QUESTION CHAPTER 6

1. I agree that effective inventory is the key to successful business operations. Management
tries to maintain sufficient quantities and types of goods to meet expected customer
demand and it also tries to avoid the cost of carrying inventories that are clearly in excess
of anticipated sales.
2. Two characteristics to be classified as inventory by a merchandiser:
• Owned by the company.
• Readiness for sale in the ordinary course of business.
3. Art Mega will need to count each kind of inventory on hand. Art Mega will have to
compare the counted inventory with the store’s record to identify any discrepancies or
errors and, she/he needs to provide the regular reports of inventory.
4. A).
• The goods will be included in Hanson Company’s inventory if the terms of sale
are FOB destination.
• They will be included in Fox Company’s inventory if the terms of sale are FOB
shipping point.
B).
• Hanson Company should include goods shipped to another company on
consignment in its inventory. Goods held by Hanson Company on consignment
should not be included in the inventory.
5. Inventory cost = original price – discount + freight charges
Inventory cost = $3.000 - $30 + $80
= $3.050
The amount paid to negotiate the purchase is a buying cost that normally is not included
in the cost of inventory because of the difficulty of allocating these costs, so Top will
record an inventory cost of $3.050 for the hats this is because the cost of the hats after
discount plus the freight charges have been applied is $3.050.
6. The meaning of FOB shipping point and FOB destination:
• FOB shipping point means that ownership of goods in transit passes to the buyer
when the public carrier accepts the goods from the seller.
• FOB destination means that ownership of goods in transit remains with the seller
until the goods reach the buyer.
7. Actual physical flow may be impractical and inappropriate. Allocating costs based on
physical flow may not be practical because it can be difficult to track the physical flow of
goods, especially if there are multiple shipments involved. This can result in delays in
production or excess inventory storage charges. Additionally, having inaccurate inventory
data may also lead to over-ordering which increases procurement costs. Allocating costs
based on physical flow may not be practical because it can be difficult to track the
physical flow of goods, especially if there are multiple shipments involved. This can
result in delays in production or excess inventory storage charges. Additionally, having
 inaccurate inventory data may also lead to over-ordering which increases procurement
costs.
8. The major advantage of the specific identification method is that it tracks the actual
physical flow of the goods available for sale. The major disadvantage is that management
could manipulate net income and it also can be more time-consuming.
9. The statement "The selection of an inventory cost flow method is a decision made by
accountants" is not entirely correct because selection of an inventory costing method is a
management decision. However, once a method has been chosen, it should be used
consistently from one accounting period to another.
10. (A). FIFO (First in, first out).
(B). Average cost.
(C). FIFO (First in, first out).
11. Steve should know that:
• A departure from the cost basis of accounting for inventories is justified when the
value of the goods is lower than its cost. The write down to net realizable value
should be recognized in the period in which the price decline occurs.
• Net realizable value (NRV) is the estimated selling price of the inventory minus
the estimated costs of completion, disposal, and transportation. NRV is estimated
selling price less estimated costs to complete and to make a sale.
12. Steering Music Center should report the DVD players at $90 each for a total of $450 on
the statement of financial position. This is because the net realizable value of each DVD
player is $90, which is lower than the cost of $100 per unit. Therefore, the lower of cost
or net realizable value basis of accounting for inventories requires that the value of the
inventory be reported at the lower of its cost or net realizable value. A decline in net
realizable value usually leads to a decline in the selling price of the item.
13. Maggie Stores should report the toasters at $28 each for a total of $560. The $28 is the
lower of cost or net realizable value. The reason for using the lower of cost or net
realizable value basis is to ensure that the value of the inventories is not overstated.
14. (A). Cohen Company’s 2013 net income will be understated €7,600.
(B). 2014 net income will be overstated €7,600.
(C). The combined net income for the two years will be correct.
15. The additional disclosures that Reglan’s Company should made:
• The major inventory classifications.
• The basis of accounting (cost or lower of cost or net realizable value).
• The costing method (FIFO or average cost).
16. An inventory turnover that is too high may indicate that the company is losing sales
opportunities because of inventory shortages. It can lead to potential issues such as lost
sales and higher carrying costs if it occurs too rapidly.
17. The average-cost method of inventory costing differs between a perpetual inventory
system and a periodic inventory system in terms of when the cost of goods sold (COGS)
is calculated.
 • In a periodic system, the average is a weighted average based on total goods
available for sale for the period.
• In a perpetual system, the average is a moving average of goods available for sale
after each purchase.
18. Inventories must be estimated when:
• Estimating inventories is also necessary when a physical count is impossible, for
example when inventory is destroyed in a fire or other disasters.
• When management wants monthly or quarterly financial statements, but a
physical inventory is only taken annually.
19. Gross profit method
• The gross profit method uses the average gross profit percentage to calculate the
ending inventory value. The gross profit percentage is calculated by dividing
gross profit by net sales. The rate is often based on last year’s actual rate. The
gross profit rate is applied to net sales in using the gross profit method.
• The retail inventory method uses the cost-to-retail ratio to estimate the ending
inventory value. The cost-to-retail ratio is calculated by dividing the cost of goods
available for sale by the retail value of goods available for sale. The ratio is based
on the current year’s data and is applied to the ending inventory at retail.
20. Data:
• Net sales : $400,000
• Gross profit rate : 40%
• Cost of goods available for sale : $300,000
Gross profit = Net sales - Cost of goods sold
Gross profit rate = Gross profit / Net sales
Cost of goods sold = Net sales - Gross profit
Cost of goods sold = $400,000 – ($400,000 x 40%)
= $240,000
Cost of ending inventory = cost of goods available for sale – cost of goods sold
Cost of ending inventory = $300,000 - $240,000
= $60,000
21. Data:
• Cost = €84,000
• Retail price = €12,000
• Sales = €90,000
The estimated cost of the ending inventory is:
Ending inventory at retail = €120,000 – €90,000
= €30,000
Cost-to-retail ratio = €84,000/€120,000
 =0,7 (70%)
Ending inventory at cost =€30,000 X 70%
= €21,000
22. Barto Company is using the FIFO (First-In, First-Out) method of inventory costing,
where the inventory reported in the statement of financial position is close to the current
cost of the inventory and Phelan Company is using the LIFO (Last-In, First-Out) method.
Barto Company will have the higher gross profit because the cost of goods sold will
include a higher proportion of goods purchased at earlier (lower) costs.
23. I don’t agree with the statement that "when perpetual inventory records are kept, the
results under the FIFO and LIFO methods are the same as they would be in a periodic
inventory system" because the results under the FIFO method are the same but the results
under the LIFO method are different. The reason is that the pool of inventoriable costs
(cost of goods available for sale) is not the same. Under a periodic system, the pool of
costs is the goods available for sale for the entire period, whereas under a perpetual
system, the pool is the goods available for sale up to the date of sale.
24. During times of rising prices, using the LIFO method for costing inventories rather than
FIFO or average-cost will result in lower income taxes because of its ability to account
for inflation. Since LIFO uses the most recent, higher, costs to calculate cost of goods
sold, taxable income is lower, and income taxes are also lower.
 BRIEF EXCERCISE

BE6-1
A. Goods shipped on consignment by Dayne to another company: excluded.
B. Goods in transit from a supplier shipped FOB destination: excluded.
C. Goods sold but being held for customer pickup: included.
D. Goods held on consignment from another company: excluded.

BE6-2
The items that should be included in goods available for sale are:
(a) Freight-In.
(b) Purchase Returns and Allowances.
(c) Purchases.
(e) Purchase Discounts.

BE6-3
Rusch Company made three purchases of merchan-
dise in the following sequence: (1) 300 units at $6, (2) 400 units at $7, and (3) 200
units at
$8. Assuming there are 450 units on hand
A. The ending inventory under FIFO consists of :
Unit Cost Total Cost
purchase 200 $8 $1,600 B20*C20
purchase 250 $7 $1,750 B21*C21
total $3,350
SUM(D20:D21
Average cost
Unit Cost Total Cost
purchase 300 $6 $1,800
purchase 400 $7 $2,800
purchase 200 $8 $1,600 D29/B29= $6.89
total 900 $6,200 end inv $3,100.00 450*$6.89

BE6-4
(a) FIFO would result in the higher net income.
(b) FIFO would result in the higher ending inventory.
(c) Average-cost would result in the lower income tax expense.
(d) Average-cost would result in the more stable income over a number
of years because it averages out any big changes in the cost of inventory.

BE6-5

Net Realizable Lower of cost or net

Inventory categories Cost (£) Value (£) realizable value(£)
Cameras 12,000 12,100 12,000
Camcorders 9,500 9,200 9,200
DVD players 14,000 12,800 12,800
Total valuation 35,500 34,100 34,000
BE6-6
The understatment of ending inventory caused cost of goods sold to be overstated
$5000 and net income to be understated $5000. The correct net income for 2014 is $
95000 ( 90,000=+$5,000).
Total assets in the statement of financial position will be understated by the amount
that ending inventory is understated $5,000.

BE6-7
Inventory turnover= COGS /{(Beg inv+end inv):2}
Inv turnover = $300,000/{($60,000+$40,000):2}
Inv turnover = 6,0

Days in inv: 365/6,0 = 60,8.

BE6-8
(a) FIFO Method product E2-D2
Date units price purchases COGS Total inv
7-May 50 $11 $550 $550
1-Jun 30 $11 $330 $220
28-Jul 30 $13 $390 $610 20*$11 =+ 30*$13
27-Aug 20 $11 $220 $195 15*13
15 $13 $195

(b) Average-cost product E2-D2

Date purchases COGS total inv
7-May $550 $550
(50*$11) (50*$11)
1-Jun $330 $220
(30*$11) (20*11)
28-Jul $390 $610
(30*$13) (50*$12.20)
27-Aug $427 $183
(35*$12.20)
(15*$12.20)

BE6-9
Net sales ¥330,000
Less: Estimated gross profit (40% X ¥330,000) ¥132,000
Estimated cost of goods sold ¥198,000

Cost of goods available for sale ¥230,000

Less: Estimated cost of goods sold ¥198000
Estimated cost of ending inventory ¥ 32,000
BE6-10
At cost At retail
Goods available for sale $35,000 $50,000
Net sales $42,000
Ending inventory at retai $8,000

Cost-to-retail ratio = ($35,000 ÷ $50,000) = 70%

Estimated cost of ending inventory = ($8,000 X 70%) = $5,600

BE6-11
Ending inv under LIFO Method
units price purchases
300 $6 $1,800
150 $7 $1,050
total $2,850

The ending inventory under LIFO consists of 300 units at $6 + 150 units at
$7 for a total allocation of $2,850
 DO IT! REVIEW

DO-IT! 6-1

Inventory cost (physical) $300.000,00

Inventory cost (consigment) -$21.000,00
Inventory purchased $20.000,00 (did not include)
Inventory sold -$17.000,00 (did not include)
Inventory December 31 $279.000,00

DO-IT! 6-2
Unit Cost per Unit
Beginning inventory 3.000,00 $5,00
Purchase 8.000,00 $7,00
Sales 9.400,00 $10,00

a.) FIFO
8.000,00
3.000,00 Connor Electronic shows 1.600,00
9.400,00

Income Statement
Revenue $94.000,00
CGS
Beginning $15.000,00 (3000*5)
Purchase $44.800,00 (9400-3000)*7
Total CGS $59.800,00
Profit $34.200,00

b.) AVERAGE COST

Available for sale 11.000,00 (3000+8000)
Cost of production $71.000,00 (3000*5 + 8000*7)
Average Cost $6,45 (71000/11000)
Total CGS $60.672,73 (9400 * 6,45)

DO-IT! 6-3

a.) Company Value (lower-of-cost)

Small $64.000,00
Medium $260.000,00
Large $149.000,00
Inventory Value $473.000,00
b.) Impact of this error
2.013 Ending Inventory Understated by $28000
Cost of Good Sold Overstated by $28000
Equity Understated by $28000
(impacted by net income, and
understated ending inventory
increased the CGS, reducing
net income and equity

2.014 Ending Inventory No Effect

Cost of Good Sold $28000 Understated
Equity No Effect

DO-IT! 6-4
2.013 2.014
Sales CHF3.120.000,00 CHF3.713.000,00
CGS CHF1.200.000,00 CHF1.425.000,00
Beginning Inv CHF180.000,00 CHF220.000,00
Ending Inv CHF220.000,00 CHF100.000,00

2.013 2.014
Inventory Turn
Over 6 8,9
(CGS) / ((Total 1200000 / 1425000 /
Inv) / 2 ((180000 + ((220000
220000) / 2) +100000) / 2)

Days in 365 / 6 = 60.8 365 / 8,9 = 41

Inventory days days

The just-in-time inventory caused the company to witness a very notable decrease
in its ending inventory. Its inventory turnover ratio and days in inventory both
improved as a result of this decline. This seems to be an advantageous circumstance
for Lousanne Company.
 EXERCISES

E6-1
Ending Inventory by physical
$297.000,00
count
1. No effect $0,00
2. No effect $0,00
3. Put to the inventory $19.000,00
4. Put to the inventory $35.000,00
5. No effect $0,00
Correct Inventory $351.000,00

E6-2
Ending inventory €740.000,00
Take out from inventory:
Superior Corporation holds the
-€250.000,00
goods. Platinum is only acting
as a consignee for them.
No effect: Platinum no
€0,00
received until 3rd January
Take out from inventory:
Office supplies should
-€17.000,00
be carried in a separate
account
Put to inventory: Platinum
owns the goods until they are €33.000,00
shipped
Put to inventory: District Sales
placed an £8,000 order for
goods. Platinum should to
document the equivalent sales
income of £10,000. The
decision by Platinum to ship
additional "unordered"
merchandise does not signify a
sale. Platinum is aware that (80000 - 10000
€62.000,00
this over-shipment is not a - 8000)
valid sale, as evidenced by the
manager's comment that
District could ship the goods
back. By over-shipping, the
manager attempted to increase
Platinum's reported income by
acting unethically.
Take out from inventory: there
were parts that the company
no longer use. Obsolete parts -€48.000,00
should be adjusted from cost
to zero
Correct Inventory €520.000,00

E6-3
Priced sell $150,00
DVD Serial Cost Purchased
#1012 $100,00 June 1
#1045 $90,00 November 1
#1056 $84,00 November 30

a.) FIFO CGS of two DVD

CGS of #1012 and #1045
CGS = 100 + 90 $190,00

CGS of #1012 and #1056

CGS = 100 + 84 $184,00

CGS of #1045 and #1056

CGS = 90 + 84 $174,00

b.) If it wanted to influence earnings in a particular way, it could decide to sell particular units
that were bought at particular prices. The cost of goods sold would be $190 if it decided to sell
the units it had bought at a higher price in order to minimize earnings. The cost of goods sold
would be $174 if it decided to sell the units it had bought at a lower price in order to maximize
earnings.

c.) In my opinion, I recommend to use FIFO method since it minimizes the possibility of
manipulating earnings and generates a more suitable Statement of Financial Position valuation.

E6-4
a.) Fifo and Average Method
FIFO
Date Unit Unit Cost Total Cost
Sept 1 23,00 HK$970,00 HK$22.310,00
Sept 12 45,00 HK$1.020,00 HK$45.900,00
Sept 19 20,00 HK$1.040,00 HK$20.800,00
Sept 26 44,00 HK$1.050,00 HK$46.200,00
Total Unit 132,00 HK$135.210,00
Total Sold 121,00
Ending inv 11,00 HK$11.550,00 (1050*11)
 CGS FIFO HK$123.660,00 (135210-11550)

Average Method
Available for sale 132,00
Cost of production HK$135.210,00 Ending inv HK$11.267,50
Average Cost (135210 / 132) HK$1.024,32 (11 * 1.024,32)
CGS (121 * 1024,32) $123.942,50

b.) Ending Inventory and Cost of goods sold

Ending Inventory FIFO HK$11.550,00
Ending Inventory Average-cost HK$11.267,50 (11 * 1.024,32)

Cost of goods available for sale = Ending Inventory + CGS

FIFO HK$135.210,00 (11550 + 123660)
Average Cost HK$135.210,00 (11267,5 + 123942)

Both approaches result in the same cost of goods available for sale (HK$135,210), when the
ending inventory and cost of goods sold are added together.

E6-5
FIFO
Units Cost Total Cost
Inventory 30,00 $9,00 $270,00
Purchases 25,00 $11,00 $275,00
Purchases 35,00 $12,00 $420,00
Total Unit 90,00 $965,00
Total Sold 68,00
Ending inv 22,00 $264,00 (12 * 22)
CGS FIFO $701,00 (965 - 264)

Average-cost Method
Available for sale 90,00
Cost of production $965,00 Ending inv $235,89
Average Cost (965/90) $10,72 (22 * 729,11)
CGS (68*10,72) $729,11

E6-6
a.) FIFO and
Average-cost
1.) FIFO
Units Cost Total Cost
Inventory 200,00 $5,00 $1.000,00
Purchases 300,00 $6,00 $1.800,00
Purchases 500,00 $7,00 $3.500,00
Total Unit 1.000,00 $6.300,00
Sold 840,00
Ending inv 160,00 $1.120,00 (7 * 160)
CGS FIFO $5.180,00 (6300 - 1120)

2.) Average-cost Method

Available for sale 1.000,00
Cost of production $6.300,00 Ending inv $1.008,00
Average Cost (6300/1000) $6,30 (160 * 6,3)
CGS (840*6,3) $5.292,00

b.) Because of rising costs, the FIFO method will result in higher ending inventory. With this
method, the most recent costs are kept in ending inventory while the earliest costs are allocated to
the cost of goods sold.

c.) The average-cost method will produce the higher cost of goods sold for Eastland Company.
The weighted average of all the inventory the business has acquired over a given period of time is
used to determine the cost of goods sold and its value.

E6-7
a.) FIFO AND
Average cost
1.) FIFO
Units Total Cost Unit Cost
Inventory 100,00 $10.000,00 $100,00
Purchases 200,00 $26.000,00 $130,00
Total Unit 300,00 $36.000,00
Sold 225,00
Ending inv 75,00 $9.750,00 (75*130)
CGS FIFO $26.250,00 (36000-26250)

2.) Average-cost Method

Available for sale 300,00
Cost of production $36.000,00 Ending inv $9.000,00
Average Cost (36000/300) $120,00 (75*120)
CGS (225*120) $27.000,00

b.) Given that earlier lower costs are matched with revenues, using FIFO would increase net
income.
c.) The application of FIFO would cause inventories in the statement of financial position to
approximate current cost.

d.) Givens would pay less in taxes in the first year if average-cost accounting was used, as their
taxable income would be reduced.

E6-8
Item Units Units Cost NRV
Cameras:
Minolta 8,00 ₩170.000 ₩156.000
Canon 6,00 ₩150.000 ₩152.000
Light meters:
Vivitar 12,00 ₩125.000 ₩115.000
Kodak 14,00 ₩115.000 ₩135.000

Lower - of -
Item Total Cost Total NRV Cost - or NRV
Cameras:
Minolta ₩1.360.000 ₩1.248.000 ₩1.248.000
Canon ₩900.000 ₩912.000 ₩900.000
Light meters:
Vivitar ₩1.500.000 ₩1.380.000 ₩1.380.000
Kodak ₩1.610.000 ₩1.890.000 ₩1.610.000
Total
₩5.370.000 ₩5.430.000 ₩5.138.000
Inventory

E6-9

Total Cost Total NRV Lower - of -

Item (units * cost (unit * NRV Cost - or NRV
per unit) per unit)
Cameras $6.800,00 $7.000,00 $6.800,00
DVD players $11.250,00 $10.350,00 $10.350,00
ipods $10.000,00 $9.750,00 $9.750,00
Total
$28.050,00 $27.100,00 $26.900,00
Inventory

E6-10
2.013 2.014
Beginning Inventory €20.000,00 €28.000,00
CGS Purchased €150.000,00 €175.000,00
Cost of Good Sale Available for sale €170.000,00 €203.000,00
Corrected Ending Inventory €28.000,00 €41.000,00
Corrected CGS €142.000,00 €162.000,00

#2013 30000 - 2000 = 28000

#2014 35000 + 6000 = 41000

E6-11
a.) 2.013 2.014
Sales Revenue $210.000,00 $250.000,00
CGS:
Beginning Inventory $32.000,00 $50.000,00
Cost of goods purchased $173.000,00 $202.000,00
Cost of goods available for sale $205.000,00 $252.000,00
Ending Inventory, 2013 = 44000 + 6000 $50.000,00 $52.000,00
CGS $155.000,00 $200.000,00
Gross Profit $55.000,00 $50.000,00

b.) The cumulative effect on total gross profit for the two years is zero
Incorrect gross profit 49000 + 56000 $105.000,00
Correct Gross Profit 55000 + 50000 $105.000,00
Difference $0,00

c.) Dear Mr./Ms President of Horner Watch Company,

Your net income for 2013 was understated by $6,000 as a result of your ending inventory being
understated by $6,000 as of December 31, 2013. The net income for 2014 was overstated by
$6,000.

When using a periodic system, the cost of goods sold is computed by subtracting the cost of
ending inventory from the total cost of the goods that are on hand for sale during the given
period. Consequently, the cost of goods sold will be overstated and net income will be
understated by that amount if the ending inventory figure is understated, as it was in December
2013. As a result, this understated ending inventory figure becomes the beginning inventory
amount for the following period and contributes to the total cost of goods that are offered for sale.
Therefore, the error occurs again in reverse

The 2013 end-of-year statement of financial position has been affected by the error. Since of the
understatement of inventory in the statement of financial position, the total assets are also
understated. The Retained Earnings account balance is understated as a result of the
understatement of the 2013 net income. The overstatement of the 2014 net income and the
accuracy of the inventory at the end of 2014 balance the understatement of the Retained Earnings
account at the end of 2013. As a result, the statement of financial position at the end of 2014 is
accurate.

Thank you for your consideration and the attention. If you have any question regarding this topic,
please contact me at your convenience.
Best Regards,

E6-12
2.012 2.013 2.014
900000 / 1120000 / 1300000 /
Inventory ((100000 + ((330000 + ((400000 +
Turonover 330000) / 2) 400000) / 2) 480000) / 2)
4,19 3,07 2,95
Days in 365 / 4,19 365 / 3,07 365 / 2,95
Inventory 87,1 days 118,9 days 123,7 days
(1200000 - (1600000 - (1900000 -
Gross Profit 900000) / 1120000) / 1300000) /
Rate 1200000 1600000 1900000
0,25 0,30 0,32
The decreased of turonver ratio and the increased days in inventory would be considered negative
because it’s better to have a higher inventory turnover with a correspondingly lower days in
inventory. However, Sepia Photo’s gross profit rate increased from 2012-2014

E6-13
Gouda
a.) Edam Company
Company
192000 / 292000 /
Inventory Turonver = CGS / ((47000 + ((71000 +
((Beginning Inventory + 55000) / 2) 69000) / 2)
Ending Inventory) / 2)
€3,76 €4,17
Days in inventory = 365 / 365 / 3,76 = 97 365 / 4,17 = 88
Inventory Turonver days days

b.) Edam Company, because the inventory turnover is higher

1.) FIFO
Total Cost
Date Explanation Unit Cost per unit (Unit * Cost
per unit)
Jan-01 Inventory 3,00 $600,00 $1.800,00
Jan-10 Purchased 6,00 $648,00 $3.888,00

Jan-8 Sold 2,00 $1.200,00 (2 * 600)

(1 * 600) + (3
Jan-15 Sold 4,00 $2.544,00
* 648)
Total Ending
3,00 $1.944,00
Inventory

2.) Moving Average Cost

Date Purchase CGS Total Inventory
(3*600)
Jan-01
 Jan-01
$1.800,00
(2*600) (1*600)
Jan-08
$1.200,00 $600,00
(6*648) (7*641,14)
Jan-10
$3.888,00 $4.488,00
(4*6441,14) (3*641,14)
Jan-15
$2.565,00 $1.923,00 Ending Inventory
Average Cost = (600 + 38888) / 7 = $641,14

E6-15
a.) FIFO and Moving Average Cost
1.) FIFO
Total Cost
Date Explanation Unit Cost per unit (Unit * Cost
per unit)
June-01 Inventory 200,00 $5,00 $1.000,00
June-12 Purchased 300,00 $6,00 $1.800,00
June-23 Purchased 500,00 $7,00 $3.500,00
Total Unit 1.000,00 $6.300,00
June-15 Sold 400,00 $8,00 $3.200,00
June-27 Sold 440,00 $9,00 $3.960,00
Total Sold 840,00 $7.160,00
Ending
June-30 160,00 $1.120,00 (160*7)
Inventory
Total CGS $5.180,00 (6300 - 1120)

2.) Moving Average Cost

Date Purchase CGS Total Inventory
(200*5)
June-01
$1.000,00
(300*6) (500*5,60)
June-12
$1.800,00 $2.800,00
(400*5,6) (100*5,6)
June-15
2.240,00 $560,00
(500*7) (600*6,767)
June-23
$3.500,00 $4.060,00
(440*6,767) (160*6,767)
June-27 Ending
$2.977,00 $1.083,00
Inventory
CGS $5.217,00 (2240+2977)
b.) Under both the periodic and perpetual inventory systems, FIFO provides the same ending
inventory and cost of goods sold values. Due to the fact that the moving average calculation is
based on distinct cost groups, it provides varying ending inventory and cost of goods sold values.

c.) The simple average would be [($5 + $6 + $7) ÷ 3)] = $6. Nevertheless instead of using a
simple average, the moving-average cost method uses a weighted-average unit cost that varies
with each purchase.

E6-16
a.) Fifo and Moving Average Cost
1.) FIFO
Date Unit Unit Cost Total Cost
Sept 1 23,00 HK$970,00 HK$22.310,00
Sept 12 45,00 HK$1.020,00 HK$45.900,00
Sept 19 20,00 HK$1.040,00 HK$20.800,00
Sept 26 44,00 HK$1.050,00 HK$46.200,00
Total Unit 132,00 HK$135.210,00

Sept 5 12,00 HK$1.990,00 HK$23.880,00

Sept 16 50,00 HK$101.500,00 HK$5.075.000,00
Sept 29 59,00 HK$123.310,00 HK$7.275.290,00
Total Sold 121,00 HK$12.374.170,00
Ending inv 11,00 HK$11.550,00 (1050*11)
CGS FIFO HK$123.660,00 (135210-11550)

2.) Moving-Average Cost

Date Purchase CGS Total Inventory
(23 * 970)
Sept 1
HK$22.310
(12 *970) (11 * 970)
Sept 5
HK$11.640 HK$10.670
(45*1.020) (56*1.010,18) (56570 / 56 = 1010,18)
Sept 12
HK$45.900 HK$56.570
(50*1.010,18) (6*1.010,18)
Sept 16
HK$50.509 HK$ 6.061
(20 *1040) (26*1.033,12) (26861 / 26 = 1033,12)
Sept 19
HK$20.800 HK$26.861 (73061 / 70 = 1043,73)
(44*1050) (70*1.043,73)
Sept 26
HK$46.200 HK$73.061
(59*1.043,73) (11*1.043,73)
Sept 29
HK$61.580 HK$11.481 Ending Inventory
b.) Periodic Perpetual
Ending Inventory FIFO HK$11.550 HK$11.550
Ending Inventory Average HK$11.268 HK$11.481

c.) Fifo gives the same ending inventory value, but average cost give different ending inventory
values

E6-17
a.) Gross Profit Rate of November
November
Cost of Goods Purchased Rs5.000.000,00
Inventory, Beginning of month Rs1.000.000,00
Cost of Goods Available for sale Rs6.000.000,00
Inventory, End of the month Rs1.200.000,00
Cost of Good Sold Rs4.800.000,00
Sales Revenue Rs7.500.000,00
Gross Profit Rs2.700.000,00
Gross Profit Rate 36,00% (2700000/7500000)*%

b.) December
Cost of Goods Purchased Rs6.100.000,00
Inventory, Beginning of month Rs1.200.000,00
Cost of Goods Available for sale Rs7.300.000,00
Inventory, End of the month Rs900.000,00 (7300000-6400000)
Cost of Good Sold Rs6.400.000,00 (10000000-3600000)
Sales Revenue Rs10.000.000,00
Gross Profit Rs3.600.000,00 (36%*10000000)
Gross Profit Rate 36,00%

E6-18
a.)
Net Sales (51000-1000) $50.000,00
Gross profit (40%*50000) $20.000,00
Cost of Good Sold (50000-20000) $30.000,00
Beginning Inventory $20.000,00
Cost of Good Purchased (31200-1800+1200) $30.600,00
Cost of Good Available for sale (20000+30600) $50.600,00
Cost of Good Sold (50000-20000) $30.000,00
Estimated cost Merchandisen lost by fire (50600-30000) $20.600,00

b.)
Net Sales (51000-1000) $50.000,00
Gross profit (32%*50000) $16.000,00
Cost of Good Sold (50000-16000) $34.000,00
Beginning Inventory $30.000,00
Cost of Good Purchased (31200-1800+1200) $30.600,00
Cost of Good Available for sale (30000+30600) $60.600,00
Cost of Good Sold (50000-16000) $34.000,00
Estimated cost Merchandisen lost by fire (50600-30000) $26.600,00

E6-19
Women's shoes Men's shoes
Cost Retail Cost Retail
Beginning Inventory $36.500,00 $46.000,00 $45.000,00 $60.000,00
Cost of Good Purchased $148.000,00 $179.000,00 $136.300,00 $185.000,00
Good Available for sale $184.500,00 $225.000,00 $181.300,00 $245.000,00
Net Sales $178.000,00 $185.000,00
Ending Inventory Retail $47.000,00 $60.000,00
Cost to retail Ratio (184500/178000)% = 82% (181300/60000)% = 74%

E6-20
Units Cost Total Cost
Inventory 200,00 $5,00 $1.000,00
Purchases 300,00 $6,00 $1.800,00
Purchases 500,00 $7,00 $3.500,00
Total Unit 1.000,00 $6.300,00
Sold 840,00 (500+300+40)
Ending inv 160,00 $800,00 (160*5)
CGS LIFO $5.500,00 (6300-800)

E6-21
Units Total Cost Unit Cost
Inventory 100,00 $10.000,00 $100,00
Purchases 200,00 $26.000,00 $130,00
Total Unit 300,00 $36.000,00
Sold 225,00
Ending inv 75,00 $7.500,00 (75*100)
CGS LIFO $28.500,00 (36000-7500)

b.) Given that earlier lower costs are matched with revenues, using FIFO would increase net
income.

c.) The application of FIFO would cause inventories in the statement of financial position to
approximate current cost.
d.) Givens would pay less in taxes in the first year if average-cost accounting was used, as their
taxable income would be reduced.
 PROBLEM SET A
Number 1
Transaction in Lira
(a) The goods should not be included in inventory as they were shipped
FOB shipping point and shipped February 26. Title to the goods
transfers to the customer February 26. Anatolia should have recorded
the transaction in the Sales Revenue and Accounts Receivable
accounts.
(b) The amount should not be included in inventory as they were shipped
FOB destination and not received until March 2. The seller still owns
the inventory. No entry is recorded.
(c) Include $620 in inventory.
(d) Include $400 in inventory.
(e) $750 should be included in inventory as the goods were shipped FOB
shipping point.
(f) The sale will be recorded on March 2. The goods should be included
in inventory at the end of February at their cost of $220.
(g) The damaged goods should not be included in inventory. They should
be recorded in a loss account since they are not saleable.

Number 2
Transaction in dollar
A Cost of Good Available to sale
Date Explanation Units Cost Total cost
23-Mar Beginning inventory
1500 7 10500
5-Mar Purchase 3500 8 28000
13-Mar Purchase 4000 9 36000
21-Mar Purchase 2000 10 20000
26-Mar Purchase 2000 11 22000
Total 13000 45 116500

B FIFO Ending Inventory

Date Units Cost Total Cost
26-Mar 2000 11 22000
21-Mar 1000 10 10000
3000 32000

Cost Of Good Sold

CGS Available to sell 116500
Ending Inventory 0
CGS 116500

Proof of CGS
Date Units Cost Total Cost
1-Mar 1500 7 10500
5-Mar 3500 8 28000
 13-Mar 4000 9 36000
21-Mar 1000 10 10000
Total 10000 84500

Avarge cost Ending Invetory

8.961538
Units Cost Total cost
3000 8.961538 26885

Cost of Good Sold

CGS Availeble 116500
Ending iInventory 26885
Total 89615

C FIFO produces the higher inventory amount $32000

Avarage cost produces the higher CGS $89,615

Number 3
Transaction in euro
A CGS Available to sale
Date Explanation Unit Cost Total cost
1-Jan Beginning Inventory400 8 3200
20-Feb Purchase 300 9 2700
5-May Purchase 500 10 5000
18-Aug Purchase 600 11 6600
8-Dec Purchase 200 12 2400
Total 2000 19900

B FIFO
1 Ending Inventory
Date Units Cost Total Cost
8-Dec 200 12 2400
18-Aug 300 11 3300
500 5700

2 CGS
CGS Available to sell
19900
Ending Inv 5700
CGS sold 14200

Proof of CGS
Date Units Cost Total Cost
1-Jan 400 8 3200
20-Feb 300 9 2700
5-May 500 10 5000
 1-Oct 300 11 3300
Total 1500 14200

Avarage cost Ending Inventory

9.95
Unit Unit Cost Total Cost
500 9.95 4975

C 1. Average-cost results in the lower inventory amount for the

statement of financial position, 4,975.
2. FIFO results in the lower cost of goods sold, 14,200

Number 4
Transaction in dollar
RED ROBIN
Condensed Income Statement
For the Year End December 31, 2024

FIFO LIFO
Sales Revenue 865000 865000
CGS
Beginning inv 22800 22800
CGS Purchased 578500 578500
CGS Available 601300 601300
Ending inv 39750 37575
CGS 561550 563725
Gross Profit 303450 301275
Operating exp 147000 147000
Income before tax 156450 154275
Income tax expense (32%) 50064 49368
Net Income 106386 104907

a 39750 b 2.50542
37575

B (1)The FIFO method produces the more meaningful inventory amount

for the statement of financial position because the units are
costed at the most recent purchase prices.
(2) The FIFO method is most likely to approximate actual physical flow
because the oldest goods are usually sold first to minimize spoilage
and obsolescence.
(3) There will be $696 additional cash available under average-cost
because income taxes are $49,368 under average-cost and
$50,064 under FIFO.
Number 5
Transaction in euro
Cost of Goods Available for Sale
Date ExplanationUnit Cost Total Cost
1-Oct Beginning inv 60 24 1440
9-Oct Purchase 120 26 3120
17-Oct Purchase 70 27 1890
25-Oct Purchase 80 28 2240
Total 330 105 8690

Ending inv in units

Units available to sell 330
Sales (10+65+120) 285
Units remaining in ending inv 45

Sales Renenue
Date Unit Unit Cost Total Sales
11-Oct 100 35 3500
22-Oct 65 40 2600
29-Oct 120 40 4800
285 10900

A
FIFO
Ending inv
Date Unit Unit Cost Total Cost
25-Oct 45 28 1260

Cost of Goods Sold

Available to sell 8690
Ending inventory 1260
7430

Gross Provit
Sales Revenue 10900
CGS 7430
Gross Provit 3470

Gross Profit Rate

Goss Profit 3470
31.83%
Net Sale 10900
 Avarage Cost
Weighed Avarage Cost Per Unit
CGS Available
Unit available Total
8690 330 26.3333

Ending inv
Unit Weight ave cost Total
45 26.3333 1185

Cost of Goods Sold

Available to sell 8690
Ending inv 1185
Total 7505

Gross Profit
Sales Revenue 10900
CGS 7505
Total 3395

Gross Provit Rate

Gross Provit 3395
31.15%
Net Sale 10900

B Average-cost produces the lower ending inventory value, gross profit,

and gross profit rate because its cost of goods sold is higher than
FIFO.

Number 6
Transaction in dollar

A 1.
Cost of Goods sold
Date Unit Unit Cost Total cost
25-Mar 150 310 46500
30 350 10500
23-Mar 170 350 59500
230 380 87400
580 203900

Sales Revenue
Date Unit Unit Cost Total Cost
5-Mar 180 600 108000
400 650 260000
total 580 368000
 Gross Profit
Sales Revenue COGS Total
368000 203900 164100

2. To minimize gross profit, Greco Diamonds should sell the diamonds

with the highest cost.

Cost of Goods Sold

Date Unit Cost Total Cost
5-Mar 180 350 63000
25-Mar 350 380 133000
20 350 7000
30 310 9300
Total 580 212300

Sales Revenue
Date Unit Cost Total
5-Mar 180 600 108000
25-Mar 400 650 260000
Total 580 368000

Gross Profit
Sales Revenue COGS Total
368000 212300 155700

B FIFO
Cost of Goods Sold
Date Explanation
Unit Cost Total Cost
1-Mar Beginning inv 150 310 46500
3-Mar Purchase 200 350 70000
10-Mar Purchase 350 380 133000
Total 700 249500

Unit Cost Total Cost

Goods Available to sell 700
Unit sold 580
Ending inv 120 380 45600
Goods Available to sell 249500
Ending inv 45600
203900

Gross Provit
Sales Revenue
COGS Total
368000 203900 164100
C Ave Cost
COGS Available to sale 249500
Ending inv 42771
Total 206729

Gross Profit
Saels Revenue
COGS Available Total
368000 206729 161271

COGS Total UnitTotal

249500 700 356.429

D The choice of inventory method depends on the company’s objectives.

Since the diamonds are marked and coded, the company could use specific
identification. This could, however, result in “earnings management” by
the company because, as shown, it could carefully choose which diamonds
to sell to result in the maximum or minimum income. Employing a cost
flow assumption, such as Average-cost or FIFO, would reduce recordkeeping
costs. FIFO would result in higher income, but Average-cost
would reduce income taxes.

Number 7
Transaction in euro
A FIFO LIFO
Sales Revenue 665000 665000
COGS
Beginning inv 35000 35000
COGS purchased 501000 501000
COGS Avvailable to sell 536000 536000
Ending inv 131000 123690
Cost of good sold 405000 412310
Gross Profit 260000 252690
Opertaing Exp 130000 130000
Income before income tax 130000 122690
Income tax expense (28%) 36400 34353
Net income 93600 88337

€ 131,000.00
€ 4.12
€ 123.69

B Answers to questions:
(1) The FIFO method produces the most meaningful inventory amount
for the statement of financial position because the units are costed
 at the most recent purchase prices.
(2) The FIFO method is most likely to approximate actual physical
flow because the oldest goods are usually sold first to minimize
spoilage and obsolescence.
(3) There will be £2,047 additional cash available under average-cost
because income taxes are £34,353 under average-cost and
£36,400 under FIFO.

Answer in the form of a business letter:

Dear Tudor Ltd.

After preparing a comparative condensed income statement for

2014 with the FIFO method and the average cost method, we have found the following
the following:

The FIFO method results in the most meaningful inventory count

which is most meaningful to the statement of financial position because the units
The FIFO method results in the most meaningful inventory counts for the statement of
financial position because the units are recorded based on the most recent purchase price.
This method is the most
most likely to approximate the actual physical flow because the oldest
oldest items are usually sold first to minimize spoilage and obsolescence.
obsolescence.

There will be £2,047 of additional cash available under average cost

due to income tax of £34,353 under average cost and £36,400 under FIFO.

Sincerely,

Number 8
Transaction in dollar
Date Unit Cost Total
6-Jan 150 40 6000
9-Jan 10 40 400 Return
10-Jan 50 45 2250
30-Jan 160 50 8000
Total 370 15850

FIFO
Date Purchases COGS Balance
1-Jan 2850
4950
2-Jan 2100 2100
 6-Jan 2850 4090
9-Jan 190 4090
1800 3730
10-Jan 360
1030 2700
23-Jan 2600
30-Jan 3740 1650
7430 1650

COGS 7430
Ending inv 1560
Gross Profit 8420

Moving Avarage
Date Purchase COGS Balance
1-Jan 2850
2-Jan 2100 4950
6-Jan 2970 1980
9-Jan 198 2178
1800 3978
10-Jan 360 3618
1064 2554
23-Jan 2600 5154
30-Jan 3748 1406
7548

19.8 21.282
21.503 23.472

COGS 7584
Ending inv 1406
Gross Profit 8266

FIFO LIFO
B Sales 15850 15850
COGS 7430 7584
Gross Profit 8420 8266
Ending inv 1560 1406
In a period of rising costs, the moving-average cost flow assumption
results in the higher cost of goods sold and lower gross profit. FIFO
gives the lower cost of goods sold and higher gross profit.
On the statement of financial position, FIFO gives the higher ending
inventory (representing the most current costs); moving-average gives
the lower ending inventory
Number 9
Transaction in dollar

FIFO
Date Purchase COGS Balance
1-May 1085 1085
4-May 620 465
8-May 1360 1825
1825
12-May
1020
15-May 1110 2130
2130
20-May 510 1620
1620
2t5 may 880 740

Moving Avarge Cost

Date Purchases COGS Balance
1-May 1085 1085
4-May 620 465
8-May 1360 1825
12-May 830 995
15-May 1110
20-May 526 1579
25-May 877 702

B (1) The higher ending inventory is $740 under the FIFO method.
(2) The lower ending inventory is $702 under the moving-average
method.

Number 10
Transaction in Euro

A February
Net Sale 300000
COGS
Beginning inv 4500
Net purchase 197800
Add: Freight in 2900
COGS purchased 200700
COGS Available 205200
Ending inv 25200
COGS 180000
Gross profit 120000
 Gross profit rate 40%

B Net Sale 26000

Less Estimated Gross Profit 104000
Estimated COGS 156000

Beginning Inv 25200

Net Purchased 191000
Add: Freight in 4000
COGS Purchased 195000
COGS Available 220200
Less: Estimated COGS 156000
Estimated Total Cost Ending
Inventory 64200
Less: Inventory not loss 19260
Estimated Inventory Lost in Fire 449490

Number 11
Transation in Dollar
Sorting Goods Jewelry and Cosmetic
Cost Retail Cost Retail
A Beginning inv 47630 74000 39440 62000
Purchases 675000 1066000 741000 1158000
Purchases Returns 26000 40000 12000 20000
Purchase Discount 12630 2440
Freight in 900 14000
GOGS Available to sell 693000 1100000 780000 1200000
Net sell 1010000 1150000
Ending Inventory at retail 90000 50000

Estimated Ending Inv at Cost

Sporting Goods 56700
Jewelry an Cosmetics 32500

Cost to Retail Ratio

Sporting Goods 63%
Jewelry an Cosmetics 65%

B Sporting Goods 51000

Jewelry an Cosmetics 34560

Number 12
Transaction in Euro
Cost of Goods Sold Available For Sale
Date ExplanationUnit Cost Total Cost
1-Oct Beginning inv 60 24 1440
 9-Oct Purchase 120 26 3120
17-Oct Purchase 70 27 1890
25-Oct Purchase 80 28 2240
Total 330 8690

Ending Inv in Units

Units Available to Sell 330
Sales 285
Units Remaining in Ending Inv 45

LIFO Ending Inv

1-Oct 1080
 PROBLEM SET B
Number 1
(a) The sale will be recorded on February 26. The goods (cost, $800) should
be excluded from Banff’s February 28 inventory.
(b) Banff owns the goods once they are shipped on February 26. Include
inventory of $480.
(c) Include $720 in inventory.
(d) Exclude the items from Banff inventory. Title remains with the
consignor.
(e) Title of the goods does not transfer to Banff until March 2. Exclude
this amount from the February 28 inventory.
(f) Title to the goods transferred to the customer on February 28. The $200
cost should be excluded from Banff’s February 28 inventory.

Number 2
Transaction in Euro
A Cost of Goods Available for Sale
Date ExplanationUnits Cost Total Cost
1-Oct Beginning inv 2000 7 14000
3-Oct Purchase 3000 8 24000
9-Oct Purchase 5500 9 49500
19-Oct Purchase 4000 10 40000
25-Oct Purchase 2000 11 22000
Total 16500 149500

B FIFO
1 Ending Inventory
Date Units Cost Total Cost
25-Oct 2000 11 22000
19-Oct 1000 10 10000
total 3000 32000

2 Cost of Goods Sold

COGS Available for sale 149500
Less: Ending Inv 32000
Cost of Goods Sold 117500

Poof of Cost of Goods Sold

Date Units Cost Total Cost
1-Oct 2000 7 14000
3-Oct 3000 8 24000
9-Oct 5500 9 49500
19-Oct 3000 10 30000
total 13500 117500
 Avarage Cost
1 Ending Inventory 2. Cost of Goods Sold
unit Cost Total Cost COGS Available
149500
3000 9.06061 27181.8 Less ending27181.8
inv
COGS Available
122318

C (1) FIFO results in the higher inventory amount for the statement of
financial position, £32,000.
(2) Average-cost results in the higher cost of goods sold, £122,317.

Number 3
Transaction in Dollar
Cost of Goods Available for Sale
A Date ExplanationUnits Cost Total Cost
1-Jan Beginning inv 100 21 2100
15-Mar Purchase 300 24 7200
20-Jun Purchase 200 25 5000
4-Sep Purchase 300 28 8400
2-Dec Purchase 100 30 3000
Total 1000 25700

B FIFO
1 Cost of Goods Available
Date Units Cost Total Cost
2-Dec 100 30 3000
4-Sep 200 28 5600
total 300 8600

2 Cost of Goods Sold

COGS Available for sale 25700
Less: Ending Inv 8600
Cost of Goods Sold 17100

Poof of Cost of Goods Sold

Date Units Cost Total Cost
1-Jan 100 21 2100
15-Mar 300 24 7200
20-Jun 200 25 5000
4-Sep 100 28 2800
total 700 17100

Avarage Cost
1 Ending Inventory 2. Cost of Goods Sold
unit Cost Total Cost COGS Available
25700
300 25.7 7710 Less ending inv7710
COGS Available
17990
C (1) FIFO results in the higher inventory amount, $8,600, as shown in
(b) above.
(2) Average-cost produces the higher cost of goods sold, $17,990 as
shown in (b) above.
Number 4
Transaction in Euro

MUNICH CO
Condense Income Statements
For Year Ended 31 Decemeber 2014

FIFO Ave Cost

Sales Revenue 780000 780000
COGS
Beginning inv 16000 16000
COGS purchased 480500 480500
COGS Avvailable to sell 496500 496500
Ending inv 40500 36690
Cost of good sold 456000 459810
Gross Profit 324000 320190
Opertaing Exp 130000 130000
Income before income tax 194000 190190
Income tax expense (28%) 69840 68468
Net income 124160 121722

40500
2.4458128 Per Unit
36687.192

B (1) The FIFO method produces the more meaningful inventory amount
for the statement of financial position because the units are
costed at the most recent purchase prices.
(2) The FIFO method is more likely to approximate actual physical
flow because the oldest goods are usually sold first to minimize
spoilage and obsolescence.
(3) There will be €1,372 additional cash available under average-cost
because income taxes are €68,468 under average-cost and €69,840
under FIFO.

Number 5
Transaction in Dollar
A Cost of Goods Available for Sale
Date Explanation
Units Cost Total Cost
1-Jun Beginning inv 40 40 1600
4-Jun Purchase 135 43 5805
18-Jun Purchase 55 46 2530
 Purchase Return-10 46 -460
28-Jun Purchase 30 50 1500
Total 250 10975

Ending Inv in Units

Units Available to sell 250
sale 155
Units Remaining in ending inv 95

Sales Renenue
Date Unit Unit Cost Total Sales
10-Jun 110 70 7700
11-Jun -15 70 -1050
25-Jun 60 75 4500
155 11150

FIFO
Ending inv
Date Unit Unit Cost Total Cost
28-Jun 30 50 1500
18-Jun 45 46 2070
4-Jun 20 43 860
95 4430

Cost of Goods Sold

Available to sell 10975
Ending inventory 4430
6545

Gross Provit
Sales Revenue 11150
CGS 6545
Gross Provit 4605

Gross Profit Rate

Goss Profit 4605
41.30%
Net Sale 11150

Average Cost
Weighed Avarage Cost Per Unit
CGS Available
Unit available Total
10975 250 43.9

Ending inventory
 Unit Weight ave cost Total
95 43.9 4170.5

Cost of Goods Sold

Available to sell 10975
Ending inv 4170.5
Total 6804.5

Gross Profit
Sales Revenue 11150
CGS 6804.5
Total 4345.5

Gross Provit Rate

Gross Provit 4345.5
38.97%
Net Sale 11150

B In this period of rising prices, average-cost gives the higher cost of

goods sold and the lower gross profit. FIFO gives the lower cost of
goods sold and the higher gross profit

Number 6
Transaction in Dollar

GAS GUZZLERS
Income Statement (partial)
For the Year Ended December 31, 2014

Specific Identification
FIFO Ave cost
Sales Revenue a 9185 9185 9185
Beginning inv 1320 1320 1320
Purchase b 6505 6505 6505
COGS
For Sale 7825 7825 7825
Ending Inv c 2500 2720 2450
Cost of Good Sold 5325 5105 5375
Gross Profit 3860 4080 3810

a 9185
b 650500
Specific Identification Ending Inventory
Beginnign inventory 650 60 39000
3-Mar Purchase 550 65 35750
10-Mar Purchase 1100 72 79200
20-Mar Purchase 1200 80 96000
 3500 249950

FIFO Ending Inventory Consist of

20-Mar Purchase 2500 80 200000
10-Mar Purchase 1000 72 72000
3500 272000

Avarge Cost Ending Inventory Consist of

3500 70 245000
Weight Avarage Cost per Liter
0.69866

B Companies can choose a cost flow method that produces the highest
possible cost of goods sold and lowest gross profit to justify price
increases. In this example, Average-cost produces the lowest gross
profit and best support to increase selling prices

Number 7
Transaction in Britania Pund sterling
AAR CO
Condense Income Statements
For Year Ended 31 Decemeber 2014

FIFO Ave Cost

Sales Revenue 40000 40000
COGS
Beginning inv 47000 47000
COGS purchased 532000 532000
COGS Avvailable to sell 579000 579000
Ending inv 140000 131600
Cost of good sold 439000 447400
Gross Profit 301000 292600
Opertaing Exp 140000 140000
Income before income tax 161000 152600
Income tax expense (28%) 51520 48832
Net income 109480 103768

140000
5.2636364 Per Unit
131590.91

B (1) The FIFO method produces the more meaningful inventory

amount for the statement of financial position because the units
are costed at the most recent purchase prices.
 (2) The FIFO method is more likely to approximate actual physical flow
because the oldest goods are usually sold first to minimize spoilage
and obsolescence.
(3) There will be CHF2,688 additional cash available under averagecost
because income taxes are CHF48,832 under average-cost and
CHF51,520 under FIFO.

Number 8
Transaction in Dollar
A Sales
Date Unit Cost Total Cost
8-Jan 110 28 3080
10-Jan -10 28 -280
20-Jan 80 30 2400
180 5200

FIFO
Date Purchases COGS Balance
1-Jan 1400
2550
5-Jan 2550 1400
2550
8-Jan 1400 2380
170
10-Jan -170 2550
2550
15-Jan 1045 1045
2550
16-Jan -95 2550
950
20-Jan 1360 1190
950
660
2760
COGS 2760
Ending Inv 2800
Gross Provit 2600

Moving Avarage
Date Purchase COGS Balance
1-Jan 1400
5-Jan 2550 3950
8-Jan 1738 2212
10-Jan -158 2370
15-Jan 1045 3415
16-Jan 95 3320
 20-Jan 1328 1192
25-Jan 660 2652
2908

15.8 16.6
16.659 17.68
COGS 2908
Ending inv 2652
Gross Profit 2452

B FIFO Ave Cost

Sales 5360 5360
COGS 2760 2908
Gross Profit 2600 2452
Ending inv 2800 2652

In a period of rising costs, the moving-average cost flow assumption

results in the higher cost of goods sold and lower gross profit. FIFO gives
the lower cost of goods sold and higher gross profit.
On the statement of financial position, FIFO gives the higher ending
inventory (representing the most current costs); and moving-average cost
results in the lower ending inventory

Number 9
Transaction Hongkong Dollar
FIFO
Date Purchase COGS Balance
1-Jul 600 600
6-Jul 360 240
11-Jul 816 240
816
14-Jul 240 544
272 544
21-Jul 1176 544
1176
27-Jul 544 882
294 882

Moving Avarge Cost

Date Purchases COGS Balance
1-Jul 600 600
6-Jul 360 240
11-Jul 816 1056
14-Jul 528 528
21-Jul 1176 1704
27-Jul 852 852
 132
142

B The higher ending inventory is HK$882 under the FIFO method

Number 10
Transaction in Dollar
A November
Net Sale 600000
COGS
Beginning inv 30000
Purchase 368000
Purchase Return 13300
Discount 8500
Add: Freighr in 4800
COGS purchased 351000
COGS Available 381000
Ending inv 33000
COGS 348000
Gross profit 252000
Gross profit rate 42%

B Net Sale 700000

Less Estimated Gross Profit 294000
Estimated COGS 406000

Beginning Inv 33000

Purchased 420000
Less: Purchased Returns and allowences 14900
Purchased Discount 9500 24400
Net Purchased 395600
Freight in 5900
COGS Purchased 401500
COGS Available 434500
Less: Estimated COGS 406000
Estimated Inventory Lost in Fire 28500
Number 11
Transaction in Euro
A Hardcovers Paperbacks
Cost Retail Cost Retail
Beginning inv 420000 700000 280000 360000
Purchases 2094000 3200000 1155000 1540000
Freight-in 26000 12000
Purchase discount -44000 -22000
Goods Available for Sale 2496000 3900000 1425000 1900000
Net sale 3100000 1570000
Ending inv at Retail 800000 330000

Cost Retail Ratio

Hardcovers 0.64 64%
Paperbacks 0.75 75%
Estimated Ending Inventory
Hardcovers 512000
Ppaperbacks 247500

B Hardcovers 513500
Paperbacks 257950

Number 12
Transaction in Dollar
Cost of Goods Sold Available For Sale
Date Explanation
Unit Cost Total Cost
1-Jun Beginning inv 40 40 1600
4-Jun Purchase 135 43 5805
18-Jun Purchase 55 46 2530
Return -10 46 -460
28-Jun Purchase 30 50 1500
Total 250 10975

Ending Inv in Units

Units Available to Sell 250
Sales 155
Units Remaining in Ending Inv 95

LIFO Ending Inv

Date Unit Cost Total Cost
1-Jun 40 40 1600
4-Jun 55 43 2365
95 3965
COMPHERENSIVE PROBLEM

CP6
Transaction With Dolar
a.) DATE TRANSACTION
DEBIT CREDIT
3-Dec Inventory 2,880 (4,000*$0.72)
Acc Payable 2,880
5-Dec AR 4,048 (4,400*$0.92)
Sales Revenue 4,048
CGS 2,985
Inventory 2,985 (3,000*$0.65)+(1,400*$0.72)
7-Dec Sales Returns 184
and Allowances
AR 184
Inventory 144
CGS 144
17-Dec Inventory 1,716 (2,200*$0.78)
Cash 1,716
22-Dec Acc Receivable
1,900 (2,000*$0.95)
Sales Revenue 1,900
CGS 1,440 (2,000*$0.72)
Inventory 1,440
31-Dec Salaries and Wages
400 Expense
Salaries and Wages Payable 400
Depreciation Expense
200
Acc Dep-Equipment 200

Total 15897 15897

b.) CASH ACCOUNTS RECEIVABLE

DEBIT CREDIT DEBIT CREDIT
Balances 4,650 1,716 Balances 3,900 184
4,048
1,900

Total 4650 1716 Total 9848 184

Balance 2934 Balance 9664
 INVENTORY EQUIPMENT
DEBIT CREDIT DEBIT CREDIT
Balances 1,950 2,958 Balances 21,000
2,880 1,440
144
1,716

Total 6690 4398 Total 21000 0

Balance 2292 Balance 21000

ACCOUNTS PAYABLE ACC DEP-EQUIPMENT

DEBIT CREDIT DEBIT CREDIT
Balances 3,000 Balances 1,500
2,880 200

Total 0 5880 Total 0 1700

Balance 5880 Balance 1700
SALARIES AND WAGES PAY SHARE CAPITAL-ORDINARY
DEBIT CREDIT DEBIT CREDIT
Balances 400 Balances 20,000

Total 0 400 Total 0 20000

Balance 400 Balance 20000

SALES REVENUE RE
DEBIT CREDIT DEBIT CREDIT
Balances 4,048 Balances 7,000
1,900

Total 0 5948 Total 0 7000

Balance 5948 Balance 7000
 CGS SALARIES AND WAGES EXP
DEBIT CREDIT DEBIT CREDIT
Balances 2,958 144 Balances 400
1,440

Total 4398 144 Total 400 0

Balance 4254 Balance 400
SALES RETURNS AND
DEPRECIATION EXP ALLOWANCES
DEBIT CREDIT DEBIT CREDIT
Balances 200 Balances 184

Total 200 0 Total 184 0

Balance 200 Balance 184
c.) Seattle Company
Adjusted Trial Balance
December 31,2014
DEBIT CREDIT
Cash 2,934
Acc Rec 9,664
Inventory 2,292
Equipment 21,000

Acc Dep-
Equipment 1,700
AP 5,880

Salaries
and Wages
Payable 400
Share
capital-
ordinary 20,000
RE 7,000
Sales Rev 5,948

Sales
Returns
and
allowances 184
CGS 4,254

Saleries
and Wages
Exp 400
Dep Exp 200
Total 40928 40928
d.) Seattle Company
Income Statement
For the Month Ending December 31, 2014
DEBIT CREDIT
Sales sales
Less: Revenue
Return and 5948
allowances 184
Net sales 5764
CGS 4254
Gross
Profit 1510
Operating
Expenses
Salaries and Wages Expense 400
Dep Exp 200 600
Net
income 910

Seattle Company
Statement of Financial Position
Dec 31,2014
(in thousands)
Asset
Property
Equiptment 21000
Accum Dep (Equiptment) 1700 19300
Current Asset
Inventory 2292
Accounts Receivable 9664
Cash 2934 14890
Total Assets 34190

Equity & Liabilities

Equity
Share Capital 20000
Retained Earning 7910 27910
Current Liabilities
Accounts Payable 5880
Salaries & Wages Payable 400 6280
Total Equity & Liabilites 34190
CCC6
a.)
CGS AVAILABLE FOR SALE
Date Explanation Units Unit Cost Total Cost
1-Feb Beginning Inv 3 595 1,785
2-Feb Purchase 2 600 1,200
2-Mar Purchase 1 618 618
1-Apr Purchase 2 612 1,224
4-May Purchase 3 625 1,875
Total 11 6702

FIFO
Ending Inventory Cost of Goods Sold
Unit Total
Date Units Cost of Goods Sold
Cost Cost
4-May 3 625 1,875 Available for sale 6,702
1-Apr 1 612 612 Ending Inventory 2,487
4 2487 Cost of Goods Sold 6,702

Gross Profit Gross Profit Rate

Sales 8050 3835 47.64%
Cost of goods sold 4215 8050
Gross Profit 3835

AVERAGE COST
Ending Inventory Cost of Goods Sold
6,702/11 = 609.273 Cost of Goods Sold
Available for sale 6,702
Total
Units Unit Cost
Cost Ending Inventory 2,437
4 609.273 2,437 Cost of Goods Sold 4,265

Gross Profit Gross Profit Rate

Sales 8,050 3,785 47.64%
Cost of goods sold 4,264 8,050
Gross Profit 3,786
CRITICAL THINGKING

BYP 6-4
(a)
1 Sales January1-March 31 180,000
Cash sales 4/1-4/10 (20,500*40%) 8,200
Acknowledged credit sales 4/1–4/10 37,000
Sales made but unacknowledged 5,600
Sales as of April 10 230,800

2 Purchases January 1–March 31 94,000

Cash purchases 4/1–4/10 4,200
Credit purchases 4/1–4/10 12,400
Less: Items in transit 1,900 10,500
Purchases as of April 10 108,700

(b) 2013 2012

Net Sales 600,000 480,000
Cost of Goods Sold
Inventory, january 1 60,000 40,000
CGS Purchased 404,000 346,400
CGS Available for sale 464,000 386,400
Inventory, dec-31 80,000 60,000
CGS 384,000 326,400
Gross profit 216,000 153,600
Gross profit rate 36% 32%
Average gross profit rate 34%

(C) Sales from (a) (1) 230,800

Less: Gross profit ($230,800 X 34%) 78,472
CGS 152,328

Inventory, January 1 80,000

Purchases (from (a) (2)) 108,700
CGS available for sale 188,700
CGS 152,328
Estimated inventory at time of fire 36,372
Less: Inventory salvaged 17,000
Estimated inventory loss 19,372
C.13
CRITICAL THINKING

BYP 13-5

a.) DEL CARPIO COMPANY

Statement of Cash Flows
For the Year Ended January 31, 2014
(in thousands)
Cash flows from operating activities
Net loss -44,000
Dep Exp 75,000
Gain from sale invest -10,000 65,000
Net cash 21,000

Cash flows from investing activities

Sale of investment 85,000
Purchase of investment -75,000
Purchase of fixtures and equipment -320,000
Net Cash -310,000

Cash flows from financing activities

Sale of ordinary shares 405,000
Purchase of treasury shares -15,000
Net cash 390,000
Net increase in cash 101,000
Cash at beginning of period 140,000
Cash at end of period 241,000
Note:
Non-cash investing and financing 25,500

Computation of net income (loss)

Sales of merchandise 350,000
Interest revenue 6,000
Gain on sale of investment
($85,000 – $75,000) 10,000
Total revenues and gains 366,000
Merchandise purchased 245,000
Operating expenses
($160,000 – $75,000) 85,000
Depreciation 75,000
Interest expense 5,000
Total expenses 410,000
Net loss -44,000
 Comprehensive Problem
CP6
e.) Compute ending inventory and cost of goods sold under FIFO, assuming Seattle
Company uses the periodic inventory system.
Answer:
Use FIFO Method
Units Unit Cost CGS
Available
for sale
Beg. inventory 3,000 $0.65 $1,950
Dec. 3 purchase 4,000 $0.72 2,880
Dec.17 purchase 2,200 $0.78 1,716
Total 9,200 $6,546

Ending Inventory CGS

Dec. 17 2,200*$0.78 $1,716 CGS available for sale $6,546
Dec. 3 800*$0.72 576 Less: Ending inventory 2,292
3,000 $2,292 CGS $4,254

*(9,200-4,400+200-2,200)-2,200

f.) Compute ending inventory and cost of goods sold under average-cost, assuming
Seattle Company uses the periodic inventory system.
Answer:
Use Average Cost Method
$6,546
Weighted-average cost per unit 9,200 𝑢𝑛𝑖𝑡𝑠 = $0.712 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡𝑠

Ending CGS
Inventory
3,000*$0.721 $2,136 CGS available for sale $6,546
Less: Ending inventory 2,136
CGS $4,410
 Critical Thinking

BYP 6-1 Financial Reporting Problem: Samsung Electronics Co., Ltd.

a) What did Samsung report for the amount of inventories in its consolidated statement
of financial position at December 31, 2010? At December 31, 2009?

Based on the consolidated statement of financial

https://images.samsung.com/is/content/samsung/assets/global/ir/docs/SECAR2010_E
ng_Final.pdf

The inventories in December 31-2010 = W13,364,524 million

The inventories in December 31-2009 = W9,839,329 million

b) Compute the Korean won amount of change and the percentage change in inventories
between 2009 and 2010. Compute inventory as a percentage of current assets at
December 31, 2010!
Answer:

To compute the Won change and percentage change in inventories

between 2009 and 2010:
• Won Change (W13,364,524 million - W9,839,329 million = W3,525,195 million
increase)
• Percentage Change (W3,525,195 ÷ W9,839,329 = 35.8% increase)

2010 inventory as a percent of current assets (W13,364,524 ÷ W61,402,589 = 21.8%)

c) How does Samsung value its inventories? Which inventory cost fl ow method does
Samsung use? (See Notes to the Consolidated Financial Statements.)
Answer:

In the Notes to the Consolidated Financial Statements, Samsung should provide

information on how they value their inventories and which inventory cost flow
method they use, such as First-In, First-Out (FIFO), Last-In, First-Out (LIFO), or
weighted average cost.

d) What is the cost of sales (cost of goods sold) reported by Samsung for 2010 and
2009? Compute the percentage of cost of sales to net sales in 2010!
Answer:
Samsung (in 2010 2009
millions)
CGS W102,666,824 W94,594,863
 2010 cost of goods sold as a percent of sales (W102,666,824 ÷ W154,630,328 =
66.4%)

BYP 6-2 Comparative Analysis Problem: Nestlé S.A. vs. Zetar plc
a.) Based on the information contained in these fi nancial statements, compute the
following ratios for each company for the most recent year shown.
(1) Inventory turnover ratio. (Round to one decimal.)
(2) Days in inventory. (Round to nearest day.)
Answer:
(1) Inventory turnover ratio.
𝐶𝐻𝐹 7,925+𝐶𝐻𝐹7,732
Nestle: CHF 45,849 ÷ = 5.9 𝑇𝑖𝑚𝑒𝑠
2
£16,453+£16,039
Zetar: £107,677 = 6.6 𝑇𝑖𝑚𝑒𝑠
2

(2) Days in inventory.

Nestle: 365 ÷ 5.9 = 62 days
Zetar: 365 ÷ 6.6 = 55 day

b.) What conclusions concerning the management of the inventory can you draw from
these data?
Answer:
The conclusion regarding inventory management is that Zetar's turnover of 6.6 times
is around 12% higher than Nestlé's 5.9 times, resulting in a number of days in
inventory of 55 versus 62. Thus, Zetar's inventory control is much more effective.

BYP 6-3 Real-World Focus

a.) At Cisco’s fi scal year-end, what was the inventory on the balance sheet (statement of
financial position)?
Answer:

$1,486,000,000, as of July 30, 2011.

b.) How has this changed from the previous fi scal year-end?
Answer:

$1,486,000,000 – $1,327,000,000 = $159,000,000 increase.

c.) How much of the inventory was fi nished goods?

Answer:

64.7% ($962 ÷ $1,486).

d.) What inventory method does Cisco use?

Answer:

Lower of cost or market using standard cost, which approximates FIFO.

BYP 6-5 Communication Activity

a.) You conclude that Kathy is incorrect. Write a brief, tactful memo to Kathy, clarifying
the situation.
Answer:

Subject: Clarification on the 2013 Financial Statements Error

Dear Kathy Mcdonnell, President

I hope this message finds you well. I wanted to address the issue regarding the error
found in the 2013 financial statements, which you mentioned to me recently. After
carefully reviewing the situation, I must respectfully disagree with your assumption
that the error has been corrected and that there is no need for further concern.

Upon further investigation, it has come to my attention that the 2013 ending inventory
was indeed overstated by $1 million. While it is true that the 2014 ending inventory
appears to be correct, it does not necessarily imply that the 2014 income is accurate.
The overstatement in the 2013 ending inventory could have had a cascading effect on
subsequent financial statements, potentially impacting the 2014 income as well.

It is crucial for us to address this issue promptly and accurately. Overstating the
ending inventory in 2013 could have distorted the financial position and performance
of Classic Toys Inc. for that year, as well as subsequent years. It is essential that we
rectify this error to ensure the accuracy and reliability of our financial statements.

I kindly request your cooperation in revisiting the 2014 income statement to verify its
accuracy in light of the 2013 inventory error. Additionally, I recommend that we
conduct a thorough review of the financial statements for the affected years to identify
any other potential discrepancies that may have arisen as a result of the 2013 error.

Please understand that my intention is not to dwell on past mistakes, but rather to
ensure the integrity of our financial reporting moving forward. By addressing this
issue promptly and transparently, we can maintain the trust of our stakeholders and
make informed decisions based on accurate financial information.

Thank you for your attention to this matter. I am available to discuss this further and
provide any assistance necessary to resolve the situation.

Best regards,

[Student]

BYP 6-6 Ethics Case

a.) What is the effect of this transaction on this year’s, and next year’s income statement
and income tax expense? Why?
Answer:
 The effect of this transaction on this year's income statement would be a significant
increase in the CGS due to the large purchase of inventory at the doubled price. This
would result in a decrease in net income for the current year. As a result, the income
tax expense for the current year would also decrease, as it is calculated based on the
net income. Next year, when the corporate tax rate is scheduled to decline
significantly, the effect on the income statement would depend on the timing of the
sale of the inventory. If the inventory is sold at a price higher than its cost, it would
result in higher revenue and potentially higher net income for the next year. However,
the income tax expense for the next year would be lower due to the lower tax rate.

b.) If Paeth Wholesale had been using the FIFO method of inventory costing, would the
president give the same directive?
Answer:

If Paeth Wholesale had been using the FIFO method of inventory costing, the
president may not give the same directive. Under FIFO, the CGS is calculated based
on the cost of the oldest inventory first. In this case, the large purchase of inventory at
the doubled price would not impact the CGS for the current year, as it would be based
on the older, lower-cost inventory. Therefore, the president may not see the same
opportunity to lower the current year's net income and take advantage of the changing
income tax rate.

c.) Should the plant accountant order the inventory purchase to lower income? What are
the ethical implications of this order?
Answer:

The accountant should not order the inventory purely for the purpose of manipulating
net income and taking advantage of the changing income tax rate. Such actions would
be considered unethical and potentially illegal. The primary purpose of ordering
inventory should be to meet the company's operational needs and maintain
appropriate inventory levels.
 GAAP EXERCISES
GAAP6-1
Similarities:
a. The definitions of inventory are essentially the same
b. Provide similar guidelines regarding who owns the goods, goods in transit, consigned
goods, and the costs to include in inventory
c. Specific identification cost flow assumption can be used when appropriate
Difference:
a. While IFRS prohibits its use, GAAP permits the use of LIFO for inventory valuation.
The only two reasonable cost flow assumptions allowed by IFRS are FIFO and average
cost.
b. The lower-of-cost-or-market test for valuing inventory market is defined by IFRS as
net realizable value. In contrast, GAAP defines the market as replacement cost.
c. Inventory write-downs under GAAP: The new basis is now regarded as the inventory's
cost if the inventory is written down using the lower-of-cost or market valuation
method. Consequently, in a later period, the inventory might not be written down to its
initial cost. According to IFRS, the write-down can be undone in a later period up to
the amount of the write-down in question. The income statement should include
information about the write-down as well as any reversal that occurs later.
d. Under IFRS, the standards for inventory accounting and reporting are more grounded
in principles. In addition, GAAP offers more thorough instructions for inventory
accounting.
GAAP6-2
Inventory turnover ratio = CGS : Average Inventory = 578 : 154 = 3,78
Days = 365 : 3,78 = +- 97 days
If the company uses the LIFO cost flow assumption, which is prohibited under IFRS,
difficulties in comparison to a business using GAAP may occur. Since LIFO assumes more
recently purchased items are sold first, it typically results in a lower inventory balance reported
on the balance sheet during periods of rising prices. Higher inventory turnover ratios will be
reported by the GAAP company as a result. To enable a "apples to apples" comparison, the
LIFO reserve can be utilized to convert the reported LIFO numbers to FIFO.
GAAP6-3
Item No. Cost Market Lower-Cost-of
Market
AB $1700 $1400 $1400
TRX $2200 $2300 $2200
NWA $7800 $7100 $7100
SGH $3000 $3700 $3000
Total $14700 $14500 $13700
GAAP6-4
a. Balance sheet
Inventories: 2010 2009
Finished goods and work in
progress $36935 $35570

b. Dollar amount of change = 36935 – 33570 = $1365

36935−35570
Percent change in inventory 2009-2010 = × 100 = 3,8%
35570
36935
Inventory percent in 2010 = 35570 × 100 = 15,5%
c. Product CGS 2010 = $348313
Product CGS 2009 = $318645
Product CGS 2008 = $333314
348313
Product CGS percent for 2010 = 517149 × 100 = 67,4%