Year Ended July 31

Year Ended July 31

Year Ended July 31

Year Ended July 31

Solution Manual for Accounting Principles, Volume1, 7th Canadian Edition by Jerry J. Weygandt, Donald E. Kieso

Year Ended July 31

Year Ended July 31

Year Ended July 31

Year Ended July 31

Description

U$7,000 = U$7,000

Net sales…………………………………………………………………… $275,000

Cost of goods available for sale ($40,000 + $160,000) $200,000

Description

U$7,000 = U$7,000

Net sales…………………………………………………………………… $275,000

Cost of goods available for sale ($40,000 + $160,000) $200,000

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Solution Manual for Accounting Principles, Volume1, 7th Canadian Edition by Jerry J. Weygandt, Donald E. Kieso

CHAPTER 6

Inventory Costing

ASSIGNMENT CLASSIFICATION TABLE

Learning Objectives	Questions	Brief Exercises	Exercises	Problems Set A	Problems Set B
; Describe the steps in determining inventory quantities.	1, 2, 3	1, 2	1, 2	1, 7	1, 7
; Calculate cost of goods sold and ending inventory in a perpetual inventory system using specific identification, FIFO, and weighted average methods of cost determination.	4, 5, 6	3, 4, 5, 6, 7, 8	3, 4, 5, 6, 7, 15, 16	2, 3, 4, 5, 6, 12, 13	2, 3, 4, 5, 6, 12, 13
; Determine the financial statement effects of inventory cost determination methods.	7, 8, 9	9, 10	6, 7	4, 5	4, 5
; Determine the financial statement effects of inventory errors	10, 11,	11, 12	8, 9	3, 7, 8	3, 7, 8
; Value inventory at the lower of cost and net realizable value.	12, 13, 14	13, 14	10, 11	6, 9	6, 9
; Demonstrate the presentation and analysis of inventory.	15, 16, 17, 18	15, 16	11, 12	8, 10	8, 10
*; Calculate ending inventory and cost of goods sold in a periodic inventory system using FIFO and weighted average inventory cost formulas (Appendix 6A).	19, 20, *21	17, 18	13, 14, 15, 16	11, 12, *13	11, 12, *13
*; Estimate ending inventory using the gross profit and retail inventory methods (Appendix 6B).	22, 23, *24	19, 20	17, 18	14, 15	14, 15

ASSIGNMENT CHARACTERISTIC TABLE

Problem Number	Description	Difficulty Level	Time Allotted (min.)
1A	Identify items in inventory.	Moderate	20-25
2A	Apply specific identification.	Simple	15-20
3A	Apply perpetual FIFO. Record sales and inventory adjustment and calculate gross profit, and answer questions.	Moderate	20-25
4A	Apply perpetual weighted average and answer questions.	Moderate	20-25
5A	Apply perpetual FIFO and weighted average. Answer questions about financial statement effects.	Moderate	35-45
6A	Record transactions using perpetual weighted average. Apply LCNRV.	Moderate	35-45
7A	Determine effects of inventory errors.	Complex	25-30
8A	Determine effects of inventory ; Calculate inventory turnover.	Complex	35-45
9A	Apply LCNRV and prepare adjustment.	Moderate	20-25
10A	Calculate ratios.	Simple	15-20
*11A	Apply periodic FIFO and weighted average.	Simple	20-25
*12A	Apply periodic and perpetual FIFO.	Moderate	20-25
*13A	Apply periodic and perpetual weighted average.	Moderate	20-25
*14A	Determine inventory loss using gross profit method.	Moderate	20-30
*15A	Determine ending inventory using retail method.	Moderate	20-30
1B	Identify items in inventory.	Moderate	20-25
2B	Apply specific identification.	Simple	15-20
3B	Apply perpetual weighted average. Record sales and inventory adjustment and calculate gross profit, and answer questions.	Moderate	20-25
4B	Apply perpetual FIFO and answer questions.	Moderate	20-25

ASSIGNMENT CHARACTERISTICS TABLE (Continued)

Problem Number	Description	Difficulty Level	Time Allotted (min.)
5B	Apply perpetual FIFO and weighted average. Answer questions about financial statement effects.	Moderate	35-45
6B	Record transactions using perpetual FIFO. Apply LCNRV.	Moderate	35-45
7B	Determine effects of inventory errors.	Complex	25-30
8B	Determine effects of inventory errors. Calculate inventory turnover.	Complex	35-45
9B	Apply LCNRV and prepare adjustment.	Moderate	20-25
10B	Calculate ratios.	Simple	15-20
*11B	Apply periodic FIFO and weighted average.	Simple	20-25
*12B	Apply periodic and perpetual weighted average.	Moderate	20-25
*13B	Apply periodic and perpetual FIFO.	Moderate	20-25
*14B	Determine inventory loss using gross profit method.	Moderate	20-30
*15B	Determine ending inventory using retail method.	Moderate	20-30

BLOOM’S TAXONOMY TABLE

Correlation Chart between Bloom’s Taxonomy, Study Objectives and End-of-Chapter Material

Learning Objective	Knowledge	Comprehension	Application	Analysis	Synthesis	Evaluation
; Describe the steps in determining inventory quantities.	BE6-1 E6-1	Q6-1 Q6-2 Q6-3	BE6-2 E6-2 P6-1A P6-1B	P6-7A P6-7B
; Calculate cost of goods sold and ending inventory in a perpetual inventory system using the specific identification, FIFO, and weighted average methods of cost determination.		Q6-4 Q6-5 Q6-6	BE6-3 BE6-4 BE6-5 BE6-6 BE6-7 BE6-8 BE6-18 E6-3 E6-4 E6-5 E6-6 E6-7 E6-15 E6-16 P6-2A P6-3A P6-4A P6-5A P6-6A P6-2B P6-3B P6-4B P6-5B P6-6B P6-12A P6-13A P6-12B *P6-13B
; Determine the financial statement effects of inventory cost determination methods.	Q6-9	Q6-7 Q6-8 BE6-9 BE6-10	E6-6 E6-7 P6-4A P6-5A P6-4B P6-5B
; Determine the financial statement effects of inventory errors.	Q6-11	Q6-10	P6-3A P6-3B	BE6-11 BE6-12 E6-8 E6-9 P6-7A P6-8A P6-7B P6-8B

BLOOM’S TAXONOMY TABLE (Continued)

Learning Objective	Knowledge	Comprehension	Application	Analysis	Synthesis	Evaluation
; Value inventory at the lower of cost and net realizable value.	Q6-13	Q6-12 Q6-14	BE6-13 BE6-14 E6-10 E6-11 P6-6A P6-6B P6-9A P6-9B
; Demonstrate the presentation and analysis of inventory.	Q6-15 Q6-16	Q6-18 BE6-16	BE6-15 E6-11 E6-12	Q6-17 P6-8A P6-10A P6-8B P6-10B
*7 Calculate ending inventory and cost of goods sold in a periodic inventory system using FIFO and weighted average inventory cost formulas (Appendix 6A).	*Q6-20	Q6-19 Q6-21	BE6-17 BE6-18 E6-13 E6-14 E6-15 E6-16 P6-11A P6-12A P6-13A P6-11B P6-12B P6-13B
*; Estimate ending inventory using the gross profit and retail inventory methods (Appendix 6B)	*Q6-22	Q6-23 Q6-24	BE6-19 BE6-20 E6-17 E6-18 P6-14A P6-15A P6-14B P6-15B
Broadening Your Perspective			BYP6-3 BYP6-4 BYP6-5	BYP6-1 BYP6-2 BYP6-6	Santé Smoothie Saga

ANSWERS TO QUESTIONS

1. Taking a physical inventory involves counting, weighing, or measuring each kind of inventory on hand. This is normally done when the store is closed. Tom will probably count items, and mark the quantity, description, location, and inventory number on pre-numbered inventory tags. Retailers, such as a hardware store, generally have thousands of different items to count. Later, unit costs will likely be applied to the inventory quantities using either specific identification or a cost formula.

Many businesses also use electronic devices, such as hand-held scanners. Information on the scanners can be uploaded to the perpetual inventory system to partially automate taking an inventory.

Goods in transit should be included in the inventory of the company (buyer or seller) that has ownership of the goods. This is determined by the terms of sale and is evidenced by the free on board (FOB) terms. When the terms are FOB shipping point, ownership of the goods passes to the buyer when the public carrier accepts the goods from the seller. When the terms are FOB destination, ownership of the goods remains with the seller until the goods reach the buyer.

Consigned goods are goods held on a company’s premises (the consignee), but belong to someone else (the consignor). The consignee agrees to sell the goods for a fee but never takes ownership of the goods even though the goods are physically located on the consignee’s premises. Therefore, the consignor, not the consignee, owns the goods and should include them in inventory.

Specific identification is appropriate when goods are uniquely identifiable or produced for a specific purpose, for example, automobiles. GAAP does not allow companies to use specific identification when goods are interchangeable.

Specific identification tracks the actual physical flow of goods in the system and matches the cost of a particular item of inventory against its sale price. Each good is uniquely identifiable and can be traced back to its purchase cost, for example, automobiles. This gives the specific identification method the advantage of producing financial results that are more accurate. Specific identification may be more expensive to operate since each item must be tracked individually in the accounting system.

QUESTIONS (Continued)

(Continued)

The FIFO cost formula assumes that the first goods purchased are the first goods sold. The weighted average cost formula determines the cost using a weighted average of the cost of the items purchased. Both the FIFO and the weighted average cost formulas assume a flow of goods that may not exactly match the actual flow of physical goods. These cost formulas can be used in both a periodic and perpetual inventory system; whereas, the specific identification method can only be used in a perpetual system. An example of merchandise that would be valued using the FIFO basis is electronic products; whereas, merchandise such as clothing might be valued on a weighted average basis.

Disagree. The weighted average cost per unit is calculated by dividing the cost of goods available for sale by the units available for sale at the date of each purchase. This means that every purchase of product will change the weighted average cost per unit. Sales of product mean that items of inventory are removed from the cost “pool” at the weighted average cost. This does not change the weighted average cost (unless by rounding).

(a) Cash: No effect. The cash impact of the purchase and sale is the same regardless of which inventory cost formula is chosen. The inventory cost formula simply allocates the cost of goods available for sale between cost of goods sold and ending inventory.

(b) Ending inventory: In a period of rising prices, FIFO will produce a higher ending inventory as inventory is costed using the most recent (higher) prices; Weighted average will produce a lower ending inventory as ending inventory is costed at an average of all the inventory available for sale during the accounting period.

(c) Cost of goods sold: The cost of goods sold effect is opposite to that of ending inventory. Hence, cost of goods sold will be lower under FIFO and higher under weighted average cost.

(d) Profit: Because of the effect on the cost of goods sold, profit will be higher under FIFO and lower under weighted average cost.

The weighted average cost formula results in more recent costs being reflected in cost of goods sold. This better matches current costs with current revenues and provides a better income statement valuation. The FIFO cost formula provides the better inventory valuation because the cost of older items is transferred to cost of goods sold. This leaves the more recently purchased items in ending inventory, which better reflects replacement cost.

QUESTIONS (Continued)

(a) Choose a method that corresponds as closely as possible to the physical flow of goods.

(b) Report an inventory cost on the balance sheet that is close to the inventory’s recent costs.

(a) Mila Company’s 2016 profit will be overstated (O) $5,000.

Beginning inventory		Sales
+ Purchases		– Cost of goods sold	U $5,000
= Cost of goods available for sale		= Gross profit/Profit	O $5,000
– Ending inventory	O $5,000
= Cost of goods sold	U $5,000

(b) Mila’s 2017 profit will be understated (U) $5,000 since the ending inventory of 2016 becomes the beginning inventory of 2017.

Beginning inventory	O $5,000	Sales
+ Purchases		– Cost of goods sold	O $5,000
= Cost of goods available for sale	O $5,000	= Gross profit/Profit	U $5,000
– Ending inventory	0000000
= Cost of goods sold	O $5,000

(c) The combined profit for the two years will be correct because the errors offset each other (O $5,000 in 2016 and U $5,000 in 2017).

Common errors that occur related to inventory include:

Recording errors

Errors in taking the physical count

Errors caused by not properly investigating goods in transit or goods on consignment

Pricing errors for the ending inventory

Errors in the compilation or summarizing of the inventory count.

Errors in arriving at the proper value for the lower of cost and net realizable value

QUESTIONS (Continued)

Lucy should know the following:

(a) A departure from the cost basis of accounting for inventories is justified when the utility (revenue-producing ability) of the goods is no longer as great as its cost. The writedown to net realizable value should be recognized in the period in which the decline in utility occurs.

Net realizable value means the estimated selling price less any estimated costs required to complete the sale.

Net realizable value is the selling price of an inventory item, less any estimated costs required to make the item saleable.

No. Net realizable value is usually higher than cost because this is the nature of selling merchandise inventory for a profit. The recognition of the gain occurs when the inventory is sold, in accordance with revenue recognition criteria.

In order to be classified as inventory, an asset must be owned by the business and must be in a form ready for sale.

The additional disclosures on the financial statements concerning inventory include

Details of inventory categories such as raw materials and finished goods.
The cost determination method used (specific identification, FIFO, or weighted average).
A statement that the inventory is reported at the lower of cost and net realizable value.
The amount of cost of goods sold.
The amount of any writedown to net realizable value.
The amount of any reversals of previous writedowns, including the reason why the writedown was reversed.

A decrease in the days sales in inventory ratio from one year to the next would usually be seen as an improvement in the company’s efficiency in managing inventory. It means that less inventory is being held relative to sales.

QUESTIONS (Continued)

The inventory turnover ratio measures the number of times, on average, inventory is sold (turned over) during the period. Although there is no right number of times, there would be an optimum number of times depending on which industry the business belongs. Having too high an inventory turnover ratio can result in too few items left in inventory causing a stockout or shortages, which may upset customers. Having too low a turnover may add risks to the business that the inventory will go out of date, deteriorate, or become obsolete and lose its resale value. In addition, too slow an inventory turnover brings on additional costs to the business such as warehousing and financing. Inventory ties up the firm’s cash and can compromise working capital.

*; It is necessary to calculate cost of goods available for sale in a periodic inventory system because we wait until the end of the period to allocate the amount to ending inventory (unsold) and cost of goods sold (sold).

*; The cost flow relationships for inventory can be translated into the following equations: (1) Beginning Inventory + Cost of Goods Purchased = Cost of Goods Available for Sale, (2) Cost of Goods Available for Sale – Cost of Goods Sold = Ending Inventory.

*21. In a periodic system, the average is a weighted average calculated at the end of the period based on total goods available for sale for the entire period. In a perpetual system, the weighted average is calculated after each purchase (goods available for sale in dollars ÷ goods available for sale in units). A new weighted average must be calculated with each purchase and thus the weighted average becomes a moving average.

*; Inventories must be estimated when (1) a company uses the periodic inventory system and management wants interim (monthly or quarterly) financial statements but a physical inventory is only taken annually, or (2) a fire or other type of casualty makes it impossible to take a physical inventory. An estimate of the inventory can also help to test the reasonableness of the inventory balance that was determined when a physical count is done.

*; Disagree. A company’s gross profit margin does not necessarily remain constant from year to year. Gross profit can change due to changes in merchandising policies or in market conditions. The accuracy of the method is also affected by the mix of products sold during the year and whether the method is applied to a product line, a department, or the company as a whole. The year-end inventory count also serves internal control purposes. It helps management examine the presence of merchandise and its physical condition.

QUESTIONS (Continued)

*; The retail inventory method is an averaging technique and may produce an incorrect inventory valuation if the blend of inventory items in ending inventory is not the same as in cost of goods available for sale. It produces an estimate of ending inventory based on the weighted average cost formula and would not be appropriate if the company is using a FIFO approach.

SOLUTIONS TO BRIEF EXERCISES

BRIEF EXERCISE 6-1

(a) Ownership of the goods belongs to the consignor (Helgeson). Thus, these goods should be included in Helgeson’s inventory.

(b) The goods in transit should not be included in inventory as title remains with the seller until the goods reach the buyer (Helgeson).

(d) Ownership of these goods rests with the other company (the consignor). These goods should not be included in Helgeson’s inventory.

(e) The goods in transit to a customer should not be included in inventory as title passes to the buyer when the public carrier accepts the goods from the seller.

BRIEF EXERCISE 6-2

The correct cost of inventory is:

Total cost per inventory count $55,500

(a) Inventory held for alterations (1,500)

(b) Inventory held on consignment (4,250)

prior to Dec. 31 2,875

Freight on inventory purchase 310

(d) Goods shipped FOB destination prior to Dec. 31 0

Freight on inventory purchase 0

Correct inventory cost at December 31 $52,935

BRIEF EXERCISE 6-3

Cost of Goods Sold

Painting Total Cost

3 $2,900

4 3,900

Total $6,800

Ending Inventory

Painting Total Cost

1 $ 500

2 2,500

Total $3,000

BRIEF EXERCISE 6-4

(a) 2 FIFO

(b) 1 Specific identification

(d) 3 Weighted Average

(e) 3 Weighted Average

(f) 1 Specific identification

(g) 1 Specific identification

BRIEF EXERCISE 6-5

	Purchases			Cost Of Goods Sold			Inventory Balance
Date	Units	Cost	Total	Units	Cost	Total	Units	Cost	Total
June 1	200	$	$5,				200	$	$5,
7	400	$	$8,				(a) 200 400	(b) $ $	(c) 5, 8, 13,
18				200 150	(d) $ $	(e) $5, $3, $8,	(f) 250	(g) $	(h) 5,
26	350	$	$7,				(i) 250 350	(j) $ $	(k) 5, 7, 12,

BRIEF EXERCISE 6-6

										Weighted Average Calculations
Date	Purchases			Cost of goods sold			Inventory Balance				Total	WA Cost
	Units	Cost	Total	Units	Cost	Total	Units	Cost	Total	Units	Cost	per unit
01-Jun	Beginning inventory									A	B	B ÷ A
	400	$	$10,				400	$	$10,
							(a)	(b)	(c)
07-Jun	600		13,				1,000		23,	400	$10,
										600	13,
										1,000	23,	$
					(d)	(e)	(f)	(g)	(h)
18-Jun				550	$	$12,	450		10,	1,000	23,
										-550	-12,
										450	10,	$
							(i)	(j)	(k)
26-Jun	450		9,				900		19,	450	10,
										450	9,
										900	19,	$

(a) 1,000 = 400 + 600

(b) ($10, + $13,) ÷ (400 + 600) = $

(d) see (b) above

(e) $12, = 550 × $

(f) 450 = 1,000 – 550

(g) see (b) above

(h) $10, = 450 × $ (or $23, – $12,)

(i) 900 = 450 + 450

(j) $ = ($10, + $9,) ÷ (450 + 450)

(k) $19, = 600 × $ (or $10, + $9,)

BRIEF EXERCISE 6-7

(a) FIFO

	Purchases			Cost of Goods Sold			Inventory Balance
Date	Units	Cost	Total	Units	Cost	Total	Units	Cost	Total
Nov. 1	Beginning inventory
	10	$	$50				10	$	$50
4	20		110				10 20		50 110 160
7	20		120				10 20 20		50 110 120 280
10				10	$	$50	20 20		110 120 230
12	_		_	20 10		110 60 170	10		60
Total	50		$280	40		$220	10		$60
	Cost of goods available for sale			Cost of goods sold			Ending inventory

Check:

Cost Units

Cost of goods available for sale $; 50

Less: cost of goods sold 40

Ending inventory $ 10

BRIEF EXERCISE 6-7 (Continued)

(b) Weighted Average

										Weighted Average Calculations
Date	Purchases			Cost of goods sold			Inventory Balance				Total	WA Cost
	Units	Cost	Total	Units	Cost	Total	Units	Cost	Total	Units	Cost	per unit
Nov 1	Beginning inventory									A	B	B ÷ A
	10	$	$				10	$	$
4	20						30			10	$
										20
										30		$
7	20						50			30
										20
										50		$
10				10	$	$	40			50
										-10
										40		$
12				30			10			40
										-30
										10		$

Total	50		$	40		$	10		$
	Cost of goods available for sale-			Cost of goods sold			Ending inventory

Check:

Cost Units

Cost of goods available for sale $; 50

Less: cost of goods sold 40

Ending inventory $ 10

BRIEF EXERCISE 6-8

(a) FIFO

Date Account Titles and Explanation Debit Credit

; 4 Merchandise Inventory (20 × $)…….. 110

Accounts Payable………………………………… 110

Nov. 12 Accounts Receivable………………………….. 240

Sales (30 × $)………………………………….. 240

Cost of Goods Sold…………………………….. 170

Merchandise Inventory…………… 170

([20 × $] + [10 × $])

(b) Weighted Average

Date Account Titles and Explanation Debit Credit

; 4 Merchandise Inventory (20 × $)…….. 110

Accounts Payable………………………………… 110

Nov. 12 Accounts Receivable………………………….. 240

Sales (30 × $)………………………………….. 240

Cost of Goods Sold…………………………….. 168

Merchandise Inventory (30 × $) 168

BRIEF EXERCISE 6-9

FIFO
Weighted average cost
Weighted average cost
FIFO

BRIEF EXERCISE 6-10

Weighted average cost gives the higher inventory valuation when prices are falling. This is because the cost of the units are a blend of older and newer items. Under the FIFO system, ending inventory is composed of newer items purchased at a lower cost.

FIFO gives the higher cost of goods sold amount. This is because the cost of the units purchased earlier, at a higher cost, are assumed to have been sold first and are allocated to cost of goods sold.

(c) The selection of a cost formula does not affect cash flow. The cost formula is a method of allocating costs to cost of goods sold and ending inventory. It does not involve the inflow or outflow of cash.

(d) In selecting a cost formula, the company should consider their type of inventory and its actual physical flow. While it is not essential to match the actual physical flow to the cost formula, it does give the company an indication as to its flow of costs throughout the period. The company should also consider the method that will report inventory on the balance sheet that is close to the inventory’s recent costs.

BRIEF EXERCISE 6-11

Assets =

Liabilities +

Owner’s Equity

2016

No Effect

2017

No Effect

2016

Beginning inventory	O $23,000	Sales
+ Purchases		– Cost of goods sold	O $23,000
Cost of goods available for sale	O $23,000	Gross profit/Profit	U $23,000
– Ending inventory
Cost of goods sold	O $23,000

Note that the inventory error first occurred on December 31, 2015 and that 2015 profit and owner’s equity would be overstated by $23,000. The 2016 profit is understated by $23,000. This error is added to the prior year’s overstatement of $23,000, and the two errors cancel out. Owner’s equity at the end of 2016 is correct. The ending inventory is also correct at the end of 2016.

2017

Since the 2016 error reverses the impact of an error originally occurring in 2015, there would be no impact on the 2017 financial statements. Profit, owner’s equity, and ending inventory would all be correctly stated (assuming no new errors have occurred).

BRIEF EXERCISE 6-12

(a) The understatement of ending inventory caused cost of goods sold to be overstated by $7,000 and profit to be understated by $7,000. The correct profit for 2016 is $97,000 ($90,000 + $7,000).

Beginning inventory		Sales
+ Purchases		– Cost of goods sold	O $7,000
Cost of goods available for sale		Gross profit / Profit	U $7,000
– Ending inventory	U $7,000
Cost of goods sold	O $7,000

(b) Total assets and owner’s equity in the balance sheet will both be understated by the amount that ending inventory is understated, $7,000. If profit is understated, then owner’s equity is also understated as profit is a component of owner’s equity. Using the accounting equation:

A = L + OE

(c) The error arising in 2016, if left uncorrected, will flow through into 2017. The 2016 error will affect the 2017 beginning inventory by an understatement of $7,000. This causes cost of goods sold to be understated $7,000 and profit to be overstated $7,000.

Beginning inventory	U $7,000	Sales
+ Purchases		– Cost of goods sold	U $7,000
Cost of goods available for sale		Gross profit / Profit	O $7,000
– Ending inventory
Cost of goods sold	U $7,000

Total assets and owner’s equity in the balance sheet will both be correct since 2017 ending inventory is correct. The 2016 error causes an understatement of 2016 profit of $7,000 and an overstatement of 2017 profit of $7,000, causing the total profit for the two-year period to self correct. This causes owner’s capital in 2017 to be correctly stated.

BRIEF EXERCISE 6-13

(a)

Inventory Categories	Cost	NRV	LCNRV	Adj.

Personal computers	$27,000	$21,500	$21,500	$5,500
Servers	18,000	19,500	18,000	N/A
Total Solution Printers	10,000	8,500	8,500	1,500
Total	$55,000	$49,500	$48,000	$7,000*

(b) *The entry to record the adjustment would be:

Cost of goods sold………………………. 7,000

Merchandise inventory………… 7,000

BRIEF EXERCISE 6-14

The correct ending inventory should be $48,000.

The correct cost of goods sold should be $425,500 ($418,500 + $7,000).

BRIEF EXERCISE 6-15

Inventory turnover = $1,150,000 ÷ [($132,000 + $143,000) ÷ 2]

= times

Days sales in inventory = 365 ÷

= days

BRIEF EXERCISE 6-16

The company’s inventory management has deteriorated in 2017. The inventory turnover ratio went from in 2016 to in 2017. The decrease in this ratio means that the company is selling its inventory fewer times in 2017 than in 2016. The days sales in inventory shows this deterioration by interpreting the turnover ratio in days that inventory is on hand. We can see that the number of days that inventory is on hand has increased from days in 2016 to days in 2017.

*BRIEF EXERCISE 6-17

Goods Available for Sale

	Units	Unit Cost		Total Cost
1st purchase	200	$8	$1,600
2nd purchase	250	7	1,750
3rd purchase	300	6	1,800
Goods available for sale	750		$5,150
Ending inventory in units	400
Number of units sold	350

(a) FIFO

Ending Inventory:

Purchase Units Unit Cost Total Cost

3rd 300 $6 $1,800

2nd 100 7 700

Total 400 $2,500

Cost of goods sold: $5,150 – $2,500 = $2,650

Check of cost of goods sold:

Purchase Units Unit Cost Total Cost

1st 200 $8 $1,600

2nd 150 7 1,050

Total 350 $2,650

*BRIEF EXERCISE 6-17 (Continued)

(b) Weighted Average

Weighted Average unit cost: $5,150 ¸ 750 units = $ per unit

Ending Inventory: 400 units × $ per unit = $2,748

Cost of Goods Sold: $5,150 – $2,748 = $2,402

Check of cost of goods sold:

350 units × $ per unit = $2,405

(rounding the weighted average cost per unit to the nearest penny introduces a slight rounding difference).

* BE6-18

Date Account Titles and Explanation Debit Credit

; 3 Accounts Receivable……………………. 5,500

Sales (550 × $10)……………………… 5,500

9 Purchases (1,000 × $)…………….. 4,500

Accounts Payable……………………. 4,500

15 Cash……………………………………………… 8,500

Sales (850 × $10)……………………… 8,500

*BRIEF EXERCISE 6-19

Less: Estimated gross profit (45% × $275,000)………. 123,750

Estimated cost of goods sold………………………………….. $151,250

Less: Estimated cost of goods sold……………………….. 151,250

Estimated cost of ending inventory…………………………. $ 48,750

*BRIEF EXERCISE 6-20

At Cost

At Retail

Goods available for sale

Net sales

Ending inventory at retail

$35,000

$50,000

40,000

$10,000

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

Estimated cost of ending inventory = $10,000 × 70% = $7,000

SOLUTIONS TO EXERCISES

EXERCISE 6-1

Do not include in inventory – Sam’s does not own items held on consignment for another company.

Include in inventory – Because the shipping terms are FOB destination, Sam’s owns the goods until they arrive at the customer’s premises.

Do not include in inventory – Shipping terms FOB destination means that Sam’s does not own the items until delivered to their premises.

Include in inventory – Because the shipping terms are FOB shipping point, Sam’s owns the goods in transit.

Include in inventory – Because the shipping terms are FOB shipping point, ownership has transferred to Sam’s and Sam’s pays the freight charges.

Do not include in inventory – Because freight costs paid by the seller are freight-out or delivery expense they are included in operating expenses, not as part of the cost of inventory.

EXERCISE 6-2

Ending inventory—physical count…………………………… $281,000

Adjustments:

Add to inventory: Title passed to Moghul when

goods were shipped…………………………………………… 95,000

Add to inventory: Title remains with Moghul until

buyer receives goods…………………………………………. 35,000

Add to inventory: Consignor (Moghul) own goods 30,500
Add to inventory: Title passed to Moghul when

goods were shipped…………………………………………… 28,000

$469,500

EXERCISE 6-3

(a) Carrie’s Car Emporium should use the specific identification instead of one of the cost ;Specific identification is used when a company sells items that are not interchangeable. In the case of cars, these items are not interchangeable. Each car has a unique identifiable VIN (vehicle identification number), along with its cost.

(b)

		Cost of	Ending
Description	Cost	Goods Sold	Inventory
2014 Red Jeep	$15,000	$15,000
2015 Blue Honda	12,000	$12,000
2016 Black Audi	25,000		$25,000
2013 Grey Toyota	18,000		18,000
2013 Green Range Rover	10,000	______	10,000
	$80,000	$27,000	$53,000

(c)

Date Account Titles and Explanation Debit Credit

Dec. 22 Cash or Accounts Receivable……… 33,000

Sales ($16,500 × 2)…………………… 33,000

Cost of Goods Sold………………………. 27,000

Merchandise Inventory…………….. 27,000

($15,000 + $12,000)

EXERCISE 6-4

(a) FIFO

	Purchases			Cost of Goods Sold			Balance
Date	Units	Cost	Total	Units	Cost	Total	Units	Cost	Total
May 1	Beginning inventory
	400	$	$1,600				400	$	$1,600
3				300	$	$1,200	100		400
4	1,300	$	5,330				100 1,300		400 5,330 5,730
14	700	$	3,080				100 1,300 700		400 5,330 3,080 8,810
16				100 900		400 3,690 4,090	400 700		1,640 3,080 4,720
18				400		1,640	700		3,080
29	500		2,375				700 500		3,080 2,375
Total	2,900		$12,385	1,700		$6,930	1,200		$5,455
	Cost of goods available for sale			Cost of goods sold			Ending inventory

EXERCISE 6-4 (Continued)

Check:

Cost Units

Cost of goods available for sale $12,385 2,900

Less: cost of goods sold 6,930 1,700

Ending inventory $ 5,455 1,200

(b)

Date Account Titles and Explanation Debit Credit

May 3 Accounts Receivable……………………….. 2,100

Sales (300 × $)………………………………… 2,100

Cost of Goods Sold………………………….. 1,200

Merchandise Inventory (300 × $) 1,200

4 Merchandise Inventory (1,300 × $) 5,330

Accounts Payable………………………………… 5,330

16 Accounts Receivable……………………….. 7,000

Sales (1,000 × $)…………………………….. 7,000

Cost of Goods Sold………………………….. 4,090

Merchandise Inventory…………………………. 4,090

[(100 × $) + (900 × $)]

Cost of goods sold 6,930

Gross profit $5,170

EXERCISE 6-5

(a) Weighted Average

										Weighted Average Calculations
Date	Purchases			Cost of goods sold			Inventory Balance				Total	WA Cost
	Units	Cost	Total	Units	Cost	Total	Units	Cost	Total	Units	Cost	per unit
Jan. 1	Beginning inventory									A	B	B ÷ A
	1,000	$	$12,000				1,000	$	$12,000
Feb. 15	2,000		36,000				3,000		48,000	1,000	12,000
										2,000	36,000
										3,000	48,000	$
Apr. 24				2,500		40,000	500		8,000	3,000	48,000
										-2,500	-40,000
										500	8,000	$
June 6	3,500		80,500				4,000		88,500	500	8,000
										3,500	80,500
										4,000	88,500	$
Oct. 18				2,000		44,260	2,000		44,240	4,000	88,500
										-2,000	-44,260
										2,000	44,240	$
Dec. 4	1,400		36,400	_____		______	3,400		80,640	2,000 1,400 3,400	44,240 36,400 80,640	$
Totals	7,900		$164,900	4,500		$84,260	3,400		$80,640
	Cost of goods available for sale			Cost of goods sold			Ending inventory

EXERCISE 6-5 (Continued)

Check:

Cost Units

Cost of goods available for sale $164,900 7,900

Less: cost of goods sold 84,260 4,500

Ending inventory $ 80,640 3,400

(b)

Date Account Titles and Explanation Debit Credit

June 6 Merchandise Inventory (3,500 × $23) 80,500

Accounts Payable………………………………… 80,500

Oct. 18 Accounts Receivable……………………… 66,000

Sales (2,000 × $33)………………………………… 66,000

Cost of Goods Sold………………………… 44,260

Merchandise Inventory (2,000 × $) 44,260

Cost of goods sold 84,260

Gross profit $56,740

EXERCISE 6-6

(a) (1) FIFO

	Purchases			Cost of Goods Sold			Balance
Date	Units	Cost	Total	Units	Cost	Total	Units	Cost	Total
July 1	Beginning inventory
	150	$	$				150	$	$
July 12	230		1,				150 230		1, 2,
July 20				150 100	$	1,	130
July 28	490		3,				130 490		3, 4,
Total	870		$5,	250		$1,425	620		$4,
	Cost of goods available for sale			Cost of goods sold			Ending inventory

Check:

Cost Units

Cost of goods available for sale $5,; 870

Less: cost of goods sold 1, 250

Ending inventory $4, 620

EXERCISE 6-6 (Continued)

(2) Weighted Average

										Weighted Average Calculations
Date	Purchases			Cost of goods sold			Inventory balance				Total	WA Cost
	Units	Cost	Total	Units	Cost	Total	Units	Cost	Total	Units	Cost	per unit
01-Jul	Beginning inventory									A	B	B ÷ A
	150	$	$				150	$	$
12-Jul	230		1,				380		2,	150	$
										230	1,
										380	2,	$
20-Jul				250	$	$1,	130			380	2,
										-250	-1,
										130		$
28-Jul	490		3,				620		4,	130
										490	3,
										620	4,	$
Total	870		$5,	250		$1,	620		$4,
	Cost of goods available			Cost of goods sold			Ending inventory
	sale

Check:
					Cost	Units
Cost of goods available for sale					$5,	870
Less: Cost of goods sold					1,	250
Ending Inventory					$4,	620

EXERCISE 6-6 (Continued)

(b)

	Cost of Goods Sold	Ending Inventory
FIFO—Perpetual	$1,	$4,

Weighted Average—Perpetual	$1,	$4,

The FIFO cost formula will produce the higher ending inventory because costs have been rising. Under this formula, the earliest costs are assigned to cost of goods sold, and the latest costs remain in ending inventory. For Dene Company, the ending inventory under FIFO is $4, compared to $4, under weighted average cost.

(c) The weighted average cost formula will produce the higher cost of goods sold for Dene Company. Under the weighted average cost formula some of the most recent costs are averaged into cost of goods sold, and the earliest costs are averaged into the ending inventory. The cost of goods sold is $1, for the weighted average compared to $1, under FIFO.

EXERCISE 6-7

(a) (2)

(1) Weighted

FIFO Average

Sales ($15 × 1,180) $17,700 $17,700

Cost of goods sold 8,060 7,787

Gross profit $ 9,640 $ 9,913

Gross profit is different under the two methods because a different flow of goods is assumed. Under the FIFO method, the earliest costs are assigned to cost of goods sold. Since product costs are decreasing, this means that older, higher costs are flowing to cost of goods sold. Under the weighted average method, the older, higher costs are averaged into cost of goods sold with newer, lower costs, producing a lower amount than the FIFO method.

(b) The choice of inventory cost formula does not affect cash flow. It affects the allocation of costs between inventory and cost of goods sold.

EXERCISE 6-8

(a)

	2017	2016
Ending inventory, incorrect	$30,000	$30,000
Error	$4,000 U	$5,500 O
Ending inventory, correct	$34,000	$24,500

Cost of goods sold, incorrect	$170,000	$175,000
Error – beginning inventory 2016	5,500 O
Error – ending inventory 2016		5,500 U
Error – ending inventory 2017	4,000 O
Cost of goods sold, correct	$160,500	$180,500

(b) In 2016 profit is overstated by $5,500, the amount of the error in ending inventory. This error flows through to owner’s equity in 2016 to produce an overstatement of $5,500.

In 2017 both errors have an impact. The net effect is an understatement of profit by $9,500. This is a result of the $5,500 overstatement of the beginning inventory plus $4,000 understatement of ending inventory.

Owner’s equity in 2017 would show only an understatement of $4,000. The $5,500 overstatement of 2016 would be offset by the $5,500 understatement in profit caused by the impact on beginning inventory in 2017.

(c) It is important that Glacier Fishing Gear correct these errors because users of the financial statements look at the results for individual years and also look at any trends.

EXERCISE 6-9

(a)

MARRAKESH COMPANY

Income Statement (Partial)

December 31

____________________________________________________

2017 2016

Sales………………………………………………………….. $500,000 $500,000

Cost of goods sold*……………………………………. 430,000 390,000

Gross profit…………………………………………………. $ 70,000 $110,000

* Cost of goods sold (2016) = $410,000 – $20,000 = $390,000

Cost of goods sold (2017) = $410,000 + $20,000 = $430,000

(b) The cumulative effect on total gross profit for the two years is zero, as shown below:

2017 2016

Incorrect gross profits: $90,000 + $90,000 = $180,000

Correct gross profits: $70,000 + $110,000 = 180,000

Difference $ 0

EXERCISE 6-10

(a)
(a)	Cost	NRV	LCNRV
Clothing	$ 665	$ 570	$ 570
Jewellery	1,440	2,016	1,440
Greeting cards	47	94	47
Stuffed toys	672	2,184	672
Total inventory	$2,824	$4,864	$2,729

(b) Cost of Goods Sold……………………………………… 95

Merchandise Inventory ($2,824 – $2,729) 95

EXERCISE 6-11

(a)
(a)	Cost	NRV	LCNRV
Cameras
Nikon	$10,125	$ 9,000
Canon	6,800	7,225
Total	16,925	16,225	$16,225
Lenses
Sony	2,970	2,728
Sigma	4,300	4,400
Total	7,270	7,128	7,128
Total inventory	$24,195	$23,353	$23,353

(b) Cost of Goods Sold……………………………………. 842

Merchandise Inventory ($24,195 – $23,353) 842

(c) In the notes to the financial statements, the following information should be reported: (1) the major inventory classifications; (2) the cost determination method; (3) the value of inventory reported at net realizable value ($23,353); (4) the cost of goods sold; and (5) the amount of the writedown to net realizable value ($842).

EXERCISE 6-12

(a)

	2017	2016
Inventory turnover	times = $50,000 [($20,000 + $30,000) ÷ 2]	times = $51,200 [($30,000 + $34,000) ÷ 2]
Days sales in inventory	183 days = 365 ÷	228 days = 365 ÷
Gross profit margin	= ($125,000 – $50,000) $125,000	= ($128,000 – $51,200) $128,000

(b) Inventory turnover has increased from (2016) to (2017). As well, days sales in inventory has decreased from 228 days (2016) to 183 days (2017). Both of these ratios indicate that it is taking less time to sell inventory.

The gross profit margin has remained at the same level of 60%. The sales volume and cost of goods sold have also remained relatively constant from 2016 to 2017. The improvement in inventory turnover and days sales in inventory seem to come from decreasing the level of merchandise on ; Whereas the gross profit margin has remained constant, lowering the quantity of merchandise on hand usually lowers carrying costs and increases overall profitability.

The increase in inventory turnover (and decrease in days sales in inventory) indicate an improving liquidity.

*EXERCISE 6-13

(a)

FIFO

Ending Inventory:

Date

Units

Unit Cost

Total Cost

Apr. 16

; 12

$12

$180

110

$290

Cost of Goods Sold: $915 – $290 = $625

Weighted Average

Weighted Average unit cost: $915 ÷ 90 units = $ (rounded) per unit

Ending Inventory: 25 units × $ per unit = $254 (rounded)

Cost of Goods Sold: $915 – $254 = $661

(b)

FIFO

Check of Cost of Goods Sold:

Date

Units

Unit Cost

Total Cost

; 1

; 12

$ 8

$240

385

$625

Weighted Average

Check of Cost of Goods Sold: 65 units × $ per unit = $661 (rounded)

*EXERCISE 6-14

(a)

Cost of Goods Available for Sale
Date	Units	Unit Cost	Total Cost
July 1	150	$	$
12	230		1,
28	490		3,
Total	870		$5,

FIFO Ending Inventory:

Date

Units

Unit Cost

Total Cost

June 28

490

130

620

$3,

$4,

Cost of Goods Sold: $5,$4, = $1,

Check of Cost of Goods Sold:

Date

Units

Unit Cost

Total Cost

June 1

150

100

250

$ 750

675

$1,425

Weighted Average

Weighted Average unit cost: $5, ÷ 870 units = $ per unit

Ending inventory: 620 units x $ per unit = $4,

Cost of goods sold: $$5, – $4, = $1,

*EXERCISE 6-14 (Continued)

(b) The weighted average cost is not $ because the weighted average cost method uses a weighted average unit cost, not a simple average of unit costs ($5 + $ + $7 = $ ÷ 3 = $).

(c)

	Cost of Goods Sold	Ending Inventory
FIFO—Periodic	$1,	$4,
FIFO—Perpetual	1,	4,

Weighted Average—Periodic	1,	4,
Weighted Average—Perpetual	1,	4,

FIFO: The results are identical using either the periodic or the perpetual inventory systems.

Weighted Average: Cost of goods sold is $ lower and ending inventory $ higher using a perpetual system. This is because in the perpetual system the higher priced purchases on July 28 are not considered in the last sale; in the periodic system the weighted average is based on all of the purchases and is applied to all of the sales.

*EXERCISE 6-15

(a) FIFO

	Purchases			Cost of Goods Sold			Balance
Date	Units	Cost	Total	Units	Cost	Total	Units	Cost	Total
	Beginning inventory
	25	$295	$7,375				25	$295	$7,375
Oct. 10	30	300	9,000				25 30	295 300	7,375 9,000 16,375
Oct. 12				25 17	$295 300	$7,375 5,100 12,475	13	300	3,900
Oct. 13	35	305	10,675				13 35	300 305	3,900 10,675 14,575
Oct. 25				13 32	300 305	3,900 9,760 13,660	3	305	915
Oct. 27	20	310	6,200				3 20	305 310	915 6,200 7,115
Total	110		$33,250	87		$26,135	23		$7,115
	Cost of goods available for sale			Cost of goods sold			Ending inventory

Check:

Cost Units

Cost of goods available for sale $33,250 110

Less: cost of goods sold 26,135 87

Ending inventory $ 7,115 23

*EXERCISE 6-15 (Continued)

Weighted Average

										Weighted Average Calculations
Date	Purchases			Cost of goods sold			Inventory balance				Total	WA Cost
	Units	Cost	Total	Units	Cost	Total	Units	Cost	Total	Units	Cost	per unit
Oct 1	Beginning inventory									A	B	B ÷ A
	25	$	$7,				25	$	$7,
10	30		9,				55		16,	25	$7,
										30	9,
										55	16,	$
12				42	$	$12,	13		3,	55	16,
										-42	-12,
										13	3,	$
13	35		10,				48		14,	13	3,
										35	10,
										48	14,	$
25				45		13,	3			48	14,
										-45	-13,
										3		$
27	20		6,				23		7,	3
										20	6,
										23	7,	$
Total	110		$33,	87		$26,	23		$7,
	Cost of goods available for			Cost of goods sold			Ending inventory
	sale

Check:
					Cost	Units
Cost of goods available for sale					$33,	110
Less: Cost of goods sold					26,	87
Ending Inventory					$7,	23

*EXERCISE 6-15 (Continued)

(b)

Cost of Goods Available for Sale
Date	Units	Unit Cost	Total Cost
Oct 1	25	$295	$ 7,375
; 10	30	300	9,000
;13	35	305	10,675
; 27	20	310	6,200
Total	110		$33,250

FIFO

Ending Inventory:

Date

Units

Unit Cost

Total Cost

;27

$310

305

$6,200

915

$7,115

Cost of Goods Sold: $33,250 – $7,115 = $26,135

Weighted Average

Weighted Average cost per unit: $33,250 ÷ 110 units = $ per unit

Ending inventory: 23 × $ = $6,

Cost of goods sold: $33,250 – $6, = $26,

*EXERCISE 6-16

(a) Perpetual

				Weighted
		FIFO		Average
		Dr.	Cr.	Dr.	Cr.
Oct. 10	Merchandise Inventory Accounts Payable	9,000	9,000	9,000	9,000
12	Cash Sales Cost of Goods Sold Merchandise Inventory	18,900 12,475	18,900 12,475	18,900 12,	18,900 12,

(b) Periodic

				Weighted
		FIFO		Average
		Dr.	Cr.	Dr.	Cr.
Oct. 13	Purchases Accounts Payable	10,675	10,675	10,675	10,675
25	Cash Sales	20,700	20,700	20,700	20,700

*EXERCISE 6-17

Net sales ($90,000 – $1,500 – $700)…………………………. $87,800

Less: Estimated gross profit (40% × $87,800)………… 35,120

Estimated cost of goods sold………………………………….. $52,680

Beginning inventory…………………………………………………. $25,000

Cost of goods purchased

($51,200 – $2,400 – $1,300 + $2,200)……………….. 49,700

Cost of goods available for sale………………………………. 74,700

Less: Estimated cost of goods sold……………………….. 52,680

Estimated cost of merchandise inventory……………….. $22,020

*EXERCISE 6-18

Men’s Women’s

Shoes Shoes

Cost Retail Cost Retail

Beginning inventory $ 36,000 $ 58,050 $ 45,000 $ 95,750

Goods purchased 216,000 348,400 315,000 670,200

Goods available for sale $252,000 406,450 $360,000 765,950

Net sales 365,000 635,000

Ending inventory at retail $ 41,450 $130,950

Cost to retail ratio: $252,000 = 62% $360,000 = 47%

$406,450 $765,950

Estimated cost of

ending inventory $41,450 × 62% $130,950 × 47%

= $25,699 = $61,547

SOLUTIONS TO PROBLEMS

PROBLEM 6-1A

(a)

Include the unsold portion of $510 ($875 – $365) in Carberry’s inventory. Title passes to the buyer on sale.

Exclude the items from Carberry’s inventory. These goods have been sold.

Exclude the items from Carberry’s inventory. These goods are owned by Craft Producers.

Title to the goods does not transfer to the customer until March 3. Include the $950 in ending inventory.

Carberry owns the goods once they are shipped on February 26. Include inventory of $405 ($375 + $30).

Include $630 in inventory. These goods have not yet been sold.

Title of the goods does not transfer to Carberry until March 2. Exclude this amount from the February 28 inventory.

The sale will be recorded on February 26. The goods should be excluded from Carberry’s inventory at the end of February.

(b) $65,000 Original Feb. 28 inventory valuation

+510 1.

+950 4.

+405 5.

+630 6.

$67,495 Revised Feb. 28 inventory valuation

PROBLEM 6-1A (Continued)

Taking It Further

The accountant would consider overlooking item 4. A sale to a customer has taken place but the legal ownership of the merchandise is transferred after year end. Recording this transaction in February will increase profit and increase the accountant’s bonus. Intentionally not correcting this error would be unethical.

PROBLEM 6-2A

		Cost of goods sold				Ending inventory
		Model	Serial #	Cost/ Unit	Sales price/ Unit	Model	Serial #	Cost/ Unit
Nov.	8	Corolla	C81362	$20,000	$22,000	Corolla	C63825	$15,000
		Camry	G62313	26,000	28,000	Tundra	F1883	22,000
	18	Camry	G71891	25,000	27,000	Camry	G71811	27,000
		Venza	X3892	27,000	31,000	Venza	X4212	28,000
		Tundra	F1921	25,000	29,000	Venza	X4214	31,000
				$123,000	$137,000	Tundra	F2182	23,000
						Camry	G72166	30,000
								$176,000

Taking It Further:

EastPoint Toyota should use the specific identification method because the vehicles are large dollar value items that are specifically identifiable and they are not interchangeable.

PROBLEM 6-3A

(a)

	Purchases			Cost of Goods Sold			Balance
Date	Units	Cost	Total	Units	Cost	Total	Units	Cost	Total
Nov. 1	Beginning inventory
	60	$50	$3,000				60	$50	$3,000
9	100	46	4,600				60 100	50 46	3,000 4,600 7,600
15				60 60	$50 46	$3,000 2,760 5,760	40	46	1,840
22	150	44	6,600				40 150	46 44	1,840 6,600 8,440
29				40 120	46 44	1,840 5,280 7,120	30	44	1,320
30	45	42	1,890				30 45	44 42	1,320 1,890 3,210
Total	355		$16,090	280		$12,880	75		$3,210

Check:

Cost Units

Cost of goods available for sale $16,090 355

Less: cost of goods sold 12,880 280

Ending inventory $ 3,210 75

PROBLEM 6-3A (Continued)

(b)

Nov. 22 Merchandise Inventory…………………….. 6,600

Accounts Payable (150 × $44)………………. 6,600

29 Accounts Receivable……………………….. 9,600

Sales (160 × $60)…………………………………… 9,600

Cost of Goods Sold………………………….. 7,120

Merchandise Inventory

[(40 × $46) + (120 × $44)]………………………. 7,120

Cost of goods sold 12,880

Gross profit $ 4,640

(d) The entry to record the adjustment would be:

Cost of Goods Sold (2 × $44)………………… 88

Merchandise Inventory…………………………. 88

Revised gross profit would be: $4,640 – $88 = $4,552

(e) The merchandise inventory on the balance sheet would be overstated by $88, as well as the owner’s capital account by the same amount. On the income statement, the cost of goods sold would be understated by $88. This would lead to an overstatement of gross profit by $88 and of profit by $88.

Taking It Further:

The FIFO cost formula produces more meaningful inventory amounts for the balance sheet because the units are costed at the most recent purchase prices. These prices approximate replacement cost, which is the most relevant value for decision making.

The FIFO cost formula is more likely to approximate actual physical flow because the oldest goods are usually sold first to minimize spoilage and obsolescence.

PROBLEM 6-4A

(a)

										Weighted Average Calculations
Date	Purchases			Cost of goods sold			Inventory Balance				Total	WA Cost
	Units	Cost	Total	Units	Cost	Total	Units	Cost	Total	Units	Cost	per unit
Nov. 1	Beginning inventory									A	B	B ÷ A
	60	$	$3,				60	$	$3,
9	100		4,				160		7,	60	3,
										100	4,
										160	7,	$
15				120		5,	40		1,	160	7,
										-120	-5,
										40	1,	$
22	150		6,				190		8,	40	1,
										150	6,
										190	8,	$
29				160		7,	30		1,	190	8,
										-160	-7,
										30	1,	$
30	45		1,	_____		______	75		3,	30 45 75	1, 1, 3,	$
Totals	355		$16,	280		$12,	75		$3,
	Cost of goods available for sale			Cost of goods sold			Ending inventory

PROBLEM 6-4A (Continued)

Check:

Cost Units

Cost of goods available for sale $16,; 355

Less: cost of goods sold 12, 280

Ending inventory $ 3, 75

(b)

Nov. 15 Accounts Receivable……………………….. 7,920

Sales (120 × $66)…………………………………… 7,920

Cost of Goods Sold………………………….. 5,700

Merchandise Inventory (120 × $) 5,700

(c) Before making the change to the FIFO cost formula, the company must consider if the FIFO formula would result in more relevant information in the financial statements. Or has the physical flow of inventory changed from average flow to FIFO?

Comparison

		Weighted
FIFO		Average
Ending Inventory	Cost of Goods Sold	Ending Inventory	Cost of Goods Sold
$3,210	$12,880	$3,	$12,

If prices continue to fall, the FIFO cost formula will continue to yield lower ending inventory and higher cost of goods sold than the weighted average cost formula.

PROBLEM 6-4A (Continued)

Taking It Further:

In selecting a cost formula, management should consider their circumstances—the type of inventory and the flow of costs throughout the period. Management should also consider their financial reporting objectives. In the final determination; however, management should select the cost formula that will provide the most relevant financial information for decision-making.

PROBLEM 6-5A

(a) (1) FIFO

	Purchases			Cost of Goods Sold			Balance
Date	Units	Cost	Total	Units	Cost	Total	Units	Cost	Total
June 1	Beginning inventory
	5	$105	$525				5	$105	$525
4				2	$105	$210	3	105	315
18	5	$115	$575				3 5	105 115	315 575 890
30				3 3	105 115	315 345 660	2	115	230
July 5	5	120	600				2 5	115 120	230 600 830
12				2 1	115 120	230 120 350	4	120	480
25				2	120	240	2	120	240
Total	15		$1,700	13		$1,460	2		$240

Check:

Cost Units

Cost of goods available for sale $1,700 15

Less: cost of goods sold 1,460 13

Ending inventory $240 2

PROBLEM 6-5A (Continued)

(2) Weighted Average

										Weighted Average Calculations
Date	Purchases			Cost of goods sold			Inventory Balance				Total	WA Cost
	Units	Cost	Total	Units	Cost	Total	Units	Cost	Total	Units	Cost	per unit
June 1	Beginning inventory									A	B	B ÷ A
	5	$	$				5	$	$
4				2	$	$	3			5	$
										-2
										3		$
18	5						8			3
										5
										8		$
30				6			2			8
										-6
										2		$
July 5	5						7			2
										5
										7		$
12				3			4			7
										-3
										4		$
25				2			2			4 -2 2		$
Totals	15		$1,	13		$1,	2		$
	Cost of goods available for sale			Cost of goods sold			Ending inventory

PROBLEM 6-5A (Continued)

(a) (Continued)

Check:

Cost Units

Cost of goods available for sale $1,700 15

Less: cost of goods sold 1,465 13

Ending inventory $235 2

(b)

Weighted

FIFO Average

Sales*…………………………………………………………… $3,105 $3,105

Cost of goods sold………………………………………. 1,460 1,465

Gross profit………………………………………………….. $1,645 $1,640

* Sales = (2 × $210) + (6 × $235) + (3 × $255) + (2 × $255)

Taking It Further:

In selecting a cost formula, management should consider their circumstances—the type of inventory and the flow of costs throughout the period. In the final determination; however, management should select the cost formula that best approximates the physical flow of goods or represents recent costs on the balance sheet.

PROBLEM 6-6A

(a)

										Weighted Average Calculations
Date	Purchases			Cost of goods sold			Inventory Balance				Total	WA Cost
	Units	Cost	Total	Units	Cost	Total	Units	Cost	Total	Units	Cost	per unit
July 1	Beginning inventory									A	B	B ÷ A
	25	$	$				25	$	$
5	55						80			25	$
										55
										80		$
8				70	$	$	10			80
										-70
										10		$
15	55						65			10
										55
										65		$
20				55			10			65
										-55
										10		$
25	10	7					20			10
										10
										20		$
Totals	145		$1,	125		$1,	20		$
	Cost of goods available for sale			Cost of goods sold			Ending inventory

PROBLEM 6-6A (Continued)

(a) (Continued)

Check:

Cost Units

Cost of goods available for sale $1,; 145

Less: cost of goods sold 1, 125

Ending inventory $ 20

GENERAL JOURNAL

Date

Account Titles

Debit

Credit

July 5 Merchandise Inventory (55 × $9).

Cash……………………………………..

8 Cash (70 × $15)…………………………. 1,

Sales…………………………………….. 1,

Cost of Goods Sold (70 × $).

Merchandise Inventory…………

15 Merchandise Inventory (55 × $8).

Cash…………………………………….

20 Cash (55 × $12)………………………….

Sales…………………………………….

Cost of Goods Sold (55 × $).

Merchandise Inventory………..

25 Merchandise Inventory (10 × $7).

Cash…………………………………….

PROBLEM 6-6A (Continued)

(b) The total cost of ending inventory is $ and consists of 20 units.

(c) Since the weighted average cost per unit of $ is less than net realizable value, no entry is required to adjust the amount to lower of cost and net realizable value.

Cost:$

Calculated net realizable value: $160 (20 × $8)

(d) The ending inventory should be valued at $, the lower of cost and net realizable value.

The cost of goods sold is $1,

Taking It Further:

If Amelia had used FIFO instead of weighted average, the cost of the ending inventory on July 31 would be calculated as follows:

(10 units × $7) + (10 units × $8) = $150

The FIFO cost is lower than net realizable value, so no adjustment is required. The inventory will be presented on the balance sheet at its cost basis of $150.

PROBLEM 6-7A

(a)

Year Ended December 31, 2015
	Total Assets	Owner’s Equity	Cost of Goods Sold	Profit
As reported	$ 850,000	$ 650,000	$ 500,000	$ 70,000
Impact of inventory overstatement	O 20,000	O 20,000	U 20,000	O 20,000
Correct amount	$ 830,000	$ 630,000	$ 520,000	$ 50,000

Year Ended December 31, 2016
	Total Assets	Owner’s Equity	Cost of Goods Sold	Profit
As reported	$ 900,000	$ 700,000	$ 550,000	$80,000
Impact of inventory overstatement	NE	NE	O 20,000	U 20,000
Impact of inventory understatement	U 32,000	U 32,000	O 32,000	U 32,000
Correct amount	$ 932,000	$ 732,000	$ 498,000	$ 132,000

Year Ended December 31, 2017
	Total Assets	Owner’s Equity	Cost of Goods Sold	Profit
As reported	$ 925,000	$ 750,000	$ 550,000	$90,000
Impact of inventory understatement	NE	NE	U 32,000	O 32,000
Correct amount	$ 925,000	$ 750,000	$ 582,000	$ 58,000

PROBLEM 6-7A (Continued)

(b) The errors in calculating the company’s ending inventory will not have an impact on the company’s cash account. The cash balances will be correctly stated at December 31, 2015, 2016, and 2017.

Taking It Further:

Part (a) shows that even though 2017 year end inventory and owner’s equity are correct, the income statement shows the impact of the 2016 error on cost of goods sold and profit. In addition, comparative amounts for 2016 and 2015 would show incorrect amounts for inventory, owner’s equity, cost of goods sold, and profit. These errors impact trend and profitability analyses and would need to be corrected.

PROBLEM 6-8A

(a) (Incorrect)

HARRISON COMPANY

Income Statement

Name: Solution Manual for Accounting Principles, Volume1, 7th Canadian Edition by Jerry J. Weygandt, Donald E. Kieso
Price: 55.00 USD
Availability: InStock

2017 2016 2015

Sales $350,000 $330,000 $310,000

Cost of goods sold 245,000 235,000 225,000

Gross profit 105,000 95,000 85,000

Operating expenses 76,000 76,000 76,000

Profit $ 29,000 $ 19,000 $ 9,000

(Corrected)

HARRISON COMPANY

Income Statement

2017 2016 2015

Sales $350,000 $330,000 $310,000

Cost of goods sold 240,000 ** 240,000 * 225,000

Gross profit 110,000 90,000 85,000

Operating expenses 76,000 76,000 76,000

Profit $ 34,000 $ 14,000 $ 9,000

** $240,000 = $245,000 + $10,000 – $15,000

* $240,000 = $235,000 – $10,000 + $15,000

PROBLEM 6-8A (Continued)

(b) The impact of these errors on owner’s equity at July 31, 2017 is zero because the total of the profit over the three-year period is the same with the incorrect statements as it is with the correct statements. However, using the incorrect numbers it appears the company’s profit is increasing at a steady rate over the three-year period when in fact it increased slightly in 2016 and increased substantially in 2017.

Incorrect

2016: $235,000 ÷ [($45,000 + $35,000) ÷ 2] =

2017: $245,000 ÷ [($55,000 + $45,000) ÷ 2] =

Corrected

2016: $240,000 ÷ [($40,000 + $35,000) ÷ 2] =

2017: $240,000 ÷ [($55,000 + $40,000) ÷ 2] =

Taking it Further:

The incorrect annual profits show an increasing trend of profitability with profits increasing at a steady rate from $9,000 in 2015 to $19,000 in 2016 and then to $29,000 in 2017.

The corrected profit also shows an increase in profitability but with a slow rate of increase from 2015 to 2016 and a much sharper increase from 2016 to 2017. Profits increased from $9,000 to $14,000 in 2016 and subsequently increased to $34,000 in 2017.

It is not possible to determine if the errors were deliberate or not. Certain factors can indicate a higher likelihood that the errors are deliberate. For example, if management bonuses are tied to trends in profitability or income smoothing, then it may be possible the errors were deliberate.

PROBLEM 6-9A

(a)

Tonnes

Total Cost

Total NRV

LCNRV

(1)

Sept. 30

2,500

$1,262,500

$1,350,000

$1,262,500

(2)

Oct. 31

2,000

1,070,000

1,040,000

(b)

(1) Sept. 30 No entry

(2) Oct. 31 Cost of Goods Sold…………….. 30,000

Merchandise Inventory……. 30,000

(c) An adjusting entry is required at November 30 because the inventory, on which a previous writedown had been recorded, is still on hand and the net realizable value has partly recovered. If the inventory on hand at October 31 had been sold then an adjusting entry would not be required. The adjustment is:

Nov. 30 Merchandise Inventory……….. 20,000

Cost of Goods Sold………… 20,000

[($530 – $520) × 2,000]

(d) The notes should disclose the cost determination method, the value of inventory reported at net realizable value, the amount of any writedown to net realizable value (for the month of October) and reversals of previous writedowns (for the month of November), including the reason why the writedown was reversed. This type of disclosure would be required if the company prepares monthly financial statements.

Taking It Further:

Essentially all companies are required to report inventory at LCNRV on the balance sheet. A few exceptions apply such as inventory items that will be used in production of finished goods where the sales price of the finished good is stable.

PROBLEM 6-10A

(a)

PepsiCo. Inc.	2014
Inventory turnover	$30,884		=		times
	($3,143 + $3,409)
	2
Days sales in inventory
	365	÷	=	39	days

Gross profit margin	($66,683 – $30,884)		=
	$66,683

PepsiCo. Inc.	2013
Inventory turnover	$31,243		=		times
	($3,409 + $3,581)
	2
Days sales in inventory
	365	÷	=	41	days

Gross profit margin	($66,415 – $31,243)		=
	$66,415

PROBLEM 6-10A (Continued)

(a) (Continued)


Coca-Cola Company	2014
Inventory turnover	$17,889		=		times
	($3,100 + $3,277)
	2
Days sales in inventory
	365	÷	=	65	days

Gross profit margin	($45,998 – $17,889)		=
	$45,998

Coca-Cola Company	2013
Inventory turnover	$18,421		=		times
	($3,277 + $3,264)
	2
Days sales in inventory
	365	÷	=	65	days

Gross profit margin	($46,854 – $18,421)		=
	$46,854

PROBLEM 6-10A (Continued)

(b)

PepsiCo’s inventory turnover improved and days sales in inventory showed an improvement of 2 days from 2013 to 2014. PepsiCo’s gross profit margin showed a slight improvement from to

Coca-Cola’s inventory turnover and days sales in inventory are practically identical for 2013 and 2014. Coca-Cola’s gross profit margin also showed a slight improvement from to

In spite of the positive performance on inventory turnover and gross profit margin, both companies’ profit declined in 2014.

It is meaningful to compare these two companies in terms of their ratios because the companies operate in the same industry. They are different in terms of their size and a ratio analysis eliminates this difference and makes for a meaningful comparison. Although PepsiCo has a better inventory turnover than Coca-Cola, it earns substantially less gross profit as a percentage of sales. It would be useful to know if their accounting polices differ in any significant ways.

Taking It Further:

In selecting a cost formula, management should consider their circumstances—the type of inventory and the flow of costs throughout the period. Management selects the cost formula that best approximates the physical flow of goods or represents recent costs on the balance sheet. Both Pepsi and Coca-Cola have different types of inventories such as ingredients for raw materials, and finished goods such as concentrates, syrups, beverages, and snack and other foods. A cost formula such as weighted average is better suited for products such as concentrates or syrups. Other products such as snack foods, where freshness is important, would be better tracked with a cost method such as FIFO.

*PROBLEM 6-11A

(a) Cost of Goods Available for Sale

Date Explanation Units Unit Cost Total Cost

Jan. 1 Beginning inventory 200 $110 $22,000

Mar. 15 Purchase 80 111 8,880

July 20 Purchase 60 110 6,600

; 4 Purchase 25 108 2,700

; 2 Purchase 10 103 1,030

Total 375 $41,210

(b) Number of units sold = 375 units available for sale – 35 units on hand at the end of the year = 340 units sold

Sales = 340 units × $290 = $98,600

Ending Inventory:

Date Units Unit Cost Total Cost

; 2 10 $ 103 $1,030

; 4 25 108 2,700

35 $3,730

Cost of goods sold: $41,210 – $3,730 = $37,480

Check of cost of goods sold:

Date Units Unit Cost Total Cost

Jan. 1 200 $110 $22,000

Mar. 15 80 111 8,880

July 20 60 110 6,600

340* $37,480

*340 = 375 – 35

*PROBLEM 6-11A (Continued)

(2) Weighted Average

Weighted Average unit cost: $41,210 ¸ 375 units = $ per unit

Ending Inventory: 35 units × $ per unit = $3,846

Cost of Goods Sold: $41,210 – $3,846 = $37,364

(d)

		Weighted
	FIFO	Average
Sales revenue (340 × $290)	$98,600	$98,600
Cost of goods sold	37,480	37,364
Gross profit	$61,120	$61,236

Taking It Further:

The Baby Store should continue to use the weighted average cost method. GAAP requires that a cost determination method be applied consistently from year to year. Changes in cost determination methods are allowed only if the physical flow of inventory has changed and the new method results in more relevant information. The company cannot change methods simply because they wish to achieve a particular outcome for profit. One user, or set of users, should not be considered above other users.

*PROBLEM 6-12A

(a) Cost of goods available for sale

Date Explanation Units Unit Cost Total Cost

July 1 Beginning inventory 400 $; $1,200

10 Purchase 1,300 ; 4,030

13 Purchase 700 ; 2,380

27 Purchase 600 ; 2,250

Total 3,000 $9,860

Number of units of ending inventory = 3,000 units available for sale – 1,700* units sold = 1,300 units of ending inventory.

*1,700 units sold = 300 + 1,000 + 400

(b) FIFO — periodic:

Ending Inventory:

Date Units Unit Cost Total Cost

July 27 600 $ ; $2,250

July 13 700 ; 2,380

1,300 $4,630

Cost of goods sold: $9,860 – $4,630 = $5,230

Sales revenue	$10,400	*
Cost of goods sold	5,230
Gross profit	$ 5,170

*(300 × $) + (1,000 × $) + (400 × $)

*PROBLEM 6-12A (Continued)

	Purchases			Cost of Goods Sold			Balance
Date	Units	Cost	Total	Units	Cost	Total	Units	Cost	Total
July 1	Beginning inventory
	400	$	$1,200				400	$	$1,200
2				300	$	$ 900	100		300
10	1,300		4,030				100 1,300		300 4,030 4,330
11				100 900		300 2,790 3,090	400		1,240
13	700		2,380				400		1,240
							700		2,380 3,620
27	600		2,250				400 700		1,240 2,380
							600		2,250 5,870
28	_______		______	400 _____		1,240 _______	700 __600		2,380 2,250 4,630
Total	3,000		$9,860	1,700		$5,230	1,300		$4,630
	Cost of goods available for sale			Cost of goods sold			Ending inventory

*PROBLEM 6-12A (Continued)

Check:

Cost Units

Cost of goods available for sale $9,860 3,000

Less: cost of goods sold 5,230 1,700

Ending inventory $4,630 1,300

Sales revenue	$10,400
Cost of goods sold	5,230
Gross profit	$ 5,170

(d) (1) FIFO periodic

GENERAL JOURNAL

Date

Account Titles

Debit

Credit

July 10 Purchases………………………………… 4,030

Cash (1,300 × $)…………….. 4,030

11 Cash (1,000 × $)…………………. 6,000

Sales…………………………………….. 6,000

(2) FIFO perpetual

GENERAL JOURNAL

Date

Account Titles

Debit

Credit

July 10 Merchandise Inventory…………….. 4,030

Cash (1,300 × $)…………….. 4,030

11 Cash (1,000 × $)…………………. 6,000

Sales…………………………………….. 6,000

Cost of Goods Sold………………….. 3,090

Merchandise Inventory………… 3,090

[(100 × $) + (900 × $)]

*PROBLEM 6-12A (Continued)

(e) Comparison:

	Periodic	Perpetual
Ending inventory	$4,630	$4,630
Cost of goods sold	5,230	5,230
Gross profit	5,170	5,170

The numbers are the same because regardless of the system (perpetual or periodic), the first costs are assigned to the cost of goods sold.

Taking It Further:

Companies are required to disclose their inventory cost determination method (FIFO, weighted average, or specific identification), but not whether a periodic or perpetual system is used. This additional level of information does not provide information that is relevant to users of financial information. The differences between FIFO and weighted average, for example, would inform users of how costs flow to the income statement when increases or decreases in costs occur. This pattern is not affected by the choice between periodic and perpetual systems.

*PROBLEM 6-13A

(a)

Goods Available for Sale
Date	Units	Unit Cost	Total Cost
Jan. 5	10	$1,000	$10,000
; 11	10	1,200	12,000
; 18	15	1,300	19,500
Dec. 20	20	1,500	30,000
Total	55		$71,500

Number of units of ending inventory = 55 units available for sale – 50* units sold = 5 units of ending inventory.

*50 units sold = 15 + 35

(b) Weighted Average cost per unit: $71,500 ÷ 55 = $1,300

Ending inventory = 5 × $1,300 = $6,500

Cost of goods sold = $71,500 – $6,500 = $65,000

Sales revenue	$100,000	*
Cost of goods sold	65,000
Gross profit	$ 35,000

*(15 × $2,000) + (35 × $2,000)

*PROBLEM 6-13A (Continued)

Weighted Average—perpetual

										Weighted Average Calculations
Date	Purchases			Cost of goods sold			Inventory Balance				Total	WA Cost
	Units	Cost	Total	Units	Cost	Total	Units	Cost	Total	Units	Cost	per unit
Jan. 1	Beginning inventory									A	B	B ÷ A
	0	$0	$0				0	$0	$0
5	10	1,000	10,000				10	1,000	10,000

June 11	10	1,200	12,000				20	1,100	22,000	10	10,000
										10	12,000
										20	22,000	$1,100
July 4				15	1,100	16,500	5	1,100	5,500	20	22,000
										-15	16,500
										5	5,500	$1,100
Oct. 18	15	1,300	19,500				20	1,250	25,000	5	5,500
										15	19,500
										20	25,000	$1,250
Dec. 20	20	1,500	30,000				40	1,375	55,000	20	25,000
										20	30,000
										40	55,000	$1,375
29				35	1,375	48,125	5	1,375	6,875	40 -35 5	55,000 -48,125 6,875	$1,375
Totals	55		$71,500	50		$64,625	5		$6,875
	Cost of goods available for sale			Cost of goods sold			Ending inventory

*PROBLEM 6-13A (Continued)

Check:

Cost Units

Cost of goods available for sale $ 71,500 55

Less: cost of goods sold 64,625 50

Ending inventory $ 6,875 5

Sales revenue	$100,000
Cost of goods sold	64,625
Gross profit	$ 35,375

(d) (1) Weighted Average periodic

GENERAL JOURNAL

Date

Account Titles

Debit

Credit

Dec. 20 Purchases………………………………… 30,000

Cash (20 × $1,500)……………….. 30,000

29 Cash (35 × $2,000)……………………. 70,000

Sales…………………………………….. 70,000

*PROBLEM 6-13A (Continued)

(d) (Continued)

(2) Weighted Average perpetual

GENERAL JOURNAL

Date

Account Titles

Debit

Credit

Dec. 20 Merchandise Inventory…………….. 30,000

Cash (20 × $1,500)……………….. 30,000

29 Cash (35 × $2,000)……………………. 70,000

Sales…………………………………….. 70,000

Cost of Goods Sold (35 × $1,375) 48,125

Merchandise Inventory………… 48,125

(e) Comparison:

	Perpetual	Periodic
Ending inventory	$6,875	$6,500
Cost of goods sold	64,625	65,000
Gross profit	35,375	35,000

The numbers are different. Using the perpetual system, the weighted average cost is recalculated after every purchase. Because the prices are rising, this results in a lower cost of goods sold.

*PROBLEM 6-13A (Continued)

Taking It Further:

Under the periodic system, the weighted average cost is calculated at the end of the period and involves a weighted average of beginning inventory and all purchases during the period. This weighted average cost is applied to the total volume of items sold throughout the period to calculate cost of goods sold, even though some sales have occurred before some of the purchases. This pattern of cost flows yields a higher cost of goods sold in a period of rising prices and a lower ending inventory than applying a perpetual weighted average method. In a period of increasing prices, the perpetual weighted average method will yield higher ending inventory, but lower cost of goods sold and higher gross profit than the periodic weighted average method. Although applying the perpetual weighted average method yields a higher profit in a period of rising prices, this does not represent a real benefit in most circumstances. The differences in the information that is available to manage inventory under the perpetual system, the cost of implementing a perpetual system, and the type of inventory involved will usually outweigh the differences caused by the flow of costs to the income statement.

*PROBLEM 6-14A

November

Net sales ($674,000 – $14,000)…………………………………. $660,000

Cost of goods sold

Beginning inventory……………………………. $34,050

Purchases……………………………. $441,190

Less: Purchase returns

and allowances…………………… 17,550

Net purchases………………………. 423,640

Add: Freight in…………………… 6,860

Cost of goods purchased…………………… 430,500

Cost of goods available for sale…………. 464,550

Ending inventory…………………………………. 39,405

Cost of goods sold………………………………………………. 425,145

Gross profit………………………………………………………………. $234,855

Gross profit margin = $234,855 =

$660,000

December

Net sales ($965,390 – $26,600)…………………………………. $938,790

Less: Estimated gross profit ( × $938,790)…….. 334,209

Estimated cost of goods sold………………………………….. $604,581

Beginning inventory…………………………………………………. $ 39,405

Purchases………………………………………………….. $621,660

Less: Purchase returns

and allowances…………………………… 22,575

Net purchases……………………………………………… 599,085

Freight in…………………………………………………….. 12,300

Cost of goods purchased………………………………………… 611,385

Cost of goods available for sale………………………………. 650,790

Less: Estimated cost of goods sold………………………… 604,581

Estimated inventory lost in fire………………………………… $ 46,209

*PROBLEM 6-14A (Continued)

Taking It Further:

The gross profit method is based on the assumption that the gross profit ratio remains constant from November to December. The gross profit ratio will be affected by merchandising policies or market conditions. In addition, the gross profit ratio may be affected by the product mix included in the sales amount. This method is more accurate when applied to a department or product line, rather than to operations as a whole.

*PROBLEM 6-15A

Women’s Shoes Men’s Shoes

Cost Retail Cost Retail

Beginning inventory $ 276,000 $424,000 $ 191,000 $ 323,000

Purchases 1,181,000 1,801,000 1,046,000 1,772,000

Purchase returns (24,600) (37,000) (21,900) (36,400)

Freight in 6,000 7,200

Goods available for sale $1,438,400 2,188,000 $1,222,300 2,058,600

Net sales (1,798,000) (1,626,000)

Ending inventory at retail $ 390,000 $ 432,600

Cost-to-retail ratio:

Women’s Shoes—$1,438,400 ÷ $2,188,000 =

Men’s Shoes—$1,222,300 ÷ $2,058,600 =

Estimated ending inventory at cost:

$390,000 × = $256,230—Women’s Shoes

$432,600 × = $256,964—Men’s Shoes

*PROBLEM 6-15A (Continued)

Taking It Further:

Women’s Shoes—$381,250 × = $250,481 per count

256,230 estimated

$ 5,749 loss at cost

Loss at retail = $390,000 – $381,250 = $8,750

Men’s Shoes—$426,100 × = $253,103 per count

256,964 estimated

$ 3,861 loss at cost

Loss at retail = $432,600 – $426,100 = $6,500

PROBLEM 6-1B

(a) ; The unsold portion of these goods $510 ($875 – $365) is owned by Carberry Company, not Morden Company and should not be included in Morden Company’s ;Therefore, no adjustment is required because it was correct to not include them.

$750 should be included in inventory as the goods were shipped FOB shipping point on February 27. Title passes to Morden on February 27, the date of shipping.

The goods should not be included in inventory as they were shipped FOB shipping point on February 26. Title to the goods transfers to the customer on February 26, the date of shipping. Since these items were not on the premises, they were not counted in inventory. No correction is required.

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. Since these items were not on the premises, they were not counted in the ending inventory valuation. No correction is required.

The sale will be recorded on March 2. The goods should be included in inventory at the end of February at their cost of $360. Since they were in the shipping department, they were not included in the inventory count.

The damaged goods should not be included in inventory because they are not saleable and have no value. Therefore, no adjustment is required because it was correct not to include them.

PROBLEM 6-1B (Continued)

(a) (Continued)

As these items have been sold, they should be excluded from Morden’s inventory. Therefore, no adjustment is required because it was correct to not include them.

Include $620 in inventory. These goods have not yet been sold.

(b) $56,000 Original Feb. 28 inventory valuation

+750 2.

+360 5.

+620 8.

$57,730 Revised Feb. 28 inventory valuation

Taking It Further

The owner might tell the accountant not to correct item 8. This transaction relates to the timing of when inventory is transferred to cost of goods sold. Not correcting this item would cause a discrepancy between the inventory records and the count and trigger an adjusting entry. Since the items are not yet sold to customers, no sale would be recorded in the same accounting period as the charge to cost of goods sold. This would decrease gross profit and minimize income taxes. This would; however, cause the business to pay more taxes in the following year when the merchandise is sold and the sale is recorded on the income statement. The sale would have no offsetting cost of goods sold and the full sales price would be taxable, rather than the gross profit. The owner might consider telling the accountant not to correct item 5 as well if the sale is not recorded in the February year end. Recording the sale in the same period as the cost of goods sold increases gross profit and increases the income taxes. Intentionally not correcting these items is unethical behaviour for the owner and the accountant.

PROBLEM 6-2B

	Cost of Goods Sold					Ending Inventory
		Supplier	Serial #	Cost/ Unit	Sales price/ Unit	Supplier	Serial #	Cost/ Unit
July	10	Civic	SZ5828	$26,600	$29,800	Accord	ST8411	$27,600
	13	Fit	YH4418	26,300	28,900	Fit	YH5632	26,600
		Accord	ST0944	27,200	28,700	Civic	SZ6148	26,600
		Civic	SZ5824	26,700	29,850			$80,800
	27	Civic	SZ6132	26,800	28,800
		Accord	ST0815	26,200	27,000
		Fit	YH6318	26,500	29,500
				$186,300	$202,550

Taking It Further:

EastPoint Honda should use the specific identification method because it sells items that are specifically identifiable and not interchangeable.

PROBLEM 6-3B

										Weighted Average Calculations
Date	Purchases			Cost of goods sold			Inventory Balance				Total	WA Cost
	Units	Cost	Total	Units	Cost	Total	Units	Cost	Total	Units	Cost	per unit
June 1	Beginning inventory									A	B	B ÷ A
	20	$	$1,				20	$	$1,
4	85		4,				105		5,	20	$1,
										85	4,
										105	5,	$
10				90	$	$4,	15			105	5,
										90	4,
										15		$
18	35		2,				50		2,	15
										35	2,
										50	2,	$
25				30		1,	20		1,	50	2,
										-30	-1,
										20	1,	$
28	15						35		2,	20 15 35	1, 2,	$
Totals	155		$8,	120		$6,	35		$2,
	Cost of goods available for sale			Cost of goods sold			Ending inventory

PROBLEM 6-3B (Continued)

Check:

Cost Units

Cost of goods available for sale $8,; 155

Less: cost of goods sold 6, 120

Ending inventory $2, 35

(b)

June 10 Accounts Receivable……………………. 8,

Sales (90 × $90)…………………………………….. 8,

Cost of Goods Sold………………………. 4,

Merchandise Inventory (90 × $) 4,

18 Merchandise Inventory…………………. 2,

Accounts Payable (35 × $58)………………… 2,

Cost of Goods Sold ($ × 3)……..

Merchandise Inventory………………………….

(d) The merchandise inventory on the balance sheet would be overstated by $, as well as the owner’s capital account by the same amount. On the income statement, the cost of goods sold would be understated by $ This would lead to an overstatement of gross profit by $;and of profit by $

Taking It Further:

The weighted average cost formula produces the more meaningful profit because weighted average costs are matched against current revenues (sales).

PROBLEM 6-4B

Date

Purchases

Cost of Goods Sold

Balance

Units

Cost

Total

Units

Cost

Total

Units

Cost

Total

Beginning inventory

$50

$1,000

$50

$1,000

4,675

1,000

4,675

5,675

$50

$1,000

3,850

4,850

825

2,030

825

2,030

2,855

825

870

1,695

1,160

900

1,160

900

2,060

155

$8,605

120

$6,545

$2,060

Check:

Cost Units

Cost of goods available for sale $8,605 155

Less: cost of goods sold 6,545 120

Ending inventory $2,060 35

PROBLEM 6-4B (Continued)

(b)

June 25 Accounts Receivable……………………….. 2,850

Sales (30 × $95)…………………………………….. 2,850

Cost of Goods Sold………………………….. 1,695

Merchandise Inventory…………………………. 1,695

([15 × $55] + [15 × $58])

		Weighted
FIFO		Average
Ending Inventory	Cost of Goods Sold	Ending Inventory	Cost of Goods Sold
$2,060	$6,545	$2,	$6,

If prices continue to rise, the FIFO cost formula will continue to yield higher ending inventory and lower cost of goods sold than the weighted average cost formula.

Taking It Further:

Before making the change to the weighted average cost formula, the company must consider if the weighted average formula would result in more relevant information in the financial statements. For example, has the physical flow of inventory changed from FIFO to weighted average?

PROBLEM 6-5B

(a) (1) FIFO

Date	Purchases			Cost of Goods Sold			Balance
Date	Units	Cost	Total	Units	Cost	Total	Units	Cost	Total
	Beginning inventory
	36	$21	$756				36	$21	$756
7				18	$21	$ 378	18	21	378
23	50	20	1,000				18	21	378
							50	20	1,000
									1,378
26				18	21	378
				32	20	640	18	20	360
						1,018
Mar. 10	24	19	456				18	20	360
							24	19	456
									816
23				18	20	360	10	19	190
				14	19	266
	_____		______			626
	110		$2,212	100		$2,022	10		$190
	Cost of goods available for sale			Cost of goods sold			Ending inventory

Check:

Cost Units

Cost of goods available for sale $2,212 110

Less: cost of goods sold 2,022 100

Ending inventory $ 190 10

PROBLEM 6-5B (Continued)

(2) Weighted Average

										Weighted Average Calculations
Date	Purchases			Cost of goods sold			Inventory Balance				Total	WA Cost
	Units	Cost	Total	Units	Cost	Total	Units	Cost	Total	Units	Cost	per unit
Feb. 1	Beginning inventory									A	B	B ÷ A
	36	$	$				36	$	$
7				18	$	$	18			36	$
										-18
										18		$
23	50		1,				68			18
										50	1,
										68	1,	$
26				50		1,	18			68	1,
										-50	-1,
										18		$
Mar. 10	24						42			18
										24
										42		$
23				32			10			42
										-32
										10		$
Totals	110		$2,	100		$2,	10		$
	Cost of goods available for sale			Cost of goods sold			Ending inventory

PROBLEM 6-5B (Continued)

Check:
	Cost	Units
Cost of goods available for sale	$2,	110
Less: Cost of goods sold	2,	100
Ending Inventory	$	10

(b)

Weighted

FIFO Average

Sales………………………………………………………………. $3,004 $3,

Cost of goods sold…………………………………………. 2,022 2,

Gross profit…………………………………………………….. 982

* Sales = (18 × $32) + (50 × $30) + (32 × $29)

Taking It Further:

In selecting a cost formula, Bennett Basketball should consider their circumstances—the type of inventory and the flow of costs throughout the period. In the final determination; however, Bennett Basketball should select the cost formula that best approximates the physical flow of goods or represents recent costs on the balance sheet.

PROBLEM 6-6B

(a)

GENERAL JOURNAL

Date

Account Titles

Debit

Credit

; 5 Merchandise Inventory………………. 1,430

Cash (110 × $13)…………………………….. 1,430

8 Cash (140 × $20)………………………… 2,800

Sales………………………………………………. 2,800

Cost of Goods Sold……………………. 1,880

Merchandise Inventory………………….. 1,880

(60 × $14) + (80 × $13)

15 Merchandise Inventory (52 × $12) 624

Cash……………………………………………….. 624

20 Cash (70 × $16)………………………….. 1,120

Sales………………………………………………. 1,120

Cost of Goods Sold………………………. 870

Merchandise Inventory………………….. 870

(30 × $13) + (40 × $12)

25 Merchandise Inventory (15 × $11) 165

Cash……………………………………………….. 165

PROBLEM 6-6B (Continued)

(b) Ending Inventory (FIFO):

Date Units Unit Cost Total Cost

Oct. 25 15 $ 11 $165

15 12 12 144

27* $309

*27 = 60 + 110 – 140 + 52 – 70 + 15

Net realizable value: 27 × $10 = $270

The inventory should be valued at its net realizable value of $270. This is the lower of cost and net realizable value.

Cost of Goods Sold ($309 – $270)… 39

Merchandise Inventory…………….. 39

(d)

The cost of goods sold is $2,495:

Cost of goods sold per (a)* $2,750

Plus: write down to NRV ($309 – $270) 39

Cost of goods sold reported _____

on the income statement $2,789

*$2,750 = $1,880 + $870

PROBLEM 6-6B (Continued)

Taking It Further:

										Weighted Average Calculations
Date	Purchases			Cost of goods sold			Inventory Balance				Total	WA Cost
	Units	Cost	Total	Units	Cost	Total	Units	Cost	Total	Units	Cost	per unit
Oct. 1	Beginning inventory									A	B	B ÷ A
	60	$	$				60	$	$
5	110		1,				170		2,	60
										110	1,
										170	2,	$
8				140		1,	30			170	2,
										-140	-1,
										30		$
15	52						82		1,	30
										52
										82	1,	$
20				70			12			82	1,
										-70
										12		$
25	15						27			12 15 27		$
Totals	237		$3,	210		$2,	27		$
	Cost of goods available for sale			Cost of goods sold			Ending inventory

PROBLEM 6-6B (Continued)

The ending inventory cost under the weighted average cost formula is $315. The October 31 balance sheet amount would be $270, the lower of cost and net realizable value. The balance sheet amount is the same under both methods, because net realizable value is lower than cost under both cost formulae.

PROBLEM 6-7B

(a)

Year Ended December 31, 2015
	Total Assets	Owner’s Equity	Cost of Goods Sold	Profit
As reported	$525,000	$250,000	$ 300,000	$ 40,000
Impact of Dec. 31/15 Inventory overstatement	O 20,000	O 20,000	U 20,000	O 20,000
Correct amount	$505,000	$230,000	$ 320,000	$ 20,000

Year Ended December 31, 2016
	Total Assets	Owner’s Equity	Cost of Goods Sold	Profit
As reported	$575,000	$275,000	$335,000	$ 50,000
Impact of Dec. 31/15 Inventory overstatement	NE	NE	O 20,000	U 20,000
Impact of Dec. 31/16 Inventory understatement	U 30,000	U 30,000	O 30,000	U 30,000
Correct amount	$605,000	$305,000	$285,000	$100,000

Year Ended December 31, 2017
	Total Assets	Owner’s Equity	Cost of Goods Sold	Profit
As reported	$600,000	$280,000	$315,000	$ 60,000
Impact of Dec. 31/16 Inventory understatement	NE	NE	U 30,000	O 30,000
Correct amount	$600,000	$280,000	$345,000	$ 30,000

PROBLEM 6-7B (Continued)

(b) The errors in calculating the company’s ending inventory will not have an impact on the company’s cash account. The cash balances will be correctly stated at December 31, 2015, 2016 and 2017.

Taking It Further:

Part (a) shows that even though inventory and owner’s equity are correct, the income statement shows the impact of the 2016 error on cost of goods sold and profit. In addition, comparative amounts for 2016 and 2015 would show incorrect amounts for inventory, owner’s equity, cost of goods sold and profit. These errors impact trend and profitability analyses and should be corrected.

PROBLEM 6-8B

(a) (Incorrect)

JAMES COMPANY

Income Statement

2017 2016 2015

Sales $648,000 $624,000 $600,000

Cost of goods sold 540,000 510,000 480,000

Gross profit 108,000 114,000 120,000

Operating expenses 100,000 100,000 100,000

Profit $ 8,000 $14,000 $20,000

(Corrected)

JAMES COMPANY

Income Statement

2017 2016 2015

Sales $648,000 $624,000 $600,000

Cost of goods sold 520,000 * 500,000 ** 510,000***

Gross profit 128,000 124,000 90,000

Operating expenses 100,000 100,000 100,000

Profit (loss) $ 28,000 $24,000 $(10,000)

* $520,000 = $540,000 – $20,000

** $500,000 = $510,000 + $20,000 – $30,000

*** $510,000 = $480,000 + $30,000

(b) The combined effect of the errors at July 31, 2017 before correction is nil. The error in 2016 closing inventory is offset by the error in 2017 opening inventory and the error in the 2015 purchases is offset by the error in 2016 purchases. The trend over the three years is completely opposite using the incorrect numbers as compared to the correct numbers.

PROBLEM 6-8B (Continued)

Incorrect

2016: $510,000 ÷ [($60,000 + $70,000) ÷ 2] =

2017: $540,000 ÷ [($40,000 + $60,000) ÷ 2] =

Corrected

2016: $500,000 ÷ [($70,000 + $40,000) ÷ 2] =

2017: $520,000 ÷ [($40,000 + $40,000) ÷ 2] =

Taking it Further:

The incorrect annual profits show a decreasing trend of profitability with profits decreasing from $20,000 in 2015 to $14,000 in 2016 and then to $8,000 in 2017.

The corrected profit (loss) show an increasing trend in profitability with profits increasing from a loss of $10,000 to profits of $24,000 in 2016 and then to a profit of $28,000 in 2017.

It is not possible to determine if the errors were deliberate or not. Certain factors can indicate a higher likelihood that the errors are deliberate. Management bonuses tied to trends in profitabilityor a desire to maintain profitability every year, could encourage deliberate misstatement. In addition, the magnitude of the errors is unlikely not to be noticed by management.

If management were deliberately recording the errors it could indicate that they had a motivation to minimize profits for purposes of paying less income tax.

PROBLEM 6-9B

(a)

		Total Cost	Total NRV	LCNRV
(1)	June 30	$2,520,000	$2,925,000	$2,520,000
(2)	July 31	4,216,000	3,813,000	3,813,000

(b)

(1) June 30 No entry

(2) July 31 Cost of Goods Sold…………….. 403,000

Merchandise Inventory……. 403,000

($4,216,000 – $3,813,000)

(c) An adjusting entry is required at August 31 because some of the inventory, on which a previous writedown had been recorded, is still on hand and the net realizable value has partly recovered. If the inventory on hand at July 31 had been sold then an adjusting entry would not be required. The adjustment is:

Aug. 31 Merchandise Inventory……….. 325,000

Cost of Goods Sold………… 325,000

[($680 – $615) × 5,000]

(d) The notes should disclose the cost determination method, the value of inventory reported at net realizable value, the amount of any writedown to net realizable value (for the month of July) and reversals of previous writedowns (for the month of August), including the reason why the writedown was reversed. This type of disclosure would be required if the company prepares monthly financial statements.

PROBLEM 6-9B (Continued)

Taking It Further:

Reporting inventory at the LCNRV is important in order to not overstate the value of inventory on the balance sheet. It would be misleading to report inventory, an asset, at an amount higher than what it could be sold for because inventory is held for resale purposes. If assets are overstated, this would mean that expenses are understated which will cause profit and owner’s equity to be overstated.

PROBLEM 6-10B

(a)

Home Depot, Inc.	2015
Inventory turnover	$54,222		=		times
	($11,079 + $11,057)
	2
Days sales in inventory
	365	÷	=	74	days

Gross profit margin	($83,176 – $54,222)		=
	$83,176

Home Depot, Inc.	2014
Inventory turnover	$51,422		=		times
	($11,057 + $10,710)
	2
Days sales in inventory
	365	÷	=	77	days

Gross profit margin	($78,812 – $51,422)		=
	$78,812

PROBLEM 6-10B (Continued)

(a) (Continued)


Lowe’s Companies, Inc.	2015
Inventory turnover	$36,665		=		times
	($8,911 + $9,127)
	2
Days sales in inventory
	365	÷	=	90	days

Gross profit margin	($56,223 – $36,665)		=
	$56,223

Lowe’s Companies, Inc.	2014
Inventory turnover	$34,941		=		times
	($9,127 + $8,600)
	2
Days sales in inventory
	365	÷	=	93	days

Gross profit margin	($53,417 – $34,941)		=
	$53,417

PROBLEM 6-10B (Continued)

(b) Both Home Depot’s and Lowe’s inventory turnover improved and days sales in inventory showed an improvement of 3 days from 2014 to 2015. In addition, Home Depot’s and Lowe’s gross profit margins are essentially the same in the two years.

The inventory turnover improvement helped profit increase for both companies in 2015.

It is meaningful to compare these two companies in terms of their ratios because the companies operate in the same industry. They are different in terms of their size and a ratio analysis eliminates this difference and makes for a meaningful comparison. Although Home Depot has a better inventory turnover than Lowe’s, it earns practically identical gross profit as a percentage of sales. It would be useful to know if their accounting polices differ in any significant ways.

Taking It Further:

In order to use the retail inventory method to value 74% of its inventory, Home Depot has to have demonstrated that the use of this technique does not have a material effect on the ultimate measurement of the cost of inventory shown on the financial statements. Consequently, there is no impact on the comparison between Home Depot and Lowe’s.

*PROBLEM 6-11B

(a) Cost of Goods Available for Sale

Date Explanation Units Unit Cost Total Cost

Jan. 1 Beginning inventory 150 $65 $ 9,750

Feb. 17 Purchase 70 65 4,550

; 12 Purchase 40 66 2,640

; 10 Purchase 30 68 2,040

; 26 Purchase 25 70 1,750

Total 315 $20,730

(b) Number of units sold = 315 units available for sale – 20 units on hand at the end of the year = 295 units sold

Sales = 295 units × $135 = $39,825

Ending Inventory:

Date Units Unit Cost Total Cost

Oct. 26 20 $70 $1,400

20 $1,400

Cost of goods sold: $20,730 – $1,400 = $19,330

Check of cost of goods sold:

Date Units Unit Cost Total Cost

Jan. 1 150 $65 $ 9,750

Feb. 17 70 65 4,550

; 12 40 66 2,640

; 10 30 68 2,040

Oct. 26 5 70 350

295* $19,330

*295 = 315 – 20

*PROBLEM 6-11B (Continued)

(2) WEIGHTED AVERAGE

Weighted average unit cost: $20,730 ¸ 315 units = $ per unit

Ending Inventory: 20 units × $ per unit = $1,316

Cost of Goods Sold: $20,730 – $1,316 = $19,414

(d)

		Weighted
	FIFO	Average
Sales revenue (295 × $135)	$39,825	$39,825
Cost of goods sold	19,330	19,414
Gross profit	$20,495	$20,411

Taking It Further:

Big Kids Store should continue to use the FIFO cost formula. GAAP requires that cost determination methods be applied consistently from year to year. Changes in cost determination methods are allowed only if the physical flow of inventory has changed and the new method results in more relevant information. The company cannot change methods simply because they wish to achieve a particular outcome for profit. One user, or set of users, should not be considered above other users.

*PROBLEM 6-12B

(a)

Cost of Goods Available for Sale
Date	Units	Unit Cost	Total Cost
Apr. 1	400	$	$1,600
10	1,300		5,330
25	1,200		5,400
27	600		2,850
Total	3,500		$15,180

Number of units of ending inventory = 3,500 units available for sale – 2,700* units sold = 800 units of ending inventory.

*2,700 units sold = 300 + 1,000 + 1,400

(b) Weighted Average cost per unit: $15,180 ÷ 3,500 = $

Ending inventory = 800 × $ = $3,472

Cost of goods sold = $15,180 – $3,472 = $11,708

Sales revenue	$19,600	*
Cost of goods sold	11,708
Gross profit	$ 7,892

*(300 × $) + (1,000 × $) + (1,400 × $)

*PROBLEM 6-12B (Continued)

										Weighted Average Calculations
Date	Purchases			Cost of goods sold			Inventory Balance				Total	WA Cost
	Units	Cost	Total	Units	Cost	Total	Units	Cost	Total	Units	Cost	per unit
Apr. 1	400	$	$1,				400	$	$1,
2				300	$	$1,	100			400	$1,
										-300	-1,
										100		$
10	1,300		5,				1,400		5,	100
										1,300	5,
										1,400	5,	$
11				1000		4,	400		1,	1,400	5,
										-1,000	-4,
										400	1,	$
25	1,200		5,				1,600		7,	400	1,
										1,200	5,
										1,600	7,	$
27	600		2,				2,		9,	1,600	7,
										600	2,
										2,200	9,	$
29				1,400		6,	800		3,	2,200 -1,400 800	9, -6, 3,	$
Totals	3,500		$15,	2,700		$11,	800		$3,
	Cost of goods available for sale			Cost of goods sold			Ending inventory

*PROBLEM 6-12B (Continued)

Check:
	Cost	Units
Cost of goods available for sale	$15,180	3,500
Less: Cost of goods sold	11,590	2700
Ending Inventory	$3,590	800

Sales revenue	$19,600
Cost of goods sold	11,590
Gross profit	$ 8,010

(d) (1) Weighted Average periodic

GENERAL JOURNAL

Date

Account Titles

Debit

Credit

April 25 Purchases………………………………… 5,400

Cash (1,200 × $)…………….. 5,400

29 Cash (1,400 × $)…………………. 10,500

Sales…………………………………….. 10,500

(d) (2) Weighted Average perpetual

GENERAL JOURNAL

Date

Account Titles

Debit

Credit

April 25 Merchandise Inventory…………….. 5,400

Cash (1,200 × $)…………….. 5,400

29 Cash (1,400 × $)…………………. 10,500

Sales…………………………………….. 10,500

Cost of Goods Sold (1,400 × $) 6,300

Merchandise Inventory………… 6,300

*PROBLEM 6-12B (Continued)

(e) Comparison:

	Perpetual	Periodic
Ending inventory	$3,590	$3,472
Cost of goods sold	11,590	11,708
Gross profit	8,010	7,892

The numbers are different. Using the perpetual system, the weighted average cost is recalculated after every purchase. Because the prices are rising this results in a lower cost of goods sold.

Taking It Further:

*PROBLEM 6-13B

(a) Cost of goods available for sale

Date Explanation Units Unit Cost Total Cost

Feb. 7 Purchase 20 $100 $ 2,000

; 12 Purchase 20 120 2,400

; 18 Purchase 25 130 3,250

; 26 Purchase 40 150 6,000

Total 105 $13,650

Number of units of ending inventory = 105 units available for sale – 85* units sold = 20 units of ending inventory.

*85 units sold = 35 + 50

(b)

Ending Inventory at Dec. 31:

Date Units Unit Cost Total Cost

Oct. 26 20 $150 $3,000

Total 20 $3,000

Cost of goods sold: $13,650 – $3,000 = $10,650

Sales revenue	$12,200	*
Cost of goods sold	10,650
Gross profit	$ 1,550

*(35 × $120) + (50 × $160)

*PROBLEM 6-13B (Continued)

	Purchases						Cost of Goods Sold						Balance
Date	Units	Cost		Total			Units		Cost		Total		Units		Cost		Total
Feb. 1	Beginning inventory
	0		$0			$0								0		$0		$0
7	20	100			2,000									20		100		2,000
Apr. 12	20	120			2,400									20 20		100 120		2,000 2,400 4,400
30								20 15		$100 120		$2,000 1,800 3,800		5		120		600
; 18	25	130			3,250									5 25		120 130		600 3,250 3,850
Oct. 26	40	150			6,000									5 25 40		120 130 150		600 3,250 6,000 9,850
Nov. 12	00				1,400			5 25 20		120 130 150		600 3,250 3,000 6,850		20		150		3,000
Total	105				$13,650			85				$10,650		20				$3,000

Sales revenue	$12,200
Cost of goods sold	10,650
Gross profit	$ 1,550

Sales revenue is 35 x $120 + 50 x $160 = $12,200

*PROBLEM 6-13B (Continued)

(d) (1) FIFO periodic

GENERAL JOURNAL

Date

Account Titles

Debit

Credit

Apr. 12 Purchases………………………………… 2,400

Accounts Payable (20 × $120) 2,400

30 Accounts Receivable (35 × $120) 4,200

Sales…………………………………….. 4,200

(2) FIFO perpetual

GENERAL JOURNAL

Date

Account Titles

Debit

Credit

Apr. 12 Merchandise Inventory…………….. 2,400

Accounts Payable (20 × $120) 2,400

30 Accounts Receivable (35 × $120) 4,200

Sales…………………………………….. 4,200

Cost of Goods Sold………………….. 3,800

Merchandise Inventory………… 3,800

[(20 × $100) + (15 × $120)]

(e) Comparison:

	Perpetual	Periodic
Ending inventory	$3,000	$3,000
Cost of goods sold	10,650	10,650
Gross profit	1,550	1,550

The numbers are the same because regardless of the system (perpetual or periodic), the first costs are assigned to the cost of goods sold.

*PROBLEM 6-13B (Continued)

Taking It Further:

When using FIFO, the periodic and perpetual systems produce the same results. The benefits from using perpetual versus periodic will depend on the differences in the information that is available to manage inventory under the perpetual system versus the cost of implementing a perpetual system. This also depends on the type of inventory involved.

*PROBLEM 6-14B

February

Net sales ($310,000 – $7,000)…………………………………… $303,000

Cost of goods sold

Beginning inventory………………………… $ 18,500

Net purchases

($204,000 – $5,300)………….. $198,700

Add: Freight in…………………. . 4,000

Cost of goods purchased………………… 202,700

Cost of goods available for sale………. 221,200

Less: Ending inventory……………………. 26,200

Cost of goods sold…………………………………………… 195,000

Gross profit………………………………………………………………. $108,000

Gross profit margin = $108,000 =

$303,000

March

Net sales ($293,500 – $6,800)…………………………………… $286,700

Less: Estimated gross profit ( × $286,700)…….. 102,065

Estimated cost of goods sold………………………………….. $184,635

Beginning inventory…………………………………………………. $ 26,200

Net Purchases ($197,000 – $4,940)…………… $192,060

Add: Freight in…………………………………………….. 3,940

Cost of goods purchased………………………………………… 196,000

Cost of goods available for sale………………………………. 222,200

Less: Estimated cost of goods sold………………………… 184,635

Estimated total cost of ending inventory…………………. 37,565

Less: Inventory not lost (20% × $37,565)…………………. 7,513

Estimated inventory lost in fire (80% × $37,565)………. $ 30,052

*PROBLEM 6-14B (Continued)

Taking It Further:

The gross profit method is based on the assumption that the gross profit ratio remains constant from February to March. The gross profit ratio can be affected by merchandising policies or market conditions. In addition, the gross profit ratio may be affected by the product mix included in the sales amount. This method is more accurate when applied to a department or product line, rather than to operations as a whole.

*PROBLEM 6-15B

Clothing Jewellery

Cost Retail Cost Retail

Beginning inventory $ 55,600 $ 98,000 $ 34,000 $ 54,000

Purchases 775,000 1,445,000 565,000 923,000

Purchase returns (41,000) (71,500) (17,200) (25,700)

Freight in 8,900 6,700

Goods avail. for sale $798,500 1,471,500 $588,500 951,300

Net sales (1,268,000) (839,600)

Ending inventory at retail $ 203,500 $ 111,700

Cost-to-retail ratio:

Clothing—$798,500 ÷ $1,471,500 =

Jewellery—$588,500 ÷ $951,300 =

Estimated ending inventory at cost:

$203,500 × = $110,501—Clothing

$111,700 × = $69,142—Jewellery

*PROBLEM 6-15B (Continued)

Taking It Further:

Clothing—$100,750 × = $54,707 per count

110,501 estimated

$ 55,794 loss at cost

Loss at retail = $203,500 – $100,750 = $102,750

Jewellery—$40,300 × = $24,946 per count

69,142 estimated

$ 44,196 loss at cost

Loss at retail = $111,700 – $40,300 = $71,400

BYP6-1 FINANCIAL REPORTING PROBLEM

(a) Inventories are valued at the lower of cost and net realizable value. Net realizable value is the estimated selling price determined on an item by item basis less estimated selling costs.

(b) Hudson’s Bay Company uses the weighted average cost formula to determine cost with the exception of inventories for ; Saks costs their inventory using the retail inventory method that approximates cost.

(c) The specific identification method would not be appropriate. Most of the goods sold by Hudson’s Bay Company are not individually distinguishable.

(d) Amounts are reported in millions of Canadian dollars.

Inventory as a percentage of current assets

2015: $2,349 ÷ $4,606 =

2014: $2,048 ÷ $4,110 =

Cost of sales as a percentage of total revenue (Sales)

2015: $4,893 ÷ $8,169 =

2014: $3,217 ÷ $5,223 =

Inventory as a percentage of current assets increased slightly from 2014 to 2015 and cost of sales as a percentage of total revenue decreased slightly indicating that gross profit and inventory management have been stable over the last two years.

BYP 6-1 (Continued)

(e)

Hudson’s Bay Co	2015
Inventory turnover	$4,893		=		times
	($2,349+$2,048)		=
	2
Days sales in inventory
	365	÷	=	166	days


Hudson’s Bay Co.	2014
Inventory turnover	$3,217		=		times
	($2,048 + $994)		=
	2
Days sales in inventory
	365	÷	=	174	days

Hudson’s Bay’s inventory management appears to have improved in 2015. The inventory turnover and day’s sales in inventory has remained stable over the past two years, although in 2015 inventory is turning over (being sold or moved) better.

BYP6-2 INTERPRETING FINANCIAL STATEMENTS

(a)

Inventory Turnover

Days Sales in Inventory

2015

$503,059

($208,395 + $218,979) ÷ 2

= times

365	= 155 days
times

2014

$493,955

($218,979 + $216,533) ÷ 2

= times

365	= 161 days
times

The ratios have improved. This means that the inventory is being sold more quickly in 2015 than in 2014.

(b) Indigo applies the lower of cost and net realizable value rule. The amount of inventory write-downs as a result of net realizable value being lower than cost was $ million in fiscal 2015. At March 28, 2015 there was $ million of inventory on hand that had net realizable value equal to cost.

(c) Inc. would have a better balance sheet valuation because FIFO results in an ending inventory value that approximates replacement cost. This will cause difficulties in comparing the two companies because it is impossible to know what the inventory valuation of would have been had it used moving weighted average. However, if inventory costs are relatively stable, both inventory methods would yield similar results.

BYP6-3 COLLABORATIVE LEARNING ACTIVITY

All of the material supplementing the collaborative learning activity, including a suggested solution, can be found in the Collaborative Learning section of the Instructor Resources site accompanying this textbook.

BYP6-4 COMMUNICATION ACTIVITY

Subject: 2016 Ending Inventory Error

From: toys@

Sent: February 10, 2018

To: Mutahir Kazmi, President

Hello Mr. Kazmi,

I wanted to clarify the situation with respect to the ending inventory error of 2016 and its impact on the financial statements of 2016 and 2017.

The combined gross profit and profit for 2016 and 2017 are correct. However, the gross profit and profit for each individual year are incorrect.

As you know, the 2016 ending inventory was understated by $1 million. This error will cause the 2016 profit to be incorrect because the ending inventory is used to calculate the 2016 cost of goods sold. An understatement of ending inventory results in an overstatement of cost of goods sold. Therefore, gross profit (sales – cost of goods sold) is understated, as is profit.

Unless corrected, this error will also affect 2017 profit. The 2016 ending inventory is also the 2017 beginning inventory. Therefore, the 2017 beginning inventory is also understated, which causes an understatement of cost of goods sold. The 2017 gross profit and profit are subsequently overstated.

If the error is not corrected, the gross profit and profit for 2016 and 2017 will be incorrect. Although the combined profits will be correct, (because the understatement in 2016 cancels the overstatement in 2017), the profit trend may be misleading.

BYP6-5 “ALL ABOUT YOU” ACTIVITY

(a) Selling on consignment means that the supplier of the inventory (in this case you the student) retains ownership of the merchandise and becomes the consignor. The store (the consignee) sells the merchandise on your behalf but does not own it. The store usually takes a commission as its fee for selling the merchandise and remits the remainder to the consignor.

(b) The advantage for the student is that ownership of the books is retained. If the student changes his/her mind about selling the books, the student still owns them and can take them back. In some arrangements, the consignor may be able to state the price he/she wants to receive for the books. The disadvantage is that the seller (consignor) does not get paid until the books have been sold.

commission to be kept by the seller (consignee);
who determines the selling price (in the case of the used textbooks, the second-hand bookstore may be in a better position to determine the likely selling price);
how long the goods will be kept, or when the arrangement is terminated;
who assumes the risks of loss and damage to merchandise for sale.

BYP6-5 (Continued)

(d) Your books may be lost or stolen from the store, the seller may not pay you when the books are sold, or you may wait a very long time for the books to sell in the ; You may get substantially less money than you hoped to receive.

(e) Any textbook’s contents will become out of date and inaccurate at some point. The ability to sell any used textbook is highly dependent on the edition currently in print. If the goal is to recoup money by selling a textbook, then the textbook should be sold as soon as it is no longer needed for the student’s use. Many students keep their accounting textbooks during their studies as a reference tool as they progress to more advanced levels.

BYP6-6 Santé Smoothie Saga

(a) Natalie has been using the specific identification method to track her inventory of juicers. She has been able to do this because each juicer has a unique serial number. This allows her to match the exact cost of the juicer to the sales revenue when the juicer is sold. But it also allows Natalie to manipulate profit by choosing the specific juicer to sell. To prevent this, Accounting Standards for Private Enterprises (ASPE) and International accounting standards (IFRS) do not allow companies to use specific identification when goods are interchangeable.

Instead, Natalie will need to choose either the weighted average cost or FIFO cost formulas. In this situation, I recommend the weighted average cost formula because the juicers are identical. Since she is selling juicers and the inventory items are not subject to spoilage or obsolescence, the FIFO cost formula would not be advantageous.

(b) Natalie has purchased juicers #3, #4, #5, #6, and #7. She has sold juicers #2, #4, and #5 and has returned juicer #6. At the end of August, her ending inventory would consist of juicers #1, #3, and #7 using the specific identification method:

Ending Inventory: Juicer #1 – #12459 $545

Juicer #3 – #49295 550

Juicer #7 – #72531 571

Total $1,666

Cost of Goods Sold: Juicer #2 – #23568 $545

Juicer #4 – #56204 550

Juicer #5 – #62897 550

Total $1,645

BYP6-6 (Continued)

										Weighted Average Calculations
Date	Purchases			Cost of goods sold			Inventory Balance				Total	WA Cost
	Units	Cost	Total	Units	Cost	Total	Units	Cost	Total	Units	Cost	per unit
July 1	Beginning inventory									A	B	B ÷ A
	2	$	$1,				2	$	$1,
14	3		1,				5		2,	2	$1,
										3	1,
										5	2,	$
19				1	$	$	4		2,	5	2,
										-1
										4	2,	$
Aug. 17	2		1,				6		3,	4	2,
										2	1,
										6	3,	$
18	-1						5		2,	6	3,
										-1
										5	2,	$
27				2		1,	3		1,	5 -2 3	2, -1, 1,	$
Totals	6		$3,	3		$1,	3		$1,
	Cost of goods available for sale			Cost of goods sold			Ending inventory

BYP6-6 (Continued)

(d) Comparison

From (c)

From (b) Moving

Specific Weighted

Identification Average Difference

Cost of Goods Sold $1,; $1,; $

Ending Inventory 1,; 1,;

GENERAL JOURNAL

Date

Account Titles

Debit

Credit

; 31 Cost of Goods Sold……………………….

Merchandise Inventory…………….

BYP6-6 (Continued)

(e)

GENERAL JOURNAL

Date

Account Titles

Debit

Credit

July 3 No entry.

14 Merchandise Inventory………………… 1,

Accounts Payable……………………. 1,

19 Cash…………………………………………….. 1,

Sales ……………………………………….. 1,

19 Cost of Goods Sold………………………

Merchandise Inventory…………….

Aug. 3 No entry.

17 Merchandise Inventory………………… 1,

Accounts Payable……………………. 1,

18 Accounts Payable…………………………

Merchandise Inventory…………….

27 Cash…………………………………………….. 2,

Sales ……………………………………….. 2,

27 Cost of Goods Sold ($ × 2)… 1,

Merchandise Inventory……………. 1,

Cost of goods available for sale

Less:Cost of goods sold

Ending Inventory