HWChap 006

Chapter 06 - Inventories and Cost of Sales
Chapter 6
Inventories and Cost of Sales
QUESTIONS
1.
(a) FIFO: The cost of the first (earliest) items purchased in inventory flow to cost of
goods sold first. (b) LIFO: The cost of the last (most recent) items purchased in
inventory flow to cost of goods sold first.
2.
Merchandise inventory is disclosed on the balance sheet as a current asset. It is

also sometimes reported in the income statement as part of the calculation of cost
of goods sold.
3.
Incidental costs sometimes are ignored in computing the cost of inventory because
the expense of tracking such costs on a precise basis can outweigh the benefits
gained from the increased accuracy. The accounting constraint of materiality
permits such practices when the effects on the financial statements are not
significant (that is, when such practices do not impact business decisions).
4.
LIFO will result in the lower cost of goods sold when costs are declining because it
assigns the most recent, lower cost purchases to cost of goods sold.
5.
The full-disclosure principle requires that the nature of the accounting change, the
justification for the change, and the effect of the change on net income be disclosed
in the notes or in the body of a company's financial statements.
6.
No; changing the inventory method each period would violate the accounting
concept of consistency.
7.
No; the consistency concept does not preclude changes in accounting methods
from ever being made. Instead, a change from one acceptable method to another is
allowed if the company justifies the change as an improvement in financial
reporting.
8.
Many people make important business decisions based on period-to-period

fluctuations in a company's financial numbers, including gross profit and net
income. As such, inventory errorswhich can substantially impact gross profit, net
income, current assets, and cost of salesshould not be permitted to cause such
fluctuations and impair business decisions. (Note: Since such errors are selfcorrecting, they will distort net income in only two consecutive accounting
periodsthe period of the error and the next period.)
9.
An inventory error that causes an understatement (or overstatement) for net income
in one accounting period, if not corrected, will cause an overstatement (or
understatement) in the next. Since an understatement (overstatement) of one period
offsets the overstatement (understatement) in the next, such errors are said to
correct themselves.
6-1
10. Market usually means replacement cost of inventory when applied in the LCM.
11. The accounting constraint of conservatism guides preparers of accounting reports
to select the less optimistic estimate in uncertain situations where two estimates of
amounts are about equally likely. Users of information must also be cognizant of
the potential conservatism in accounting reports when making business decisions.
12. Factors that contribute to inventory shrinkage are breakage, loss, deterioration,
decay, and theft.
13.A Accounts that are used only in a periodic inventory system include Purchases,
Purchase Discounts, Purchase Returns and Allowances, and Transportation-In.
14. On February 27, 2010, inventory as a percent of current assets is ($ in thousands):
$622 / $5,813 = 10.7%.
15. Cost of goods available for sale equals ending inventory plus cost of sales. As of
September 26, 2009, this is computed as ($ millions):
Ending Inventory of $455 + Cost of Sales of $25,683 = $26,138
16. Cost of goods available for sale equals ending inventory plus cost of sales. As of
December 31, 2009, this is computed as (in EUR millions):
Ending Inventory of 1,865 + Cost of Sales of 27,720 = 29,585
17. Merchandise inventory ($ thousands) comprises 5.6% ($19,716 / $353,579) of Palms
current assets as of May 31, 2009, and 12.5% ($67,461 / $540,086) of its current
assets as of May 31, 2008.
18.B For interim reporting, companies can estimate costs of goods sold and ending
inventory by either the retail inventory method or the gross profit method.
6-2
QUICK STUDIES
Quick Study 6-1 (10 minutes)
FIFO
Date
Goods Purchased
1/ 1
1/ 9
85 @ $6.40
1/25
110 @ $6.60
1/26
Alternate solution format

FIFO:
110 @ $6.60 =
45 @ $6.40 =
155
Cost of Goods Sold
320 @ $6.00 = $1,920

40 @ $6.40 =
256
360
$2,176
$ 726
288
$1,014
6-3
Inventory Balance
320 @ $6.00
320 @ $6.00
85 @ $6.40
320 @ $6.00
85 @ $6.40
110 @ $6.60
45 @ $6.40
110 @ $6.60
Ending inventory cost
= $1,920
= $2,464
= $3,190
= $1,014

LIFO
Date
Goods Purchased
1/ 1
1/ 9
85 @ $6.40
1/25
110 @ $6.60
1/26
Cost of Goods Sold
110 @ $6.60 = $ 726

85 @ $6.40 =
544
165 @ $6.00 =
990
360
$2,260

LIFO:
155 @ $6.00 =
$ 930
Inventory Balance
320 @ $6.00
320 @ $6.00
85 @ $6.40
320 @ $6.00
85 @ $6.40
110 @ $6.60
155 @ $6.00
= $1,920
= $2,464
= $3,190
= $ 930
Ending inventory cost

Weighted Average
Date
Goods Purchased
1/ 1
1/ 9
Cost of Goods Sold
Inventory Balance
320 @ $6.00
320 @ $6.00
85 @ $6.40
85 @ $6.40
= $1,920
= $2,464
(avg. cost is $6.084*)
1/25
110 @ $6.60
320 @ $6.00
85 @ $6.40
110 @ $6.60
= $3,190
360 @ $6.194 = $2,230*
1/26
*rounded
6-4
155 @ $6.194
= $ 960*

Weighted average:
320 @ $6.00 =
85 @ $6.40 =
110 @ $6.60 =
515
$1,920
544
726
$3,190
Cost of goods available for sale
$3,190/515 = $6.194 (rounded) weighted average cost per unit

155 units @ $6.194 =
$ 960 Ending inventory cost (rounded)
6-5

Beginning inventory .....................................
Plus:
1st week purchase .......................................
2nd week purchase ......................................
3rd week purchase .......................................
4th week purchase .......................................
Units available for sale ................................
Cost of goods available for sale .................
10 units @ $50
$ 500
10 units @ $51
10 units @ $52
10 units @ $55
10 units @ $60
50 units
510
520
550
600
$2,680

FIFO
Date
Goods Purchased
12/ 7
10 @ $ 9 = $ 90
10 @ $ 9
= $ 90
12/14
20 @ $10 = $200
10 @ $ 9
20 @ $10
= $290
12 @ $10
= $120
12 @ $10
15 @ $12
= $300
12/15
12/21
Cost of Goods Sold
10 @ $ 9
8 @ $10 = $170
15 @ $12 = $180
____
$170
6-6
Inventory Balance

LIFO
Date
Goods Purchased
12/ 7
10 @ $ 9 = $ 90
10 @ $ 9
= $ 90
12/14
20 @ $10 = $200
10 @ $ 9
20 @ $10
= $290
10 @ $ 9
2 @ $10
= $110
10 @ $ 9
2 @ $10
15 @ $12
= $290
12/15
12/21
Cost of Goods Sold
18 @ $10 = $180
15 @ $12 = $180
____
$180
6-7
Inventory Balance

Weighted Average
Date
Goods Purchased
Cost of Goods Sold
Inventory Balance
12/ 7
10 @ $ 9 = $ 90
10 @ $ 9
= $ 90
12/14
20 @ $10 = $200
10 @ $ 9
20 @ $ 10
= $290
(avg cost is $9.667)
12/15
12/21
18 @ $9.667 =$174
15 @ $12 = $180
12 @ $9.667
12 @ $9.667
____
15 @ $ 12
(avg
cost is $10.963)
$174

Specific identification
(3 units x $9) + (9 units x $10) + (15 units x $12) = $297.

1.
2.
3.
4.
5.
Specific identification
LIFO
LIFO
LIFO
FIFO
6-8
= $116
= $296

Units in ending inventory
Units stored in basement ............................
Less damaged (unsalable) units .................
Plus units in transit ......................................
Plus units on consignment .........................
Total units in ending inventory ...................
6-9
1,500 units
(30)
250
70
1,790 units

Cost .....................................................................................
Plus
Transportation-in .............................................................
Import duties ....................................................................
Insurance ..........................................................................
Inventory cost ..................................................................
$3,000
150
200
50
$3,400
The $25 advertising cost and the $250 cost for sales staff salaries are
included in operating expensesnot part of inventory costs. Those two
costs are not necessary to get the vehicle in a place and condition for
sale.

Inventory Items Units
Mountain bikes
9
Skateboards
12
Gliders
25
Total
Per Unit
Cost Market
Cost
$360
$330 $ 3,240
210
270
2,520
480
420 12,000
$17,760
Total
LCM Applied
to Items
Market
$ 2,970
$ 2,970
3,240
2,520
10,500
10,500
$15,990
LCM applied to each product ......................................................
$15,990

a.
b.
c.
d.
e.
Overstates 2011 cost of goods sold.

Understates 2011 gross profit.
Understates 2011 net income.
Overstates 2012 net income.
The understated 2011 net income and the overstated 2012 net income
combine to yield a correct total income for the two-year period.
f. The 2011 error will not affect years after 2012.
6-10

Inventory turnover
= Cost of goods sold/Average merchandise inventory

= $1,600,000 / [($200,000 + $230,000)/2 ] = 7.44 times
Days sales in inventory = Ending Inventory/Costs of goods sold x 365

= ($230,000 / $1,600,000) x 365 = 52.47 days
Quick Study 6-15A (10 minutes)

Ending
Inventory
FIFO
(45 x $6.40) + (110 x $6.60) ................................. $1,014
(320 x $6.00) + (40 x $6.40) .................................
Cost of
Goods Sold
$2,176

Ending
Inventory
LIFO
(155 x $6.00) ......................................................... $ 930
(110 x $6.60) + (85 x $6.40) + (165 x $6.00) .......
Cost of
Goods Sold
$2,260

Ending
Inventory
Weighted Average ($3,190/ 515 = $6.194* cost per unit)
(155 x $6.194) ....................................................... $ 960*
(360 x $6.194) .......................................................
*rounded
6-11
Cost of
Goods Sold
$2,230*

Ending
Inventory
FIFO
(12 x $10) + (15 x $12) ........................................
(10 x $9) + (8 x $10) ............................................
Cost of
Goods Sold
$300
$170

Ending
Inventory
LIFO
(10 x $9) + (17 x $10) ..........................................
(15 x $12) + (3 x $10) .........................................
Cost of
Goods Sold
$260
$210

Ending
Inventory
Weighted Average ($470 / 45 = $10.444 cost per unit)*

(27 x $10.444) .....................................................
(18 x $10.444) .....................................................
Cost of
Goods Sold
$282*
$188*
*rounded

Ending
Inventory
Specific Identification
(3 x $9) + (9 x $10) + (15 x $12) ..........................
(7 x $9) + (11 x $10) ............................................
6-12
Cost of
Goods Sold
$297
$173
Quick Study 6-22B (15 minutes)

Goods available for sale
Inventory, January 1 ......................................................................
$180,000
Cost of goods purchased (net) .....................................................
342,000
Goods available for sale (at cost) .................................................
522,000
Net sales at retail .............................................................................. $675,000
Estimated cost of goods sold [$675,000 x (1 - 42%)]..........................
(391,500)
Estimated September 5 inventory destroyed ................................
$130,500

a. Both IFRS and U.S. GAAP provide broad and similar guidance on the
accounting for items and costs making up merchandise inventory.
Specifically, merchandise inventory includes all items that a company
owns and holds for sale. Further, merchandise inventory includes
costs of expenditures necessary, directly or indirectly, to bring those
items to a salable condition and location.
b. Yes, companies reporting under IFRS can apply cost flow assumptions
in assigning costs to inventory. FIFO and weighted average are two
popular cost flow assumptions applied by companies reporting under
IFRS. (LIFO is not presently acceptable under IFRS.)
c.
U.S. GAAP prohibits any later increase in the recorded value of

inventory that had been written down even if that decline in value is
reversed through value increases in later periods. However, IFRS
allows reversals of those write-downs up to the original acquisition
cost.
6-13
EXERCISES
Exercise 6-1 (10 minutes)
1. The consignor is Jolie Company. The consignee is China Company. The
consignor, Jolie Company, should include any unsold and consigned
goods in its inventory.
2. The title will pass at destination which is China Companys receiving
dock. Jolie should show the $850 in its inventory at year-end as Jolie
retains title until the goods reach China Company.

Cost of inventory (estates contents)
Price ........................................................................................ $37,500
Transportation-in ...................................................................
1,200
Insurance on shipment ..........................................................
150
Cleaning and refurbishing.....................................................
490
Total cost of inventory........................................................... $39,340

a. Specific identification
Ending inventory90 units from March 30, 80 units from March 20, and 55
units from beginning inventory
Ending
Inventory
Computations
Cost of
Goods Sold
(90 x $5.00) + (80 x $6.00) + (55 x $7.00) ......... $1,315

$2,820 - $1,315 ..................................................
Exercise 6-3 (Continued)
6-14
$1,505
b. Weighted average perpetual

Date
Goods Purchased
Cost of Goods Sold
3/ 1
3/10
90 @ $ 7.00 = $ 630
3/20
220 @ $6.00
Inventory Balance
150 @ $7.000
= $1,050
60 @ $7.000
= $ 420
60 @ $7.000
220 @ $6.000
= $1,740
3/25
145 @ $6.214 = $ 901*
3/30
90 @ $5.00
135 @ $6.214
135 @ $6.214
_____
90 @ $5.000
$1,531 (avg. cost is $5.729*)
= $ 839*
= $1,289
*rounded
c. FIFO Perpetual
Date
Goods Purchased
Cost of Goods Sold
3/ 1
3/10
3/20
3/30
150 @ $7.00
= $1,050
60 @ $7.00
= $ 420
60 @ $7.00
220 @ $6.00
= $1,740
60 @ $7.00
85 @ $6.00 = $ 930
135 @ $6.00
= $ 810
_____
$1,560
135 @ $6.00
90 @ $5.00
= $1,260
90 @ $7.00 = $ 630
220 @ $6.00
3/25
Inventory Balance
90 @ $5.00
d. LIFO Perpetual
Date
Goods Purchased
Cost of Goods Sold
3/ 1
3/10
3/20
90 @ $7.00
220 @ $6.00
3/25
3/30
= $ 630
145 @ $6.00
= $ 870
90 @ $5.00
_____
$1,500
6-15
Inventory Balance
150 @ $7.00
= $1,050
60 @ $7.00
= $ 420
60 @ $7.00
220 @ $6.00
= $1,740
60 @ $7.00
75 @ $6.00
= $ 870
60 @ $7.00
75 @ $6.00
90 @ $5.00
= $1,320
Exercise 6-3 (Concluded)

Alternate Solution Format for FIFO and LIFO Perpetual
Computations
c. FIFO
(135 x $6.00) + (90 x $5.00) ...............................................
Ending
Inventory
Cost of
Goods Sold
$1,260
(90 x $7.00) + (60 x $7.00) + (85 x $6.00) .........................

d. LIFO
(60 x $7.00) + (75 x $6.00) + (90 x $5.00) .........................
$1,560
$1,320
(90 x $7.00) + (145 x $6.00) ...............................................
$1,500

PARK COMPANY
Income Statements
For Month Ended March 31
Specific
Identification
Sales...................................... $3,525
Weighted
Average
FIFO
LIFO
$3,525
$3,525
$3,525
1,531
1,994
1,600
394
118*
$ 276
1,560
1,965
1,600
365
110*
$ 255
1,500
2,025
1,600
425
128*
$ 297
(235 units x $15 price)
Cost of goods sold ..............

Gross profit ..........................
Expenses ..............................
Income before taxes ............
1,505
2,020
1,600
420
Income tax expense (30%) ........
126
Net income ........................... $ 294
* Rounded to nearest dollar.
1. LIFO method results in the highest net income of $297.

2. Weighted average net income of $276 falls between the FIFO net
income of $255 and the LIFO net income of $297.
3. If costs were rising instead of falling, then the FIFO method would yield
the highest net income.
6-16

a. FIFO Perpetual
Date
Goods Purchased
Cost of Goods Sold
1/1
100 @ $10
1/10
3/14
90 @ $10 = $ 900
250 @ $15 = $ 3,750
3/15
7/30
10 @ $10
130 @ $15 = $2,050
400 @ $20 = $ 8,000
10/5
10/26
Inventory Balance
120 @ $15
180 @ $20 = $5,400
600 @ $25 = $15,000
_____
$8,350
10 @ $10
= $ 1,000
=$
100
10 @ $10
250 @ $15
= $ 3,850
120 @ $15
= $ 1,800
120 @ $15
400 @ $20
= $ 9,800
220 @ $20
= $ 4,400
220 @ $20
600 @ $25
= $19,400
b. LIFO Perpetual
Date
Goods Purchased
Cost of Goods Sold
1/1
100 @ $10
1/10
3/14
90 @ $10 = $ 900
250 @ $15 = $ 3,750
3/15
140 @ $15 = $2,100
7/30
400 @ $20 = $ 8,000
10/5
300 @ $20 = $6,000
10/26
Inventory Balance
600 @ $25 = $15,000
_____
$9,000
6-17
10 @ $10
= $ 1,000
= $
100
10 @ $10
250 @ $15
= $ 3,850
10 @ $10
110 @ $15
= $ 1,750
10 @ $10
110 @ $15
400 @ $20
= $ 9,750
10 @ $10
110 @ $15
100 @ $20
= $ 3,750
10 @ $10
110 @ $15
100 @ $20
600 @ $25
= $ 18,750

Alternate Solution Format
Ending
Inventory
a. FIFO:
(600 x $25) + (220 x $20) .....................................................
(90 x $10) + (10 x $10) + (130 x $15) +
(120 x $15)+ (180 x $20) ......................................................
b. LIFO:
(10 x $10) + (110 x $15) + (100 x $20) + (600 x $25) .........
(90 x $10) + (140 x $15) + (300 x $20) .................................
Cost of
Goods Sold
$19,400
$8,350
$18,750
$9,000
FIFO Gross Margin

Sales Revenue (530 units sold x $40 selling price) ...............
Less: FIFO cost of goods sold ...............................................
Gross margin.............................................................................
$21,200
8,350
$12,850
LIFO Gross Margin

Sales Revenue (530 units sold x $40 selling price) ...............
Less: LIFO cost of goods sold ...............................................
Gross margin ............................................................................
$21,200
9,000
$12,200

a. Specific identification methodCost of goods sold
Cost of goods available for sale .............................................
Ending inventory under specific identification
3/14 purchase (100 @ $15) ...............................................
$ 1,500
7/30 purchase (120 @ $20) ................................................
2,400
10/26 purchase (600 @ $25) ................................................
15,000
Total ending inventory under specific identification ..........
Cost of goods sold under specific identification ................
$27,750
18,900
$ 8,850
b. Specific identification methodGross margin

Sales Revenue (530 units sold x $40 selling price) ..............
Less: Specific identification cost of goods sold ..................
Gross margin ............................................................................
6-18
$21,200
8,850
$12,350

Inventory Items
Units
Helmets ........... 22
Bats ................. 15
Shoes .............. 36
Uniforms ......... 40
Per Unit
Cost Market
$50
78
95
36
$54
72
91
36
Total
Cost
$1,100
1,170
3,420
1,440
$7,130
Total
Market
LCM Applied
to Items
$1,188
1,080
3,276
1,440
$6,984
$1,100
1,080
3,276
1,440
$6,896
Lower of cost or market of inventory by product = $6,896

1. Gross profit = $900,000 - $500,000 = $400,000 (for each year)
2.
Year 2010
$900,000
Year 2011
$900,000
Year 2012
$900,000
Sales ..................................
Cost of goods sold
Beginning inventory ..... $200,000
$180,000
$200,000
Cost of purchases ......... 500,000
500,000
500,000
Good available for sale.... 700,000
680,000
700,000
Ending inventory ........... 180,000
200,000
200,000
Cost of goods sold........
520,000
480,000
500,000
Gross profit ......................
$380,000
$420,000
$400,000

1. a. LIFO ratio computations
LIFO current ratio (2011) = $210/$190 = 1.1
LIFO inventory turnover (2011) = $730/ [($150+$100)/2] = 5.8
LIFO days sales in inventory (2011) = ($150/$730) x 365 = 75 days
b. FIFO ratio computations
FIFO current ratio (2011) = $280*/$190 = 1.5
FIFO inventory turnover (2011) = $685/ [($220+$125)/2] = 4.0
FIFO days sales in inventory (2011) = ($220/$685) x 365 = 117.2 days
*FIFO inventory is $70 greater than LIFO inventory ($220 vs $150),
thus FIFO current assets are also $70 greater.
6-19

2. The use of LIFO versus FIFO for Chess markedly impacts the ratios
computed. Specifically, LIFO makes Chess appear worse in comparison
to FIFO numbers on the current ratio (1.1 vs. 1.5) but better on inventory
turnover (5.8 vs. 4.0) and days sales in inventory (75 vs. 117.2). These
results can be generalized. That is, when costs are rising and quantities
are stable or rising, the FIFO inventory exceeds LIFO inventory. This
suggests that (relative to FIFO) the LIFO current ratio is understated, the
LIFO inventory turnover is overstated, and the days sales in inventory
is understated. Overall, users prefer the FIFO numbers for these ratios
because they are considered more representative of current
replacement costs for inventory.

2010 Inventory turnover
2010 Days' Sales in Inventory
$426,650/[($91,500 + $86,750)/2]
= 4.8 times
$86,750/$426,650 x 365 days = 74.2 days
2011 Inventory turnover
2011 Days' Sales in Inventory
$643,825/[($86,750 + $96,400)/2]
= 7.0 times
$96,400/$643,825 x 365 days = 54.7 days
Analysis comment: It appears that during a period of increasing sales,

Ryder has been efficient in controlling its amount of inventory. Specifically
inventory turnover increased by 2.2 times (7.0 - 4.8) from 2010 to 2011. In
addition, days' sales in inventory decreased by 19.5 days (74.2 - 54.7).
6-20
Exercise 6-11A (20 minutes)

Ending
Cost of
Inventory Goods Sold
a. Specific Identification
(90 x $5.00) + (80 x $6.00) + (55 x $7) .......................... $1,315
$2,820 - $1,315 ..............................................................
$1,505
b. Weighted Average
($2,820 / 460 units = $6.130* average cost per unit)
225 x $6.130 .................................................................. $1,379*

235 x $6.130 ..................................................................
$1,441*
c. FIFO
(90 x $5.00) + (135 x $6.00) .......................................... $1,260
(150 x $7.00) + (85 x $6.00) .........................................
$1,560
d. LIFO
(150 x $7.00) + (75 x $6.00) .......................................... $1,500
(90 x $5.00) + (145 x $6.00) ..........................................
*rounded
6-21
$1,320

Cost of goods available for sale = (100 x $10) + (250 x $15) + (400 x $20)
+ (600 x $25)
= $27,750
Ending
Cost of
Inventory Goods Sold
a. FIFO
(600 x $25) + (220 x $20) ............................................ $19,400
(90 x $10) + (10 x $10) + (130 x $15) +
(120 x $15)+ (180 x $20) ...........................................
$8,350
b. LIFO
(100 x $10) + (250 x $15) + (400 x $20) + (70 x $25) .... $14,500
530 x $25 .....................................................................
$13,250
c.
FIFO Gross Margin
Sales Revenue (530 units sold x $40 selling price) ............... $21,200
Less: FIFO cost of goods sold ...............................................
8,350
Gross margin............................................................................. $12,850
LIFO Gross Margin
Sales Revenue (530 units sold x $40 selling price) ............... $21,200
Less: LIFO cost of goods sold ............................................... 13,250
Gross margin............................................................................. $ 7,950
6-22

Ending
Inventory
(100 x $2.90) + (100 x $2.80) + (100 x $2.50) .......
$7,706 - $820 ..........................................................
b. Weighted average ($7,706/3,000 = $2.57*)
$2.57 x 300 .............................................................
$7,706 - $771 ..........................................................
c. FIFO
(300 x $2.90) ..........................................................
(200 x $2.00) + (440 x $2.25) + (1,080 x $2.50) +
(960 x $2.80) + (20 x 2.90) ...............................
d. LIFO
(200 x $2.00) + (100 x $2.25) .................................
(320 x $2.90) + (960 x $2.80) + (1,080 x $2.50) +
(340 x $2.25) ......................................................
Cost of
Goods Sold
$820
$6,886
771
6,935
870
6,836
625
7,081
*rounded
Income effect: FIFO provides the lowest cost of goods sold, the highest
gross profit, and the highest net income.

Ending
Inventory
(100 x $2.00) + (100 x $2.30) + (100 x $2.50) .......
$7,550 - $680 ..........................................................
b. Weighted average ($7,550/3,030 = $2.49*)
$2.49 x 300 .............................................................
$7,550 - $747 ..........................................................
c. FIFO
(250 x $2.00) + (50 x $2.30) ...................................
(280 x $3.00) + (600 x $2.80) + (800 x $2.50) +
(1,050 x $2.30) ..................................................
d. LIFO
(280 x $3.00) + (20 x $2.80) ...................................
(250 x $2.00) + (1,100 x $2.30) + (800 x $2.50) +
(580 x $2.80) .....................................................
Cost of
Goods Sold
$680
$6,870
747
6,803
615
6,935
896
6,654
*rounded
Income effect: FIFO provides the highest cost of goods sold, the lowest
gross profit, and the lowest net income.
6-23
Exercise 6-15B (20 minutes)

At Cost
At Retail

Beginning inventory ................................................... $ 31,900
Cost of goods purchased .......................................... 57,810
Goods available for sale ............................................ 89,710
Deduct net sales at retail ..............................................
Ending inventory at retail ..............................................
$ 64,200
98,400
162,600
130,000
$ 32,600
Cost ratio: ($89,710/$162,600) = 0.55 ...............................

Ending inventory at cost ($32,600 x 55%) ................... $ 17,930
Exercise 6-16B (20 minutes)

Inventory, January 1 .....................................................
$ 450,000
*
Net cost of goods purchased ......................................1,604,500
Goods available for sale ...............................................2,054,500
Less estimated cost of goods sold
Net sales .........................................................................
$2,000,000
Estimated cost of goods sold
[$2,000,000 x (1 30%)] ...........................................(1,400,000)
Estimated March 31 inventory ........................................
$ 654,500
*
$1,590,000 - $23,100 + $37,600 = $1,604,500

1. Samsung generally applies the (weighted) average cost assumption when
assigning costs to its inventories. An exception is for its materials-in-transit
where it applies specific identification.
2. Samsung recorded losses on valuation of inventories amounting to 651,296
million for 2008.
3. Under IFRS, Samsung would reverse inventory valuation losses if inventory
values increased in subsequent periods. Specifically, it would reduce
inventory costs by 900 million in 2009 for the reversal. However, had
Samsung followed U.S. GAAP, it would have ignored the reversal in inventory
value and would not record the 900 million cost reduction in 2009.
6-24
PROBLEM SET A
Problem 6-1A (40 minutes)
1. Compute cost of goods available for sale and units available for sale
Beginning inventory ........................... 50 units @ $50
March 5 ................................................ 200 units @ $55
$ 2,500
11,000
March 18 ............................................... 60 units @ $60

March 25 ............................................... 100 units @ $62
3,600
6,200
Units available ..................................... 410 units

$23,300
2. Units in ending inventory

Units available (from part 1) ............................
410 units
Less: Units sold (210 + 80) ..............................
290 units
Ending Inventory (units) ..................................
120 units
3a. FIFO perpetual

Date
Goods Purchased
Cost of Goods Sold
Mar. 1
Mar. 5
200 @ $55 = $11,000
Mar. 9
Mar. 18
Mar. 25
Mar. 29
50 @ $50 = $ 2,500
160 @ $55 = $ 8,800
60 @ $60 = $ 3,600
100 @ $62 = $ 6,200
40 @ $55 = $ 2,200
40 @ $60 = $ 2,400
$15,900
6-25
Inventory Balance
50 @ $50
= $ 2,500
50 @ $50
200 @ $55
= $13,500
40 @ $55
= $ 2,200
40 @ $55
60 @ $60
= $ 5,800
40 @ $55
60 @ $60
100 @ $62
= $12,000
20 @ $60
100 @ $62
= $ 7,400
Problem 6-1A (Continued)

3b. LIFO perpetual
Date
Goods Purchased
Cost of Goods Sold
Mar. 1
Mar. 5
200 @ $55 = $11,000
Mar. 9
Mar. 18
Mar. 25
200 @ $55 = $11,000

10 @ $50 = $ 500
60 @ $60 = $ 3,600
100 @ $62 = $ 6,200
Mar. 29
80 @ $62 = $ 4,960
______
$16,460
Inventory Balance
50 @ $50
= $ 2,500
50 @ $50
200 @ $55
= $13,500
40 @ $50
= $ 2,000
40 @ $50
60 @ $60
= $ 5,600
40 @ $50
60 @ $60
100 @ $62
= $11,800
40 @ $50
60 @ $60
20 @ $62
= $ 6,840
3c. Weighted Average perpetual

Date
Goods Purchased
Cost of Goods Sold
Mar. 1
Mar. 5
200 @ $55 = $11,000
Inventory Balance
50 @ $50
= $ 2,500
50 @ $50
200 @ $55
= $13,500
(avg. = $54)
Mar. 9
210 @ $54 = $11,340
40 @ $54
= $ 2,160
(avg. = $54)
Mar. 18
60 @ $60 = $ 3,600
40 @ $54
60 @ $60
= $ 5,760
(avg. = $57.60)
Mar. 25
100 @ $62 = $ 6,200
40 @ $54
60 @ $60
100 @ $62
= $11,960
(avg. = $59.80)
Mar. 29
80 @ $59.8 = $ 4,784
________
$16,124
6-26
120 @ $59.80
(avg. = $59.80)
= $ 7,176
Problem 6-1A (Concluded)

3d. Specific Identification
Date
Goods Purchased
Cost of Goods Sold
Mar. 1
Mar. 5
200 @ $55 = $11,000
Mar. 9
Mar. 18
Mar. 25
Mar. 29
40 @ $50 = $ 2,000
170 @ $55 = $ 9,350
60 @ $60 = $ 3,600
100 @ $62 = $ 6,200
20 @ $60 = $ 1,200
60 @ $62 = $ 3,720
______
$16,270
Inventory Balance
50 @ $50
= $ 2,500
50 @ $50
200 @ $55
= $13,500
10 @ $50
30 @ $55
= $ 2,150
10 @ $50
30 @ $55
60 @ $60
= $ 5,750
10 @ $50
30 @ $55
60 @ $60
100 @ $62
= $11,950
10 @ $50
30 @ $55
40 @ $60
40 @ $62
= $ 7,030
4.
Specific
Identification
LIFO
Weighted
Average
$25,450
$25,450
$25,450
15,900
16,460
16,124
16,270
Gross profit............................. $ 9,550
$ 8,990
$ 9,326
$ 9,180
FIFO
Sales* ...................................... $25,450

Less: Cost of goods sold ......
*Sales = (210 units x $85) + (80 units x $95) = $25,450
6-27

1. Calculate cost of goods available for sale and units available for sale
Beginning inventory ...........................
Feb. 10 .................................................
Mar. 13 .................................................
600 units @ $44

200 units @ $40
100 units @ $20
$26,400
8,000
2,000
Aug. 21 .................................................
Sept. 5 .................................................
160 units @ $60

280 units @ $48
9,600
13,440
Units available ..................................... 1,340 units


1,340
Less: Units sold (400+200) ..............................
600
740
6-28
$59,440

3a. FIFO perpetual
Date
Goods Purchased
Cost of Goods Sold
1/1
2/10
3/13
200 @ $40 = $ 8,000
100 @ $20 = $ 2,000
3/15
8/21
9/5
600 @ $44
= $26,400
600 @ $44
200 @ $40
= $34,400
600 @ $44
200 @ $40
100 @ $20
400 @ $44 = $17,600
160 @ $60 = $ 9,600
200 @ $44
200 @ $40
100 @ $20
200 @ $44
200 @ $40
100 @ $20
160 @ $60
280 @ $48 = $13,440
9/10
Inventory Balance
200 @ $44
200 @ $40
100 @ $20
160 @ $60
280 @ $48
200 @ $44 = $ 8,800
______
$26,400
FIFO Alternate Solution Format

Less: Cost of sales
400 @ $44
$17,600
200 @ $44
8,800
Total cost of goods sold

Ending Inventory
200 @ $40
100 @ $20
160 @ $60
280 @ $48
$59,440
26,400
$33,040
Proof of Ending Inventory
Ending Inventory ...................
200 @ $40
100 @ 20
160 @ 60
280 @ 48
740 units
6-29
$ 8,000
2,000
9,600
13,440
$33,040
= $36,400
= $18,800
= $28,400
= $41,840
= $33,040

3b. LIFO perpetual
Date
Goods Purchased
Cost of Goods Sold
1/1
2/10
3/13
200 @ $40 = $ 8,000
100 @ $20 = $ 2,000
3/15
8/21
9/5
100 @ $20
200 @ $40
100 @ $44
280 @ $48 = $13,440
200 @ $48
= $ 9,600
______
$24,000
LIFO alternate solution format

Less: Cost of sales
100 @ $20
200 @ 40
100 @ 44
200 @ 48
Cost of Goods Sold
Ending Inventory
600 @ $44
= $26,400
600 @ $44
200 @ $40
= $34,400
600 @ $44
200 @ $40
100 @ $20
= $36,400
500 @ $44
= $22,000
500 @ $44
160 @ $60
= $31,600
= $14,400
160 @ $60 = $ 9,600
9/10
Inventory Balance
500 @ $44
160 @ $60
280 @ $48
= $45,040
500 @ $44
160 @ $60
80 @ $48
= $35,440
$59,440
$ 2,000
8,000
4,400
9,600
24,000
$35,440
Ending Inventory
500 @ $44
160 @ 60
80 @ 48
740 units
6-30
$22,000
9,600
3,840
$35,440

3c. Specific Identification
Cost of goods available for sale .............
Less: Cost of Goods Sold
500 @ $44 .................................... $22,000
100 @ $20 .................................... 2,000
Total cost of goods sold ..........................
Ending Inventory ......................................
$59,440
24,000
$35,440
Ending Inventory.
100 @ $44
200 @
40
160 @
60
280 @
48
740 units
$ 4,400
8,000
9,600
13,440
$35,440
3d. Weighted Average

Date
Goods Purchased
Cost of Goods Sold
1/1
2/10
200 @ $40 = $ 8,000
Inventory Balance
600 @ $44.00
= $26,400
600 @ $44.00
200 @ $40.00
= $34,400
(avg. cost is $43.00)
3/13
100 @ $20 = $ 2,000
600 @ $44.00
200 @ $40.00
100 @ $20.00
= $36,400
3/15
8/21
400 @ $40.44 = $16,176

160 @ $60 = $ 9,600
500 @ $40.44
= $20,220
500 @ $40.44
160 @ $60.00
= $29,820
9/5
280 @ $48 = $13,440
660 @ $45.18
280 @ $48.00
= $43,259**
9/10
200 @ $46.02 = $ 9,204

$25,380
740 @ $46.02
* rounded to nearest cent

** rounded to nearest dollar
*** Total cost of goods sold plus ending inventory = $25,380 + $34,055 = $59,435 (the $5
difference from cost of goods available for sale of $59,440 is due to rounding)
6-31
= $34,055***
Problem 6-2A (Concluded)

4.
LIFO
Specific
Identification
Weighted
Average
$45,000
$45,000
$45,000
26,400
24,000
24,000
25,380
Gross profit............................. $18,600
$21,000
$21,000
$19,620
FIFO
Sales (600 x $75) .................... $45,000

Less: Cost of goods sold ......
5. The companys manager would likely prefer the LIFO method or the
Specific Identification method since these methods gross profit is the
largest at $21,000. This would give the manager his/her highest bonus
based on gross profit. It is only by coincidence that the LIFO and
Specific Identification method have the same cost of goods sold and
gross profit. This would not necessarily be the case.
6-32
Inventory Items
Audio equipment:
Receivers....................
CD players..................
MP3 players ...............
Speakers.....................
Units
Per Unit
Cost Market
335 $ 90
250 111
316
86
194
52
Video equipment:
Handheld LCDs ......... 470
VCRs ........................... 281
Camcorders ............... 202
Car audio equip:
Satellite radios........... 175
CD/MP3 radios........... 160
Total...............................
Total
Cost
Total
Market
$ 98 $ 30,150 $ 32,830
100
27,750
25,000
95
27,176
30,020
41
10,088
7,954
LCM Applied
to Items
$ 30,150
25,000
27,176
7,954
150
93
310
125
84
322
70,500
26,133
62,620
58,750
23,604
65,044
58,750
23,604
62,620
70
97
84
105
12,250
15,520
$282,187
14,700
16,800
12,250
15,520
$263,024
1. Lower of cost or market for inventory applied separately = $263,024

2.
Dec 31 Cost of Goods Sold .....................................................19,163
Merchandise Inventory .........................................
To adjust inventory cost to market.
$19,163 = $282,187 - $263,024
6-33
19,163

Part 1
(a)
Cost of goods sold
Reported .......................................
Adjustments: 12/31/2010 error ......
12/31/2011 error ......
Corrected .....................................
(b)
Net income
Reported .......................................
12/31/2011 error ......
Corrected .....................................
(c)
Total current assets
Reported .......................................
12/31/2011 error ......
Corrected .....................................
(d)
Equity
Reported .......................................
12/31/2011 error ......
Corrected .....................................
2010
$ 725,000
- 50,000
.
$ 675,000
2011
$ 955,000
+ 50,000
+ 20,000
$1,025,000
2012
$ 790,000
2010
$ 268,000
+ 50,000
.
$ 318,000
2011
$ 275,000
- 50,000
- 20,000
$ 205,000
2012
$ 250,000
2010
$1,247,000
+ 50,000
.
$1,297,000
2011
$1,360,000
2012
$1,230,000
- 20,000
$1,340,000
.
$1,230,000
2010
$1,387,000
+ 50,000
_________
$1,437,000
2011
$1,580,000
2012
$1,245,000
- 20,000
$1,560,000
.
$1,245,000
- 20,000
$ 770,000
+ 20,000
$ 270,000
Part 2
Total net income for the combined three-year period ($793,000) is not affected
by the errors. This is because these errors are "self-correcting"that is, each
overstatement (or understatement) of net income is offset by a matching
understatement (or overstatement) in the following year.
Part 3
The understatement of inventory by $50,000 results in an overstatement of cost of
goods sold by that same amount. The $50,000 overstatement of cost of goods
sold results in an understatement of gross profit by the same amount. This
understatement of gross profit carries through to an understatement of net
income. Since the understated net income is closed to equity, the final equity
figure is understated by the amount of the inventory understatement.
6-34
Problem 6-5AA (25 minutes)

Part 1
Number and total cost of units available for sale:
20,000 units in beginning inventory @ $15 .......................... $ 300,000
28,000 units purchased @ $18 ...............................................
504,000
30,000 units purchased @ $22 ...............................................
660,000
20,000 units purchased @ $24 ...............................................
480,000
33,000 units purchased @ $27 ...............................................
891,000
131,000 units available for sale .............................................. $2,835,000
Part 2
a. FIFO periodic
Total cost of 131,000 units available for sale ........................
Less ending inventory on a FIFO basis
33,000 units @ $27 ................................................................
$891,000
2,000 units @ $24 ................................................................
48,000
Cost of units sold .....................................................................
$2,835,000
939,000
$1,896,000
b. LIFO periodic
Less ending inventory on a LIFO basis
20,000 beginning inventory units @ $15 .............................
$300,000
15,000 units @ $18 ................................................................
270,000
$2,835,000
570,000
$2,265,000
c. Weighted average periodic

Less ending inventory at weighted average
($2,835,000/131,000) x 35,000 ..............................................
*
Amount can slightly vary due to differences in rounding.
6-35
$2,835,000
757,443
$2,077,557
*
*

Part 1
BOTCH CORP.
Income Statements Comparing FIFO, LIFO, and Weighted Average
For Year Ended December 31, 2011
LIFO
Weighted
Average
$247,500
$247,500
10,800
10,800
10,800
Cost of purchases....................................... 123,500

Cost of goods available for sale ................ 134,300
Inventory, Dec. 31, 2011 ............................. 22,000
123,500
134,300
18,400
123,500
134,300
20,662 *
Cost of goods sold ..................................... 112,300
115,900
113,638 *
Gross profit ................................................... 135,200
131,600
133,862 *
33,000
33,000
33,000
Income before taxes ..................................... 102,200
98,600
100,862 *
Income taxes expense .................................
30,660
29,580
30,259 *
Net income .................................................... $ 71,540
$ 69,020
$ 70,603 *
FIFO
$ 10,800
LIFO
$ 10,800
Weighted
Average
$ 10,800
$123,500
$123,500
$123,500
Dec. 31, 2011, inventory (6,500 - 5,500 = 1,000 units)

FIFO: 1,000 x $22 = $22,000
$ 22,000
LIFO:
600 x $18 = $10,800
400 x $19 = $ 7,600
W.A.:
($134,300/6,500) x 1,000
$ 18,400
FIFO
Sales .............................................................. $247,500

Cost of goods sold
Inventory, Dec. 31, 2010 .............................
Expenses .......................................................
*Amounts can slightly vary due to differences in rounding.
Supporting calculations:
Dec. 31, 2010, inventory (600 x $18). ................
Purchases
1,500 x $19 = $28,500
700 x $20 = 14,000
400 x $21 = 8,400
3,300 x $22 = 72,600
6-36
$ 20,662*
Problem 6-6AA (Concluded)

Part 2
If Botch, Corp. had been experiencing declining costs in the acquisition of
inventory, we would observe the opposite results in our comparisons.
Specifically, LIFO would have resulted in a higher ending inventory, lower
cost of goods sold, higher gross profit, and higher net income. FIFO would
have resulted in a lower ending inventory, higher cost of goods sold, lower
gross profit, and lower net income.
Part 3
Advantages:
LIFO: Given the cost trends in the problem, the advantage of using LIFO is
that the lower net income will result in a lower tax obligation (tax deferral).
Also, LIFO is likely to better match current costs against revenues.
FIFO: The advantage of using FIFO is that the inventory figure reported on
the balance sheet is likely similar to the current replacement cost.
Disadvantages:
LIFO: Given the cost trends in the problem, the disadvantage of using LIFO
is that the inventory figure, which is also reported on the income
statement, will likely be understated in comparison to the current
replacement costs.
FIFO: The disadvantage of using FIFO is that it will produce a greater tax
obligation for the current period as a result of a higher reported net
income.
6-37

Part 1
NILSON COMPANY
Estimated Inventory
December 31
Beginning inventory............................................
Cost of goods purchased ...................................
Goods available for sale .....................................
At Cost
At Retail
$ 471,350
3,276,030
$3,747,380
$ 927,150
6,279,350
$7,206,500
Sales .......................................................................
Less: Sales returns ...............................................
Net sales.................................................................
5,495,700
(44,600)
5,451,100
Ending inventory at retail ($7,206,500 - $5,451,100)
$1,755,400
Cost-to-retail ratio: $3,747,380/$7,206,500 = 0.52 or 52%

Ending inventory at cost ($1,755,400 x 52%) .................
$ 912,808
Part 2
Estimated physical inventory at cost: $1,675,800 x 52% = $871,416
NILSON COMPANY
Inventory Shortage
December 31
At Cost
At Retail
Estimated inventory (from part 1) ............................$ 912,808
$ 1,755,400
Physical inventory (given) ........................................ 871,416
1,675,800
Inventory shortage ....................................................$
6-38
41,392
79,600
Problem 6-8AB (25 minutes)

WAYMAN COMPANY
Estimated Inventory at March 31
At Cost
At Retail

Inventory, January 1 ..............................................$ 300,260
Cost of goods purchased ......................................
939,050
Goods available for sale ........................................ 1,239,310

Sales ........................................................................
$1,191,150
Less sales returns .................................................
(9,450)
Net sales .................................................................
$1,181,700

[$1,181,700 x (1 35%)] ....................................
(768,105)
Estimated March 31 inventory .................................$
471,205
6-39
PROBLEM SET B
Problem 6-1B (40 minutes)
1. Compute cost of goods available for sale and units available for sale
Beginning inventory ........................... 15 units @ $3,000
April 6 .................................................. 35 units @ $3,500
$ 45,000
122,500
April 17 ................................................. 8 units @ $4,500

April 25 ................................................. 10 units @ $4,580
36,000
45,800
Units available .....................................

Cost of goods available for sale ........
68 units
$249,300

68 units
Less: Units sold (18 + 30) ................................
48 units
20 units
3a. FIFO perpetual
Date
Goods Purchased
Cost of Goods Sold
Inventory Balance
Apr. 1
15 @ $3,000
= $ 45,000
Apr. 6 35 @ $3,500 = $122,500
15 @ $3,000
35 @ $3,500
= $167,500
32 @ $3,500
= $112,000
32 @ $3,500
8 @ $4,500
= $148,000
32 @ $3,500
8 @ $4,500
10 @ $4,580
= $193,800
2 @ $3,500
8 @ $4,500
10 @ $4,580
= $ 88,800
Apr. 9
Apr. 17
15 @ $3,000 = $ 45,000
3 @ $3,500 = $ 10,500
8 @ $4,500 = $ 36,000
Apr. 25 10 @ $4,580 = $ 45,800
Apr. 30
30 @ $3,500 = $105,000
_______
$160,500
6-40
Problem 6-1B (Continued)

3b. LIFO perpetual
Date
Goods Purchased
Cost of Goods Sold
Inventory Balance
Apr. 1
15 @ $3,000
= $ 45,000
Apr. 6 35 @ $3,500 = $122,500
15 @ $3,000
35 @ $3,500
= $167,500
15 @ $3,000
17 @ $3,500
= $104,500
15 @ $3,000
17 @ $3,500
8 @ $4,500
= $140,500
15 @ $3,000
17 @ $3,500
8 @ $4,500
10 @ $4,580
= $186,300
15 @ $3,000
5 @ $3,500
= $ 62,500
Apr. 9
Apr. 17
18 @ $3,500 = $ 63,000
8 @ $4,500 = $ 36,000
Apr. 25 10 @ $4,580 = $ 45,800
10 @ $4,580 = $ 45,800
8 @ $4,500 = $ 36,000
12 @ $3,500 = $ 42,000
$186,800
Apr. 30
3c. Weighted Average perpetual

Date
Goods Purchased
Cost of Goods Sold
Inventory Balance
Apr. 1
15 @ $3,000
= $ 45,000
Apr. 6 35 @ $3,500 = $122,500
15 @ $3,000
35 @ $3,500
= $167,500
(avg. = $3,350)
Apr. 9
18 @ $3,350 = $ 60,300
32 @ $3,350
= $107,200
(avg. = $3,350)
Apr. 17
8 @ $4,500 = $ 36,000
32 @ $3,350
8 @ $4,500
= $143,200
(avg. = $3,580)
Apr. 25 10 @ $4,580 = $ 45,800
32 @ $3,350
8 @ $4,500
10 @ $4,580
= $189,000
(avg. = $3,780)
Apr. 30
30 @ $3,780 = $113,400
20 @ $3,780
_________
(avg. = $3,780)
$173,700
6-41
= $ 75,600
Problem 6-1B (Concluded)

3d. Specific Identification
Date
Goods Purchased
Cost of Goods Sold
Inventory Balance
Apr. 1
15 @ $3,000
= $ 45,000
Apr. 6 35 @ $3,500 = $122,500
15 @ $3,000
35 @ $3,500
= $167,500
7 @ $3,000
25 @ $3,500
= $108,500
7 @ $3,000
25 @ $3,500
8 @ $4,500
= $144,500
7 @ $3,000
25 @ $3,500
8 @ $4,500
10 @ $4,580
= $190,300
7 @ $3,000
5 @ $3,500
8 @ $4,500
= $ 74,500
Apr. 9
Apr. 17
8 @ $3,000 = $ 24,000
10 @ $3,500 = $ 35,000
8 @ $4,500 = $ 36,000
Apr. 25 10 @ $4,580 = $ 45,800
Apr. 30
20 @ $3,500 = $ 70,000
10 @ $4,580 = $ 45,800
$174,800
4.
Weighted
Average
Specific
Identification
$636,000
$636,000
186,800
173,700
174,800
Gross profit............................. $475,500 $449,200
$462,300
$461,200
FIFO
LIFO
Sales* ...................................... $636,000 $636,000

Less: Cost of goods sold ...... 160,500
*Sales = (18 units x $12,000) + (30 units x $14,000) = $636,000
6-42

1. Calculate cost of goods available for sale and units available for sale:
Beginning inventory ........................... 600 units @ $55 =
Jan. 10 .................................................. 450 units @ $56 =
$ 33,000
Feb. 13 .................................................. 200 units @ $57 =

July 21 .................................................. 230 units @ $58 =
11,400
13,340
Aug. 5 .................................................. 345 units @ $59 =

Units available ..................................... 1,825 units
20,355
2. Units in ending inventory:

Units available (from part 1) ....................
1,825
Less: Units sold (given)...........................765
Ending Inventory ......................................
1,060
6-43
25,200
$103,295

3a. FIFO perpetual
Date
Goods Purchased
Cost of Goods Sold
1/1
Inventory Balance
600 @ $55
= $33,000
= $58,200
1/10
450 @ $56 = $25,200
600 @ $55
450 @ $56
2/13
200 @ $57 = $11,400
600 @ $55
450 @ $56
200 @ $57
= $69,600
170 @ $55
450 @ $56
200 @ $57
= $45,950
170 @ $55
450 @ $56
200 @ $57
230 @ $58
= $59,290
170 @ $55
450 @ $56
200 @ $57
230 @ $58
345 @ $59
= $79,645
2/15
7/21
8/5
430 @ $55 = $23,650
230 @ $58 = $13,340
345 @ $59 = $20,355
8/10
170 @ $55
165 @ $56 = $18,590
______
$42,240
Alternate FIFO solution format

Cost of goods available for sale ...........................
430 @ $55 ...............................................................
$23,650
170 @ 55 ...............................................................
9,350
165 @ 56 ...............................................................
9,240
765
Total cost of goods sold ........................................
Ending Inventory ....................................................
285 @ $56
200 @ $57
230 @ $58
345 @ $59
$103,295
42,240
$ 61,055
Ending Inventory
285 @ $56
200 @ 57
230 @ 58
345 @ 59
1,060 units
6-44
$ 15,960
11,400
13,340
20,355
$ 61,055
= $61,055

3b. LIFO perpetual
Date
Goods Purchased
Cost of Goods Sold
1/1
1/10
2/13
450 @ $56 = $25,200
200 @ $57 = $11,400
2/15
7/21
8/5
200 @ $57
230 @ $56 = $24,280
230 @ $58 = $13,340
345 @ $59 = $20,355
8/10
335 @ $59 = $19,765
______
$44,045
Alternate LIFO solution format

Cost of goods available for sale ...........................
200 @ $57 ...............................................................
$11,400
230 @ 56 ...............................................................
12,880
335 @ 59 ...............................................................
19,765
765
Cost of Goods Sold ................................................
Ending Inventory ......................................................
Inventory Balance
600 @ $55
= $33,000
600 @ $55
450 @ $56
= $58,200
600 @ $55
450 @ $56
200 @ $57
= $69,600
600 @ $55
220 @ $56
= $45,320
600 @ $55
220 @ $56
230 @ $58
= $58,660
600 @ $55
220 @ $56
230 @ $58
345 @ $59
= $79,015
600 @ $55
220 @ $56
230 @ $58
10 @ $59
= $59,250
$103,295
44,045
$ 59,250

600 @ $55
220 @ 56
230 @ 58
10 @ 59
Ending inventory ......................................................
1,060 units
6-45
$ 33,000
12,320
13,340
590
$ 59,250

3c. Specific Identification
600 @ $55 ............................................
$33,000
165 @ $57 ............................................
9,405
765 .......................................................
Cost of Goods Sold .............................
Ending inventory .................................
$103,295
42,405
$ 60,890

450 @ $56
35 @ 57
230 @ 58
345 @ 59
Ending inventory .................. 1,060 Units
$25,200
1,995
13,340
20,355
$60,890
3d. Weighted Average

Date
Goods Purchased
Cost of Goods Sold
1/1
1/10
450 @ $56 = $25,200
Inventory Balance
600 @ $55.00
= $33,000
600 @ $55.00
450 @ $56.00
= $58,200
2/13
200 @ $57 = $11,400
600 @ $55.00
450 @ $56.00
200 @ $57.00
= $69,600
2/15
7/21
430@ $55.68 = $23,942**

230 @ $58 = $13,340
820 @ $55.68
= $45,658**
820 @ $55.68
230 @ $58.00
= $58,998**
8/5
345 @ $59 = $20,355
820 @ $55.68
230 @ $58.00
345 @ $59.00
= $79,353**
8/10
335@ $56.88 = $19,055**

$42,997
1,060@ $56.88
= $60,293**
* rounded to nearest cent

** rounded to nearest dollar
Note: Total cost of goods sold plus ending inventory = $42,997 + $60,293 = $103,290. The
$5 difference from the cost of goods available for sale of $103,295 is due to rounding.
6-46
Problem 6-2B (Concluded)

4.
Specific
Identification
Weighted
Average
$68,850
$68,850
44,045
42,405
42,997
Gross profit ..................................$26,610 $24,805
$26,445
$25,853
FIFO
LIFO
Sales (765 x $90) ..........................$68,850 $68,850

Less: Cost of goods sold ............ 42,240
5. The manager of Venus Company likely will prefer the FIFO method
because it would yield the largest gross profit. This would give the
manager his/her highest bonus based on gross profit.
6-47
Inventory Items
Office furniture
Desks ....................
Total
Cost
Per Unit
Units Cost Market
436 $261
Total
Market
$305 $113,796 $132,980
LCM Applied
to Items
$113,796
Credenzas ............
295
227
256
66,965
75,520
66,965
Chairs....................
587
49
43
28,763
25,241
25,241
Bookshelves ........
321
93
82
29,853
26,322
26,322
Two-drawer ..........
214
81
70
17,334
14,980
14,980
Four-drawer .........
398
135
122
53,730
48,556
48,556
Lateral ...................
175
104
118
18,200
20,650
18,200
Fax machines ......
430
168
200
72,240
86,000
72,240
Copiers .................
545
317
288 172,765
156,960
156,960
Telephones ..........
352
125
117
41,184
41,184
Filing cabinets
Office equipment
Total .........................
44,000
$617,646
$584,444
1. Lower of cost or market for inventory applied separately = $584,444

2.
Dec 31 Cost of Goods Sold .....................................................33,202
Merchandise Inventory .........................................
To adjust inventory cost to market.
$33,202 = $617,646 - $584,444
6-48
33,202

Part 1
(a)
Cost of goods sold
Reported ...................................
Adjustments: 12/31/2010 error
12/31/2011 error
Corrected ..................................
(b)
Net income
Reported ...................................
12/31/2011 error
Corrected ..................................
(c)
Total current assets
Reported ...................................
12/31/2011 error
Corrected ..................................
2010
$ 655,000
+ 70,000
_________
$ 725,000
2011
$ 957,000
- 70,000
- 55,000
$ 832,000
2012
$ 799,000
2010
$ 225,000
- 70,000
_________
$ 155,000
2011
$ 277,000
+ 70,000
+ 55,000
$ 402,000
2012
$ 244,000
2010
$1,251,000
- 70,000
_________
$1,181,000
2011
$1,360,000
2012
$1,200,000
+ 55,000
$1,415,000
_________
$1,200,000
2011
$1,520,000
2012
$1,250,000
+ 55,000
$1,575,000
_________
$1,250,000
(d)
Equity
2010
Reported ........................................... $1,387,000
- 70,000
12/31/2011 error
_________
Corrected .......................................... $1,317,000
+ 55,000
$ 854,000
- 55,000
$ 189,000
Part 2
Total net income for the combined three-year period ($746,000) is not affected by
the errors. This is because these errors are "self-correcting"that is, each
overstatement (or understatement) of net income is offset by a matching
understatement (or overstatement) in the following year.
Part 3
The overstatement of inventory by $70,000 results in an understatement of cost of
goods sold by that same amount. The $70,000 understatement of cost of goods
sold results in an overstatement of gross profit by the same amount. This
overstatement of gross profit carries through to an overstatement of net income.
Since the overstated net income is closed to equity, the final equity figure is
overstated by the amount of the inventory overstatement.
6-49
Problem 6-5BA (25 minutes)

Part 1
Number and total cost of units available for sale
6,300 units in beginning inventory @ $35 .............................
10,500 units purchased @ $33 .................................................
13,000 units purchased @ $32 .................................................
12,000 units purchased @ $29 .................................................
15,500 units purchased @ $26 .................................................
57,300 units available for sale ..................................................
$ 220,500
346,500
416,000
348,000
403,000
$1,734,000
0
Part 2
a. FIFO periodic
Total cost of 57,300 units available for sale.............
Less ending inventory on a FIFO basis
15,500 units @ $26................................................... $403,000
1,000 units @ $29................................................... 29,000
Cost of units sold .......................................................
$1,734,000
432,000
$1,302,000
b. LIFO periodic
Less ending inventory on a LIFO basis
6,300 beg. inv. units @ $35 ..................................... $220,500
10,200 units @ $33..................................................... 336,600
$1,734,000
557,100
$1,176,900
c. Weighted average periodic

Less ending inventory at weighted average cost
($1,734,000/57,300) x 16,500 units..........................
*Amount can slightly vary due to differences in rounding.
6-50
$1,734,000
499,319*
$1,234,681*
Problem 6-6BA (30 minutes)

Part 1
RIKKERS CORP.
Income Statements Comparing FIFO, LIFO, and Weighted Average
For Year Ended December 31, 2011
FIFO
Sales .............................................................. $245,000

Cost of goods sold
Inventory, Dec. 31, 2010 .............................
42,920
LIFO
Weighted
Average
$245,000
$245,000
42,920
42,920
Cost of purchases.......................................
161,900
161,900
161,900
Cost of goods available for sale ................

Inventory, Dec. 31, 2011 .............................
204,820
54,560
204,820
48,820
204,820
51,512 *
Cost of goods sold .....................................
150,260
156,000
153,308 *
Gross profit ...................................................
94,740
89,000
91,692 *
Expenses .......................................................
Income before taxes .....................................
35,000
59,740
35,000
54,000
35,000
56,692 *
Income taxes expense .................................
14,935
13,500
14,173 *
Net income .................................................... $ 44,805
$ 40,500
$ 42,519 *
Supporting calculations:
Dec. 31, 2010, inventory (740 x $58) ..................
Purchases
700 x $59 = $41,300
600 x $61 = 36,600
500 x $64 = 32,000
800 x $65 = 52,000
Dec. 31, 2011, inventory
FIFO:
800 x $65 = $52,000
40 x $64 =
2,560
LIFO:
W.A.:
FIFO
$ 42,920
LIFO
$ 42,920
Weighted
Average
$ 42,920
$161,900
$161,900
$161,900
$ 54,560
740 x $58 = $42,920

100 x $59 =
5,900
$ 48,820
($204,820/3,340) x 840
$ 51,512*
6-51
Problem 6-6BA (Concluded)

Part 2
If Rikkers Corp. had been experiencing decreasing costs in the acquisition
of inventory, we would observe the opposite results in our comparisons.
Specifically, LIFO would have resulted in a higher ending inventory, lower
cost of goods sold, higher gross profit, and higher net income. FIFO would
have resulted in a lower ending inventory, higher cost of goods sold, lower
gross profit, and lower net income.
Part 3
Advantages:
LIFO: Assuming a trend of increasing costs, the advantage of using LIFO is
that the lower net income will result in a lower tax obligation (tax deferral).
Also, LIFO is likely to better match current costs against revenues.
FIFO: The advantage of using FIFO is that the inventory figure reported on
the balance sheet is likely similar to the current replacement cost.
Disadvantages:
LIFO: Assuming a trend of increasing costs, the disadvantage of using
LIFO is the inventory figure, which is also reported on the income
statement, will likely be understated in comparison to the current
replacement costs.
FIFO: The disadvantage of using FIFO is that it will produce a greater tax
obligation for the current period as a result of a higher reported net
income.
6-52
Problem 6-7BB (25 minutes)

Part 1
SATURN CO.
Estimated Inventory
December 31
Goods available for sale:
Beginning inventory ..............................................
Cost of goods purchased ......................................
Goods available for sale ........................................
At Cost
At Retail
$ 81,670
492,250
$573,920
$114,610
751,730
$866,340
Sales ..........................................................................
Less: Sales returns ..................................................
Net sales ...................................................................
786,120
(4,480)
781,640
Ending inventory at retail ($866,340 - $781,640) ...
$ 84,700
Cost ratio: $573,920/$866,340 = 0.66 or 66%

Ending inventory at cost ($84,700 x 66%) .....................
$ 55,902
Part 2
Estimated physical inventory at cost: $78,550 x 66% = $51,843
SATURN CO.
Inventory Shortage
December 31
At Cost
At Retail
Estimated inventory (from part 1) ............................
$55,902
$84,700
Physical inventory (given) ........................................
51,843
78,550
Inventory shortage ....................................................
$ 4,059
$ 6,150
6-53
Problem 6-8BB (25 minutes)

ERNST EQUIPMENT CO.
Estimated Inventory at March 31
At Cost
Inventory, January 1 .......................................
Cost of goods purchased ...............................
Goods available for sale .................................
Sales .................................................................
Less sales returns ..........................................
Net sales ..........................................................
[$3,636,050 x (1 - 30%)] ..............................
Estimated March 31 inventory ..........................
SERIAL PROBLEM
At Retail
$ 752,880
2,159,630
2,912,510
$3,710,250
(74,200)
$3,636,050
(2,545,235)
$ 367,275
SP 6
Serial Problem SP 6, Business Solutions (20 minutes)

Part A
1.
Inventory Items
Units
Office productivity ...........
3
Desktop publishing..........
2
Accounting .......................
3
Totals ................................
Per Unit
Cost Market
$ 76
$ 74
103
100
90
96
Total
Cost
$228
206
270
$704
Total
Market
$222
200
288
$710
Assuming LCM is applied to the whole of inventory, the $704 total cost
of inventory is less than the $710 total market value. Thus, the company
would not adjust the currently reported inventory value of $704.
6-54
Serial Problem SP 6, Business Solutions (concluded)

2.
Inventory Items
Units
Office productivity........ 3
Desktop publishing ...... 2
Accounting .................... 3
Per Unit
Cost Market
$ 76
$ 74
103
100
90
96
Total
Cost
$228
206
270
$704
Total LCM Applied

Market
To Items
$222
$222
200
200
288
270
$710
$692
Assuming LCM is applied to the items of inventory, the $692 market

value (per items) is less than the $704 total cost of inventory. Thus, the
company must adjust the currently reported inventory value from $704 to
the LCM value of $692.
Part B
1. Ratio computations for the three months ended March 31, 2012:
Inventory Turnover
= Cost of Goods Sold / Average Inventory

= $14,052 / [($0 + $704)/2]
= 40 times (Because this is the first period of carrying
inventory, it is acceptable to substitute ending inventory for
average inventory. This would yield a turnover of 20 times.)
Days Sales in Inventory = (Ending Inventory/Cost of Goods Sold) x 365

= ($704 / $14,052) x 365 = 18.3 days
2. Business Solutions outperforms its competitors on both ratios. Its
inventory turnover is 40 (or 20) times versus the competitors 15 times.
Also, its days sales in inventory is 18.3 days versus the competitors 25
days. Thus, Business Solutions appears to be successfully managing its
inventory.
6-55
Reporting in Action BTN
6-1
($ thousands for all parts)
1. Ending inventories at February 27, 2010: $621,611.

Ending inventories at February 28, 2009: $682,400.
2. February 27, 2010:
$621,611/$10,204,409 = 0.061 or 6.1%
February 28, 2009:
$682,400/ $ 8,101,372 = 0.084 or 8.4%
3. Research In Motions inventories are less than a fourth of its largest

asset and more than 4 times its smallest asset as of February 27, 2010.
Although not the largest asset, merchandise inventories are an
important item for Research In Motion and should command
managements attention.
4. Reviewing notes to its financial statements, we see Note 1 under the
subheading inventories that Research In Motions raw materials are
stated at the lower of cost and replacement cost. Work in process and
finished goods inventories are stated at the lower of cost and net
realizable value. Research In Motion uses the first-in-first-out basis to
determine cost.
5. a. Inventory turnover =
Cost of sales
Average inventory
Average inventory = ($621,611 + $682,400)/2

= $652,006
Inventory turnover = $8,368,958 / $652,006
= 12.8 times
b. Days sales in inventory =
Ending inventory
Cost of sales
x 365
= ($621,611/$8,368,958) x 365 = 27.1 days

6. Solution depends on the financial statement information obtained.
6-56
Comparative Analysis
BTN 6-2
($ millions)
1. Inventory turnover =
Cost of sales
Average inventory
Research In Motion current year

Inventory turnover =
$8,369
($622 + $682)/2
Research In Motion one year prior

$5,968
($682 + $396)/2
= 12.8 times
= 11.1 times
Apple current year

$25,683
($455 + $509)/2
= 53.3 times
$24,294
($509 + $346)/2
= 56.8 times
Apple one year prior

6-57
Comparative Analysis (Concluded)

2. Days sales in inventory =
Ending Inventory x 365

Costs of Goods Sold
Current year Research In Motions days sales in inventory

$622
$8,369 x 365
= 27.1 days
One year prior Research In Motions days sales in inventory

$682
x 365
$5,968
= 41.7 days
Two years priorResearch In Motions days sales in inventory

$396
$2,929 x 365
= 49.3 days
Current year Apples days sales in inventory

$455
$25,683
x 365
= 6.5 days
One year prior Apples days sales in inventory

$ 509
$24,294
x 365
= 7.6 days
Two years priorApples days sales in inventory

$346
$16,426
x 365
= 7.7 days
3. For all years examined here, Apple manages its inventory more
efficiently than does Research In Motion. Apples inventory turnover is
higher, and its days sales in inventory is shorter. Apple compares
favorably to (exceeds) the industry average of 10 for inventory
turnover; Research In Motions inventory turnover slightly exceeds the
industry average.
6-58
Ethics Challenge
BTN 6-3
1. Profit Margin: In an economic environment of rising costs, the use of

FIFO results in a lower cost of goods sold than LIFO. If cost of goods
sold is lower, then net income will be higher. A higher net income will
improve the profit margin ratio, which is calculated as net income
divided by net sales.
Current Ratio: With rising costs, FIFO results in the most recent, higher
costs being reflected in ending inventory. This means that the balance
sheet FIFO inventory figure will be larger than under LIFO. In the
numerator of the current ratio, inventory is included as part of the
current asset total. A larger inventory from FIFO results in a larger
numerator and, therefore, a larger current ratio than under LIFO.
2. First, it is true that managers have discretion in choosing an inventory
costing method. It appears, however, that Golf Marts owner does not
understand that changing methods can only be done very selectively
over time. A change in method must be justified by management for
improving the financial reporting of the company.
Second, the consistency concept does not allow frequent changes in
inventory costing methods by management. If Golf Marts owner can
justify the method change as improving the financial reports of the
company, then the owners action is ethical. However, the owner must
realize that changing methods can only be an infrequent occurrence
given that consistency in financial reporting is required.
Third, the full disclosure principle requires the owner to disclose to the
bank that the company has implemented a change in inventory costing
method from LIFO to FIFO.
Finally, if LIFO is currently being used for tax reporting, then the tax
reporting method must also change due to the LIFO Conformity Rule
which demands that if LIFO is used for tax reporting, it must be used
for financial reporting.
6-59
Communicating in Practice
BTN 6-4
[Note: An acceptable memorandum format should be used.]
The body of the memo would likely recommend use of the LIFO method for
this start-up business. The memo should explain that this would allow for
the matching of the most recent (higher) costs against revenue through
cost of goods sold. It should further explain that this would result in a
lower net income (and taxable income) and, therefore, lower tax (cash)
payments. The justification for this method is a better matching of current
costs against revenue to more fairly reflect the results of operation. A
statement could be made that the actual physical flow of goods does not
dictate the inventory method a business uses.
Taking It to the Net
BTN 6-5
1. Polaris manufactures off-road vehicles such as all terrain vehicles

(ATV) and snowmobiles, and on-road vehicles such as motorcycles.
2. Its summary of significant accounting policies (Note 1) reports:
Inventories are stated at the lower of cost (first-in, first-out method) or
market.
3. Its gross margin for 2009 is ($ thousands)
Sales .....................................................................
Cost of sales ........................................................
Gross margin .......................................................
$1,565,887
(1,172,668)
$ 393,219
Gross margin ratio is: $393,219 / $1,565,887 = 0.251 or 25.1%

Comment: Its gross margin ratio is slightly lower (less favorable) than
the industry average gross margin ratio of 27%.
4. 2009 Inventory turnover*
$1,172,668 / [($179,315 + $222,312)/2]
2009 Days sales in inventory*
($179,315 / $1,172,668) x 365
=
= 5.8 times
=
= 56 days
* $ thousands
Comment: Its inventory turnover is lower (less favorable) than the

industry average turnover of 5.9. Similarly, its days sales in inventory
is greater (less favorable) than the industry norm of 55 days.
6-60
Teamwork in Action
BTN 6-6
Concepts and procedures to illustrate in expert presentation:

Specific Identification Expert:
(a) and (b) Concept:
Purchases are always recorded at the actual specific costs. The specific
identification cost flow assumption requires units sold be assigned their
actual cost. Total cost of goods sold is tallied based on these individual
cost assignments. The new inventory balance is perpetually determined to
be the amount after sales at actual cost is deducted.
(a) and (b) Procedures:
Date
Goods Purchased
Cost of Goods Sold
Jan. 1
50 @ $10 = $ 500
Jan.10
Jan.14
Inventory Balance
30 @ $10 = $ 300
150 @ $12 = $1,800
Feb.15
20 @ $10 = $ 200
20 @ $10 = $ 200
150 @ $12 =
1,800
$2,000
100 @ $ 12 = $1,200
20 @ $10 = $ 200
50 @ $12 =
600
$ 800
Apr.30
200 @ $15 = $3,000
20 @ $10 = $ 200
50 @ $12 =
600
200 @ $15 =
3,000
$3,800
Sept 26
300 @ $20 = $6,000
20
50
200
300
@
@
@
@
$10
$12
$15
$20
= $ 200
=
600
=
3,000
=
6,000
$9,800
20
50
100
50
@
@
@
@
$10
$12
$15
$20
= $ 200
=
600
=
1,500
=
1,000
Oct. 5
100 @ $ 15 = $1,500
250 @ $ 20 = $5,000
_____
$8,000
6-61
$3,300
Teamwork in Action (Continued)

LIFO Expert:
Purchases are always recorded at actual costs. The LIFO cost flow
assumption requires (i) units sold be assigned the most recent costtotal
cost of goods sold is tallied based on these individual cost assignments,
and (ii) that the inventory balance be perpetually determined to be the
amount after goods sold (using the most recent costs) are deducted.
Date
Goods Purchased
Cost of Goods Sold
Jan. 1
Jan.10
Jan.14
30 @ $10 = $
300
150 @ $12 = $1,800
Feb.15
100 @ $12 = $ 1,200
Inventory Balance
50 @ $10 =
500
20 @ $10 =
200
20 @ $10 =
150 @ $12 =
20 @ $10 =
50 @ $12 =
200
1,800
$ 2,000
$
Apr.30
200 @ $15 =$3,000
20 @ $10 =
50 @ $12 =
200 @ $15 =
Sept 26
300 @ $20 = $6,000
20
50
200
300
=
=
=
=
20 @ $10 =
50 @ $12 =
150 @ $15 =
Oct. 5
300 @ $20 = $ 6,000

50 @ $15 = $ 750
______
$ 8,250
6-62
@
@
@
@
$10
$12
$15
$20
200
600
800
200
600
3,000
$ 3,800
200
600
3,000
6,000
$ 9,800
200
600
2,250
$ 3,050

FIFO Expert:
Purchases are always recorded at actual costs. The FIFO cost flow
assumption requires units sold be assigned the first (earliest) cost of
purchases. Total cost of goods sold is tallied based on these individual
cost assignments. The inventory balance is perpetually determined to be
the amount after deducting goods sold using the earliest costs.
Date
Goods Purchased
Cost of Goods Sold
Inventory Balance
Jan. 1
Jan.10
Jan.14
30 @ $10 = $
300
150 @ $12 = $1,800
Feb.15
50 @ $10 = $
500
20 @ $10 = $
200
20 @ $10 = $ 200
150 @ $12 = 1,800
$ 2,000
20 @ $ 10 = $
80 @ $ 12 =
200
960
70 @ $12 = $
840
Apr.30
200 @ $15 = $3,000
70 @ $12 = $ 840
200 @ $15 = 3,000
$ 3,840
Sept 26
300 @ $20 = $6,000
70 @ $12 = $ 840
200 @ $15 = 3,000
300 @ $20 = 6,000
$ 9,840
Oct. 5
70 @ $12 = $ 840
200 @ 15 = 3,000
80 @ 20 = 1,600
______
$ 6,900
6-63
220 @ $20 = $ 4,400

______
$ 4,400

Weighted Average Expert:
Purchases are always recorded at actual costs. The Weighted Average
cost flow assumption requires units sold be assigned a cost based on
running weighted average cost per unit in the inventory balance. This
requires the computation of a new weighted average cost per unit after
each purchase. The total cost of goods sold is tallied based on cost
assignments. The new inventory balance is perpetually determined to be
the residual amount after goods sold are deducted using this weighted
average cost.
Date
Goods Purchased
Cost of Goods Sold
Jan. 1
Jan.10
Jan.14
30 @ $10
= $ 300
150 @ $12 = $1,800
Inventory Balance
50 @ $10
= $ 500
20 @ $10
= $ 200
170 @ $11.7647 = $2,000

(200+1,800) / (20+150)
Feb.15
Apr.30
100 @ $11.7647 = $1,176*

200 @ $15 = $3,000
70 @ $11.7647 = $ 824*
270 @ $14.163* = $3,824*
(824+3,000) / (70+200)
Sept 26
300 @ $20 = $6,000
570 @ $17.235* = $9,824*

(3,824+6,000)/(270+300)
Oct. 5
350 @ $17.235 = $6,032

_____
$7,508
* rounded
** adjusted for rounding
6-64
220 @ $17.235* = $3,792**
Teamwork in Action (Concluded)

(c) Cost Flow versus Actual Physical Flow
Typical comments experts may express in response to (c):
Physical flow of goods can be affected by the type of products in

inventory and/or the way inventory is stored and/or displayed.
Actual physical flow of goods is not relevant in selecting an acceptable

method of accounting for inventory. Any one of the four methods is
acceptable. The method chosen should be consistently applied.
More Specific Expert Comments to (c):
Specific Identification--Always reflects the actual cost flow. Electronic
scanning has increased the ability to use this method in businesses that sell
homogeneous goods.
FIFO--Most businesses try to move their older or earlier acquired inventory
first, particularly if they sell perishable goods. Therefore, FIFO will frequently
reflect the physical flow of goods.
LIFO--Few actually sell their most recently acquired inventory first. This
could follow actual physical flow if inventory is stocked in a manner that
requires accessing most recent cost first.
Weighted Average--This cost is rarely the actual cost flow. This would
require the mixing or combining of units on hand. This is possible for
inventory such as oil but it still unlikely that the actual blending would be as
complete as the averaging of costs.
(d) Impact of Methods
Typical comments experts may express in response to (d):
In a period of rising prices LIFO will generally result in the highest cost of
goods sold and therefore the lowest net income and lowest tax. However,
LIFO must be used for financial reporting if it is used for tax purposes.
In a period of rising prices FIFO will generally result in the lowest cost of
goods sold and therefore the highest net income and highest tax.
Weighted Average will usually result in a reported net income and tax
consequences somewhere in between LIFO and FIFO.
Specific Identification will result in a cost of goods sold, net income and tax
expense dependent on whether the actual cost of units sold were the higher
or lower priced items.
(e) Valuation
Typical comments experts may express in response to (e):
FIFO tends to value ending inventory closest to replacement cost whereas
LIFO does not. Weighted average tends to value inventory between old and
new market values, and specific identification depends on whether the items
remaining in inventory have costs similar to current replacement costs.
6-65
Entrepreneurial Decision
BTN 6-7
Part 1
(a) Current inventory turnover
Current days sales in inventory
(b) Proposed inventory turnover
= $1,200,000 / $300,000 = 4 times

= ($300,000/$1,200,000) x 365
= 91.25 days
= $1,200,000 / $150,000 = 8 times
Proposed days sales in inventory = ($150,000 / $1,200,000) x 365

= 45.63 days
*Ratio definitions:
Cost of goods sold

Average inventory
Days sales in inventory =
Ending inventory
Cost of goods sold x 365
Part 2
The owners proposal for his company would yield a much improved
inventory turnover of 8 vis--vis the current turnover of 4. On the
downside, its days sales in inventory would dramatically decline from
91 days to 46 days. Assuming an inventory buffer of 46 days is
sufficient, then the proposal should be implemented.
We need to recognize that the major concern with this proposal is with
the companys confidence in both maintaining its current sales level and
with not losing or alienating its current and future customers due to
delays in acquiring merchandise. Assuming the companys predictions
are reasonable, we need to focus on the customer concern. That is, we
need to be certain that the company can continue to satisfactorily serve
customers with a 46-day buffer in inventory. If not, then current and
future sales could suffer to an extent that would outweigh the benefit of
slashing inventory.
Hitting the Road
BTN 6-8
There is no formal solution for this field activity. The required solution
does allow students to see the relevance of studying merchandise
activities and inventory accounting.
6-66
Global Decision
1. Inventory turnover =
BTN 6-9
Cost of sales
Average inventory
Current year Nokia (EUR Millions):

27,720
(1,865 + 2,533) / 2
= 12.6 times
One year prior Nokia (EUR Millions):

33,337
(2,533 + 2,876) / 2
Days sales in inventory =
= 12.3 times
Ending Inventory x 365

Costs of Goods Sold
Current year Nokia days sales in inventory (EUR Millions):

1,865
27,720
x 365
= 24.6 days
One year priorNokia days sales in inventory (EUR Millions):

2,533
33,337
Company
x 365
= 27.7 days
Inventory Turnover
Current Prior Year
Days Sales in Inventory

Current
Prior Year
Nokia ..................................................
12.6
12.3
24.6
27.7
Research In Motion ............................

12.8
11.1
27.1
41.7
Apple ......................................................
53.3
56.8
6.5
7.6
Note: Computations for Research In Motion and Apple are in BTN 6-2.
2. For the current year, Nokia and Research In Motion have fairly
comparable inventory turnover and days sales in inventory. For the
prior year, Nokia outperformed Research In Motion in both inventory
turnover and days sales in inventory. Apple manages its inventory
more efficiently than both Nokia and Research In Motion for both years.
6-67

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Chapter 06 - Inventories and Cost of Sales

Merchandise inventory is disclosed on the balance sheet as a current asset. It is

Many people make important business decisions based on period-to-period

Chapter 06 - Inventories and Cost of Sales

Chapter 06 - Inventories and Cost of Sales

Alternate solution format

Cost of Goods Sold

320 @ $6.00 = $1,920

Ending inventory cost

Chapter 06 - Inventories and Cost of Sales

Quick Study 6-2 (10 minutes)

Cost of Goods Sold

110 @ $6.60 = $ 726

Alternate solution format

Ending inventory cost

Quick Study 6-3 (10 minutes)

Cost of Goods Sold

(avg. cost is $6.084*)

(avg. cost is $6.194*)

360 @ $6.194 = $2,230*

Chapter 06 - Inventories and Cost of Sales

Alternate solution format

Cost of goods available for sale

$3,190/515 = $6.194 (rounded) weighted average cost per unit

$ 960 Ending inventory cost (rounded)

Chapter 06 - Inventories and Cost of Sales

Quick Study 6-4 (10 minutes)

Quick Study 6-5 (10 minutes)

Cost of Goods Sold

Chapter 06 - Inventories and Cost of Sales

Quick Study 6-6 (10 minutes)

Cost of Goods Sold

Chapter 06 - Inventories and Cost of Sales

Quick Study 6-7 (10 minutes)

Cost of Goods Sold

(avg cost is $9.667)

Quick Study 6-8 (10 minutes)

Quick Study 6-9 (10 minutes)

Chapter 06 - Inventories and Cost of Sales

Quick Study 6-10 (10 minutes)

Chapter 06 - Inventories and Cost of Sales

Quick Study 6-11 (5 minutes)

Quick Study 6-12 (20 minutes)

LCM applied to each product ......................................................

Quick Study 6-13 (15 minutes)

Overstates 2011 cost of goods sold.

Chapter 06 - Inventories and Cost of Sales

Quick Study 6-14 (10 minutes)

= Cost of goods sold/Average merchandise inventory

Days sales in inventory = Ending Inventory/Costs of goods sold x 365

Quick Study 6-15A (10 minutes)

Quick Study 6-16A (10 minutes)

Quick Study 6-17A (10 minutes)

Chapter 06 - Inventories and Cost of Sales

Quick Study 6-18A (10 minutes)

Quick Study 6-19A (10 minutes)

Quick Study 6-20A (10 minutes)

Weighted Average ($470 / 45 = $10.444 cost per unit)*

Quick Study 6-21A (10 minutes)

Chapter 06 - Inventories and Cost of Sales

Quick Study 6-22B (15 minutes)

Quick Study 6-23 (10 minutes)