CH 06 SM

CHAPTER 6
Inventory Costing
ASSIGNMENT CLASSIFICATION TABLE
Study Objectives
Brief
Exercises
Questions
Problems
Set A
Exercises
Problems
Set B
1. Describe the steps in determining

inventory quantities.
1, 2, 3, 4
1, 2
2. Prepare the entries for purchases

and sales of inventory under a
periodic inventory system.
6, 8
2, 10
2, 8, *9
2, 8, *9
3. Determine the cost of goods sold

under a periodic inventory system.
5, 7, 8
4, 5
3, 4
4. Identify the unique features of the

income statement for a
merchandising company using a
periodic inventory system.
5, 6
2, 3
2, 3
5. Explain the basis of accounting for

inventories and use the inventory
cost flow methods.
10, 11, 12
6, 7, 8, 9
4, 5, 8, *9
4, 5, 8, *9
6. Demonstrate the effects on the

financial statements of each of the
inventory cost flow methods.
13, 14
8, 9, 10
4, 5, 6, *10
4, 5, 6
7. Determine the effects of inventory

errors on the financial statements.
15
9, 10
11, 12
6, 7
6, 7
8. Explain and use the lower of cost

and market basis of accounting for
inventories.
16, 17, 18
11
13
*9. Apply the inventory cost flow

methods to perpetual inventory
records (Appendix 6A).
*19
*12, *13
*14
*9, *10
*9, *10
*10. Use the two methods of estimating

inventories (Appendix 6B).
*20, *21, *22
*14, *15
*15, *16
*11, *12
*11, *12
6-1
ASSIGNMENT CHARACTERISTIC TABLE

Problem
Number
Description
Difficulty
Level
Time
Allotted min.)
1A
Determine items and amounts to be recorded in inventory.
Moderate
25-30
2A
Journalize, post, and prepare trial balance and partial income

statement.
Simple
30-40
3A
Prepare a multiple-step income and closing entries.
Simple
15-20
4A
Determine cost of goods sold and ending inventory, using

periodic FIFO, weighted average, and LIFO. Answer questions
about financial statement effects.
Simple
20-30
5A
Calculate ending inventory using FIFO and weighted average

periodic inventory methods, prepare income statements, and
answer questions.
Moderate
20-35
6A
Indicate effect of errors and identify cost flow assumptions.
Moderate
20-25
7A
Illustrate impact of inventory error.
Simple
15-20
8A
Prepare journal entries for purchaser and seller using weighted

average cost. Apply lower of cost and market.
Moderate
25-30
*9A
Calculate and journalize FIFO transactions in perpetual and

periodic inventory systems.
Moderate
25-35
*10A
Calculate cost of goods and inventory using perpetual inventory

system with FIFO and moving average cost. Answer questions
Moderate
20-30
*11A
Estimate inventory loss using gross profit method.
Moderate
15-20
*12A
Estimate ending inventory using retail method.
Moderate
15-20
1B
Determine items and amounts to be recorded in inventory.
Moderate
25-30
2B
Journalize, post, and prepare trial balance and partial income

statement.
Simple
30-40
3B
Prepare a multiple-step income statement and closing entries.
Simple
15-20
4B
Determine cost of goods sold and ending inventory using

periodic FIFO, weighted average, and LIFO. Answer questions
Simple
20-30
5B
Calculate ending inventory using FIFO and LIFO periodic

inventory methods, prepare income statements, and answer
questions.
Moderate
20-35
6B
Indicate effect of errors and identify cost flow assumptions.
Moderate
20-25
7B
Illustrate impact of inventory error.
Simple
15-20
6-2
Problem
Number
Description
Difficulty
Level
Time
Allotted min.)
8B
Prepare journal entries for purchaser and seller using FIFO

periodic method. Apply lower of cost and market.
Moderate
25-30
*9B
Calculate and journalize average cost transactions in perpetual

and periodic inventory systems.
Moderate
25-35
*10B
Calculate ending inventory and gross profit using perpetual

inventory system with FIFO costing.
Moderate
20-30
*11B
Estimate inventory loss using gross profit method.
Moderate
15-20
*12B
Estimate ending inventory using retail method.
Moderate
15-20
6-3
BLOOMS TAXONOMY TABLE

Correlation Chart between Blooms Taxonomy, Study Objectives and End-of-Chapter Material
Study Objective
1. Describe the steps

in determining
inventory
quantities.
Knowledge
Q6-2
BE6-1
2. Prepare the entries

for purchases and
sales of inventory
under a periodic
inventory system.
3. Determine the cost
of goods sold
under a periodic
inventory system.
Q6-7
4. Identify the unique

features of the
income statement
for a
merchandising
company using a
periodic inventory
system.
5. Explain the basis of
accounting for
inventories and use
the inventory cost
flow methods.
Comprehension
Q6-1
Q6-3
Q6-4
Application
BE6-2
Analysis
E6-1
P6-1A
P6-1B
Q6-6
Q6-8
BE6-3
E6-2
P6-2A
P6-8A
E6-10
Q6-5
Q6-8
BE6-4
BE6-5
E6-3
P6-2A
P6-2B
BE6-5
BE6-6
E6-5
P6-2A
P6-3A
Q6-9
Q6-10
BE6-7
E6-7
E6-8
E6-9
6. Demonstrate the
effects on the
financial
statements of each
of the inventory
cost flow methods.
Q6-13
Q6-14
E6-8
E6-9
*P6-10A
7. Determine the
effects of inventory
errors on the
financial
statements.
Q6-15
BE6-9
BE6-10
E6-11
Q6-16
Q6-17
BE6-11
E6-13
P6-8A
P6-8B
8. Explain and use

the lower of cost
and market basis
of accounting for
inventories.
Q6-11
Q6-12
Q6-18
6-4
*P6-9A
P6-2B
P6-8B
*P6-9B
Synthesis
E6-4
P6-2B
P6-3B
P6-8A
*P6-9A
P6-8B
*P6-9B
E6-6
P6-4A
P6-5A
P6-4B
P6-5B
BE68
E610
P64A
P65A
P6-6A
P6-7A
P6-6B
P6-7B
P6-6A
P6-4B
P6-5B
P6-6B
E6-12
Evaluation
Study Objective
*9. Apply the inventory

cost flow methods
to perpetual
inventory records
(Appendix 6A).
*10. Use the two
methods of
estimating
inventories
(Appendix 6B).
Broadening Your
Perspective
Knowledge
*Q6-19
*Q6-20
Comprehension
Application
*BE6-12
*P6-10A
*BE6-13
*P6-9B
*E6-14
*P6-10B
*P6-9A
*Q6-21
*Q6-22
*BE6-14
*BE6-15
*E6-15
BYP6-5
6-5
Analysis
Synthesis
Evaluation
BYP6-7
BYP6-8
*E6-16
*P6-11A
*P6-12A
*P6-11B
*P6-12B
BYP6-1
BYP6-2
BYP6-3
BYP6-4
BYP6-6
ANSWERS TO QUESTIONS
01. Agree. Effective inventory management is frequently the key to
successful business operations. Management attempts to maintain
sufficient quantities and types of goods to meet expected customer
demand. It also seeks to avoid the cost of carrying inventories that
are clearly in excess of anticipated sales.
02. Inventory items have two common characteristics: (1) they are owned
by the company and (2) they are in a form ready for sale to customers
in the ordinary course of business.
03. Taking a physical inventory involves counting, weighing or measuring
each kind of inventory on hand. This is normally done when the store
is closed. Tom will probably count items, and mark the quantity,
description, and inventory number on prenumbered inventory tags.
Retailers, such as a hardware store, generally have thousands of
different items to count. Later, unit costs will likely be applied to the
inventory quantities using either specific identification or an assumed
cost flow method.
04. (a) (1) The goods will be included in Janine Company's inventory if
the terms of sale are FOB destination.
(2) They will be included in Laura Corporation's inventory if the
terms of sale are FOB shipping point.
(b) Janine Company should include goods shipped to a consignee in
its inventory. Goods held by Janine Company on consignment
should not be included in its inventory.
5.
Account
Purchases
Purchase returns
and allowances
Freight in
(a) Added or Deducted (b) Normal Balance

Added
Debit
Deducted
Added
Credit
Debit
Purchases Purchase returns and allowances = Net purchases +

Freight in = Cost of goods purchased
6-6
Questions Chapter 6 (Continued)

6.
Recording sales in either system requires an entry to record the

revenue generated by the transaction (e.g., Dr. Cash or Accounts
Receivable; Cr. Sales). Under the perpetual inventory system, a
second entry is made to record the cost of the sale (e.g., Dr. Cost of
Goods Sold; Cr. Merchandise Inventory). Under a periodic system the
cost of goods sold is not determined until the end of the accounting
period. At that time, it is not recorded but rather is a calculation
detailed within the income statement.
7.
(1)
(2)
(3)
(4)
8.
Under a periodic inventory system, cost of goods sold is determined

at the end of an accounting period. Under a perpetual inventory
system, the cost of goods sold is determined throughout the period
as each sale takes place.
9.
The distinguishing feature is that cost of goods sold is detailed, rather

than shown as one amount. These details consist of:
Purchase returns and allowances

Freight in
Cost of goods purchased
Ending inventory
Beginning inventory
+ Cost of goods purchased
+ Purchases
- Purchase returns and allowances
= Net purchases
+ Freight in
= Cost of goods purchased
= Goods available for sale
- Ending inventory
= Cost of goods sold
10. Actual physical flow may be impractical because many items are
indistinguishable from one another. And, even if the items are
individually identifiable, it may be too costly and too complex to track
the physical flow of each inventory item. Actual physical flow may
also be inappropriate because management may be able to
manipulate net income through specific identification of items sold.
6-7

11. An advantage of the specific identification method is that it tracks the
actual physical flow of the goods available for sale. A disadvantage is
that management could manipulate net income by directing the flow
of items and hence costs.
12. (a) FIFO
(b) FIFO
(c) Average cost
13. Plato Company is using the FIFO method of inventory costing. York
Company is using the LIFO or average cost flow method. Under FIFO,
the latest goods purchased remain in inventory. Thus, the inventory
on the balance sheet should be close to current costs. The reverse is
true of the LIFO cost flow method and average cost falls somewhere
in between the FIFO and LIFO results.
Plato Company will probably have the higher gross profit, because
cost of goods sold will include a higher proportion of goods
purchased at earlier (lower) costs.
14. No. Selection of an inventory costing method is a management
decision. The accountants may provide input for management
consideration, but the decision is that of the management. Once a
method has been chosen, it should be used consistently.
15. (a) Mila Company's 2002 net income will be understated $5,000.
BI + CGP EI = CGS
-U=O
Sales CGS = NI
-O=U
(b) Milas 2003 net income will be overstated $5,000 since the ending
inventory of 2002 becomes the beginning inventory of 2003.
BI + CGP EI = CGS
U
=U
Sales CGS = NI
-U=O
(c) The combined net income for the two years will be correct
because the errors offset each other (U$5,000 in 2002 and O$5,000
in 2003).
6-8

16. Lucy should know the following:
(a) A departure from the cost basis of accounting for inventories is
justified when the utility (revenue-producing ability) of the goods
is no longer as great as its cost. The writedown to market should
be recognized in the period in which the price decline occurs.
(b) Market can mean current replacement cost (cost to replace) or the
net realizable value (selling price less any costs required to make
the goods ready for sale) of the goods. The net realizable value is
more commonly used.
17. Rock Music Centre should report the five CD players at $320 each, for
a total of $1,600. $320 is the estimated net realizable value (NRV)
under the lower of cost and market basis of accounting for
inventories. NRV represents the net revenue which can be expected
from the sale of the goods, and therefore constitutes a logical
maximum on the value of the items.
18.
Maureen & Nathan Company should disclose (1) the major inventory
classifications, (2) the basis of accounting (cost or lower of cost and
market), and (3) the costing method used (specific identification,
FIFO, average cost, or LIFO).
*19. In a periodic system, the average is a weighted average based on

total goods available for sale at the end of the period. In a perpetual
system, the average is calculated the same (GAS $ GAS units) but
it becomes a moving average as the weighted average is recalculated
after each purchase.
*20. Inventories must be estimated when (1) management wants interim
(monthly or quarterly) financial statements but a physical inventory is
only taken annually, or (2) a fire or other type of casualty makes it
impossible to take a physical inventory.
6-9

*21. The estimated cost of the ending inventory is $20,000:
Net sales ............................................................................
Less: Gross profit ($400,000 X 30%) ..............................
Estimated cost of goods sold ..........................................
$400,000
120,000
$280,000
Cost of goods available for sale ......................................

Less: Cost of goods sold ................................................
Estimated cost of ending inventory ................................
$300,000
280,000
$ 20,000
*22. The estimated cost of the ending inventory is $21,000:

Cost-to-retail ratio:
$84,000 $120,000 = 70%
Ending inventory at retail: $120,000 $100,000 = $20,000

Ending inventory at cost:
$20,000 X 70% = $14,000
6-10
SOLUTIONS TO BRIEF EXERCISES

BRIEF EXERCISE 6-1
1.
Ownership of the goods belongs to the consignor (Helgeson). Thus,

these goods should be included in Helgesons inventory.
2.
The goods in transit should not be included in the inventory count because ownership by Helgeson does not occur until the goods reach
its warehouse.
3.
The goods being held belong to the customer. They should not be included in Helgesons inventory.
4.
Ownership of these goods rests with the other company (the

consignor). These goods should not be included in Helgesons
inventory.
5.
The goods in transit to a customer should be included in inventory as

title does not pass to the customer until they reach the destination.
BRIEF EXERCISE 6-2

Inventoriable costs are $3,070 (invoice cost $3,000 + freight charges $70).
The amount paid to negotiate the purchase is a buying cost that normally
is not included in the cost of inventory because of the difficulty of
allocating these costs, or other employee-related costs (e.g., wages),
directly to the product Buying costs such as these are usually expensed in
the year incurred.
6-11
BRIEF EXERCISE 6-3

(1) Buyer Company
(a) March 2
(b) March 6
(c) March 29
Purchases ...............................
Accounts Payable............
900,000
Accounts Payable...................
Purchases Returns and
Allowances ..................
130,000
900,000
130,000
Accounts Payable................... 770,000

Cash ($900,000 - $130,000)
770,000
(2) Seller Company

(a) March 2
(b) March 6
(c) March 29
Accounts Receivable .............

Sales .................................
900,000
900,000
Sales Returns and Allowances 130,000

Accounts Receivable ......
130,000
Cash ($900,000 - $130,000) ....

770,000
770,000
BRIEF EXERCISE 6-4

Purchases ...........................................................................
Less: Purchase returns and allowances .........................
Net purchases.....................................................................
Add: Freight in..................................................................
Cost of goods purchased ..................................................
6-12
$400,000
11,000
389,000
16,000
$405,000
BRIEF EXERCISE 6-5

Net sales ...........................................................
$630,000
Beginning inventory ........................................
$ 60,000
Add: Purchases ............................................. $400,000
Less: Purchase returns and allowances.......
11,000
Net purchases .................................................. 389,000
Add: Freight in................................................
16,000
Cost of goods purchased................................
405,000
Cost of goods available for sale .....................
465,000
Less: Ending inventory...................................
90,000
Cost of goods sold...........................................
0 375,000
Gross profit.......................................................
$255,000
BRIEF EXERCISE 6-6
Dec. 31 Sales..............................................................
Merchandise Inventory (December 31) ......
Purchase Returns and Allowances ............
Capital....................................................
630,000
90,000
11,000
Dec. 31 Capital ...........................................................

Merchandise Inventory (January 1) ....
Purchases .............................................
Freight In ...............................................
476,000
6-13
731,000
60,000
400,000
16,000
BRIEF EXERCISE 6-7

Goods available for sale (GAS):
Units
Dollars
P
300 X $6 = $1,800
P
400 X $7 = 2,800
P
300 X $8 = 2,400
GAS 1,000
$7,000
-EI
400
CGS
600
(a) FIFO
CGS:
300 x $6 = $1,800
300 x $7 = 2,100
600
= $3,900
EI:
300 x $8 = $2,400
100 x $7 =
700
400
= $3,100
Check: CGS + EI = GAS

$3,900 + $3,100 = $7,000
(b) Weighted Average Cost
Weighted average unit cost: $7,000 1,000 = $7
CGS:
600 x $7 = $4,200
EI:
400 x $7 = $2,800

$4,200 + $2,800 = $7,000
6-14
BRIEF EXERCISE 6-7 (Continued)

(c) LIFO
CGS:
300 x $8 = $2,400
300 x $7 = 2,100
600
= $4,500
EI:
300 x $6 = $1,800
100 x $7 =
700
400
= $2,500

$4,500 + $2,500 = $7,000
BRIEF EXERCISE 6-8
(a) LIFO gives the highest inventory valuation when prices are falling.
This is because the cost of the units purchased earlier, at a higher
cost, are assumed to be still in inventory.
(b) FIFO gives the highest cost of goods sold amount. This is because the
cost of the units purchased earlier, at a higher cost, are assumed to
have been sold first and are allocated to cost of goods sold.
(c) In selecting a cost flow method, the company should consider their
type of inventory and its actual physical flow. While it is not essential
to match the actual physical flow to the assumed cost flow method, it
does give the company an indication as to its flow of costs throughout
the period. What is important is choosing a method that best matches
these costs to the revenue they generate.
6-15
BRIEF EXERCISE 6-9

BI + CGP = GAS EI
= CGS
- U$7,000 = O$7,000
Sales CGS
= NI
- O$7,000 = U$7,000
The understatement of ending inventory caused cost of goods sold to be
overstated $7,000 and net income to be understated $7,000. The correct
net income for 2002 is $97,000 ($90,000 + $7,000).
A
= L + OE
U$7,000 =
U$7,000
Total assets and owners equity in the balance sheet will both be
understated by the amount that ending inventory is understated, $7,000.
Remember that if net income is understated, then owners equity is also
understated as net income is a component of owners equity. Check your
work by ensuring that the accounting equation balances.
6-16
BRIEF EXERCISE 6-10

Assets =
Liabilities +
Owners Equity
2002
U$25,000
No Effect
U$25,000
2003
No Effect
No Effect
No Effect
2002
BI + CGP = GAS EI
= CGS
- U$25,000 = O$25,000
Sales CGS
= NI
- O$25,000 = U$25,000
Note that if Net Income is understated $25,000, then Owners Equity is also
understated $25,000.
2003
BI + CGP = GAS
EI = CGS
U$25,000 = U$25,000
= U$25,000
Sales CGS
= NI
- U$25,000 = O$25,000
Note that if net income is overstated $25,000 and added to the prior years
understatement of $25,000, that the two errors cancel out. The Owners
Equity at the end of the period is correct. The ending inventory is also
correct at the end of 2003.
6-17
BRIEF EXERCISE 6-11

Inventory Categories
Cost
Market
LCM
Cameras
Camcorders
VCRs
Total valuation
$12,000
9,000
14,000
$35,000
$11,200
9,500
12,800
$33,500
$33,500
*BRIEF EXERCISE 6-12

(1) Buyer Company
(a) March 2
(b) March 6
(c) March 29
Merchandise Inventory ..........

Accounts Payable............
900,000
Merchandise Inventory ...
130,000
Cash..................................
770,000
900,000
130,000
770,000
(2) Seller Company

(a) March 2
(b) March 6
(c) March 29
Accounts Receivable .............

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

Merchandise Inventory ...
($900,000 1.45 = $620,689)
620,689
900,000
620,689
Sales Returns and Allowances 130,000

Merchandise Inventory ..........
Cost of Goods Sold .........
($130,000 1.45 = $89,655)
89,655
Cash.........................................
770,000
6-18
130,000
89,655
770,000

(a) FIFO
Date
May 5
Purchased
(50 X $10)
(30 X $10)
(25 X $12)
Balance
$500
June 1
July 29
Sold
$300
$300
(20 X $10)
(15 X $12)
Aug. 27
$380
(50 X $10)
$500
(20 X $10)
$200
(20 X $10)
(25 X $12)
$500
(10 X $12)
$120
Cost of goods sold = $300 + $380 = $680

Ending inventory = $120
Check: CGS + EI =GAS; $680 + $120 = $800
(b) Moving Average
Date
May 5
Purchased
(50 X $10)
Aug. 27
(30 X $10)
(25 X $12)
Balance
$500
June 1
July 29
Sold
$300
$300
(35 X $11.11) $389

Check: CGS + EI =GAS; $689 + $111 = $800
6-19
(50 X $10)
$500
(20 X $10)
$200
(20 X $10)
(25 X $12)
$500
Average $500 45
= $11.11
(10 X $11.11) $111

(c) LIFO
Date
May 5
Purchased
(50 X $10)
Sold
$500
June 1
July 29
(30 X $10)
(25 X $12)
Balance
$300
$300
(25 X $12)
(10 X $10)
Aug. 27
$400
(50 X $10)
$500
(20 X $10)
$200
(20 X $10)
(25 X $12)
$500
(10 X $10)
$100

Check: CGS + EI =GAS; $700 + $100 = $800
Recap:
CGS
EI
GAS
FIFO
$680
120
$800
Moving
Average
$689
111
$800
6-20
LIFO
$700
100
$800

Net sales ....................................................................................
Less: Estimated gross profit (40% X $350,000).....................
Estimated cost of goods sold ..................................................
$350,000
140,000
$210,000
Cost of goods available for sale ..............................................

Less: Estimated cost of goods sold.......................................
Estimated cost of ending inventory ........................................
$310,000
210,000
$100,000

At Cost
$35,000
Goods available for sale

Net sales
Ending inventory at retail
At Retail
$50,000
40,000
$10,000
Cost-to-retail ratio = $35,000 $50,000 = 70%

Estimated cost of ending inventory = $10,000 X 70% = $7,000
6-21
SOLUTIONS TO EXERCISES
EXERCISE 6-1
Ending inventoryphysical count ..............................................
1. No effect: Title passes to purchaser upon shipment
when terms are FOB shipping point .....................................
2. No effect: Title does not transfer to Novotna until
goods are received .................................................................
3. Add to inventory: Title passed to Novotna when
goods were shipped ...............................................................
4. Add to inventory: Title remains with Novotna until
purchaser receives goods .....................................................
5. No effect: Title does not transfer to Novotna until goods
are received.............................................................................
Correct inventory ...............................................................................
6-22
$297,000
0
0
25,000
40,000
0
$362,000
EXERCISE 6-2
(1)
Olaf Company
April 5
April 6
April 7
April 8
April 30
(2)
Purchases ...............................................
Accounts Payable..............................
18,000
Freight In .................................................
Cash ....................................................
900
Equipment...............................................
Accounts Payable..............................
26,000
Accounts Payable ..................................

Purchase Returns and Allowances ..
3,000
Accounts Payable ($18,000 $3,000) ...

Cash ....................................................
15,000
18,000
900
26,000
3,000
15,000
DeVito Company
April 5
April 8
April 30
Accounts Receivable .............................

Sales ...................................................
18,000
Sales Returns and Allowances .............

Accounts Receivables.......................
3,000
Cash ($18,000 $3,000) .........................

Accounts Receivable.........................
15,000
18,000
3,000
15,000
Note: Transactions #2 and #3 do not affect the DeVito Company.
6-23
EXERCISE 6-3
LEBLANC COMPANY
Income Statement (Partial)
For the Year Ended August 31, 2003
Cost of goods sold:
Inventory, September 1, 2002.........................
Purchases ........................................................
Less: Purchase returns and allowances ......
Net purchases..................................................
Add: Freight in...............................................
Cost of goods purchased ...............................
Cost of goods available for sale.....................
Inventory, August 31, 2003 .............................
Cost of goods sold ..........................................
6-24
$017,200
$142,400
2,000
140,400
4,000
144,400
161,600
0 26,000
$135,600
EXERCISE 6-4
Co. 1
BI
$ 250
+P
$1,500
- PR&A
40
= NP
(a) 1,460
+ FI
110
= CGP + CGP
(b) 1,570 (b) 1,570
= CGAS
1,820
- EI
310
=CGS
(c) 1,510
Co. 2
Co. 3
Co. 4
$ 120
$1,000
(j) $ 2,960
$1,080
(g) $7,500
$44,590
(d)
60
290
(k) 260
1,020
7,210
44,330
(e) 210
(h)
730
2,240
1,230 1,230
7,940
7,940 (l) 46,570 (l) 46,570
1,350
(i) 8,940
49,530
(f) 100
1,450
6,230
1,250
7,490
43,300
Supporting Detail:
(a) $1,460 ($1,500 - $40)
(b) $1,570 ($1,460 + $110)
(c) $1,510 ($1,820 - $310)
(d) $60 ($1,080 - $1,020)
(e) $210 ($1,230 - $1,020)
(f) $100 ($1,350 - $1,250)
(g) $7,500 ($290 + $7,210)

(h) $730 ($7,940 - $7,210)
(i) $8,940 ($1,000 + $7,940)
(j) $2,960 ($49,530 - $46,570 from (l))
(k) $260 ($44,590 - $44,330)
(l) $46,570 ($44,330 + $2,240)
6-25
EXERCISE 6-5
(a)
OKANAGAN COMPANY
Income Statement
For the Year Ended January 31, 2003
Sales revenues
Sales .............................................................................
Less: Sales returns and allowances..........................
Net sales ..........................................................................
Cost of goods sold
Inventory, February 1, 2002 ........................................
Purchases ................................................... $200,000
Less: Purchase returns and allowances ..
6,000
Net purchases............................................. 194,000
Add: Freight in............................................
10,000
Cost of goods purchased ...........................................
Cost of goods available for sale ................................
Inventory, January 31, 2003 .......................................
Cost of goods sold..........................................................
Gross profit......................................................................
Operating expenses
Salary expense ............................................................
Rent expense ...............................................................
Insurance expense ......................................................
Freight out....................................................................
Total operating expenses .....................................
Net income.......................................................................
6-26
$312,000
13,000
$299,000
$ 42,000
204,000
246,000
63,000
183,000
116,000
$ 61,000
20,000
12,000
7,000
100,000
$ 16,000
EXERCISE 6-5 (Continued)

(b)
Jan. 31
Sales................................................................
Merchandise Inventory (Jan. 31, 2003) ........
Purchase Returns and Allowances ..............
Capital .....................................................
312,000
63,000
6,000
Capital .............................................................
Merchandise Inventory (Feb. 1, 2002) ..
Purchases...............................................
Freight In.................................................
Salary Expense ......................................
Rent Expense .........................................
Insurance Expense ................................
Freight Out..............................................
Sales Returns and Allowances .............
365,000
381,000
42,000
200,000
10,000
61,000
20,000
12,000
7,000
13,000
EXERCISE 6-6
(a) FIFO
Cost of Goods Sold: (#1012) $500 + (#1045) $450 = $950
(b) It could choose to sell specific units purchased at specific costs if it
wished to impact income selectively. If it wished to minimize net
income, it would choose to sell the units purchased at higher costs.
In this case, the cost of goods sold would be $950 [(#1012) $500 +
(#1045) $450]. If it wished to minimize net income, it would choose to
sell the units purchased at lower costs. In this case, the cost of
goods sold would be $850 [(#1045) $450 + (#1056) $400].
(c) I recommend Discount uses the FIFO method. FIFO provides a more
relevant balance sheet valuation for decision making (closer to
replacement cost) and reduces the opportunity to manipulate net
income.
Note to Instructor: This answer may vary depending on the method
the student chooses.
6-27
EXERCISE 6-7
(a)
FIFO
Cost of Goods Sold:
Date
Units
Unit Cost
5/1
5/15
5/24
30
25
15
70
$08
010
012
Date
Units
Unit Cost
5/24
20
$12
Total Cost
$240
0250
180
$670
Ending Inventory:
Proof:
CGS + EI = GAS
$670 + $240 = $910
(b)
WEIGHTED AVERAGE
$910 90 = $10.11 average unit cost
Cost of Goods Sold:
70 x $10.11 = $708 (rounded)
Ending Inventory:
20 x $10.11 = $202 (rounded)
Proof:
CGS + EI = GAS
$708 + $202 = $910
6-28
Total Cost
$240
EXERCISE 6-8
Beginning inventory (200 X $5)..........................................
$1,000
Purchases: June 12 (300 X $6)............................................ $1,800
June 23 (500 X $7) ........................................... 03,500 5,300
Cost of goods available for sale (1,000 units) ...................
6,300
Less: Ending inventory (180 units)
Cost of goods sold (820 units)
(a)
(1) FIFO
Cost of Goods Sold:
Date
Units
Unit Cost
6/1
6/12
6/23
200
300
320
820
$5
6
7
Date
Units
Unit Cost
6/23
180
$7
Total Cost
$1,000
1,800
2,240
$5,040
Ending Inventory:
Total Cost
$1,260
Proof: CGS
+ EI
= GAS
$5,040 + $1,260 = $6,300
(2) LIFO
Cost of Goods Sold:
Date
6/23
6/12
6/1
Units
Unit Cost
$7
6
5
500
300
20
820
Total Cost
$3,500
1,800
100
$5,400
Ending Inventory:
Date
6/1
Units
Unit Cost
180
$5
Proof: CGS + EI = GAS

$5,400 + $900 = $6,300
6-29
Total Cost
$900

(b) The FIFO method will produce the higher ending inventory because
costs have been rising. Under this method, the earliest costs are assigned to cost of goods sold, and the latest costs remain in ending
inventory. For Dene Company, the ending inventory under FIFO is
$1,260 compared to $900 under LIFO.
(c) The LIFO method will produce the higher cost of goods sold for
Dene Company. Under LIFO, the most recent costs are charged to
cost of goods sold, and the earliest costs are included in the ending
inventory. The cost of goods sold is $5,400 compared to $5,040
under FIFO.
6-30
EXERCISE 6-9
(a)
Cost of Goods
Available for Sale
$6,300
Total Units
Available for Sale
1,000
Weighted Average
Unit Cost
$6.30
Ending Inventory:
180 X $6.30 = $1,134
Cost of Goods Sold:
820 X $6.30 = $5,166
Proof: CGS + EI
= GAS
$5,166 + $1,134 = $6,300
(b) Ending inventory is lower than FIFO ($1,260) and higher than LIFO
($900). In contrast, cost of goods sold is higher than FIFO ($5,040)
and lower than LIFO ($5,400). When prices are changing, the
average cost method will always produce this type of result. That is,
average results will fall somewhere between those of FIFO and
LIFO.
(c) The average cost method uses a weighted average unit cost, not a
simple average of unit costs ($5 + $6 + $7 = $18 3 = $6).
6-31
EXERCISE 6-10
(a)
Periodic Inventory Method

Purchases (100 x $10) .........................................
Accounts Payable.......................................
1,000
Accounts Receivable (70 x $15) .........................

Sales ............................................................
1,050
1,000
1,050
Perpetual Inventory Method
(b)
Merchandise Inventory (100 x $10) ....................

1,000
Accounts Receivable (70 x $15) .........................

Sales ............................................................
1,050
Cost of Goods Sold (70 x $10) ............................

Merchandise Inventory ..............................
700
1. FIFO
2. LIFO
3. Specific Identification
4. LIFO
6-32
1,000
1,050
700
EXERCISE 6-11
SELES HARDWARE
Beginning inventory ...............................................
Cost of goods purchased.......................................
Cost of goods available for sale............................
Corrected ending inventory ...................................
Cost of goods sold .................................................
2002
2003
$020,000
150,000
0170,000
a
0025,000
$145,000
$025,000
175,000
0200,000
b
0 39,000
$161,000
$30,000 $5,000 = $25,000

$35,000 + $4,000 = $39,000
EXERCISE 6-12
(a)
BRASCAN COMPANY
2002
2003
Sales .....................................................................
Cost of goods sold
Beginning inventory ....................................
Cost of goods purchased ...........................
Cost of goods available for sale.................
Ending inventory ($40,000 $3,000) ..........
Cost of goods sold ..............................
$210,000
$250,000
0032,000
0173,000
0205,000
0037,000
0168,000
0037,000
0202,000
0239,000
0052,000
0187,000
Gross profit..........................................................
$ 42,000
$ 63,000
6-33

(b) The cumulative effect on total gross profit for the two years is zero,
as shown below:
Incorrect gross profits: $45,000 + $60,000 =
Correct gross profits:
$42,000 + $63,000 =
Difference
$105,000
105,000
$
0
(c) Dear Mr./Ms. President:

Because your ending inventory of December 31, 2002 was
overstated by $3,000, your net income for 2002 was overstated and
net income for 2003 was understated by $3,000.
In a periodic system, the cost of goods sold is calculated by
deducting the cost of ending inventory from the total cost of goods
you have available for sale in the period. Therefore, if this ending
inventory figure is overstated, as it was in December 2002, the cost
of goods sold is understated and therefore net income will be
overstated by that amount.
Consequently, this overstated ending inventory figure goes on to
become the next periods beginning inventory amount and is a part
of the total cost of goods available for sale. Therefore, the mistake
repeats itself in the reverse.
Although the cumulative effect of the error over the combined two
year period is nil, the effect on each individual years income
statement is significant. For example, the gross profit margin
before correction was 21.4% ($45,000 $210,000) in 2002 and
increased 2.6% to 24.0% ($60,000 $250,000) in 2003. After the
error is corrected, the gross profit margin for 2002 is 20.0%
($42,000 $210,000) and the increase is 5.2% to 25.2% ($63,000
$250,000) in 2003.
Thank you for allowing me to bring this to your attention. If you
have any questions, please contact me at your convenience.
Sincerely,
6-34
EXERCISE 6-13
Cameras
Minolta
Canon
Total
Light Meters
Vivitar
Kodak
Total
Total inventory
Cost
Market
$ 875
1,050
1,925
$ 800
1,064
1,864
1,500
1,150
2,650
1,428
1,350
2,778
$4,575
$4,642
LCM
$4,575
Since the market value of the total inventory is higher than its cost, the
lower of cost and market value is the inventorys cost, $4,575.
6-35
*EXERCISE 6-14
(1)
Date
FIFO
Sold
Purchased
Balance
Jan. 1
(2 X $600)
8
10
$1,200
(6 X $700) $4,200
15
(2 X $600)
(2 X $700)
$2,600
(4 X $600)
$2,400
(2 X $600)
1,200
(2 X $600)
(6 X $700)
5,400
(4 X $700)
2,800
Cost of goods sold: $1,200 + $2,600 = $3,800

Ending inventory: $2,800
Proof: CGS + EI
= GAS
$3,800 + $2,800 = $6,600
(2)
MOVING AVERAGE COST
Purchased
Date
Sold
Jan. 1
(2 X $600)
8
10
15
$1,200
(6 X $700) $4,200
(4 X $675)
$2,700
*Average unit cost = $5,400 8 = $675

Cost of goods sold: $1,200 + $2,700 = $3,900
Proof: CGS + EI
= GAS
$3,900 + $2,700 = $6,600
6-36
Balance
(4 X $600)
$2,400
(2 X $600)
1,200
(8 X $675)*
5,400
(4 X $675)
2,700
*EXERCISE 6-15
Net sales ($51,000 $1,000) ...............................................................
Less: Estimated gross profit (30% X $50,000).................................
Estimated cost of goods sold ............................................................
$50,000
015,000
$35,000
Beginning inventory ...........................................................................

Cost of goods purchased ($28,200 $1,400 + $1,200) ....................
Cost of goods available for sale ........................................................
Less: Estimated cost of goods sold.................................................
Estimated cost of merchandise lost..................................................
$25,000
028,000
53,000
035,000
$18,000
*EXERCISE 6-16
Women's
Department
Cost
Retail
$045,000
0 180,000
225,000
0 185,000
$ 40,000
Men's
Department
Cost
Retail
$060,000
185,000
245,000
195,000
$ 50,000
Beginning inventory
Goods purchased
Goods available for sale
Net sales
$032,000
0148,000
$180,000
Cost to retail ratio
$180,000 = 80%
$225,000
$183,750 = 75%
$245,000
$40,000 X 80%
= $32,000
$50,000 X 75%
= $37,500
Estimated cost of
ending inventory
6-37
$046,450
0137,300
$183,750
SOLUTIONS TO PROBLEMS
PROBLEM 6-1A
1.
Title to the goods does not transfer to the customer until March 2.
Include the $800 in ending inventory.
2.
Kananaskis owns the goods once they are shipped on February

26. Include inventory of $375.
3.
Include $500 in inventory.
4.
Exclude the items from Kananaskis inventory.
5.
Title of the goods does not transfer to Kananaskis until March 2.

Exclude this amount from the February 28 inventory.
6.
The sale will be recorded on February 26. The goods should be

excluded from Kananaskis inventory at the end of February.
6-38
PROBLEM 6-2A
(a)
GENERAL JOURNAL
Account Titles and Explanation
Date
Apr.
5
7
9
10
12
14
17
20
21
27
30
30
Debit
Purchases .........................................................
Accounts Payable.....................................
1,600
Freight In...........................................................
Cash ...........................................................
80
Accounts Payable ............................................

Purchase Returns and Allowances .........
100
Accounts Receivable .......................................

Sales ..........................................................
900
Purchases .........................................................
Accounts Payable.....................................
660
Accounts Payable ($1,600 $100)..................

Cash ...........................................................
1,500

60
Accounts Receivable .......................................

Sales ..........................................................
700
Accounts Payable ($660 $60).......................

Cash ...........................................................
600
Sales Returns and Allowances .......................

Accounts Receivable................................
30
Cash ..................................................................
Sales ..........................................................
600
Cash ..................................................................
Accounts Receivable................................
1,100
6-39
J1
Credit
1,600
80
100
900
660
1,500
60
700
600
30
600
1,100
PROBLEM 6-2A (Continued)

(b)
Cash
Date
Apr.
1
7
14
21
30
30
Explanation
Ref.
Balance
9
J1
J1
J1
J1
J1
Debit
Credit
80
1,500
600
600
1,100
Balance
2,500
2,420
920
320
920
2,020
Accounts Receivable
Date
Explanation
Apr. 10
20
27
30
Ref.
Debit
J1
J1
J1
J1
Credit
900
700
30
1,100
Balance
900
1,600
1,570
470
Merchandise Inventory
Date
Apr.
Explanation
1
Balance
Ref.
Debit
Credit
Balance
3,500
Accounts Payable
Date
Apr.
Explanation
5
9
12
14
17
21
Ref.
J1
J1
J1
J1
J1
J1
6-40
Debit
Credit
1,600
100
1,500
60
600
660
Balance
1,600
1,500
2,160
660
600
0

(b) (Continued)
Kane, Capital
Date
Apr.
Explanation
Ref.
Balance
Debit
Credit
Balance
6,000
Sales
Date
Explanation
Apr. 10
20
30
Ref.
Debit
J1
J1
J1
Credit
900
700
600
Balance
900
1,600
2,200
Sales Returns and Allowances

Date
Explanation
Apr. 27
Ref.
J1
Debit
Credit
30
Balance
30
Purchases
Date
Apr.
Explanation
5
12
Ref.
J1
J1
Debit
Credit
Balance
1,600
2,260
1,600
660
Purchase Returns and Allowances

Date
Apr.
Explanation
9
17
Ref.
Debit
Credit
100
60
J1
J1
Balance
100
160
Freight In
Date
Apr.
Explanation
7
Ref.
J1
6-41
Debit
80
Credit
Balance
80

(c)
KANES PRO SHOP
Trial Balance
April 30, 2003
Cash ...............................................................................
Accounts Receivable ....................................................
Merchandise Inventory .................................................
Kane, Capital .................................................................
Sales...............................................................................
Sales Returns and Allowances ....................................
Purchases ......................................................................
Purchase Returns and Allowances .............................
Freight In........................................................................
Totals ......................................................................
(d)
Debit
$2,020
470
3,500
Credit
$6,000
2,200
30
2,260
160
80
$8,360
$8,360
KANES PRO SHOP

For the Month Ended April 30, 2003
Sales revenues
Sales ..........................................................
Less: Sales returns and allowances.....
Net sales ...................................................
Cost of goods sold
Inventory, April 1 ......................................
Purchases .................................................
Less: Purchase returns and allowances
Net purchases...........................................
Add: Freight in.......................................
Cost of goods purchased ........................
Cost of goods available for sale..............
Inventory, April 30 ....................................
Cost of goods sold..............................
Gross profit.....................................................
6-42
$2,200
30
$2,170
$3,500
$2,260
160
2,100
80
2,180
5,680
4,200
1,480
$ 690
PROBLEM 6-3A
(a)
METRO DEPARTMENT STORE
Income Statement
For the Year Ended November 30, 2003
Sales revenues
Sales ...........................................................................
$848,000
Less: Sales returns and allowances......................
10,000
Net sales ....................................................................
838,000
Cost of goods sold
Inventory, Dec. 1, 2002 ...............................
$ 34,360
Purchases ................................................... $630,000
Less: Purchase returns
and allowances..........................
3,000
Net purchases............................................. 627,000
Add: Freight in.........................................
5,060
Cost of goods purchased ..........................
632,060
Cost of goods available for sale................
666,420
Inventory, Nov. 30, 2003.............................
36,200
Cost of goods sold................................
630,220
Gross profit......................................................
207,780
Operating expenses
Salaries expense...................................................... $140,000
Utilities expense ......................................................
19,600
Sales commissions expense ..................................
12,000
Amortization expensebuilding..............................
9,500
Insurance expense ..................................................
9,000
Delivery expense .....................................................
8,200
Amortization expensedelivery equipment...........
4,000
Property tax expense ..............................................
3,500
Total operating expenses ................................
205,800
Net income.......................................................................
$ 1,980
6-43

(b)
Nov. 30
Sales .............................................................
Merchandise Inventory (Nov. 30, 2003)......
Hachey, Capital .......................................
848,000
36,200
3,000
887,200
Hachey, Capital ............................................

885,220
Merchandise Inventory (Dec. 1, 2002) ...
Purchases ...............................................
Freight In .................................................
Salaries Expense ....................................
Utilities Expense .....................................
Sales Commissions Expense ................
Amortization Expense-Building.............
Insurance Expense .................................
Delivery Expense ....................................
Amortization Expense-Delivery Equipment
Property Tax Expense ............................
Sales Returns and Allowances..............
Hachey, Capital ............................................
Hachey, Drawings ...................................
12,000
Net income: $887,200 - $885,220 = $1,980

Ending capital balance: $220,200 + $887,200 - $885,220 - $12,000 =
$210,180
6-44
34,360
630,000
5,060
140,000
19,600
12,000
9,500
9,000
8,200
4,000
3,500
10,000
12,000
PROBLEM 6-4A
(a)
COST OF GOODS AVAILABLE FOR SALE

Date
Jan. 1
Mar. 15
July 20
Sept. 4
Dec. 2
Explanation
Beginning inventory
Purchase
Purchase
Purchase
Purchase
Total
(b)
Units
100
300
200
300
100
1,000
FIFO
(1)
Date
Sept.
Dec.
Ending Inventory
Unit
Total
Units Cost
Cost
4
150
$ 28 $4,200
2
100
30
3,000
250*
$7,200
*1,000 750 = 250

(2)
Cost of Goods Sold

Unit
Total
Date
Units Cost
Cost
Jan.
1
100
$ 20 $ 2,000
Mar. 15
300
24
7,200
July 20
200
25
5,000
Sept. 4
150
28
4,200
750
$18,400
Check: EI
+ CGS
= GAS
$7,200 + $18,400 = $25,600
6-45
Unit Cost
$20
24
25
28
30
Total Cost
$ 2,000
7,200
5,000
8,400
3,000
$25,600

(b) (Continued)
WEIGHTED AVERAGE COST
Weighted average unit cost: $25,600 1,000 = $25.60
(1)
Units
250
Ending Inventory
Unit
Total
Cost
Cost
$25.60
$6,400
(2)
Cost of Goods Sold

Unit
Total
Units
Cost
Cost
750
$25.60
$19,200
Check: EI
+ CGS
= GAS
$6,400 + $19,200 = $25,600
LIFO
(1)
Date
Jan.
Mar.
(2)
Date
Mar.
July
Sept.
Dec.
Ending Inventory
Unit
Total
Units Cost
Cost
1
100
$ 20 $2,000
15
150
24
3,600
250
$5,600
Cost of Goods Sold
Unit
Total
Units Cost
Cost
15
150
$ 24 $ 3,600
20
200
25
5,000
4
300
28
8,400
2
100
30
3,000
750
$20,000
Check: EI
+ CGS
= GAS
$5,600 + $20,000 = $25,600
6-46

(c) FIFO produces the highest inventory cost for the balance sheet,
$7,200. LIFO produces the highest cost of goods sold for the income
statement, $20,000.
(d) The choice of inventory cost method does not affect cash flow. It is
an allocation of costs between inventory and cost of goods sold.
6-47
PROBLEM 6-5A
(a)
RAL NOVELTY
Condensed Income Statements
For the Year Ended December 31, 2003
Sales.........................................................
Cost of goods sold
Beginning inventory ........................
Cost of goods purchased ...............
Cost of goods available for sale.....
Ending inventory .............................
Cost of goods sold ..........................
Gross profit..............................................
Operating expenses................................
Net income...............................................
FIFO
Weighted
Average
$865,000
$865,000
34,000
591,500
625,500
55,000a
570,500
294,500
147,000
$147,500
34,000
591,500
625,500
51,000b
574,500
290,500
147,000
$143,500
20,000 x $2.75 = $55,000
[($34,000 + $591,500) (15,000 + 230,000) = $2.55]

20,000 x $2.55 = $51,000
6-48

(b) Dear Sir/Madame:
I would like to bring the following inventory related points to your
attention to assist you in making a choice between the FIFO and
weighted average cost flow assumptions:
1.
Gross profit under the weighted average cost flow assumption

will be lower than the gross profit reported under the FIFO cost
flow assumption. Costs are rising, and in such instances, FIFO
will always result in the higher gross profit.
2.
The choice of inventory cost flow assumption will impact the

balance sheet (through inventory) and income statement
(through cost of goods sold) of the company. It will not impact
the companys cash flow. While purchases and sales have a
cash effect, the choice of cost flow assumption does not affect
cash as it only allocates costs between inventory and cost of
goods sold.
3.
In selecting a cost flow assumption management should

consider their circumstancesthe type of inventory and the
flow of costs throughout the period. Management should select
the method that will best match their costs with their revenues.
The FIFO cost flow assumption produces the more meaningful
inventory amount for the balance sheet because the units are
costed at the most recent purchases. The FIFO method is most
likely to approximate actual physical flow because the oldest
goods are usually sold first to minimize spoilage and
obsolescence.
The weighted average cost flow assumption produces the more
meaningful gross profit / net income because the cost of more
recent purchases are matched against sales. At least, more so
than occurs with FIFO, which matches the cost of the earliest
purchases against sales revenue. Average also smoothes
these costs, using an average of all costs during the period
rather than matching the cost of any specific time period.
Sincerely,
6-49
PROBLEM 6-6A
(a)
1.
2.
3.
4.
5.
Cost of goods sold 2002

Net income 2002
Net income 2003
Combined net income
2002:
Overstated
Understated
Understated
Overstated
No effect
BI + P - EI = CGS
-U =O
Sales - CGS = NI
-O =U
2003:
BI + P - EI = CGS
U
=U
Sales - CGS = NI
-U
=O
(b)
1.
2.
3.
4.
LIFO
LIFO
FIFO
Average cost
6-50
PROBLEM 6-7A
(a) (incorrect)
ALYSSA COMPANY
Income Statement
For the Year Ended July 31
Sales
Cost of goods sold
Beginning inventory
Purchases
Cost of goods available for sale
Ending inventory
Cost of goods sold
Gross profit
Operating expenses
Net income
2002
$300,000
2003
$320,000
30,000
200,000
230,000
22,000
208,000
92,000
60,000
$ 32,000
22,000
240,000
262,000
31,000
231,000
89,000
64,000
$ 25,000
(correct)
ALYSSA COMPANY
Income Statement
Sales
Cost of goods sold
Beginning inventory
Purchases
Ending inventory
Cost of goods sold
Gross profit
Operating expenses
Net income
(b)
2002
$300,000
2003
$320,000
30,000
200,000
230,000
27,000
203,000
97,000
60,000
$ 37,000
27,000
240,000
267,000
31,000
236,000
84,000
64,000
$ 20,000
The impact of this error on owners equity at July 31, 2003 is zero.
The error in the 2002 is offset by the error in 2003. The total income
for the two years is $57,000 in both the incorrect and correct
income statements.
6-51
PROBLEM 6-8A
(a) Amelia CompanyPurchaser
GENERAL JOURNAL
Date
July
5
8
10
15
16
20
25
Debit
Purchases .........................................................
Cash ...........................................................
540
Cash ..................................................................
Sales ..........................................................
495
Sales Returns ...................................................

Cash ...........................................................
110
Purchases .........................................................
Cash ...........................................................
200

40
Cash ..................................................................
Sales ..........................................................
540
Purchases .........................................................
Cash ...........................................................
65
6-52
Credit
540
495
110
200
40
540
65

(b) Karina CompanySeller
GENERAL JOURNAL
Date
July
5
15
16
25
Debit
Cash ...................................................................
Sales ...........................................................
540
Cash ...................................................................
Sales ...........................................................
200
Sales Returns and Allowances ........................

Cash ............................................................
40
Cash ...................................................................
Sales ...........................................................
65
(c)
Credit
540
200
40
65

Date
July 1
July 5
July 15
July 16
July 25
Explanation
Beginning inventory
Purchase
Purchase
Purchase return
Purchase
Total
Units
25
60
25
(5)
10
115
Unit Cost
$10.00
9.00
8.00
8.00
6.50
Total Cost
$ 250
540
200
(40)
65
$1,015
Weighted average unit cost = $1,015 115 = $8.83

Ending inventory = 201 x $8.83 = $176.60
1
115 45 + 10 - 60 = 20
(d) Ending inventory:

Cost: 20 x $8.83 = $176.60
Market: 20 x $7 = $140
The ending inventory should be valued at $140, the lower of cost
and market.
6-53
*PROBLEM 6-9A
(a)
Date
9/1
9/5
9/12
Purchases
FIFOPerpetual
Sales
(12 @ $97)
(45 @ $102) $4,590
9/16
9/19
(14 @ $97)
(36 @ $102) $5,030
(28 @ $104) $2,912
9/22
9/26
$1,164
( 9 @ $102)
(23 @ $104) $3,310
(40 @ $105) $4,200
Balance
(26 @ $97) $2,522
(14 @ $97) $1,358
(14 @ $97)
(45 @ $102) $5,948
( 9 @ $102) $918
( 9 @ $102)
(28 @ $104) $3,830
( 5 @ $104) $520
( 5 @ $104)
(40 @ $105) $4,720
Cost of goods sold: $1,164 + $5,030 + $3,310 = $9,504

Check: CGS + EI
= GAS
$9,504 + $4,720 = $14,224
Note to Instructor: Remind students that the sales price is not relevant
when recording cost of goods sold or inventory. Only the cost is
relevant in this case.
6-54

(b)
FIFOPeriodic
Cost of Goods Sold (12 + 50 + 32 = 94 units)
Date
Sept. 1
12
19
Units
Unit Cost
26
45
23
94
$ 97
102
104
Total Cost
$2,522
4,590
2,392
$9,504
Ending Inventory (45 units)

Date
Sept. 26
19
Units
Unit Cost
$105
104
40
5
45
Total Cost
$4,200
520
$4,720
Proof: CGS
+ EI
= GAS
$9,504 + $4,720 = $14,224
Note: FIFO periodic yields exactly the same results as does FIFO
perpetual.
6-55
*PROBLEM 6-9A (Continued)

(c)
Sept.
5 Cash................................................
Sales ..........................................
2,388
Cost of Goods Sold .......................

Merchandise Inventory ............
1,164
12 Merchandise Inventory .................

Cash...........................................
4,590
16 Cash................................................
Sales ..........................................
9,950

5,030

Cash...........................................
2,912
22 Cash................................................
Sales ..........................................
6,688

3,310

Cash...........................................
4,200
6-56
2,388
1,164
4,590
9,950
5,030
2,912
6,688
3,310
4,200

(d)
Sept.
5 Cash.................................................
Sales ...........................................
2,388
12 Purchases .......................................
Cash............................................
4,590
16 Cash.................................................
Sales ...........................................
9,950
19 Purchases .......................................
Cash............................................
2,912
22 Cash.................................................
Sales ...........................................
6,688
26 Purchases .......................................
Cash............................................
4,200
6-57
2,388
4,590
9,950
2,912
6,688
4,200
*PROBLEM 6-10A
(a)
(1)
FIFO
Date
Purchased
May 1
(7 X $150) $1,050
15
(2 X $150) $0,300
(2 X $150)
(8 X $170) $1,660
(8 X $170) $1,360
(2 X $150)
(3 X $170) $810
12
Balance
(7 X $150) $1,050
(5 X $150) $750
4
8
Sold
(5 X $170) $ 850
(5 X $170)
(5 X $180) $1,750
(5 X $180) $900
20
(4 X $170) $680
25
(1 X $170)
(1 X $180) $350
(1 X $170)
(5 X $180) $1,070
(4 X $180) $0,720
Cost of goods sold: $750 + $810 + $680 + $350 = $2,590

Ending inventory: $720
Check: CGS
+ EI = GAS
$2,590 + $720 = $3,310
6-58

(2)
MOVING AVERAGE COST
Date
Purchased
May 1
(7 X $150) $1,050
15
(5 X $166) $830
(5 X $180)
(02 X $150)
$300
(10 X $166)* $1,660
(8 X $170) $1,360
12
Balance
(07 X $150) $1,050
(5 X $150) $750
4
8
Sold
(05 X $166)
$830
(10 X $173)**$1,730
$900
20
(4 X $173) $692
(06 X $173) $1,038
25
(2 X $173) $346
(04 X $173)
$692
*Average cost = ($300 + $1,360) (2 + 8) = $1,660 10 = $166

** Average cost = ($830 + $900) (5 + 5) = $1,730 10 = $173
Cost of goods sold: $750 + $830 + $692 + $346 = $2,618
Ending inventory: $692
Check: CGS
+ EI = GAS
$2,618 + $692 = $3,310
(b) (1) The FIFO method produces the higher ending inventory valuation
($720 versus $692).
(2) The FIFO method also produces the higher net income. Its cost
of goods sold is lower ($2,590 versus $2,618) than the moving
average cost method. A lower cost of goods sold results in a
higher net income.
6-59
*PROBLEM 6-11A
(a)
November
Net sales ...........................................................
Beginning inventory .................................
Purchases .................................................
Less: Purchase returns & allowances ...
Net purchases ...........................................
Add: Freight in ........................................
Cost of goods available for sale..............
Ending inventory ......................................
Cost of goods sold ...................................
Gross profit ......................................................
$500,000
$ 22,100
$314,975
11,800
303,175
4,402
0307,577
329,677
31,100
298,577
$201,423
Gross profit margin = $201,423 = 40.3%

$500,000
(b)
December
Net sales .........................................................
Less: Estimated gross profit
(40.3% x $400,000) ...........................
Estimated cost of goods sold.......................
$400,000
Beginning inventory ......................................

Purchases ......................................................
Less: Purchase returns and allowances ....
Net purchases ................................................
Freight in ........................................................
Cost of goods purchased .............................
Cost of goods available for sale...................
Less: Estimated cost of goods sold ............
Estimated inventory lost in fire ....................
$ 31,100
6-60
161,200
$238,800
$236,000
4,000
232,000
3,700
235,700
266,800
238,800
$ 28,000
*PROBLEM 6-12A
(a)
Cost
Retail
Beginning inventory .................... $0,260,000
$0,400,000
Purchases..................................... 01,180,000
1,800,000
Freight in ......................................
5,000
Goods available for sale ............. $1,445,000
2,200,000
Net sales ($1,820,000 $15,000)
1,805,000
Ending inventory .........................
$ 395,000
Cost-to-retail ratio: $1,445,000 $2,200,000 = 65.68%

Estimated inventory at cost: $395,000 X 65.68% = $259,436
(b)
$400,000 X 65.68% = $262,720
6-61
PROBLEM 6-1B
(a) 1. The goods should not be included in inventory as they were
shipped FOB shipping point on February 26. Title to the goods
transfers to the customer on February 26, the date of shipping.
Since these items were not on the premises, they were not
counted in inventory. No correction is required.
2. The amount should not be included in inventory as they were
shipped FOB destination and not received until March 4. The seller
still owns the inventory. Since these items were not on the
premises, they were not counted in the ending inventory valuation.
No correction Is required.
3. Include $500 in inventory.
4. Include $400 in inventory.
5. $750 should be included in inventory as the goods were shipped
FOB shipping point on February 27. Title passes to Banff on
February 27, the date of shipping.
6. The sale will be recorded on March 2. The goods should be
included in inventory at the end of February at their cost of $280.
7. The damaged goods should not be included in inventory. They
were on the premises and counted during the inventory count,
therefore they must be deducted from the original ending
inventory valuation.
(b)
$48,000
+500
+400
+750
+280
-400
$49,530
Original Feb. 28 inventory valuation

3.
4.
5.
6.
7.
Revised Feb. 28 inventory valuation
6-62
PROBLEM 6-2B
(a)
GENERAL JOURNAL
Date
Apr.
4
6
8
10
11
13
14
15
17
18
20
Debit
Purchases ...........................................................
640
Freight In.............................................................
Cash .............................................................
40
Accounts Receivable .........................................

Sales ............................................................
900
Accounts Payable ..............................................

Purchase Returns and Allowances ...........
40
Purchases ...........................................................
Cash .............................................................
300
Accounts Payable ($640 $40).........................

Cash .............................................................
600
Purchases ...........................................................
700
Cash ....................................................................
Purchase Returns and Allowances ...........
50
Freight In.............................................................
Cash .............................................................
30

Sales ............................................................
800
Cash ....................................................................
Accounts Receivable..................................
500
6-63
J1
Credit
640
40
900
40
300
600
700
50
30
800
500
PROBLEM 6-2B (Continued)

(a) (Continued)
Date
Apr.

21
27
30
30
Debit
Accounts Payable ..............................................

Cash .............................................................
700
Sales Returns and Allowances .........................

30

Sales ............................................................
900
Cash ....................................................................
500
6-64
J2
Credit
700
30
900
500

(b)
Cash
Date
Apr.
1
6
11
13
15
17
20
21
30
Explanation
Ref.
Balance
9
J1
J1
J1
J1
J1
J1
J2
J2
Debit
50
500
500
Credit
40
300
600
30
700
Balance
2,500
2,460
2,160
1,560
1,610
1,580
2,080
1,380
1,880
Accounts Receivable
Date
Apr.
Explanation
8
18
20
27
30
30
Ref.
Debit
J1
J1
J1
J2
J2
J2
Credit
900
800
500
30
900
500
Balance
900
1,700
1,200
1,170
2,070
1,570
Date
Apr.
Explanation
1
Balance
Ref.
Debit
Credit
Balance
1,700
Accounts Payable
Date
Apr.
Explanation
4
10
13
14
21
Ref.
J1
J1
J1
J1
J2
6-65
Debit
Credit
640
40
600
700
700
Balance
640
600
0
700
0

(b) (Continued)
J. Noya, Capital
Date
Apr.
Explanation
1
Ref.
Debit
Credit
Balance
Balance
4,200
Sales
Date
Apr.
Explanation
8
18
30
Ref.
Debit
J1
J1
J2
Credit
900
800
900
Balance
900
1,700
2,600
Sales Returns and Allowances

Date
Apr.
Explanation
27
Ref.
J2
Debit
Credit
30
Balance
30
Purchases
Date
Apr.
Explanation
4
11
14
Ref.
J1
J1
J1
Debit
Credit
640
300
700
Balance
640
940
1,640
Purchase Returns and Allowances

Date
Explanation
Apr. 10
15
Ref.
Debit
Credit
40
50
J1
J1
Balance
40
90
Freight In
Date
Apr.
Explanation
6
17
Ref.
J1
J1
6-66
Debit
40
30
Credit
Balance
40
70

(c)
KICKED-BACK TENNIS SHOP

Trial Balance
April 30, 2003
Cash .............................................................................
Accounts Receivable ..................................................
Merchandise Inventory ...............................................
J. Noya, Capital ...........................................................
Sales.............................................................................
Sales Returns and Allowances ..................................
Purchases ....................................................................
Purchase Returns and Allowances ...........................
Freight In......................................................................
Totals ....................................................................
(d)
Debit
$1,880
1,570
1,700
Credit
$4,200
2,600
30
1,640
90
70
$6,890
$6,890
KICKED-BACK TENNIS SHOP

For the Month Ended April 30, 2003
Sales revenues
Sales ...........................................................................
Less: Sales returns and allowances......................
Net sales ....................................................................
Cost of goods sold
Inventory, April 1 .......................................................
Purchases .................................................... $1,640
Less: Purchase returns and allowances ...
90
Net purchases.............................................. 1,550
Add: Freight in .............................................
70
Cost of goods purchased .........................................
Cost of goods available for sale...............................
Inventory, April 30 .....................................................
Cost of goods sold...............................................
Gross profit......................................................................
6-67
$2,600
30
2,570
$1,700
1,620
3,320
1,800
1,520
$1,050
PROBLEM 6-3B
(a)
N-MART DEPARTMENT STORE
Income Statement
Sales revenues
Sales ...........................................................................
Less: Sales returns and allowances .......................
Net sales ....................................................................
Cost of goods sold
Inventory, January 1..................................................
Purchases ............................................... $442,000
Less: Purchase returns and allowances
6,400
Net purchases.......................................... 435,600
Add: Freight in .........................................
5,600
Cost of goods purchased .........................................
Cost of goods available for sale...............................
Inventory, December 31 ............................................
Cost of goods sold...............................................
Gross profit......................................................................
Operating expenses
Selling expenses
Sales salaries expense .................. $76,000
Sales commissions expense.........
14,500
Administrative expenses
Office salaries expense.................. $32,000
Utilities expense .............................
18,000
Amortization expenseequipment
13,300
Amortization expensebuilding ....
10,400
Insurance expense .........................
7,200
Property tax expense .....................
4,800
Total operating expenses..........................
Net income.......................................................................
6-68
$618,000
8,000
610,000
$ 40,500
441,200
481,700
75,000
406,700
203,300
$90,500
85,700
176,200
$ 27,100

(b)
Date
Dec. 31
GENERAL JOURNAL
Debit
Sales .............................................................
Merchandise Inventory (Dec. 31, 2003)......
S. Koo, Capital.........................................
618,000
75,000
6,400
S. Koo, Capital .............................................

Merchandise Inventory (Jan. 1, 2003) ...
Purchases ...............................................
Freight In .................................................
Sales Salaries Expense..........................
Office Salaries Expense .........................
Utilities Expense .....................................
Sales Commissions Expense ................
Amortization Expense-Equipment.........
Amortization Expense-Building ...........
Insurance Expense .................................
Property Tax Expense ............................
Sales Returns and Allowances..............
672,300
S. Koo, Capital .............................................

S. Koo, Drawings ....................................
28,000
6-69
J2
Credit
699,400
40,500
442,000
5,600
76,000
32,000
18,000
14,500
13,300
10,400
7,200
4,800
8,000
28,000

(c)
Date
Explanation
Ref.
Jan. 1
Dec. 31
Dec. 31
Balance
Closing entry
Closing entry
9
J2
J2
Debit
Credit
75,000
40,500
Balance
40,500
115,500
75,000
S. Koo, Capital
Date
Explanation
Ref.
Jan. 1
Dec. 31
Dec. 31
Dec. 31
Balance
Closing entry
Closing entry
Closing entry
9
J2
J2
J2
6-70
Debit
Credit
699,400
672,300
28,000
Balance
178,600
878,000
205,700
177,700
PROBLEM 6-4B
(a)

Date
Jan. 1
Feb.20
May 5
Aug.12
Dec. 8
Explanation
Beginning inventory
Purchase
Purchase
Purchase
Purchase
Total
(b)
Units
400
700
500
300
100
2,000
FIFO
(1)
Cost of Goods Sold

Unit
Total
Date
Units Cost
Cost
Feb. 1
400
$ 8 $ 3,200
Feb.20
700
9
6,300
May 5
400
10
4,000
1,500
$13,500
(2)
Ending Inventory
Unit
Total
Date
Units Cost
Cost
Dec. 8
100 $ 12
$1,200
Aug.12
300
11
3,300
May 5
100
10
1,000
500*
$5,500
*2,000 1,500 = 500
Check: CGS + EI
= GAS
$13,500 + $5,500 = $19,000
6-71
Unit Cost
$8
9
10
11
12
Total Cost
$ 3,200
6,300
5,000
3,300
1,200
$19,000

(b) (Continued)
Weighted average unit cost: $19,000 2,000 = $9.50
(1)
Cost of Goods Sold

Unit
Total
Units
Cost
Cost
1,500
$9.50
$14,250
(2)
Units
500
Ending Inventory
Unit
Total
Cost
Cost
$9.50
$4,750
Check: CGS
+ EI
= GAS
$14,250 + $4,750 = $19,000
LIFO
(1)
Cost of Goods Sold

Unit
Total
Date
Units Cost
Cost
Dec. 8
100
$12 $ 1,200
Aug.12
300
11
3,300
May 5
500
10
5,000
Feb.20
600
9
5,400
1,500
$14,900
(2)
Ending Inventory
Unit
Total
Date
Units Cost
Cost
Feb. 1
400
$ 8 $3,200
Feb.20
100
9
900
500
$4,100
Check: CGS
+ EI
= GAS
$14,900 + $4,100 = $19,000
6-72

(c) (1)
LIFO results in the lowest inventory amount for the balance

sheet, $4,100.
(2)
FIFO results in the lowest cost of goods sold for the income
statement, $13,500.
6-73
PROBLEM 6-5B
(a)
AUDAS COMPANY
Condensed Income Statement
Sales.........................................................................
Cost of goods sold
Beginning inventory ........................................
Cost of goods purchased ...............................
Cost of goods available for sale.....................
Ending inventory .............................................
Gross profit..............................................................
Operating expenses................................................
Net income...............................................................
a
b
(20,000 @ $4.50) + (5,000 @ $4.40) = $112,000

(10,000 @ $3.50) + (15,000 @ $4.20) = $98,000
6-74
FIFO
$665,000
LIFO
$665,000
35,000
478,000
513,000
112,000a
401,000
264,000
120,000
$144,000
35,000
478,000
513,000
98,000b
415,000
250,000
120,000
$130,000

(b) Dear Audas Company:
After preparing the comparative condensed income statements for
2003 under the FIFO and LIFO cost flow assumptions, we have
found the following:
1. The FIFO cost flow assumption produces the more meaningful
inventory amount for the balance sheet because the units are
costed at the most recent purchase prices. These prices
approximate replacement cost, which is the most relevant value
for decision making.
2. The LIFO cost flow assumption produces the more meaningful
net income because current costs (the costs of the most recent
purchases are matched against current revenues (sales).
There exists an illusionary profit of $14,000 ($415,000
$401,000) under FIFO. Under LIFO, the company has recovered
the current replacement cost of the units ($415,000) whereas
under FIFO you have only recovered the earlier costs ($401,000).
This means that under FIFO, the company must reinvest $14,000
of the gross profit to replace the units used.
3. The FIFO cost flow assumption is most likely to approximate
actual physical flow because the oldest goods are usually sold
first to minimize spoilage and obsolescence.
4. The choice of cost flow assumption does not affect cash flow.
The amount of cash (spent on purchases) will be the same under
either method.
Sincerely,
6-75
PROBLEM 6-6B
(a)
1.
2.
3.
4.
5.
6.
7.
8.
9.

Net income 2002
Net income 2003
Combined net income
Assets for 2002
Assets for 2003
Owners equity for 2002
Owners equity for 2003
2002:
Understated
Overstated
Overstated
Understated
No effect
Overstated
No effect
Overstated
No effect
BI + P - EI = CGS
-O=U
Sales - CGS = NI
-U
=O
A = L + OE
O
+O
2003:
BI + P - EI = CGS
O
=O
Sales - CGS = NI
-O =U
A = L + OE
NE + NE
(The net income overstatement in 2002 and
understatement in 2003 cancel each other. At the
end of 2003, owners equity is correct.)
(b)
1.
2.
3.
4.
LIFO
LIFO
FIFO
Average cost
6-76
PROBLEM 6-7B
(a) (incorrect)
PELLETIER COMPANY
Income Statement
Sales
Cost of goods sold
Beginning inventory
Purchases
Ending inventory
Cost of goods sold
Gross profit
Operating expenses
Net income
2002
$300,000
2003
$320,000
30,000
200,000
230,000
22,000
208,000
92,000
60,000
$ 32,000
22,000
240,000
262,000
31,000
231,000
89,000
64,000
$ 25,000
(correct)
PELLETIER COMPANY
Income Statement
Sales
Cost of goods sold
Beginning inventory
Purchases
Ending inventory
Cost of goods sold
Gross profit
Operating expenses
Net income (loss)
2002
$300,000
2003
$320,000
30,000
200,000
230,000
25,000
205,000
95,000
60,000
$ 35,000
25,000
265,000
290,000
31,000
259,000
61,000
64,000
($ 3,000)
(b) The combined effect of the errors at July 31, 2003 before
correction is an overstatement of gross profit and net income of
$25,000. ($32,000 + $25,000 less $35,000 - $3,000). This is equal to
the understatement of purchases in 2003. The error in the 2002
inventory is reversed in 2003.
6-77
PROBLEM 6-8B
(a) PurchaserSchwinghamer Co.
GENERAL JOURNAL
Date
Oct.
Debit
No entry required
Purchases .........................................................
Cash ..........................................................
480
Cash ..................................................................
Sales ..........................................................
675
Sales Returns and Allowances .......................

Cash ...........................................................
150
Purchases .........................................................
Cash ..........................................................
225
Cash ..................................................................
45
Cash ..................................................................
Sales ..........................................................
960
Purchases .........................................................
Cash ...........................................................
100
8
10
15
16
20
25
6-78
Credit
480
675
150
225
45
960
100

(b) SellerPataki Co.
GENERAL JOURNAL
Date
Oct.
5
15
16
25
(c)
Debit
Cash ...................................................................
Sales ...........................................................
480
Cash ...................................................................
Sales ...........................................................
225
Purchase Returns and Allowances .................

Cash ............................................................
45
Cash ...................................................................
Sales ...........................................................
960
Ending Inventory
Unit
Date
Units Cost
Oct. 25
10
$ 10
Oct. 15
10
9
20*
Credit
480
225
45
960
Total
Cost
$100
90
$190
*25 + 60 45 + 10 + 25 5 60 + 10 = 20
(d) Cost: $190
Market: 20 x $11 = $220
The inventory should be valued at its cost of $190. This is the lower
of cost and market.
6-79
*PROBLEM 6-9B
(a)
Date
4/1
4/5
4/12
4/16
4/19
4/22
4/26
a
b
c
MOVING AVERAGE COST

Purchases
Sales
(12 @ $197a)
(65 @ $202) $13,130
(38 @ $204) $7,752
$2,364
(50 @ $201b) $10,050

(62 @ $203c) $12,586
(40 @ $205) $8,200

$5,122 26 = $197
$15,888 79 = $201
$13,590 67 = $203
Ending inventory
Cost of goods sold
Balance
$5,122
$2,758
$15,888
$5,838
$13,590
$1,004
$9,204
26 12 + 65 = 79
79 - 50 + 38 = 67
$9,204
$2,364 + $10,050 + $12,586 = $25,000
Check: EI
+ CGS
= GAS
$9,204 + $25,000 = $34,204
(b)
Weighted average unit cost = $34,204 169d = $202.39
Ending inventory:
45 x $202.39 = $9,107.55
Cost of goods sold: 124e x $202.39 = $25,096.36
d
e
26 + 65 + 38 + 40 = 169
12 + 50 + 62 = 124
Check: EI
+ CGS
= GAS
$9,107.55 + $25,096.36 = $34,203. 91 (rounding discrepancy only)
6-80
*PROBLEM 6-9B (Continued)

(c)
Sept.
5 Accounts Receivable ...................

Sales .........................................
3,588
Cost of Goods Sold ......................

Merchandise Inventory ...........
2,364
12 Merchandise Inventory ................

Accounts Payable....................
13,130

Sales .........................................
14,950

10,050

7,752

Sales .........................................
19,158

12,586

8,200
6-81
3,588
2,364
13,130
14,950
10,050
7,752
19,158
12,586
8,200
*PROBLEM 6-9B (Continued)

(d)
Sept.
5 Accounts Receivable ....................

Sales ..........................................
3,588
12 Purchases ......................................
Accounts Payable.....................
13,130

Sales ..........................................
14,950
19 Purchases ......................................
7,752

Sales ..........................................
19,158
26 Purchases ......................................
8,200
6-82
3,588
13,130
14,950
7,752
19,158
8,200
*PROBLEM 6-10B
(a)
FIFO
Date
Purchased
Sold
Balance
(60 X $13)
Oct. 1
9
17
(60 X $13)
(40 X $14) $1,340
(80 X $14) $1,120

(50 x $16)
$800
28
(80 X $14) $1,120

(80 X $14)
(70 X $15) $2,170
(70 X $15) $1,050
22
25
(60 X $13)
(120 X $14) $2,460
(120 X $14) $1,680
11
$780
(70 X $15) $1,050

(70 X $15)
(50 X $16) $1,850
(50 X $15)
$750
(20 X $15)
(50 X $16) $1,100

Cost of goods sold: $1,340 + $1,120 + $750 = $3,210
(b)
Sales [(100@ $35) + (80@ $38) + (50@ $40)] ................
Cost of goods sold .........................................................
Gross profit .....................................................................
6-83
$8,540
3,210
$5,330
*PROBLEM 6-11B
February
Net sales..........................................................
Cost of goods sold .........................................
Beginning inventory ...............................
Net purchases.........................................
Add: Freight in .......................................
Cost of goods purchased ......................
Cost of goods available for sale............
Less: Ending inventory ..........................
Cost of goods sold .................................
Gross profit .....................................................
$300,000
$ 16,500
$200,800
0002,900
203,700
220,200
00 25,200
0195,000
$105,000
Gross profit margin = $105,000 = 35%

$300,000
March
Net sales..............................................................
Less: Estimated gross profit
(35% x $260,000) ...................................
Estimated cost of goods sold............................
Beginning inventory ...........................................
Net Purchases..................................................... $191,000
3,500
Add: Freight in ....................................................
Cost of goods purchased ..................................
Cost of goods available for sale........................
Less: Estimated cost of goods sold .................
Estimated total cost of ending inventory .........
Less: Inventory not lost (20% X $50,700) .........
Estimated inventory lost in fire
(80% X $50,700)................................................
6-84
$260,000
0 91,000
$169,000
$ 25,200
194,500
219,700
169,000
50,700
10,140
$ 40,560
*PROBLEM 6-12B
(a)
Sporting
Goods
Cost
Jewellery and
Cosmetics
Retail
Cost
Retail
Beginning inventory........ $047,360
$0,074,000
$038,000
$0,062,000
Purchases ........................ 0670,000
01,166,000
0731,000
01,158,000
Purchase returns .............
(26,000)
(40,000)
(12,000)
(20,000)
Freight in ..........................
6,000
8,000
1,200,000
Goods available for sale . $697,360
$765,000
01,200,000
Net sales...........................
(1,120,000)
(1,160,000)
80,000
Cost-to-retail ratio:
Sporting Goods$697,360 $1,200,000 = 58.11%
Jewellery and Cosmetics$765,000 $1,200,000 = 63.75%
Estimated ending inventory at cost:
$80,000 X 58.11% = $46,488Sporting Goods
$40,000 X 63.75% = $25,500Jewellery and Cosmetics
(b) Sporting Goods$85,000 X 60% = $51,000

Jewellery and Cosmetics$54,000 X 65% = $35,100
6-85
40,000
BYP 6-1 FINANCIAL REPORTING PROBLEM
(a) The categories of inventory include merchandise held for resale,

and supplies.
(b)
Inventory
June 24, 2000
June 30, 1999
$107 thousand
$103 thousand
(1) 2000: $107 $5,416 = 2.0%

1999: $103 $24,990 = 0.4%
(2) 2000: $107 $20,844 = 0.5%
1999: $103 $21,465 = 0.5%
Inventory as a percentage of current assets was higher in 2000
than in 1999. Inventory as a percentage of total revenue was
substantially unchanged between 1999 and 2000. The company
had smaller inventories, in both absolute and relative terms, at
the end of 1999 than it did in 2000.
(c) Inventories are valued at the lower of cost or net realizable value,
with cost being determined substantially on a first-in first-out
basis. A different cost flow assumption would affect The Second
Cups results, if the price of coffee increases or decreases
greatly during the course of the year. Although given the low
level of inventory in relation to total revenue, the effect may not
be material.
(d) The Second Cup does not disclose any information regarding its
cost of goods sold, other than indirectly through its inventory
valuation disclosureas indicated in part (c) above.
6-86
BYP 6-2 INTERPRETING FINANCIAL STATEMENTS
(a) Using a perpetual system will enable the coffee chain to keep its
gross profit and inventory up-to-date in a time of changing
prices.
(b) In a period of changing prices, the cost flow assumption can
have a significant impact on income and on evaluations based on
income. By using an average cost flow assumption, variations in
price will be smoothed and therefore net income will be
smoothed as well. Using the average cost flow assumption
allows the coffee chain to average its changing inventory prices
and avoid a distortion of net income in any one period.
6-87
BYP 6-3 INTERPRETING FINANCIAL STATEMENTS
(a) General Motors inventories are reported in the balance sheet at

their cost, which is less than their market value (replacement
cost or net realizable value). If their market value was less than
their cost, generally accepted accounting principles would
require that the inventories be reported at the lower of cost and
market value.
(b) GM presents their inventory information using both LIFO and
FIFO for several reasons:
U.S. accounting standards require companies to disclose the
current (or replacement) cost of ending inventory because of
their concerns that inventory under LIFO may be substantially
undervalued;
converting the information into FIFO shows the inventory at a
figure closer to its replacement cost, which may be more
meaningful to some decision makers. It also allows more
meaningful analysis, including calculations of the current and
inventory turnover ratios; and
because GM reports throughout the world, presenting
inventories using both FIFO and LIFO makes comparisons
easier for its users.
(c) The LIFO cost flow assumption means that the oldest costs are
assigned to ending inventory. If its inventory under LIFO is less
than under FIFO, prices must be rising.
6-88
BYP 6-3 (Continued)

(d) LIFO is often used primarily because of income tax benefits in
the U.S. (where it is permitted for tax purposes). In addition, it is
used to better match current costs to current revenues. Many
companies also use other cost flow assumptions, such as FIFO
or average cost, for reasons such as:
extensive record keeping costs may result under LIFO, where
inventory turnover is very high in certain product lines;
unwanted involuntary liquidations may result under LIFO in
certain product lines, where inventory levels are unstable; and
certain product lines can be more susceptible to deflation
instead of inflation.
(e) This may be due to income tax regulations, which differ between
countries. For example, LIFO is acceptable for tax purposes in
the U.S., but not in Canada. It may also be due to different
economic situations (inflationary conditions, etc.) from country
to country, which affect the appropriateness of alternative
inventory cost flow assumptions.
6-89
BYP 6-4 ACCOUNTING ON THE WEB
Due to the frequency of change with regard to information available

on the world wide web, the Accounting on the Web cases are updated
as required. Their suggested solutions are also updated whenever
necessary, and can be found on-line in the Instructor Resources
section of our home page [www.wiley.com/canada/weygandt2].
6-90
BYP 6-5 COLLABORATIVE LEARNING ACTIVITY

(a)
(1)
Sales ..........................................................
Cash sales ($18,500 x 40%) .....................
Acknowledged credit sales April 1 10 .
Sales made but not acknowledged.........
Sales as of April 10 ..................................
$180,000
7,400
28,000
4,600
$220,000
(2)
Purchases .................................................
Cash purchases April 1-10 ......................
Credit purchases ......................................
Less: Items in transit ...............................
Purchases as of April 10..........................
$94,000
4,200
(b)
$12,400
1,800
2002
10,600
$108,800
2001
Net sales ........................................................... $600,000 $480,000

Cost of goods sold
Inventory, January 1 ................................
60,000
40,000
416,000 356,000
Cost of goods available for sale .............
476,000 396,000
Inventory, December 31 ...........................
80,000
60,000
Cost of goods sold ...................................
396,000 336,000
Gross profit ...................................................... $204,000 $144,000
Gross profit margin .........................................
Average gross profit margin (34% + 30%) 2
(c)
(d)
34%
30%
32%
Sales ..................................................................
Less: Gross profit ($220,000 x 32%) ...............
Cost of goods sold ...........................................
$220,000
70,400
$149,600
Inventory, January 1.........................................

Purchases .........................................................
Cost of goods available for sale .....................
Cost of goods sold (68% of $220,000) ............
Estimated inventory at the time of fire ...........
$ 80,000
108,800
188,800
149,600
$ 39,200
Estimated inventory at the time of the fire .....

Less: Inventory salvaged.................................
Estimated inventory loss .................................
$39,200
19,000
$20,200
6-91
BYP 6-6 COLLABORATIVE LEARNING ACTIVITY

Effect On Fiscal Year
2003
2002
Beginning inventory
Overstated $40 million
Not Affected
Ending inventory
Not affected
Cost of goods sold
Understated $40 million
Gross profit
Net income
Total assets
Not affected
Owners equity
Not affected
2002:
BI + P - EI = CGS
-O=U
Sales - CGS = GP NI
-U
=O
A = L + OE
O
+O
2003:
BI + P - EI = CGS
O
=O
Sales - CGS = GP NI
-O =U
A = L + OE
NE + NE
(The net income overstatement in 2002 and
understatement in 2003 cancel each other. At the end of
2003, owners equity is correct)
6-92
BYP 6-7 COMMUNICATION ACTIVITY

MEMO
To:
Mutahir Kazmi, President
From:
Student
Subject: 2002 Ending Inventory Error

The combined gross profit and net income for 2002 and 2003 are
correct. However, the gross profit and net income for each individual
year are incorrect.
As you know, the 2002 ending inventory was overstated by $1 million.
This error will cause the 2002 net income to be incorrect because the
ending inventory is used to calculate the 2002 cost of goods sold. Since
the ending inventory is subtracted in the calculation of cost of goods
sold, an overstatement of ending inventory results in an understatement
of cost of goods sold. Therefore, gross profit (sales cost of goods
sold) is overstated, as is net income.
Unless corrected, this error will also affect 2003 net income. The 2002
ending inventory is also the 2003 beginning inventory. Therefore, the
2003 beginning inventory is also overstated, which causes an
overstatement of cost of goods sold. The 2003 gross profit and net
income are subsequently understated.
If the error is not corrected, the gross profit and net income for 2002
and 2003 will be incorrect. Although the combined net incomes will be
correct (because the overstatement in 2002 cancels the understatement
in 2003), the trend in each year will be misleading.
6-93
BYP 6-8
ETHICS CASE
(a) 1. Maximize gross profitselect lowest cost inventory for cost of

goods sold
Sales [(500 x $650) + (180 x $600)] .................
Cost of goods sold
[(150 x $300) + (200 x $350) + (330 x $375)] .
Gross profit ......................................................
$433,000
238,750
$194,250
2. Minimize gross profitselect highest cost inventory for cost of

goods sold
(b)
Sales [(500 x $650) + (180 x $600)] .................

Cost of goods sold
[(130 x $300) + (200 x $350) + (350 x $375)] .
Gross profit ......................................................
$433,000
Difference .........................................................
$1,500
Reconciliation of difference
20 x ($375 - $300) ............................................
$1,500
240,250
$192,750
Average cost flow assumption

Sales [(500 x $650) + (180 x $600)] .................
Cost of goods sold [((150 x $300) +
(200 x $350) + (350 x $375)) 700 x 680]......
Gross profit ......................................................
$433,000
239,214
$193,786
(c)
The stakeholders are the investors and creditors of Quality

Diamonds. Choosing which diamonds to sell in a month is
unethical because it is managing incomeit is not based on fact as
the diamonds are all identical.
(d)
Quality Diamonds should select the weighted average cost flow

assumption. The specific identification method is not appropriate
because all items are identical. Using the weighted average cost
flow assumption in a time of rising prices will smooth out
variations in prices and result in reasonable values for both the
income statement and balance sheet.
6-94

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CHAPTER 6

1. Describe the steps in determining

2. Prepare the entries for purchases

3. Determine the cost of goods sold

4. Identify the unique features of the

5. Explain the basis of accounting for

6. Demonstrate the effects on the

7. Determine the effects of inventory

8. Explain and use the lower of cost

*9. Apply the inventory cost flow

*10. Use the two methods of estimating

*20, *21, *22

ASSIGNMENT CHARACTERISTIC TABLE

Determine items and amounts to be recorded in inventory.

Journalize, post, and prepare trial balance and partial income

Prepare a multiple-step income and closing entries.

Determine cost of goods sold and ending inventory, using

Calculate ending inventory using FIFO and weighted average

Indicate effect of errors and identify cost flow assumptions.

Illustrate impact of inventory error.

Prepare journal entries for purchaser and seller using weighted

Calculate and journalize FIFO transactions in perpetual and

Calculate cost of goods and inventory using perpetual inventory

Estimate inventory loss using gross profit method.

Estimate ending inventory using retail method.

Determine items and amounts to be recorded in inventory.

Journalize, post, and prepare trial balance and partial income

Prepare a multiple-step income statement and closing entries.

Determine cost of goods sold and ending inventory using

Calculate ending inventory using FIFO and LIFO periodic

Indicate effect of errors and identify cost flow assumptions.

Illustrate impact of inventory error.

Prepare journal entries for purchaser and seller using FIFO

Calculate and journalize average cost transactions in perpetual

Calculate ending inventory and gross profit using perpetual

Estimate inventory loss using gross profit method.

Estimate ending inventory using retail method.

BLOOMS TAXONOMY TABLE

1. Describe the steps

2. Prepare the entries

4. Identify the unique

8. Explain and use

*9. Apply the inventory

(a) Added or Deducted (b) Normal Balance

Purchases Purchase returns and allowances = Net purchases +

Questions Chapter 6 (Continued)

Recording sales in either system requires an entry to record the

Under a periodic inventory system, cost of goods sold is determined

The distinguishing feature is that cost of goods sold is detailed, rather

Purchase returns and allowances

Questions Chapter 6 (Continued)

Questions Chapter 6 (Continued)

*19. In a periodic system, the average is a weighted average based on

Questions Chapter 6 (Continued)

Cost of goods available for sale ......................................

*22. The estimated cost of the ending inventory is $21,000:

$84,000 $120,000 = 70%

Ending inventory at retail: $120,000 $100,000 = $20,000

$20,000 X 70% = $14,000

SOLUTIONS TO BRIEF EXERCISES

Ownership of the goods belongs to the consignor (Helgeson). Thus,

Ownership of these goods rests with the other company (the

The goods in transit to a customer should be included in inventory as

20, 21, *22