# Chapter 6 Inventory and Cost of Goods Sold

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```					Chapter 6

Inventory and Cost of Goods Sold

Short Exercises

(10 min.)       S 6-1
Billions
Inventory…………………………                   3.9
Cash…………………………...                          3.9

Accounts Receivable………….            19.4
Sales Revenue……………….                         19.4

Cost of Goods Sold……………               4.2
Inventory……………………...                          4.2

Cash………………………………                    18.9
Accounts Receivable……….                      18.9

Chapter 6   Inventory and Cost of Goods Sold   343
(10-15 min.)   S 6-2
1. (Journal entries)

Inventory…………………………………..                    100,000
Accounts Payable…………………….                            100,000

Amounts Receivable……………………                  240,000
Sales Revenue………………………...                             240,000

Cost of Goods Sold……………………..                 80,000
Inventory (\$100,000 × .80)…………..                        80,000

Cash (\$240,000 × .20)…………………...              48,000
Accounts Receivable………………...                            48,000

2. (Financial statements)

BALANCE SHEET
Current assets:
Inventory (\$100,000 − \$80,000)………………. \$ 20,000

INCOME STATEMENT
Sales revenue………………………………………                        \$240,000
Cost of goods sold………………………………..                      80,000
Gross profit…………………………………………                        \$160,000

344   Financial Accounting 7/e Solutions Manual
(15-20 min.)         S 6-3
a                  b               c
Average
Cost              FIFO            LIFO
Cost of goods sold:
Average (24 × \$156.67)            \$3,760
FIFO \$1,500 + (14 × \$160)                          \$3,740
LIFO \$3,200 + (4 × \$150)                                           \$3,800

Ending inventory:
Average (6 × \$156.67)             \$ 940
FIFO (6 × \$160)                                         960
LIFO (6 × \$150)                                                         900

Computations:
Units sold = 24 (10 + 20 − 6)
Units in ending inventory = 6
Average cost per unit = \$156.67 (\$1,500 + \$3,200) ÷ (10 + 20)

Cost per unit:
First purchase  = \$150 (\$1,500 ÷ 10 = \$150)
Second purchase = \$160 (\$3,200 ÷ 20 = \$160)

Chapter 6   Inventory and Cost of Goods Sold   345
(10-15 min.)   S 6-4
Pinkie Copy Center
Income Statement
Year Ended December 31, 20XX
Average     FIFO      LIFO
Sales revenue (600 × \$20)            \$12,000 \$12,000 \$12,000
Cost of goods sold (600 × \$9.90*)       5,940
(100 × \$9) + (500 × \$10)                     5,900
(600 × \$10)                                            6,000
Gross profit                            6,060   6,100     6,000
Operating expenses                      3,000   3,000     3,000
Net income                           \$ 3,060 \$ 3,100 \$ 3,000
_____
*
Average cost per unit:
Beginning inventory (100 @ \$9.20)……………..         \$ 920
Purchases (700 @ \$10)……………………………                  7,000
Goods available…………………….………………                   \$7,920
Average cost per unit \$7,920 / 800 units……     \$ 9.90

346   Financial Accounting 7/e Solutions Manual
(10-15 min.)         S 6-5
Pinkie Copy Center
Income Statement
Year Ended December 31, 20XX
Average     FIFO                    LIFO
Sales revenue (600 × \$20)          \$12,000 \$12,000                  \$12,000
Cost of goods sold (600 × \$9.90*)     5,940
(100 × \$9) + (500 × \$10)                    5,900
(600 × \$10)                       ______  ______                    6,000
Gross profit                          6,060   6,100                   6,000
Operating expenses                    3,000   3,000                   3,000
Income before income tax           \$ 3,060 \$ 3,100                  \$ 3,000
Income tax expense (40%)           \$ 1,224 \$ 1,240                  \$ 1,200

*From S 6-4                                        Method to        Method to
maximize         minimize
reported         income tax
income           expense.
(before
tax).

Chapter 6   Inventory and Cost of Goods Sold   347
(5 min.)   S 6-6
Microdot managers can purchase lots of inventory before year
end. Under LIFO, these high inventory costs go directly to cost
of goods sold in the current year. As a result, the current year’s
net income drops and that saves on income tax. 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 [\$410,000 + (\$60,000 − \$49,000)]…… \$421,000

348   Financial Accounting 7/e Solutions Manual
(5-10 min.)        S 6-8
Dollars in Millions
\$35,137 − \$15,762
Gross profit percentage    =                                   = 0.551
\$35,137

\$15,762
Inventory turnover         =                         = 8.7 times
(\$1,693 + \$1,926) / 2

(5-10 min.)        S 6-9
Beginning inventory……………………………... \$ 300,000
+   Purchases……………………………………….…                      1,600,000
=   Goods available…………………………………...                 1,900,000
−   Cost of goods sold:
Sales revenue………………………. \$3,000,000
Less estimated gross profit (40%) (1,200,000)
Estimated cost of goods sold………………. (1,800,000)
=   Estimated cost of ending inventory…………... \$ 100,000

Chapter 6   Inventory and Cost of Goods Sold   349
(5 min.)   S 6-10
Correct
Amount
(Millions)

a.     Net sales (unchanged)……………………………….                     \$1,700
b.     Inventory (\$360 − \$10)………………………………..                   \$ 350
c.     Cost of goods sold (\$1,180 + \$10)…………………               \$1,190
d.     Gross profit (\$1,700 − \$1,190)………………………                \$ 510

(5 min.)   S 6-11
1. Last year’s reported gross profit was understated.
Correct gross profit last year was \$5.6 million (\$4.0 + \$1.6).

2. This year’s gross profit is overstated.
Correct gross profit for this year is \$3.2 million (\$4.8 − \$1.6).

350    Financial Accounting 7/e Solutions Manual
(5-10 min.)        S 6-12
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 cheat the government
(and the people) out of income tax.

Chapter 6   Inventory and Cost of Goods Sold   351
Exercises

(15-20 min.)    E 6-13
Req. 1

Perpetual System
Thousands
1. Purchases:
Inventory…………………….……….… 1,200
Accounts Payable………………….                                   1,200

2. Sales:
Cash (\$2,000 × .20)…….……………..                      400
Accounts Receivable (\$2,000 × .80).              1,600
Sales Revenue…………….……….                                    2,000

Cost of Goods Sold…………………..                    900
Inventory………………….………....                                 900

Req. 2

Thousands
BALANCE SHEET
Current assets:
Inventory……………………………….                            \$ 670

INCOME STATEMENT
Sales revenue…………………………….                           \$2,000
Cost of goods sold………………………                            900
Gross profit……………………………….                           \$1,100

352   Financial Accounting 7/e Solutions Manual
(15-25 min.)         E 6-14

Journal
DATE      ACCOUNT TITLES AND EXPLANATION               DEBIT         CREDIT

1 Inventory (\$1,870 + \$900)……………..                  2,770
Accounts Payable…………………...                                     2,770

2 Accounts Receivable (13 @ \$500)…..                6,500
Sales Revenue……………………….                                        6,500

Cost of Goods Sold…………………….                     2,160*
Inventory………………………………                                        2,160

3 Sales revenue…………………………... \$6,500
Cost of goods sold…………………….. 2,160
Gross profit……………………………... \$4,340

Ending inventory
(\$800 + \$1,870 + \$900 − \$2,160)…...                        \$1,410**
_____
*(5 @ \$160) + (8 @ \$170) = \$2,160
**Or, (5 @ \$180) + (3 @ \$170) = \$1,410

Chapter 6   Inventory and Cost of Goods Sold   353
(10-15 min.)       E 6-15
1.
Inventory
Begin. Bal.           ( 5 units @ \$160) 800
Purchases
Oct. 15             (11 units @ \$170) 1,870 Cost of goods sold
26             ( 5 units @ \$180) 900     (13 units @ \$?)                            ?
Ending bal.           ( 8 units @ \$?)      ?

Cost of Goods Sold                            Ending Inventory

(a) Specific
unit cost (2 @ \$160) + (11 @ \$170) = \$2,190                (3 @ \$160) + (5 @ \$180) = \$1,380

(b) Average
cost                  13 × \$170*                = \$2,210          8 × \$170*          = \$1,360

_____
(\$800 + \$1,870 + \$900)
*Average cost per unit      =                                        =      \$170
(5 + 11 + 5)

(c) FIFO (5 @ \$160) + (8 @ \$170)            =       \$2,160     (5 @ \$180) + (3 @ \$170) = \$1,410

(d) LIFO (5 @ \$180) + (8 @ \$170)            =       \$2,260     (5 @ \$160) + (3 @ \$170) = \$1,310

2. LIFO produces the highest cost of goods sold, \$2,260.
FIFO produces the lowest cost of goods sold, \$2,160.
The increase in inventory cost from \$160 to \$170 to \$180 per
unit causes the difference in cost of goods sold.

354     Financial Accounting 7/e Solutions Manual
(10 min.)       E 6-16
Cost of goods sold:
LIFO (\$2,260) − FIFO (\$2,160)…………………………                          \$100
× Income tax rate………………………………………..                                 .40
LIFO advantage in tax savings…………………………..                          \$ 40

(15 min.)       E 6-17
1.
a. FIFO
Cost of goods sold:
(5 @ \$90) + (6 @ \$95)……………...                  \$1,020
Ending inventory:
6 @ \$95………………………………                            \$ 570

b. LIFO
Cost of goods sold:
11 @ \$95……………………………..                          \$1,045
Ending inventory:
(5 @ \$90) + (1 @ \$95)……………...                  \$ 545

2.
MusicBiz.net
Income Statement
Month Ended June 30, 20X5

Sales revenue (3 @ \$150) + (8 @ \$155)…………….                     \$1,690
Cost of goods sold…………………………………….                                1,020
Gross profit……………………………………………..                                    670
Operating expenses…………………………………...                                 320
Income before income tax……………………………                                350
Income tax expense (40%)……………………………                                140
Net income………………………………………………                                    \$ 210

Chapter 6   Inventory and Cost of Goods Sold   355
(15 min.)   E 6-18
Millions
1. Gross profit:                                      FIFO LIFO
Sales revenue……………………………………                        \$5.0    \$5.0
Cost of goods sold
FIFO: 600,000 × \$7……………………………                     4.2
LIFO: (400,000 × \$5) + (100,000 × \$6)
+ (100,000 × \$7)………………………                            3.3
Gross profit………………………………………                        \$0.8      \$1.7

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

356    Financial Accounting 7/e Solutions Manual
(15-20 min.)         E 6-19
DATE:      _____________

TO:        Jim Deitrick, President of Deitrick Guitar Company

FROM:      Student Name

SUBJECT: Proposal for Increasing Net Income

We can increase net income by not buying our 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 slowing 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 and Cost of Goods Sold   357
(10-15 min.)   E 6-20
LIFO           1. Generally associated with saving income taxes.

FIFO           2. Results in a cost of ending inventory that is close
to the current cost of replacing the inventory.
Specific
unit cost        3. Used to account for automobiles, jewelry, and art
objects.

Average          4. Provides a middle-ground measure of ending
inventory and cost of goods sold.

FIFO           5. Maximizes reported income.

LIFO           6. Matches the most current cost of goods sold
against sales revenue.

LIFO           7. Results in an old measure of the cost of ending
inventory.

LCM             8. Writes inventory down when replacement cost
drops below historical cost.

LIFO           9. Enables a company to buy high-cost inventory at
year end and thereby to decrease reported
income and income tax.

LIFO         10. Enables a company to keep reported income
from dropping lower by liquidating older layers of
inventory.

358   Financial Accounting 7/e Solutions Manual
(5-10 min.)        E 6-21
Sloan, Inc.
Income Statement (partial)
Year Ended December 31, 20X4
Sales revenue ………………………………………………                                   \$125,000
Cost of goods sold [\$78,000 + (\$14,000 − \$12,000)]…                  80,000
Gross profit…………………………………………………                                    \$ 45,000

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.

Chapter 6   Inventory and Cost of Goods Sold   359
(15-20 min.)   E 6-22
(Amounts in millions or billions)
a.       \$475     \$29 + \$470 − \$24 = \$475
b.       \$ 68     \$543 − \$475 = \$68
c.       Must first solve for d
d.       \$ 55     \$74 − \$19 = \$55
c.       \$ 56     \$7 + c − \$8 = \$55; c = \$56
e.       \$ 35     \$16 + \$19 = \$35
f.       \$ 2      f + \$16 − \$2 = \$16; f = \$2
g.       \$ 3      \$2 + \$24 − g = \$23; g = \$3
h.       \$ 8      \$31 − \$23 = \$8

Krispy Kreme Doughnuts, Inc.
Income Statement
Year Ended January 31, 2006
(Millions)
Net sales                                       \$ 543
Cost of goods sold
Beginning inventory                \$ 29
Net purchases                        470
Goods available                      499
Ending inventory                     (24)
Cost of goods sold                               475
Gross profit                                        68
Operating and other expenses                       204
Net income (Net loss)                           \$(136)

360   Financial Accounting 7/e Solutions Manual
(20-30 min.)         E 6-23
Gross Profit
Company        Percentage              Inventory Turnover

\$68                   \$475
Krispy Kreme             = 0.125                    = 17.9 times
\$543              (\$29 + \$24) / 2

\$19                    \$55
Hewlett-Packard          = 0.257                            = 7.3 times
\$74                (\$7 + \$8) / 2

\$19                    \$16
PepsiCo                  = 0.543                            = 8.0 times
35                (\$2 + \$2) / 2

\$8                    \$23
Best Buy                 = 0.258                            = 9.2 times
\$31                (\$2 + \$3) / 2

PepsiCo has the highest gross profit percentage, 54.3%.

Krispy Kreme has the highest rate of inventory turnover, 17.9
times.

Based on these data, PepsiCo looks the most profitable
because PepsiCo’s gross profit percentage is 2 to 4 times the
other companies’ gross profit percentage. And PepsiCo’s
inventory turnover is about half as high as Krispy Kreme’s
turnover.

Chapter 6   Inventory and Cost of Goods Sold   361
(15 min.)   E 6-24
Req. 1 and 2

1                        2
FIFO                     LIFO
\$138,000 − \$85,500        \$138,000 − \$92,800
Gross profit percentage =
\$138,000                  \$138,000

= 0.380               = 0.328

\$85,500                   \$92,800
Inventory turnover                 =
(\$18,000 + \$20,000) / 2   (\$14,000 + \$18,000) / 2

= 4.5 times             = 5.8 times

Req. 3

FIFO makes the company look better on the gross profit
percentage.

Req. 4

LIFO makes the company look better on the rate of inventory
turnover.

362   Financial Accounting 7/e Solutions Manual
(10-15 min.)         E 6-25
Year ended January 31, 20X4:                                       Millions

Budgeted cost of goods sold (\$1,175 × 1.08)………..                   \$1,269

Budgeted ending inventory……………………………..                                  369

Budgeted goods available………….……………………                                1,638

Actual beginning inventory……………………………..                                (366)

Budgeted purchases……………………………………..                                 \$1,272

Chapter 6   Inventory and Cost of Goods Sold    363
(10-15 min.)   E 6-26
Beginning inventory………………………                   \$ 48,000
Net purchases………………………………                       106,000
Goods available……….…………………...                   154,000
Estimated cost of goods sold:
Net sales revenue……………………… \$200,000
Less estimated gross profit of 40%… (80,000)
Estimated cost of goods sold………...            120,000
Estimated cost of inventory destroyed..        \$ 34,000

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

364   Financial Accounting 7/e Solutions Manual
(10-15 min.)         E 6-27
Dijon Mustard, Inc.
Income Statement (Corrected)
Years Ended September 30, 20X5 and 20X4
20X5              20X4

Sales revenue                  \$149,000           \$122,000
Cost of goods sold:
Beginning inventory \$27,000           \$12,000
Net purchases        72,000            66,000
Goods available   99,000            78,000
Ending inventory    (16,000)          (27,000)*
Cost of goods sold             83,000             51,000
Gross profit                     66,000             71,000
Operating expenses               20,000             20,000
Net income                     \$ 46,000           \$ 51,000

*\$18,000 + \$9,000 = \$27,000

Dijon actually performed poorly in 20X5, compared to 20X4,
with net income down from \$51,000 to \$46,000.

Chapter 6   Inventory and Cost of Goods Sold   365
(5-10 min.)   E 6-28
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 costs are stable.

366   Financial Accounting 7/e Solutions Manual
(20-30 min.)         E 6-29
Req. 1

Actual cost of goods sold =

1.   From purchase in December (30 @ \$1,300)……..                     \$ 39,000
2.   From purchase in June (50 @ \$1,200)…………….                         60,000
3.   From purchase in February (20 @ \$1,100)……….                       22,000
4.   From beginning inventory (20 @ \$1,000)………...                      20,000
Actual cost of goods sold………………………..                          \$141,000

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 (50* @ \$1,300)…….          \$ 65,000
2. From purchase in June (50 @ \$1,200)…………….              60,000
3. From purchase in February (20 @ \$1,100)……….            22,000
Cost of goods sold (with no LIFO liquidation).     \$147,000
_____
*Must purchase a total of 50 units in December to keep ending
inventory at 40 units, which was the level of beginning
inventory.

Chapter 6   Inventory and Cost of Goods Sold   367
(20-30 min.)       E 6-30
Sales increased, the gross profit dropped, and net income slid
into a net loss, as shown here:

Dollars in millions                  20X7                      20X6                     20X5

Sales                               \$37.0                     \$35.9                     \$33.7
Cost of sales                        29.7                      28.1                      26.3
Gross profit                          7.3                       7.8                       7.4

Net income (net loss)                 (0.2)                       0.4                      0.5

Gross profit            \$7.3                       \$7.8                      \$7.4
=                      = 0.197                  = 0.217                   = 0.220
percentage             \$37.0                      \$35.9                     \$33.7

Inventory               \$29.7                      \$28.1                     \$26.3
=                     = 3.7                      = 3.8                     = 3.9
turnover           (\$8.4 + \$7.8) / 2          (\$7.8 + \$7.0) / 2         (\$7.0 + \$6.4) / 2

Both the gross profit percentage and the rate of inventory
turnover dropped during this period. This suggests that Zmart
was having to discount its merchandise more and more just to
sell the goods. The end result was a net loss in 20X7.

Selling expenses increased significantly, which suggests that
Zmart was having to advertise heavily in order to sell its
inventory.

368   Financial Accounting 7/e Solutions Manual
Practice Quiz
Q6-31   b   (\$3,500 + \$6,000 − \$5,500 = \$4,000)
Q6-32   b   (\$7,200 − \$5,500 = \$1,700)
Q6-33   d
Q6-34   d   (1,000 @ \$10.60 + 500 @ \$10 = \$15,600)
Q6-35   d   (1,000 @ \$10.60 + 500 @ \$10 = \$15,600)
Q6-36   a
Q6-37   c   (\$144,000 + \$216,000 = \$360,000)
Q6-38   b
Q6-39   a
Q6-40   d   [\$620,000 − (\$60,000 + \$400,000 − \$40,000) =
\$200,000]
Q6-41   a   (\$20,000 + X − \$15,000 = \$90,000; X = \$85,000)
Q6-42   d
Q6-43   d   [\$300,000 ÷ (\$25,000 + \$35,000) / 2] = 10 times
Q6-44   c   Net sales = \$480,000 (\$490,000 − \$10,000)
COGS       = \$50,000 + (\$205,000 + \$20,000 −
\$4,000 − \$6,000) − \$40,000
= \$225,000
GP%        = (\$480,000 − \$225,000) / \$480,000
= .531
Q6-45   a   \$50,000 + \$75,000 − \$90,000 (1 − .30) = \$62,000
Q6-46   c
Q6-47   c

Chapter 6   Inventory and Cost of Goods Sold   369
Problems
Group A

(20-30 min.)   P 6-48A
Req. 1

Inventory…………………………………….                          9,200,000
Accounts Payable………………………                                      9,200,000

Accounts Payable………………………….                       8,800,000
Cash……………………………………….                                           8,800,000

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

Cost of Goods Sold (150,000 × \$63.75*). 9,562,500
Inventory………………………………….                              9,562,500
_____
*(\$1,000,000 + \$9,200,000) ÷ (20,000 + 30,000 + 50,000 + 60,000)
= \$63.75

Operating Expenses……………………….                      4,000,000
Cash (\$4,000,000 × .80)………………...                               3,200,000
Accrued Liabilities (\$4,000,000 × .20).                          800,000

Income Tax Expense………………………                  335,000
Income Tax Payable……………………                           335,000
[(\$14,400,000 − \$9,562,500 − \$4,000,000) × .40 = \$335,000]

370   Financial Accounting 7/e Solutions Manual
(continued)         P 6-48A
Req. 2

Inventory
Beg. bal.     1,000,000
Purchases     9,200,000 COGS                     9,562,500
End. bal.       637,500

Req. 3

Income Statement
Year Ended February 28, 20X5
Sales revenue ……………………………… \$14,400,000
Cost of goods sold………………………..           9,562,500
Gross profit…………………………………               4,837,500
Operating expenses………………………. 4,000,000
Income before tax………………………….              837,500
Income tax expense (40%)……………….           335,000
Net income…………………………………. \$ 502,500

Chapter 6   Inventory and Cost of Goods Sold   371
(20-30 min.)   P 6-49A
Req. 1

The store uses FIFO.

This is apparent from the flow of costs out of inventory. For
example, the August 11 sale shows unit cost of \$40, which
came from the beginning inventory. This is how FIFO, and only
FIFO, works.

Req. 2

Cost of goods sold:
16 × \$40                          =       \$ 640
24 ×       40                     =          960
9 ×      41                     =          369
30 ×       41                     =        1,230
\$3,199

Sales 16 + 24 = 40 units × \$70                         = \$2,800
9 + 30 = 39 units × \$72 = 2,808                                   \$5,608
Cost of goods sold……………………………………….                                         3,199
Gross profit………………………………………………..                                          \$2,409

Req. 3

Cost of August 31 inventory (18 × \$42) + (41 × \$41).                      \$2,437

372   Financial Accounting 7/e Solutions Manual
(20-30 min.)         P 6-50A
Req. 1

Inventory
Begin. bal.     ( 70 units @ \$20) 1,400
Purchases:
Mar. 4        (100 units @ \$22)     2,200
19       (160 units @ \$24)     3,840 Cost of goods sold
25       ( 40 units @ \$25)     1,000   (320 units @ \$?)                    ?
Ending bal.     ( 50 units @ \$?)        ?

Cost of Goods Sold                    Ending Inventory

Average cost 320 × \$22.8108* = \$7,299              50 × \$22.8108*          = \$1,141
____
*Average cost            (\$1,400 + \$2,200 + \$3,840 + \$1,000)
=                                                       = \$22.8108
per unit                      (70 + 100 + 160 + 40)

FIFO     (70 @ \$20) + (100 @ \$22)
+ (150 @ \$24)         = \$ 7,200 (40 @ \$25) + (10 @ \$24) = \$1,240

LIFO     (40 @ \$25) + (160 @ \$24)
+ (100 @ \$22) + (20 @ \$20) = \$7,440 (50 @ \$20)                          = \$1,000

Chapter 6   Inventory and Cost of Goods Sold   373
(continued)   P 6-50A
Req. 2

LIFO results in the highest cost of goods sold because (a) the
company’s prices are rising and (b) LIFO assigns to cost of
goods sold the cost of the latest inventory purchases. 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, 20XX
Sales revenue (320 × \$45)………………………..                      \$14,400
Cost of goods sold………………………………..                            7,299
Gross profit…………………………………………                                7,101
Operating expenses………………………………                              4,000
Income before income taxes…………………….                         3,101
Income tax expense (40%)……………………….                          1,240
Net income………………………………………….                               \$ 1,861

374   Financial Accounting 7/e Solutions Manual
(30-40 min.)   P 6-51A
Req. 1 (partial income statements)

Armstrong Aviation Supply
Income Statement
Year Ended December 31, 20XX
AVERAGE               FIFO                                     LIFO
Sales revenue                       \$127,800           \$127,800                                 \$127,800
Cost of goods sold                    67,514             67,015                                   67,955
Gross profit                        \$ 60,286           \$ 60,785                                 \$ 59,845

Computations of cost of goods sold:

Average cost           (\$4,900 + \$2,115 + \$63,000 + \$4,250)
=                                                                =   \$7.5015
per unit                   (700 + 300 + 8,400 + 500)

COGS at average cost    = 9,000 × \$7.5015                                                    =    \$67,514

FIFO COGS     = (700 @ \$7.00) + (300 @ \$7.05) + (8,000 @ \$7.50)                              =    \$67,015

LIFO COGS     = (500 @ \$8.50) + (8,400 @ \$7.50) + (100 @ \$7.05)                              =    \$67,955

Chapter 6   Inventory and Cost of Goods Sold                                 375
(continued)   P 6-51A
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.

376   Financial Accounting 7/e Solutions Manual
(15-30 min.)         P 6-52A
AMC should apply the lower-of-cost-or-market rule to account
for inventories. The current replacement cost of ending
inventory is less than AMC’s actual cost, so AMC must write
the inventory down to current replacement cost, with the
following journal entry:

Cost of Goods Sold………………            80,000
Inventory………………………...                                      80,000
To write inventory down to market value.

AMC should report the following amounts in its financial
statements:

BALANCE SHEET
Inventory at market (which is lower than
cost of \$190,000)………………………………...                           \$110,000*

INCOME STATEMENT
Cost of goods sold (\$780,000 + \$80,000)………                   \$860,000
_____
*\$190,000 − \$80,000 = \$110,000

Accounting conservatism is the reason to account for
inventory at the lower of cost or market value. Conservatism
directs accountants to write inventory down if cost appears
unrealistically high. In this case the current replacement cost
(market value) of AMC’s ending inventory is less than cost.
Under the lower-of-cost-or-market rule, this requires a write-
down of the inventory value to current replacement cost.

Student responses may vary.

Chapter 6   Inventory and Cost of Goods Sold   377
(20-30 min.)   P 6-53A
Req. 1

Krispy Kreme          Starbucks
Millions            Millions
Gross profit percentage:
Sales…………………….                                 \$543                \$7,787
Cost of sales…………...                            475                 3,179
Gross profit…………….                             \$ 68                \$4,608

Gross profit                               \$68                  \$4,608
= 12.5%                 = 59.2%
percentage:                               \$543                  \$7,787

Inventory turnover:
Cost of goods sold                              \$475                \$3,179
=
Average inventory                          (\$24 + \$29) / 2     (\$636 + \$546) / 2

= 17.9 times            = 5.4 times

Req. 2

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

378   Financial Accounting 7/e Solutions Manual
(25-30 min.)         P 6-54A
Req. 1 (estimate of ending inventory by the gross profit
method)

Beginning inventory……………………...                     \$ 360,000
Purchases…………………………………. \$2,780,000
Less: Purchase discounts………….           (20,000)
Purchase returns……………...         (40,000)
Net purchases………………………….                          2,720,000
Goods available…………………………..                         3,080,000
Cost of goods sold:
Sales revenue………………………….. \$4,430,000
Less: Sales returns…………………           (750,000)
Net sales…………………………….….. 3,680,000
Less: Estimated gross profit of 40%. (1,472,000)
Estimated cost of goods sold……….                  2,208,000
Estimated cost of ending inventory…...             \$ 872,000

Chapter 6   Inventory and Cost of Goods Sold   379
(continued)   P 6-54A
Req. 2 (income statement through gross profit)

Amazon.com
Income Statement (partial)
Month of July, 20XX
Sales revenue……………………………….                         \$4,430,000
Less: Sales returns……………………...                    (750,000)
Net sales revenue………………………..                     3,680,000
Cost of goods sold…………………………                        2,208,000*
Gross profit…………………………….……                         \$1,472,000
_____
*Cost of goods sold:
Beginning inventory…………………………...                     \$ 360,000
Purchases………………………. \$2,780,000
Less: Purchases discounts...       (20,000)
Purchase returns……..        (40,000)
Net purchases………………………………….                           2,720,000
Cost of goods available for sale…………….                3,080,000
Less: Ending inventory……………………….                       (872,000)
Cost of goods sold…………………………….                       \$2,208,000

380   Financial Accounting 7/e Solutions Manual
(20-25 min.)         P 6-55A
Req. 1

Cost of sales, budgeted (\$700,000 × 1.08)…. \$756,000
+ Ending inventory, budgeted…………………..           50,000
= Cost of goods available……………………….. 806,000
− Beginning inventory……………………………               (35,000)
= Purchases, budgeted …………………………. \$771,000

Req. 2

Pontiac Convenience Store
Budgeted Income Statement
Year Ended December 31, 20X3
Sales (\$900,000 × 1.08)……………………….…..                       \$972,000
Cost of sales (\$700,000 × 1.08)………………….                     756,000
Gross profit…………………………………………                                216,000
Operating expenses (\$80,000 − \$24,000)……...                  56,000
Net income…………………………………….……                                \$160,000

Chapter 6   Inventory and Cost of Goods Sold   381
(15-20 min.)   P 6-56A
Req. 1 (corrected income statements)

Columbia Video Sales
Income Statement (adapted; amounts in millions)
Years Ended 20X6, 20X5, and 20X4
20X6              20X5              20X4
Net sales revenue……………...                \$36               \$33                 \$30
Cost of goods sold:
Beginning inventory………..     \$ 7               \$ 6                \$ 4
Purchases……………………             26                24                 22
Goods available……………..        33                30                 26
Ending inventory……………          (7)              (7)                (6)
Cost of goods sold…………                  26                23                  20
Gross profit……………………..                    10                10                  10
Operating expenses..………….                  8                  8                  8
Net income………………………                      \$ 2               \$ 2                 \$ 2

382   Financial Accounting 7/e Solutions Manual
(continued)         P 6-56A
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 a flat trend of net
income because the company is making no progress with its
profits.

Chapter 6   Inventory and Cost of Goods Sold   383
Problems
Group B

(20-30 min.)   P 6-57B
Req. 1

Inventory………………………………………. 8,940,000
Accounts Payable…………………………        8,940,000

Accounts Payable…………………………… 8,610,000
Cash…………………………………………                8,610,000

Cash……………………………………………. 4,700,000
Accounts Receivable……………………….. 8,200,000
Sales Revenue……………………………..             12,900,000

Cost of Goods Sold………………………..... 8,940,000
Inventory……………………………………                           8,940,000
(\$6,300,000 + \$1,360,000 + \$1,280,000 = \$8,940,000)

Operating Expenses………………………… 2,080,000
Cash (\$2,080,000 × 0.60)…………………           1,248,000
Accrued Liabilities (\$2,080,000 × 0.40)..   832,000

Income Tax Expense………………………... 752,000
Income Tax Payable………………………                          752,000
[(\$12,900,000 − \$8,940,000 − \$2,080,000) × .40 = \$752,000]

384   Financial Accounting 7/e Solutions Manual
(continued)         P 6-57B
Req. 2

Inventory
Beg. bal.     1,500,000
Purchases     8,940,000 COGS                     8,940,000
End. bal.     1,500,000

Req. 3

Italian Leather Goods
Income Statement
Year Ended December 31, 20X6
Sales revenue …………………………… \$12,900,000
Cost of goods sold……………………..           8,940,000
Gross profit………………………………               3,960,000
Operating expenses……………………             2,080,000
Income before tax………………………             1,880,000
Income tax expense (40%)…………….           752,000
Net income………………………………. \$ 1,128,000

Chapter 6   Inventory and Cost of Goods Sold   385
(20-30 min.)   P 6-58B
Req. 1

The store uses FIFO.

This is apparent from the flow of costs out of inventory. For
example, the July 8 sale shows a unit cost of \$19, which came
from the beginning inventory. This is how FIFO, and only FIFO,
works.

Req. 2

Cost of goods sold:
37 × \$19                          =       \$ 703
13 ×       19                     =          247
4 ×      20                     =           80
15 ×       20                     =          300
\$1,330

Sales    37 + 13 = 50 units × \$36 = \$1,800
4 + 15 = 19 units × \$37 =    703                        \$2,503
Cost of goods sold…………………………………….                                 (1,330)
Gross profit……………………………………………...                                  \$1,173

Req. 3

Cost of July 31 inventory (17 × \$20)…………………                       \$ 340

386   Financial Accounting 7/e Solutions Manual
(20-30 min.)         P 6-59B
Req. 1

Inventory
Begin. bal.     (100 units @ \$76) 7,600
Purchases:
Dec. 3        (200 units @ \$81) 16,200
12       ( 90 units @ \$82) 7,380 Cost of goods sold
24       (240 units @ \$85) 20,400 (500 units @ \$?)                          ?
Ending bal.     (130 units @ \$?)     ?

Cost of Goods Sold                   Ending Inventory

Average cost 500 × \$81.873*          \$40,937        130 × \$81.873*             \$10,643
____
*Average cost              (\$7,600 + \$16,200 + \$7,380 + \$20,400
=                                                         = \$81.873
per unit                        (100 + 200 + 90 + 240)

FIFO     (100 @ \$76) + (200 @ \$81)
+ ( 90 @ \$82) + (110 @ \$85) = \$40,530              130 @ \$85          = \$11,050

LIFO              (240 @ \$85)
+ ( 90 @ \$82)                            100 @ \$76 +
+ (170 @ \$81)          = \$41,550          (30 @ \$81) = \$10,030

Chapter 6   Inventory and Cost of Goods Sold   387
(continued)   P 6-59B
Req. 2

LIFO cost of goods sold is highest because (a) prices are rising
and (b) LIFO assigns to cost of goods sold the cost of the latest
inventory purchases. 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

Spice, Inc.
Income Statement
Month Ended October 31, 20XX
Sales revenue (500 @ \$130)……………………..                      \$65,000
Cost of goods sold………………………………..                           41,550
Gross profit…………………………………………                               23,450
Operating expenses………………………………                             10,000
Income before income taxes…………………….                        13,450
Income tax expense (40%)……………………….                          5,380
Net income………………………………………….                               \$ 8,070

388   Financial Accounting 7/e Solutions Manual
(30-40 min.)   P 6-60B
Req. 1 (partial income statements

Sonic Sound Systems
Income Statement
Year Ended December 31, 20XX
AVERAGE               FIFO                                   LIFO
Sales revenue                      \$910,000           \$910,000                               \$910,000
Cost of goods sold                  618,429            610,500                                631,500
Gross profit                       \$291,571           \$299,500                               \$278,500

Computations of cost of goods sold:

Average cost   (\$121,500 + \$201,000 + \$140,000 + \$259,000)
=                                             =                 \$343.5714
per case               (400 + 600 + 400 + 700)

COGS at average cost   = 1,800 × \$343.5714                                                 =    \$618,429

FIFO COGS     = (300 @ \$300) + (100 @ \$315) + (600 @ \$335) + (400 @ \$350)
+ (400 @ \$370)                                                          =   \$610,500

LIFO COGS     = (700 @ \$370) + (400 @ \$350) + (600 @ \$335) + (100 @ \$315)                  =    \$631,500

Chapter 6   Inventory and Cost of Goods Sold                            389
(continued)   P 6-60B
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.

390   Financial Accounting 7/e Solutions Manual
(15-20 min.)         P 6-61B
Westside Copiers should apply the lower-of-cost-or-market rule
to account for inventories. The current replacement cost of
ending inventory is less than Westside’s actual cost, so
Westside must write the inventory down to current replacement
cost, with the following journal entry:
Cost of Goods Sold………… 2,100,000*
Inventory…………………...                                    2,100,000
To write inventory down to market value.
*\$8,900,000 − \$6,800,000 = \$2,100,000

Westside should report the following in its financial statements:

BALANCE SHEET
Inventory, at market (which is lower than cost
of \$8,900,000)……………………………………... \$ 6,800,000

INCOME STATEMENT
Cost of goods sold (\$36,400,000 + \$2,100,000*).. \$38,500,000

Accounting conservatism is the reason to account for
inventory at the lower of cost or market value. Conservatism
directs accountants to write inventory down if cost appears
unrealistically high. In this case the current replacement cost
(market value) of Westside’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 and Cost of Goods Sold   391
(20-25 min.)   P 6-62B
Req. 1

Hewlett-Packard         Apple
Dollars in Billions
Gross profit percentage:
Sales……………………                                  \$73.6              \$19.3
Cost of sales…………..                             55.2               13.7
Gross profit……………                              \$18.4              \$ 5.6

Gross profit                              \$18.4                 \$ 5.6
= 25.0%               = 29.0%
percentage:                               \$73.6                 \$19.3

Inventory turnover:
Cost of goods sold                          \$55.2                 \$13.7
=
Average inventory                      (\$7.8 + \$6.9) / 2     (\$0.3 + \$0.2) / 2

= 7.5 times         = 54.8 times

Req. 2

These statistics suggest that Apple should be more profitable.
Apple has a higher gross profit percentage and also turns its
inventory over more rapidly. On both measures, Apple looks
better. Another factor that figures into which company should
be more profitable is selling, general, and administrative
expenses.

392   Financial Accounting 7/e Solutions Manual
(25-30 min.)         P 6-63B
Req. 1 (estimate of ending inventory by the gross profit
method)

Beginning inventory………………………                         \$1,200,000
Purchases………………………………….. \$6,500,000
Less: Purchase discounts…………..          (100,000)
Purchase returns………………            (10,000)
Net purchases…………………………...                          6,390,000
Goods available……………………………                            7,590,000
Cost of goods sold:
Sales revenue…………………………… \$8,600,000
Less: Sales returns………………….             (20,000)
Net sales…………………………………. 8,580,000
Less: Estimated gross profit of 40%.. (3,432,000)
Estimated cost of goods sold………...                  5,148,000
Estimated cost of ending inventory……                 \$2,442,000

Chapter 6   Inventory and Cost of Goods Sold   393
(continued)   P 6-63B
Req. 2 (income statement through gross profit)

Kinko’s
Income Statement (partial)
For the Period Up to the Fire
Sales revenue…………………………..                   \$8,600,000
Less: Sales returns…………………                   (20,000)
Net sales revenue…………………...                8,580,000
Cost of goods sold…………………….                   5,148,000*
Gross profit……………………………..                   \$3,432,000
_____
*Cost of goods sold:
Beginning inventory………………………... \$1,200,000
Purchases……………………... \$6,500,000
Less: Purchases discounts.       (100,000)
Purchase returns…….        (10,000)
Net purchases………………………………..                     6,390,000
Goods available……………………………...                   7,590,000
Less: Ending inventory…………………….                (2,442,000)
Cost of goods sold…………………………. \$5,148,000

394   Financial Accounting 7/e Solutions Manual
(20-25 min.)         P 6-64B
Req. 1

Cost of sales, budgeted (\$720,000 × 1.10).. \$792,000
+ Ending inventory, budgeted………………...           80,000
= Cost of goods available……………………... 872,000
− Beginning inventory…………………………. (70,000)
= Purchases, budgeted ……………………….. \$802,000

Req. 2

Pay Less Store
Budgeted Income Statement
Year Ended December 31, 20X6
Sales (\$960,000 × 1.10)……………………… \$1,056,000
Cost of sales (\$720,000 × 1.10)…………….    792,000
Gross profit…………………………………....            264,000
Operating expenses (\$110,000 − \$6,000)…  104,000
Net income…………………………………….. \$ 160,000

Chapter 6   Inventory and Cost of Goods Sold   395
(15-20 min.)   P 6-65B
Req. 1 (corrected income statements)

Oriental Rugs
Income Statement (adapted; amounts in thousands)
Years Ended 2007, 2006, and 2005
2007               2006              2005
Net sales revenue……………...                 \$1,400             \$1,200            \$1,100
Cost of goods sold:
Beginning inventory……….. \$ 450                  \$ 200             \$ 200
Purchases……………………               800                700              600
Goods available……………..        1,250                900              800
Ending inventory……………          (500)              (450)            (200)
Cost of goods sold…………                     750                450               600
Gross profit……………………..                       650                750               500
Operating expenses…………...                    500                430               450
Net income………………………                       \$ 150              \$ 320             \$ 50

396   Financial Accounting 7/e Solutions Manual
(continued)        P 6-65B
Req. 2

The corrections did not change total net income over the
three-year period. But the corrections made the company’s
trend of net income look more variable — with net income
rising sharply in 2006 and then dropping in 2007.

Chapter 6   Inventory and Cost of Goods Sold 397
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

398   Financial Accounting 7/e Solutions Manual
(continued) Decision Case 1

Reqs. 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.

Chapter 6   Inventory and Cost of Goods Sold   399
(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 conservative in
accounting for inventory — for all the reasons accountants use
conservatism. If any errors occur, we would prefer to be
pleasantly surprised rather than negatively shocked.

400   Financial Accounting 7/e Solutions Manual
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
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.

Chapter 6   Inventory and Cost of Goods Sold   401
Focus on Financials: YUM! Brands
(30 min.)

Req. 1

Millions
December 30, December 31,
2006              2005

Inventory (from the balance sheet)..                            \$93              \$85

Req. 2

Note 2: Summary of significant accounting policies states, “We
value our inventories at the lower of cost (computed on the
first-in, first-out method) or net realizable value.”

Req. 3

Millions
Rearranging,

Beginning Inventory                             Food and paper expense
(2006 income statement)     \$2,549
+ Purchases                                      +   Ending inventory
(at Dec. 30, 2006)                 93
= Goods available                                =   Goods available                  2,642
− Ending Inventory                               −   Beginning inventory
(at Dec. 31, 2005)             (85)
= Cost of goods sold                             =   Purchases                    \$2,557
(food and paper expense)

402   Financial Accounting 7/e Solutions Manual
(continued) Focus on Financials: YUM! Brands

Req. 4

The gross profit percentage improved during 2006:

2006                               2005
Company sales…………….. \$8,365 100.0%                         \$8,225 100.0%
Food and paper expense…. 2,549 30.5%                        2,584 31.4%
Gross profit…………………. \$5,816 69.5%                          \$5,641 68.6%

Req. 5

YUM’s rate of inventory turnover is fast.

Cost of goods sold
(Food and paper expense)       \$2,549
=                 = 29 times
Average inventory      (\$93 + \$85) / 2

Few companies turn their inventory over 29 times per year.

Chapter 6   Inventory and Cost of Goods Sold   403
Focus on Analysis: Pier 1 Imports
(30-40 min.)

Req. 1

a. Inventory on hand at year end, \$369 million.
b. Cost of goods sold, \$1,175 million.

Millions
c. Purchases               =    Ending inventory…………………      \$ 369
+    Cost of goods sold……………….     1,175
−    Beginning inventory………….….      (366)
=    Purchases………………………….         \$1,178

Req. 2

Purchases are most directly related to cash flow because Pier 1
must pay for the inventory it purchases.

Req. 3

Millions
Accounts payable at the end of 2005 (this is
the beginning balance for 2006)………………….               \$ 108
+     Purchases during 2006 (Req. 1)…………………….                  1,178
−     Cash payments on account during 2006………….                   (X)
=     Accounts payable at the end of 2006………………               \$ 106

Cash payments (X) = \$1,180 million

404   Financial Accounting 7/e Solutions Manual
(continued) Focus on Analysis: Pier 1 Imports

Req. 4

Note 1 (Summary of Significant Accounting Policies) states that
Pier 1 values inventories “at the lower of average cost or
market, cost being determined on a weighted average inventory
method.”

Req. 5

(Dollars in millions)          2006                           2005

Gross profit             \$1,777 − \$1,175              \$1,825 − \$1,122
=
percentage                   \$1,777                       \$1,825

= 33.9%                      = 38.5%

Inventory                     \$1,175                       \$1,122
=
turnover                 (\$369 + \$366) / 2            (\$366 + \$374) / 2

= 3.20 times                 = 3.03 times

Gross profit percent decreased dramatically during 2006.
Inventory      turnover      increased       a     little.   Overall,        Pier       1’s
combination of (a) gross profit percent and (b) rate of inventory
turnover deteriorated during 2006. These data may explain why
Pier 1 had a net loss in 2006.

Chapter 6     Inventory and Cost of Goods Sold    405
Appendix A
(10 min.)   S 6A-1
Purchases…………………………………….                          100,000
Accounts Payable………………………..                                  100,000

Accounts Receivable……………………….                     140,000
Sales Revenue…………………………….                                    140,000

End-of-period entries:

Cost of Goods Sold…………………………                       20,000
Inventory (beginning balance)…………                             20,000

Inventory (ending balance)………………..                 30,000
Cost of Goods Sold……………………...                                 30,000

Cost of Goods Sold…………………………                      100,000
Purchases………………………………….                                      100,000

406   Financial Accounting 7/e Solutions Manual
(10 min.)       S 6A-2
1.
Inventory                 Cost of Goods Sold
20,000      20,000            20,000       30,000
30,000                       100,000
90,000

2. Cost of goods sold:
Beginning inventory……………………………                          \$ 20,000
Purchases………………………………………..                               100,000
Goods available…………………………………                             120,000
Ending inventory……………………………….                            (30,000)
Cost of good sold………………………………                           \$ 90,000

3.                   Parkland Technologies
Income Statement
20XX
Sales revenue……………………………………… \$140,000
Cost of goods sold (from Req. 2)………………. 90,000
Gross profit…………………………………….….. \$ 50,000

Chapter 6   Inventory and Cost of Goods Sold   407
(10-15 min.)   E 6A-3
Cost of goods available:

Oct.         1 Beginning inventory………….                    5 @ \$160 = \$ 800

8    Purchase……………………….. 4 @                                 160            640
15    Purchase……………………….. 11 @                                170          1,870
26    Purchase……………………….. 5 @                                 180            900
31    Goods available for sale……. 25                                      \$4,210

Ending inventory               Cost of goods sold

1.    Specific unit cost (4 @ \$160) + (4 @ \$170) = \$1,320        \$4,210 − \$1,320   = \$2,890

2.    Average cost        \$4,210  25 = average
= \$1,347     \$4,210 − \$1,347   = \$2,863
unit cost of \$168.40* × 8

3.    FIFO                (5 @ \$180) + (3 @ \$170) = \$1,410       \$4,210 − \$1,410   = \$2,800

4.    LIFO                8 @ \$160                 = \$1,280      \$4,210 − \$1,280   = \$2,930
_____
*\$4,210  25 units = \$168.40 per unit

408   Financial Accounting 7/e Solutions Manual
(20-25 min.)         E 6A-4

Journal
DATE        ACCOUNT TITLES AND EXPLANATION                 DEBIT       CREDIT

1. Purchases (\$640 + \$1,870 + \$900)……… 3,410
Accounts Payable………………………                                        3,410

2. Accounts Receivable (17 @ \$300)……… 5,100
Sales Revenue…………………………..                                        5,100

3. Cost of Goods Sold……………………….                            800
Inventory (beginning balance)……….                                  800

Inventory [ending balance: (8 @ \$160)].. 1,280
Cost of Goods Sold…………………….                                    1,280

Cost of Goods Sold………………………. 3,410
Purchases………………………………..                                        3,410

Cost of Goods Sold
Beginning inventory           Ending inventory                          1,280
(5 × \$160)             800
Purchases              3,410
2,930

4. Cost of goods sold:
Beginning inventory……………………….…… \$ 800
Purchases………………………………………... 3,410
Goods available…………………….…………… 4,210
Ending inventory………………………………... (1,280)
Cost of goods sold……………………………... \$2,930

Chapter 6   Inventory and Cost of Goods Sold   409
(20-30 min.)   P 6A-5
Req. 1 and 2

Periodic System

Cost of goods sold:
Beginning inventory (50 × \$40)……………                                \$2,000
Purchases:                    80 × \$41 =                  \$3,280
18 × 42 =                      756       4,036
Goods available………………………………                                            6,036
Ending inventory (FIFO)
26 × \$41 =                  \$1,066
18 × 42 =                      756   (1,822)
Cost of goods sold…………………………..                                     \$4,214

Sales           16 + 34 = 50 units × \$70 =                \$3,500
9 + 35 + 10 = 54 units × \$72 =                 3,888   \$7,388
Cost of goods sold…………………………..                                      4,214
Gross profit……………………………………                                         \$3,174

410   Financial Accounting 7/e Solutions Manual
(15-20 min.)         P 6A-6
Req. 1 (journal entries)

(In thousands)
Purchases…………………………………………                             2,900
Accounts Payable………………………….….                                2,900

Cash (\$4,390 × .20)……………………………….                        878
Accounts Receivable (\$4,390 × .80)…………..              3,512
Sales Revenue…………………………………                                          4,390

End-of-period entries:

Cost of goods sold………………………………                           370
Inventory
(beginning balance)…………………………..                                          370

Inventory
(ending balance)………………………………….                           560
Cost of Goods Sold…………………………...                                          560

Cost of Goods Sold……………………………...                      2,900
Purchases………………………………….…...                                         2,900

Chapter 6   Inventory and Cost of Goods Sold    411
(continued)    P 6A-6
Req. 2 (financial statement amounts)

BALANCE SHEET                                  (In thousands)
Current assets:
Inventory………………………………..                       \$     560

INCOME STATEMENT
Sales revenue………………………….….                          \$4,390
Cost of goods sold……………………….                         2,710*
Gross profit………………………………..                          \$1,680

_____
*\$370 + \$2,900 − \$560 = \$2,710

412   Financial Accounting 7/e Solutions Manual

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