hawai Chapter 6Inventories and Cost of SalesQUICK STUDIESQ uick Study 6-1 (25 minutes)a. FIFODate Goods Purchased Cost of Goods Sold Inventory Balance1/ 1 320 @ $6.00 = $1,9201/ 9 85 @ $6.40 320 @ $6.00= $2,46485 @ $6.401/25 110 @ $6.60 320 @ $6.0085 @ $6.40 = $3,190110 @ $6.601/26 320 @ $6.00 = $1,92045 @ $6.40= $1,01440 @ $6.40 = 256110 @ $6.60360 $2,176b. LIFODate Goods Purchased Cost of Goods Sold Inventory Balance1/ 1 320 @ $6.00 = $1,9201/ 9 85 @ $6.40 320 @ $6.00= $2,46485 @ $6.401/25 110 @ $6.60 320 @ $6.0085 @ $6.40 = $3,190110 @ $6.601/26 110 @ $6.60 = $ 726155 @ $6.00 = $ 93085 @ $6.40 = 544165 @ $6.00 = 990360 $2,260c. Weighted AverageDate Goods Purchased Cost of Goods Sold Inventory Balance1/ 1 320 @ $6.00 = $1,920 1/ 9 85 @ $6.40 320 @ $6.0085 @ $6.40 = $2,464(avg. cost is $6.084*)1/25 110 @ $6.60 320 @ $6.00©McGraw-Hill Companies, 2009 Solutions Manual, Chapter 6 32985 @ $6.40 = $3,190110 @ $6.60(avg. cost is $6.194*)1/26 360 @ $6.194 = $2,230*155 @ $6.194 = $ 960* *roundedAlternate solution format(a) FIFO: 110 @ $6.60 = $ 72645@ $6.40 = 288155 $1,014Ending inventory cost(b) LIFO:155 @ $6.00 = $ 930Ending inventory cost(c) Weighted average:320 @ $6.00 = $1,92085 @ $6.40 = 544110@ $6.60 = 726515 $3,190Cost of goods available for sale$3,190/515 = $6.194 (rounded) weighted average cost per unit155 units @ $6.194 = $ 960 Ending inventory cost (rounded)©McG330Q uick Study 6-2 (10 minutes)Beginning inventory.....................................10 units @ $28 $ 280Plus 1st week purchase.......................................10 units @ $30 3002nd week purchase......................................10 units @ $31 3103rd week purchase.......................................10 units @ $32 3204th week purchase.......................................10 units @ $34 340Units Available for sale................................50 unitsCost of Goods Available for Sale................$1,550Q uick Study 6-3 (25 minutes)a. FIFODate Goods Purchased Cost of Goods Sold Inventory Balance12/ 7 10 @ $ 9 = $ 90 10 @ $ 9 = $ 9012/14 20 @ $10 = $200 10 @ $ 920 @ $10 = $29012/15 10 @ $ 9 12 @ $10 = $1208 @ $10 = $17012/21 15 @ $12 = $180 12 @ $10= $300____ 15 @ $12$170b. LIFODate Goods Purchased Cost of Goods Sold Inventory Balance12/ 7 10 @ $ 9 = $ 90 10 @ $ 9 = $ 9012/14 20 @ $10 = $200 10 @ $ 920 @ $10 = $29012/15 18 @ $10 = $180 10 @ $ 92 @ $10 = $11012/21 15 @ $12 = $180 10 @ $ 92 @ $10 = $290____ 15 @ $12$180©McGraw-Hill Companies, 2009 Solutions Manual, Chapter 6 331c. Weighted AverageDate Goods Purchased Cost of Goods Sold Inventory Balance12/ 7 10 @ $ 9 = $ 90 10 @ $ 9 = $ 9012/14 20 @ $10 = $200 10 @ $ 9= $29020 @ $ 10(avg cost is $9.667)12/15 18 @ $9.667 =$17412 @ $9.667 = $11612/21 15 @ $12 = $180 12 @ $9.667= $296____15 @ $ 12$174(avg cost is $10.963)d. Specific identification(3 units x $9) + (9 units x $10) + (15 units x $12) = $297.Quick Study 6-4 (10 minutes)1. FIFO2. Specific identification3. LIFO4. LIFO5. LIFOQ uick Study 6-5 (10 minutes)1. The consignor is Jabar Company. The consignee is Chi Company. Theconsignor, Jabar Company, should include any unsold and consigned goods in its inventory.2. Title will pass at “destination” which is Kwon Company’s receiving dock.Liu should show the $750 in its inventory at year-end as Liu retains title until the goods reach Kwon Company.©McG332Cost..............................................................................................$17,500PlusTransportation-in (300)Import duties.............................................................................1,000 Insurance.. (250)Inventory cost...........................................................................$19,050The $400 advertising cost and the $3,000 cost for sales staff salaries are included in operating expenses—not part of inventory costs. Those two costs are unnecessary to get the vehicle in a place and condition for sale.Q uick Study 6-7 (20 minutes)Per Unit Total Total LCM applied to Inventory Items Units Cost Market Cost Market Items Whole Mountain bikes 20 $650 $500$13,000$10,000$10,000 Skateboards 22 400 4508,8009,9008,800790 34,000 31,600 31,600_______850Gliders 40$55,800$51,500$50,400$51,500a. LCM for inventory as a whole...................................................$51,500b. LCM applied to each product ..................................................$50,400Q uick Study 6-8(15 minutes)a.Overstates 2009 cost of goods sold.b.Understates 2009 gross profit.c.Understates 2009 net income.d.Overstates 2010 net income.e.The understated 2009 net income and the overstated 2010 net incomecombine to yield a correct total income for the two-year period.f.The 2009 error will not affect years after 2010.©McGraw-Hill Companies, 2009 Solutions Manual, Chapter 6 333Quick Study 6-9A (15 minutes)ofCostEndingSold InventoryGoodsa. FIFO(45 x $6.40) + (110 x $6.60)................................. $1,014(320 x $6.00) + (40 x $6.40)................................. $2,176b. LIFO(155 x $6.00)......................................................... $ 930(110 x $6.60) + (85 x $6.40) + (165 x $6.00)....... $2,260c. Weighted Average ($3,190/ 515 = $6.194* cost per unit)(155 x $6.194)....................................................... $ 960*(360 x $6.194)....................................................... $2,230**rounded©McGraw-Hill Companies, 2009Fundamental Accounting Principles, 19th Edition334EXERCISESExercise 6-1 (30 minutes)a. Specific identificationEnding inventory—100 units from January 30, 80 units from January 20, and45 units from beginning inventoryEnding Cost of Computations Inventory Goods Sold (100 x $5.00) + (80 x $6.00) + (45 x $7.00).......$1,295$2,800 - $1,295..................................................$1,505b. Weighted average perpetualDate Goods Purchased Cost of Goods Sold Inventory Balance1/ 1 140 @ $7.000 = $ 980 1/10 90 @ $ 7.00 = $ 630 50 @ $7.000 = $ 350 1/20 220 @ $6.00 50 @ $7.000= $1,670220 @ $6.000(avg. cost is $6.185)1/25 145 @ $6.185 = $ 897*125 @ $6.185 = $ 773*1/30 100 @ $5.00 _____125 @ $6.185= $1,273$1,527100 @ $5.000(avg. cost is $5.658) *roundedc. FIFO PerpetualDate Goods Purchased Cost of Goods Sold Inventory Balance1/ 1 140 @ $7.00 = $ 980 1/10 90 @ $7.00 = $ 630 50 @ $7.00 = $ 350 1/20 220 @ $6.00 50 @ $7.00220 @ $6.00 = $1,670 1/25 50 @ $7.0095 @ $6.00 = $ 920 125 @ $6.00 = $ 750 1/30 100 @ $5.00 _____ 125 @ $6.00$1,550 100 @ $5.00 = $1,250, 2009335E xercise 6-1 (Continued)d. LIFO PerpetualDate Goods Purchased Cost of Goods Sold Inventory Balance1/ 1 140 @ $7.00 = $ 9801/10 90 @ $7.00 = $ 630 50 @ $7.00 = $ 3501/20 220 @ $6.00 50 @ $7.00220 @ $6.00 = $1,6701/25 145 @ $6.00 = $ 870 50 @ $7.0075 @ $6.00 = $ 8001/30 100 @ $5.00 _____ 50 @ $7.00$1,50075 @ $6.00 = $1,300100 @ $5.00Alternate Solution Format for FIFO and LIFO PerpetualEnding Cost ofComputations Inventory Goods Soldc. FIFO(125 x $6.00) + (100 x $5.00)............................................$1,250(90 x $7.00) + (50 x $7.00) + (95 x $6.00)........................$1,550d. LIFO(50 x $7.00) + (75 x $6.00) + (100 x $5.00)...................... $1,300(90 x $7.00) + (145 x $6.00)............................................. $1.500E xercise 6-2(20 minutes)LIBERTY COMPANYIncome StatementsFor Month Ended January 31Specific Identification WeightedAverage FIFO LIFOSales.................................$3,525 $3,525 $3,525 $3,525 (235 units x $15 price)Cost of goods sold......... 1,505 1,527 1,550 1,500 Gross profit.....................2,020 1,998 1,975 2,025 Expenses......................... 1,250 1,250 1,250 1,250 Income before taxes.......770 748 725 775 Income tax expense (30%).. 231 224* 218* 233* Net income......................$ 539 $ 524 $ 507 $ 542 * Rounded to nearest dollar.©McG336Exercise 6-2 (Concluded)1. LIFO method results in the highest net income of $542.2. Weighted average net income of $524 falls between the FIFO netincome of $507 and the LIFO net income of $542.3. If costs were rising instead of falling, then the FIFO method would yieldthe highest net income.Exercise 6-3 (30 minutes)a. FIFO PerpetualDate Goods Purchased Cost of Goods Sold Inventory Balance1/ 1 126 @ $ 8 = $1,008 1/10 113 @ $ 8 = $ 904 13 @ $ 8 = $ 104 3/14 315 @ $13 = $4,095 13 @ $ 8315 @ $13 = $4,199 3/15 13 @ $ 8 148 @ $13 = $1,924167 @ $13 = $ 2,2757/30 250 @ $18 = $4,500 148 @ $13250 @ $18 = $6,424 10/ 5 148 @ $13230 @ $18 = $ 6,064 20 @ $18 = $ 360 10/26 50 @ $23 = $1,150 20 @ $18______ 50 @ $23 = $1,510$9,243, 2009337E xercise 6-3 (Concluded)a. LIFO PerpetualDate Goods Purchased Cost of Goods Sold Inventory Balance1/ 1 126 @ $ 8 = $1,0081/10 113 @ $ 8 = $ 904 13 @ $ 8 = $ 1043/14 315 @ $13 = $4,095 13 @ $ 8315 @ $13 = $4,1993/15 13 @ $ 8180 @ $13 = $2,340135 @ $13 = $1,8597/30 250 @ $18 = $4,500 13 @ $ 8135 @ $13 = $6,359250 @ $1810/ 5 250 @ $18 = $4,500 13 @ $ 8128 @ $13 = 1,664 7 @ $13 = $ 195$6,16410/26 50 @ $23 = $1,150 13 @ $ 87 @ $13 = $1,345_____ 50 @ $23$9,408Alternate Solution FormatofCostEndingSold InventoryGoodsa. FIFO(20 x $18) + (50 x $23)...........................................................$1,510(113 x $8) + (13 x $8) + (167 x $13) + (148 x $13) +(230 x $18)............................................................................$9,243b. LIFO(13 x $8) + (7 x $13) + (50 x $23).......................................... $1,345(113 x $8) + (180 x $13) + (250 x $18) + (128 x $13)............. $9,408FIFO Gross MarginSales revenue (671 units sold x $40 selling price).................$26,840Less: FIFO cost of goods sold................................................ 9,243Gross profit................................................................................$17,597LIFO Gross MarginSales revenue (671 units sold x $40 selling price).................$26,840Less: LIFO cost of goods sold................................................ 9,408Gross profit................................................................................$17,432©McG338a. Specific identification method—Cost of goods soldCost of goods available for sale.......................................$10,753 Ending inventory under specific identification3/14 purchase ( 5 @ $13) ........................................$ 657/30 purchase ( 15 @ $18) (270)10/26 purchase ( 50 @ $23)......................................... 1,150Total ending inventory under specific identification.... 1,485 Cost of goods sold under specific identification..........$ 9,268b. Specific identification method—Gross marginSales revenue (671 units sold x $40 selling price)..........$26,840 Less: Specific identification cost of goods sold............ 9,268 Gross profit.........................................................................$17,572E xercise 6-5 (15 minutes)Per Unit Total Total LCM applied to Inventory Items Units Cost Market Cost Market Products Whole Helmets.........19 $45 $49$ 855$ 931$ 855 Bats...............12 73 67876804804 Shoes............33 90 862,9702,8382,838 Uniforms.......37 31 31 1,147 1,147 1,147$5,848$5,720$5,644 $5,720a. Lower of cost or market of inventory as a whole = $5,720b. Lower of cost or market of inventory by product = $5,644©McGraw-Hill Companies, 2009 Solutions Manual, Chapter 6 3391. Correct gross profit = $1,100,000 - $700,000 = $400,000 (for each year)2. Reported income figuresYear 2008 Year 2009 Year 2010 Sales.....................................$1,100,000$1,100,000$1,100,000Cost of goods soldBeginning inventory........$280,000$262,000$280,000Cost of purchases............ 700,000 700,000 700,000Good available for sale...980,000962,000980,000Ending inventory.............. 262,000 280,000 280,000Cost of goods sold.......... 718,000 682,000 700,000Gross profit.........................$ 382,000$ 418,000$ 400,000E xercise 6-7A (20 minutes)CostofEndingGoodsSold Inventorya. Specific Identification(100 x $5.00) + (80 x $6.00) + (45 x $7)........................ $1,295$2,800 - $1,295.............................................................. $1,505b. Weighted Average($2,800 / 460 units = $6.087* average cost per unit)225 x $6.087.................................................................. $1,370*235 x $6.087.................................................................. $1,430*c. FIFO(100 x $5.00) + (125 x $6.00)........................................ $1,250(140 x $7.00) + (95 x $6.00).........................................$1,550©McG340d. LIFO(140 x $7.00) + (85 x $6.00).......................................... $1,490(100 x $5.00) + (135 x $6.00)........................................ $1,310 *roundedExercise 6-8A (20 minutes)Ending InventoryCost of Goods Solda. Specific identification(135 x $2.70) + (135 x $2.60) + (135 x $2.30).......$1,026$8,976 - $1,026.......................................................$7,950 b. Weighted average ($8,976/3,780 = $2.375*)405 x $2.375...........................................................962*$8,976 - $962..........................................................8,014* c. FIFO(390 x $2.70) + (15 x $2.60) ..................................1,092(270 x $1.90) + (540 x $2.05) + (1,350 x $2.30) +(1,215 x $2.60)..................................................7,884 d. LIFO(270 x $1.90) + (135 x $2.05).................................790*(390 x $2.70) + (1,230 x $2.60) + (1,350 x $2.30)+ (405 x $2.05).....................................................8,186* *RoundedIncome effect: FIFO provides the lowest cost of goods sold, thehighest gross profit, and the highest net income.©McGraw-Hill Companies, 2009 Solutions Manual, Chapter 6 341PROBLEM SET AProblem 6-1A (40 minutes)Instructor note: In the first printing, Requirement 3 in the book for specific identification reads “—units sold consist of…,” which should read “—ending inventory consists of…”1. Compute cost of goods available for sale and units available for saleBeginning inventory......................... 770 units @ $50$38,500 Feb. 10............................................... 420 units @ $4117,220 Mar. 13............................................... 260 units @ $256,500 Aug. 21............................................... 180 units @ $498,820 Sept. 5............................................... 585 units @ $42 24,570 Units available................................... 2,215 unitsCost of goods available for sale $95,6102. Units in ending inventoryUnits available (from part 1).............2,2151,420Less: Units sold (770 + 650).............Ending Inventory (units) (795)©McG3423a. FIFO perpetualDate Goods Purchased Cost of Goods Sold Inventory Balance1/ 1 770 @ $50 = $38,5002/10 420 @ $41 = $17,220 770 @ $50420 @ $41 = $55,720 3/13 260 @ $25 = $ 6,500 770 @ $50420 @ $41 = $62,220260 @ $253/15 770 @ $50 = $38,500 420 @ $41260 @ $25 = $23,7208/21 180 @ $49 = $ 8,820 420 @ $41260 @ $25 = $32,540180 @ $499/ 5 585 @ $42 = $24,570 420 @ $41260 @ $25 = $57,110180 @ $49585 @ $429/10 420 @ $41230 @ $25 = $22,970_______ 30 @ $25180 @ $49585 @ $42 = $34,140$61,470FIFO Alternate Solution FormatCost of goods available for sale $95,610 Less: Cost of sales 770 @ $50 $38,500420 @ $41 17,220230 @ $25 5,75061,470 Total cost of goods soldEndingInventory $34,140 Proof of Ending Inventory30 @ $25 180 @ $49 $ 7508,820585 @ $42 24,570EndingInventory............... 795 units $34,140©McGraw-Hill Companies, 2009 Solutions Manual, Chapter 6 3433b. LIFO perpetualDate Goods Purchased Cost of Goods Sold Inventory Balance1/ 1 770 @ $50 = $38,500 2/10 420 @ $41 = $17,220 770 @ $50420 @ $41 = $55,720 3/13 260 @ $25 = $ 6,500 770 @ $50420 @ $41 = $62,220260 @ $253/15 260 @ $25420 @ $41 = $28,22090 @ $50680 @ $50 = $34,0008/21 180 @ $49 = $ 8,820 680 @ $50180 @ $49 = $42,820 9/ 5 585 @ $42 = $24,570 680 @ $50180 @ $49 = $67,390585 @ $429/10 585 @ $4265 @ $49 = $27,755_______680 @ $50115 @ $49 = $39,635$55,975LIFO alternate solution formatCost of goods available for sale $95,610Less: Cost of sales 260 @ $25 $ 6,500420 @ 41 17,22090 @ 50 4,500585 @ 42 24,57065 @ 49 3,18555,975 Cost of Goods SoldEndingInventory $39,635 Proof of Ending Inventory680 @ $50 $34,0005,635115 @ 49EndingInventory………..795 units $39,635©McGraw-Hill Companies, 2009Fundamental Accounting Principles, 19th Edition 3443c. Specific IdentificationCost of goods available for sale...........$95,610Less: Cost of Goods Sold675 @ $50..................................$33,750245 @ $41.................................. 10,045190 @ $25..................................4,750180 @ $49..................................8,820130 @ $42.................................. 5,460Total cost of goods sold........................ 62,825Ending Inventory....................................$32,785Proof of Ending Inventory95 @ $50 $ 4,750175 @ $41 7,17570 @ $25 1,750455 @ $42 19,110Ending Inventory…………. 795 units $32,785, 2009345P roblem 6-1A (Continued)3d. Weighted AverageDate Goods Purchased Cost of Goods Sold Inventory Balance1/ 1 770 @ $50.00 = $38,500 2/10 420 @ $41 = $17,220 770 @ $50.00420 @ $41.00 = $55,720(avg. cost is $46.824*)3/13 260 @ $25 = $ 6,500 770 @ $50.00420 @ $41.00 = $62,220260 @ $25.00(avg. cost is $42.910*)3/15 770 @ $42.910* = $33,041**680 @ $42.910* = $29,179** 8/21 180 @ $49 = $ 8,820 680 @ $42.910*180 @ $49.000 = $37,999(avg. cost is $44.185*)9/ 5 585 @ $42 = $24,570 680 @ $42.910*180 @ $49.000585 @ $42.000 = $62,569(avg. cost is $43.300*)9/10 650 @ $43.300 = $28,145**795 @ $43.300 = $34,424$61,186* rounded to three decimals** rounded to nearest dollar4.FIFO LIFO SpecificIdentifi-cationWeightedAverageSales (1,420 x $75)................$106,500$106,500$106,500 $106,500 Less: Cost of goods sold..... 61,470 55,975 62,825 61,186 Gross profit............................$ 45,030$ 50,525$ 43,675 $ 45,3145. The manager would likely prefer the LIFO method since this method’sgross profit is the largest at $50,525. This would give the manager the highest bonus based on gross profit.©McG346a. Lower of cost or market for the inventory as a whole = $275,948b. Lower of cost or market for the inventory by major category =$95,011 + $148,699 + $27,752 = $271,462 c. Lower of cost or market for inventory applied separately = $264,007, 2009347P art 1(a)Cost of goods sold 2008 2009 2010 Reported......................................$ 623,000$ 955,000 $ 780,000 Adjustments: 12/31/2008 error.....- 56,000+ 56,00012/31/2009 error..... + 25,000 - 25,000 Corrected....................................$ 567,000$1,036,000 $ 755,000 (b)Net income 2008 2009 2010 Reported......................................$ 230,000$ 275,000 $ 250,000 Adjustments: 12/31/2008 error.....+ 56,000- 56,00012/31/2009 error..... - 25,000 + 25,000 Corrected....................................$ 286,000$ 194,000 $ 275,000 (c)Total current assets 2008 2009 2010 Reported......................................$1,247,000$1,360,000 $1,230,000 Adjustments: 12/31/2008 error.....+ 56,00012/31/2009 error..... - 25,000 Corrected....................................$1,303,000$1,335,000 $1,230,000 (d)Equity 2008 2009 2010 Reported......................................$1,387,000$1,580,000 $1,245,000 Adjustments: 12/31/2008 error.....+ 56,00012/31/2009 error....._________ - 25,000 Corrected....................................$1,443,000$1,555,000 $1,245,000 P art 2Total net income for the combined three-year period ($755,000) 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.P art 3The understatement of inventory by $56,000 results in an overstatement of cost of goods sold by that same amount. The $56,000 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.©McG348。