CHAPTER 6
Inventory and Cost of Goods Sold
BRIEF EXERCISES
BE6–1 Match each of the following types of companies with its definition.
Types of Companies
1.
2.
3.
Understand terms
related to types of
companies (LO1)
Definitions
Service company
Merchandising company
Manufacturing company
a. Purchases goods that are primarily in
finished form for resale to customers.
b. Earns revenues by providing services
to customers.
c. Produces the goods they sell to
customers.
BE6–2 Match each of the following inventory classifications with its definition.
Inventory Classifications
1.
2.
3.
Understand terms related
to inventory (LO1)
Definitions
Raw materials
Work-in-process
Finished goods
a. Cost of items not yet complete by the
end of the period.
b. Inventory that has been substantially
completed.
c. Basic components used to build a
product.
BE6–3 At the beginning of 2012, Bryers Incorporated reports inventory of $7,000.
During 2012, the company purchases additional inventory for $22,000. At the end of
2012, the cost of inventory remaining is $9,000. Calculate cost of goods sold for 2012.
Calculate cost of goods
sold (LO2)
BE6–4 During 2012, Wright Company sells 320 remote control airplanes for $100 each.
The company has the following inventory purchase transactions for 2012.
Calculate ending
inventory and cost
of goods sold using
FIFO (LO3)
Date
Jan. 1
May. 5
Nov. 3
Transaction
Beginning inventory
Purchase
Purchase
Number
of Units
Unit
Cost
Total
Cost
50
200
100
350
$72
75
80
$ 3,600
15,000
8,000
$26,600
Calculate ending inventory and cost of goods sold for 2012 assuming the company uses
FIFO.
BE6–5 Refer to the information in BE6–4. Calculate ending inventory and cost of
goods sold for 2012, assuming the company uses LIFO.
BE6–6 Refer to the information in BE6–4. Calculate ending inventory and cost of
goods sold for 2012, assuming the company uses weighted-average cost.
BE6–7 Refer to the information in BE6–4. Calculate ending inventory and cost of
goods sold for 2012, assuming the company uses specific identification. Actual sales
by the company include its entire beginning inventory, 180 units of inventory from the
May 5 purchase, and 90 units from the November 3 purchase.
BE6–8 For each item below, indicate whether FIFO or LIFO will generally result in a
higher reported amount when inventory costs are rising versus falling. The first answer
is provided as an example.
Inventory Costs
Rising
Declining
Higher
Total Assets
FIFO
Higher Cost of
Goods Sold
Higher
Net Income
Calculate ending inventory
and cost of goods sold
using LIFO (LO3)
Calculate ending inventory
and cost of goods sold
using weighted-average
cost (LO3)
Calculate ending
inventory and cost of
goods sold using specific
identification (LO3)
Identify financial
statement effects of FIFO
and LIFO (LO4)
CHAPTER 6
Inventory and Cost of Goods Sold
Record inventory
purchases and sales using
a perpetual system (LO5) BE6–9 Shankar Company uses a perpetual system to record inventory transactions.
The company purchases inventory on account on February 2, 2012, for $30,000
and then sells this inventory on account on March 17, 2012, for $50,000. Record
transactions for the purchase and sale of inventory.
Record freight charges
for inventory using a
perpetual system (LO5)
BE6–10 Shankar Company uses a perpetual system to record inventory transactions.
The company purchases inventory on account on February 2, 2012, for $30,000.
In addition to the cost of inventory, the company also pays $500 for freight charges
associated with the purchase on the same day. Record the purchase of inventory on
February 2, including the freight charges.
Record purchase returns
of inventory using a
perpetual system (LO5)
BE6–11 Shankar Company uses a perpetual system to record inventory transactions.
The company purchases 1,000 units of inventory on account on February 2, 2012, for
$30,000 ($30 per unit) but then returns 50 defective units on February 5, 2012. Record
the inventory purchase on February 2 and the inventory return on February 5.
Record purchase
discounts of inventory
using a perpetual
system (LO5)
BE6–12 Shankar Company uses a perpetual system to record inventory transactions.
The company purchases inventory on account on February 2, 2012, for $30,000, with
terms 2/10, n/30. On February 10, the company pays on account for the inventory.
Record the inventory purchase on February 2 and the payment on February 10.
Calculate amounts related
to the multiple-step
income statement (LO6)
BE6–13 For each company, calculate the missing amount.
Calculate ending
inventory using lower-ofcost-or-market (LO7)
Calculate ending
inventory using lower-ofcost-or-market (LO7)
Company
Sales
Revenue
Cost of
Goods Sold
Gross Profit
Operating
Expenses
Net Income
Lennon
Harrison
McCartney
Starr
$16,000
17,000
11,000
14,000
(a)
$10,000
8,000
5,000
$7,000
(b)
3,000
9,000
$3,000
5,000
(c)
6,000
$4,000
2,000
1,000
(d)
BE6–14 Powder Ski Shop reports inventory using lower-of-cost-or-market. Below is
information related to its year-end inventory. Calculate the amount to be reported for
ending inventory.
Inventory
Quantity
Cost
Market
Ski jackets
Skis
15
20
$120
350
$100
400
BE6–15 Creative Technology reports inventory using lower-of-cost-or-market. Below is
information related to its year-end inventory. Calculate the amount to be reported for
ending inventory.
Inventory
Quantity
Cost
Market
100
40
$50
60
$80
50
Optima cameras
Inspire speakers
Calculate inventory
ratios (LO8)
BE6–16 Using the amounts below, calculate the inventory turnover ratio, average days
in inventory, and gross profit ratio.
Net sales
Cost of goods sold
Beginning inventory
Ending inventory
Record inventory
purchases and sales using
a periodic system (LO9)
$200,000
140,000
45,000
35,000
BE6–17 Refer to the information in BE6–9, but now assume that Shankar uses a
periodic system to record inventory transactions. Record transactions for the purchase
and sale of inventory.
CHAPTER 6
Inventory and Cost of Goods Sold
BE6–18 Refer to the information in BE6–10, but now assume that Shankar uses a
periodic system to record inventory transactions. Record the purchase of inventory on
February 2, including the freight charges.
Record freight charges for
inventory using a periodic
system (LO9)
BE6–19 Refer to the information in BE6–11, but now assume that Shankar uses a
periodic system to record inventory transactions. Record the inventory purchase on
February 2 and the inventory return on February 5.
Record purchase returns
of inventory using a
periodic system (LO9)
BE6–20 Refer to the information in BE6–12, but now assume that Shankar uses a
periodic system to record inventory transactions. Record the inventory purchase on
February 2 and the payment on February 10.
Record purchase
discounts of inventory
using a periodic
system (LO9)
BE6–21 Ebbers Corporation overstated its ending inventory balance by $10,000 in
2012. What impact will this error have on cost of goods sold and gross profit in 2012
and 2013?
BE6–22 Refer to the information in BE6–21. What impact will this error have
on ending inventory and retained earnings in 2012 and 2013? Ignore any
tax effects.
Find income
statement effects of
overstatement in ending
inventory (LO10)
Find balance sheet effects
of overstatement in
ending inventory (LO10)
EXERCISES
E6–1 Russell Retail Group begins the year with inventory of $45,000 and ends the year
with inventory of $35,000. During the year, the company has four purchases for the
following amounts.
Purchase on February 17
Purchase on May 6
Purchase on September 8
Purchase on December 4
Calculate cost of goods
sold (LO2)
$200,000
120,000
150,000
400,000
Required:
Calculate cost of goods sold for the year.
E6–2 During 2012, TRC Corporation has the following inventory transactions.
Date
Jan. 1
Apr. 7
Jul. 16
Oct. 6
Transaction
Number of Units
Unit Cost
Total Cost
Beginning inventory
Purchase
Purchase
Purchase
40
120
190
100
450
$32
34
37
38
$ 1,280
4,080
7,030
3,800
$16,190
For the entire year, the company sells 400 units of inventory for $50 each.
Required:
1. Using FIFO, calculate (a) ending inventory, (b) cost of goods sold, (c) sales revenue,
and (d) gross profit.
2. Using LIFO, calculate (a) ending inventory, (b) cost of goods sold, (c) sales revenue,
and (d) gross profit.
3. Using weighted-average cost, calculate (a) ending inventory, (b) cost of goods sold,
(c) sales revenue, and (d) gross profit.
4. Determine which method will result in higher profitability when inventory costs are
rising.
Calculate inventory
amounts when costs are
rising (LO3)
CHAPTER 6
Calculate inventory
amounts when costs are
declining (LO3)
Inventory and Cost of Goods Sold
E6–3 During 2012, Trombley Incorporated has the following inventory transactions.
Date
Jan. 1
Mar. 4
Jun. 9
Nov. 11
Transaction
Number of Units
Unit Cost
Total Cost
Beginning inventory
Purchase
Purchase
Purchase
10
15
20
20
65
$12
11
10
8
$120
165
200
160
$645
For the entire year, the company sells 50 units of inventory for $20 each.
Required:
1. Using FIFO, calculate (a) ending inventory, (b) cost of goods sold, (c) sales revenue,
and (d) gross profit.
2. Using LIFO, calculate (a) ending inventory, (b) cost of goods sold, (c) sales revenue,
and (d) gross profit.
3. Using weighted-average cost, calculate (a) ending inventory, (b) cost of goods sold,
(c) sales revenue, and (d) gross profit.
4. Determine which method will result in higher profitability when inventory costs are
declining.
Record inventory
transactions using a
perpetual system (LO5)
E6–4 Bingerton Industries uses a perpetual inventory system. The company began the
year with inventory of $75,000. Purchases of inventory on account during the year
totaled $300,000. Inventory costing $325,000 was sold on account for $500,000.
Required:
Record transactions for the purchase and sale of inventory.
Record inventory
purchase and purchase
return using a perpetual
system (LO5)
E6–5 On June 5, Staley Electronics purchases 100 units of inventory on account for
$10 each. After closer examination, Staley determines 20 units are defective and
returns them to its supplier for full credit on June 9. All remaining inventory is sold on
account on June 16 for $15 each.
Required:
Record transactions for the purchase, return, and sale of inventory.
Record inventory
purchase and purchase
discount using a perpetual
system (LO5)
E6–6 On June 5, Staley Electronics purchases 100 units of inventory on account for
$10 each, with terms 2/10, n/30. Staley pays for the inventory on June 12.
Record transactions using
a perpetual system (LO5)
E6–7 Littleton Books has the following transactions during May.
Required:
1. Record transactions for the purchase of inventory and payment on account.
2. Now assume payment is made on June 22. Record the payment on account.
May 2
May 3
May 5
May 10
May 30
Purchases books on account from Readers Wholesale for $2,300, terms 2/10,
n/30.
Pays freight costs of $100 on books purchased from Readers.
Returns books with a cost of $300 to Readers because part of the order is
incorrect.
Pays the full amount due to Readers.
Sells all books purchased on May 2 (less those returned on May 5) for $3,000
on account.
Required:
1. Record the transactions of Littleton Books, assuming the company uses a perpetual
inventory system.
2. Assume that payment to Readers is made on May 24 instead of May 10. Record this
payment.
CHAPTER 6
Inventory and Cost of Goods Sold
E6–8 Sundance Systems has the following transactions during July.
July 5 Purchases 20 laptop computers on account from Red River Supplies for
$1,500 each, terms 3/10, n/30.
July 8 Returns to Red River two laptops that had defective hard drives.
July 13 Pays the full amount due to Red River.
July 28 Sells remaining 18 laptops purchased on July 5 for $2,000 each on account.
Record transactions using
a perpetual system (LO5)
Required:
Record the transactions of Sundance Systems, assuming the company uses a perpetual
inventory system.
E6–9 DS Unlimited has the following transactions during August.
August 6
Purchases 50 handheld game devices on account from GameGirl, Inc.,
for $100 each, terms 1/10, n/60.
August 7 Pays $300 to Sure Shipping for freight charges associated with the
August 6 purchase.
August 10 Returns to GameGirl five game devices that were defective.
August 14 Pays the full amount due to GameGirl.
August 23 Sells 30 game devices purchased on August 6 for $120 each to customers
on account. The total cost of the 30 game devices sold is $3,170.
Record transactions using
a perpetual system (LO5)
Flip Side of E6–10
Required:
Record the transactions of DS Unlimited, assuming the company uses a perpetual
inventory system.
E6–10 Refer to the transactions in E6–9.
Required:
Prepare the transactions for GameGirl, Inc., assuming the company uses a perpetual
inventory system. Assume the 50 game devices sold on August 6 to DS Unlimited had
a cost to GameGirl of $80 each. The items returned on August 10 were considered
worthless to GameGirl and were discarded.
E6–11 Wayman Corporation reports the following amounts in its December 31, 2012,
income statement.
Sales revenue
Interest expense
Salaries expense
Utilities expense
$320,000
10,000
30,000
40,000
Income tax expense
Cost of goods sold
Advertising expense
Record transactions using
a perpetual system (LO5)
Flip Side of E6–9
Prepare a multiple-step
income statement (LO6)
$ 40,000
120,000
20,000
Required:
Prepare a multiple-step income statement.
E6–12 Tisdale Incorporated reports the following amount in its December 31, 2012,
income statement.
Sales revenue
Gain on land sale*
Selling expenses
General expenses
$250,000
100,000
50,000
40,000
Income tax expense
Cost of goods sold
Administrative expenses
$ 20,000
180,000
30,000
*On July 12, 2012, the company sold land for $400,000 that it had previously purchased for
$300,000, resulting in a $100,000 gain. This is the only land owned by the company.
Required:
1. Prepare a multiple-step income statement.
2. Explain how analyzing the multiple levels of profitability can help in understanding
the future profit-generating potential of Tisdale Incorporated.
Prepare a multiple-step
income statement and
analyze profitability (LO6)
CHAPTER 6
Calculate inventory
using lower-of-cost-ormarket (LO7)
Inventory and Cost of Goods Sold
E6–13 Home Furnishings reports inventory using the lower-of-cost-or-market method.
Below is information related to its year-end inventory.
Inventory
Quantity
Cost
Market
Furniture
Electronics
100
40
$ 75
300
$ 90
250
Required:
1. Calculate ending inventory under lower-of-cost-or-market.
2. Record any necessary adjustment to inventory.
3. Explain the impact of the adjustment in the financial statements.
Calculate inventory
using lower-of-cost-or
market (LO7)
E6–14 A company like Golf USA that sells golf-related inventory typically will have
inventory items such as golf clothing and golf equipment. As technology advances
the design and performance of the next generation of drivers, the older models
become less marketable and therefore decline in value. Suppose that in 2012, Ping
(a manufacturer of golf clubs) introduces the MegaDriver II, the new and improved
version of the MegaDriver. Below are amounts related to Golf USA’s inventory at the
end of 2012.
Inventory
Quantity
Cost
Market
25
5
20
$ 50
260
300
$ 60
200
320
Shirts
MegaDriver
MegaDriver II
Required:
1. Calculate ending inventory under lower-of-cost-or-market.
2. Record any necessary adjustment to inventory.
3. Explain the impact of the adjustment in the financial statements.
Calculate cost of goods
sold, the inventory
turnover ratio, and
average days in
inventory (LO2, 8)
E6–15 Lewis Incorporated and Clark Enterprises report the following amounts
for 2012.
Inventory (beginning)
Inventory (ending)
Purchases
Purchase returns
Lewis
Clark
$ 14,000
8,000
120,000
5,000
$ 40,000
50,000
150,000
50,000
Required:
1. Calculate cost of goods sold for each company.
2. Calculate the inventory turnover ratio for each company.
3. Calculate the average days in inventory for each company.
4. Explain which company appears to be managing its inventory more efficiently.
Calculate levels of
profitability for a multiplestep income statement
and the gross profit
ratio (LO6, 8)
E6–16 Below are amounts found in the income statements of three companies.
Company
Sales
Revenue
Cost of
Goods Sold
Operating
Expenses
Nonoperating
Expenses
Income Tax
Expense
Henry
Grace
James
$12,000
15,000
20,000
$ 3,000
10,000
12,000
$4,000
6,000
2,000
$1,000
3,000
0
$1,000
0
2,000
Required:
1. For each company, calculate (a) gross profit, (b) operating income, (c) income
before income taxes, and (d) net income.
2. For each company, calculate the gross profit ratio and indicate which company has
the most favorable ratio.
CHAPTER 6
Inventory and Cost of Goods Sold
E6–17 Refer to the transactions in E6–7.
Required:
1. Record the transactions of Littleton Books, assuming the company uses a periodic
inventory system.
2. Record the period-end adjustment to cost of goods sold on May 31, assuming the
company has no beginning or ending inventory.
E6–18 Refer to the transactions in E6–8.
Required:
1. Record the transactions of Sundance Systems, assuming the company uses a
periodic inventory system.
2. Record the period-end adjustment to cost of goods sold on July 31, assuming the
company has no beginning inventory.
E6–19 Refer to the transactions in E6–9.
Required:
1. Record the transactions of DS Unlimited, assuming the company uses a periodic
inventory system.
2. Record the period-end adjustment to cost of goods sold on August 31, assuming the
company has no beginning inventory and ending inventory has a cost of $1,585.
E6–20 Mulligan Corporation purchases inventory on account with terms FOB shipping
point. The goods are shipped on December 30, 2012, but do not reach the company
until January 5, 2013. Mulligan correctly records accounts payable associated with the
purchase but does not include this inventory in its 2012 ending inventory count.
Record transactions using
a periodic system (LO9)
Record transactions using
a periodic system (LO9)
Record transactions using
a periodic system (LO9)
Find financial
statement effects of
understatement in ending
inventory (LO10)
Required:
1. If an error has been made, explain why.
2. If an error has been made, indicate whether there is an understatement (U),
overstatement (O), or no effect (N) on the reported amount of each financial
statement element in the current year and following year. Ignore any tax effects.
Balance Sheet
Year
Assets
Liabilities
Income Statement
Stockholders’
Equity
Cost of
Revenues Goods Sold
Gross
Profit
Current
Following
PROBLEMS: SET A
P6–1A Sandra’s Purse Boutique has the following transactions related to its top-selling
Gucci purse for the month of October 2012.
Date
October 1
October 4
October 10
October 13
October 20
October 28
October 30
Transactions
Units
Cost per Unit
Total Cost
Beginning inventory
Sale
Purchase
Sale
Purchase
Sale
Purchase
6
4
5
3
4
7
6
$800
$ 4,800
810
4,050
820
3,280
830
4,980
$17,110
Calculate ending
inventory and cost of
goods sold for four
inventory methods (LO3)
CHAPTER 6
Inventory and Cost of Goods Sold
Required:
1. Calculate ending inventory and cost of goods sold at October 31, 2012, using the
specific identification method. The October 4 sale consists of purses from beginning
inventory, the October 13 sale consists of one purse from beginning inventory
and two purses from the October 10 purchase, and the October 28 sale consists of
three purses from the October 10 purchase and four purses from the October 20
purchase.
2. Using FIFO, calculate ending inventory and cost of goods sold at October 31, 2012.
3. Using LIFO, calculate ending inventory and cost of goods sold at October 31, 2012.
4. Using weighted-average cost, calculate ending inventory and cost of goods sold at
October 31, 2012.
Calculate ending
inventory, cost of
goods sold, sales
revenue, and gross
profit for four inventory
methods (LO3, 4, 5)
P6–2A Greg’s Bicycle Shop has the following transactions related to its top-selling
Mongoose mountain bike for the month of March 2012:
Date
March 1
March 5
March 9
March 17
March 22
March 27
March 30
Transactions
Units
Cost per Unit
Total Cost
Beginning inventory
Sale ($300 each)
Purchase
Sale ($350 each)
Purchase
Sale ($375 each)
Purchase
20
15
10
8
10
12
8
$200
$ 4,000
220
2,200
230
2,300
250
2,000
$10,500
Required:
1. Calculate ending inventory and cost of goods sold at March 31, 2012, using the
specific identification method. The March 5 sale consists of bikes from beginning
inventory, the March 17 sale consists of bikes from the March 9 purchase, and the
March 27 sale consists of four bikes from beginning inventory and eight bikes from
the March 22 purchase.
2. Using FIFO, calculate ending inventory and cost of goods sold at March 31, 2012.
3. Using LIFO, calculate ending inventory and cost of goods sold at March 31, 2012.
4. Using weighted-average cost, calculate ending inventory and cost of goods sold at
March 31, 2012.
5. Calculate sales revenue and gross profit under each of the four methods.
6. Comparing FIFO and LIFO, which one provides the more meaningful measure of
ending inventory? Explain.
7. If Greg’s Bicycle Shop chooses to report inventory using LIFO instead of FIFO,
record the LIFO adjustment.
Record transactions
and prepare a partial
income statement using
a perpetual inventory
system (LO5, 6)
P6–3A At the beginning of July, CD City has a balance in inventory of $2,900. The
following transactions occur during the month of July.
July 3 Purchase CDs on account from Wholesale Music for $1,800, terms 2/10, n/30.
July 4 Pay freight charges related to the July 3 purchase from Wholesale Music, $100.
July 9 Return incorrectly ordered CDs to Wholesale Music and receive credit, $300.
July 11 Pay Wholesale Music in full.
July 12 Sell CDs to customers on account, $4,800, that had a cost of $2,500.
July 15 Receive full payment from customers related to the sale on July 12.
July 18 Purchase CDs on account from Music Supply for $2,600, terms 1/10, n/30.
July 22 Sell CDs to customers for cash, $3,700, that had a cost of $2,000.
July 28 Return CDs to Music Supply and receive credit of $200.
July 30 Pay Music Supply in full.
Required:
1. Assuming that CD City uses a perpetual inventory system, record the transactions.
2. Prepare the top section of the multiple-step income statement through gross profit
for the month of July.
CHAPTER 6
Inventory and Cost of Goods Sold
P6–4A A local Chevrolet dealership carries the following types of vehicles:
Inventory Items
Vans
Trucks
2-door sedans
4-door sedans
Sports cars
SUVs
Quantity
Cost per Unit
Market
(replacement cost)
per Unit
3
6
2
7
3
5
$22,000
17,000
12,000
16,000
32,000
28,000
$20,000
16,000
14,000
19,000
35,000
23,000
Lower-ofCost-orMarket
Report inventory
using lower-of-cost-ormarket (LO7)
Because of recent increases in gasoline prices, the car dealership has noticed a reduced
demand for its SUVs, vans, and trucks.
Required:
1. Compute the total cost of the entire inventory.
2. Determine whether each inventory item would be reported at cost or market.
Multiply the quantity of each inventory item by the appropriate cost or market
amount and place the total in the “Lower-of-Cost-or-Market” column. Then
determine the total for that column.
3. Compare your answers in Requirement 1 and Requirement 2 and then record any
necessary adjustment to write down inventory from cost to market value.
4. Discuss the financial statement effects of using lower-of-cost-or-market to report
inventory.
P6–5A For 2012, Parker Games has the following inventory transactions related to its
traditional board games.
Date
Transaction
Units
Cost
Total Cost
Jan. 1
Mar. 12
Sep. 17
Beginning inventory
Purchase
Purchase
100
80
50
230
$20
15
8
$2,000
1,200
400
$3,600
Jan. 1–Dec. 31
Sales
160
Calculate ending
inventory and cost of
goods sold using FIFO
and LIFO and adjust
inventory using the
lower-of-cost-or-market
method (LO3, 7)
Because of the increasing popularity of electronic video games, Parker Games
continues to see a decline in the demand for board games. Sales prices have decreased
by over 50% during 2012. At the end of the year, Parker estimates the total cost to
replace the 70 units of unsold inventory is only $400.
Required:
1. Using FIFO, calculate ending inventory and cost of goods sold.
2. Using LIFO, calculate ending inventory and cost of goods sold.
3. Determine the amount of ending inventory to report using lower-of-cost-or-market.
Record any necessary adjustment under (a) FIFO and (b) LIFO.
P6–6A At the beginning of October, Bowser Co.’s inventory consists of 60 units with a
cost per unit of $40. The following transactions occur during the month of October.
October 4 Purchase 120 units of inventory on account from Waluigi Co. for $50 per
unit, terms 2/10, n/30.
October 5 Pay freight charges related to the October 4 purchase, $600.
October 9 Return 20 defective units from the October 4 purchase and receive credit.
October 12 Pay Waluigi Co. in full.
October 15 Sell 150 units of inventory to customers on account, $12,000. [Hint: The cost
of units sold from the October 4 purchase includes $50 unit cost plus $6 per
unit for freight less $1 per unit for the purchase discount, or $55 per unit.]
October 19 Receive full payment from customers related to the sale on October 15.
Record transactions
using a perpetual system,
prepare a partial income
statement, and adjust
for the lower-of-cost-ormarket method (LO2, 3, 4, 5, 6, 7)
CHAPTER 6
Inventory and Cost of Goods Sold
October 20 Purchase 100 units of inventory from Waluigi Co. for $60 per unit, terms
1/10, n/30.
October 22 Sell 90 units of inventory to customers for cash, $7,200.
Required:
1. Assuming that Bowser Co. uses a FIFO perpetual inventory system to maintain its
inventory records, record the transactions.
2. Assuming for preparing financial statements that Bowser Co. reports inventory
using LIFO, record the LIFO adjustment.
3. Suppose by the end of October that the remaining inventory is estimated to have a
market value per unit of $35, record any necessary adjustment for the lower-of-costor-market method after the LIFO adjustment.
4. Prepare the top section of the multiple-step income statement through gross profit
for the month of October after the lower-of-cost-or-market adjustment.
Prepare a multiple-step
income statement and
calculate the inventory
turnover ratio and gross
profit ratio (LO6, 8)
P6–7A Baskin-Robbins is one of the world’s largest specialty ice cream shops. The
company offers dozens of different flavors, from Very Berry Strawberry to lowfat
Espresso ’n Cream. Assume that a local Baskin-Robbins in Raleigh, North Carolina,
has the following amounts for the month of July 2012.
Salaries expense
Inventory (July 1, 2012)
Sales returns
Utilities expense
Income tax expense
$12,700
1,800
1,200
3,100
5,000
Sales revenue
Interest income
Cost of goods sold
Rent expense
Interest expense
Inventory (July 31, 2012)
$64,800
2,300
28,200
5,700
500
1,200
Required:
1. Prepare a multiple-step income statement for the month ended July 31, 2012.
2. Calculate the inventory turnover ratio for the month of July. Would you expect this
ratio to be higher or lower in December 2012? Explain.
3. Calculate the gross profit ratio for the month of July.
Use the inventory
turnover ratio and gross
profit ratio to analyze
companies (LO8)
P6–8A Wawa Food Markets is a convenience store chain located primarily in the
Northeast. The company sells gas, candy bars, drinks, and other grocery-related items.
St. Jude Medical Incorporated sells medical devices related to cardiovascular needs.
Suppose a local Wawa Food Market and St. Jude sales office report the following
amounts in the same year (company names are disguised):
Company 1
Company 2
Net sales
Cost of goods sold
Gross profit
$300,000
90,000
$210,000
$300,000
240,000
$ 60,000
Average inventory
$ 30,000
$ 20,000
Required:
1. For Company 1 and Company 2, calculate the inventory turnover ratio.
2. For Company 1 and Company 2, calculate the gross profit ratio.
3. After comparing the inventory turnover ratios and gross profit ratios, which
company do you think is Wawa and which is St. Jude? Explain.
Record transactions
and prepare a partial
income statement using
a periodic inventory
system (LO9)
P6–9A Refer to the transactions of CD City in P6–3A.
Required:
1. Assuming that CD City uses a periodic inventory system, record the transactions.
2. Record the month-end adjustment to inventory, assuming that a final count reveals
ending inventory with a cost of $2,370.
CHAPTER 6
Inventory and Cost of Goods Sold
3. Prepare the top section of the multiple-step income statement through gross profit
for the month of July.
P6–10A Over a four-year period, Jackie Corporation reported the following series of
gross profits.
Net sales
Cost of goods sold
Gross profit
2009
2010
2011
2012
$50,000
25,000
$25,000
$56,000
39,000
$17,000
$64,000
21,000
$43,000
$80,000
41,000
$39,000
Correct inventory
understatement and
calculate gross profit
ratio (LO8, 10)
In 2012, the company performed a comprehensive review of its inventory accounting
procedures. Based on this review, company records reveal that ending inventory was
understated by $10,000 in 2010. Inventory in all other years is correct.
Required:
1. Calculate the gross profit ratio for each of the four years based on amounts
originally reported.
2. Calculate the gross profit ratio for each of the four years based on corrected
amounts. Describe the trend in the gross profit ratios based on the original amounts
versus the corrected amounts.
3. Total gross profit over the four-year period based on the amounts originally reported
equals $124,000 (= $25,000 + $17,000 + $43,000 + $39,000). Compare this amount
to total gross profit over the four-year period based on the corrected amounts.
PROBLEMS: SET B
P6–1B Jimmie’s Fishing Hole has the following transactions related to its top-selling
Shimano fishing reel for the month of June 2012:
Date
June 1
June 7
June 12
June 15
June 24
June 27
June 29
Transactions
Units
Cost per Unit
Total Cost
Beginning inventory
Sale
Purchase
Sale
Purchase
Sale
Purchase
16
11
10
12
10
8
10
$250
$ 4,000
240
2,400
230
2,300
220
2,200
$10,900
Required:
1. Calculate ending inventory and cost of goods sold at June 30, 2012, using the
specific identification method. The June 7 sale consists of fishing reels from
beginning inventory, the June 15 sale consists of three fishing reels from beginning
inventory and nine fishing reels from the June 12 purchase, and the June 27 sale
consists of one fishing reel from beginning inventory and seven fishing reels from
the June 24 purchase.
2. Using FIFO, calculate ending inventory and cost of goods sold at June 30, 2012.
3. Using LIFO, calculate ending inventory and cost of goods sold at June 30, 2012.
4. Using weighted-average cost, calculate ending inventory and cost of goods sold
at June 30, 2012.
P6–2B Pete’s Tennis Shop has the following transactions related to its top-selling
Wilson tennis racket for the month of August 2012:
Calculate ending
inventory and cost of
goods sold for four
inventory methods (LO3)
Calculate ending
inventory, cost of
goods sold, sales
revenue, and gross
profit for four inventory
methods (LO3, 4, 5)
CHAPTER 6
Inventory and Cost of Goods Sold
Date
August 1
August 4
August 11
August 13
August 20
August 26
August 29
Transactions
Units
Cost per Unit
Total Cost
Beginning inventory
Sale ($175 each)
Purchase
Sale ($190 each)
Purchase
Sale ($200 each)
Purchase
8
5
10
8
10
11
12
$150
$1,200
140
1,400
130
1,300
120
1,440
$5,340
Required:
1. Calculate ending inventory and cost of goods sold at August 31, 2012, using the
specific identification method. The August 4 sale consists of rackets from beginning
inventory, the August 13 sale consists of rackets from the August 11 purchase, and
the August 26 sale consists of one racket from beginning inventory and 10 rackets
from the August 20 purchase.
2. Using FIFO, calculate ending inventory and cost of goods sold at August 31, 2012.
3. Using LIFO, calculate ending inventory and cost of goods sold at August 31, 2012.
4. Using weighted-average cost, calculate ending inventory and cost of goods sold at
August 31, 2012.
5. Calculate sales revenue and gross profit under each of the four methods.
6. Comparing FIFO and LIFO, which one provides the more meaningful measure of
ending inventory? Explain.
7. If Pete’s chooses to report inventory using LIFO, record the LIFO adjustment.
Record transactions
and prepare a partial
income statement using
a perpetual inventory
system (LO5, 6)
P6–3B At the beginning of June, Circuit Country has a balance in inventory of $2,500.
The following transactions occur during the month of June.
June 2
June 4
June 8
June 10
June 11
June 18
June 20
June 23
June 26
June 28
Purchase radios on account from Radio World for $2,200, terms 2/15, n/45.
Pay freight charges related to the June 2 purchase from Radio World, $300.
Return defective radios to Radio World and receive credit, $200.
Pay Radio World in full.
Sell radios to customers on account, $4,000, that had a cost of $2,700.
Receive payment on account from customers, $3,000.
Purchase radios on account from Sound Unlimited for $3,300, terms 3/10, n/30.
Sell radios to customers for cash, $4,800, that had a cost of $3,100.
Return damaged radios to Sound Unlimited and receive credit of $400.
Pay Sound Unlimited in full.
Required:
1. Assuming that Circuit Country uses a perpetual inventory system, record transactions
using the following account titles: Cash, Accounts Receivable, Inventory, Accounts
Payable, Sales, and Cost of Goods Sold.
2. Prepare the top section of the multiple-step income statement through gross profit
for the month of June.
Report inventory
using lower-of-cost-ormarket (LO7)
P6–4B A home improvement store, like Lowe’s, carries the following items:
Inventory Items
Hammers
Saws
Screwdrivers
Drills
1-gallon paint cans
Paintbrushes
Quantity
Cost per Unit
Market
(replacement cost)
per Unit
100
50
130
40
160
180
$ 7.00
10.00
2.00
25.00
5.50
6.00
$ 7.50
9.00
2.60
22.00
5.00
6.50
Lower-ofCost-orMarket
CHAPTER 6
Inventory and Cost of Goods Sold
Required:
1. Compute the total cost of inventory.
2. Determine whether each inventory item would be reported at cost or market.
Multiply the quantity of each inventory item by the appropriate cost or market
amount and place the total in the “Lower-of-Cost-or-Market” column. Then
determine the total of that column.
3. Compare your answers in Requirement 1 and Requirement 2 and then record any
necessary adjustment to write down inventory from cost to market value.
4. Discuss the financial statement effects of using lower-of-cost-or-market to report
inventory.
P6–5B Trends by Tiffany sells high-end leather purses. During 2012, the company has
the following inventory transactions.
Date
Transaction
Units
Cost
Total Cost
Jan. 1
Apr. 9
Oct. 4
Beginning inventory
Purchase
Purchase
10
20
16
46
$400
420
450
$ 4,000
8,400
7,200
$19,600
Jan. 1–Dec. 31
Sales
42
Calculate ending
inventory and cost of
goods sold using FIFO
and LIFO and adjust
inventory using lower-ofcost-or-market (LO3, 7)
Because trends in purses change frequently, Trends by Tiffany estimates that the
remaining four purses have a current replacement cost at December 31 of only $250
each.
Required:
1. Using FIFO, calculate ending inventory and cost of goods sold.
2. Using LIFO, calculate ending inventory and cost of goods sold.
3. Determine the amount of ending inventory to report using lower-of-cost-or-market.
Record any necessary adjustment under (a) FIFO and (b) LIFO.
P6–6B At the beginning of November, Yoshi Inc.’s inventory consists of 50 units with a
cost per unit of $95. The following transactions occur during the month of November.
November 2
November 3
November 9
November 11
November 16
November 20
November 21
November 24
Purchase 80 units of inventory on account from Toad Inc.
for $100 per unit, terms 2/10, n/30.
Pay freight charges related to the November 2 purchase, $210.
Return 10 defective units from the November 2 purchase and receive
credit.
Pay Toad Inc. in full.
Sell 100 units of inventory to customers on account, $13,000. [Hint:
The cost of units sold from the November 2 purchase includes $100
unit cost plus $3 per unit for freight less $2 per unit for the purchase
discount, or $101 per unit.]
Receive full payment from customers related to the sale on November 16.
Purchase 60 units of inventory from Toad Inc. for $105 per unit, terms
1/10, n/30.
Sell 70 units of inventory to customers for cash, $8,100.
Required:
1. Assuming that Yoshi Inc. uses a FIFO perpetual inventory system to maintain its
internal inventory records, record the transactions.
2. Assuming for preparing financial statements that Yoshi Inc. reports inventory using
LIFO, record the LIFO adjustment.
3. Suppose by the end of November that the remaining inventory is estimated to have
a market value per unit of $80, record any necessary adjustment for the lower-ofcost-or-market method after the LIFO adjustment.
4. Prepare the top section of the multiple-step income statement through gross profit
for the month of November after the lower-of-cost-or-market adjustment.
Record transactions
using a perpetual system,
prepare a partial income
statement, and adjust
for the lower-of-cost-ormarket method (LO2, 3, 4, 5, 6, 7)
CHAPTER 6
Prepare a multiple-step
income statement and
calculate the inventory
turnover ratio and gross
profit ratio (LO6, 8)
Inventory and Cost of Goods Sold
P6–7B Toys “R” Us sells a variety of children’s toys, games, books, and accessories.
Assume that a local store has the following amounts for the month of March 2012.
Sales revenue
Purchase discounts
Advertising expense
Rent expense
Gain on sale of building
Inventory (Mar. 1, 2012)
$72,300
2,200
5,400
3,300
6,500
2,300
Cost of goods sold
Inventory (Mar. 31, 2012)
Insurance expense
Sales discounts
Salaries expense
Income tax expense
$35,300
1,100
1,800
2,500
8,400
3,200
Required:
1. Prepare a multiple-step income statement for the month ended March 31, 2012.
2. Calculate the inventory turnover ratio for the month of March. Would you expect
this ratio to be higher or lower in December 2012? Explain.
3. Calculate the gross profit ratio for the month of March.
Use the inventory
turnover ratio and gross
profit ratio to analyze
companies (LO8)
P6–8B Payless ShoeSource and Dillard’s both offer men’s formal footwear. Payless
offers lower- to middle-priced footwear, whereas Dillard’s offers more specialized,
higher-end footwear. The average price for a pair of shoes in Payless may be about $50,
whereas the average price in Dillard’s may be about $175. The types of shoes offered
by Dillard’s are not sold by many other stores. Suppose a Payless store and a Dillard’s
store report the following amounts for men’s shoes in the same year (company names
are disguised):
Company 1
Company 2
Net sales
Cost of goods sold
Gross profit
$100,000
40,000
$ 60,000
$100,000
75,000
$ 25,000
Average inventory
$ 25,000
$ 10,000
Required:
1. For Company 1 and Company 2, calculate the inventory turnover ratio.
2. For Company 1 and Company 2, calculate the gross profit ratio.
3. After comparing the inventory turnover ratios and gross profit ratios, which
company do you think is Payless and which is Dillard’s? Explain.
Record transactions
and prepare a partial
income statement using
a periodic inventory
system (LO9)
P6–9B Refer to the transactions of Circuit Country in P6–3B.
Determine the effects
of inventory errors using
FIFO (LO3, 10)
P6–10B Sylvester has a bird shop that sells canaries. Sylvester maintains accurate
records on the number of birds purchased from its suppliers and the number sold to
customers. The records show the following purchases and sales during 2012.
Required:
1. Assuming that Circuit Country uses a periodic inventory system, record the
transactions.
2. Record the month-end adjustment to inventory, assuming that a final count reveals
ending inventory with a cost of $1,860.
3. Prepare the top section of the multiple-step income statement through gross profit
for the month of June.
Date
Transactions
Units
Cost per Unit
January 1
April
14
August 22
October 29
Beginning inventory
Purchase
Purchase
Purchase
25
70
120
85
300
$30
32
34
36
Jan. 1–Dec. 31
Sales ($50 each)
270
Total Cost
$
750
2,240
4,080
3,060
$10,130
CHAPTER 6
Inventory and Cost of Goods Sold
Sylvester uses a periodic inventory system and believes there are 30 birds remaining
in ending inventory. However, Sylvester neglects to make a final inventory count at
the end of the year. An employee accidentally left one of the cages open one night
and 10 birds flew away, leaving only 20 birds in ending inventory. Sylvester is not
aware of the lost canaries.
Required:
1. What amount will Sylvester calculate for ending inventory and cost of goods
sold using FIFO, assuming he erroneously believes 30 canaries remain in ending
inventory?
2. What amount would Sylvester calculate for ending inventory and cost of goods sold
using FIFO if he knew that only 20 canaries remain in ending inventory?
3. What effect will the inventory error have on reported amounts for (a) ending
inventory, (b) retained earnings, (c) cost of goods sold, and (d) net income (ignoring
tax effects) in 2012?
4. Assuming that ending inventory is correctly counted at the end of 2013, what effect
will the inventory error in 2012 have on reported amounts for (a) ending inventory,
(b) retained earnings, (c) cost of goods sold, and (d) net income (ignoring tax
effects) in 2013?