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Chapter 08 - Inventories: Measurement

Chapter 8

Inventories: Measurement

QUESTIONS FOR REVIEW OF KEY TOPICS
Question 8-1
Inventory for a manufacturing company consists of (1) raw materials, (2) work in process, and
(3) finished goods. Raw materials represent the cost, primarily purchase price plus freight charges,
of goods purchased from other manufacturers that will become part of the finished product. Workin-process inventory represents the products that are not yet complete. The cost of work in process
includes the cost of raw materials used in production, the cost of labor that can be directly traced to
the goods in process, and an allocated portion of other manufacturing costs, called manufacturing
overhead. When the manufacturing process is completed, these costs that have been accumulated in
work in process are transferred to finished goods.

Question 8-2
Beginning inventory plus net purchases for the period equals cost of goods available for sale.
The main difference between a perpetual and a periodic system is that the periodic system allocates
cost of goods available for sale to ending inventory and cost of goods sold only at the end of the
period. The perpetual system accomplishes this allocation by decreasing inventory and increasing
cost of goods sold each time goods are sold.

Question 8-3
Perpetual System

Periodic System

(1) purchase of merchandise

debit inventory

debit purchases

(2) sale of merchandise

debit cost of goods sold;
credit inventory

no entry

(3) return of merchandise

credit inventory

credit purchase returns

(4) payment of freight

debit inventory

debit freight-in

Question 8-4
Inventory shipped f.o.b. shipping point is included in the inventory of the purchaser when the
merchandise reaches the common carrier. Laetner Corporation records the purchase in 2011 and
includes the shipment in its ending inventory. Bockner Company records the sale in 2011.
Inventory shipped f.o.b. destination is included in the inventory of the seller until it reaches the
purchaser’s location. Bockner would include the merchandise in its 2011 ending inventory and the
sale/purchase would be recorded in 2012.

8-1

Chapter 08 - Inventories: Measurement

Answers to Questions (continued)
Question 8-5
A consignment is an arrangement under which goods are physically transferred to another
company (the consignee), but the transferor (consignor) retains legal title. If the consignee can’t find
a buyer, the goods are returned to the consignor. Goods held on consignment are included in the
inventory of the consignor until sold by the consignee.

Question 8-6
By the gross method purchase discounts not taken are viewed as part of inventory cost. By the
net method purchase discounts not taken are considered interest expense, because they are viewed as
compensation to the seller for providing financing to the buyer.

Question 8-7
1. Beginning inventory
2. Purchases
3. Ending inventory
4. Purchase returns
5. Freight-in





increase
increase
decrease
decrease
increase

Question 8-8
Four methods of assigning cost to ending inventory and cost of goods sold are (1) specific
identification, (2) first-in, first-out (FIFO), (3) last-in, first-out (LIFO), and (4) average cost. The
specific identification method requires each unit sold during the period or each unit on hand at the
end of the period to be traced through the system and matched with its actual cost. First-in, first-out
(FIFO) assumes that units sold are the first units acquired. The last-in, first-out (LIFO) method
assumes that the units sold are the most recent units purchased. The average cost method assumes
that cost of goods sold and ending inventory consist of a mixture of all the goods available for sale.
The average unit cost applied to goods sold or ending inventory is an average unit cost weighted by
the number of units acquired at the various unit prices.

Question 8-9
When costs are declining, LIFO will result in a lower cost of goods sold and higher income
than FIFO. This is because LIFO will include in cost of goods sold the most recently purchased
lower cost merchandise. LIFO also will provide a higher ending inventory in the balance sheet.

8-2

Chapter 08 - Inventories: Measurement

Answers to Questions (continued)
Question 8-10
Proponents of LIFO argue that it provides a better match of revenues and expenses because
cost of goods sold includes the costs of the most recent purchases. These are matched with sales that
reflect a current selling price. On the other hand, inventory costs in the balance sheet generally are
out of date because they are derived from old purchase transactions. It is conceivable that a
company’s LIFO inventory balance could be based on unit costs actually incurred several years
earlier. When inventory quantity declines during a period, then these out-of-date inventory layers
will be liquidated and cost of goods sold will match noncurrent costs with current selling prices.

Question 8-11
Many companies choose the LIFO inventory method to reduce income taxes in periods when
prices are rising. In periods of rising prices, LIFO results in a higher cost of goods sold and
therefore a lower net income than the other methods. The companies’ income tax returns will report
lower taxable incomes using LIFO and lower taxes will be paid currently. If a company uses LIFO
to measure its taxable income, IRS regulations require that LIFO also be used to measure income
reported to investors and creditors.

Question 8-12
The gross profit, inventory turnover, and average days in inventory ratios are designed to
monitor inventories. The gross profit ratio is calculated by dividing gross profit (net sales minus
cost of goods sold) by net sales. Inventory turnover is calculated by dividing cost of goods sold by
average inventory, and we compute average days in inventory by dividing the number of days in the
period by the inventory turnover ratio.

Question 8-13
A LIFO inventory pool groups inventory units into pools based on physical similarities of the
individual units. The average cost for all of a pool’s beginning inventory and for all of a pool’s
purchases during the period is used instead of individual unit costs. If the quantity of ending
inventory for the pool increases, then ending inventory will consist of the beginning inventory plus a
layer added during the period at the average acquisition cost for the pool.

Question 8-14
The dollar-value LIFO method has important advantages. First, it simplifies the recordkeeping
procedures compared to unit LIFO because no information is needed about unit flows. Second, it
minimizes the probability of the liquidation of LIFO inventory layers, even more so than the use of
pools alone, through the aggregation of many types of inventory into larger pools. In addition, firms
that do not replace units sold with new units of the same kind can use the method.

8-3

Convert each layer’s base year cost measurement to layer year cost measurement using the layer year’s cost index and then sum the layers. GAAP and IFRS in the methods allowed to value inventory is that IFRS does not allow the use of the LIFO method.S. Question 8-16 The primary difference between U. 3.Chapter 08 . 2.Inventories: Measurement Answers to Questions (concluded) Question 8-15 After determining ending inventory at year-end cost. Identify the layers in ending inventory with the years they were created. 8-4 . the following steps remain: 1. Convert ending inventory valued at year-end cost to base year cost.

.....Inventories: Measurement BRIEF EXERCISES Brief Exercise 8-1 Beginning inventory Plus: Purchases Less: Cost of goods sold Ending inventory $186.....................................000) $149......... Inventory ...000 (982....................000 Inventory ......................................000 Brief Exercise 8-2 To record the purchase of inventory on account...... Accounts receivable..... 845...........000 Cost of goods sold ......... 1..420..............420......................................000 Sales revenue ....000 945...000 To record sales on account and cost of goods sold... 1.......Chapter 08 .............................................................. 902........................................................................ 902......000 Accounts payable.................. 845.......000 8-5 ...........

.........................500 8-6 ....... 2011 Inventory ...................... Title to the goods shipped from a supplier to Kelly on December 30..Chapter 08 .000 Accounts payable ....o.......500 Inventory (1% x $250........ 247.......000) .. Brief Exercise 8-4 Purchase price = 10 units x $25.................000) .......b................... They belong to Kelly until they arrive at the customer’s location......... 250.000 January 6........... 2012 Accounts payable .................Inventories: Measurement Brief Exercise 8-3 Both shipments should be included in inventory....... shipping point........................................000 = $250.000 December 28...................... 250..............000 Cash (99% x $250............o............ 2... f.......... changed hands on December 30.......... 250. destination did not arrive at the customer’s location until after the fiscal year-end...... The goods shipped to a customer f....b..

.500 Cash ..... 247................ 2012 Accounts payable........500 Accounts payable .............Chapter 08 ..........................000) .500 8-7 .... 2011 Inventory (99% x $250................500 January 6.............Inventories: Measurement Brief Exercise 8-5 December 28........................................................ 247................. 247..................................................................... 247..

Chapter 08 - Inventories: Measurement

Brief Exercise 8-6
Cost of goods available for sale:
Beginning inventory (200 x $25)
Purchases:
100 x $28
200 x $30
Cost of goods available (500 units)

$5,000
$2,800
6,000

8,800
$13,800

First-in, first-out (FIFO)
Cost of goods available for sale (500 units)
Less: Ending inventory (determined below)
Cost of goods sold

$13,800
(8,100)
$5,700

Cost of ending inventory:
Date of
purchase
January 8
January 19
Total

Units
75
200

Unit cost
$28
30

Total cost
$2,100
6,000
$8,100

Average cost
Cost of goods available for sale (500 units)
Less: Ending inventory (determined below)
Cost of goods sold

$13,800
(7,590)
$6,210 *

Cost of ending inventory:
$13,800
Weighted-average unit cost =

= $27.60
500 units

275 units x $27.60 = $7,590
* Alternatively, could be determined by multiplying the units sold by the average
cost: 225 units x $27.60 = $6,210

8-8

Chapter 08 - Inventories: Measurement

Brief Exercise 8-7
First-in, first-out (FIFO)
Cost of goods sold:
Date of
sale
January 10
January 25
Total

Cost of
Units Sold

Units sold
125 (from Beg. Inv.)
75 (from Beg. Inv.)
25 (from 1/8 purchase)
225

Ending inventory:
Date of
purchase
Units
January 8
75
January 19
200
Total

Unit cost
$28
30

$25
25
28

Total cost
$2,100
6,000
$8,100

8-9

Total Cost
$3,125
1,875
700
$5,700

Chapter 08 - Inventories: Measurement

Brief Exercise 8-7 (concluded)
Average cost
Date

Purchased

Beginning
inventory

200 @ $25

= $5,000

January 8

100 @ $28

= $2,800

Available

Sold

Balance
200 @ $25

$5,000

125 @ $26 = $3,250 175 @ $26

$4,550

$7,800
= $26/unit
300 units

January 10
January 19

200 @ $30 =

Available

$10,550

$6,000

= $28.133/unit
375 units
100 @ $28.133 = $2,813 275 @ $28.133

January 25
Total cost of goods sold

= $6,063

8-10

$7,737
Ending
inventory

525.122.000 x $15 Cost of goods sold $1.000 $1.000 2.000 units) Less: Ending inventory (15.000 15.000 x $30 Cost of goods available (100.000 375. the year-end purchase would have no effect on income before income taxes.000 units from beginning inventory and 54.000 Brief Exercise 8-9 64.000 units) Cost of goods sold $ 500.140.000 60.000* $2.000 1.000 x $25) Purchases: 80. If FIFO were used instead of LIFO.000 units x $15 Plus: 54.000 units x $18 Cost of goods sold $ 150.000 $ 12.000 units x $25 each = $375.000 lower if the year-end purchase is made.000 higher and income before income taxes $12. FIFO cost of goods sold with or without the purchase would consist of the 10. Cost of goods sold without year-end purchase: Units purchased during the year: 60.Chapter 08 .000 Cost of goods sold with year-end purchase: 64.000 units x $18 Difference 1.000 2.000 8-11 .000 972.080.000 x $18 Plus units from beginning inventory: 4.900.400.000 units were sold.000 units purchased during the year at $18: 10.152.Inventories: Measurement Brief Exercise 8-8 Cost of goods available for sale: Beginning inventory (20.000 Cost of goods sold would be $12.

Chapter 08 .000 Brief Exercise 8-11 Cost of goods sold for the fiscal year ended February 28. FIFO instead of LIFO 8-12 $34. ending inventory also would have been higher by $258 million. An increase in beginning inventory causes an increase in cost of goods sold. Purchases for the year are the same regardless of the inventory valuation method used. 2009 would have been $78 million lower had SuperValue used FIFO for its LIFO inventory. but an increase in ending inventory causes a decrease in cost of goods sold.Inventories: Measurement Brief Exercise 8-10 Units liquidated Difference in cost ($30 – 25) Before tax LIFO liquidation profit Tax effect ($25.000) $15.451 million (78) million $34.000 x 40%) LIFO liquidation profit 5.000 (10.000 x $5 $25.373 million . While beginning inventory would have been $180 million higher. Cost of goods sold as reported Decrease if FIFO Cost of goods sold.

400.000 Cost of goods sold  Average inventory = Inventory turnover Cost of goods sold  $54.400.04 8-13 .000 x 1.000 x 1.000 1.000 $1.400. therefore cost percentage = 60% Sales x .000 200.60 = $450.000 + 48.000 Sales = $270.000 $1.400.000 x 1.Inventories: Measurement Brief Exercise 8-12 Average inventory = ($60.04 = 208.000 = $1.00 12/31/11 $1.608.600.000 $1.000 Inventory Layers at Base Year Cost Inventory Layers Converted to Cost Inventory DVL Cost = $1.400.000 (base) $1.000  .000 Brief Exercise 8-13 Date Ending Inventory at Base Year Cost 1/1/11 $1.664.60 = $270.000 $1.000 Gross profit ratio = 40%.400.000 x 5 Cost of goods sold = $270.Chapter 08 .000)  2 = $54.000 1.000 (base) 200.400.400.00 = $1.000 (2011) $1.000 = 5 Cost of goods sold = $54.00 =$1.400.

..................................200 Cost of goods sold ....................................... Inventory .............................................................................800 ........ Cash ....... 5.... 3........ 5..........................Inventories: Measurement EXERCISES Exercise 8-1 1............. Accounts payable ..........................................................000 600 600 To record cash sales and cost of goods sold...000 Inventory .................................................................... Cash ......... Sales revenue.................................................................................................... Inventory ..... 2.................. 300 300 To record purchase returns.............. To record the purchase of inventory on account and the payment of freight charges..................................Chapter 08 ....200 2.......... 5....................................................................800 8-14 5.. Inventory ............ 2............. Accounts payable ............................................................

..... Sales revenue .............Inventories: Measurement Exercise 8-2 1...................................................................... 8-15 5................... Cash ...................................000 Freight-in . Accounts payable................Chapter 08 ........................................ 5........................................... To record the purchase of inventory on account and the payment of freight charges...................000 600 600 To record cash sales....................................................... Purchase returns..................... 5...................... 5.......................... 3.................. 2.........................................................................200 .. Purchases .. Cash .................................200 NO ENTRY IS MADE FOR THE COST OF GOODS SOLD................. Accounts payable........ 300 300 To record purchase returns...........

......000 Freight-in .000 241....000 Inventory (beginning) ...................000 $240.....000 Requirement 2 Cost of goods sold (above) ......000 273......................... 17................ 10...000 (6.......000) $233.......000) (10........... 6...............000 8-16 .... 40..............................................................000 Purchase returns ... 32.........000 (40................................................. 233.................................................000 Inventory (ending) ..........000) 17...............Chapter 08 ............................. 240............................................000 Purchase discounts ............000 Purchases ......................Inventories: Measurement Exercise 8-3 Requirement 1 Beginning inventory Plus net purchases: Purchases Less: Purchase discounts Less: Purchases returns Plus: Freight-in Cost of goods available for sale Less: Ending inventory Cost of goods sold $ 32.

Inventories: Measurement Exercise 8-4 PERPETUAL SYSTEM PERIODIC SYSTEM ($ in 000s) Purchases Inventory Accounts payable 155 155 Freight Inventory Cash 10 Returns Accounts payable Inventory 12 Sales Accounts receivable Sales revenue Cost of goods sold Inventory End of period No entry Purchases Accounts payable 155 155 Freight-in Cash 10 10 Accounts payable Purchase returns 12 12 250 250 Accounts receivable Sales revenue 250 148 10 12 250 No entry 148 Cost of goods sold (below) Inventory (ending) Purchase returns Inventory (beginning) Purchases Freight-in Cost of goods sold: Beginning inventory Purchases Less: Returns Plus: Freight-in Net purchases Cost of goods available Less: Ending inventory Cost of goods sold 8-17 148 30 12 25 155 10 $25 $155 (12) 10 153 178 (30) $148 .Chapter 08 .

Chapter 08 .Ending inventory = Cost of goods sold 2011: (1) Cost of goods available for sale .24 + 13) = 275 = Beginning inventory (2) Cost of goods available for sale .Cost of goods sold = Ending inventory 876 .(630 .18 .Purchase returns .Inventories: Measurement Exercise 8-5 Beginning inventory Cost of goods sold Ending inventory Cost of goods available for sale Purchases (gross) Purchase discounts Purchase returns Freight-in 2011 275 (1) 627 249 (2) 876 630 18 24 13 2012 249 (3) 621 225 846 (4) 610 (5) 15 30 32 2013 225 584 (6) 216 800 585 12 (7) 14 16 Net purchases = Purchases(gross) .627 = 249 = Ending inventory 2012: (3) 2012 beginning inventory = 2011 ending inventory = 249 (4) Cost of goods sold + Ending inventory = Cost of goods available for sale 621 + 225 = 846 = Cost of goods available for sale (5) Cost of goods available for sale .249 = 597 = Net purchases Net purchases + Purchases discounts + Purchase returns .Purchase discounts + Freight-in Beginning inventory + Net purchases = Cost of goods available for sale Cost of goods available for sale .Net purchases = Beginning inventory 876 .32 = 610 = Purchases (gross) 2013: (6) Cost of goods available for sale .Beginning inventory = Net purchases 846 .Freight-in = Purchases(gross) 597 + 15 + 30 .216 = 584 = Cost of goods sold 8-18 .Ending inventory = Cost of goods sold 800 .

225 = 575 = Net purchases Purchases(gross) .Net purchases = Purchase discounts 585 .Beginning inventory = Net purchases 800 .Chapter 08 .Inventories: Measurement Exercise 8-5 (concluded) (7) Cost of goods available for sale .575 = 12 = Purchase discounts 8-19 .Purchase returns + Freight-in .14 + 16 .

Deduct: Merchandise shipped to Raymond f. destination on December 26 Merchandise held on consignment from the Harrison Company Correct inventory balance Exercise 8-8 1. 4.b. shipping point on Dec.000 Exercise 8-7 Inventory balance before additional transactions Add: Merchandise on consignment with Joclyn Corp.b.Inventories: Measurement Exercise 8-6 Inventory balance before additional transactions Add: Goods shipped to Kwok f. 6. destination on December 27 Correct inventory balance $165. 28 Goods shipped to customer f.000 $204.o. 5.000) (14. Excluded Included Included Excluded Included Excluded Included Included 8-20 $210.b.000 .000 17.000 15. 3.o. 2. 8.000 22.o. 7.000 (30.Chapter 08 .000) $181.

...000 1......................................................................... July 23..000) ..................000 50.............. 50.................000 units x $50 = $50......................000 July 15....................000 50............................. 2011 Accounts payable........000) ....... and the July 23 entry would include a credit to the inventory account instead of to purchase discounts......... Cash (98% x $50.......000 Requirement 3 The July 15 entry would include a debit to the inventory account instead of to purchases..........................Chapter 08 .............. Purchase discounts (2% x $50.. 8-21 ........ 50....................................000 50...000 Requirement 2 August 15....000 49.................................... Cash ............... 2011 Purchases ................... Accounts payable............ 2011 Accounts payable..................Inventories: Measurement Exercise 8-9 Requirement 1 Purchase price = 1...

............. 8-22 .............. 49..................... 2011 Accounts payable ...........................................................000 50............ Cash .......................000 Requirement 3 The July 15 entry would include a debit to the inventory account instead of to purchases...................... 2011 Accounts payable ......... Cash .....000)..Chapter 08 ............... 2011 Purchases (98% x $50...................................... Interest expense .. 49....................000 49........000 49..............................000 July 23........................................................000 Requirement 2 August 15.................................Inventories: Measurement Exercise 8-10 Requirement 1 July 15..................000 1.................... Accounts payable ............................ 49.......

.................................................000 700 34....................................000) ......300 Requirement 2 December 15..Chapter 08 .................................000 .... 8-23 35..... 2011 Accounts payable. Purchase discounts (2% x $35..................................... 2011 Accounts payable .... Cash .....................000) ......... Cash (98% x $35....... 2011 Purchases ..........000 35....................................................................................000 November 17.....000 35...................Inventories: Measurement Exercise 8-11 Requirement 1 Purchases: $500 x 70% = $350 per unit.. 35..................................... 100 units x $350 = $35... Accounts payable..........000 35..... November 26................................

................. 8-24 34......... Accounts payable .............................. 2011 Accounts payable .. Cash .................................................000)..000) ...................300 34.................................................... 34. 34........... Interest expense (2% x $35..........000 .................................Chapter 08 ............................................................300 34...................................300 November 26.................................................................Inventories: Measurement Exercise 8-11 (concluded) Requirement 3 Requirement 1: November 17......300 700 35...... 2011 Accounts payable ........... 2011 Purchases (98% x $35......300 Requirement 2: December 15.. Cash ......

FASB ASC 330–10–30–1: ―Inventory–Overall–Initial Measurement. The accounting basis of those kinds of inventories shall be their realizable value. calculated on the basis of quoted market prices less estimated direct costs of disposal. 8-25 . 2. An example is freshly dressed meats produced in meat packing operations. They have characteristics of unit interchangeability.‖ The primary basis of accounting for inventories is cost.S. cost means in principle the sum of the applicable expenditures and charges directly or indirectly incurred in bringing an article to its existing condition and location. They have immediate marketability at quoted market prices that cannot be influenced by the producer. generally accepted accounting principles. As applied to inventories. They have relatively insignificant costs of disposal.Inventories: Measurement Exercise 8-12 The FASB Accounting Standards Codification represents the single source of authoritative U. Indicate the circumstances when it is appropriate to initially measure agricultural inventory at fair value. which has been defined generally as the price paid or consideration given to acquire an asset.  b.  c. and its determination involves many considerations. A market basis is acceptable if the products meet all of the following criteria:  a. Define the meaning of cost as it applies to the initial measurement of inventory. FASB ASC 905–330–30–1: ―Agriculture–Inventory–Initial Measurement. It is understood to mean acquisition and production cost.Chapter 08 . The specific citation for each of the following items is: 1.‖ Exceptional cases exist in which it is not practicable to determine an appropriate cost basis for products.

handling costs.Chapter 08 .Inventories: Measurement Exercise 8-12 (concluded) 3.‖ Unallocated overheads shall be recognized as an expense in the period in which they are incurred. Other items such as abnormal freight. and amounts of wasted materials (spoilage) require treatment as current period charges rather than as a portion of the inventory cost. What is a major objective of accounting for inventory? FASB ASC 330–10–10–1: ―Inventory–Overall–Objectives.‖ A major objective of accounting for inventories is the proper determination of income through the process of matching appropriate costs against revenues. 8-26 . Are abnormal freight charges included in the cost of inventory? FASB ASC 330–10–30–7: ―Inventory–Overall–Initial Measurement. 4.

Chapter 08 .000 6.000 x $5.00 30.200 (17. first-out (LIFO) Cost of goods available for sale (18.000 Last-in.200 (15.700) $79. Inv.000 $97.50 Total cost $12.10 5.500 .200 First-in.000 Total Unit cost $6.000 units) Less: Ending inventory (determined below) Cost of goods sold Cost of ending inventory: Date of purchase Beg.000 Cost of goods available (18.000 1.000 x $6.Inventories: Measurement Exercise 8-13 Cost of goods available for sale: Beginning inventory (2. August 8 Units 2.000 units) Less: Ending inventory (determined below) Cost of goods sold $97.700 8-27 $97.000) $82.000 x $5.50 $55.000 Unit cost $5.10) Purchases: 10.000 units) $12.200 85.200 Cost of ending inventory: Date of purchase August 18 Units 3.00 Total cost $15.500 $17. first-out (FIFO) Cost of goods available for sale (18.200 5.

200 Weighted-average unit cost = = $5.40 18.000 units x $5.200 (16.40 = $81.000 * Cost of ending inventory: $97.000 units) Less: Ending inventory (determined below) Cost of goods sold $97.Chapter 08 .000 units x $5.200) $81. could be determined by multiplying the units sold by the average cost: 15.40 = $16.000 8-28 .Inventories: Measurement Exercise 8-13 (concluded) Average cost Cost of goods available for sale (18.200 * Alternatively.000 units 3.

50 5. first-out (LIFO) Date Purchased Sold Balance Beginning inventory 2.000 @ $6.50 6.00 6.000 @ $5.10 1.000 Last-in.700 Ending inventory .50 5.000 2.Inventories: Measurement Exercise 8-14 First-in.00 = $30.000 @ $5.) 6.50 = $30.000 $6.000 @ $5.000 (from 8/8 purchase) 4. first-out (FIFO) Cost of goods sold: Date of sale Aug.10 10. Inv.000 6.000 August 25 2.Chapter 08 .200 August 8 10.10 2.50 = August 14 August 18 $44.50 $67.000 @ $6.000 @ $6.50 = $55.000 (from 8/18 purchase) 15.00 = 1.000 @ $5.000 @ $ 5.200 $17.00 = $15.200 8.000 @ $6.000 (from 8/8 purchase) 3.10 $12.00 Total Cost $12.500 = $79.000 @ $6.000 $ 5.000 22.000 units x $5.000 (from Beg.50 $53.000 $82. 25 Total Cost of Units Sold Units sold 2.000 @ $5.000 @ $6.500 Total cost of goods sold 8-29 2.10 2.000 @ $5.10 5.10 = $12.200 2. 14 Aug.200 2.000 @ $5.200 Ending inventory = 3.000 15.200 33.50 $23.000 @ $5.000 @ $5.

720 Ending inventory 10.24/unit 10.) Average cost Date Beginning inventory August 8 Available Purchased Sold Balance 2. LIFO perpetual and LIFO periodic normally produce different results for ending inventory and cost of goods sold.000 @ $5.Inventories: Measurement Exercise 8-14 (concluded) (Note: the perpetual inventory LIFO results in this exercise are the same as periodic LIFO results.24 $15.000 @ $5.10 = $12.200 8.000 @ $6.400 = $5.000 units August 25 Total cost of goods sold = 8-30 $81. due to the timing of sales and purchases.000 @ $5.60/unit 12.480 .000 units August 14 August 18 Available 6.000 @ $5.000 $67.000 @ $5.000 $52.000 @ $6. The same LIFO layers are on hand at the end of the period under each method.10 $12.680 3.24 = $36.200 2. This is unusual.50 = $55.000 @ $5.400 7.00 = $30.60 = $44.Chapter 08 .60 $22.800 4.200 = $5.

000 Cost of ending inventory: Date of purchase Beg. first-out (FIFO) Cost of goods available for sale (2.000 First-in.000 $67.000 x $ 95 $95. FIFO will result in the highest ending inventory balance for the same reasons.000 Cost of goods available (2.400 units) Less: Ending inventory (below) Cost of goods sold $223.000 Cost of ending inventory: Date of purchase January 21 Units 800 Unit cost $100 Total cost $80.000) $156. Inv.000 .000 (80.000 Last-in.000 19.Chapter 08 .400 units) Less: Ending inventory (below) Cost of goods sold $223. January 15 Total Units 600 200 Unit cost $80 95 8-31 Total cost $48.000 $223.000) $143. Requirement 2 Cost of goods available for sale: Beginning inventory (600 x $80) Purchases: 1.000 (67.000 175.000 800 x $100 80.400 units) $ 48.Inventories: Measurement Exercise 8-15 Requirement 1 LIFO will result in the highest cost of goods sold figure because both the cost of merchandise and the quantity of merchandise rose during the period. first-out (LIFO) Cost of goods available for sale (2.

000 units) Less: Ending inventory (below) Cost of goods sold $ 50.200 $167.000 Cost of goods available (16.000 117.000 x $10.000 units x $10.40 $31.Chapter 08 .Inventories: Measurement Exercise 8-16 Requirement 1 Cost of goods available for sale: Beginning inventory (5. could be determined by multiplying the units sold by the average cost: 9.000 units x $10.45 = $73.000 units 7.050 8-32 .45 16.150) $ 94.75 86.200 (73.45 = $94.200 $167.00) Purchases: 3.200 Weighted-average unit cost = = $10.000 x $10.200 8.050* Cost of ending inventory: $167.150 * Alternatively.000 units) Cost of goods available for sale (16.000 x $10.

000 September 7 3.40 = Available Sold Balance 5.000 @ $10.000 @ $10.15 = $40.000 @ $10.Chapter 08 .55 $93.75 = $86.000 @ $10.000 @ $10.000 @ $10.600 4.000 @ $10.200 $81.850 Ending inventory $31.000 units September 10 September 25 8.600 5.000 units September 29 Total cost of goods sold = 8-33 $52.350 .15/unit 8.750 7.200 = $10.Inventories: Measurement Exercise 8-16 (concluded) Requirement 2 Date Purchased Beginning inventory 5.00 = $50.000 @ $10.00 $50.15 $40.000 Available $126.000 4.55/unit 12.55 = $73.600 = $10.

000 units = $230.Inventories: Measurement Exercise 8-17 Requirement 1 FIFO cost of goods sold: 10.000 .000 = Cost of purchases $180.000 units @ $6.000 x $6.000 Calculations to determine cost per unit of year 2011 purchases: Cost of goods sold = Weighted-average cost per unit Number of units sold $115.000 (beginning inventory) = $180.00 (determined below) = $120.75 per unit 20.000 = Cost of goods available for sale $230.000 Requirement 2 LIFO cost of goods sold: 20.000 x $5.00) Purchases (30.000 = $5.00 + 10.000 units @ $6.000 units $5.000 $110.000 $230.000 units) 8-34 $ 50.000 180.00 (determined below) = $50.000 = 60.00) Cost of goods available (40.000 = $6 = Cost per unit of year 2011 purchases 30.$50.75 x 40.000 units @ $5.000 units purchased Cost of goods available for sale: Beginning inventory (10.Chapter 08 .000 .

........7 + 2..Chapter 08 .6-27.4 2......4 = $2..236.......... 2009 LIFO reserve ($29.Inventories: Measurement Exercise 8-18 Requirement 1 February 27. Requirement 2 $2. Cost of goods sold .......1 million 8-35 ($ in millions) 2..............2).................................4 .........239...................

Inventories: Measurement Exercise 8-19 Requirement 1 Cost of goods sold: 50. In this case.Chapter 08 . 8-36 . Such disclosure would be required in order to make the financial statements not misleading. Disclosure may be made either in a footnote or parenthetically on the face of the income statement. Exercise 8-20 Requirement 2 The specific citation that describes the disclosure requirements that must be made by publicly traded companies for a LIFO liquidation is FASB ASC 330–10–S99–3: ―Inventory–Overall–SEC Materials–LIFO Liquidations. it must be disclosed. the effect of the LIFO layer liquidation is to increase income (ignoring taxes) by $6.$7 LIFO layer cost per unit)].00 = $425. liquidation of LIFO inventory layers carried at different costs prevailing in prior years results in noncurrent costs being matched with current selling prices.000 units x $8.‖ Requirement 3 When a company using LIFO liquidates a substantial portion of its LIFO inventory and as a result includes a material amount of income in its income statement that otherwise would not have been recorded must disclose the amount of income realized as a result of the inventory liquidation.50 ($8.000 $453.000 Requirement 2 When inventory quantity declines during a reporting period.000 units liquidated x $1.50 current year cost per unit .50 = 4.000 units x $7.000 [4.000 28. If the resulting effect on income is material.

202 31.061 $690.04 $760.000 x 1.000 3.04 = 3.00 = $660.000 3.22 11.461 707. Exercise 8-22 Date 1/1/11 12/31/11 12/31/12 Inventory Layers at Base Year Cost $660.22 = 86 days The gross profit ratios for the two companies are almost identical and similar to the industry average (33%).462 x 1.600 $660.288 16.08 = 43.462 1.00 = $660.600 40.Chapter 08 .462 x 1.000 x 1.000 = $660.000 (base) 3.501 48.000 = $703.000 $660.242 x 1.000 (base) $660.000 = $663. Home Depot turns over its inventory five days faster than both Lowe’s and the industry average.704 1.000 $660.242 (2012) $660.910 = 4.230 = 34.01 = 91 days 365 4.462 (2011) 40.7% 71.Inventories: Measurement Exercise 8-21 ($ in millions) LOWE’S HOME DEPOT Gross profit ratio = 23.2% Inventory turnover = 47.00 $660.00 = $660.298 = 4.462 (2011) $660. On average.08 8-37 Inventory Layers Converted to Cost Ending Inventory DVL Cost Ending Inventory at Base Year Cost .000 x 1.000 (base) 3.990 = 33.01 Average days in inventory = 365 4.04 = 3.729 7.600 663.000 1.

000 (2012) 30.000 30.15 = 34.000 x 1.000 Index = 1.000 = $220.500 255.000 (2013) 8-38 .000 $200.000 (base) 20.000 x 1.000 20.000 40.000 20.05 Index $200.05 = 21.000 = $200.00 = $200.000 221.000 x 1.000 (2013) 12/31/14 $300.000 1.000 x 1.00 = $200.Chapter 08 .00 $200.000 20.05 = 21.20 Index $200.00 = $200.000 x 1.000 (2012) 12/31/13 $299.15 Index $200.000 x 1.000 Index = 1.000 $200.500 $231.000 (2012) 40.000 $200.000 $200.000 (base) 20.000 x 1.Inventories: Measurement Exercise 8-23 Date 12/31/11 12/31/12 Ending Inventory at Base Year Cost Inventory Layers at Base Year Cost $200.000 Index = 1.05 = 21.000 267.000 x 1.15 = 46.00 = $200.000 (base) 20.000 = $260.000 x 1.000 = $250.000 (base) Inventory Layers Converted to Cost Ending Inventory DVL Cost $200.

Average cost d 12. Items sold are those acquired last. i. k. Consignment j 11.o. F.b. Legal title passes when goods arrive at location.Inventories: Measurement Exercise 8-24 List A i l 1. Items sold are those acquired first. F. Gross method g h k 5. g. Goods are transferred to another company but title remains with transferor. 8-39 .o. Perpetual inventory system 2. If LIFO is used for taxes. Purchase discounts not taken are considered interest expense.Chapter 08 . FIFO f 9. d. l. destination e 8. it must be used for financial reporting. Continuously records changes in inventory.b. IRS conformity rule List B a. h. Purchase discounts not taken are included in inventory cost. e. shipping point c 4. Used to convert ending inventory at yearend cost to base year cost. Legal title passes when goods are delivered to common carrier. LIFO b 10. b. Items sold come from a mixture of goods acquired during the period. Periodic inventory system a 3. Adjusts inventory at the end of the period. Cost index 7. c. f. Net method 6. j.

2.000 120.528 3. the higher priced items are sold first with lower-priced goods remaining in the ending inventory.800 Ending Inventory $100.000 1.00 $20. then prices during the period were moving downward.36 per unit Ending Inventory = $35.05 8.Inventories: Measurement CPA / CMA REVIEW QUESTIONS CPA Exam Questions 1.000 121. purchases are recorded net of the discount: $3. If the inventory balance was lower using FIFO than LIFO. c. a. b. 7.000 Layer at base Cost year cost Index 1.36 x 5 = $176.950 / 140 units = $35.000 8. Under the net method. 5 units x $50 = $250 6.000 128. Average Cost = $4.Chapter 08 . d. Date 1/1/11 12/31/11 12/31/12 Inventory at base year cost $100. 5 units x $30 = $150 5. b. b.000 129.800 .79 4.000 1. c. By using FIFO during such a period.600 x 98% = $3.10 8-40 Layer at current year cost $21.

500 at $66 is added to the previous 3.300).000 units. leaving just 50 of those units at $66 each.000 units at $64.200.30. The 3. the firm is left with 3. those units are valued at the oldest prices for the period.75.30 and 400 of the units priced at $64.000 remaining units priced at $64. at the end of the month.30 times 3.200 units at $64.600 units sold on March 14 were the oldest units. a.400 units at $64.200 units in inventory at $64.30 of the beginning inventory.450 units comes entirely from the March 25 purchase. Thus. Under the periodic LIFO method. The March 4 purchase added 3. c. The March 28 sale of 3.450 units sold on March 28 were the 3.000 units at $64. The ending inventory consists of 3.75 prior to the March 25 purchase.30 each.200). minus sales).75 each. Added to this is the March 4 purchase of 3. 3. Adding the two together produces a total ending inventory of $196. That sale eliminated all of the 3. 2. and 50 units at $66 ($3.400 additional units at $64. leaving an inventory of 3.115.Inventories: Measurement CMA Exam Questions 1.30 ($192. The March 25 purchase of 3.050 units at $66 each. the company begins with 3. a. Thus. the inventory consists of two layers: 3.500 units were acquired at $66.000 units at $64. On March 25. the 3.300.75 and 450 units priced at $66. 3.75. The March 14 sale uses all of the March 4 purchase and 200 of the original inventory units.30.Chapter 08 . The answer would have been the same under the periodic FIFO method.050 units (beginning inventory plus purchases. The ending inventory consists of 3. which is $64. Multiplying $64. Under FIFO. Under the perpetual LIFO method. The company began March with 3. 8-41 . or $201.200 units priced at $64.050 units produces a total inventory value of $196.

........................ October 18. Purchase returns ....................................................................................Inventories: Measurement PROBLEMS Problem 8-1 Requirement 1 a................................................................. 2011 Accounts payable ..........................Chapter 08 ................ Cash ..000 3..... Interest expense ................................... October 31.. 21...............560 3.................560 440 22.......................000 ....... c...... October 12........... 21............ Cash ............000 To record payment of accounts payable........... 2011 Accounts payable .............. 8-42 21............................................. 2011 Purchases (98% x $22............ To record the purchase of inventory on account and the payment of freight charges................................. Freight-in .... Accounts payable .......... b.....................560 500 500 To record purchase returns.............................................000)................................

................................................. 2011 Cost of goods sold (above) ......... Freight-in ................000 21... 8-43 18.. Purchases ....................Inventories: Measurement Problem 8-1 (continued) d...............................000 28.....000 Cost of goods sold: Beginning inventory Plus net purchases: Purchases $21..560 Less: Purchases returns (3............................... Inventory (beginning)................... Sales revenue .......... 2011 Accounts receivable............................................................ No entry is made for the cost of goods sold................000 15.....060 3....... Purchase returns ....... To record sales on account................. Inventory (ending) .........Chapter 08 ........060) $18.............................................000 Adjusting entry: October 31........................................... October..................000 16...... 28.....060 (16....000 19.....................000) Plus: Freight-in 500 Cost of goods available for sale Less: Ending inventory Cost of goods sold $15........060 34...............560 500 .....

.............................000 28..................................Inventories: Measurement Problem 8-1 (concluded) Requirement 2 a.. Inventory .. October 18..............560 440 22................. 8-44 28...................560 To record purchase returns............................. October 31....................................... Sales revenue............. d........... 2011 Accounts receivable ...... Interest expense ....... Inventory ..................................................................................000 18... 2011 Accounts payable ...................................................... 2011 Inventory (98% x $22...................................... Cost of goods sold ......... 21......................................... Inventory .................000 18................................................. b.... 500 500 3.....000 3...................... October 12......... October............................000 To record payment of accounts payable...........000 To record sales on account.. 2011 Accounts payable ......... Accounts payable ................ Cash ... 21............Chapter 08 ........ c............................................................................... Cash .....................000) ................................000 ......560 21........ To record the purchase of inventory on account and the payment of freight charges.................................................................

(155.300) Total adjustments 54. 2. shipping point changes hands when the goods are shipped.increase (decrease): 1. Rasul should record the purchase and corresponding account payable in 2011 and include the merchandise in its 2011 ending inventory.700 NONE NONE 40. (22.000 Initial amounts Adjustments . 25.b. 2.000 6.304.040. NONE 4. destination and did not arrive at the customer's location until 2012.000) 3.000.000 (155. 4. The transaction is not correctly accounted for. Problem 8-3 Inventory $1.o.000 NONE NONE NONE NONE 40.Chapter 08 . it should be included in Rasul’s 2011 ending inventory. Merchandise held on consignment from another company belongs to the consignor and should be excluded from the inventory of the consignee. Rasul should include this merchandise in its 2011 ending inventory. destination and did not arrive at Rasul’s location until 2012. Inventory held on consignment by another company should be included in the inventory of the consignor.000 2. The transaction is correctly accounted for. The transaction is not correctly accounted for.700 Adjusted amounts $1.b. Legal title to merchandise shipped f. The sale should be recorded in 2012.700 8-45 Accounts Payable $1. Since the merchandise was shipped f. The transaction is correctly accounted for.000) NONE NONE NONE 25. 3.000 5. (5.000 7.b. The purchase is correctly recorded in 2012.000 Sales $9. 5.000 . Since the merchandise was shipped f. it should not be included in Rasul’s 2011 ending inventory.300) (133.000 (5.o.o. The transaction is not correctly accounted for.250. 210.000.Inventories: Measurement Problem 8-2 1.000 $9.000) 2.300) $ 866.

000 14. Cost of ending inventory: Date of purchase Beg.500) $196.30 Requirement 2 Sales (45.b.500) (9.Inventories: Measurement Problem 8-4 Requirement 1 Beginning inventory (10.000 x 2%) Plus: Freight-in (50.000 Unit cost Total cost $ 8.00) Net purchases: Purchases (50.000 (10. Inv.30** 41. destination and did not arrive at Johnson’s warehouse until 2012.000 10.200 $121.000 units) Less: Ending inventory (below) $ 80.700 (121.200 **$10 x 98% = $9.000 Cost of goods sold 504.50) Less: Purchase discounts ($490. The merchandise was shipped f.o.500 150.Chapter 08 .000 units purchased on December 28 are not included.000 units x $.500 * The 5.700 584.000 4.800) 25.000 x $8.80 + .50 in freight charges = $10.50) Cost of goods available (59.000 units x $18.00) Less: Cost of goods sold (above) Other operating expenses Income before income taxes $810.000 8-46 (613.00) Less: Returns (1.500 .000 $463.00 $ 80. 2011 Total Units 10.000* units x $10.000 $500.000 units x $10.200) $463.

000 x $ 9.000 6.000 6.000 Alternatively.000 x $8.000 Cost of ending inventory: Date of purchase Jan.000 60. cost of goods sold can be determined by adding the cost of the 6.000 Cost of goods available (17.000 8. FIFO.000 1.00 $45.000) and the 3.000 Unit cost $ 9.000 $78.000 units from the January 10 purchase ($27.00 Total cost $18.000) = $75. 10 Jan.000 $153.Inventories: Measurement Problem 8-5 Cost of goods available for sale for periodic system: Beginning inventory (6. periodic system Cost of goods available for sale (17.00 10.000 units in beginning inventory ($48.000 (78. 8-47 .000) $ 75.Chapter 08 .00) Purchases: 5.00 60. 18 Totals Units 2.000 x $10.000 units) Less: Ending inventory (determined below) Cost of goods sold $153.000 105.000 units) $ 48.000.

000 units from the January 18 purchase ($60.000 Unit cost $8.000 8. periodic system Cost of goods available for sale (17.000) and the 3.00 Total cost $48.000 (66.000 2.000 Cost of ending inventory: Date of purchase Beg.000 units) Less: Ending inventory (determined below) Cost of goods sold $153.000 18.Inventories: Measurement Problem 8-5 (continued) 2. 8-48 .000. Jan.Chapter 08 .000) $ 87.000 $66. LIFO.000) = $87.00 9.000 Alternatively. cost of goods sold can be determined by adding the cost of the 6. Inv.000 units from the January 10 purchase ($27. 10 Totals Units 6.

000 @ $8.00 = January 20 Total cost of goods sold = $40.00 = $60.00 6.000 @ $9.000 $71.000) $ 81.000 $24.000 units 8.000 @ $8. LIFO.00 = January 12 January 18 Balance $48.00 17.00 $111.000 Cost of ending inventory: $153. cost of goods sold could be determined by multiplying the units sold by the average cost: 9.000 3.000 units x $9.000 3.000 3.000 $45.000 @ $8.000 @ $8.000 4.00 3.00 $51.000 @ $9.000 2.00 3.Inventories: Measurement Problem 8-5 (continued) 3.00 = 6.00 $48.00 4.000 @ $8. 8-49 .000 3.000 (72.000 @ $8.000 Ending inventory $82.000 units x $9.00 $24.000 @ $9.000 @ $9.00 2.000 units) Less: Ending inventory (below) Cost of goods sold $153.000 @ $10.000 January 5 January 10 Sold 6.00 5.00 $69.000 @ $8.000 @ $8.Chapter 08 .000 @ $9. Average cost. periodic system Cost of goods available for sale (17.000.000 @ $10.000 3.00 = 5.00 3.00 = $72.000 Alternatively.000 $18. perpetual system Date Beginning inventory Purchased 6.000 @ $9.00 = $81.00 = 3.000 @ $10.000 Weighted-average unit cost = = $9.000 @ $10.

000 @ $9.000 @ $9.000 $111. perpetual system Date Beginning inventory Purchased 6.625/unit 8.000 units January 12 January 18 Available 2.Chapter 08 .500 8-50 .625 = $17.000 January 5 January 10 Sold 6.00 = 3.625 $51.000 @ $8.00 = Available 5.Inventories: Measurement Problem 8-5 (concluded) 5.750 = $9.000 units January 20 Total cost of goods sold = $78.000 $45.000 3.000 @ $8.00 $24.00 $48.000 @ $9.00 = $60.000 $69.000 $24.000 @ $10.500 Ending inventory 6.3125/unit 12.000 = $8.3125 $74.00 = Balance $48.250 8.000 @ $8.750 4.000 @ $8.3125 = $37. Average cost.000 @ $8.250 6.000 @ $8.

00 Cost of goods available (34.000 Cost of ending inventory: Date of purchase March 22 Units 14.000 Unit cost 5.000 Unit cost $4.000 units) Less: Ending inventory (determined below) Cost of goods sold Cost of ending inventory: Date of purchase Jan.000 (60.000 14.500) $ 98.00 Total cost 70.000 40.000 x $4.000 54.000 x $4.50 8-51 Total cost $20. FIFO Cost of goods available for sale (34.000 units) Less: Ending inventory (determined below) Cost of goods sold $159.Inventories: Measurement Problem 8-6 Requirement 1 Cost of goods available for sale for periodic system: Purchases: 5.00 12.000 85.000 b.000 $159.00 4.50 17.500 .500 $60.500 $159.000 a.000 units) $20.Chapter 08 . 16 Totals Units 5. 7 Feb.000 x $5.000 9. LIFO Cost of goods available for sale (34.000 (70.000) $ 89.

Average cost Cost of goods available for sale (34.000 units x $4. 8-52 .000 Weighted-average unit cost = = $4. LIFO results in a higher cost of goods sold and. a lower gross profit ratio than FIFO.6765 = $65.471) $ 93.000** = 36% LIFO: $41.000** = 30% Average: $46. could be determined by multiplying the units sold by the average cost: 20.000** = 33% *Sales less cost of goods sold **20.471 * Alternatively.6765 = $93.000 (65.6765 34.000 units 14. therefore.Chapter 08 .000* ÷ $140.529* Cost of ending inventory: $159.471* ÷ $140.000 units) Less: Ending inventory (below) Cost of goods sold $159.530 (rounding) Gross Profit ratio: FIFO: $51.000 units x $7 sales price = sales Requirement 2 In situations when costs are rising.Inventories: Measurement Problem 8-6 (concluded) c.000 units x $4.500* ÷ $140.

000 216 70.500 216 70.000 Cost of goods available Ending inventory: 213 $64.000 Cost of goods sold $183.Inventories: Measurement Problem 8-7 Requirement 1 Beginning inventory ($60.300 Requirement 2 Cost of goods available for sale Less: Ending inventory (below) Cost of goods sold $798.300 219 75.000 72.000 + 60.500 219 75.000 $219.000) $588.000) Purchases: 211 $63.300 (210.000 213 64.000 615.300) $579.300 8-53 .500 217 72.000 215 69.500 214 66.000 + 63.000 Cost of ending inventory (3 autos): Car ID 219 218 217 Total Cost $ 75.300 (219.300 798.000 218 72.300 72.000 212 63.Chapter 08 .

525 = $199.300 (183.000 Requirement 4 Cost of goods available for sale (12 units) Less: Ending inventory (below) Cost of goods sold $798.000 $183.300 (199.575) $598.300 Cost of ending inventory (3 autos): Car ID 203 207 210 Total Cost $ 60.725* Cost of ending inventory: $798.Chapter 08 .525 = $598.300 Weighted-average unit cost = = $66.000 63.000) $615.525 12 units 3 units x $66. could be determined by multiplying the units sold by the average cost: 9 units x $66.575 * Alternatively.Inventories: Measurement Problem 8-7 (concluded) Requirement 3 Cost of goods available for sale Less: Ending inventory (below) Cost of goods sold $798.725 8-54 .000 60.

Requirement 3 Retained earnings would have been higher by approximately $2.183 .2.617 million at the end of 2008 and 2007. This means that the tax effect of the difference between LIFO and FIFO was $119 million ($566 . inventory would have been higher by $3.617). The information provided also states that net income for 2008 would have been higher by $447 million if FIFO had been used. respectively.183 million and $2. 2008 cost of goods sold would have been lower (and income before tax higher) by $566 million ($3.183 million x (1 .21)]. Therefore. 8-55 . Requirement 2 The information might be useful to a financial analyst interested in comparing Caterpillar’s performance with another company using the FIFO inventory method exclusively. The effective tax rate is therefore approximately 21% ($119 ÷ $566).Chapter 08 .515 million [$3.447).Inventories: Measurement Problem 8-8 Requirement 1 The note indicates that if the company had used FIFO..

000) LIFO liquidation profit before tax 50.000 8-56 .000 Less: LIFO cost of goods sold (950.000 Requirement 2 Cost of goods sold assuming all units purchased at the year 2011 price: 40. Inv. 10.000 x 40% = $20.000) $ 950.000 1.200. Inv.Inventories: Measurement Problem 8-9 Requirement 1 Beginning inventory Purchases: 30.000 units @ $25 Cost of goods available for sale Less: Ending inventory (below) Cost of goods sold $ 450.Chapter 08 .000 $250.000 (250.000.00 = $1.000 Multiplied by 1 .000 Cost of ending inventory: Date of purchase Units Beg.000 100.000 Unit cost $15 20 Total cost $150.000 Beg.40 x .000 units x $25.000 Requirement 3 $50..000 750.000 Totals 15. 5.60 LIFO liquidation profit $ 30.

These reductions resulted in a liquidation of LIFO inventory quantities carried at lower costs prevailing in prior years as compared with the cost of fiscal 2013.000 $196.000 in fiscal 2013. respectively. 8-57 .000 x $12 = $ 12. inventory quantities in certain LIFO layers were reduced. and $2.500 units x $2 ($18 – 16) = 2013: 1.000 13.000 14.500 x $16 = $ 24.000 x $18 = 180.000 profit $3.000 13. and 2011.000 profit Requirement 3 Disclosure note: During fiscal 2013. cost of goods sold decreased by $6.200. and 2011. 2012.800.000 units x $6 ($18 – 12) = $2.000 11.600.000 x $16 = $ 16. As a result.000.000 units x $2 ($18 – 16) = 2012: 1.000 Requirement 2 LIFO liquidation before-tax profit or loss: 2011: 1.500 $258.000. and $1. and 2011 purchases. and net income increased by approximately $3.000 x $18 = 234.000 $228.Chapter 08 .000 profit $6. 2012.000 12. $1.000 x $18 = 216. $3.000 2012: 1.Inventories: Measurement Problem 8-10 Requirement 1 Cost of goods sold: 2011: 1. 2012. respectively.000 10.000 2013: 1.

000) Gross profit $54.000.000.000.000 6.000.000.000 $25.000.000 units x $1.000 units x $ 900 4.000 units x $1.000 (25.400.000.400.000.000 1.000 = 53.Inventories: Measurement Problem 8-11 Requirement 1 Sales (27.000 8-58 .200.000.000 Gross profit ratio = $27.000.000) Less: Cost of goods sold (27.000 3.000 (27.000 units x $2.000 Gross profit ratio = $29.000.000 units x $ 800 2.Chapter 08 .000 units = = = = $15.000 units x $ 700 27.000  $54.000 5.000) $27.000) Less: Cost of goods sold* Gross profit $54.7% *Cost of goods sold: 15.000.000 units x $2.000) $29.000 = 50% Requirement 2 Sales (27.000  $54.

Chapter 08 .000 units x $100 ($1.000) Cost of goods sold: 5. there would be no LIFO liquidation. The profit difference ($2.000  $54. gross profit.000 = 55.000 Gross profit ratio = $29.500.400. cost of goods sold. If the company had purchased at least 27. 8-59 .000 600.900.000 27. first-out approach.000 – 800) 2. When applying the first-in.000 5. must be disclosed in a note.000 units x $200 ($1.000 units during 2007.900.000 units x $700 4.000 $ 3.000 units purchased because of the LIFO liquidation profit that results.000 units x $900 12.000 units x $800 6.Inventories: Measurement Problem 8-11 (concluded) Requirement 3 The gross profit and gross profit ratio are higher applying the requirement 2 assumption of 15.000 $54. The difference can be arrived at by comparing the current replacement cost of $1. Requirement 5 The number of units purchased has no effect on FIFO cost of goods sold.000 units $ 600.000 in this case).000.000 12.000 units x $1.000 3.000.000 units are purchased.000. if material.000.000 $2.000 with each inventory layer from prior years that were included in this year’s cost of goods sold.000 – 900) 4.000 800. LIFO inventory layers carried at costs prevailing in prior years are ―liquidated‖ or assumed sold in the cost of goods sold calculation.100.000 Gross profit = 24. regardless of the quantities of inventory purchased in the new reporting period.000 units x $300 ($1. This results in noncurrent costs being matched with current selling prices. beginning inventory costs are included in cost of goods sold first.000.000 $29.000 units x $2.4% If only 15.200.000 units are purchased. When inventory quantity declines during a reporting period. and the gross profit ratio would be exactly the same as when 28. as follows: 6.000 – 700) Total LIFO liquidation profit Requirement 4 Sales (27.

An increase in beginning inventory causes an increase in cost of goods sold.5. Therefore. While beginning inventory would have been $350 million higher. Gross profit ratio $6.Chapter 08 .255 = 17% 8-60 . ending inventory also would have been higher by $480 million.127 Requirement 3 Cost of goods sold for 2011 would have been $130 million lower had Inverness used the average cost method for its entire inventory. Purchases for the year are the same regardless of the inventory valuation method used.73 $5.15 = ($6. beginning of year Add: Bad debt expense for 2011 Less: End-of-year balance Accounts receivable written off $7 8 (10) $5 Requirement 2 Accounts receivable analysis: Balance.190 ($880 + 808)/2 = 6.255 ($703 + 583)/2 = 9. Requirement 4 a.060 ($5. Inventory turnover ratio = c.190 – 130). beginning of year ($583 + 7) Add: Credit sales Less: write-offs (from Requirement 1) Less: Balance end of year ($703 + 10) Cash collections $ 590 6. cost of goods sold would have been $5.255.255 (5) (713) $6. but an increase in ending inventory causes a decrease in cost of goods sold.Inventories: Measurement Problem 8-12 Requirement 1 Allowance for uncollectible accounts Balance.190) $6. Receivables turnover ratio = b.

Inventories: Measurement Problem 8-12 (concluded) Requirement 5 If inventory costs are increasing. liquidation of LIFO inventory layers carried at lower costs prevailing in prior years results in noncurrent costs being matched with current selling prices.35)] 8-61 .Chapter 08 . The liquidation caused 2011 cost of goods sold to be lower by $9.. when inventory quantity declines during a period. The ―income‖ generated by this liquidation is known as LIFO liquidation profit.23 million [$6 million  (1 .

000 $150.815 (2012) 1.000 x 1.000 = $420.000 (2014) $150.10 = = = = .000 35.000 25.000 x 1.Chapter 08 .12 12/31/13 $510.185 (2011) $150.000 (2012) $400.000 29.000 $150.000 (base) 20.185 (2011) 21.12 = $400.000 x 1.200 = $435.000 421.600 426.800 = $208.000 (base) $400.600 1.185 x 1.000 $400.000 188.000 1.000 x 1.000 x 1.00 = 20.10 8-62 x 1.00 12/31/11 $441.815 1.05 = 15.000 = $185.000 x 1.00 = 35.000 x 1.08 = 21.980 = $207.000 38.000 $400.000 $400.524 $150.000 21.17 = $150.00 = $150.000 1.00 = 20.624 1.185 $150.05 = 5.000 1.17 x 1.000 (base) 35.00 x 1.08 = $150.000 38.08 12/31/12 $245.08 = 24.000 5.000 1.000 (base) 35.185 21.000 $400.000 Inventory Layers at Base Year Cost Inventory Layers Converted to Cost Ending Inventory DVL Cost = $150.000 (base) 35.20 Problem 8-14 Date Ending Inventory at Base Year Cost 1/1/11 $150.815 (2012) $150.815 x 1.000 (base) 35.Inventories: Measurement Problem 8-13 Date Ending Inventory at Base Year Cost 1/1/11 $400.000 1.034 $150.000 x 1.000 1.000 (base) $150.000 Inventory Layers at Base Year Cost Ending Inventory DVL Cost Inventory Layers Converted to Cost = $400.000 38.185 x 1.000 = $425.000 x 1.000 1.000 (base) 20.185 (2011) 24.100 214.000 x 1.14 12/31/14 $228.700 = $210.000 $150.034 217.00 12/31/11 $200.800 437.000 38.000 (2012) $400.05 = $400.185 (2011) 21.000 $150.000 x 1.00 = 20.000 (2011) 15.00 = 35.000 (2011) 5.00 = $400.815 x 1.815 (2012) $150.000 x 1.17 = $150.524 213.524 1.000 (base) 20.00 = 35.000 21.185 x 1.05 12/31/12 $487.000 (2011) $400.12 = $400.000 x 1.000 25.800 $400.08 x 1.000 21.000 16.17 12/31/13 $235.

000 70.00 12/31/11 $340.00 = 70.07 12/31/14 $430.000 x 1.02 x 1.800 334.000 71.00 = 70.10 8-63 x 1.785 397.593 46.06 12/31/13 $400.077 (2014) $260.000 = $333.000 71.000 74.Chapter 08 .643 (2013) $260.189 (2011) 43.000 = $373.189 (2011) 43.000 (base) 70.333 x 1.07 x 1.643 x 1.Inventories: Measurement Problem 8-15 Date Ending Inventory at Base Year Cost 1/1/11 $260.189 x 1.02 = $260.698 378.000 (base) 70.000 (base) $260.10 = = = = .291 $260.643 (2013) 17.000 1.07 = $260.832 1.800 $260.909 1.077 $260.000 x 1.000 (base) 70.333 (2011) $260.000 $260.593 331.00 x 1.076 1.698 18.000 71.189 (2011) $260.593 46.000 x 1.189 1.000 (base) 73.000 x 1.000 $260.00 = 73.02 = 43.000 Inventory Layers at Base Year Cost Inventory Layers Converted to Cost Ending Inventory DVL Cost = $260.333 $260.00 = $260.000 = $390.189 x 1.02 12/31/12 $350.189 43.643 17.593 $260.02 = $260.000 = $330.

25 = $160.000 12.000 = $128.360 6.000 24.000 (2011) 24.000 3.000 (base) 12.00 = $84.000(5) = $128.360 123.000 5.000 (base) 12.000 (2011) $84.00 12/31/11 $100.20 x 1.Inventories: Measurement Problem 8-16 Date Ending Inventory at Base Year Cost 1/1/11 $84.750(2) 133.000(2014 inventory at year-end costs) 8-64 84.000 (2014 inventory at base-year cost) $128.05 x 1.14 x 1.000(3) x 1.000 (2013) $84.000 + 3.05 = $84.600 27.000 (base) $84.000 5.000 (2011) 24.000 1.000 x 1.360 6.960 $84.000 x 1.600 27.14 x 1.25 = $3.000 $125.20 (2013 cost index) $133.000 (2012) $84.000 12.05 12/31/12 $136.05 = x 1.000 (base) 12.05 x 1.000 12.000 (2014) $84.00 x 1.000  $125.800 = $120.800 1.600 $84.000 x 1.000 12.14 12/31/13 $150.000 24.750 $3.20 = = = = $84.000(4) 1.600 27.000 12.00 = x 1.000 (2012) 5.00 x 1.000 $84.000 Inventory Layers at Base Year Cost Ending Inventory DVL Cost Inventory Layers Converted to Cost = $84.000 x 1.000 (2013) 3.000 129.960 = $3.000 12.000 24.000 3.Chapter 08 .000 $84.25 $150.750  1.000 12.000 $84.20 (1) 12/31/14 (1) (2) (3) (4) (5) $160.960 $84.000 (base) 12.000 (2012) 5.14 = 84.000 = $125.000 = 1.710 .000 1.000 = $96.00 = x 1.000 (2011) 24.600 96.000 12.000 x 1.710 – 129.25 = = = = = 1.