Financial Accounting, 9e (Harrison/Horngren/Thomas)

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Chapter 6

Inventory & Cost of Goods Sold

Short Exercises

(10 min.) S 6-1

Billions
a. Inventory....................................... 4.5
Cash ......................................... 4.5

b. Accounts Receivable ................... 18.9

Sales Revenue ......................... 18.9

c. Cost of Goods Sold...................... 3.9

Inventory .................................. 3.9

d. Cash .............................................. 18.7

Accounts Receivable .............. 18.7

Chapter 6 Inventory & Cost of Goods Sold 6-1

 (10-15 min.) S 6-2

1. (Journal entries)

Inventory………………………………….. 125,000
Accounts Payable……………………. 125,000

Accounts Receivable…………………… 190,000

Sales Revenue………………………... 190,000

Cost of Goods Sold…………………….. 100,000

Inventory ($125,000 × .80)………….. 100,000

Cash ($190,000 × .25)…………………... 47,500

Accounts Receivable………………... 47,500

2. (Financial statements)

BALANCE SHEET
Current assets:
Inventory ($125,000 − $100,000)………………. $ 25,000

INCOME STATEMENT
Sales revenue……………………………………….... $190,000
Cost of goods sold…………………………………... 100,000
Gross profit…………………………………………… $ 90,000

6-2 Financial Accounting 9/e Solutions Manual

 (15-20 min.) S 6-3

a b c
Average
Cost FIFO LIFO
Cost of goods sold:
Average (28 × $157.50) $4,410
FIFO [$1,350 + (19 × $160)] $4,390
LIFO [$4,320 + (1 × $150)] $4,470

Ending inventory:
Average (8 × $157.50) $ 1,260
FIFO (8 × $160) $1,280
LIFO (8 × $150) $1,200

Computations:
Units sold = 28 (9 + 27 − 8)
Average cost per unit = $157.50 ($1,350 + $4,320) ÷ (9 + 27)
Cost per unit:
Beginning inventory = $150 ($1,350 ÷ 9 = $150)
March purchase = $160 ($4,320 ÷ 27 = $160)

Chapter 6 Inventory & Cost of Goods Sold 6-3

 (10-15 min.) S 6-4

Jonah’s Copy Center

Income Statement
Year Ended December 31

Average FIFO LIFO

Sales revenue (600 × $20.50) $12,300 $12,300 $12,300
Cost of goods sold (600 × $9.85*) 5,910
(100 × $8.40) + (500 × $9.90) 5,790
(600 × $9.90) 5,940
Gross profit 6,390 6,510 6,360
Operating expenses 3,900 3,900 3,900
Net income $ 2,490 $ 2,610 $ 2,460
_____
*Average cost per unit:
Beginning inventory (100 @ $9.50)…………….. $ 950
Purchases (700 @ $9.90)………………………… 6,930
Goods available…………………….……………… $7,880
Average cost per unit $7,880 / 800 units…… $ 9.85

6-4 Financial Accounting 9/e Solutions Manual

 (10-15 min.) S 6-5

Jonah’s Copy Center

Income Statement
Year Ended December 31
Average FIFO LIFO
Sales revenue (600 × $20.50) $12,300 $12,300 $12,300
Cost of goods sold (600 × $9.85*) 5,910
(100 × $8.40) + (500 × $9.90) 5,790
(600 × $9.90) ______ ______ 5,940
Gross profit 6,390 6,510 6,360
Operating expenses 3,900 3,900 3,900
Income before income tax $ 2,490 $ 2,610 $ 2,460
Income tax expense (40%) $ 996 $ 1,044 $ 984

*From S 6-4 Method to Method to

maximize minimize
reported income tax
income expense.
(before
tax).

Chapter 6 Inventory & Cost of Goods Sold 6-5

 (5 min.) S 6-6

Macrovision.com managers can purchase a large amount of inventory

before year end. Under LIFO, these high inventory costs go directly to
cost of goods sold in the current year. Higher cost of goods sold creates
lower net income, and lower net income results in lower income taxes.
Saving on taxes is one reason companies want to decrease their
income.

Student responses may vary.

(5-10 min.) S 6-7

BALANCE SHEET
Current assets:
Inventories, at market (which is lower than cost)……. $ 49,000

INCOME STATEMENT
Cost of goods sold [$420,000 + ($65,000 − $49,000)]……. $436,000

6-6 Financial Accounting 9/e Solutions Manual

 (15-20 min.) S 6-8

DATE: _____________

TO: Jim Tolbert, President of Tolbert Trumpet Company

FROM: Student Name

SUBJECT: Proposal for Increasing Net Income

We can increase net income by not buying below-normal quantities of

inventory as we make sales. Inventory costs are rising, and the company
uses the LIFO inventory method. Under LIFO, the high cost of our
inventory purchases goes straight into cost of goods sold. By
decreasing our purchases of inventory, we can keep those high costs
out of cost of goods sold this year. That will keep net income from going
lower and will help net income be as high as possible. Also, our
inventory quantities are above normal, so we don’t need to buy a lot of
inventory before year end.

Student responses will vary.

Chapter 6 Inventory & Cost of Goods Sold 6-7

 (10-15 min.) S 6-9

LIFO 1. Generally associated with saving income taxes.

Specific
unit cost 2. Used to account for automobiles, jewelry, and art
objects.

FIFO 3. Results in a cost of ending inventory that is close to the

current cost of replacing the inventory.

FIFO 4. Maximizes reported income.

LIFO 5. Enables a company to buy high-cost inventory at year

end and thereby to decrease reported income and
income tax.

LIFO 6. Results in an old measure of the cost of ending

inventory.

Average 7. Provides a middle-ground measure of ending inventory

and cost of goods sold.

LIFO 8. Enables a company to keep reported income

from dropping lower by liquidating older layers of
inventory.

All 9. Writes inventory down when replacement cost drops

below historical cost.

LIFO 10. Matches the most current cost of goods sold against
sales revenue.

6-8 Financial Accounting 9/e Solutions Manual

 (5-10 min.) S 6-10

Dollars in Millions
$35,376 − $15,437
Gross profit percentage = = 56.4%
$35,376

$15,437
Inventory turnover = = 8.6 times
($1,672 + $1,908) / 2

(5-10 min.) S 6-11

Beginning inventory……………………………... $ 315,000

+ Purchases……………………………………….… 1,820,000
= Goods available…………………………………... 2,135,000
− Cost of goods sold:
Sales revenue…………………………. $3,920,000
Less estimated gross profit (60%)… (2,352,000)
Estimated cost of goods sold………………. (1,568,000)
= Estimated cost of ending inventory…………... $ 567,000

Chapter 6 Inventory & Cost of Goods Sold 6-9

 (5 min.) S 6-12

Correct
Amount
(Millions)

a. Net sales (unchanged)………………………………. $2,500

b. Inventory ($480 − $13)……………………………….. $ 467
c. Cost of goods sold ($1,160 + $13)………………… $1,173
d. Gross profit ($2,500 − $1,173)……………………… $1,327

(5 min.) S 6-13

1. Last year’s reported gross profit was understated.

Correct gross profit last year was $5.1 million ($3.7 + $1.4).

2. This year’s gross profit is overstated.

Correct gross profit for this year is $3.2 million ($4.6 − $1.4).

6-10 Financial Accounting 9/e Solutions Manual

 (5-10 min.) S 6-14

1. Unethical. The company falsified its ending inventory in order to

cheat the government (and the people) out of taxes.

2. Ethical. There is nothing wrong with buying inventory whenever a

company wishes.

3. Ethical. Same idea as 2.

4. Unethical. The company falsified its ending inventory and net income.

5. Unethical. The company falsified its purchases, cost of goods sold,

and net income in order to evade taxes.

Chapter 6 Inventory & Cost of Goods Sold 6-11

 Exercises

(15-20 min.) E 6-15A

Req. 1

Perpetual System

1. Purchases:
Inventory ........................................................ 46,000
Accounts Payable ..................................... 46,000

2. Sales:
Cash ($75,000 × .17) ...................................... 12,750
Accounts Receivable ($75,000 × .83) ........... 62,250
Sales Revenue ........................................... 75,000

Cost of Goods Sold ....................................... 39,000

Inventory .................................................... 39,000

Req. 2

BALANCE SHEET
Current assets:
Inventory………………………………. $17,000

INCOME STATEMENT
Sales revenue……………………………. $75,000
Cost of goods sold……………………… 39,000
Gross profit………………………………. $36,000

6-12 Financial Accounting 9/e Solutions Manual

 (15-25 min.) E 6-16A

Journal
DATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT
Req. 1
Inventory ($1,085 + $1,980)…………………. 3,065
Accounts Payable…………………........... 3,065

Req. 2
Accounts Receivable (15 @ $600)…………. 9,000
Sales Revenue…………………………….. 9,000

Cost of Goods Sold………………………….. 2,365*

Inventory……………………………………. 2,365

Req. 3
Sales revenue…………………………... $9,000
Cost of goods sold…………………….. 2,365
Gross profit……………………………... $6,635

Ending inventory
($620 + $1,085 + $1,980 − $2,365)... $1,320**
_____
*(11 @ $155) + (4 @ $165) = $2,365
**Or, (8 @ $165) = $1,320

Chapter 6 Inventory & Cost of Goods Sold 6-13

 (10-15 min.) E 6-17A

Req. 1

Inventory
Beg. bal. (4 units @ $155) 620
Purchases
Jan. 8 (7 units @ $155) 1,085 Cost of goods sold
12 (12 units @ $165) 1,980 (15 units @ $?) ?
End. bal. (8 units @ $?) ?

Cost of Goods Sold Ending Inventory

(a) Specific
unit cost (8 @ $155) + (7 @ = $2,395 (3 @ $155) + (5 @ = $1,290
$165) $165)

(b)Average
cost 15 × $160.22* = $2,403 8 × $160.22* = $1,282

(c) FIFO (11 @ $155) + (4 @ = $2,365 (8 @ $165) = $1,320

$165)

(d) LIFO (12 @ $165) + (3 @ = $2,445 (8 @ $155) = $1,240

$155)

_____
*Average cost per ($620 + $1,085 + $1,980)
= = $160.22
unit (4 + 7 + 12)

Req. 2

LIFO produces the highest cost of goods sold, $2,445.

FIFO produces the lowest cost of goods sold, $2,365.
The increase in inventory cost from $155 to $165 per unit causes the
difference in cost of goods sold.

6-14 Financial Accounting 9/e Solutions Manual

 (10 min.) E 6-18A

Cost of goods sold:

LIFO ($2,445) − FIFO ($2,365)..…………………… $80.00
× Income tax rate…………………………………… × .28
Tax savings advantage of LIFO...…………………… $22.40

Chapter 6 Inventory & Cost of Goods Sold 6-15

 (15 min.) E 6-19A
Req. 1

a. FIFO
Cost of goods sold:
(12 @ $42)………………................. $504
Ending inventory:
(4 @ $69) + (2 @ $42)……………… $360

b. LIFO
Cost of goods sold:
(4 @ $69) + (8 @ $42)….................. $612
Ending inventory:
(6 @ $42)..……………...................... $252

Req. 2

MusicWorld.net
Income Statement
Month Ended June 30, 2012

Sales revenue (12 @ $111) ........................................... $1,332

Cost of goods sold ........................................................ 504
Gross profit… ................................................................ 828
Operating expenses ...................................................... 340
Income before income tax............................................. 488
Income tax expense (40%) ............................................ 195
Net income ..................................................................... $ 293

6-16 Financial Accounting 9/e Solutions Manual

 (15 min.) E 6-20A
Req. 1

Gross profit: FIFO LIFO

Sales revenue…………………………… $8,450,000 $8,450,000
Cost of goods sold
FIFO: 650,000 × $6………………….. 3,900,000
LIFO: (400,000 × $4) + (100,000 × $5) +
(150,000 × $6)………………………. 3,000,000
Gross profit……………………………... $4,550,000 $5,450,000

Req. 2
Gross profit under FIFO and LIFO differ because inventory costs
decreased during the period.

(5-10 min.) E 6-21A

Princeton Garden Supply

Income Statement (partial)
Year Ended October 31, 2012

Sales revenue……………………………………………….. $115,000

Cost of goods sold [$70,000 + ($14,000 − $12,500)]..… 71,500
Gross profit………………………………………………….. $ 43,500

Note:Cost is used for beginning inventory because cost is lower than

market. Market (replacement cost) is used for ending inventory
because market is lower than cost at year end.

Chapter 6 Inventory & Cost of Goods Sold 6-17

 (15-20 min.) E 6-22A
Req. 1

a. $ 66,000 $21,000 + $62,000 − $17,000 = $66,000

b. $ 40,000 $106,000 − $66,000 = $40,000
c. Must first solve for d
d. $ 93,000 $137,000 − $44,000 = $93,000
c. $ 90,000 $26,000 + c − $93,000 = $23,000;
c = $90,000
e. $ 91,000 $62,000 + $29,000 = $91,000
f. $ 32,000 f + $54,000 − $24,000 = $62,000; f = $32,000
g. $ 4,000 $8,000 + $29,000 − g = $33,000; g = $4,000
h. $ 49,000 $82,000 − $33,000 = $49,000

Req. 2

Baker Company
Income Statement
Year Ended December 31, 2012
Net sales .............................................. $106,000
Cost of goods sold
Beginning inventory....................... $ 21,000
Net purchases ................................ 62,000
Goods available.............................. 83,000
Ending inventory ............................ (17,000)
Cost of goods sold ......................... 66,000
Gross profit .......................................... 40,000
Operating and other expenses ........... 44,000
Net income (Net loss) .......................... $ (4,000)

6-18 Financial Accounting 9/e Solutions Manual

 (20-30 min.) E 6-23A
Req. 1
Gross Profit
Company Percentage Inventory Turnover

$40 $66
Baker = 37.7% = 3.5 times
$106 ($21 + $17) / 2

$44 $93
Lawson = 32.1%1 = 3.8 times
$137 ($26 + $23) / 2

$29 $62
Ethan = 31.9% = 2.2 times
$91 ($32 + $24) / 2

$49 $33
Paulus = 59.8% = 5.5 times
$82 ($8 + $4) / 2

Req. 2

Paulus has the highest gross profit percentage, 59.8%. Ethan has the
lowest gross profit percentage.
Paulus has the highest rate of inventory turnover, 5.5 times. Ethan has
the lowest rate of inventory turnover.
Based on these data, Paulus looks the most profitable because its’
gross profit percentage is greater than 1½ times the other companies’
gross profit percentages. And Paulus’ inventory turnover is almost 50%
higher than Lawson’s turnover.

Chapter 6 Inventory & Cost of Goods Sold 6-19

 (15 min.) E 6-24A

Req. 1 and 2

1 2
FIFO LIFO
$139,000 − $85,800 $139,000 − $92,900
Gross profit percentage =
$139,000 $139,000

= 38.3% = 33.2%

$85,800 $92,900
Inventory turnover =
($22,000 + $26,000) / 2 ($9,000 + $21,000) / 2

= 3.6 times = 6.2 times

Req. 3

FIFO produces a higher gross profit percentage.

Req. 4

LIFO produces a higher rate of inventory turnover.

6-20 Financial Accounting 9/e Solutions Manual

 (10-15 min.) E 6-25A

Year ended January 31, 2012 Millions

Budgeted cost of goods sold ($6,600 × 1.10)……….. $7,260

Budgeted ending inventory…………………………….. 2,200

Budgeted goods available………….…………………… 9,460

Actual beginning inventory…………………………….. (1,900)

Budgeted purchases…………………………………….. $7,560

(10-15 min.) E 6-26A

Beginning inventory……………………………... $ 45,300

Net purchases…………………………………….. 33,300
Goods available……….…………………............. 78,600
Estimated cost of goods sold:
Net sales revenue…………………………….. $ 61,600
Less: estimated gross profit of 45%…..….. (27,720)
Estimated cost of goods sold………………. 33,880
Estimated cost of inventory destroyed………. $ 44,720

Another reason that managers use the gross profit method to estimate
ending inventory is to test the reasonableness of ending inventory.

Chapter 6 Inventory & Cost of Goods Sold 6-21

 10-15 min.) E 6-27A

Myrtle Bay Marine Supply

Income Statement (Corrected)
Years Ended June 30, 2012 and 2011
2012 2011

Sales revenue $136,000 $119,000

Cost of goods sold:
Beginning inventory $22,500 $ 11,500
Net purchases 75,000 74,000
Goods available 97,500 85,500
Ending inventory (18,000) (22,500)*
Cost of goods sold 79,500 63,000
Gross profit 56,500 56,000
Operating expenses 28,000 26,000
Net income $ 28,500 $ 30,000

_____
*$15,000 + $7,500 = $22,500

Myrtle Bay actually performed poorly in 2012, compared to 2011, with net
income down from $30,000 to $28,500.

6-22 Financial Accounting 9/e Solutions Manual

 (15-20 min.) E 6-28B

Req. 1

Perpetual System

1. Purchases:
Inventory ........................................................ 48,000
Accounts Payable ..................................... 48,000

2. Sales:
Cash ($72,000 × .21) ...................................... 15,120
Accounts Receivable ($72,000 × .79)............ 56,880
Sales Revenue ........................................... 72,000

Cost of Goods Sold ....................................... 38,000

Inventory .................................................... 38,000

Req. 2

BALANCE SHEET
Current assets:
Inventory………………………………. $ 19,000

INCOME STATEMENT
Sales revenue……………………………. $ 72,000
Cost of goods sold……………………… 38,000
Gross profit………………………………. $ 34,000

Chapter 6 Inventory & Cost of Goods Sold 6-23

 (15-25 min.) E 6-29B

Journal
DATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT
Req. 1
Inventory ($1,190 + $2,340)…...…………….. 3,530
Accounts Payable…………………........... 3,530

Req. 2
Accounts Receivable (16 @ $575)……..….. 9,200
Sales Revenue…………………………….. 9,200

Cost of Goods Sold………………………….. 2,760*

Inventory……………………………………. 2,760

Req. 3
Sales revenue…………………………... $9,200
Cost of goods sold…………………….. 2,760
Gross profit……………………………... $6,440

Ending inventory
($850 + $1,190 + $2,340 − $2,760)... $1,620**
_____
*(12 @ $170) + (4 @ $180) = $2,760
**Or, (9 @ $180) = $1,620

6-24 Financial Accounting 9/e Solutions Manual

 (10-15 min.) E 6-30B
Req. 1
Inventory
Beg. bal. (5 units @ $170 850
Purchases
Aug. 8 (7 units @ $170) 1,190 Cost of goods sold
15 (13 units @ $180) 2,340 (16 units @ $?) ?
Ending bal. (9 units @ $?) ?

Cost of Goods Sold Ending Inventory

(a) Specific
unit cost (7 @ $170) + (9 @ = $2,810 (5 @ $170) + (4 @ = $1,570
$180) $180)

(b)
Average
cost 16 × $175.20* = $2,803 9 × $175.20* = $1,577

(c) FIFO (12 @ $170) + (4 @ = $2,760 (9 @ $180) = $1,620

$180)

(d) LIFO (13 @ $180) + (3 @ = $2,850 (9 @ $170) = $1,530

$170)
_____
*Average cost per ($850 + $1,190 + $2,340)
= = $175.20
unit (5 + 7 + 13)

Req. 2

LIFO produces the highest cost of goods sold, $2,850.

FIFO produces the lowest cost of goods sold, $2,760.
The increase in inventory cost from $170 to $180 per unit causes the
difference in cost of goods sold.

Chapter 6 Inventory & Cost of Goods Sold 6-25

 (10 min.) E 6-31B

Cost of goods sold:

LIFO ($2,850) − FIFO ($2,760)………………………… $ 90
× Income tax rate……………………………………….. × .40
Tax savings advantage of LIFO..……………………….. $ 36

6-26 Financial Accounting 9/e Solutions Manual

 (15 min.) E 6-32B
Req. 1

a. FIFO
Cost of goods sold:
(13 @ $59) ……………................... $767
Ending inventory:
(4 @ $59) + (3 @ $71)…………….. $449

b. LIFO
Cost of goods sold:
(3 @ $71) + (10 @ $59).………….. $803
Ending inventory:
(7 @ $59) ……………..................... $413

Req. 2

MusicMagic.net
Income Statement
Month Ended September 30, 2012

Sales revenue (6 @ $118) + (7 @ $107)........................ $1,457

Cost of goods sold........................................................ 767
Gross profit… ................................................................ 690
Operating expenses ...................................................... 320
Income before income tax ............................................ 370
Income tax expense (35%) ............................................ 130
Net income..................................................................... $ 240

Chapter 6 Inventory & Cost of Goods Sold 6-27

 (15 min.) E 6-33B
Req. 1

Gross profit: FIFO LIFO

Sales revenue ................................................... $9,500,000 $9,500,000
Cost of goods sold
FIFO: 950,000 × $7....................................... 6,650,000
LIFO: (600,000 × $5) + (200,000 × $6)
+ (150,000 × $7) ................................. 5,250,000
Gross profit ....................................................... $2,850,000 $4,250,000

Req. 2

Gross profit under FIFO and LIFO differ because inventory costs
changed during the period.

(5-10 min.) E 6-34B

Erie Garden Supply

Income Statement (partial)
Year Ended August 31, 2012
Sales revenue …………………………………………………….. $120,000
Cost of goods sold [$72,000 + ($14,000 − $12,000)]………….. 74,000
Gross profit………………………………………………………….. $ 46,000

Note:Cost is used for beginning inventory because cost is lower than

market. Market (replacement cost) is used for ending inventory
because market is lower than cost at year end.

6-28 Financial Accounting 9/e Solutions Manual

 (15-20 min.) E 6-35B

Req. 1

a. $ 62,000 $21,000 + $60,000 − $19,000 = $62,000

b. $ 38,000 $100,000 − $62,000 = $38,000
c. Must first solve for d
d. $ 96,000 $137,000 − $41,000= $96,000
c. $ 90,000 $28,000 + c − $96,000 = $22,000;
c = $90,000
e. $ 92,000 $60,000 + $32,000 = $92,000
f. $ 26,000 f + $55,000 − $21,000 = $60,000; f = $26,000
g. $ 7,000 $9,000 + $33,000 − g = $35,000; g = $7,000
h. $ 45,000 $80,000 − $35,000 = $45,000

Req. 2

Gerald Company
Income Statement
Year Ended December 31, 2012
Net sales ............................................... $ 100,000

Cost of goods sold ..............................

Beginning inventory ....................... $ 21,000

Net purchases................................. 60,000

Goods available .............................. 81,000

Ending inventory ............................ (19,000)

Cost of goods sold ......................... 62,000

Gross profit .......................................... 38,000

Operating and other expenses ........... 42,000

Net income (Net loss) .......................... $(4,000)

Chapter 6 Inventory & Cost of Goods Sold 6-29

 (20-30 min.) E 6-36B

Req. 1

Gross Profit
Company Percentage Inventory Turnover

$38 $62
Gerald = 38.0% = 3.1 times
$100 ($21 + $19) / 2

$41 $96
Evans = 29.9% = 3.8 times
$137 ($28 + $22) / 2

$32 $60
Dunleavy = 34.8% = 2.6 times
$92 ($26 + $21) / 2

$45 $35
Thomas = 56.3% = 4.4 times
$80 ($9 + $7) / 2

Req. 2

Thomas has the highest gross profit percentage, 56.3%. Evans has the
lowest gross profit percentage.
Thomas has the highest rate of inventory turnover, 4.4 times. Dunleavy
has the lowest rate of inventory turnover.
Based on these data, Thomas looks the most profitable because its’
gross profit percentage is greater than 1½ times the other companies’
gross profit percentages. And Thomas’ inventory turnover is higher than
the other companies’ turnovers.

6-30 Financial Accounting 9/e Solutions Manual

 (15 min.) E 6-37B

Req. 1 and 2

1 2
FIFO LIFO
$143,000 − $85,900 $143,000 − $92,300
Gross profit percentage =
$143,000 $143,000

= 39.9% = 35.5%

$85,900 $92,300
Inventory turnover =
($16,000 + $27,000) / 2 ($8,000 + $16,000) / 2

= 4.0 times = 7.7 times

Req. 3

FIFO produces a higher gross profit percentage.

Req. 4

LIFO produces a higher rate of inventory turnover.

Chapter 6 Inventory & Cost of Goods Sold 6-31

 (10-15 min.) E 6-38B

Year ended January 31, 2012: Millions

Budgeted cost of goods sold ($6,700 × 1.10)……….. $7,370

Budgeted ending inventory…………………………….. 2,000

Budgeted goods available………….…………………… 9,370

Actual beginning inventory…………………………….. (1,700)

Budgeted purchases…………………………………….. $7,670

(10-15 min.) E 6-39B

Beginning inventory……………………………... $ 46,100

Net purchases…………………………………….. 31,500
Goods available……….…………………............. 77,600
Estimated cost of goods sold:
Net sales revenue…………………………….. $64,600
Less: estimated gross profit of 40%………. (25,840)
Estimated cost of goods sold………............ 38,760
Estimated cost of inventory destroyed………. $ 38,840

Another reason managers use the gross profit method to estimate

ending inventory is to test the reasonableness of ending inventory.

6-32 Financial Accounting 9/e Solutions Manual

 (10-15 min.) E 6-40B

By the Bay Marine Supply

Income Statement (Corrected)
Years Ended June 30, 2012 and 2011
2012 2011

Sales revenue $138,000 $120,000

Cost of goods sold:
Beginning inventory $20,000 $ 9,500
Net purchases 78,000 75,000
Goods available 98,000 84,500
Ending inventory (16,500) (20,000)*
Cost of goods sold 81,500 64,500
Gross profit 56,500 55,500
Operating expenses 30,000 25,000
Net income $ 26,500 $ 30,500

_____
*$12,000 + $8,000 = $20,000

By the Bay Marine Supply actually performed poorly in 2012, compared

to 2011, with net income down from $30,500 to $26,500.

Chapter 6 Inventory & Cost of Goods Sold 6-33

 Quiz

Q6-41 c ($3,400 + $6,700 − $5,500 = $4,600)

Q6-42 b ($7,700 − $5,500 = $2,200)
Q6-43 b
Q6-44 b [(700 @ $11.00) + (1,200 @ $11.50) = $21,500]
Q6-45 a [(1,200 @ $11.50) + (200 @ $11) = $16,000]
Q6-46 b
Q6-47 a ($153,000 + $213,000 = $366,000)
Q6-48 a
Q6-49 c
Q6-50 d [$627,000 − ($61,000 + $430,000 − $40,000) =
$1,000]

Q6-51 a ($25,000 + X − $17,000 = $92,000; X = $84,000)

Q6-52 d
Q6-53 d [$310,000 ÷ ($23,000 + $38,000) ÷ 2] = 10.2 times
Q6-54 a Net sales = $486,000 ($490,000 − $4,000)
COGS = $55,000 + ($202,000 + $21,000 −
$4,600 − $6,000) − $44,000
= $223,400
GP% = ($486,000 − $223,400) / $486,000
= 54%
Q6-55 a $56,000 + $79,000 − $95,000 (1 − .40) = $78,000
Q6-56 d
Q6-57 c

6-34 Financial Accounting 9/e Solutions Manual

Problems

(20-30 min.) P 6-58A

Req. 1

Inventory……………………………………. 9,296,000
Accounts Payable……………………… 9,296,000

Accounts Payable…………………………. 8,896,000

Cash………………………………………. 8,896,000

Cash…………………………………………. 5,000,000
Accounts Receivable……………………... 9,784,000
Sales Revenue………………………….. 14,784,000

Cost of Goods Sold (154,000 × $62.02*).. 9,551,080

Inventory………………………………… 9,551,080

Operating Expenses………………………. 2,750,000

Cash ($2,750,000 × .70)………………... 1,925,000
Accrued Liabilities ($3,250,000 × .30).. 825,000

Income Tax Expense……………………… 993,168

Income Tax Payable (see Req. 3).…… 993,168

_____
*($1,000,000 + $9,296,000) ÷ (20,000 + 32,000 + 52,000 + 62,000) = $62.02

Chapter 6 Inventory & Cost of Goods Sold 6-35

 (continued) P 6-58A

Req. 2

Inventory
Beg. bal. 1,000,000
Purchases 9,296,000 COGS 9,551,080
End. bal. 744,920

Req. 3

Better Buy Store, San Diego

Income Statement
Year Ended January 31, 2012
Sales revenue .......................................... $14,784,000
Cost of goods sold .................................. 9,551,080
Gross profit .............................................. 5,232,920
Operating expenses… ............................. 2,750,000
Income before tax .................................... 2,482,920
Income tax expense (40%) ...................... 993,168
Net income ............................................... $ 1,489,752

6-36 Financial Accounting 9/e Solutions Manual

 (20-30 min.) P 6-59A

Req. 1

The store uses FIFO.

This is apparent from the flow of costs out of inventory. For example, the
August 13 sale shows unit cost of $33, which came from the beginning
inventory. This is how FIFO, and only FIFO, works.

Req. 2

Cost of goods sold:

15 × $33 = $ 495
29 × 33 = 957
11 × 34 = 374
30 × 34 = 1,020
$2,846

Sales [( 44 units × $61) + 41 units x 63)]……………. $5,267

Cost of goods sold………………………………………. 2,846
Gross profit……………………………………………….. $2,421

Req. 3

Cost of August 31 inventory (38 × $34) + (26 × $35) $2,202

Chapter 6 Inventory & Cost of Goods Sold 6-37

 (20-30 min.) P 6-60A

Req. 1

Inventory
Beg. bal. (75 units @ $16) 1,200
Purchases:
Mar. 3 (95 units @ $18) 1,710
17 (165 units @ $20) 3,300 Cost of goods sold
23 (36 units @ $21) 756 (318 units @ $?) ?
End. bal. (53 units @ $?) ?

Cost of Goods Sold Ending Inventory

Average cost 318 × $18.78* = $5,972 53 × $18.78* = $995

FIFO (75 @ $16) + (95 @ = $5,870 (17 @ $20) + = $1,096

$18) + (148 @ $20) (36 @ $21)

LIFO (36 @ $21) + (165 @ $20)

+ (95 @ $18) + (22 @ $16) = $6,118 (53 @ $16) = $848

____
*Average cost ($1,200 + $1,710 + $3,300 + $756)
= = $18.78
per unit (75 + 95 + 165 + 36)

6-38 Financial Accounting 9/e Solutions Manual

 (continued) P 6-60A

Req. 2

LIFO results in the highest cost of goods sold because (a) the
company’s prices are rising and (b) LIFO assigns the cost of the latest
inventory purchases to cost of goods sold. When costs are rising, these
latest inventory costs are the highest, and that makes cost of goods sold
the highest under LIFO.

Student responses may vary.

Req. 3

Army-Navy Surplus
Income Statement
Month Ended March 31, 2012
Sales revenue (318 × $45) .................................... $14,310
Cost of goods sold ............................................... 5,971
Gross profit ........................................................... 8,339
Operating expenses ............................................. 2,750
Income before income taxes................................ 5,589
Income tax expense (30%) ................................... 1,677
Net income ............................................................ $ 3,912

Chapter 6 Inventory & Cost of Goods Sold 6-39

 (30-40 min.) P 6-61A
Req. 1 (partial income statements)
Lindbergh Aviation
Partial Income Statement
Year Ended July 31, 2012
AVERAGE FIFO LIFO
Sales revenue $127,605 $127,605 $127,605
Cost of goods sold 68,744 68,260 69,200
Gross profit $ 58,861 $ 59,345 $ 58,405

Computations of cost of goods sold:

Average cost ($5,112 + $2,880 + $63,992 + $4,128)

= = $7.5960
per unit (720 + 400 + 8,420 + 480)

Average cost COGS = 9,050 × $7.5960 = $68,744

FIFO COGS = (720 @ $7.10) + (400 @ $7.20) + (7,930 @ $7.60) = $68,260

LIFO COGS = (480 @ $8.60) + (8,420 @ $7.60) + (150 @ $7.20) = $69,200

Req. 2

Use the LIFO method to minimize income tax because cost of goods sold is highest (gross profit is
lowest) under LIFO when inventory costs are rising.

6-40 Financial Accounting 9/e Solutions Manual

 (15-30 min.) P 6-62A

Great White Trade Mart should apply the lower-of-cost-or-market rule to

account for inventories. The current replacement cost of ending
inventory is less than Great White’s actual cost, so Great White must
write the inventory down to current replacement cost, with the following
journal entry:

Cost of Goods Sold……………………. 90,000

Inventory……………………….......... 90,000
To write inventory down to market value.

Great White Trade Mart should report the following amounts in its
financial statements:

BALANCE SHEET
Inventory at market (which is lower than
cost of $240,000)………………………………………... $150,000*

INCOME STATEMENT
Cost of goods sold ($810,000 + $90,000)………….…… $900,000
_____
*$240,000 − $90,000 = $150,000

Representational faithfulness is the reason to account for inventory at

the lower of cost or market value. Representational faithfulness directs
accountants to report inventory at the most realistic and transparent
amount. In this case the current replacement cost (market value) of
Great White Trade Mart’s ending inventory is less than cost, and the
lower-of-cost-or-market rule requires a write-down of the inventory value
to current replacement cost.

Student responses may vary.

Chapter 6 Inventory & Cost of Goods Sold 6-41

 (20-30 min.) P 6-63A

Req. 1

La Crème Coffee
Muffin Mania, Inc. Corp.
Millions Millions
Gross profit percentage:
Sales……………………. $540 $7,710
Cost of sales…………... 470 3,170
Gross profit……………. $ 70 $4,540

Gross profit $70 $4,540

= 13.0% = 58.9%
percentage: $540 $7,710

Inventory turnover:
Cost of goods sold $470 $3,170
=
Average inventory ($30 + $18) / 2 ($540+ $630) / 2

= 19.6 times = 5.4 times

Req. 2

From these statistics, it’s hard to tell whether Muffin Mania or La Crème
Coffee is more profitable. Muffin Mania has a much faster inventory
turnover, and La Crème Coffee has a much higher gross profit
percentage. To evaluate profitability, we should also consider each
company’s selling, general, and administrative expenses.

6-42 Financial Accounting 9/e Solutions Manual

 (25-30 min.) P 6-64A

Req. 1 (estimate of ending inventory by the gross profit method)

Beginning inventory……………………............ $ 57,200

Purchases………………………………………… $490,800
Less: Purchase discounts……………….. (15,000)
Purchase returns…………….......... (70,800)
Net purchases………………………………… 405,000
Goods available…………………………………. 462,200
Cost of goods sold:
Sales revenue………………………………… $665,000
Less: Sales returns………………………. (12,000)
Net sales…………………………….………… 653,000
Less: Estimated gross profit of 45%.......... (293,850)
Estimated cost of goods sold……………... 359,150
Estimated cost of ending inventory…............ $103,050

Chapter 6 Inventory & Cost of Goods Sold 6-43

 (continued) P 6-64A

Req. 2 (income statement through gross profit)

Smith Company
Income Statement (partial)
Period Ending August 15 (date of the fire)
Sales revenue……………………………………… $665,000
Less: Sales returns……………………............ (12,000)
Net sales revenue……………………………… 653,000
Cost of goods sold………………………………... 359,150*
Gross profit…………………………….…………... $293,850
_____
*Cost of goods sold:
Beginning inventory…………………………... $ 57,200
Purchases………………………. $490,800
Less: Purchases discounts... (15,000)
Purchase returns…….. (70,800)
Net purchases…………………………………... 405,000
Cost of goods available for sale…………….. 462,200
Less: Ending inventory……………………….. (103,050)
Cost of goods sold…………………………….. $359,150

6-44 Financial Accounting 9/e Solutions Manual

 (20-25 min.) P 6-65A

Req. 1

Cost of sales, budgeted ($721,000 × 1.05)………… $ 757,050

+ Ending inventory, budgeted…………………………. 83,000
= Cost of goods available………………………………. 840,050
− Beginning inventory…………………………………… (64,000)
= Purchases, budgeted ………………………………... $ 776,050

Req. 2

Chester’s Convenience Store

Budgeted Income Statement
Year Ended December 31, 2012
Sales ($964,000 × 1.05)……………………………….… $1,012,200
Cost of sales ($721,000 × 1.05)………….…………… 757,050
Gross profit………………………………………………. 255,150
Operating expenses ($109,000 − $11,850)………..… 97,150
Net income…………………………………….…………. $158,000

Chapter 6 Inventory & Cost of Goods Sold 6-45

 (15-20 min.) P 6-66A

Req. 1 (corrected income statements)

J. L. Home Store
Income Statement (adapted; amounts in millions)
Years Ended December 31, 2012, 2011, and 2010
2012 2011 2010
Net sales revenue……………... $44 $41 $38
Cost of goods sold:
Beginning inventory……….. $12 $11 $ 6
Purchases…………………… 29 27 25
Goods available…………….. 41 38 31
Ending inventory…………… (9) (12) (11)
Cost of goods sold………… 32 26 20
Gross profit…………………….. 12 15 18
Operating expenses..…………. 8 8 8
Net income……………………… $ 4 $ 7 $10

6-46 Financial Accounting 9/e Solutions Manual

 (continued) P 6-66A

Req. 2

The corrections did not change total net income over the three-year
period. But the corrections drastically altered the trend of net income —
from an increasing pattern to a decreasing pattern.

Req. 3

The shareholders will not be happy with a declining trend of net income
because the company’s profit is decreasing each year.

Chapter 6 Inventory & Cost of Goods Sold 6-47

 (20-30 min.) P 6-67B

Req. 1

Inventory………………………………………. 8,008,000
Accounts Payable………………………… 8,008,000

Accounts Payable…………………………… 7,608,000

Cash………………………………………... 7,608,000

Cash…………………………………………… 5,400,000
Accounts Receivable……………………….. 9,288,000
Sales Revenue……………………………. 14,688,000

Cost of Goods Sold……………………….... 8,924,490*

Inventory………………………………….. 8,924,490

Operating Expenses…………………………. 3,500,000

Cash ($3,500,000 × 0.50)………………… 1,750,000
Accrued Liabilities ($3,500,000 × 0.50).. 1,750,000

Income Tax Expense………………………… 792,229

Income Tax Payable (see Req. 3).……… 792,229

_____
*($1,150,000 + $8,008,000) ÷ 157,000 = $58.33 x 153,000 = $8,924,490

6-48 Financial Accounting 9/e Solutions Manual

 (continued) P 6-67B

Req. 2

Inventory
Beg. bal. 1,150,000
Purchases 8,008,000 COGS 8,924,490
End. bal. 233,510

Req. 3

Fun Buy Store in Nashville

Income Statement
Year Ended June 30, 2012
Sales revenue…………………………… $14,688,000
Cost of goods sold…………………….. 8,924,490
Gross profit……………………………… 5,763,510
Operating expenses…………………… 3,500,000
Income before tax……………………… 2,263,510
Income tax expense (35%)……………. 792,229
Net income………………………………. $ 1,471,281

Chapter 6 Inventory & Cost of Goods Sold 6-49

 (20-30 min.) P 6-68B

Req. 1

The store uses FIFO.

This is apparent from the flow of costs out of inventory. For example, the
January 11 sale shows a unit cost of $37, which came from the
beginning inventory. This is how FIFO, and only FIFO, works.

Req. 2

Cost of goods sold:

15 × $37 = $ 555
27 × 37 = 999
6 × 38 = 228
29 × 38 = 1,102
$2,884

Sales [(42 units × $63) + (35 x $65)] $4,921

Cost of goods sold……………………………………. (2,884)
Gross profit……………………………………………... $2,037

Req. 3

Cost of January 31 inventory (25 × $39) + (47 x $38) = $ 2,761

6-50 Financial Accounting 9/e Solutions Manual

 (20-30 min.) P 6-69B

Req. 1

Inventory
Beg. bal. (67 units @ $25) 1,675
Purchases:
May 6 (101 units @ $27) 2,727
18 (163 units @ $29) 4,727 Cost of goods sold
26 (41 units @ $30) 1,230 (323 units @ $?) ?
End. bal. (49 units @ $?) ?

Cost of Goods Sold Ending Inventory

Average cost 323 × $27.8468* $8,995 49 × $27.8468* $1,364

____
*Average cost ($1,675 + $2,727 + $4,727 + $1,230)
= = $27.8468
per unit (67 + 101 + 163 + 41)

FIFO (67 @ $25) + (101 @ $27) (41 @ $30) +

+ (155 @ $29) = $8,897 (8 @ $29) = $1,462

LIFO (41 @ $30) + (163 @ $29) +

(101 @ $27) + (18 @ $25) = $9,134 49 @ $25 = $1,225

Chapter 6 Inventory & Cost of Goods Sold 6-51

 (continued) P 6-69B

Req. 2

LIFO cost of goods sold is highest because (a) prices are rising and (b)
LIFO assigns the cost of the latest inventory purchases to cost of goods
sold. When costs are rising, these latest inventory costs are the highest,
and that makes cost of goods sold the highest under LIFO.

Student responses may vary.

Req. 3

Camp Surplus
Income Statement
Month Ended May 31, 2012
Sales revenue (323 @ $49)………………………………. $15,827
Cost of goods sold………………………………………... 8,995
Gross profit………………………………………………… 6,832
Operating expenses………………………………………. 3,250
Income before income taxes……………………………. 3,582
Income tax expense (30%)………………………………. 1,075
Net income…………………………………………………. $ 2,507

6-52 Financial Accounting 9/e Solutions Manual

 (30-40 min.) P 6-70B
Req. 1 (partial income statements)

Shepard Aviation
Income Statement
Year Ended October 31, 2012
AVERAGE FIFO LIFO
Sales revenue $128,936 $128,936 $128,936
Cost of goods sold 71,723 71,242 72,152
Gross profit $ 57,213 $ 57,694 $ 56,784

Computations of cost of goods sold:

Average cost ($5,180 + $2,625 + $66,755 + $4,272)

= = $7.8990
per case (700 + 350 + 8,450 + 480)

Average cost COGS = 9,080 × $7.8990 = $71,723

FIFO COGS = (700 @ $7.40) + (350 @ $7.50) + (8,030 @ $7.90) = $71,242

LIFO COGS = (480 @ $8.90) + (8,450 @ $7.90) + (150 @ $7.50) = $72,152

Req. 2

Use FIFO to report the highest net income because cost of goods sold is lowest (gross profit is
highest) under FIFO when inventory costs are rising.

Chapter 6 Inventory & Cost of Goods Sold 6-53

 (15-20 min.) P 6-71B

Saltwater Trade Mart should apply the lower-of-cost-or-market rule to

account for inventories. The current replacement cost of ending
inventory is less than Saltwater Trade Mart’s actual cost, so Saltwater
Trade Mart must write the inventory down to current replacement cost,
with the following journal entry:

Cost of Goods Sold……………… 85,000

Inventory…………………......... 85,000
To write inventory down to market value.

Saltwater Trade Mart should report the following in its financial

statements:

BALANCE SHEET
Inventory, at market (which is lower than cost
of $270,000)……………………………………... $185,000*

INCOME STATEMENT
Cost of goods sold ($790,000 + $85,000)……… $875,000

*$270,000 − $85,000 = $185,000

Representational faithfulness is the reason to account for inventory at

the lower of cost or market value. Representational faithfulness directs
accountants to report inventory at the most realistic amount amount. In
this case the current replacement cost (market value) of Saltwater Trade
Mart’s ending inventory is less than cost, and the lower-of-cost-or-
market rule requires a write-down of the inventory value to current
replacement cost.

Student responses may vary.

6-54 Financial Accounting 9/e Solutions Manual

 (20-25 min.) P 6-72B

Req. 1

Cinnamon Roll, Dunking Coffee

Inc. Corp.
Dollars in Millions
Gross profit percentage:
Sales……………………. $542 $7,777
Cost of goods sold…... 474 3,180
Gross profit…………… $ 68 $4,597

Gross profit $68 $4,597

= 12.5% = 59.1%
percentage: $542 $7,777

Inventory turnover:
Cost of goods sold $474 $3,180
=
Average inventory ($36 + $20) / 2 ($541 + $625) / 2

= 16.9 times = 5.5 times

Req. 2

These statistics are unclear. The numbers suggest that Dunking Coffee
Corp. should be more profitable because it has a higher gross profit
percentage. However, Cinnamon Roll, Inc., turns its inventory over more
rapidly. To evaluate profitability, we should also consider each
company’s selling, general, and administrative expenses.

Chapter 6 Inventory & Cost of Goods Sold 6-55

 (25-30 min.) P 6-73B

Req. 1 (estimate of ending inventory by the gross profit method)

Beginning inventory……………………………... $57,300

Purchases………………………………………….. $490,700
Less: Purchase discounts………………… (17,000)
Purchase returns……………………. (70,000)
Net purchases…………………………............ 403,700
Goods available………………………………….. 461,000
Cost of goods sold:
Sales revenue………………………………….. $660,000
Less: Sales returns……………………….. (13,000)
Net sales………………………………………... 647,000
Less: Estimated gross profit of 44%............ (284,680)
Estimated cost of goods sold………............ 362,320
Estimated cost of ending inventory…………... $98,680

6-56 Financial Accounting 9/e Solutions Manual

 (continued) P 6-73B

Req. 2 (income statement through gross profit)

Young Company
Income Statement (partial)
For the Period ending March 15 (date of the fire)
Sales revenue…………………………………. $660,000
Less: Sales returns………………………. (13,000)
Net sales revenue…………………........... 647,000
Cost of goods sold………………………….. 362,320*
Gross profit…………………………………… $284,680
_____
*Cost of goods sold:
Beginning inventory……………………….. $57,300
Purchases……………………...... $490,700
Less: Purchases discounts… (17,000)
Purchase returns…….. (70,000)
Net purchases……………………………….. 403,700
Goods available……………………………... 461,000
Less: Ending inventory……………………. (98,680)
Cost of goods sold…………………………. $362,320

Chapter 6 Inventory & Cost of Goods Sold 6-57

 (20-25 min.) P 6-74B

Req. 1

Cost of sales, budgeted ($724,000 × 1.10)……….. $ 796,400

+ Ending inventory, budgeted……………….............. 81,000
= Cost of goods available…………………….............. 877,400
− Beginning inventory…………………………………. (69,000)
= Purchases, budgeted..………………………………. $ 808,400

Req. 2

Eddie’s Convenience Stores

Budgeted Income Statement
Year Ended December 31, 2010
Sales ($962,000 × 1.10)……………………… $1,058,200
Cost of sales ($724,000 × 1.10)……………. 796,400
Gross profit………………………………….... 261,800
Operating expenses ($113,000 − $3,200)… 109,800
Net income…………………………………….. $ 152,000

6-58 Financial Accounting 9/e Solutions Manual

 (15-20 min.) P 6-75B

Req. 1 (corrected income statements)

Columbia Furniture
Income Statement (adapted; amounts in millions)
Years Ended December 31, 2012, 2011, and 2010
2012 2011 2010
Net sales revenue……………... $38 $35 $32
Cost of goods sold:
Beginning inventory……….. $ 12 $ 11 $ 9
Purchases…………………… 30 28 26
Goods available…………….. 42 39 35
Ending inventory…………… (12) (12) (11)
Cost of goods sold………… 30 27 24
Gross profit…………………….. 8 8 8
Operating expenses…………... 6 6 6
Net income……………………… $ 2 $ 2 $ 2

Chapter 6 Inventory & Cost of Goods Sold 6-59

 (continued) P 6-75B

Req. 2

The corrections did not change total net income over the three-year
period. But the corrections drastically altered the trend of net income —
from an increasing pattern to a flat pattern.

Req. 3

The shareholders will not be happy with the trend of net income, since
the company’s profit is not increasing.

6-60 Financial Accounting 9/e Solutions Manual

Challenge Exercises and Problem

(5-10 min.) E 6-76

a. Buy inventory late in the year.

b. Company is using LIFO.
c. Use average cost.
d. Use FIFO.
e. Use FIFO.
f. Use any method. They all produce the same results because
inventory costs are stable.

Chapter 6 Inventory and Cost of Goods Sold 6-61

 (20-30 min.) E 6-77

Req. 1

LIFO cost of goods sold =

1. From purchase in December (31 @ $1,200)……………… $ 37,200

2. From purchase in June (55 @ $1,100)…………………….. 60,500
3. From purchase in February (19 @ $1,050)……………….. 19,950
4. From beginning inventory (12 @ $975)……….................. 11,700
LIFO cost of goods sold…………………………………. $129,350

Req. 2

Cost of goods sold with the additional year-end purchase

(this would have avoided a LIFO liquidation—that is,
kept year-end inventory at the same level it was at the
beginning of the year)

1. From purchase in December (43* @ $1,200)……. $ 51,600

2. From purchase in June (55 @ $1,100)……………. 60,500
3. From purchase in February (19 @ $1,050)………. 19,950
Cost of goods sold (with no LIFO liquidation). $132,050
_____
*Must purchase a total of 43 units in December to keep ending inventory
at 44 units, which was the level of beginning inventory.

6-62 Financial Accounting 9/e Solutions Manual

 (20-30 min.) E 6-78

Sales increased, the gross profit dropped, and net income slid into a net
loss, as shown here:

Dollars in millions 2012 2011 2010

Sales $36.6 $35.3 $34.3

Cost of sales 29.4 27.6 26.8
Gross profit 7.2 7.7 7.5

Net income (net loss) (0.4) 0.5 0.8

Gross
profit = $7.2 = $7.7 = $7.5 =
19.7% 21.8% 21.9%
percentage $36.6 $35.3 $34.3

Inventory $29.4 $27.6 $26.8

turnover = ($8.6 + $7.2) = 3.7 ($7.2 + $7.2) = 3.8 ($7.2 + $6.4) = 3.9
/2 /2 /2

Both the gross profit percentage and the rate of inventory turnover
dropped during this period. The gross profit percentage dropped
significantly. This suggests that Z Mart was having to discount its
merchandise more and more just to sell the goods. The end result was a
net loss in 2012.

Selling expenses increased significantly, which suggests that Z Mart

was having to advertise heavily in order to sell its inventory.

Chapter 6 Inventory and Cost of Goods Sold 6-63

 P 6-79

Req. 1

Beginning inventory $ 300,000

+ Purchases ? $3,930,000
- Ending inventory (330,000)
= Cost of goods sold $3,900,000

Req. 2

Inventory ............................... 3,930,000

Accounts Payable ....... 3,930,000

Accounts Receivable ........... 6,700,000

Sales............................. 6,700,000

Cost of Goods Sold .............. 3,900,000

Inventory ...................... 3,900,000

Inventory
Beg. Bal 300,000
Purchases 3,930,000 3,900,000 Cost of
goods sold
End. Bal 330,000

6-64 Financial Accounting 9/e Solutions Manual

 (continued) P 6-79
Req. 3

Beginning inventory ($20,000 higher under FIFO) $320,000

+ Purchases 3,930,000
- Ending inventory ($22,000 higher under FIFO) (352,000)
= Cost of goods sold (FIFO) $3,898,000

Req. 4

Heart Smart $800,000 = 40.0%

$2,000,000

GeneTech $2,802,000 = 41.8%

$6,700,000

Req. 5

Heart Smart $1,200,000 = 12.2

[($95,000 + $101,000)/2]

GeneTech $3,902,000 = 11.6

[($320,000 + $352,000)/2]

Req. 6

GeneTech has a higher gross profit percentage which indicates that

GeneTech has a gross profit of $.418 of every sales dollar and
HeartSmart has a gross profit of $.40 of every sales dollar. GeneTech
has a lower inventory turnover than HeartSmart, although both appear
strong.

Chapter 6 Inventory and Cost of Goods Sold 6-65

 Decision Cases

(50-60 min.) Decision Case 1

Req 1

Duracraft Corporation
Income Statement
FIFO LIFO
Sales revenue $1,200,000 $1,200,000
Cost of goods sold: 585,000* 645,000**
Gross profit 615,000 555,000
Operating expenses 200,000 200,000
Income before income
tax expense 415,000 355,000
Income tax expense
($415,000 × .40) 166,000
($355,000 × .40) 142,000
Net income $ 249,000 $ 213,000
_____
*$100,000 + $485,000 = $585,000
**$160,000 + $485,000 = $645,000

Req. 2

FIFO LIFO
Net income………… $249,000 $213,000

FIFO net income is higher because (1) prices are rising (from $100 to
$121.25 to $160), and (2) FIFO and LIFO assign costs to expense (cost of
goods sold) in opposite patterns.

Student responses may vary.

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 (15-25 min.) Decision Case 2
Req. 1

This question provides a rich setting for a class discussion. There’s no

single correct answer to this question. Some students may favor Company
B because it reports higher net income than Company A. B may be
preferred because it appears more successful than A, and B’s stock price
may therefore rise more than A’s stock price. Thus it may appear that
Company B would be a better investment than A.

Other students may prefer Company A because it discloses the inventory

method it uses. Company B does not let outsiders know which method it
uses to account for its inventory. These students may trust Company A
more than B because A is more willing to “bare its soul to the public.”

Professors can point out that A, the LIFO company, may be better off
because of the lower income taxes that A pays by using the LIFO method.
We don’t know whether Company B is making the most of this cash-flow
advantage of LIFO.

Student responses will vary.

Req. 2

Yes, the authors would prefer managers to be faithful in representing the

disclosures for inventory — for all the reasons accountants use
transparent and truthful. We would prefer that the financial statements
present the most economically realistic and honest picture of the way
assets, liabilities, revenue, and expenses are measured and reported. It is
only then that financial markets can operate in the way intended.

Chapter 6 Inventory and Cost of Goods Sold 6-67

 Ethical Issue

Req. 1

Changing accounting methods year after year hurts a company’s

credibility, which makes it hard for the company to borrow or raise
money from outside investors. The question that arises about such a
company is: What is the business trying to hide?

Req. 2

The consistency principle is violated.

Req. 3

Creditors and outside investors could be harmed by accounting

changes year after year. It becomes difficult to tell which changes in the
business are real and which changes result from the shift in the
accounting method. Outsiders find it difficult to track the company’s
operating results and financial position over time. Ultimately the
company suffers because lenders will not want to lend it money, and
outsiders will be reluctant to invest money in the business. This may
deprive the entity of needed funds and hurt its chances for success or
survival.

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Focus on Financials: Amazon.com, Inc.

(30 min.)

Req. 1

Millions
December 31, December 31,
2010 2009

Inventory (from the balance sheet) $3,202 $2,171

In addition to these inventories that Amazon.com, Inc. owns,

Amazon.com, Inc. handles a significant amount of sellers’ inventory on
consignment. Note 1 of the Consolidated Financial Statements
(Description of Business and Accounting Policies), under Inventories,
states that “we provide fulfillment-related services in connection with
certain of our sellers’ programs. Third party sellers maintain ownership
of their inventory, regardless of whether fulfillment is provided by us or
the third party sellers, and therefore these products are not included in
our inventories.”

Req. 2

Note 1 of the Consolidated Financial Statements (Description of

Business and Accounting Policies), under inventories, states:
“Inventories, consisting of products available for sale, are accounted
for…at lower of cost or market value.” The company uses the First-in,
First-out (FIFO) method.

Chapter 6 Inventory and Cost of Goods Sold 6-69

 (continued) Focus on Financials: Amazon.com, Inc.

Req. 3

Millions
Rearranging,

Beginning Inventory Cost of sales

(2010 income statement) $26,561
+ Purchases + Ending inventory
(at Dec. 31, 2010) 3,202
= Goods available = Goods available 29,763
− Ending Inventory − Beginning inventory
(at Dec. 31, 2009) (2,171)
= Cost of sales = Purchases $27,592

Req. 4

The gross profit percentage remained constant during 2010:

2010 2009
Net sales…………….. $34,204 100.0% $24,509 100.0%
Cost of sales…….…. 26,561 77.4% 14,978 77.4%
Gross profit………… $ 7,643 22.6% $ 5,531 22.6%

6-70 Financial Accounting 9/e Solutions Manual

 (continued) Focus on Financials: Amazon.com, Inc.

Req. 5

Amazon.com, Inc.’s rate of inventory turnover is 9.89 times.

Cost of sales $26,561

9.89
Average inventory = ($2,171 + =
times
$3,202) / 2

On a number-of-days basis, this works out to once about every 37 days

(365/9.89). Compared to other companies in the retail business,
Amazon.com, Inc.’s inventory turnover is relatively fast. Wal-Mart’s
inventory turnover, for example, illustrated in Exhibit 6-13, is about 9.1
times per year (about once every 40 days).

Req. 6

Answers to this question will vary, depending on when the exercise is

completed. In 2011, the retail industry was slowly recovering from a
severe economic recession. This will likely cause gross margins, as
well as inventory turnover statistics, to be improving slowly.

Chapter 6 Inventory and Cost of Goods Sold 6-71

 Focus on Analysis: RadioShack, Corp.

(30-40 min.)

Req. 1

a. Inventory on hand at fiscal 2010 year end, $723.7 million.

b. Cost of sales, $2,462.1 million.

Millions
c. Purchases = Ending inventory………………… $ 723.7
+ Cost of goods sold………………. 2,462.1
− Beginning inventory………….…. (670.6)
= Purchases…………………………. $2,515.2

Req. 2

Purchases are most directly related to cash flow because RadioShack,

Corp. must pay for the inventory it purchases.

Req. 3

Millions
Accounts payable, beginning of 2010
(ending balance for fiscal 2009)…………………. $ 262.9
+ Purchases 2010 (Req. 1)………………………….. 2,515.2
− Cash payments on account 2010…….…………. (X)
= Accounts payable, end of 2010…..……………… $ 272.4

2010 Cash payments (X) = $2,505.7 million

6-72 Financial Accounting 9/e Solutions Manual

 (continued) Focus on Analysis: RadioShack, Corp.

Req. 4

Note 2 (Summary of Significant Accounting Policies), Inventories, states

that RadioShack, Corp. values inventories “at the lower of cost
(principally based on average cost, which approximates FIFO) or market
value.”

Req. 5

(Dollars in millions) 2010 2009

Gross profit $4,473 − $2,460 $4,276 − $2,314

=
percentage $4,473 $4,276

= 45.0% 45.9%

This represents a slight decline in gross profit, largely due to a $197

million increase in sales accompanied by an increase ($148 million) in
cost of sales.

Inventory = $2,462 $2,314

turnover ($723.7 + $670.6) / 2 ($670.6 + $636.3) / 2

= 3.52 3.54

Inventory turnover declined slightly. Overall, RadioShack’s combination

of (a) gross profit percent and (b) rate of inventory turnover deteriorated
slightly during 2010. However, these declines were offset by a moderate
increase in sales. This information helps to explain how income from
operations increased slightly in fiscal 2010.

Chapter 6 Inventory and Cost of Goods Sold 6-73

 Group Project

Student responses will vary.

6-74 Financial Accounting 9/e Solutions Manual

Chapter 6 Appendix

Appendix Short Exercises

(10-15 min.) S6A-1

(Journal entries)

General Journal

1. Purchases 1,190
Accounts Payable 1,190
Purchased inventory on account.

2. Accounts Receivable 2,900

Sales Revenue 2,900
Sold inventory on account.

3. End-of-period entries to update inventory

and record Cost of Goods sold:

a. Cost of Goods Sold 580

Inventory (beginning balance) 580
Transfer beginning inventory to COGS.

b. Inventory (ending balance) 650

Cost of Goods Sold 650
Set up ending inventory based on physical
count.

c. Cost of Goods Sold 1,190

Purchases 1,190
Transfer purchases to COGS.

Chapter 6 Inventory and Cost of Goods Sold 6-75

 (10-15 min.) S6A-2
Req. 1 Posting general journal entries

Inventory
580* 580
650
650
* Beginning inventory was $580

Cost of Goods Sold

580 650
1,190
1,120

Req. 2
Cost-of-Goods-Sold Model
Beginning inventory $ 580
+ Purchases 1,190
= Goods available 1,770
- Ending inventory 650
= Cost of goods sold $1,120

Req. 3
Flexon Technologies
Income Statement (Partial)
Sales revenue $2,900
Cost of goods sold:
Beginning inventory $ 580
Purchases 1,190
Goods available 1,770
Ending inventory (650)
Cost of goods sold 1,120
Gross profit $1,780

6-76 Financial Accounting 9/e Solutions Manual

Appendix Exercises

(10-15 min.) E6A-3A

Inventory
Begin. Bal. (5 units @ $60) 300
Purchases
Oct. 8 (4 units @ $60) 240 Cost of goods sold
15 (10 units @ $70) 700
26 (1 unit @ $80) 80 (13 units @ $?) ?
Ending Bal. (7 units @ $?) ?

Cost of
Ending Inventory
Goods Sold

(1) Specific
unit (6 @ $60) + (6 @ (3 @ $60) + (4 @
cost $70) + (1 @ $80) = $860 $70) = $460

(2) Average
cost (13 × $66*) = $858 (7 × $66*) = $462

_____
*Average cost per ($300 + $240 + $700 + $80)
= = $66.00
unit (5 + 4 + 10 + 1)

(3)
FIFO (9 @ $60) + (4 @ $70) = $820 (6 @ $70) + (1 @ 80) = $500

(4) (1 @ $80) + (10 @

LIFO $70) + (2 @ $60) = $900 (7 @ $60) = $420

Chapter 6 Inventory and Cost of Goods Sold 6-77

 (10-15 min.) E6A-4A
Reqs. 1 & 2 (Journal entries)

General Journal
1. Purchases 1,020
Accounts Payable 1,020
Purchased inventory on account.

2. Accounts Receivable 3,900

Sales Revenue 3,900
Sold inventory on account.

3. End-of-period entries to update inventory

and record Cost of Goods Sold:

a. Cost of Goods Sold 300

Inventory (beginning balance) 300
Transfer beginning inventory to COGS.

b. Inventory (ending balance) 420

Cost of Goods Sold 420
Set up ending inventory based on physical
count.

c. Cost of Goods Sold 1,020

Purchases 1,020
Transfer purchases to COGS.

Req.3 Posting general journal entries

Cost of Goods Sold

Purchases 1,020 Ending Inventory 420
Beginning Inventory 300
Cost of goods sold 900

Req. 4 Cost-of-Goods-Sold Model

Beginning inventory $ 300

+ Purchases 1,020
= Goods available 1,320
- Ending inventory 420
= Cost of goods sold $ 900
6-78 Financial Accounting 9/e Solutions Manual
 (10-15 min.) E6A-5B

Inventory
Begin. Bal. (6 units @ $59) 354
Purchases
Dec. 8 (4 units @ $59) 236 Cost of goods sold
15 (10 units @ $69) 690
26 (5 units @ $79) 395 (18 units @ $?) ?
Ending Bal. (7 units @ $?) ?

Cost of Goods Sold Ending Inventory

(1) Specific
unit (8 @ $59) + (5 @ (2 @ $59) + (5 @ = $463
cost $69) + (5 @ $79) = $1,212 $69)

(2) Average
cost (18 × $67*) = $1,206 (7 × $67*) = $469

_____
*Average cost per ($354 + $236 + $690 +$395)
= = $67.00
unit (6 + 4 + 10 + 5)

(3)
FIFO (10 @ $59) + (8 @ $69) = $1,142 (5 @ $79) + (2@ $69) = $533

(4) (5 @ $79) + (10 @

LIFO $69) + (3 @ $59) = $1,262 (7 @ $59) = $413

Chapter 6 Inventory and Cost of Goods Sold 6-79

 (10-15 min.) E6A-6B
Reqs. 1 & 2 (Journal entries)
General Journal
1. Purchases 1,321
Accounts Payable 1,321
Purchased inventory on account

2. Accounts Receivable 5,670

Sales Revenue 5,670
Sold inventory on account

3. End-of-period entries to update inventory

and record Cost of Goods Sold:

a. Cost of Goods Sold 354

Inventory (beginning balance) 354
Transfer beginning inventory to COGS

b. Inventory (ending balance) 413

Cost of Goods Sold 413
Set up ending inventory based on physical
count

c. Cost of Goods Sold 1,321

Purchases 1,321
Transfer purchases to COGS

Req.3 Posting general journal entries

Cost of Goods Sold

Purchases 1,321 Ending Inventory 413
Beginning Inventory 354
Cost of goods sold 1,262

Req. 4 Cost-of-Goods-Sold Model

Beginning inventory $ 354

+ Purchases 1,321
= Goods available 1,675
- Ending inventory 413
= Cost of goods sold $1,262

6-80 Financial Accounting 9/e Solutions Manual

Appendix Problems

(20-25 min.) P6A-7A

Req. 1

Inventory
Begin. Bal. (52 units @ $13) 676
Purchases
Aug. 8 (78 units @ $14) 1,092 Cost of goods sold
30 (20 units @ $15) 300 (100 units @ $?) ?
Ending Bal. (50 units @ $?) ?

Cost of Goods Sold Ending Inventory

FIFO (52 @ $13) + (48 @$14) = $1,348 (20 @ $15) + (3 @ $14) = $720

Req. 2

Selling
Date Units Sold Price Total Revenue
Aug 3 14 $67 $ 938
Aug 11 38 $67 2,546
Aug 19 7 $69 483
Aug 24 32 $69 2,208
Aug 31 9 $69 621
Total 100 $6,796

Waverly Outlet
Income Statement (Partial)
Sales revenue $6,796
Cost of goods sold:
Beginning inventory $ 676
Purchases 1,392
Goods available 2,068
Ending inventory (720)
Cost of goods sold 1,348
Gross profit $5,448

Chapter 6 Inventory and Cost of Goods Sold 6-81

 (20-30 min.) P6A-8A

Req. 1 (Journal entries)

General Journal (thousands)

1. Purchases 2,000
Accounts Payable 2,000
Purchased inventory on account

2. Accounts Receivable 2,550

Cash 850
Sales Revenue 3,400
Sold inventory for cash and on account

3. End-of-period entries to update inventory

and record Cost of Goods Sold:

a. Cost of Goods Sold 490

Inventory (beginning balance) 490
Transfer beginning inventory to COGS

b. Inventory (ending balance) 620

Cost of Goods Sold 620
Set up ending inventory based on physical
count

c. Cost of Goods Sold 2,000

Purchases 2,000
Transfer purchases to COGS

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 (continued) P6A-8A
Req. 2
Total Desserts, Inc.
Income Statement (Partial)

Sales revenue $3,400

Cost of goods sold:
Beginning inventory $ 490
Purchases 2,000
Goods available 2,490
Ending inventory (620)
Cost of goods sold 1,870
Gross profit $1,530

Cost-of-Goods-Sold Model

Beginning inventory $ 490

+ Purchases 2,000
= Goods available 2,490
- Ending inventory 620
= Cost of goods sold $1,870

Current asset section of the balance sheet reports:

Inventory, $620

Chapter 6 Inventory and Cost of Goods Sold 6-83

 (20-25 min.) P6A-9B
Req. 1
Inventory
Begin. Bal. (48 units @ $18) 864
Purchases
May 8 (83 units @ $19) 1,577 Cost of goods sold
30 (17 units @ $20) 340 (97 units @ $?) ?
Ending Bal. (51 units @ $?) ?

Cost of Goods Sold Ending Inventory

FIFO (48 @ $18) + (17 @ $20) +

(49 @ $19) = $1,795 (34 @ $19) = $986

Req. 2

Selling
Date Units Sold Price Total Revenue
May 3 18 $73 $1,314
May 11 30 $73 2,190
May 19 6 $75 450
May 24 32 $75 2,400
May 31 11 $75 825
Total 97 $7,179

Whitewater Outlet
Income Statement (Partial)
Sales revenue $7,179
Cost of goods sold:
Beginning inventory $ 864
Purchases 1,917
Goods available 2,718
Ending inventory (986)
Cost of goods sold 1,795
Gross profit $5,384

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 (20-30 min.) P6A-10B

Req. 1 (Journal entries)

General Journal (thousands)

1. Purchases 1,180
Accounts Payable 1,180
Purchased inventory on account

2. Accounts Receivable 2,480

Cash 620
Sales Revenue 3,100
Sold inventory for cash and on account

3. End-of-period entries to update inventory

and record Cost of Goods Sold:

a. Cost of Goods Sold 520

Inventory (beginning balance) 520
Transfer beginning inventory to COGS.

b. Inventory (ending balance) 620

Cost of Goods Sold 620
Set up ending inventory based on physical
count.

c. Cost of Goods Sold 1,180

Purchases 1,180
Transfer purchases to COGS.

Chapter 6 Inventory and Cost of Goods Sold 6-85

 (continued) P6A-10B
Req. 2

Parkland Pastries, Inc.

Income Statement (Partial)

Sales revenue $ 3,100

Cost of goods sold:
Beginning inventory $ 520
Purchases 1,180
Goods available 1,700
Ending inventory (620)
Cost of goods sold 1,080
Gross profit $ 2,020

Cost-of-Goods-Sold Model

Beginning inventory $ 520

+ Purchases 1,180
= Goods available 1,700
- Ending inventory 620
= Cost of goods sold $1,080

Current asset section of the balance sheet reports:

Inventory, $620

6-86 Financial Accounting 9/e Solutions Manual