EXERCISE 8.

1
Accounting Terminology
Listed as follows are eight technical accounting terms introduced in this chapter.
Retail method
FIFO method
Lower-of-cost-or-market
Gross profit method
LIFO method
Specific identification
Cost flow assumption
Average-cost method

Each of the following statements may (or may not) describe one of these technical terms. For each statement, indicate the term described, or
answer “None” if the statement does not correctly describe any of the terms.
A pattern of transferring unit costs from the Inventory account to the Cost of Goods Sold that may (or may not) parallel the physical flow of
merchandise.
The only flow assumption in which all units of merchandise are assigned the same per-unit cost.
The method used to record the cost of goods sold when each unit in the inventory is unique.
The most conservative of the flow assumptions during a period of sustained rising prices.
The flow assumption that provides the most current valuation of inventory in the balance sheet.
A technique for estimating the cost of goods sold and the ending inventory that is based on the relationship between cost and sales price during
the current accounting period.

Lower-of-cost-or-
Retail method F FIFO method E
market
Gross profit method LIFO method D Specific identification C
Cost flow assumption A Average-cost method B

EXERCISE 8.4
Effects of Different Cost Flow Assumptions
Gable, Inc., is a provider of home furnishings. The company uses the FIFO inventory method. The following information was taken from the
company’s recent financial statements (dollar amounts are in thousands).
Cost of goods sold $1,850,000
Income before taxes 125,000
Income taxes expense (and payments) 52,500
Net income 72,500
Net cash provided by operating activities 123,250
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The financial statements also revealed that had Gable been using LIFO, its cost of goods sold would have been $1,865,000. The company’s
income taxes and payments amount to approximately 40 percent of income before taxes.
Explain how LIFO can result in a higher cost of goods sold. Would you expect LIFO to result in a greater or lesser valuation of the company’s
ending inventories? Defend your answer.
Assuming that Gable had been using LIFO, compute the following amounts for the current year. Show your supporting computations, with
dollar amounts in thousands.
Income before taxes
Income taxes expense (which are assumed equal to income taxes actually paid)
Net income
Net cash provided by operating activities
Effects of Different Cost Flow Assumptions

Gable, Inc., is a provider of home furnishings. The company uses the FIFO inventory method.
The following information was taken from the company’s recent financial statements 

Cost of goods sold $1,850,000

Income before taxes 125,000
Income taxes
expense (and
payments) 52,500
Net income 72,500
Net cash provided
by operating
activities 123,250

LIFO results in a higher cost of goods sold than does FIFO when the replacement costs of merchandise are
rising. Under LIFO, the most recent (higher) costs are assigned to the cost of goods sold, and the oldest
A. (lower) costs to inventory. This situation reverses under FIFO. Because LIFO assigns the oldest (lowest)
costs to inventory, it is reasonable to expect that the LIFO inventory would be lower than that resulting
from FIFO valuation, not higher
 Income before income taxes ( as reported under
B. 1 LIFO) 1,850,000

Less: Additional cost of goods sold had LIFO been in use ($1,865,000) - ($1,850,000) $15,000
Income before income taxes ( assuming
LIFO) $1,835,000

2
Income taxes expense under LIFO ($ 1,835,000 efore taxes x 40 %) $734,000

Income before income taxes (LIFO basis

3 ) 1,835,000
Less: Income taxes expense under LIFO 734,000
Net income ( assuming
LIFO) 1,101,000

4 Net cash provided by operating activities ( as reported under FIFO) 123,250

Add: income tax savings had LIFO been in use 609,000
Net cash provided by operating activities
( assuming LIFO) 732,250

EXERCISE 8.7
Costing Inventory in a Periodic System
page 374
Rogers Products uses a periodic inventory system. The company’s records show the beginning inventory of PH4 oil filters on January 1 and the
purchases of this item during the current year to be as follows.
Jan. 1  Beginning inventory90 units @ $3.00 $ 270.00
Feb. 23  Purchase 120 units @ $3.50 420.00
Apr. 20 Purchase 300 units @ $3.80 1,140.00
May 4  Purchase 400 units @ $4.00  1,600.00
Nov. 30  Purchase 190 units @ $5.00 950.00
  Totals   1,100 units $4,380.00
A physical count indicates 200 units in inventory at year-end.
Determine the cost of the ending inventory on the basis of each of the following methods of inventory valuation. (Remember to use periodic
inventory costing procedures.)
Average cost.
FIFO.
LIFO.
Which of the given methods (if any) results in the same ending inventory valuation under both periodic and perpetual costing procedures?
Explain.
Costing Inventory in a Periodic System

Rogers Products uses a periodic inventory system.

The company’s records show the beginning inventory of PH4 oil filters on January 1 and
the purchases of this item during the current year to be as follows.

a. Jan. 1  Beginning inventory 90 units @ $3.00 $270.00

Feb. 23  Purchase 120 units @ $3.50 420
Apr. 20  Purchase 300 units @ $3.80 1,140.00
4-May  Purchase 400 units @ $4.00  1,600.00
Nov. 30  Purchase 190 units @ $5.00 950
  Totals   1,100 units $4,380.00

A physical count indicates 200 units in inventory at year-end.

Determine the cost of the ending inventory on the basis of each of the following methods
of inventory valuation. (Remember to use periodic inventory costing procedures.)

a. Average cost.

Average cost : $4,380 / 1,100 = $3.98

(200 units @ $3.98)
Average cost : $796.36

b. FIFO.
 $990.00 ( 190 units @ $5.00 + 1 unit @ $4.00 )

c. LIFO.

$655.00 (90 units @ $3.00 + 110 units @ $3.50).

d. Which of the given methods (if any) results in the same ending inventory valuation
under both periodic and perpetual costing procedures? Explain.

Only the FIFO method results in the same ending inventory valuation in both periodic and
perpetual costing envitoments. Under FIFO, the value assigned to ending inventory is the same
using periodic or perpetual procedures, regardless of when purchases or sales occur during period.

EXERCISE 8.10
Estimating Inventory by the Retail Method
Phillips Supply uses a periodic inventory system but needs to determine the approximate amount of inventory at the end of each month without
taking a physical inventory. Phillips has provided the following inventory data.
Cost Price Retail Selling Price
Inventory of merchandise, June 30 $300,000 $500,000
Purchases during July 222,000 400,000
Goods available for sale during July $522,000 $900,000
Net sales during July $600,000
Estimate the cost of goods sold and the cost of the July 31 ending inventory using the retail method of evaluation.
Was the cost of Phillips’s inventory, as a percentage of retail selling prices, higher or lower in July than it was in June? Explain.

Estimating Inventory by the Retail Method

Cost Price Retail Selling Price

Inventory of merchandise, June 30 $300,000 $500,000
Purchases during July   222,000   400,000
Goods available for sale during July $522,000 $900,000
Net sales during July $600,000

Estimate the cost of goods sold and the cost of the July 31 ending inventory using the retail method
a.
of evaluation.

Cost ratio during July ( $ 522,000 + $

900,000 ) 58%
Esrimated cost of goods sold ( $600,000 x
58%) $348,000
Estimated ending inventory ( at
cost):
Cost of goods available for sale
during July $522,000
Less: Estimated cost of goods sold
( above ) 348,000
Estimated ending inventory $174,000

Was the cost of Phillips’s inventory, as a percentage of retail selling prices, higher or lower in July
b.
than it was in June? Explain.

The cost of Phillips inventory as a percentage of retail sales in July is lower than it was in June.
At june 30, the percentage as 60% ($300,000 / $500,000), and in July the percentaje as
only 55%($222,000 / $400,000)

EXERCISE 8.13
Inventory Turnover
A recent annual report of Kraft Foods Group, Inc., reveals the following information (dollar amounts are stated in millions).
Cost of goods sold $13,360
Inventory (beginning of year) 1,616
Inventory (end of year) 1,775
Average time required to collect accounts receivable 17 days
page 376
Compute Kraft Food Group, Inc.’s inventory turnover for the year (round to nearest tenth).
Compute the number of days required to sell its average inventory (round to the nearest day).
What is the length of Kraft’s operating cycle?
What comparative information would you want to be able to evaluate Kraft’s operating cycle figure?
Inventory Turnover

A recent annual report of Kraft Foods Group, Inc., reveals the following information (dollar amounts
are stated in millions).

Cost of goods sold $13,360

Inventory (beginning of year) 1,616
Inventory (end of year) 1,775
Average time required to collect 17 days
accounts receivable

Compute Kraft Food Group, Inc.’s inventory turnover for the year (round to
a. nearest tenth).

7.8773584 7.9
Cost of Goods sold $13,360 $13,360 91 = times
( 1,616 +
Average inventory 1,775 /2 ) $1,696

Compute the number of days required to sell its average inventory (round to
b. the nearest day).

30.416666
Days in year 365 67 = 30 days
Inventory Turnover rate 7.9 times

What is the length of Kraft’s operating

c. cycle?

Days Required to collect aount of

Days required to sell amount of avg. avg.
inventory receivable
30 days + 17 days = 47 days

The operating cycle of a merchandising company consists of basic transactions: purchases of merchandise; sales of the
merchandise, often on account; and collection of the accounts receivable from customers. As the word cycle suggests,
this sequence of transactions repeats continuously. Some of the cash collected from the customers is used to purchase
more merchandise, and the cycle begins anew.

PROBLEM 8.1A
Four Methods of Inventory Valuation
On January 15, 2018, Sports World sold 1,000 Ace-5 fishing reels to Angler’s Warehouse. Immediately prior to this sale, Sports World
perpetual inventory records for Ace-5 reels included the following cost layers.
Purchase Date Quantity Unit Cost Total Cost
Dec. 12, 2017 600 $29 $17,400
Jan. 9, 2018 900 32 28,800
Total on hand  1,500 $46,200
Instructions
Note: We present this problem in the normal sequence of the accounting cycle—that is, journal entries before ledger entries. However, you may
find it helpful to work part b first.
Prepare a separate journal entry to record the cost of goods sold relating to the January 15 sale of 1,000 Ace-5 reels, assuming that Sports
World uses:
Specific identification (500 of the units sold were purchased on December 12, and the remaining 500 were purchased on January 9).
Average cost.
FIFO.
LIFO.
page 377
Complete a subsidiary ledger record for Ace-5 reels using each of the four inventory valuation methods listed. Your inventory records should
show both purchases of this product, the sale on January 15, and the balance on hand at December 12, January 9, and January 15. Use the
formats for inventory subsidiary records illustrated on Exhibits 8–3 through 8-5 of this chapter.
Refer to the cost of goods sold figures computed in part a. For financial reporting purposes, can the company use the valuation method that
resulted in the lowest cost of goods sold if, for tax purposes, it used the method that resulted in the highest cost of goods sold? Explain.
Problems 8.2A and 8.3A are based on the following data:
Speed World Cycles sells high-performance motorcycles and motocross racers. One of Speed World’s most popular models is the Kazomma
900 dirt bike. During the current year, Speed World Cycles purchased eight of these bikes at the following costs.
Purchase Date Units Purchased Unit Cost Total Cost
July 1 2 $4,950 $ 9,900
July 22 3 5,000 15,000
Aug. 3 3 5,100 15,300
8 $40,200
On July 28, Speed World Cycles sold four Kazomma 900 dirt bikes to the Vince Wilson racing team. The remaining four bikes remained in
inventory at September 30, the end of Speed World’s fiscal year.
Four Methods of Inventory Valuation

Purchase Unit
Date Quantity Cost Total Cost
Dec. 12, 600 $2 $17,400
2017 9
Jan. 9, 2018 900 32 28,800
Total on  1,500 $46,200
hand

a. General Journal
2018
(1) specific identification method:

15-Jan Cost of goods sold

Inventory 30,500
To record cost of 1,000 Ace-5 reels sold to Angler's Warehouse :
500 units @$29: 500 units @$32 30,500

(2) Average - cost method

15-Jan Cost of goods sold

Inventory 30,800
To record cost of 1,000 Ace-5 reels sold to Anler's Warehouse by
the average cost method: 1,000 units @$30.80 ($46,200 total cost,
divided by 1,500 units). 30,800

(3) First-in , First-out (FIFO)

method :

15-Jan Cost of goods sold

Inventory 30,200
To record cost of 1,000 Ace 5 reels sold to Anler's Warehouse . Cost
determined by the FIFO flow assumption :600 units @$29, plus 400
units @$32 = $30,200 30,200

(4) Last-in , first out (LIFO)

method:

15-Jan Cost of goods sold

Inventory 31,700

To record cost of 1,000 Ace 5 reels sold to Anler's Warehouse . Cost

determined by the LIFO flow assumption: 900 unitsd @32, plus 100
units @$ 29 = $ 31,700 31,700

b. Inventory subsisiary ledger records

(1) Specific identification method

PURCHASED
Unit
Units total
Date cost
12-Dec 600 $29 $17,400
9-Jan 900 $32 $28,800

15-Jan
 SOLD BALANCE
Cost of
Units Unit cost goods Units Unit cost Balance
sold
600 $29 $17,400
600 $29
900 $32 46,200
500 $29 100 $29
$30,50
500 $32 0 400 $32 15,700

(2) Average -cost method

PURCHASED
Unit
Units total
Date cost
12-Dec 600 $29 $17,400
9-Jan 900 $32 $28,800
15-Jan

SOLD BALANCE
Cost of
Units Unit cost goods Units Unit cost Balance
sold
600 $29.00 $17,400
1500 $30.80 46,200
$30,80
1,000 $30.80 0 500 $30.80 15,400

(3) First in , first out (FIFO) method:

PURCHASED
Unit
Units total
Date cost
12-Dec 600 $29 $17,400
9-Jan 900 $32 $28,800

15-Jan

SOLD BALANCE
Cost of
Units Unit cost goods Units Unit cost Balance
sold
600 $29 $17,400
600 $29
900 $32 46,200
600 $29
$30,20
400 $32 0 500 $32 16,000

(4) Last in, last out (LIFO) method

PURCHASED
Unit
Units total
Date cost
12-Dec 600 $29 $17,400
9-Jan 900 $32 $28,800

15-Jan

SOLD BALANCE
Cost of
Units Unit cost goods Units Unit cost Balance
sold
600 $29 $17,400
600 $29
900 $32 46,200
900 $32
 $31,70
100 $29 0 500 $29 14,500

No. As shown before in the first part, LIFO method resulted in the highest cost of goods sold, and FIFO method resulted in the lowest.
c.
If LIFO method is used for tax purposes, income tax regulations require that it also be used for financial reporting purposes