BRIEF EXERCISES

BRIEF EXERCISE 6-2

$95,000 Count
(7,500)Held on consignment
(1,000)Sold
5,000August 28 shipment plus freight, FOB shipping point
($4,750 + $250)
$91,500 Correct inventory cost
LO 1 BT: AP Difficulty: M Time: 5 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 6-3

(a) Cost of Goods Available for Sale
3 electric pianos @ $600 = $1,800
2 electric pianos @ $475 = 950
$2,750

Ending Inventory Cost of Goods Sold

(a) Specific 2 pianos @ $600 = $1,200 $2,750 – $1,675 = $1,075

Identification 1 piano @ $475 = 475
$1,675 (Proof: 1 piano @ $600 +
1 piano @ $475 = $1,075)

(b) If management wished higher net income, it could have sold two pianos from the
last shipment, that had a lower cost. If it wished lower net income, it could have
sold two of the first pianos purchased.
LO 2 BT: AP Difficulty: M Time: 10 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
BRIEF EXERCISE 6-4
[1] $450 ÷ 30 = $15
[2] 15 (from April 1)
[3] $18 (from April 1)
[4] 30 (from April 6)
[5] $15 (from April 6)
[6] (15 @ $18) + (30 @ $15) = $720
[7] $18 (from April 1)
[8] $15 (from April 6)
[9] (15 @ $18) + (10 @ $15) = $420
[10] 15 + 30 – 15 – 10 = 20
[11] $15
[12] 20 @ $15 = $300
[13] $144 ÷ 12 = $12
[14] 20
[15] $15
[16] 12
[17] $12
[18] (20 @ $15) + (12 @ $12) = $444

LO 2 BT: AN Difficulty: C Time: 15 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
BRIEF EXERCISE 6-5

[1] $200 ($6,000 ÷ 30)

[2] 45 (15 + 30)
[3] $8,700 ($2,700 + $6,000)
[4] $193.3333 ($8,700 (from [3]) ÷ 45 (from [2]))
[5] $193.33 (from [4])
[6] 25 x $193.3333 = $4,833.33
[7] 45 (from [2]) – 25 sold = 20
[8] $8,700.00 (from [3]) – $4,833.33 (from [6]) = $3,866.67
[9] $3,866.67 (from [8]) ÷ 20 (from [7]) = $193.3333 rounded to equal [4].
Notice how the average cost does not change after a sale.
[10] $2,460 ÷ $205 = 12
[11] 20 (from [7]) + 12 (from [10]) = 32
[12] $3,866.67 (from [8]) + $2,460.00 = $6,326.67
[13] $6,326.67 (from [12]) ÷ 32 (from [11]) = $197.708 rounded to $197.71

LO 2 BT: AN Difficulty: C Time: 15 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 6-8

Total assets in the statement of financial position will be overstated by the amount that
ending inventory is overstated, $25,000. When the purchase of inventory was recorded,
an account payable would have been created, so total liabilities will also be overstated by
$25,000 (assuming the “supplier” was not paid). Shareholders’ equity will not be affected.

LO 4 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 6-10

(a)
Inventory Categories
Cost NRV
LCNRV
Desktops $347,000 $326,000 $326,000
Tablets and readers 168,700 224,000 168,700
Laptops 221,020 285,000 221,020
Accessories and parts 97,400 94,300 94,300
Total valuation $834,120 $929,300 $810,020

The lower of cost and net realizable value is $810,020.

(b)
Cost of Goods Sold ...................................................................... 24,100
 Inventory ........................................................................... 24,100
$834,120 – $810,020 = $24,100

LO 5 BT: AP Difficulty: M Time: 10 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 6-12

(a)
$7,747.1
Inventory Turnover (2015) = 4.6 times
($1,764.5 + $1,623.8) ÷ 2

365
Days in Inventory (2015) = 79 days
4.6

$8,033.2
Inventory Turnover (2014) = 5.2 times
($1,623.8 + $1,481.0) ÷ 2

365
Days in Inventory (2014) = 70 days
5.2

(b) The inventory management deteriorated in 2015 as evidenced by the increase in

number of days in inventory from 70 days in 2014 to 79 days in 2015. This was
corroborated by the declining inventory turnover. This deterioration signifies that it
took longer to sell the inventory in 2015.

LO 5 BT: AN Difficulty: M Time: 10 min. AACSB: Analytic CPA: cpa-t001 cpa-t005 CM: Reporting and Finance
 EXERCISES

EXERCISE 6-6

(a) (1) FIFO

Date Purchases Cost of Goods Sold Balance

June 1 Beginning inventory 1,500 @ $5 = $ 7,500
12 2,300 @ $6 = $13,800 1,500 @ $5
2,300 @ $6 =
21,300
15 1,500 @ $5
1,000 @ $6 = $13,500 1,300 @ $6 =
7,800
16 4,500 @ $7 = 31,500 1,300 @ $6
4,500 @ $7 = 39,300
23 1,500 @ $8 = 12,000 1,300 @ $6
4,500 @ $7
1,500 @ $8 = 51,300
27 1,300 @ $6 100 @ $7
4,400 @ $7 = 38,600 1,500 @ $8 = 12,700
Total $57,300 $52,100 $12,700

Check: $52,100 + $12,700 = $64,800 ($7,500 + $57,300)

(a) (2) Average cost

Note: Unrounded numbers have been used in the average cost calculations, although the
numbers have been rounded to the nearest cent for presentation purposes. Because of
this, some amounts may not appear to multiply exactly because of the rounding in the
presentation.

Date Purchases Cost of Goods Sold Balance

June 1 Beginning inventory 1,500 @ $5.00 = $ 7,500.00
12 2,300 @ $6 = $13,800.00 3,800 @ $5.61 = 21,300.00
15 2,500 @ $5.61 = $14,013.16 1,300 @ $5.61 = 7,286.84
16 4,500 @ $7 = 31,500.00 5,800 @ $6.69 = 38,786.84
23 1,500 @ $8 = 12,000.00 7,300 @ $6.96 = 50,786.84
27 5,700 @ $6.96 = 39,655.48 1,600 @ $6.96 = 11,131.36
Total $57,300.00 $53,668.64 $11,131.36

Check: $53,668.64 + $11,131.36 = $64,800 ($7,500 + $57,300)

(b) The average cost formula results in a higher cost of goods sold because the cost
of inventory is rising.
EXERCISE 6-6 (CONTINUED)
(c) The FIFO cost formula results in a higher net income because it produces the lower
cost of goods sold when prices are rising, as the lower costs from earlier units are
assigned to cost of goods sold, while the higher costs are assigned to ending
inventory.

(d) The FIFO cost formula results in a higher ending inventory because the cost of
inventory is rising and these higher unit prices are used to determine ending
inventory.

(e) Both cost formulas result in the same pre-tax cash flow. The cost formulas do not
change the pre-tax cash flows of a company.
LO 2,3 BT: AN Difficulty: M Time: 30 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
EXERCISE 6-10
(a)
Units Cost/Unit Total Cost NRV/Unit Total NRV LCNRV
Cameras:
Sony 4 $175 $ 700 $160 $ 640 $ 640
Canon 8 150 1,200 152 1,216 1,200
Light Meters:
Gossen 12 135 1,620 139 1,668 1,620
Sekonic 10 115 1,150 110 1,100 1,100
Total $4,670 $4,624 $4,560

(b) Dec. 31 Cost of Goods Sold ($4,670 – $4,560) ............................... 110

Inventory .................................................................... 110

(c) Dec. 31 Cost of Goods Sold (2 × $150)........................................... 300

Inventory .................................................................... 300
LO 5 BT: AP Difficulty: M Time: 15 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
*EXERCISE 6-13

(a),(b)(1)
FIFO

Beginning inventory ($2,000 ×$20) ....................................... $ 40,000

Purchases
Oct. 9 (5,000 × $21)..................................................... $105,000
Oct. 12 (4,000 × $20.50).............................................. 82,000
Oct. 25 (4,000 × $20.80).............................................. 83,200 270,200
Cost of goods available for sale (15,000 units) ...................... 310,200
Less: Ending inventory (4,000 × $20.80) ............................... 83,200
Cost of goods sold (11,000 units)........................................... $ 227,000

(a),(b)(2)
Average cost

Beginning inventory ($2,000 ×$20) ....................................... $ 40,000

Purchases
Oct. 9 (5,000 × $21)..................................................... $105,000
Oct. 12 (4,000 × $20.50).............................................. 82,000
Oct. 25 (4,000 × $20.80).............................................. 83,200 270,200
Cost of goods available for sale (15,000 units) ...................... 310,200
Less: Ending inventory (4,000 × $20.68*) ............................. 82,720
Cost of goods sold (11,000 units)........................................... $ 227,480

*$310,200 ÷ 15,000 units = $20.68/unit

(c) FIFO would result in a slightly higher gross profit, since its cost of goods sold is lower.

LO 3,6 BT: AP Difficulty: M Time: 15 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
*EXERCISE 6-15
(a) (1) FIFO

Date Purchases Sales Balance

Nov. 1 Beginning inventory (30 @ $295) = $8,850

5 25 @ $300 = $7,500 (30 @ $295) +

(25 @ $300) = $16,350

12 (30 @ $295) +
(12 @ $300) = $12,450 (13 @ $300) = $3,900

19 40 @ $305 = $12,200 (13 @ $300) +

(40 @ $305) = $16,100

22 (13 @ $300) +
(37 @ $305) = $15,185 (3 @ $305) = $915

25 30 @ $310 = $9,300 (3 @ $305) +

(30 @ $310) = $10,215
Cost of Goods Sold: $12,450 + $15,185 = $27,635
Ending Inventory: $10,215

Check: $27,635 + $10,215 = $37,850 ($8,850 + $7,500 + $12,200 + $9,300)

*EXERCISE 6-15 (CONTINUED)

(a) (2) Average cost

Note: Unrounded numbers have been used in the average cost calculations,
although the numbers have been rounded to the nearest cent for presentation
purposes. Because of this, some amounts may not appear to multiply exactly
because of the rounding in the presentation.

Date Purchases Sales Balance

Nov. 1 Beginning inventory 30 @ $295 = $8,850.00

5 25 @ $300 = $7,500 55 @ $297.27 = $16,350.00

12 42 @ $297.27 = $12,485.45 13 @ $297.27 = $3,864.55

19 40 @ $305 = $12,200 53 @ $303.10 = $16,064.55

22 50 @ $303.10 = $15,155.23 3 @ $303.10 = $909.31

25 30 @ $310 = $9,300 33 @ $309.37 = $10,209.31

Cost of Goods Sold: $12,485.45 + $15,155.24 = $27,640.69

Ending Inventory: $10,209.31

Check: $27,640.69 + $10,209.31 = $37,850 ($8,850 + $7,500 + $12,200 + $9,300)

EXERCISE 6-15 (CONTINUED)
(b) FIFO
Beginning inventory (30 × $295) ....................................................... $ 8,850
Purchases
Nov. 5 (25 × $300) ........................................................................ $ 7,500
Nov. 19 (40 × $305) ...................................................................... 12,200
Nov. 25 (30 × $310) ...................................................................... 9,300 29,000
Cost of goods available for sale (125 units) ...................................... 37,850
Less: Ending inventory (3 × $305) + (30 × $310) .............................. 10,215
Cost of goods sold............................................................................. $27,635

AVERAGE COST
Cost of goods available for sale (125 units) ...................................... $37,850.00
Less: Ending inventory (33 × $302.801) ............................................ 9,992.40
Cost of goods sold............................................................................. $27,857.60
1 $37,850 ÷ 125 = $302.80

LO 2,6 BT: AP Difficulty: M Time: 40 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
 PROBLEMS

PROBLEM 6-2A

(a)

Cost of Goods Sold Ending Inventory

Sales
Cost/ price/ Cost/
Unit Unit Unit
Model VIN # $ $ Model VIN # $

Apr. 8 Focus C81362 24,000 26,000 Apr. 1 F-150 F1883 25,000

Mustang G62313 29,000 32,000 12 Mustang G71811 30,000
18 Mustang G71891 28,000 33,000 Flex X4214 31,000
F-150 F1921 29,000 32,500 Flex X4212 30,000
Flex X3892 31,000 34,000 23 Focus C81528 27,000
Escape E21202 29,000 32,000 Escape E28268 30,000
170,000 189,500 173,000

(b) Gross profit = $189,500 – $170,000

= $19,500

(c) The specific identification formula is likely the most appropriate formula for Dean’s Sales
Ltd. because the vehicles are large dollar value items that are specifically identifiable by
vehicle identification number.

LO 2 BT: AP Difficulty: M Time: 30 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
 PROBLEM 6-3A

(a) (1) FIFO

Date Description Purchases Cost of Goods Sold Ending Inventory

Purchase 120 $100 $12,000 120 $100 $12,000

May 1

3 Sale 80 $100 $ 8,000 040 100 4,000

40 100
8 Purchase 100 110 11,000 100 110 15,000
40 100
13 Sale 40 110 8,400 60 110 6,600
60 110
15 Purchase 60 115 6,900 60 115 13,500

20 Sale 60 110 6,600 60 115 6,900

27 Sale 40 115 4,600 20 115 2,300

31 Balance 280 $29,900 260 $27,600 20 $ 2,300

Check: $27,600 + $2,300 = $29,900

 PROBLEM 6-3A (CONTINUED)

(a) (2) Average cost

Note: Unrounded numbers have been used in the average cost calculations, although the
numbers have been rounded to the nearest cent for presentation purposes. Because of this,
some amounts may not appear to multiply exactly because of the rounding in the presentation.

Date Description Purchases Cost of Goods Sold Ending Inventory

May 1 Purchase 120 $100.00 $12,000.00 120 $100.00 $12,000.00

3 Sale 80 $100.00 $8,000.00 40 100.00 4,000.00

8 Purchase 100 110.00 11,000.00 140 107.14 15,000.00

13 Sale 80 107.14 8,571.43 60 107.14 6,428.57

15 Purchase 60 115.00 6,900.00 120 111.07 13,328.57

20 Sale 60 111.07 6,664.29 60 111.07 6,664.29

27 Sale 40 111.07 4,442.86 20 111.07 2,221.43

31 Balance 280 $29,900.00 260 $27,678.57 20 $2,221.43

Check: $27,678.57 + $2,221.43 = $29,900.00

(b) Save-Mart should consider the physical flow of its goods, the amount to be
reported on the statement of financial position, and the nature and use of its goods.

(c) The FIFO cost formula produces a slightly higher gross profit and net income as
results in cost of goods sold being lower during periods of rising prices.
PROBLEM 6-3A (CONTINUED)

(d) FIFO produces a higher ending inventory during periods of rising prices.

(e) The pre-tax cash flows are the same no matter which cost formula is used.

LO 2,3 BT: AP Difficulty: M Time: 35 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
 PROBLEM 6-8A

(a) (INCORRECT)
KMETA INC.
Income Statement

Year Ended July 31

2018 2017 2016
Sales $340,000 $320,000 $300,000
Cost of goods sold 233,000 220,000 209,000
Gross profit 107,000 100,000 91,000
Operating expenses 68,000 64,000 64,000
Income before income tax $ 39,000 $ 36,000 $ 27,000

Statement of financial position:

Inventory $40,000 $40,000 $24,000

(CORRECT)
KMETA INC.
Income Statement

................................................................................... Year Ended July 31

2018 2017 2016
Sales $340,000 $320,000 $300,000
Cost of goods sold 233,000 229,0002 200,0001
Gross profit 107,000 91,000 100,000
Operating expenses 68,000 64,000 64,000
Income before income tax $ 39,000 $ 27,000 $ 36,000

Statement of financial position:

Inventory $40,000 $55,0004 $33,0003
1$209,000 – $9,000 = $200,000
2$220,000 + $9,000 (2016 error) + $0* (2017 error) = $229,000
3 $24,000 + $9,000 = $33,000
4 $40,000 + $15,000 = $55,000

* - Purchases understated by $15,000 and inventory understated by $15,000, so nil effect

on cost of goods sold.
PROBLEM 6-8A (CONTINUED)

(b) Retained earnings before correction = $27,000 + $36,000 + $39,000 = $102,000

Retained earnings after correction = $36,000 + $27,000 + $39,000 = $102,000

The retained earnings balance at the end of 2018 is unaffected and remains at $102,000
because by that time, all errors have been corrected.

(c) Inventory turnover

(INCORRECT)
$233,000
Inventory turnover (2018) = 5.8 times
($40,000 + $40,000) ÷ 2

$220,000
Inventory turnover (2017) = 6.9 times
($40,000 + $24,000) ÷ 2

(CORRECT)
$233,000
Inventory turnover (2018) = 4.9 times
($40,000 + $55,000) ÷ 2

$229,000
Inventory turnover (2017) = 5.2 times
($55,000 + $33,000) ÷ 2

LO 4,5 BT: AN Difficulty: C Time: 10 min. AACSB: Analytic CPA: cpa-t001, cpa-t005
CM: Reporting and Finance
 PROBLEM 6-9A

(a)

Unit
Type of Bean Quantity Cost Total Cost NRV Total NRV LCNRV
Coffea arabica 13,000 bags $5.60 $72,800 $5.55 $72,150 $72,150
Coffea robusta 5,000 bags 3.40 17,000 3.50 17,500 17,000
$89,800 $89,650 $89,150

(b) Dec. 31 Cost of Goods Sold ($89,800 – $89,150) .......... 650

Inventory..................................................... 650

(c) Tascon’s operations involve the sale of coffee beans. The users of the financial
information are aware of the volatility of the cost of the beans due to weather
conditions in the countries where the beans are grown. Users expect and
appreciate that the lower of cost and net realizable value (LCNRV) requirement in
accounting because they know that inventory and income are not overstated.
Adjustments Tascon would need to make by applying the item-by-item approach
of the LCNRV would not be minor in amount. The item-by-item is always the more
conservative method (that is, lower inventory amount reported) because net
realizable values above cost are never included in the calculations. Under these
circumstances, Tascon should apply the LCNRV rule on an item-by-item basis for
coffee beans.

One argument in support of both types of coffee beans being considered as part
of one inventory grouping is that the accounting values that are reported under
LCNRV on an item-by-item basis are not neutral and unbiased measures of
income and inventory. Recognizing net realizable values only when they are lower
than cost, is an inconsistent treatment that can lead to distortions in reported net
income. Another argument can be made on the basis of the cost versus benefit
constraint of accounting. Although not appropriate in this case, due to the type of
inventory, the costs incurred in arriving at the net realizable value on an item-by-
item basis may far outweigh the benefit derived by applying LCNRV on an item-
by-item basis.
LO 5 BT: AN Difficulty: M Time: 20 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 6-12A
(a) Both companies have current ratios that exceed the industry average and therefore
enjoy greater liquidity. Wendy’s has a lower current ratio and higher inventory
turnover ratio than McDonald’s, so it may be more liquid than McDonald’s.
McDonald’s has a lower inventory turnover than the industry. Since inventory is a
large component of current assets, an inventory turnover ratio lower than the
industry means that more inventory is kept on hand and therefore increases current
assets and the current ratio. As a result, the higher than average current ratio may
not translate into higher liquidity.

(b) Both companies’ gross profit margin exceeds the industry average, with
McDonald’s having the better ratio of the two companies. Where the differences in
ratios is more noticeable is in the profit margin. In the case of Wendy’s, its profit
margin is well below the industry average. For McDonald’s, the profit margin is
double that of Wendy’s and well above the industry average. This indicates that
McDonald’s has succeeded in translating a higher gross profit margin into a higher
profit margin by controlling its expenses.

LO 5 BT: AN Difficulty: M Time: 20 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
 *PROBLEM 6-13A

(a) Cost Of Goods Available For Sale

Date Explanation Units Unit Cost Total Cost

Jan. 1 Beginning inventory 250 $160 $ 40,000
Mar. 15 Purchase 700 150 105,000
July 20 Purchase 500 145 72,500
Sept. 4 Purchase 450 135 60,750
Dec. 2 Purchase 100 125 12,500
Total 2,000 $290,750

(b) (1) FIFO

Step 1: Ending Inventory

Date Units Unit Cost Total Cost
Sept. 4 100 $135 $13,500
Dec. 2 100 125 12,500
200 $26,000

Step 2: Cost of Goods Sold

Cost of goods available for sale $290,750
Less: Ending inventory 26,000
Cost of goods sold $264,750

Proof: Cost of Goods Sold

Unit Total
Units Cost Cost
250 $160 $ 40,000
700 150 105,000
500 145 72,500
350 135 47,250
1,800 $264,750
*PROBLEM 6-13A (CONTINUED)

(b) (2) Average Cost

Step 1: Ending Inventory

Weighted Average Total
Units Unit Cost Cost
200 $145.38* = $29,075.00

*$290,750 ÷ 2,000 = $145.38 (rounded)

Step 2: Cost of Goods Sold

Cost of goods available for sale $290,750
Less: Ending inventory (200 x $145.38 rounding) 29,075
Cost of goods sold $261,675

Proof: Cost of goods sold

1,800 × ($290,750 ÷ 2,000) = $261,675

LO 6 BT: AP Difficulty: M Time: 30 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
 *PROBLEM 6-15A

(a) (1)Periodic Inventory System

COST OF GOODS AVAILABLE FOR SALE
Date Explanation Units Unit Cost Total Cost
Aug. 1 Beginning inventory 50 $90 $ 4,500
4 Purchase 180 92 16,560
18 Purchase 70 94 6,580
28 Purchase 40 95 3,800
Total 340 $31,440

Units Sold = 160 + 100 = 260

Units in Ending inventory = 340 – 260 = 80

Step 1: Ending Inventory

Unit Total
Units Cost Cost
40 $95 $3,800
40 94 3,760
80 $7,560

Step 2: Cost of Goods Sold

Cost of goods available for sale $31,440
Less: Ending inventory 7,560
Cost of goods sold $23,880

Proof: Cost of Goods Sold

Unit Total
Units Cost Cost
50 $90 $ 4,500
180 92 16,560
30 94 2,820
260 $23,880
 *PROBLEM 6-15A (Continued)

(a) (2) Perpetual Inventory System

Date Description Purchases Cost of Goods Sold Ending Inventory

Aug 1 Beginning
inventory 50 $90 $ 4,500
50 90
4 Purchase 180 $92 $16,560 180 92 21,060
50 $90
10 Sale 110 92 $14,620 70 92 6,440
70 92
18 Purchase 70 94 6,580 70 94 13,020
70 92
25 Sale 30 94 9,260 40 94 3,760
40 94
28 Purchase 40 95 3,800 40 95 7,560

31 Balance 290 $26,940 260 $23,880 80 , $ 7,560

Check: $23,880 + $7,560 = $31,440 ($4,500 + $26,940)

(b)
Perpetual Periodic
Cost of goods sold $23,880 $23,880
Ending inventory 7,560 7,560
Cost of goods available for sale $31,440 $31,440

The results under FIFO in a perpetual system are the same as in a periodic system.
Under both inventory systems, the first costs in inventory are the ones assigned to the
cost of goods sold.

LO 2,6 BT: AN Difficulty: M Time: 45 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting