Chapter 6
Inventory & Cost of Goods Sold
Ethics Check
(5-10 min.) EC 6-1
a. Due care
b. Integrity
c. Objectivity and independence
d. Integrity
Short Exercises
1. (Journal entries)
Inventory ......................................................
125,000
Accounts Payable ...................................
125,000
2. (Financial statements)
BALANCE SHEET
Current assets:
(5 min.) S 6-3
Purchases $250,000
Freight-in + 3,000
Purchase returns & allowances – 22,000
Purchase discounts – 2,000
Cost of inventory $229,000
(10-15 min.) S 6-4
McDonough Copy Center
(10-15 min.) S 6-5
McDonough Copy Center
Income Statement
Year Ended December 31, Current Year
Average
FIFO
LIFO
Sales revenue (570 × $20.00)
$11,400
$11,400
$11,400
(5 min.) S 6-6
Marley Corporation managers can purchase a large amount of inventory
before year end. Under LIFO, these high inventory costs go directly to cost
of goods sold in the current year. Higher cost of goods sold creates lower
Average cost per unit $1,700 / 250 units .....................
$ 6.80
Therefore, ending inventory = 90 × $6.80 = $612
And cost of goods sold = 160 × $6.80 = $1,088
(10-15 min.) S 6-10
LIFO 10. Enables a company to buy high-cost inventory at year end
and thereby to decrease reported income and income tax.
**Wording changed in reprint: “The method of inventory valuation that is disallowed by
(5-10 min.) S 6-12
Inventory turnover
=
=
9.2 times
($1,000 + $1,400) / 2
(5-10 min.) S 6-13
Beginning inventory ..................................................
$ 299,000
(10-15 min.) S 6-16
Ending inventory
(350)
(700)*
2.
Sales:
Cash ($99,000 × .19) ......................................
18,810
Accounts Receivable ($99,000 × .81) ...........
80,190
Sales Revenue ...........................................
99,000
Cost of Goods Sold .......................................
52,000
Inventory ....................................................
52,000
(15-25 min.) E 6-18A
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
Req. 1
Inventory ($604 + $2,240) .............................
2,844
Accounts Payable ....................................
2,844
Req. 2
Accounts Receivable (14 @ $550) ...............
7,700
(10-15 min.) E 6-19A
Req. 1
Inventory
Beg. bal.
(6 units @ $150) 900
Purchases
May 15
(4 units @ $151) 604
Cost of goods sold
26
(14 units @ $160) 2,240
(24 units @ $?)
?
End. bal.
(10 units @ $?) ?
Cost of Goods Sold
Ending Inventory
(a) Specific
unit cost
(1 @ $150) +
(4 @ $151) +
(9 @ $160)
=
$2,194
(5 @ $150) +
(5 @ $160)
=
$1,550
(5-10 min.) E 6-20A
Cost of goods sold:
(15 min.) E 6-22A
Req. 1
a.
FIFO
Cost of goods sold:
(10 @ $42)...........................................
$420
Ending inventory:
(7 @ $73) + (5 @ $42) .........................
$721
b.
LIFO
Cost of goods sold:
(15 min.) E 6-23A
Req. 1
Gross profit:
FIFO
LIFO
Sales revenue ...................................................
$850,000
$850,000
Cost of goods sold
FIFO: 100,000 × $8 ........................................
800,000
LIFO: (30,000 × $5.20) + (45,000 × $6.10)
+ (25,000 × $8) ..................................
630,500
(15-20 min.) E 6-25A
a.
$62,000
$19,000 + $60,000 − $17,000 = $62,000
b.
$44,000
$106,000 − $62,000 = $44,000
c.
Must first solve for d
d.
$92,000
$132,000 − $40,000 = $92,000
c.
$91,000
$27,000 + c − $26,000 = $92,000;
c = $91,000
e.
$95,000
$63,000 + $32,000 = $95,000
f.
$28,000
f + $57,000 − $22,000 = $63,000; f = $28,000
g.
$ 5,000
$8,000 + $32,000 − g = $35,000; g = $5,000
Nugent
=
59.3%
=
5.4 times
$86
($8 + $5) / 2
Nugent has the highest gross profit percentage, 59.3%. Donahue has the
lowest gross profit percentage, 30.3%.
(15 min.) E 6-27A
= 36.5%
= 29.0%
2016.)
(10-15 min.) E 6-28A
Year ended January 31, 2016
Millions
(10-15 min.) E 6-29A
Beginning inventory ..............................................
$ 45,300
Net purchases ........................................................
37,200
(10-15 min.) E 6-30A
By the Bay Marine Supply
Income Statement (Corrected)
Years Ended November 30, 2016 and 2015
2016
2015
Sales revenue
$135,000
$122,000
Cost of goods sold:
(15-20 min.) E 6-31B
2.
Sales:
Cash ($90,000 × .21) ......................................
18,900
Accounts Receivable ($90,000 × .79) ...........
71,100
Sales Revenue ..........................................
90,000
Cost of Goods Sold .......................................
40,000
Inventory ...................................................
40,000
(15-25 min.) E 6-32B
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
Req. 1
Inventory ($830 + $2,275) ...............................
3,105
Accounts Payable ......................................
3,105
Req. 2
Accounts Receivable (16 @ $500) .................
8,000
(10-15 min.) E 6-33B
Req. 1
Inventory
Beg. bal.
(9 units @ $165) 1,485
Purchases
Mar. 15
(5 units @ $166) 830
Cost of goods sold
26
(13 units @ $175) 2,275
(16 units @ $?)
?
Ending bal.
(11 units @ $?) ?
Cost of Goods Sold
Ending Inventory
(a) Specific
unit cost
(2 @ $165) +
(5 @ $166) +
(9 @ $175)
=
$2,735
(7 @ $165) +
(4 @ $175)
=
$1,855
(10 min.) E 6-34B
Cost of goods sold:
(15 min.) E 6-36B
Req. 1
a.
FIFO
Cost of goods sold:
(10 @ $46) ............................................
$460
Ending inventory:
(1 @ $46) + (7 @ $68) ..........................
$522
b.
LIFO
Cost of goods sold:
(15 min.) E 6-37B
Req. 1
Gross profit:
FIFO
LIFO
Sales revenue ...................................................
$510,000
$510,000
Cost of goods sold
FIFO: 100,000 × $5.00 ..................................
500,000
LIFO: (40,000 × $2.20) + (45,000 × $3.10)
+ (15,000 × $5.00) ..............................
302,500
(15-20 min.) E 6-39B
a.
$ 64,000
$22,000 + $62,000 − $20,000 = $64,000
b.
$ 42,000
$106,000 − $64,000 = $42,000
c.
Must first solve for d
d.
$ 95,000
$136,000 − $41,000= $95,000
c.
$ 90,000
$26,000 + c − $21,000 = $95,000;
c = $90,000
e.
$ 91,000
$64,000 + $27,000 = $91,000
f.
$ 32,000
f + $57,000 − $25,000 = $64,000; f = $32,000
g.
$ 13,000
$9,000 + $33,000 − g = $29,000; g = $13,000
Thomas
=
65.9%
=
2.6 times
$85
($9 + $13) / 2
Thomas has the highest gross profit percentage, 65.9%. Ethan has the
lowest gross profit percentage, 29.7%.
(15 min.) E 6-41B
Req. 1 and 2
= 3.2 times
= 6.8 times
2016.)
(10-15 min.) E 6-42B
Year ended January 31, 2016:
Millions
(10-15 min.) E 6-43B
Beginning inventory .........................................
$ 49,300
Net purchases ..................................................
61,000
(10-15 min.) E 6-44B
Blue Sky Marine Supply
Income Statement (Corrected)
Years Ended April 30, 2016 and 2015
2016
2015
Sales revenue
$144,000
$115,000
Cost of goods sold:
Quiz
Q6-58
c
Sales = $446,000
Problems
(20-30 min.) P 6-62A
Req. 1
Inventory .......................................................
8,920,000
Accounts Payable....................................
8,920,000
Accounts Payable .........................................
8,592,000
Cash .........................................................
8,592,000
(continued) P 6-62A
Req. 2
Inventory
Beg. bal.
1,219,000
Purchases
8,920,000
COGS
9,392,200
End. bal.
746,800
(20-30 min.) P 6-63A
Req. 1
The store uses FIFO.
This is apparent from the flow of costs out of inventory. For example, the
October 13 sale shows unit cost of $38, which came from the beginning
inventory. This is how FIFO, and only FIFO, works.
Req. 2
(20-30 min.) P 6-64A
Req. 1
Inventory
Beg. bal.
(80 units @ $15) 1,200
Purchases:
Mar. 6
(100 units @ $20) 2,000
18
(120 units @ $25) 3,000
Cost of goods sold
26
(50 units @ $30) 1,500
(296 units @ $?)
?
End. bal.
(54 units @ $?) ?
(continued) P 6-64A
Req. 2
LIFO cost of goods sold is highest because (a) prices are rising and (b) LIFO
assigns the cost of the latest inventory purchases to cost of goods sold.
When costs are rising, these latest inventory costs are the highest, and that
makes cost of goods sold the highest under LIFO.
Student responses may vary.
(30-40 min.) P 6-65A
Req. 1 (partial income statements)
Aldrin Aviation
Partial Income Statement
Year Ended July 31, 2016
=
=
$7.40
per unit
(700 + 400 + 8,400 + 500)
Average cost COGS = 9,050 × $7.40
=
$66,970
(15-30 min.) P 6-66A
a. Dixson Trade Mart should apply the lower-of-cost-or-market rule to
account for inventories. The current replacement cost of ending
inventory is less than Dixson’s actual cost, so Dixson must write the
inventory down to current replacement cost, with the following
journal entry:
b.
Cost of Goods Sold ..........................
90,000
Inventory ....................................
90,000
To write inventory down to market value.
Dixson Trade Mart should report the following amounts in its financial
statements:
(20-25 min.) P 6-67A
Req. 1
= 27 times
= 5.6 times
Req. 2
(25-30 min.) P 6-68A
Req. 1 (estimate of ending inventory by the gross profit method)
Beginning inventory ......................................
$ 57,400
Purchases ......................................................
$490,300
(continued) P 6-68A
Req. 2 (income statement through gross profit)
Watertown Company
Income Statement (partial)
Two Week Period Ending March 15 (date of the fire)
Net sales revenue .............................................
$647,000
Cost of goods sold ...........................................
394,670*
(20-25 min.) P 6-69A
Req. 1
Cost of sales, budgeted ($724,000 × 1.10) .............
$ 796,400
+ Ending inventory, budgeted ...................................
82,000
= Cost of goods available ..........................................
878,400
− Beginning inventory ...............................................
(64,000)
(15-20 min.) P 6-70A
Req. 1 (corrected income statements)
Ending inventory .....................
(11)
(15)
(13)
(continued) P 6-70A
Req. 2
(20-30 min.) P 6-71B
Req. 1
Inventory ...........................................................
8,679,000
Accounts Payable .......................................
8,679,000
Accounts Payable ............................................
8,351,000
Cash .............................................................
8,351,000
Cash ..................................................................
5,200,000
(continued) P 6-71B
Req. 2
Inventory
Beg. bal.
742,000
Purchases
8,679,000
COGS
8,941,490
End. bal.
479,510
(20-30 min.) P 6-72B
Req. 1
The store uses FIFO.
This is apparent from the flow of costs out of inventory. For example, the
March 13 sale shows a unit cost of $35, which came from the beginning
inventory. This is how FIFO, and only FIFO, works.
Req. 2
(20-30 min.) P 6-73B
Req. 1
Inventory
Beg. bal.
(80 units @ $20) 1,600
Purchases:
May 6
(100 units @ $25) 2,500
18
(120 units @ $30) 3,600
Cost of goods sold
26
(50 units @ $35) 1,750
(286 units @ $?)
?
End. bal.
(64 units @ $?) ?
(continued) P 6-73B
Req. 2
LIFO results in the highest cost of goods sold because (a) the
company’s prices are rising and (b) LIFO assigns the cost of the latest
inventory purchases to cost of goods sold. When costs are rising, these
latest inventory costs are the highest, and that makes cost of goods sold
the highest under LIFO.
(30-40 min.) P 6-74B
Req. 1 (partial income statements)
Buzz Aviation
Income Statement
Year Ended July 31, 2016
=
=
$7.40
per case
(600 + 500 + 7,000 + 900)
Average cost COGS = 8,090 × $7.40
=
$59,866
(15-20 min.) P 6-75B
a. Mahtomedi Trade Mart should apply the lower-of-cost-or-market rule
to account for inventories. The current replacement cost of ending
inventory is less than Mahtomedi Trade Mart’s actual cost, so
Mahtomedi Trade Mart must write the inventory down to current
replacement cost, with the following journal entry:
b.
Cost of Goods Sold .................
75,000
Inventory ............................
75,000
To write inventory down to market value.
Mahtomedi Trade Mart should report the following in its financial
statements:
(20-30 min.) P 6-76B
Req. 1
= 11.2 times
= 4.5 times
Req. 2
(25-30 min.) P 6-77B
Req. 1 (estimate of ending inventory by the gross profit method)
Beginning inventory ........................................
$ 57,600
Purchases ........................................................
$490,600
(continued) P 6-77B
Req. 2 (income statement through gross profit)
Thompson Company
Income Statement (partial)
Two Week Period ending July 15 (date of the fire)
Net sales revenue .......................................
$648,000
Cost of goods sold .....................................
362,880*
(20-25 min.) P 6-78B
Req. 1
Cost of sales, budgeted ($721,000 × 1.05) ..........
$ 757,050
+ Ending inventory, budgeted ................................
77,000
= Cost of goods available .......................................
834,050
− Beginning inventory .............................................
(66,000)
(15-20 min.) P 6-79B
Req. 1 (corrected income statements)
Columbia Home Store
Income Statement (adapted; amounts in millions)
Ending inventory ......................
(10)
(13)
(14)
(continued) P 6-79B
Req. 2
Challenge Exercises and Problem
(5-10 min.) E 6-80
a. Use FIFO.
b. Use FIFO.
(20-30 min.) E 6-81
4.
From beginning inventory (26 @ $1,050) ........................
27,300
LIFO cost of goods sold .............................................
$162,600
3.
From purchase in February (24 @ $1,200) ......................
28,800
turnover
($8.4 + $7.2)
/ 2
($7.2 + $7.0)
/ 2
($7.0 + $6.0)
/ 2
Both the gross profit percentage and the rate of inventory turnover
dropped during this period. The gross profit percentage dropped
significantly. This suggests that A Mart was having to discount its
merchandise more and more just to sell the goods. The end result was a
net loss in 2016.
Selling expenses increased significantly, which suggests that A Mart
was having to advertise heavily in order to sell its inventory.
(20-30 min) P 6-83
Req. 1
Beginning inventory $ 309,000
+ Purchases ? $3,960,000
(continued) P 6-83
Req. 3
Beginning inventory ($21,000 higher under FIFO) $ 330,000
+ Purchases 3,960,000
- Ending inventory ($22,000 higher under FIFO) (370,000)
= Cost of goods sold (FIFO) $3,920,000
Req. 4
FutureNow $480,000 = 32.0%
$1,500,000
LifeTech $3,080,000 = 44.0%
$7,000,000
Req. 5
FutureNow $1,020,000 = 12.0
[($80,000 + $90,000)/2]
LifeTech $3,920,000 = 11.2
[($330,000 + $370,000)/2]
Req. 6
LifeTech has a higher gross profit percentage which indicates that
LifeTech has a gross profit of $.44 of every sales dollar and FutureNow
has a gross profit of $.32 of every sales dollar. LifeTech has a slightly
Decision Cases
(15-25 min.) Decision Case 2
Req. 1
This question provides a rich setting for a class discussion. There’s no
single correct answer to this question. Some students may favor Company
B because it reports higher net income than Company A. B may be
preferred because it appears more successful than A, and B’s stock price
may therefore rise more than A’s stock price. Thus it may appear that
Company B would be a better investment than A.
Other students may prefer Company A because it discloses the inventory
method it uses. Company B does not let outsiders know which method it
uses to account for its inventory. These students may trust Company A
more than B because A is more willing to “bare its soul to the public.”
Professors can point out that A, the LIFO company, may be better off
because of the lower income taxes that A pays by using the LIFO method.
We don’t know whether Company B is making the most of this cash-flow
advantage of LIFO.
Student responses will vary.
Req. 2
Yes, the authors would prefer managers to be faithful in representing the
disclosures for inventory — for all the reasons accountants are transparent
and truthful. We would prefer that the financial statements present the
most economically realistic and honest picture of the way assets, liabilities,
revenue, and expenses are measured and reported. It is only then that
financial markets can operate in the way intended.
Ethical Issue
Req. 1
Changing accounting methods year after year hurts a company’s
credibility, which makes it hard for the company to borrow or raise
money from outside investors. The question that arises about such a
company is: What is the business trying to hide?
Focus on Financials: Apple Inc.
(30 min.)
Req. 1
Millions
September 27,
September 28,
2014
2013
Inventory (from the balance sheet)
$2,111
$1,764
Apple Inc. reports all of its’ inventory on the balance sheet. Note 1 of the
Consolidated Financial Statements (Summary of Significant Accounting
Policies), under Inventories, does not allude to any consignment goods
nor does Note 3 (Consolidated Financial Statement Details) under
Inventories.
Req. 2
Note 1 of the Consolidated Financial Statements (Summary of
Significant Accounting Policies), under Inventories, states: “Inventories
(continued) Focus on Financials: Apple Inc.
=
=
57.94
times
Average inventory
($2,111 +
$1,764) / 2
83.45
=
=
62.82
times
Average inventory
($2,111 +
$2,349) / 2
Gross profit percentage =
Both ratios increased or improved over the previous fiscal year.
Focus on Analysis: Under Armour, Inc.
(30-40 min.)
−
Beginning inventory .......................
(469)
=
Purchases ........................................
$1,640
Req. 2
Purchases are most directly related to cash flow because Under Armour,
Inc. must pay for the inventory it purchases.
Req. 3
Millions
Accounts payable, beginning of 2014
(ending balance for fiscal 2013) .......................................
$ 165
+
Purchases 2014 (Req. 1) ...................................................
1,640
(continued) Focus on Analysis: Under Armour, Inc.
=
49.027%
48.756%
This represents a slight increase in gross profit, largely due to a $752
=
3.125
3.033
Group Project
Chapter 6 Appendix
3.
End-of-period entries to update inventory
and record Cost of Goods sold:
a.
Cost of Goods Sold
560
Inventory (beginning balance)
560
Transfer beginning inventory to COGS.
(10-15 min.) S6A-2
Req. 1 Posting general journal entries
Inventory
560*
560
640
640
* Beginning inventory was $560
Cost of Goods Sold
560
640
Ending inventory
(640)
Cost of goods sold
1,080
Gross profit
$1,520
Appendix Exercises
(10-15 min.) E6A-3
Inventory
Begin. Bal.
(4 units @ $60) 240
Purchases
Oct. 8
(3 units @ $60) 180
Cost of goods sold
15
(12 units @ $70) 840
26
(1 unit @ $80) 80
(15 units @ $?)
?
Ending Bal.
(5 units @ $?) ?
(10-15 min.) E6A-4
3.
End-of-period entries to update inventory
and record Cost of Goods Sold:
a.
Cost of Goods Sold
240
Inventory (beginning balance)
240
Transfer beginning inventory to COGS.
b.
Inventory (ending balance)
300
Cost of Goods Sold
300
Set up ending inventory based on physical
count.
c.
Cost of Goods Sold
1,100
Purchases
1,100
Transfer purchases to COGS.
Posting general journal entries:
Cost of Goods Sold
Beginning inventory 240
Ending Inventory 300
Purchases 1,100
Cost of goods sold 1,040
Req. 4 Cost-of-Goods-Sold Model
Beginning inventory
$ 240
+ Purchases
1,100
= Cost of goods available
1,340
- Ending inventory
300
= Cost of goods sold
$1,040
Appendix Problems
(20-25 min.) P6A-5
Req. 1
(20-30 min.) P6A-6
3.
End-of-period entries to update inventory
and record Cost of Goods Sold:
a.
Cost of Goods Sold
510
Inventory (beginning balance)
510
Transfer beginning inventory to COGS
b.
Inventory (ending balance)
690
Cost of Goods Sold
690
Set up ending inventory based on physical
count
(continued) P6A-6
Ending inventory
(690)
Cost of goods sold
1,000
Gross profit
$2,400
Cost-of-Goods-Sold Model