12
$180
6-7
Weighted Average
12/ 7 10 @ $ 9 = $ 90 10 @ $ 9 = $ 90
12/14 20 @ $10 = $200 10 @ $ 9 = $290
20 @ $ 10
(avg cost is $9.667)
12/15 18 @ $9.667 =$174 12 @ $9.667 = $116

12/21 15 @ $12 = $180 12 @ $9.667 = $296
____ 15 @ $ 12
$174 (avg cost is $10.963)
Specific identification
(3 units x $9) + (9 units x $10) + (15 units x $12) = $297.
1. Specific identification
2. LIFO
3. LIFO
4. LIFO
5. FIFO
6-8

Units in ending inventory
Units stored in basement............................ 1,500 units
Less damaged (unsalable) units................. (30)
Plus units in transit...................................... 250
Plus units on consignment......................... 70
Total units in ending inventory................... 1,790 units
6-9

Cost..................................................................................... $3,000
Plus
Transportation-in............................................................. 150
Import duties.................................................................... 200
Insurance.......................................................................... 50
Inventory cost.................................................................. $3,400
The $25 advertising cost and the $250 cost for sales staff salaries are
included in operating expenses—not part of inventory costs. Those two
costs are not necessary to get the vehicle in a place and condition for
sale.
Per Unit Total Total LCM Applied

Inventory Items Units Cost Market Cost Market to Items
Mountain bikes 9 $360 $330 $ 3,240 $ 2,970 $ 2,970
Skateboards 12 210 270 2,520 3,240 2,520
Gliders 25 480 420 12,000 10,500 10,500
$17,760 $15,990
LCM applied to each product ....................................................... $15,990
a. Overstates 2011 cost of goods sold.

b. Understates 2011 gross profit.
c. Understates 2011 net income.
d. Overstates 2012 net income.
e. The understated 2011 net income and the overstated 2012 net income
combine to yield a correct total income for the two-year period.
f. The 2011 error will not affect years after 2012.
6-10
Inventory turnover = Cost of goods sold/Average merchandise inventory

= $1,600,000 / [($200,000 + $230,000)/2 ] = 7.44 times
Days’ sales in inventory = Ending Inventory/Costs of goods sold x 365

= ($230,000 / $1,600,000) x 365 = 52.47 days
Quick Study 6-15A (10 minutes)
Ending Cost of
Inventory Goods Sold
FIFO
(45 x $6.40) + (110 x $6.60)................................. $1,014
(320 x $6.00) + (40 x $6.40).................................. $2,176
Ending Cost of
LIFO
(155 x $6.00)......................................................... $ 930
(110 x $6.60) + (85 x $6.40) + (165 x $6.00)....... $2,260
Ending Cost of
Weighted Average ($3,190/ 515 = $6.194* cost per unit)

(155 x $6.194)....................................................... $ 960*
(360 x $6.194)....................................................... $2,230*
*rounded
6-11
Ending Cost of
FIFO
(12 x $10) + (15 x $12)....................................... $300
(10 x $9) + (8 x $10)............................................ $170
Ending Cost of
LIFO
(10 x $9) + (17 x $10).......................................... $260
(15 x $12) + (3 x $10) ......................................... $210
Ending Cost of
Weighted Average ($470 / 45 = $10.444 cost per unit)*

(27 x $10.444)..................................................... $282*
(18 x $10.444)..................................................... $188*
*rounded
Ending Cost of
Specific Identification
(3 x $9) + (9 x $10) + (15 x $12).......................... $297
(7 x $9) + (11 x $10)............................................ $173
6-12
Quick Study 6-22B (15 minutes)
Goods available for sale

Inventory, January 1......................................................................
$180,000
Cost of goods purchased (net)..................................................... 342,000
Goods available for sale (at cost)................................................. 522,000
Net sales at retail.............................................................................. $675,000
Estimated cost of goods sold [$675,000 x (1 - 42%)].......................... (391,500)
Estimated September 5 inventory destroyed................................ $130,500
a. Both IFRS and U.S. GAAP provide broad and similar guidance on the
accounting for items and costs making up merchandise inventory.
Specifically, merchandise inventory includes all items that a company
owns and holds for sale. Further, merchandise inventory includes
costs of expenditures necessary, directly or indirectly, to bring those
items to a salable condition and location.
b. Yes, companies reporting under IFRS can apply cost flow assumptions
in assigning costs to inventory. FIFO and weighted average are two
popular cost flow assumptions applied by companies reporting under
IFRS. (LIFO is not presently acceptable under IFRS.)
c. U.S. GAAP prohibits any later increase in the recorded value of

inventory that had been written down even if that decline in value is
reversed through value increases in later periods. However, IFRS
allows reversals of those write-downs up to the original acquisition
cost.
6-13
EXERCISES
Exercise 6-1 (10 minutes)
1. The consignor is Jolie Company. The consignee is China Company. The

consignor, Jolie Company, should include any unsold and consigned
goods in its inventory.
2. The title will pass at “destination” which is China Company’s receiving

dock. Jolie should show the $850 in its inventory at year-end as Jolie
retains title until the goods reach China Company.
Cost of inventory (estate’s contents)

Price........................................................................................ $37,500
Transportation-in................................................................... 1,200
Insurance on shipment.......................................................... 150
Cleaning and refurbishing..................................................... 490
Total cost of inventory........................................................... $39,340
a. Specific identification
Ending inventory—90 units from March 30, 80 units from March 20, and 55
units from beginning inventory
Ending Cost of
Computations Inventory Goods Sold
(90 x $5.00) + (80 x $6.00) + (55 x $7.00)......... $1,315
$2,820 - $1,315.................................................. $1,505
Exercise 6-3 (Continued)
6-14
b. Weighted average perpetual

3/ 1 150 @ $7.000 = $1,050
3/10 90 @ $ 7.00 = $ 630 60 @ $7.000 = $ 420
3/20 220 @ $6.00 60 @ $7.000
= $1,740
220 @ $6.000
3/25 145 @ $6.214 = $ 901* 135 @ $6.214 = $ 839*

3/30 90 @ $5.00 135 @ $6.214
= $1,289
_____ 90 @ $5.000
$1,531 (avg. cost is $5.729*)
*rounded
c. FIFO Perpetual

3/ 1 150 @ $7.00 = $1,050
3/10 90 @ $7.00 = $ 630 60 @ $7.00 = $ 420
3/20 220 @ $6.00 60 @ $7.00
220 @ $6.00 = $1,740
3/25 60 @ $7.00
85 @ $6.00 = $ 930 135 @ $6.00 = $ 810
3/30 90 @ $5.00 _____ 135 @ $6.00
90 @ $5.00 = $1,260
$1,560
d. LIFO Perpetual
3/ 1 150 @ $7.00 = $1,050
3/10 90 @ $7.00 = $ 630 60 @ $7.00 = $ 420
3/20 220 @ $6.00 60 @ $7.00
220 @ $6.00 = $1,740
3/25 145 @ $6.00 = $ 870 60 @ $7.00

75 @ $6.00 = $ 870
3/30 90 @ $5.00 60 @ $7.00

_____ 75 @ $6.00 = $1,320
$1,500 90 @ $5.00
6-15
Exercise 6-3 (Concluded)

Alternate Solution Format for FIFO and LIFO Perpetual
Ending Cost of
Computations Inventory Goods Sold
c. FIFO
(135 x $6.00) + (90 x $5.00)............................................... $1,260
(90 x $7.00) + (60 x $7.00) + (85 x $6.00)......................... $1,560
d. LIFO
(60 x $7.00) + (75 x $6.00) + (90 x $5.00)......................... $1,320
(90 x $7.00) + (145 x $6.00)............................................... $1,500
PARK COMPANY
Income Statements
For Month Ended March 31
Specific Weighted
Identification Average FIFO LIFO
Sales...................................... $3,525 $3,525 $3,525 $3,525
(235 units x $15 price)
Cost of goods sold............... 1,505 1,531 1,560 1,500
Gross profit........................... 2,020 1,994 1,965 2,025
Expenses............................... 1,600 1,600 1,600 1,600
Income before taxes............. 420 394 365 425
Income tax expense (30%)......... 126 118* 110* 128*
Net income............................ $ 294 $ 276 $ 255 $ 297
* Rounded to nearest dollar.
1. LIFO method results in the highest net income of $297.
2. Weighted average net income of $276 falls between the FIFO net
income of $255 and the LIFO net income of $297.
3. If costs were rising instead of falling, then the FIFO method would yield
the highest net income.
6-16
a. FIFO Perpetual

1/1 100 @ $10 = $ 1,000
1/10 90 @ $10 = $ 900 10 @ $10 =$ 100
3/14 250 @ $15 = $ 3,750 10 @ $10

250 @ $15 = $ 3,850
3/15 10 @ $10 120 @ $15 = $ 1,800

130 @ $15 = $2,050
7/30 400 @ $20 = $ 8,000 120 @ $15

400 @ $20 = $ 9,800
10/5 120 @ $15

180 @ $20 = $5,400 220 @ $20 = $ 4,400
10/26 600 @ $25 = $15,000 220 @ $20

_____ 600 @ $25 = $19,400
$8,350
b. LIFO Perpetual

1/1 100 @ $10 = $ 1,000
1/10 90 @ $10 = $ 900 10 @ $10 = $ 100
3/14 250 @ $15 = $ 3,750 10 @ $10
250 @ $15 = $ 3,850
3/15 10 @ $10
140 @ $15 = $2,100 110 @ $15 = $ 1,750
7/30 400 @ $20 = $ 8,000 10 @ $10

110 @ $15 = $ 9,750
400 @ $20
10/5 10 @ $10
300 @ $20 = $6,000 110 @ $15 = $ 3,750
100 @ $20
10/26 600 @ $25 = $15,000 10 @ $10

110 @ $15
100 @ $20 = $ 18,750
_____ 600 @ $25
$9,000
6-17
Alternate Solution Format

Ending Cost of
a. FIFO:
(600 x $25) + (220 x $20).................................................... $19,400
(90 x $10) + (10 x $10) + (130 x $15) +
(120 x $15)+ (180 x $20)...................................................... $8,350
b. LIFO:
(10 x $10) + (110 x $15) + (100 x $20) + (600 x $25).......... $18,750
(90 x $10) + (140 x $15) + (300 x $20)................................. $9,000
FIFO Gross Margin

Sales Revenue (530 units sold x $40 selling price)............... $21,200
Less: FIFO cost of goods sold................................................ 8,350
Gross margin............................................................................. $12,850
LIFO Gross Margin

Less: LIFO cost of goods sold................................................ 9,000
Gross margin............................................................................. $12,200
a. Specific identification method—Cost of goods sold

Cost of goods available for sale............................................. $27,750
Ending inventory under specific identification
3/14 purchase (100 @ $15) ...............................................
$ 1,500
7/30 purchase (120 @ $20)................................................
2,400
10/26 purchase (600 @ $25)................................................
15,000
Total ending inventory under specific identification.......... 18,900
Cost of goods sold under specific identification................ $ 8,850
b. Specific identification method—Gross margin

Sales Revenue (530 units sold x $40 selling price).............. $21,200
Less: Specific identification cost of goods sold.................. 8,850
Gross margin............................................................................ $12,350
6-18

Inventory Items Unit Cost Market Cost Market to Items
s
Helmets........... 22 $50 $54 $1,100 $1,188 $1,100
Bats.................. 15 78 72 1,170 1,080 1,080
Shoes............... 36 95 91 3,420 3,276 3,276
Uniforms.......... 40 36 36 1,440 1,440 1,440
$7,130 $6,984 $6,896
Lower of cost or market of inventory by product = $6,896

1. Gross profit = $900,000 - $500,000 = $400,000 (for each year)
2.
Year 2010 Year 2011 Year 2012
Sales.............................. $900,000 $900,000 $900,000
Cost of goods sold
Beginning inventory..... $200,000 $180,000 $200,000
Cost of purchases........ 500,000 500,000 500,000
Good available for sale... 700,000 680,000 700,000
Ending inventory.......... 180,000 200,000 200,000
Cost of goods sold....... 520,000 480,000 500,000
Gross profit.................... $380,000 $420,000 $400,000
1. a. LIFO ratio computations

LIFO current ratio (2011) = $210/$190 = 1.1
LIFO inventory turnover (2011) = $730/ [($150+$100)/2] = 5.8
LIFO days’ sales in inventory (2011) = ($150/$730) x 365 = 75 days
b. FIFO ratio computations

FIFO current ratio (2011) = $280*/$190 = 1.5
FIFO inventory turnover (2011) = $685/ [($220+$125)/2] = 4.0
FIFO days’ sales in inventory (2011) = ($220/$685) x 365 = 117.2 days
6-19
*FIFO inventory is $70 greater than LIFO inventory ($220 vs $150),

thus FIFO current assets are also $70 greater.
6-20
2. The use of LIFO versus FIFO for Chess markedly impacts the ratios
computed. Specifically, LIFO makes Chess appear worse in comparison
to FIFO numbers on the current ratio (1.1 vs. 1.5) but better on inventory
turnover (5.8 vs. 4.0) and days’ sales in inventory (75 vs. 117.2). These
results can be generalized. That is, when costs are rising and quantities
are stable or rising, the FIFO inventory exceeds LIFO inventory. This
suggests that (relative to FIFO) the LIFO current ratio is understated, the
LIFO inventory turnover is overstated, and the days’ sales in inventory
is understated. Overall, users prefer the FIFO numbers for these ratios
because they are considered more representative of current
replacement costs for inventory.
2010 Inventory turnover 2010 Days' Sales in Inventory
$426,650/[($91,500 + $86,750)/2] $86,750/$426,650 x 365 days = 74.2 days

= 4.8 times
2011 Inventory turnover 2011 Days' Sales in Inventory
$643,825/[($86,750 + $96,400)/2]
= 7.0 times $96,400/$643,825 x 365 days = 54.7 days
Analysis comment: It appears that during a period of increasing sales,

Ryder has been efficient in controlling its amount of inventory. Specifically
inventory turnover increased by 2.2 times (7.0 - 4.8) from 2010 to 2011. In
addition, days' sales in inventory decreased by 19.5 days (74.2 - 54.7).
6-21
Exercise 6-11A (20 minutes)
Ending Cost of
a. Specific Identification
(90 x $5.00) + (80 x $6.00) + (55 x $7).......................... $1,315
$2,820 - $1,315............................................................... $1,505
b. Weighted Average
($2,820 / 460 units = $6.130* average cost per unit)
225 x $6.130................................................................... $1,379*
235 x $6.130................................................................... $1,441*
c. FIFO
(90 x $5.00) + (135 x $6.00)........................................... $1,260
(150 x $7.00) + (85 x $6.00).......................................... $1,560
d. LIFO
(150 x $7.00) + (75 x $6.00)........................................... $1,500
(90 x $5.00) + (145 x $6.00)........................................... $1,320
*rounded
6-22
Cost of goods available for sale = (100 x $10) + (250 x $15) + (400 x $20)
+ (600 x $25)
= $27,750
Ending Cost of
a. FIFO
(600 x $25) + (220 x $20)............................................ $19,400
(90 x $10) + (10 x $10) + (130 x $15) +
(120 x $15)+ (180 x $20)........................................... $8,350
b. LIFO
(100 x $10) + (250 x $15) + (400 x $20) + (70 x $25).... $14,500
530 x $25.................................................................... $13,250
c.
FIFO Gross Margin
Less: FIFO cost of goods sold................................................ 8,350
Gross margin............................................................................. $12,850
LIFO Gross Margin

Less: LIFO cost of goods sold................................................ 13,250
Gross margin............................................................................. $ 7,950
6-23

Ending Cost of
(100 x $2.90) + (100 x $2.80) + (100 x $2.50)....... $820
$7,706 - $820.......................................................... $6,886
b. Weighted average ($7,706/3,000 = $2.57*)
$2.57 x 300............................................................. 771
$7,706 - $771.......................................................... 6,935
c. FIFO
(300 x $2.90) .......................................................... 870
(200 x $2.00) + (440 x $2.25) + (1,080 x $2.50) +
(960 x $2.80) + (20 x 2.90)............................... 6,836
d. LIFO
(200 x $2.00) + (100 x $2.25)................................. 625
(320 x $2.90) + (960 x $2.80) + (1,080 x $2.50) +
(340 x $2.25)...................................................... 7,081
*rounded
Income effect: FIFO provides the lowest cost of goods sold, the highest
gross profit, and the highest net income.

Ending Cost of
(100 x $2.00) + (100 x $2.30) + (100 x $2.50)....... $680
$7,550 - $680.......................................................... $6,870
b. Weighted average ($7,550/3,030 = $2.49*)
$2.49 x 300............................................................. 747
$7,550 - $747.......................................................... 6,803
c. FIFO
(250 x $2.00) + (50 x $2.30)................................... 615
(280 x $3.00) + (600 x $2.80) + (800 x $2.50) +
(1,050 x $2.30).................................................. 6,935
d. LIFO
(280 x $3.00) + (20 x $2.80)................................... 896
(250 x $2.00) + (1,100 x $2.30) + (800 x $2.50) +
(580 x $2.80)..................................................... 6,654
*rounded
Income effect: FIFO provides the highest cost of goods sold, the lowest
gross profit, and the lowest net income.
6-24
Exercise 6-15B (20 minutes)
At Cost At Retail
Beginning inventory................................................... $ 31,900 $ 64,200
Cost of goods purchased........................................... 57,810 98,400
Goods available for sale............................................. 89,710 162,600
Deduct net sales at retail............................................... 130,000
Ending inventory at retail.............................................. $ 32,600
Cost ratio: ($89,710/$162,600) = 0.55...............................
Ending inventory at cost ($32,600 x 55%)................... $ 17,930
Exercise 6-16B (20 minutes)

Inventory, January 1...................................................... $ 450,000
*
Net cost of goods purchased ......................................1,604,500
Goods available for sale...............................................2,054,500
Less estimated cost of goods sold
Net sales......................................................................... $2,000,000
Estimated cost of goods sold
[$2,000,000 x (1 – 30%)]............................................ (1,400,000)
Estimated March 31 inventory......................................... $ 654,500
*
$1,590,000 - $23,100 + $37,600 = $1,604,500

1. Samsung generally applies the (weighted) average cost assumption when
assigning costs to its inventories. An exception is for its materials-in-transit
where it applies specific identification.
2. Samsung recorded losses on valuation of inventories amounting to ￦651,296
million for 2008.
3. Under IFRS, Samsung would reverse inventory valuation losses if inventory
values increased in subsequent periods. Specifically, it would reduce
inventory costs by ￦ 900 million in 2009 for the reversal. However, had
Samsung followed U.S. GAAP, it would have ignored the reversal in inventory
value and would not record the ￦900 million cost reduction in 2009.
6-25
PROBLEM SET A
Problem 6-1A (40 minutes)
1. Compute cost of goods available for sale and units available for sale
Beginning inventory............................ 50 units @ $50 $ 2,500

March 5................................................ 200 units @ $55 11,000
March 18............................................... 60 units @ $60 3,600
March 25............................................... 100 units @ $62 6,200
Units available...................................... 410 units
Cost of goods available for sale $23,300
2. Units in ending inventory
Units available (from part 1)............................

410 units
Less: Units sold (210 + 80)..............................
290 units
Ending Inventory (units)..................................
120 units
3a. FIFO perpetual

Mar. 1 50 @ $50 = $ 2,500
Mar. 5 200 @ $55 = $11,000 50 @ $50

200 @ $55 = $13,500
Mar. 9 50 @ $50 = $ 2,500 40 @ $55 = $ 2,200
160 @ $55 = $ 8,800
Mar. 18 60 @ $60 = $ 3,600 40 @ $55

60 @ $60 = $ 5,800
Mar. 25 100 @ $62 = $ 6,200 40 @ $55
60 @ $60
100 @ $62 = $12,000
Mar. 29 40 @ $55 = $ 2,200 20 @ $60
40 @ $60 = $ 2,400 100 @ $62 = $ 7,400
$15,900
6-26
Problem 6-1A (Continued)
3b. LIFO perpetual

Mar. 1 50 @ $50 = $ 2,500
Mar. 5 200 @ $55 = $11,000 50 @ $50

200 @ $55 = $13,500
Mar. 9 200 @ $55 = $11,000 40 @ $50 = $ 2,000
10 @ $50 = $ 500
Mar. 18 60 @ $60 = $ 3,600 40 @ $50
60 @ $60 = $ 5,600
Mar. 25 100 @ $62 = $ 6,200 40 @ $50
60 @ $60
100 @ $62 = $11,800
40 @ $50
Mar. 29 80 @ $62 = $ 4,960 60 @ $60
______ 20 @ $62 = $ 6,840
$16,460
3c. Weighted Average perpetual

Mar. 1 50 @ $50 = $ 2,500
Mar. 5 200 @ $55 = $11,000 50 @ $50

200 @ $55 = $13,500
(avg. = $54)
Mar. 9 210 @ $54 = $11,340 40 @ $54 = $ 2,160

(avg. = $54)
Mar. 18 60 @ $60 = $ 3,600 40 @ $54

60 @ $60 = $ 5,760
(avg. = $57.60)
Mar. 25 100 @ $62 = $ 6,200 40 @ $54

60 @ $60
100 @ $62 = $11,960
(avg. = $59.80)
Mar. 29 80 @ $59.8 = $ 4,784 120 @ $59.80 = $ 7,176

________ (avg. = $59.80)
6-27
$16,124
6-28
Problem 6-1A (Concluded)
3d. Specific Identification

Mar. 1 50 @ $50 = $ 2,500
Mar. 5 200 @ $55 = $11,000 50 @ $50
200 @ $55 = $13,500
Mar. 9 40 @ $50 = $ 2,000 10 @ $50
170 @ $55 = $ 9,350 30 @ $55 = $ 2,150
Mar. 18 60 @ $60 = $ 3,600 10 @ $50

30 @ $55
60 @ $60 = $ 5,750
Mar. 25 100 @ $62 = $ 6,200 10 @ $50
30 @ $55
60 @ $60
100 @ $62 = $11,950
10 @ $50
20 @ $60 = $ 1,200
Mar. 29 30 @ $55
60 @ $62 = $ 3,720
40 @ $60
______ 40 @ $62 = $ 7,030
$16,270
4.
Specific
Weighted Identifi-
FIFO LIFO Average cation
Sales*....................................... $25,450 $25,450 $25,450 $25,450
Less: Cost of goods sold....... 15,900 16,460 16,124 16,270
Gross profit............................. $ 9,550 $ 8,990 $ 9,326 $ 9,180
*Sales = (210 units x $85) + (80 units x $95) = $25,450
6-29
1. Calculate cost of goods available for sale and units available for sale
Beginning inventory............................ 600 units @ $44 $26,400

Feb. 10.................................................. 200 units @ $40 8,000
Mar. 13.................................................. 100 units @ $20 2,000
Aug. 21.................................................. 160 units @ $60 9,600
Sept. 5.................................................. 280 units @ $48 13,440
Units available......................................1,340 units

1,340
Less: Units sold (400+200)..............................
600
740
6-30

3a. FIFO perpetual
Date Goods Purchasd Cost of Goods Sold Inventory Balance

1/1 600 @ $44 = $26,400
2/10 200 @ $40 = $ 8,000 600 @ $44

200 @ $40 = $34,400
3/13 100 @ $20 = $ 2,000 600 @ $44

200 @ $40 = $36,400
100 @ $20
3/15 400 @ $44 = $17,600 200 @ $44 = $18,800

200 @ $40
100 @ $20
8/21 160 @ $60 = $ 9,600 200 @ $44

200 @ $40
100 @ $20 = $28,400
160 @ $60
9/5 280 @ $48 = $13,440 200 @ $44

200 @ $40
100 @ $20 = $41,840
160 @ $60
280 @ $48
9/10 200 @ $44 = $ 8,800 200 @ $40

100 @ $20
160 @ $60 = $33,040
______ 280 @ $48
$26,400
FIFO Alternate Solution Format

Less: Cost of sales 400 @ $44 $17,600
200 @ $44 8,800
Total cost of goods sold 26,400
Ending Inventory $33,040
Proof of Ending Inventory

200 @ $40 $ 8,000
100 @ 20 2,000
160 @ 60 9,600
280 @ 48 13,440
Ending Inventory................... 740 units $33,040
6-31
3b. LIFO perpetual

1/1 600 @ $44 = $26,400
2/10 200 @ $40 = $ 8,000 600 @ $44

200 @ $40 = $34,400
3/13 100 @ $20 = $ 2,000 600 @ $44

200 @ $40 = $36,400
100 @ $20
3/15 100 @ $20 500 @ $44 = $22,000

200 @ $40
100 @ $44 = $14,400
8/21 160 @ $60 = $ 9,600 500 @ $44

160 @ $60 = $31,600
9/5 280 @ $48 = $13,440 500 @ $44

160 @ $60 = $45,040
280 @ $48
9/10 200 @ $48 = $ 9,600 500 @ $44

160 @ $60 = $35,440
______ 80 @ $48
$24,000
LIFO alternate solution format

Less: Cost of sales 100 @ $20 $ 2,000
200 @ 40 8,000
100 @ 44 4,400
200 @ 48 9,600
Cost of Goods Sold 24,000
Ending Inventory $35,440

500 @ $44 $22,000
160 @ 60 9,600
80 @ 48 3,840
Ending Inventory… 740 units $35,440
6-32

3c. Specific Identification
Cost of goods available for sale.............. $59,440
Less: Cost of Goods Sold
500 @ $44..................................... $22,000
100 @ $20..................................... 2,000
Total cost of goods sold.......................... 24,000
Ending Inventory....................................... $35,440

100 @ $44 $ 4,400
200 @ 40 8,000
160 @ 60 9,600
280 @ 48 13,440
Ending Inventory…. 740 units $35,440
3d. Weighted Average

1/1 600 @ $44.00 = $26,400
2/10 200 @ $40 = $ 8,000 600 @ $44.00 = $34,400

200 @ $40.00
(avg. cost is $43.00)
3/13 100 @ $20 = $ 2,000 600 @ $44.00

200 @ $40.00 = $36,400
100 @ $20.00
3/15 400 @ $40.44 = $16,176 500 @ $40.44 = $20,220
8/21 160 @ $60 = $ 9,600 500 @ $40.44

= $29,820
160 @ $60.00
9/5 280 @ $48 = $13,440 660 @ $45.18

280 @ $48.00 = $43,259**
9/10 200 @ $46.02 = $ 9,204 740 @ $46.02 = $34,055***

$25,380
* rounded to nearest cent

** rounded to nearest dollar
*** Total cost of goods sold plus ending inventory = $25,380 + $34,055 = $59,435 (the $5
difference from cost of goods available for sale of $59,440 is due to rounding)
6-33
Problem 6-2A (Concluded)
4.
Specific
Identifi- Weighted
FIFO LIFO cation Average
Sales (600 x $75)..................... $45,000 $45,000 $45,000 $45,000
Gross profit............................. $18,600 $21,000 $21,000 $19,620
5. The company’s manager would likely prefer the LIFO method or the
Specific Identification method since these methods’ gross profit is the
largest at $21,000. This would give the manager his/her highest bonus
based on gross profit. It is only by coincidence that the LIFO and
Specific Identification method have the same cost of goods sold and
gross profit. This would not necessarily be the case.
6-34
Per Unit Total Total

LCM Applied
Unit to Items
Inventory Items Cost Market Cost Market
s
Audio equipment:
Receivers................. 335 $ 90 $ 98 $ 30,150 $ 32,830 $ 30,150
CD players............... 250 111 100 27,750 25,000 25,000
MP3 players............. 316 86 95 27,176 30,020 27,176
Speakers.................. 194 52 41 10,088 7,954 7,954
Video equipment:
Handheld LCDs........ 470 150 125 70,500 58,750 58,750
VCRs........................ 281 93 84 26,133 23,604 23,604
Camcorders............. 202 310 322 62,620 65,044 62,620
Car audio equip:
Satellite radios......... 175 70 84 12,250 14,700 12,250
CD/MP3 radios......... 160 97 105 15,520 16,800 15,520
Total........................... $282,187 $263,024
1. Lower of cost or market for inventory applied separately = $263,024
2.
Dec 31 Cost of Goods Sold.....................................................19,163
Merchandise Inventory......................................... 19,163
To adjust inventory cost to market.
$19,163 = $282,187 - $263,024
6-35

Part 1
(a)
Cost of goods sold 2010 2011 2012
Reported....................................... $ 725,000 $ 955,000 $ 790,000
Adjustments: 12/31/2010 error....... - 50,000 + 50,000
12/31/2011 error....... . + 20,000 - 20,000
Corrected..................................... $ 675,000 $1,025,000 $ 770,000
(b)
Net income 2010 2011 2012
Reported....................................... $ 268,000 $ 275,000 $ 250,000
Adjustments: 12/31/2010 error....... + 50,000 - 50,000
12/31/2011 error....... . - 20,000 + 20,000
Corrected..................................... $ 318,000 $ 205,000 $ 270,000
(c)
Total current assets 2010 2011 2012
Reported....................................... $1,247,000 $1,360,000 $1,230,000
Adjustments: 12/31/2010 error....... + 50,000
12/31/2011 error....... . - 20,000 .
Corrected..................................... $1,297,000 $1,340,000 $1,230,000
(d)
Equity 2010 2011 2012
Reported....................................... $1,387,000 $1,580,000 $1,245,000
Adjustments: 12/31/2010 error....... + 50,000
12/31/2011 error....... _________ - 20,000 .
Corrected..................................... $1,437,000 $1,560,000 $1,245,000
Part 2
Total net income for the combined three-year period ($793,000) is not affected
by the errors. This is because these errors are "self-correcting"—that is, each
overstatement (or understatement) of net income is offset by a matching
understatement (or overstatement) in the following year.
Part 3
The understatement of inventory by $50,000 results in an overstatement of cost of
goods sold by that same amount. The $50,000 overstatement of cost of goods
sold results in an understatement of gross profit by the same amount. This
understatement of gross profit carries through to an understatement of net
income. Since the understated net income is closed to equity, the final equity
figure is understated by the amount of the inventory understatement.
6-36
Problem 6-5AA (25 minutes)

Part 1
Number and total cost of units available for sale:
20,000 units in beginning inventory @ $15........................... $ 300,000
28,000 units purchased @ $18................................................ 504,000
30,000 units purchased @ $22................................................ 660,000
20,000 units purchased @ $24................................................ 480,000
33,000 units purchased @ $27................................................ 891,000
131,000 units available for sale ............................................... $2,835,000
Part 2
a. FIFO periodic
Total cost of 131,000 units available for sale........................ $2,835,000

Less ending inventory on a FIFO basis
33,000 units @ $27................................................................
$891,000
2,000 units @ $24................................................................
48,000 939,000
Cost of units sold..................................................................... $1,896,000
b. LIFO periodic

Less ending inventory on a LIFO basis
20,000 beginning inventory units @ $15............................. $300,000
15,000 units @ $18................................................................
270,000 570,000
c. Weighted average periodic

Less ending inventory at weighted average
*
($2,835,000/131,000) x 35,000.............................................. 757,443
*
*
Amount can slightly vary due to differences in rounding.
6-37

Part 1
BOTCH CORP.
Income Statements Comparing FIFO, LIFO, and Weighted Average
For Year Ended December 31, 2011
Weighted
FIFO LIFO Average
Sales...............................................................$247,500 $247,500 $247,500
Cost of goods sold
Inventory, Dec. 31, 2010.............................. 10,800 10,800 10,800
Cost of purchases....................................... 123,500 123,500 123,500
Cost of goods available for sale................ 134,300 134,300 134,300
Inventory, Dec. 31, 2011.............................. 22,000 18,400 20,662 *
Cost of goods sold...................................... 112,300 115,900 113,638 *
Gross profit.................................................... 135,200 131,600 133,862 *
Expenses........................................................ 33,000 33,000 33,000
Income before taxes...................................... 102,200 98,600 100,862 *
Income taxes expense.................................. 30,660 29,580 30,259 *
Net income.....................................................$ 71,540 $ 69,020 $ 70,603 *
*Amounts can slightly vary due to differences in rounding.
Weighted
Supporting calculations: FIFO LIFO Average
Dec. 31, 2010, inventory (600 x $18)................... $ 10,800 $ 10,800 $ 10,800
Purchases
1,500 x $19 = $28,500
700 x $20 = 14,000
400 x $21 = 8,400
3,300 x $22 = 72,600 $123,500 $123,500 $123,500
Dec. 31, 2011, inventory (6,500 - 5,500 = 1,000 units)
FIFO: 1,000 x $22 = $22,000 $ 22,000
LIFO: 600 x $18 = $10,800 $ 18,400
400 x $19 = $ 7,600
W.A.: ($134,300/6,500) x 1,000 $ 20,662*
6-38
Problem 6-6AA (Concluded)
Part 2
If Botch, Corp. had been experiencing declining costs in the acquisition of

inventory, we would observe the opposite results in our comparisons.
Specifically, LIFO would have resulted in a higher ending inventory, lower
cost of goods sold, higher gross profit, and higher net income. FIFO would
have resulted in a lower ending inventory, higher cost of goods sold, lower
gross profit, and lower net income.
Part 3
Advantages:
LIFO: Given the cost trends in the problem, the advantage of using LIFO is
that the lower net income will result in a lower tax obligation (tax deferral).
Also, LIFO is likely to better match current costs against revenues.
FIFO: The advantage of using FIFO is that the inventory figure reported on
the balance sheet is likely similar to the current replacement cost.
Disadvantages:
LIFO: Given the cost trends in the problem, the disadvantage of using LIFO
is that the inventory figure, which is also reported on the income
statement, will likely be understated in comparison to the current
replacement costs.
FIFO: The disadvantage of using FIFO is that it will produce a greater tax
obligation for the current period as a result of a higher reported net
income.
6-39

Part 1
NILSON COMPANY
Estimated Inventory
December 31
At Cost At Retail
Beginning inventory............................................ $ 471,350 $ 927,150
Cost of goods purchased................................... 3,276,030 6,279,350
Goods available for sale..................................... $3,747,380 $7,206,500
Sales....................................................................... 5,495,700
Less: Sales returns............................................... (44,600)
Net sales................................................................. 5,451,100
Ending inventory at retail ($7,206,500 - $5,451,100) $1,755,400
Cost-to-retail ratio: $3,747,380/$7,206,500 = 0.52 or 52%
Ending inventory at cost ($1,755,400 x 52%).................

$ 912,808
Part 2
Estimated physical inventory at cost: $1,675,800 x 52% = $871,416
NILSON COMPANY
Inventory Shortage
December 31
At Cost At Retail
Estimated inventory (from part 1)............................. $ 912,808 $ 1,755,400
Physical inventory (given)......................................... 871,416 1,675,800
Inventory shortage.....................................................
$ 41,392 $ 79,600
6-40
Problem 6-8AB (25 minutes)
WAYMAN COMPANY
Estimated Inventory at March 31
At Cost At Retail

Inventory, January 1..............................................$ 300,260
Cost of goods purchased...................................... 939,050
Goods available for sale........................................ 1,239,310
Sales........................................................................ $1,191,150
Less sales returns................................................. (9,450)
Net sales................................................................. $1,181,700
[$1,181,700 x (1 – 35%)].................................... (768,105)
Estimated March 31 inventory.................................$ 471,205
6-41
PROBLEM SET B
Problem 6-1B (40 minutes)
1. Compute cost of goods available for sale and units available for sale
Beginning inventory............................ 15 units @ $3,000 $ 45,000

April 6................................................... 35 units @ $3,500 122,500
April 17.................................................. 8 units @ $4,500 36,000
April 25.................................................. 10 units @ $4,580 45,800
Units available...................................... 68 units
Cost of goods available for sale......... $249,300

68 units
Less: Units sold (18 + 30)................................
48 units
20 units
3a. FIFO perpetual

Apr. 1 15 @ $3,000 = $ 45,000
Apr. 6 35 @ $3,500 = $122,500 15 @ $3,000

35 @ $3,500 = $167,500
Apr. 9 15 @ $3,000 = $ 45,000 32 @ $3,500 = $112,000
3 @ $3,500 = $ 10,500
Apr. 17 8 @ $4,500 = $ 36,000 32 @ $3,500

8 @ $4,500 = $148,000
Apr. 25 10 @ $4,580 = $ 45,800 32 @ $3,500
8 @ $4,500
10 @ $4,580 = $193,800
2 @ $3,500
Apr. 30 30 @ $3,500 = $105,000 8 @ $4,500
_______ 10 @ $4,580 = $ 88,800
$160,500
6-42
Problem 6-1B (Continued)
3b. LIFO perpetual

Apr. 1 15 @ $3,000 = $ 45,000
Apr. 6 35 @ $3,500 = $122,500 15 @ $3,000
35 @ $3,500 = $167,500
Apr. 9 18 @ $3,500 = $ 63,000 15 @ $3,000
17 @ $3,500 = $104,500
Apr. 17 8 @ $4,500 = $ 36,000 15 @ $3,000
17 @ $3,500
8 @ $4,500 = $140,500
Apr. 25 10 @ $4,580 = $ 45,800 15 @ $3,000
17 @ $3,500
8 @ $4,500
10 @ $4,580 = $186,300
10 @ $4,580 = $ 45,800 15 @ $3,000
8 @ $4,500 = $ 36,000
Apr. 30 5 @ $3,500 = $ 62,500
12 @ $3,500 = $ 42,000
$186,800
3c. Weighted Average perpetual

Apr. 1 15 @ $3,000 = $ 45,000
Apr. 6 35 @ $3,500 = $122,500 15 @ $3,000
35 @ $3,500 = $167,500
(avg. = $3,350)
Apr. 9 18 @ $3,350 = $ 60,300 32 @ $3,350 = $107,200

(avg. = $3,350)
Apr. 17 8 @ $4,500 = $ 36,000 32 @ $3,350

8 @ $4,500 = $143,200
(avg. = $3,580)
Apr. 25 10 @ $4,580 = $ 45,800 32 @ $3,350

8 @ $4,500
10 @ $4,580 = $189,000
(avg. = $3,780)
Apr. 30 30 @ $3,780 = $113,400 20 @ $3,780 = $ 75,600

_________ (avg. = $3,780)
$173,700
6-43
Problem 6-1B (Concluded)
3d. Specific Identification

Apr. 1 15 @ $3,000 = $ 45,000
Apr. 6 35 @ $3,500 = $122,500 15 @ $3,000

35 @ $3,500 = $167,500
Apr. 9 8 @ $3,000 = $ 24,000 7 @ $3,000
10 @ $3,500 = $ 35,000 25 @ $3,500 = $108,500
7 @ $3,000
Apr. 17 8 @ $4,500 = $ 36,000
25 @ $3,500
8 @ $4,500 = $144,500
Apr. 25 10 @ $4,580 = $ 45,800 7 @ $3,000
25 @ $3,500
8 @ $4,500
10 @ $4,580 = $190,300
7 @ $3,000
Apr. 30 20 @ $3,500 = $ 70,000 5 @ $3,500
10 @ $4,580 = $ 45,800 8 @ $4,500 = $ 74,500
$174,800
4.
Specific
Weighted Identifi-
FIFO LIFO Average cation
Sales*.......................................$636,000 $636,000 $636,000 $636,000
Gross profit.............................$475,500 $449,200 $462,300 $461,200
*Sales = (18 units x $12,000) + (30 units x $14,000) = $636,000
6-44
1. Calculate cost of goods available for sale and units available for sale:
Beginning inventory............................ 600 units @ $55 = $ 33,000

Jan. 10................................................... 450 units @ $56 = 25,200
Feb. 13................................................... 200 units @ $57 = 11,400
July 21................................................... 230 units @ $58 = 13,340
Aug. 5................................................... 345 units @ $59 = 20,355
Units available......................................1,825 units
Cost of goods available for sale......... $103,295
2. Units in ending inventory:
Units available (from part 1)....................

1,825
Less: Units sold (given)...........................
765
Ending Inventory......................................
1,060
6-45

3a. FIFO perpetual

1/1 600 @ $55 = $33,000
1/10 450 @ $56 = $25,200 600 @ $55 = $58,200

450 @ $56
2/13 200 @ $57 = $11,400 600 @ $55

450 @ $56 = $69,600
200 @ $57
2/15 430 @ $55 = $23,650 170 @ $55

450 @ $56 = $45,950
200 @ $57
7/21 230 @ $58 = $13,340 170 @ $55

450 @ $56 = $59,290
200 @ $57
230 @ $58
8/5 345 @ $59 = $20,355 170 @ $55

450 @ $56
200 @ $57 = $79,645
230 @ $58
345 @ $59
8/10 170 @ $55 285 @ $56

165 @ $56 = $18,590 200 @ $57 = $61,055
230 @ $58
______ 345 @ $59
$42,240
Alternate FIFO solution format

Cost of goods available for sale........................... $103,295
430 @ $55...............................................................
$23,650
170 @ 55...............................................................
9,350
165 @ 56...............................................................
9,240
765
Total cost of goods sold........................................ 42,240
Ending Inventory.................................................... $ 61,055

285 @ $56 $ 15,960
200 @ 57 11,400
230 @ 58 13,340
345 @ 59 20,355
Ending Inventory…… 1,060 units $ 61,055
6-46
3b. LIFO perpetual

1/1 600 @ $55 = $33,000
1/10 450 @ $56 = $25,200 600 @ $55

450 @ $56 = $58,200
2/13 200 @ $57 = $11,400 600 @ $55

450 @ $56
200 @ $57 = $69,600
2/15 200 @ $57 600 @ $55

230 @ $56 = $24,280 220 @ $56 = $45,320
7/21 230 @ $58 = $13,340 600 @ $55

220 @ $56
230 @ $58 = $58,660
8/5 345 @ $59 = $20,355 600 @ $55

220 @ $56
230 @ $58
= $79,015
345 @ $59
8/10 335 @ $59 = $19,765 600 @ $55

220 @ $56
230 @ $58
______ 10 @ $59 = $59,250
$44,045
Alternate LIFO solution format

Cost of goods available for sale........................... $103,295
200 @ $57...............................................................
$11,400
230 @ 56...............................................................
12,880
335 @ 59...............................................................
19,765
765
Cost of Goods Sold................................................ 44,045
Ending Inventory..................................................... $ 59,250

600 @ $55 $ 33,000
220 @ 56 12,320
230 @ 58 13,340
10 @ 59 590
Ending inventory.....................................................
1,060 units $ 59,250
6-47

3c. Specific Identification
Cost of goods available for sale........ $103,295
600 @ $55.............................................
$33,000
165 @ $57.............................................
9,405
765 ........................................................
Cost of Goods Sold............................. 42,405
Ending inventory................................. $ 60,890

450 @ $56 $25,200
35 @ 57 1,995
230 @ 58 13,340
345 @ 59 20,355
Ending inventory................. 1,060 Units $60,890
3d. Weighted Average

1/1 600 @ $55.00 = $33,000
1/10 450 @ $56 = $25,200 600 @ $55.00

= $58,200
450 @ $56.00
2/13 200 @ $57 = $11,400 600 @ $55.00

450 @ $56.00 = $69,600
200 @ $57.00
2/15 430@ $55.68 = $23,942** 820 @ $55.68 = $45,658**
7/21 230 @ $58 = $13,340 820 @ $55.68

= $58,998**
230 @ $58.00
8/5 345 @ $59 = $20,355 820 @ $55.68

230 @ $58.00 = $79,353**
345 @ $59.00
8/10 335@ $56.88 = $19,055** 1,060@ $56.88 = $60,293**

$42,997
* rounded to nearest cent
** rounded to nearest dollar
Note: Total cost of goods sold plus ending inventory = $42,997 + $60,293 = $103,290. The
$5 difference from the cost of goods available for sale of $103,295 is due to rounding.
6-48
Problem 6-2B (Concluded)
4.
Specific
Identifica- Weighted
FIFO LIFO tion Average
Sales (765 x $90).......................... $68,850 $68,850 $68,850 $68,850

Less: Cost of goods sold............ 42,240 44,045 42,405 42,997
Gross profit...................................
$26,610 $24,805 $26,445 $25,853
5. The manager of Venus Company likely will prefer the FIFO method
because it would yield the largest gross profit. This would give the
manager his/her highest bonus based on gross profit.
6-49

Inventory Items Units Cost Market Cost Market to Items
Office furniture
Desks.................. 436 $261 $305 $113,79 $132,980 $113,796
6
Credenzas........... 295 227 256 66,965 75,520 66,965
Chairs.................. 587 49 43 28,763 25,241 25,241
Bookshelves....... 321 93 82 29,853 26,322 26,322
Filing cabinets
Two-drawer......... 214 81 70 17,334 14,980 14,980
Four-drawer........ 398 135 122 53,730 48,556 48,556
Lateral................. 175 104 118 18,200 20,650 18,200
Office equipment
Fax machines...... 430 168 200 72,240 86,000 72,240
Copiers................ 545 317 288 172,765 156,960 156,960
Telephones......... 352 125 117 44,000 41,184 41,184
Total...................... $617,64 $584,444
1. Lower of cost or market for inventory applied separately = $584,444
2.
Dec 31 Cost of Goods Sold.....................................................33,202
Merchandise Inventory......................................... 33,202
To adjust inventory cost to market.
$33,202 = $617,646 - $584,444
6-50

Part 1
(a)
Cost of goods sold 2010 2011 2012
Reported.................................... $ 655,000 $ 957,000 $ 799,000
Adjustments: 12/31/2010 error + 70,000 - 70,000
12/31/2011 error _________ - 55,000 + 55,000
Corrected.................................. $ 725,000 $ 832,000 $ 854,000
(b)
Net income 2010 2011 2012
Reported.................................... $ 225,000 $ 277,000 $ 244,000
Adjustments: 12/31/2010 error - 70,000 + 70,000
12/31/2011 error _________ + 55,000 - 55,000
Corrected.................................. $ 155,000 $ 402,000 $ 189,000
(c)
Total current assets 2010 2011 2012
Reported.................................... $1,251,000 $1,360,000 $1,200,000
Adjustments: 12/31/2010 error - 70,000
12/31/2011 error _________ + 55,000 _________
Corrected.................................. $1,181,000 $1,415,000 $1,200,000
(d)
Equity 2010 2011 2012
Reported............................................$1,387,000 $1,520,000 $1,250,000
Adjustments: 12/31/2010 error - 70,000
12/31/2011 error _________ + 55,000 _________
Corrected..........................................$1,317,000 $1,575,000 $1,250,000
Part 2
Total net income for the combined three-year period ($746,000) is not affected by
the errors. This is because these errors are "self-correcting"—that is, each
overstatement (or understatement) of net income is offset by a matching
understatement (or overstatement) in the following year.
Part 3
The overstatement of inventory by $70,000 results in an understatement of cost of
goods sold by that same amount. The $70,000 understatement of cost of goods
sold results in an overstatement of gross profit by the same amount. This
overstatement of gross profit carries through to an overstatement of net income.
6-51
Since the overstated net income is closed to equity, the final equity figure is
overstated by the amount of the inventory overstatement.
6-52
Problem 6-5BA (25 minutes)

Part 1
Number and total cost of units available for sale
6,300 units in beginning inventory @ $35............................. $ 220,500
10,500 units purchased @ $33.................................................. 346,500
13,000 units purchased @ $32.................................................. 416,000
12,000 units purchased @ $29.................................................. 348,000
15,500 units purchased @ $26.................................................. 403,000
57,300 units available for sale.................................................. $1,734,000
0
Part 2
a. FIFO periodic
Total cost of 57,300 units available for sale............. $1,734,000
Less ending inventory on a FIFO basis
15,500 units @ $26................................................... $403,000
1,000 units @ $29................................................... 29,000 432,000
Cost of units sold....................................................... $1,302,000
b. LIFO periodic
Less ending inventory on a LIFO basis
6,300 beg. inv. units @ $35..................................... $220,500
10,200 units @ $33..................................................... 336,600 557,100
Cost of units sold....................................................... $1,176,900
c. Weighted average periodic

Less ending inventory at weighted average cost
($1,734,000/57,300) x 16,500 units.......................... 499,319*
Cost of units sold....................................................... $1,234,681*
*Amount can slightly vary due to differences in rounding.
6-53
Problem 6-6BA (30 minutes)

Part 1
RIKKERS CORP.
Income Statements Comparing FIFO, LIFO, and Weighted Average
For Year Ended December 31, 2011
Weighted
FIFO LIFO Average
Sales............................................................... $245,000 $245,000 $245,000
Cost of goods sold
Inventory, Dec. 31, 2010.............................. 42,920 42,920 42,920
Cost of purchases....................................... 161,900 161,900 161,900
Cost of goods available for sale................ 204,820 204,820 204,820
Inventory, Dec. 31, 2011.............................. 54,560 48,820 51,512 *
Cost of goods sold...................................... 150,260 156,000 153,308 *
Gross profit.................................................... 94,740 89,000 91,692 *
Expenses........................................................ 35,000 35,000 35,000
Income before taxes...................................... 59,740 54,000 56,692 *
Income taxes expense.................................. 14,935 13,500 14,173 *
Net income..................................................... $ 44,805 $ 40,500 $ 42,519 *
Weighted
Supporting calculations: FIFO LIFO Average
Dec. 31, 2010, inventory (740 x $58)................... $ 42,920 $ 42,920 $ 42,920
Purchases
700 x $59 = $41,300
600 x $61 = 36,600
500 x $64 = 32,000
800 x $65 = 52,000 $161,900 $161,900 $161,900
Dec. 31, 2011, inventory
FIFO: 800 x $65 = $52,000
40 x $64 = 2,560 $ 54,560
LIFO: 740 x $58 = $42,920

100 x $59 = 5,900 $ 48,820
W.A.: ($204,820/3,340) x 840 $ 51,512*

6-54
Problem 6-6BA (Concluded)

Part 2
If Rikkers Corp. had been experiencing decreasing costs in the acquisition

of inventory, we would observe the opposite results in our comparisons.
Specifically, LIFO would have resulted in a higher ending inventory, lower
cost of goods sold, higher gross profit, and higher net income. FIFO would
have resulted in a lower ending inventory, higher cost of goods sold, lower
gross profit, and lower net income.
Part 3
Advantages:
LIFO: Assuming a trend of increasing costs, the advantage of using LIFO is
that the lower net income will result in a lower tax obligation (tax deferral).
Also, LIFO is likely to better match current costs against revenues.
FIFO: The advantage of using FIFO is that the inventory figure reported on
the balance sheet is likely similar to the current replacement cost.
Disadvantages:
LIFO: Assuming a trend of increasing costs, the disadvantage of using
LIFO is the inventory figure, which is also reported on the income
statement, will likely be understated in comparison to the current
replacement costs.
FIFO: The disadvantage of using FIFO is that it will produce a greater tax
obligation for the current period as a result of a higher reported net
income.
6-55
Problem 6-7BB (25 minutes)

Part 1
SATURN CO.
Estimated Inventory
December 31
At Cost At Retail
Goods available for sale:
Beginning inventory.............................................. $ 81,670 $114,610
Cost of goods purchased...................................... 492,250 751,730
Goods available for sale........................................ $573,920 $866,340
Sales.......................................................................... 786,120
Less: Sales returns.................................................. (4,480)
Net sales................................................................... 781,640
Ending inventory at retail ($866,340 - $781,640)... $ 84,700
Cost ratio: $573,920/$866,340 = 0.66 or 66%
Ending inventory at cost ($84,700 x 66%).....................

$ 55,902
Part 2
Estimated physical inventory at cost: $78,550 x 66% = $51,843
SATURN CO.
Inventory Shortage
December 31
At Cost At Retail
Estimated inventory (from part 1)............................. $55,902 $84,700

Physical inventory (given)......................................... 51,843 78,550
Inventory shortage..................................................... $ 4,059 $ 6,150
6-56
Problem 6-8BB (25 minutes)
ERNST EQUIPMENT CO.

Estimated Inventory at March 31
At Cost At Retail
Inventory, January 1....................................... $ 752,880
Cost of goods purchased............................... 2,159,630
Goods available for sale................................. 2,912,510
Sales................................................................. $3,710,250
Less sales returns........................................... (74,200)
Net sales........................................................... $3,636,050
[$3,636,050 x (1 - 30%)].............................. (2,545,235)
Estimated March 31 inventory.......................... $ 367,275
SERIAL PROBLEM — SP 6
Serial Problem — SP 6, Business Solutions (20 minutes)
Part A
1.
Per Unit Total Total
Inventory Items Units Cost Market Cost Market
Office productivity............ 3 $ 76 $ 74 $228 $222
Desktop publishing.......... 2 103 100 206 200
Accounting........................ 3 90 96 270 288
Totals................................. $704 $710
Assuming LCM is applied to the “whole of inventory,” the $704 total cost
of inventory is less than the $710 total market value. Thus, the company
would not adjust the currently reported inventory value of $704.
6-57
Serial Problem — SP 6, Business Solutions (concluded)
2.
Inventory Items Units Cost Market Cost Market To Items
Office productivity........ 3 $ 76 $ 74 $228 $222 $222
Desktop publishing...... 2 103 100 206 200 200
Accounting.................... 3 90 96 270 288 270
$704 $710 $692
Assuming LCM is applied to the “items of inventory,” the $692 market

value (per items) is less than the $704 total cost of inventory. Thus, the
company must adjust the currently reported inventory value from $704 to
the LCM value of $692.
Part B
1. Ratio computations for the three months ended March 31, 2012:
Inventory Turnover = Cost of Goods Sold / Average Inventory

= $14,052 / [($0 + $704)/2]
= 40 times (Because this is the first period of carrying
inventory, it is acceptable to substitute ending inventory for
average inventory. This would yield a turnover of 20 times.)
Days’ Sales in Inventory = (Ending Inventory/Cost of Goods Sold) x 365

= ($704 / $14,052) x 365 = 18.3 days
2. Business Solutions outperforms its competitors on both ratios. Its

inventory turnover is 40 (or 20) times versus the competitors’ 15 times.
Also, its days’ sales in inventory is 18.3 days versus the competitors’ 25
days. Thus, Business Solutions appears to be successfully managing its
inventory.
6-58
Reporting in Action — BTN 6-1
($ thousands for all parts)

1. Ending inventories at February 27, 2010: $621,611.
Ending inventories at February 28, 2009: $682,400.
2. February 27, 2010: $621,611/$10,204,409 = 0.061 or 6.1%
February 28, 2009: $682,400/ $ 8,101,372 = 0.084 or 8.4%
3. Research In Motion’s inventories are less than a fourth of its largest

asset and more than 4 times its smallest asset as of February 27, 2010.
Although not the largest asset, merchandise inventories are an
important item for Research In Motion and should command
management’s attention.
4. Reviewing notes to its financial statements, we see Note 1 under the

subheading “inventories” that Research In Motion’s raw materials are
stated at the lower of cost and replacement cost. Work in process and
finished goods inventories are stated at the lower of cost and net
realizable value. Research In Motion uses the first-in-first-out basis to
determine cost.
5. a. Inventory turnover = Cost of sales

Average inventory
Average inventory = ($621,611 + $682,400)/2
= $652,006
Inventory turnover = $8,368,958 / $652,006
= 12.8 times
Ending inventory
b. Days’ sales in inventory = x 365
Cost of sales
= ($621,611/$8,368,958) x 365 = 27.1 days
6. Solution depends on the financial statement information obtained.
6-59
Comparative Analysis — BTN 6-2
($ millions)
1. Inventory turnover = Cost of sales

Average inventory
Research In Motion — current year
Inventory turnover = $8,369 = 12.8 times

($622 + $682)/2
Research In Motion — one year prior
$5,968
Inventory turnover = ($682 + $396)/2 = 11.1 times
Apple — current year

$25,683
Apple — one year prior

$24,294
6-60
Comparative Analysis (Concluded)
2. Days’ sales in inventory = Ending Inventory x 365

Costs of Goods Sold
Current year — Research In Motion’s days’ sales in inventory

$622
$8,369 x 365 = 27.1 days
One year prior —Research In Motion’s days’ sales in inventory

$682
x 365 = 41.7 days
$5,968
Two years prior—Research In Motion’s days’ sales in inventory
$396
$2,929 x 365 = 49.3 days
Current year — Apple’s days’ sales in inventory

$455
x 365 = 6.5 days
$25,683
One year prior —Apple’s days’ sales in inventory

$ 509
x 365 = 7.6 days
$24,294
Two years prior—Apple’s days’ sales in inventory

$346
x 365 = 7.7 days
$16,426
3. For all years examined here, Apple manages its inventory more
efficiently than does Research In Motion. Apple’s inventory turnover is
higher, and its days’ sales in inventory is shorter. Apple compares
favorably to (exceeds) the industry average of 10 for inventory
turnover; Research In Motion’s inventory turnover slightly exceeds the
industry average.
6-61
Ethics Challenge — BTN 6-3
1. Profit Margin: In an economic environment of rising costs, the use of

FIFO results in a lower cost of goods sold than LIFO. If cost of goods
sold is lower, then net income will be higher. A higher net income will
improve the profit margin ratio, which is calculated as net income
divided by net sales.
Current Ratio: With rising costs, FIFO results in the most recent, higher
costs being reflected in ending inventory. This means that the balance
sheet FIFO inventory figure will be larger than under LIFO. In the
numerator of the current ratio, inventory is included as part of the
current asset total. A larger inventory from FIFO results in a larger
numerator and, therefore, a larger current ratio than under LIFO.
2. First, it is true that managers have discretion in choosing an inventory

costing method. It appears, however, that Golf Mart’s owner does not
understand that changing methods can only be done very selectively
over time. A change in method must be justified by management for
improving the financial reporting of the company.
Second, the consistency concept does not allow frequent changes in

inventory costing methods by management. If Golf Mart’s owner can
justify the method change as improving the financial reports of the
company, then the owner’s action is ethical. However, the owner must
realize that changing methods can only be an infrequent occurrence
given that consistency in financial reporting is required.
Third, the full disclosure principle requires the owner to disclose to the
bank that the company has implemented a change in inventory costing
method from LIFO to FIFO.
Finally, if LIFO is currently being used for tax reporting, then the tax
reporting method must also change due to the LIFO Conformity Rule—
which demands that if LIFO is used for tax reporting, it must be used
for financial reporting.
6-62
Communicating in Practice — BTN 6-4
[Note: An acceptable memorandum format should be used.]
The body of the memo would likely recommend use of the LIFO method for
this start-up business. The memo should explain that this would allow for
the matching of the most recent (higher) costs against revenue through
cost of goods sold. It should further explain that this would result in a
lower net income (and taxable income) and, therefore, lower tax (cash)
payments. The justification for this method is a better matching of current
costs against revenue to more fairly reflect the results of operation. A
statement could be made that the actual physical flow of goods does not
dictate the inventory method a business uses.
Taking It to the Net — BTN 6-5
1. Polaris manufactures off-road vehicles such as all terrain vehicles

(ATV) and snowmobiles, and on-road vehicles such as motorcycles.
2. Its summary of significant accounting policies (Note 1) reports:
“Inventories are stated at the lower of cost (first-in, first-out method) or
market.”
3. Its gross margin for 2009 is ($ thousands)
Sales..................................................................... $1,565,887
Cost of sales........................................................ (1,172,668)
Gross margin....................................................... $ 393,219
Gross margin ratio is: $393,219 / $1,565,887 = 0.251 or 25.1%
Comment: Its gross margin ratio is slightly lower (less favorable) than
the industry average gross margin ratio of 27%.
4. 2009 Inventory turnover* =

$1,172,668 / [($179,315 + $222,312)/2] = 5.8 times
2009 Days’ sales in inventory* =

($179,315 / $1,172,668) x 365 = 56 days
* $ thousands
6-63
Comment: Its inventory turnover is lower (less favorable) than the

industry average turnover of 5.9. Similarly, its days’ sales in inventory
is greater (less favorable) than the industry norm of 55 days.
6-64
Teamwork in Action — BTN 6-6
Concepts and procedures to illustrate in expert presentation:
Specific Identification Expert:
(a) and (b) Concept:

Purchases are always recorded at the actual specific costs. The specific
identification cost flow assumption requires units sold be assigned their
actual cost. Total cost of goods sold is tallied based on these individual
cost assignments. The new inventory balance is perpetually determined to
be the amount after sales at actual cost is deducted.
(a) and (b) Procedures:

Jan. 1 50 @ $10 = $ 500
Jan.10 30 @ $10 = $ 300 20 @ $10 = $ 200
Jan.14 150 @ $12 = $1,800 20 @ $10 = $ 200

150 @ $12 = 1,800
$2,000
Feb.15 100 @ $ 12 = $1,200 20 @ $10 = $ 200
50 @ $12 = 600
$ 800
Apr.30 200 @ $15 = $3,000 20 @ $10 = $ 200
50 @ $12 = 600
200 @ $15 = 3,000
$3,800
Sept 26 300 @ $20 = $6,000 20 @ $10 = $ 200
50 @ $12 = 600
200 @ $15 = 3,000
300 @ $20 = 6,000
$9,800
Oct. 5 100 @ $ 15 = $1,500 20 @ $10= $ 200
250 @ $ 20 = $5,000 50 @ $12 = 600
100 @ $15 = 1,500
50 @ $20 = 1,000
_____
$8,000 $3,300
6-65
Teamwork in Action (Continued)
LIFO Expert:

Purchases are always recorded at actual costs. The LIFO cost flow
assumption requires (i) units sold be assigned the most recent cost—total
cost of goods sold is tallied based on these individual cost assignments,
and (ii) that the inventory balance be perpetually determined to be the
amount after goods sold (using the most recent costs) are deducted.

Jan. 1 50 @ $10 = $ 500
Jan.10 30 @ $10 = $ 300 20 @ $10 = $ 200
Jan.14 150 @ $12 = $1,800 20 @ $10 = $ 200

150 @ $12 = 1,800
$ 2,000
Feb.15 100 @ $12 = $ 1,200 20 @ $10 = $ 200
50 @ $12 = 600
$ 800
Apr.30 200 @ $15 =$3,000 20 @ $10 = $ 200
50 @ $12 = 600
200 @ $15 = 3,000
$ 3,800
Sept 26 300 @ $20 = $6,000 20 @ $10 = $ 200
50 @ $12 = 600
200 @ $15 = 3,000
300 @ $20 = 6,000
$ 9,800
Oct. 5 300 @ $20 = $ 6,000 20 @ $10 = $ 200
50 @ $15 = $ 750 50 @ $12 = 600
______ 150 @ $15 = 2,250
$ 8,250 $ 3,050
6-66
FIFO Expert:

Purchases are always recorded at actual costs. The FIFO cost flow
assumption requires units sold be assigned the first (earliest) cost of
purchases. Total cost of goods sold is tallied based on these individual
cost assignments. The inventory balance is perpetually determined to be
the amount after deducting goods sold using the earliest costs.

Jan. 1 50 @ $10 = $ 500
Jan.10 30 @ $10 = $ 300 20 @ $10 = $ 200
Jan.14 150 @ $12 = $1,800 20 @ $10 = $ 200

150 @ $12 = 1,800
$ 2,000
Feb.15 20 @ $ 10 = $ 200
80 @ $ 12 = 960 70 @ $12 = $ 840
Apr.30 200 @ $15 = $3,000 70 @ $12 = $ 840

200 @ $15 = 3,000
$ 3,840
Sept 26 300 @ $20 = $6,000 70 @ $12 = $ 840
200 @ $15 = 3,000
300 @ $20 = 6,000
$ 9,840
Oct. 5 70 @ $12 = $ 840
200 @ 15 = 3,000
220 @ $20 = $ 4,400
80 @ 20 = 1,600
______ ______
$ 6,900 $ 4,400
6-67
Weighted Average Expert:

Purchases are always recorded at actual costs. The Weighted Average
cost flow assumption requires units sold be assigned a cost based on
running weighted average cost per unit in the inventory balance. This
requires the computation of a new weighted average cost per unit after
each purchase. The total cost of goods sold is tallied based on cost
assignments. The new inventory balance is perpetually determined to be
the residual amount after goods sold are deducted using this weighted
average cost.

Jan. 1 50 @ $10 = $ 500
Jan.10 30 @ $10 = $ 300 20 @ $10 = $ 200
Jan.14 150 @ $12 = $1,800 170 @ $11.7647 = $2,000

(200+1,800) / (20+150)
Feb.15 100 @ $11.7647 = $1,176* 70 @ $11.7647 = $ 824*
Apr.30 200 @ $15 = $3,000 270 @ $14.163* = $3,824*

(824+3,000) / (70+200)
Sept 26 300 @ $20 = $6,000 570 @ $17.235* = $9,824*
(3,824+6,000)/(270+300)
Oct. 5 350 @ $17.235 = $6,032 220 @ $17.235* = $3,792**
_____
$7,508
* rounded ** adjusted for rounding
6-68
Teamwork in Action (Concluded)

(c) Cost Flow versus Actual Physical Flow
Typical comments experts may express in response to (c):
 Physical flow of goods can be affected by the type of products in
inventory and/or the way inventory is stored and/or displayed.
 Actual physical flow of goods is not relevant in selecting an acceptable
method of accounting for inventory. Any one of the four methods is
acceptable. The method chosen should be consistently applied.
More Specific Expert Comments to (c):

Specific Identification--Always reflects the actual cost flow. Electronic
scanning has increased the ability to use this method in businesses that sell
homogeneous goods.
FIFO--Most businesses try to move their older or earlier acquired inventory
first, particularly if they sell perishable goods. Therefore, FIFO will frequently
reflect the physical flow of goods.
LIFO--Few actually sell their most recently acquired inventory first. This
could follow actual physical flow if inventory is stocked in a manner that
requires accessing most recent cost first.
Weighted Average--This cost is rarely the actual cost flow. This would
require the mixing or combining of units on hand. This is possible for
inventory such as oil but it still unlikely that the actual blending would be as
complete as the averaging of costs.
(d) Impact of Methods

Typical comments experts may express in response to (d):
In a period of rising prices LIFO will generally result in the highest cost of
goods sold and therefore the lowest net income and lowest tax. However,
LIFO must be used for financial reporting if it is used for tax purposes.
In a period of rising prices FIFO will generally result in the lowest cost of
goods sold and therefore the highest net income and highest tax.
Weighted Average will usually result in a reported net income and tax
consequences somewhere in between LIFO and FIFO.
Specific Identification will result in a cost of goods sold, net income and tax
expense dependent on whether the actual cost of units sold were the higher
or lower priced items.
(e) Valuation
Typical comments experts may express in response to (e):
FIFO tends to value ending inventory closest to replacement cost whereas
LIFO does not. Weighted average tends to value inventory between old and
new market values, and specific identification depends on whether the items
remaining in inventory have costs similar to current replacement costs.
6-69
Entrepreneurial Decision — BTN 6-7

Part 1
(a) Current inventory turnover = $1,200,000 / $300,000 = 4 times
Current days’ sales in inventory = ($300,000/$1,200,000) x 365

= 91.25 days
(b) Proposed inventory turnover = $1,200,000 / $150,000 = 8 times
Proposed days’ sales in inventory = ($150,000 / $1,200,000) x 365

= 45.63 days
*Ratio definitions:
Cost of goods sold
Inventory turnover = Average inventory
Ending inventory
Days’ sales in inventory = Cost of goods sold x 365
Part 2
The owner’s proposal for his company would yield a much improved
inventory turnover of 8 vis-à-vis the current turnover of 4. On the
downside, its days’ sales in inventory would dramatically decline from
91 days to 46 days. Assuming an inventory buffer of 46 days is
sufficient, then the proposal should be implemented.
We need to recognize that the major concern with this proposal is with
the company’s confidence in both maintaining its current sales level and
with not losing or alienating its current and future customers due to
delays in acquiring merchandise. Assuming the company’s predictions
are reasonable, we need to focus on the customer concern. That is, we
need to be certain that the company can continue to satisfactorily serve
customers with a 46-day buffer in inventory. If not, then current and
future sales could suffer to an extent that would outweigh the benefit of
slashing inventory.
Hitting the Road — BTN 6-8
There is no formal solution for this field activity. The required solution
does allow students to see the relevance of studying merchandise
activities and inventory accounting.
6-70
Global Decision — BTN 6-9
1. Inventory turnover = Cost of sales

Average inventory
Current year — Nokia (EUR Millions):
Inventory turnover = 27,720 = 12.6 times

(1,865 + 2,533) / 2
One year prior — Nokia (EUR Millions):
33,337
Inventory turnover = (2,533 + 2,876) / 2 = 12.3 times
Days’ sales in inventory = Ending Inventory x 365

Costs of Goods Sold
Current year —Nokia days’ sales in inventory (EUR Millions):

1,865
27,720 x 365 = 24.6 days
One year prior—Nokia days’ sales in inventory (EUR Millions):

2,533
x 365 = 27.7 days
33,337
Inventory Turnover Days’ Sales in Inventory

Company Current Prior Year Current Prior Year
Nokia..................................................
12.6 12.3 24.6 27.7
Research In Motion.............................
12.8 11.1 27.1 41.7
Apple.......................................................
53.3 56.8 6.5 7.6
Note: Computations for Research In Motion and Apple are in BTN 6-2.
2. For the current year, Nokia and Research In Motion have fairly
comparable inventory turnover and days’ sales in inventory. For the
prior year, Nokia outperformed Research In Motion in both inventory
turnover and days sales in inventory. Apple manages its inventory
more efficiently than both Nokia and Research In Motion for both years.
6-71

Inventories and Cost of Sales: Questions

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Chapter 06 - Inventories and Cost of Sales

Alternate solution format

FIFO: 110 @ $6.60 = $ 726

Quick Study 6-2 (10 minutes)

Date Goods Purchased Cost of Goods Sold Inventory Balance

Alternate solution format

Quick Study 6-3 (10 minutes)

Date Goods Purchased Cost of Goods Sold Inventory Balance

1/26 360 @ $6.194 = $2,230* 155 @ $6.194 = $ 960*

Alternate solution format

$3,190/515 = $6.194 (rounded) weighted average cost per unit

155 units @ $6.194 = $ 960 Ending inventory cost (rounded)

Quick Study 6-4 (10 minutes)

Beginning inventory..................................... 10 units @ $50 $ 500

Quick Study 6-5 (10 minutes)

12/15 10 @ $ 9 12 @ $10 = $120

Quick Study 6-6 (10 minutes)

12/15 18 @ $10 = $180 10 @ $ 9

12/21 15 @ $12 = $180 10 @ $ 9

Quick Study 6-7 (10 minutes)

12/15 18 @ $9.667 =$174 12 @ $9.667 = $116

Quick Study 6-8 (10 minutes)

(3 units x $9) + (9 units x $10) + (15 units x $12) = $297.

Quick Study 6-9 (10 minutes)

Quick Study 6-10 (10 minutes)

Quick Study 6-11 (5 minutes)

Quick Study 6-12 (20 minutes)

Per Unit Total Total LCM Applied

LCM applied to each product ....................................................... $15,990

Quick Study 6-13 (15 minutes)

a. Overstates 2011 cost of goods sold.

Quick Study 6-14 (10 minutes)

Inventory turnover = Cost of goods sold/Average merchandise inventory

Days’ sales in inventory = Ending Inventory/Costs of goods sold x 365

Quick Study 6-15A (10 minutes)

Quick Study 6-16A (10 minutes)

Quick Study 6-17A (10 minutes)

Weighted Average ($3,190/ 515 = $6.194* cost per unit)

Quick Study 6-18A (10 minutes)

Quick Study 6-19A (10 minutes)

Quick Study 6-20A (10 minutes)

Weighted Average ($470 / 45 = $10.444 cost per unit)*

Quick Study 6-21A (10 minutes)

Quick Study 6-22B (15 minutes)

Goods available for sale

Quick Study 6-23 (10 minutes)

c. U.S. GAAP prohibits any later increase in the recorded value of

1. The consignor is Jolie Company. The consignee is China Company. The

2. The title will pass at “destination” which is China Company’s receiving

Exercise 6-2 (10 minutes)

Cost of inventory (estate’s contents)

Exercise 6-3 (30 minutes)

(90 x $5.00) + (80 x $6.00) + (55 x $7.00)......... $1,315

$2,820 - $1,315.................................................. $1,505

Exercise 6-3 (Continued)

b. Weighted average perpetual

Date Goods Purchased Cost of Goods Sold Inventory Balance

3/25 145 @ $6.214 = $ 901* 135 @ $6.214 = $ 839*

Date Goods Purchased Cost of Goods Sold Inventory Balance

3/25 145 @ $6.00 = $ 870 60 @ $7.00

3/30 90 @ $5.00 60 @ $7.00

Exercise 6-3 (Concluded)

(90 x $7.00) + (60 x $7.00) + (85 x $6.00)......................... $1,560