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# Chapter 6

Short Exercises

\$ Billions
Inventory 3.8

3.8
Cash...

Accounts 19.7
Receivable.
Sales 19.7
Revenue.

## Cost of Goods 4.5

Sold
4.5
Inventory...

Cash 18.8

Accounts 18.8
Receivable.
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(10-15 min.) S 6-2

1. (Journal entries)

Inventory 120,000
..
Accounts 120,000
Payable.

Amounts 150,000
Receivable
Sales 150,000
Revenue...

## Cost of Goods 90,000

Sold..
Inventory (\$120,000 .75) 90,000
..

## Cash (\$150,000 .30) 45,000

...
Accounts 45,000
Receivable...

2. (Financial statements)

BALANCE SHEET
Current assets:
Inventory (\$120,000 \$90,000) \$
. 30,000
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INCOME STATEMENT
Sales \$150,00
revenue 0
Cost of goods 90,00
sold.. 0
Gross \$60,000
profit

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(15-20 min.) S 6-3

a b c
Average
Cost FIFO LIFO
Cost of goods sold:
Average (26 \$154.71) \$4,022.4
6
FIFO \$1,260 + (17 \$160) \$3,980
LIFO \$4,000 + (1 \$140) \$4,140

Ending inventory:
Average (8 \$154.71) \$
1,237.68
FIFO (8 \$160) \$1,280
LIFO (8 \$140) \$1,120

Computations:
Units sold = (9 + 25 8) = 26
Units in ending inventory = 8
Average cost per unit = (\$1,260 + \$4,000) (9 + 25) =
\$154.71

## Cost per unit:

First purchase = \$140 (\$1,260 9 = \$140)
Second purchase = \$160 (\$4,000 25 = \$160)

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(10-15 min.) S 6-4

## Jeffersons Copy Center

Income Statement
Year Ended December 31, 20X6
Aver
age FIFO LIFO
Sales revenue (580 \$20.25) \$11,74 \$11,745 \$11,745
5
Cost of goods sold (580 5,626
\$9.70*)
(92 \$8.90) + (488 \$9.80) 5,601
(580 \$9.80) 5,68
4
Gross profit 6,119 6,144 6,061
Operating expenses 3,75 3,75
0 3,750 0
Net income \$ \$ 2,311
2,369 \$2,394
_____
*
Average cost per unit:
Beginning inventory (92 @ \$9.00).. \$ 828
Purchases (680 @ \$9.80) 6,664
Goods available. \$7,492
Average cost per unit \$7,492 / 772 units \$ 9.70

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(10-15 min.) S 6-5

## Jefferson Copy Center

Income Statement
Year Ended December 31, 20X6
Averag LIF
e FIFO O
Sales revenue (580 \$11,745 \$11,745 \$11,745
\$20.25)
Cost of goods sold (580 5,626
\$9.70*)
(92 \$8.90) + (488 5,601
\$9.80)
(580 \$9.80) ______ ______ 5,68
4
Gross profit 6,119 6,144 6,061
Operating expenses 3,750 3,75
3,750 0
Income before income tax \$2,369 \$ 2,394 \$
2,311
Income tax expense (30%) \$ 711 \$ 718 \$ 693

## *From S 6-4 Method to Method to

maximize minimize
reported income tax
income expense.
(before
tax).

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(5 min.) S 6-6

## Microdata managers can purchase lots of inventory

before year end. Under LIFO, these high inventory
costs go directly to cost of goods sold in the current
year. As a result, the current years net income drops
and that saves on income tax. Saving on taxes is one
reason companies want to decrease their income.

## (5-10 min.) S 6-7

BALANCE SHEET
Current assets:
Inventories, at market (which is lower than \$
cost). 42,000

INCOME STATEMENT
Cost of goods sold [\$440,000 + (\$57,000 \$455,00
\$42,000)] 0

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6-9
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(15-20 min.) S 6-8

DATE: _____________

Company

## We can increase net income by not buying our normal

quantities of inventory as we make sales. Inventory
costs are rising, and the company uses the LIFO
inventory method. Under LIFO, the high cost of our
inventory purchases goes straight into cost of goods
sold. By slowing our purchases of inventory, we can
keep those high costs out of cost of goods sold this
year. That will keep net income from going lower and
will help net income be as high as possible. Also, our
inventory quantities are above normal, so we dont
need to buy a lot of inventory before year end.

## Student responses will vary.

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(10-15 min.) S 6-9

taxes.

## FIFO 2. Results in a cost of ending inventory

that is close to the current cost of
replacing the inventory.
Specific
unit cost 3. Used to account for automobiles,
jewelry, and art objects.

## Average 4. Provides a middle-ground measure of

ending inventory and cost of goods sold.

## LIFO 6. Matches the most current cost of goods

sold against sales revenue.

## LIFO 7. Results in an old measure of the cost of

ending inventory.

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LCM 8. Writes inventory down when
replacement cost drops below historical
cost.

## LIFO 9. Enables a company to buy high-cost

inventory at year end and thereby to
decrease reported income and income tax.

## FIFO 10. Enables a company to keep reported

income from dropping lower
by liquidating older layers of inventory.

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(5-10 min.) S 6-10

Dollars in
Millions
\$35,482
Gross profit
= \$15,333 = 0.568
percentage
\$35,482

\$15,333
8.6
Inventory turnover = (\$1,641 + \$1,945) =
times
/2

(5-10
min.) S 6-11

Beginning \$
inventory... 244,000
+ Purchases. 1,540,00
0
= Goods 1,784,00
available... 0
Cost of goods sold:
Sales
\$4,000,000
revenue.
Less estimated gross profit
(2,400,000)
(60%)
Estimated cost of goods (1,600,000
sold. )
= Estimated cost of ending \$
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inventory... 184,000

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(5 min.) S 6-12

Correct
Amount
(Million
s)

## a Net sales (unchanged) \$1,900

. .
b Inventory (\$450 \$14) \$ 436
. ..
c Cost of goods sold (\$1,130 + \$14) \$1,144
.
d Gross profit (\$1,900 \$1,144) \$ 756
.

(5 min.) S 6-13

## 1. Last years reported gross profit was understated.

Correct gross profit last year was \$5.5 million (\$3.8 +
\$1.7).

## 2. This years gross profit is overstated.

Correct gross profit for this year is \$3.8 million (\$5.5
\$1.7).

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(5-10 min.) S 6-14

## 1. Unethical. The company falsified its ending inventory

in order to cheat the government (and the people)
out of taxes.

## 2. Ethical. There is nothing wrong with buying inventory

whenever a company wishes.

and net income.

## 5. Unethical. The company falsified its purchases, cost

of goods sold, and net income in order to cheat the
government (and the people) out of income tax.

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Exercises

Group A
(15-20 min.) E 6-15A

Req. 1

Perpetual System

1. Purchases:
Inventory.. 47,000
Accounts Payable. 47,000

2. Sales:
Cash (\$79,000 .21).
16,590
Accounts Receivable (\$79,000 .
62,410
79).
Sales Revenue.. 79,00
0

## Cost of Goods Sold..

41,000
Inventory..... 41,00
0

Req. 2

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BALANCE SHEET
Current assets:
\$ 14,000
Inventory.

INCOME STATEMENT
Sales \$79,000
revenue.
Cost of goods 41,000
sold
Gross \$38,000
profit.

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(15-25 min.) E 6-16A

Journal
DATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT

..
Accounts 2,520
Payable...

\$550)..
Sales 6,600
Revenue.

## Cost of Goods 1,830*

Sold.
1,830
Inventory
_____
*(9 @ \$150) + (3 @ \$160) = \$1,830

Req. 3
Sales \$6,600
revenue...
Cost of goods 1,830
sold..
Gross \$4,770
profit...

Ending inventory
(\$750 + \$600 + \$1,9206-19 \$1,440
2014 Pearson Education
\$1,830)... **
**Or, (9 @ \$160) = \$1,440

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(10-15 min.) E 6-
17A
1.
Inventory
Begin. Bal. ( 5 units @ \$150)
750
Purchases
Dec. 15 ( 4 units @ \$150) Cost of goods
600 sold
26 (12 units @ \$160) (12 units @ \$?) ?
1,920
Ending bal. ( 9 units @ \$?) ?

## Cost of Goods Sold Ending Inventory

(a)

Specific
unit (6 @ \$150) + (6 @ = \$1,860 (3 @ \$150) + (6 @ = \$1,41
cost \$160) \$160) 0

(b)Average
cost 12 \$156* = \$1,872 9 \$156* = \$1,40
4

_____
*Average cost per (\$750 + \$600 + \$1,920)
= = \$156
unit (5 + 4 + 12)

\$160)

## (d) LIFO (12 @ \$160) = \$1,920 (9 @ \$150) = \$1,350

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2. LIFO produces the highest cost of goods sold,
\$1,920.
FIFO produces the lowest cost of goods sold, \$1,830.
The increase in inventory cost from \$150 to \$160 per
unit causes the difference in cost of goods sold.

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(10 min.) E 6-18A

## Cost of goods sold:

LIFO (\$1,920) FIFO (\$1,830) \$90

Income tax .35
rate
savings 31.50

## (15 min.) E 6-19A

1.
a FIFO
.
Cost of goods sold:
(12 @ \$32) \$384
...............
Ending inventory:
(4 @ \$32) + (5 @ \$63) \$ 443
...

b LIFO
.
Cost of goods sold:
(5 @ \$63) + (7@ \$32) \$539
.................
Ending inventory:
(9 @ \$32) \$ 288
......................

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2.
MusicPlace
Income Statement
Month Ended April 30, X6

## Sales revenue (12 @ \$112) \$1,344

..
Cost of goods 384
sold.
Gross 960
profit..
Operating 260
expenses...
Income before income 700
tax
Income tax expense (35%) 245

Net \$ 455
income

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(15 min.) E 6-20A

Millions
1 Gross profit: FIFO LIFO
.
Sales revenue \$4.8 \$4.8
Cost of goods sold
FIFO: 800,000 \$5.. 4.0
LIFO: (500,000 \$3) + (200,000 \$4) 2
+ .8
(100,000 5).
Gross profit \$0.8 \$2.0

## 2. Gross profit under FIFO and LIFO differ because

inventory costs decreased during the period.

## 3. Valuing the ending inventory at \$5.00 per unit will,

result in an ending inventory valued at \$4,000,000
(800,000 @ \$5) while the FIFO inventory was valued
at \$2,800,000 (500,000 @ \$3) + (200,000 @ \$4) +
(100,000 @ \$5). This would amount to changing the
method of accounting for inventories from FIFO to
LIFO. The difference of \$1,200,000 between the
ending inventories would reduce cost of goods sold
by \$1,200,000 and increase net income by the same
amount. While accounting changes like this are
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permissible under GAAP, they must be for a business
purpose, and not merely to increase the managers
bonus. The companys auditors will likely view the
change unfavorably. In addition, such a change will
likely increase the companys tax bill, so it is unlikely
that the owners of the company will go along with it
either.

## Thames Garden Supply

Income Statement (partial)
Year Ended July 31, 20X6
Sales revenue \$116,00
0
Cost of goods sold [\$67,000 + (\$15,000 71,20
\$10,800)] 0
Gross \$
profit 44,800

## Note: Cost is used for beginning inventory because

cost is lower than market. Market (replacement
cost) is used for ending inventory because
market is lower than cost at year end.

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(15-20 min.) E 6-22A

## (Amounts in millions or billions)

a. \$ 66 \$19 + \$65 \$18 = \$66
b. \$ 39 \$105 \$66 = \$39
c. Must first solve for d
d. \$ 93 \$138 \$45= \$93
c. \$ 94 \$27 + c \$93 = \$28; c =
\$94
e. \$ 92 \$60 + \$32 = \$92
f. \$ 25 f + \$56 \$21 = \$60; f =
\$25
g. \$ 5 \$11 + \$30 g = \$36; g =
\$5
h. \$ 48 \$84 \$36 = \$48

Crane Company
Income Statement
Year Ended December 31, 20X6
(Millions)
Net sales \$ 105
Cost of goods sold
Beginning inventory \$ 19
Net purchases 65
Goods available 84
Ending inventory (18)
Cost of goods sold 66
Gross profit 39
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Operating and other expenses 41
Net income (Net loss) \$(2)

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(20-30 min.) E 6-23A

Gross Profit
Company Percentage Inventory Turnover

\$39 \$66
Crane = 0.371 (\$19 + \$18) / = 3.6 times
\$105
2

\$45 \$93
Foster = 0.326 (\$27 + \$28) / = 3.4 times
\$138
2

\$32 \$60
Allen = 0.348 (\$25 + \$21) / = 2.6 times
\$92
2

\$48 \$36
Matthews = 0.571 = 4.5 times
\$84 (\$11 + \$5) / 2

## Matthews has the highest gross profit percentage,

57.1%.
Matthews has the highest rate of inventory turnover ,
4.5 times.
Based on these data, Matthews looks the most
profitable because Matthews gross profit percentage
is approximately 1 times the other companies
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gross profit percentage. And Matthews inventory
turnover is about 25% higher than Cranes turnover.

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(15 min.) E 6-24A

Req. 1 and 2

1 2
FIFO LIFO
\$144,000 \$144,000
Gross profit
= \$85,200 \$92,800
percentage
\$144,000 \$144,000

= 0.408 = 0.356

\$85,200 \$92,800
Inventory turnover = (\$21,000 + \$23,000) (\$8,000 +
/2 \$17,000) / 2

Req. 3

## FIFO makes the company look better on the gross

profit percentage.

Req. 4

## LIFO makes the company look better on the rate of

inventory turnover.
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6-32
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(10-15 min.) E 6-25A

..

inventory..

inventory..

Budgeted \$7,450
purchases..

## (10-15 min.) E 6-26A

Beginning \$
inventory 47,500
Net 30,900
purchases
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Goods available. 78,400
...
Estimated cost of goods sold:
Net sales \$
revenue 62,100
Less estimated gross profit of (21,73
35% 5)
Estimated cost of goods 40,365
sold...
Estimated cost of inventory \$
destroyed.. 38,035

## Another reason managers use the gross profit method

to estimate ending inventory is to test the
reasonableness of ending inventory.

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10-15 min.) E 6-27A

## Big Blue Sea Marine Supply

Income Statement (Corrected)
Years Ended September 30, 20X6 and 20X5
20X6 20X5

## Sales revenue \$143,00 \$120,00

0 0
Cost of goods sold:
Beginning \$ 9,000
\$21,000
inventory
*
Net purchases 67,000
74,000
Goods 95,000 76,000
available
Ending inventory (19,000
(21,000)
)
*
Cost of goods 76,00 55,0
sold 0 00
Gross profit 67,000 65,000
Operating 28,00 24,0
expenses 0 00
Net income \$ \$
39,000 41,000

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*\$14,500 + \$6,500 = \$21,000

## Big Blue Sea actually performed poorly in 20X6,

compared to 20X5, with net income down from \$41,000
to \$39,000, despite the increase in sales revenue.

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Exercises

Group B
(15-20 min.) E 6-28B

Req. 1

Perpetual System

1. Purchases:
Inventory.. 49,000
Accounts 4,900
Payable.

2. Sales:
Cash (74,000 .24).
17,760
Accounts Receivable (74,000 .
56,240
76).
Sales Revenue.. 74,000

## Cost of Goods Sold..

40,000
Inventory..... 40,00
0

Req. 2

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BALANCE SHEET
Current assets:
17,000
Inventory.

INCOME STATEMENT
Sales 74,000
revenue.
Cost of goods 40,000
sold
Gross 34,000
profit.

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(15-25 min.) E 6-29B

Journal
DATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT

..
Accounts 2,830
Payable...

\$625)..
Sales 8,750
Revenue.

## Cost of Goods 2,250*

Sold.
2,250
Inventory
_____
*(13 @ \$160) + (1 @ \$170) = \$2,250

Req. 3
Sales \$8,750
revenue...
Cost of goods 2,250
sold..
Gross \$6,500
profit...

Ending inventory
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(\$1,120 + \$960 + \$1870 \$1,700
\$2,250). **

## **Or, (10 @ \$170) = \$1,700

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(10-15 min.) E 6-30B
1.
Inventory
Begin. Bal. ( 7 units @ 160
1,120
Purchases
May 15 ( 6 units @ 160) Cost of goods
960 sold
26 (11 units @ 170) (14 units @ ?) ?
1,870
Ending bal. ( 10 units @ ?) ?

## Cost of Goods Sold Ending Inventory

(a)Specific
unit (8 @ 160) + (6 @ = 2,30 (5 @ 160) + (5 @ = 1,65
cost 170) 0 170) 0

(b)Average
cost 14 165* = 2,310 10 165* = 1,65
0

_____
*Average cost per (\$1,120 + 960 + 1,870)
= = 165
unit (7 + 6 + 11)

170)

## (d) LIFO (11 @ \$170) + (3 @ = 2,350 (10 @ 160) = 1,600

160)

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2. LIFO produces the highest cost of goods sold,
2,350.
FIFO produces the lowest cost of goods sold, 2,250.
The increase in inventory cost from 160 to 170 per
unit causes the difference in cost of goods sold.

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(10 min.) E 6-31B

## Cost of goods sold:

LIFO (2,350) FIFO (2,250) 100

Income tax .32
rate..
savings..

## (15 min.) E 6-32B

1.
a FIFO
.
Cost of goods sold:
(13 @ 39) 507
...................
Ending inventory:
(3 @ 39) + (6 @ 66) 513
..

b LIFO
.
Cost of goods sold:
(6 @ 66) + (7 @ 39) 669
..
Ending inventory:
(9 @ 39) 351
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.....................

2.
MusicLife.net
Income Statement
Month Ended April 30, 20X6

## Sales revenue (7 @ 105) + (6 @ 96) 1,311

.
Cost of goods 507
sold.
Gross 804
profit..
Operating 340
expenses...
Income before income 464
tax
Income tax expense (30%) 139

Net 325
income

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(15 min.) E 6-33B
Millions
1 Gross profit: FIFO LIFO
.
Sales revenue. 9.7 9.7
Cost of goods sold
FIFO: 1,000,000 9 9.0
LIFO: (600,000 7) + (100,000 8)
+ (300,000 9) 7.7
Gross profit 0.7 2.0

## 2. Gross profit under FIFO and LIFO differ because

inventory costs decreased during the period.

## 3. Valuing the ending inventory at 9.00 per unit will result in

an ending inventory valued at 7,200,000 (800,000 @ 9) while
the FIFO inventory was valued at 5,900,000 (100,000 @ 9) +
(100,000 @ 8) + (600,000 @ 7). The difference of 1,300,000
between the ending inventories would reduce cost of goods
sold by 1,300,000 and increase net income by the same
amount. While accounting changes like this are
permissible under GAAP, they must be for a business
purpose, and not merely to increase the managers
bonus. The companys auditors will likely view the
change unfavorably. In addition, such a change will
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likely increase the companys tax bill, so it is unlikely
that the owners of the company will go along with it
either.

## Ontario Garden Supply

Income Statement (partial)
Year Ended May 31, 20X6
Sales revenue 115,00
0
Cost of goods sold [73,000 + (13,500 73,50
13,000)] 0
Gross
profit 41,500

## Note: Cost is used for beginning inventory because

cost is lower than market. Market (replacement
cost) is used for ending inventory because
market is lower than cost at year end.

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(15-20 min.) E 6-35B

## (Amounts in millions or billions)

a. 66 22 + 61 17 = 66
b. 35 101 66 = 35
c. Must first solve for d
d. 92 132 40= 92
c. 93 26 + c 92 = 27; c =
93
e. 95 65 + 30 = 95
f. 29 f + 56 20 = 65; f =
29
g. 6 8 + 37 g = 39; g = 6
h. 47 86 39 = 47

Fisher Company
Income Statement

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Year Ended December 31, 20X6
(Millions)
Net sales 101
Cost of goods sold
Beginning inventory 22
Net purchases 61
Goods available 83
Ending inventory (17)
Cost of goods sold 66
Gross profit 35
Operating and other expenses 46
Net income (Net loss) (11)

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(20-30 min.) E 6-36B

Gross Profit
Company Percentage Inventory Turnover

35 66
Fisher = 0.347 (22 + 17) / = 3.4 times
101
2

40 92
Hults = 0.303 (26 + 27) / = 3.5 times
132
2

30 65
Franklin = 0.316 (29 + 20) / = 2.7 times
95
2

47 39
Ogden = 0.547 = 5.6 times
86 (8 + 6) / 2

## Ogden also has the highest rate of inventory turnover ,

5.6 times.
Based on these data, Ogden looks the most profitable
because Ogdens gross profit percentage is greater
than 1 times the other companies gross profit
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percentage. And Ogdens inventory turnover is about 1
times the other companies turnover.

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(15 min.) E 6-37B

Req. 1 and 2

1 2
FIFO LIFO
Gross profit 141,000 85,700 141,000 92,500
=
percentage 141,000 141,000

= 0.392 = 0.344

85,700 92,500
Inventory turnover = (17,000 + 21,000) / (15,000 +
2 23,000) / 2

Req. 3

## FIFO makes the company look better on the gross

profit percentage.

Req. 4

## LIFO makes the company look better on the rate of

inventory turnover.
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(10-15 min.) E 6-38B

..

inventory..

## Budgeted goods available. 8,920

Actual beginning
(1,800)
inventory..

Budgeted 7,120
purchases..

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(10-15 min.) E 6-39B

Beginning
inventory 45,800
Net 31,900
purchases
Goods available. 77,700
...
Estimated cost of goods sold:
Net sales 64,500
revenue
Less estimated gross profit of
(29,025)
45%
Estimated cost of goods 35,475
sold...
Estimated cost of inventory
destroyed.. 42,225

## Another reason managers use the gross profit method

to estimate ending inventory is to test the
reasonableness of ending inventory.

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(10-15 min.) E 6-40B

## Harbour Master Marine Supply

Income Statement (Corrected)
Years Ended September 30, 20X6 and 20X5
20X6 20X5

## Sales revenue 139,00 121,000

0
Cost of goods sold:
Beginning 12,00
20,000
inventory 0
*
Net purchases
74,000 69,000
Goods 94,000 81,000
available
Ending inventory (18,500
(20,00
)
0)*
Cost of goods 75,50 61,00
sold 0 0
Gross profit 63,500 60,000
Operating 26,00 19,00
expenses 0 0
Net income 37,500 41,000

## *13,000 + 7,000 = \$20,000

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Harbour Master actually performed poorly in 20X6,
compared to 20X5, with net income down from 41,000
to 37,500, despite the increase in sales revenue.

Challenge Exercises

## a. Buy inventory late in the year.

b. Company is using LIFO.
c. Use average cost.
d. Use FIFO.
e. Use FIFO.
f. Use any method. They all produce the same
results because costs are stable.

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6-56
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(20-30 min.) E 6-42

## Sales increased, the gross profit dropped, and net

income slid into a net loss, as shown here:

20X6
5

## Sales \$36. \$36. \$34.6

1 0
Cost of sales 27.9 26.9
28.7
Gross profit 7.4 8.1 7.7

(0.3)
loss)

## Gross \$7.4 \$8.1 \$7.7

= = =
=
percentag \$36.1 0.205 \$36.0 0.225 \$34.6 0.223
e

## Inventory \$28.7 \$27.9 \$26.9

turnover = (\$8.8 + \$7.4 / = 3.5 (\$7.4 + \$7.6) / = 3.7 (\$7.6 + \$6.6) / = 3.8
2 2 2

## Both the gross profit percentage and the rate of

inventory turnover dropped during this period. This
suggests that T Mart had to discount its merchandise
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2014 Pearson Education
more and more just to sell the goods. The end result
was a net loss in 20X6.

## Selling expenses increased significantly, which

to sell its inventory.

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2014 Pearson Education
Quiz

## Q6-43 c (\$3,200 + \$6,400 \$5,400 = \$4,200)

Q6-44 d (\$7,400 \$5,400 = \$2,000)
Q6-45 d
Q6-46 a (1,100 @ \$14.00 + 1,500 @ \$14.40 =
\$37,000)
Q6-47 b (1,500 @ \$14.40 + 100 @ \$14 = \$23,000)
Q6-48 b
Q6-49 b (\$151,000 + \$215,000 = \$366,000)
Q6-50 d Replace word lower in question with
higher
Q6-51 b
Q6-52 d [\$623,000 (\$64,000 + \$460,000
\$45,000) =
\$144,000]
Q6-53 a (\$25,000 + X \$12,000 = \$102,000; X =
\$89,000)
Q6-54 a
Q6-55 d [\$330,000 (\$29,000 + \$34,000) / 2] = 10.5
times
Q6-56 c Net sales = \$443,000 (\$450,000 \$7,000)
COGS = \$57,000 + (\$208,000 + \$25,000

\$4,300 \$6,200) \$46,000
= \$233,500
GP% = (\$443,000 \$233,500) /
\$443,000
= .473
Q6-57 b \$52,000 + \$73,000 \$94,000 (1 .50) =
\$78,000
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2014 Pearson Education
Q6-58 c
Q6-59 a

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2014 Pearson Education
Problems

Group A

## (20-30 min.) P 6-60A

Req. 1

Inventory 8,107,000
.
Accounts 8,107,000
Payable

Accounts 7,707,000
Payable.
7,707,000
Cash.

Cash 4,900,00
. 0
Accounts 9,308,00
Receivable... 0
Sales 14,208,0
Revenue.. 00

## Cost of Goods Sold (148,000 8,264,32

\$55.84*). 0
8,264,32
Inventory. 0
_____

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*(\$1,050,000 + \$8,107,000) (21,000 + 31,000 + 51,000
+ 61,000)
= \$55.84

Operating 3,750,00
Expenses. 0
Cash (\$3,750,000 .70) 2,625,0
... 00
Accrued Liabilities (\$3,750,000 1,125,00
.30). 0

## Income Tax 658,104

Expense
Income Tax 658,104
Payable
[(\$14,208,000 \$8,264,320 \$3,750,000) .30 =
\$658,104

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(continued) P 6-60A

Req. 2

Inventory
Beg. bal. 1,050,000
Purchase 8,107,000 COGS 8,264,320
s
End. bal. 892,680

Req. 3

Income Statement
Year Ended February 28, 20X6
Sales revenue \$
14,208,00
0
Cost of goods 8,264,3
sold.. 20
Gross 5,943,680
profit
Operating 3,750,0
expenses. 00
Income before 2,193,680
tax.
Income tax expense (30%) 658,1
. 04

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Net \$
income. 1,535,576

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(20-30 min.) P 6-61A

Req. 1

## This is apparent from the flow of costs out of inventory.

For example, the October 11 sale shows unit cost of
\$34, which came from the beginning inventory. This is
how FIFO, and only FIFO, works.

Req. 2

11 \$34 = \$
374
37 34 = 1,25
8
6 35 = 210
38 35 = 1,33
0
\$3,17
2

## Sales 11 + 37 = 48 units \$69 = \$3,312

6 + 38 = 44 units \$71 = 3,124 \$6,43
6
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Cost of goods 3,172
sold.
Gross \$3,26
profit.. 4

Req. 3

(25 \$36). 5

## *Goods remaining from Oct 8 purchase: 83 units - 6 - 38

=39

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2014 Pearson Education
(20-30 min.) P 6-62A

Req. 1

Inventory
Begin. bal. ( 72 units @ \$17)
1,224
Purchases
:
Oct. (103 units @ \$19)
4 1,957
19 (158 units @ \$21) Cost of goods sold
3,318
25 ( 43 units @ \$22) (324 units @ \$?) ?
946
Ending ( 52 units @
bal. \$?) ?

## Cost of Goods Sold Ending Inventory

Average 52 \$19.8001* =
324 \$19.8001* = \$6,415
cost \$1,030
____
*Average (\$17 x 72 + \$1,957 + \$3,318 + \$946)
=
cost =
\$19.8001
per unit (72+ 103 + 158 + 43)

## FIFO (72 @ \$17) + (103 @

\$19)
+ (149 @ \$21) = \$ (9 @ \$21) + (43 @ =
6,310 \$22) \$1,135

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2014 Pearson Education
LIFO (43 @ \$22) + (158 @
\$21)
+ (103 @ \$19) + (20 @ = (52 @ \$17) = \$884
\$17) \$6,561

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(continued) P 6-62A

Req. 2

## LIFO results in the highest cost of goods sold because

(a) the companys prices are rising and (b) LIFO
assigns to cost of goods sold the cost of the latest
inventory purchases. When costs are rising, these
latest inventory costs are the highest, and that makes
cost of goods sold the highest under LIFO.

## Student responses may vary.

Req. 3

Fatigues Surplus
Income Statement
Month Ended October 31, 20X6
Sales revenue (324 \$51) \$16,524
..
Cost of goods 6,415
sold..
Gross 10,109
profit
Operating 5,000
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expenses
Income before income 5,109
taxes.
Income tax expense (40%) 2,044
.
Net \$ 3,065
income.

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(30-40 min.) P 6-63A

## Req. 1 (partial income statements)

Bell Aviation
Income Statement
Year Ended December 31, 20X6
AVERAGE FIFO LIFO
Sales revenue \$132,447 \$132,447 \$132,447
Cost of goods sold 73,888 73,359 74,360
Gross profit \$ 58,559 \$ 59,088 \$ 58,087

## Average (\$6,083 + \$2,496 + \$68,470 + \$4,876)

cost = = \$8.2007
per unit (790 + 320 + 8,350 + 530)

= \$73,88
COGS at average cost = 9,010 \$8.2007
8

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FIFO COGS = = \$73,35
(790 @ \$7.70) + (320 @ \$7.80) + (7,900 @ \$8.20)
9

## LIFO COGS = (530 @ \$9.20) + (8,350 @ \$8.20) + (130 @ \$7.80) = \$74,360

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(continued) P 6-63A

Req. 2

## Use the LIFO method to minimize income tax because

cost of goods sold is highest (gross profit is lowest)
under LIFO when inventory costs are rising.

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(15-30 min.) P 6-64A

## ELV Trade Mart should apply the lower-of-cost-or-

market rule to account for inventories. The current
replacement cost of ending inventory is less than ELVs
actual cost, so ELV must write the inventory down to
current replacement cost, with the following journal
entry:

## Cost of Goods 75,000

Sold
75,000
Inventory...
To write inventory down to NRV.

## ELV should report the following amounts in its financial

statements:

BALANCE SHEET
Inventory at market (which is lower than
cost of \$220,000)... \$145,000*

INCOME STATEMENT
Cost of goods sold (\$770,000 + \$75,000) \$845,000
_____
*\$200,000 \$75,000 = \$145,000

## Reliability qualitative characteristic is the reason to

account for inventory at the lower of cost or NRV. Not
revaluing the inventory to the lower NRV lends
biasness to the ending inventory which violates the
reliability requirement.
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The Matching principle (from Chapter 3: Accrual
Accounting & Income) requires costs/losses to be
recorded in the period in which they contributed to
revenue/gains. Since the impairment in inventory
occurred during this accounting period, not recording
the impairment would mean a misstatement of both
this years and the subsequent years net income.

## Student responses may vary.

(20-30 min.) P 6-65A

Req. 1

## Sprinkle Top, Coffee Shop

Inc. Corp.
Millions Millions
Gross profit
percentage:
\$544 \$7,700
Sales.
Cost of 478 3,160
sales...
Gross \$ 66 \$4,540
profit.

\$4,54
Gross profit \$66
0
= 12.1% = 59.0%
percentage: \$544 \$7,70
0

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Inventory turnover:
Cost of goods \$478 \$3,160
sold
=
Average (\$26 + \$36) / 2 (\$627+ \$544) /
inventory 2

Req. 2

## From these statistics, its hard to tell whether Sprinkle

Top or Coffee Shop is more profitable. Coffee Shop has
a much higher gross profit percentage but Sprinkle Top
has a much faster inventory turnover. To adequately
evaluate profitability, we will need to also consider the
expenses.

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2014 Pearson Education
(25-30 min.) P 6-66A

## Req. 1 (estimate of ending inventory by the gross

profit
method)

Beginning \$ 57,100
inventory...
Purchases \$490,200
.
Less: Purchase (11,000)
discounts.
Purchase
(70,900)
returns...
Net 408,300
purchases.
Goods 465,400
available..
Cost of goods sold:
Sales \$667,000
revenue..
Less: Sales
(11,000)
returns
Net sales. 656,000
..
Less: Estimated gross profit of (268,960)
41%.
Estimated cost of goods 387,040
sold.
Estimated cost of ending \$
inventory... 78,360
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6-78
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(continued) P 6-66A

## Req. 2 (income statement through gross profit)

Thompson Company
Income Statement (partial)
Month of October, 20X6
Sales \$667,000
revenue.
Less: Sales
(11,000)
returns..
Net sales 656,000
revenue.
Cost of goods 387,040*
sold
Gross profit. \$268,960

_____
*Cost of goods sold:
Beginning \$ 57,100
inventory...
\$490,200
Purchases.
Less: Purchases (11,000)
discounts...
Purchase (70,90
returns.. 0)
Net 408,300
purchases..
Cost of goods available for 467,400
sale.

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Less: Estimated ending (78,360)
inventory.
Cost of goods \$387,040
sold.

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2014 Pearson Education
(20-25 min.) P 6-67A

Req. 1

## Cost of sales, budgeted (\$720,000 \$ 763,200

1.06)
+ Ending inventory, 76,000
budgeted.
= Cost of goods 839,200
available.
Beginning (68,000)
inventory..
= Purchases, budgeted \$ 771,200

Req. 2

## Maroneys Convenience Store

Budgeted Income Statement
Year Ended December 31, 20X5
Sales (\$957,000 1.06) \$1,014,4
. 20
Cost of sales (\$720,000 1.06) 763,200

Gross profit 251,220
Operating expenses (\$114,000 97,220
\$16,780)
Net income. \$154,000

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6-82
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(15-20 min.) P 6-68A

## Req. 1 (corrected income statements)

R. B. Video Sales
Income Statement (adapted; amounts in millions)
Years Ended 20X6, 20X5, and 20X4
20X6 20X5 20X4
Net sales \$39 \$36 \$33
revenue...
Cost of goods sold:
Beginning \$ 8* \$ 7* \$ 3
inventory..
27 25 23
Purchases
Goods 35 32 26
available..
Ending (6) (8)* (7)*
inventory
Cost of goods 29 24 19
sold

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Gross 10 12 14
profit..
Operating expenses.. 6 6 6
.
Net \$ 4 \$ 6 \$ 8
income

*Throughout the period from year end 20X4 to year beginning 20X6, inventory
was understated by \$3 million.

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(continued) P 6-68A

Req. 2

## The corrections did not change total net income over

the three-year period. But the corrections drastically
altered the trend of net income from an increasing
pattern to a decreasing pattern.

Req. 3

## The shareholders will not be happy with a declining

trend of net income because the company is losing
ground with its profits.

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2014 Pearson Education
Problems

Group B

## (20-30 min.) P 6-69B

Req. 1

Inventory 9,782,00
0
Accounts Payable 9,782,00
0

## Accounts Payable 9,382,00

0
Cash 9,382,00
0

Cash 4,500,00
0
Accounts 10,092,0
Receivable 00
Sales 14,592,0
Revenue. 00

## Cost of Goods 9,735,60

Sold... 0*
Inventory 9,735,60
0
*(850,000 + 1,980,000 + 3,392,000 + 4,410,000)
166,000 =
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2014 Pearson Education
64.05 64.05 x 152,000 = 9,735,600

## Operating Expenses 2,750,0

00
Cash (2,750,000 0.60) 1,650,00
0
Accrued Liabilities (2,750,000 1,100,00
0.40). 0

## Income Tax 737,240

Expense.
Income Tax Payable 737,240
[(14,592,000 9,735,600 2,750,000) .35 =
737,240]

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2014 Pearson Education
(continued) P 6-69B

Req. 2

Inventory
Beg. bal. 850,000
Purchase 9,782,000 COGS 9,735,600
s
End. bal. 896,400

Req. 3

Best Guy
Income Statement
Year Ended February 28, 20X6
Sales revenue 14,592,0
00
Cost of goods 9,735,6
sold.. 00
Gross 4,856,400
profit
Operating 2,750,0
expenses 00
Income before 2,106,400
tax
Income tax expense (35%) 737,2
. 40
Net
income. 1,369,160
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6-89
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(20-30 min.) P 6-70B

Req. 1

## This is apparent from the flow of costs out of inventory.

For example, the March 11 sale shows a unit cost of
39, which came from the beginning inventory. This is
how FIFO, and only FIFO, works.

Req. 2

17 39 = 663
29 39 = 1,131
11 40 = 440
36 40 = 1,4
40
3,674

## Sales 17 + 29 = 46 units 65 = 2,990

11 + 36 = 47 units 67 = 3,149 6,139
Cost of goods (3,674)
sold.
Gross 2,465
profit...
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2014 Pearson Education
Req. 3

41) = 2,019

## *Goods remaining from Oct 8 purchase: 78 - 11 - 36 =

31

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2014 Pearson Education
(20-30 min.) P 6-71B

Req. 1

Inventory
Begin. bal. (66 units @ 23)
1,518
Purchases
:
July (105 units @ 25)
4 2,625
12 (157 units @ 27) Cost of goods sold
4,239
25 (37 units @ 28) 1,036 (310 units @ ?) ?
Ending (55 units @ ?) ?
bal.

## Cost of Goods Sold Ending Inventory

Average 55 25.8027*
310 25.8027* 7,999
cost 1,419
____
*Average (1,518 + 2,625 + 4,239 + 1,036
=
cost =
25.8027
per unit (66 + 105 + 157 + 37)

## FIFO (66 @ 23) + (105 @ (18 @ 27

25) +
+ ( 139 @ 27) = 7,896 37 @ 28 = 1,522

## LIFO (37 @ 28) + (157 @ 27)

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+
( 105 @ 25) + (11 @ = 8,153 55 @ 23 + = 1,265
23)

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2014 Pearson Education
(continued) P 6-71B

Req. 2

## LIFO cost of goods sold is highest because (a) prices

are rising and (b) LIFO assigns to cost of goods sold
the cost of the latest inventory purchases. When costs
are rising, these latest inventory costs are the highest,
and that makes cost of goods sold the highest under
LIFO.

Req. 3

## Swat Team Surplus

Income Statement
Month Ended July 31, 20X6
Sales revenue (310 @ 53) 16,430
..
Cost of goods 7,999
sold..
Gross 8,431
profit
Operating 3,000
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expenses
Income before income 5,431
taxes.
Income tax expense (32%) 1,738
.
Net 3,693
income.

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2014 Pearson Education
(30-40 min.) P 6-72B

## Req. 1 (partial income statements

Buzz Aviation
Income Statement
Year Ended December 31, 20X6
AVERAGE FIFO LIFO
Sales revenue 128,226 128,226 128,226
Cost of goods sold 73,171 72,654 73,607
Gross profit 55,055 55,572 54,619

## Average (5,548 + 2,387 + 67,797 + 4,732)

cost = = 8.1031
per case (730 + 310 + 8,370 + 520)

## FIFO COGS = (730 @ \$7.60) + (310 @ \$7.70) + (7,990 @ \$8.10) = 72,654

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LIFO COGS = (520 @ \$9.10) + (8,370 @ \$8.10) + (140 @ \$7.70) = 73,607

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(continued) P 6-72B

Req. 2

## Use FIFO to report the highest net income because

cost of goods sold is lowest (gross profit is highest)
under FIFO when inventory costs are rising.

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2014 Pearson Education
(15-20 min.) P 6-73B

## Aquarium Trade Mart should apply the lower-of-cost-or-

market rule to account for inventories. The current
replacement cost of ending inventory is less than
Mart must write the inventory down to current
replacement cost, with the following journal entry:
Cost of Goods 70,000
Sold
70,000
Inventory...
To write inventory down to NRV.

## Aquarium Trade Mart should report the following in its

financial statements:
BALANCE SHEET
Inventory, at market (which is lower than cost
of 280,000)... 210,000*

INCOME STATEMENT
Cost of goods sold (800,000 + 70,000) 870,000
*280,000 70,000 = 210,000

## Faithful representation qualitative characteristic is the

reason to account for inventory at the lower of cost or
NRV. Not revaluing the inventory to the lower NRV

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2014 Pearson Education
lends a biasness to the ending inventory which violates
the reliability requirement.

## The Matching principle (from Chapter 3: Accrual

Accounting & Income) requires costs to be recorded in
the period in which they contributed to gains. Since the
impairment occurred during this period, not recording
it would mean a misstatement of both this years and
the subsequent years net income.

## Student responses may vary.

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2014 Pearson Education
(20-25 min.) P 6-74B

Req. 1

## Pastry People, Coffee Grind

Inc. Corp.
Dollars in Millions
Gross profit
percentage:
548 7,171
Sales
Cost of goods 477 3,190
sold.
Gross 71 3,981
profit

## Gross profit 71= 3,981 =

percentage: 548 13.0% 7,171 55.5%

Inventory turnover:
Cost of goods 477 3,190
sold
=
Average (17 + 33) / 2 (631 + 546) / 2
inventory

## = 19.1 times = 5.4 times

Req. 2

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From these statistics, it is hard to tell whether Pastry
People or Coffee Grind is more profitable. Coffee Grind
Corp. has a higher gross profit percentage but Pastry
People has a much faster inventory turnover. To
adequately evaluate profitability, we will need to also
consider the companies selling, general, and

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2014 Pearson Education
(25-30 min.) P 6-75B

## Req. 1 (estimate of ending inventory by the gross profit

method)

Beginning 57,500
inventory
Purchases 490,500
..
Less: Purchase (12,000)
discounts..
Purchase
(70,300)
returns
Net 408,200
purchases...
Goods 465,700
available
Cost of goods sold:
Sales 664,000
revenue
Less: Sales (16,000)
returns.
Net 648,000
sales.
Less: Estimated gross profit of
(278,640)
43%..
Estimated cost of goods 369,360
sold...
Estimated cost of ending 96,340
inventory

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2014 Pearson Education
6-104
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(continued) P 6-75B

## Req. 2 (income statement through gross profit)

Ross Company
Income Statement (partial)
For the Period Up to the Fire
Sales 664,000
revenue..
Less: Sales (16,000)
returns
Net sales 648,000
revenue...
Cost of goods 369,360*
sold.
Gross 278,640
profit..
_____
*Cost of goods sold:
Beginning 57,500
inventory...
490,500
Purchases...
Less: Purchases (12,000)
discounts.
Purchase (70,30
returns. 0)
Net 408,200
purchases..
Goods 465,700
available...

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Less: Estimated ending (96,340)
inventory.
Cost of goods 369,360
sold.

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2014 Pearson Education
(20-25 min.) P 6-76B

Req. 1

## Cost of sales, budgeted (722,000 786,980

1.09)..
+ Ending inventory, 78,00
budgeted... 0
= Cost of goods
864,980
available...
Beginning
(65,000)
inventory.
= Purchases, budgeted 799,980
..

Req. 2

## Daves Convenience Stores

Budgeted Income Statement
Year Ended December 31, 20X6
Sales (964,000 1.09) 1,050,76
0
Cost of sales (722,000 1.09) 786,98
. 0
Gross 263,780
profit....
Operating expenses (110,000 107,78
2,220) 0

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Net
income.. 156,000

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(15-20 min.) P 6-77B

## Waterville Video Sales

Income Statement (adapted; amounts in millions)
Years Ended 20X6, 20X5, and 20X4
20X6 20X5 20X4
Net sales 42 39 36
revenue...
Cost of goods sold:
Beginning 12* 11* 8
inventory..
33 31 29
Purchases
Goods 45 42 37
available..
Ending (11) (11)*
(12)*
inventory
Cost of goods 34 30 26
sold

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Gross 8 9 10
profit..
Operating 5 5 5
expenses...
Net 3 4 5
income

*Throughout the period from year end 20X4 to year beginning 20X6, inventory
was understated by 2 million.

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(continued) P 6-77B

Req. 2

## The corrections did not change total net income over

the three-year period. But the corrections made the
companys trend of net income reflect a downward
trend with 20X5 net income decreasing from that of
20X4 and then continuing the drop in 20X6.

Req. 3
The shareholders will not be happy with the downward
trend, since it appears to be continuing.

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Decision Cases

## (50-60 min.) Decision Case 1

Req 1

Duracraft Corporation
Income Statement
FIFO LIFO
Sales revenue \$1,200,000 \$1,200,000
Cost of goods sold: 585,000* 645,000**
Gross profit 615,000 555,000
Operating expenses 200,000 200,000
Income before
income
tax expense 415,000 355,000
Income tax expense
(\$415,000 . 166,000
40)
(\$355,000 . 142,000
40)
Net income \$ 249,000 \$ 213,000
_____
*\$100,000 + \$485,000 = \$585,000
**\$160,000 + \$485,000 = \$645,000

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(continued) Decision Case 1

Reqs. 2

FIFO LIFO
Net \$249,000 \$213,000
income

## FIFO net income is higher because (1) prices are rising

(from \$100 to \$121.25 to \$160), and (2) FIFO and LIFO
assign costs to expense (cost of goods sold) in
opposite patterns.

## Student responses may vary.

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(15-25 min.) Decision Case 2

Req. 1

## This question provides a rich setting for a class

discussion. Theres no single correct answer to this
question. Some students may favor Company B
because it reports higher net income than Company A.
B may be preferred because it appears more
successful than A, and Bs share price may therefore
rise more than As share price. Thus it may appear that
Company B would be a better investment than A.

## Other students may prefer Company A because it

discloses the inventory method it uses. Company B
does not let outsiders know which method it uses to
account for its inventory. These students may trust
Company A more than B because A is more willing to
bare its soul to the public.

## Professors can point out that A, the LIFO company,

may be better off because of the lower income taxes
that A pays by using the LIFO method. We dont know
whether Company B is making the most of this cash-

## Student responses will vary.

Req. 2

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Yes, the authors would prefer managers to be
conservative in accounting for inventory for all the
reasons accountants use conservatism. If any errors
occur, we would prefer to be pleasantly surprised
rather than negatively shocked.

Ethical Issue

Req. 1

## Changing accounting methods year after year hurts a

companys credibility, which makes it hard for the
company to borrow or raise money from outside
investors. The question that arises about such a
company is: What is the business trying to hide?

Req. 2

Req. 3

## Creditors and outside investors could be harmed by

accounting changes year after year. It becomes
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2014 Pearson Education
difficult to tell which changes in the business are real
and which changes result from the shift in the
accounting method. Outsiders find it difficult to track
the companys operating results and financial position
over time. Ultimately the company suffers because
lenders will not want to lend it money, and outsiders
will be reluctant to invest money in the business. This
may deprive the entity of needed funds and hurt its
chances for success or survival.

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Focus on Financials: Vodafone Corporation

(30 min.)
Req. 1

## Note 2 of the Consolidated Financial Statements

(Significant Accounting Policies), under inventories,
states: Inventories are stated at the lower of cost or
net realizable value. Cost is determined on the basis of
weighted average costs and comprises direct
materials an direct labor costs and those overheads
that have been incurred in bringing the inventories to
their preset location and condition.

Req. 2

## If Vodafone adopted FIFO with rising inventory prices,

profit would rise due to lower COGS. This is because
the older, cheaper inventory would be sold first.

Req. 3

## Cost of inventory on hand at end of 2011: 537 million

Cost of sales: 30,814 million
Cost of inventory purchases: (begin inventory +
purchase ending inventory = inventory sold out)
Therefore, inventory purchases = 30,814 - 433 + 537 =
30,918 million

Req. 4

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It deteriorated from 33.8% in 2010 to 32.8% in 2011.

Req. 5

63.5 times

## In general, higher inventory turnover is better because

it means the company is moving sales faster and
incurring fewer holding costs. To give a better picture,
we need to know how Vodafones inventory turnover
compares to that of its competitors.

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Group Project

## Student responses will vary.

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Chapter 6 Appendix

## Appendix Short Exercises

(10-15 min.) S6A-1

(Journal entries)

General Journal

1. Purchases 1,180
Accounts Payable 1,180
Purchased inventory on account.

## 2. Accounts Receivable 3,200

Sales Revenue 3,200
Sold inventory on account.

## 3. End-of-period entries to update

inventory and record Cost of
Goods sold:

## a. Cost of Goods Sold 480

Inventory (beginning balance) 480
Transfer beginning inventory to COGS.

## b. Inventory (ending balance) 610

Cost of Goods Sold 610
Set up ending inventory based on

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physical count.

## c. Cost of Goods Sold 1,180

Purchases 1,180
Transfer purchases to COGS.

(10-15 min.)
S6A-2

## Req. 1 Posting general journal entries

Inventory
480* 480
61
0
61
0
* Beginning inventory was \$480

## Cost of Goods Sold

480 610
1,180
1,0
50

Req. 2
Cost-of-Goods-Sold Model
Beginning inventory \$ 480
Goods available for sale 1,660
Less: Ending inventory 610
Cost of goods sold \$1,050

Req. 3

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Saxton Technologies
Income Statement (Partial)
Sales revenue \$3,200
Cost of goods sold:
Beginning inventory 480
Purchases 1,180
Goods available 1,660
Ending inventory (610)
Cost of goods sold 1,050
Gross profit \$2,150

Appendix Exercises

## (10-15 min.) E6A-3A

Inventory
Begin. Bal. (5 units @ \$59)
295
Purchases
Jul 1 (3 units @ \$59) Cost of goods
177 sold
15 (13 units @ \$69 (15 units @ \$?) ?
897
26 ( 1 unit @ \$79)
79
Ending Bal. ( 7 units @ \$?) ?

Cost of
Ending Inventory
Goods Sold

(1)

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Specific
unit (6 @ \$59) + (8 @ \$69) (2 @ \$59) + (5 @ \$69) = \$463
cost + (1 @ \$79) = \$985

(2)Average
cost (15 \$65.8*) = \$987 (7 \$65.8*) = \$461

_____
(\$295 + 177 + 897 + 79) \$65.8
(5 + 3 + 13 + 1) (rounded to
*Average cost per unit = =
the nearest
cent)

(3)
FIFO (8 @ \$59) + (7@ \$69) = \$955 (6 @ \$69) + (1 @ \$79) = \$493

## (4) LIFO (1 @ \$79) + (13@ \$69) \$1,0

+ (1@ \$59) = 35 (7 @ \$59) = \$413

## Reqs. 1 & 2 (Journal entries)

General Journal

1. Purchases 1,153
Accounts Payable 1,153
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Purchased inventory on account.

2. Accounts Receivable
4,425
Sales Revenue 4,425
Sold inventory on account.

## 3. End-of-period entries to update

inventory and record Cost of Goods
Sold:

## a. Cost of Goods Sold 295

Inventory (beginning balance) 295
Transfer beginning inventory to COGS.

## b. Inventory (ending balance) 413

Cost of Goods Sold 413
Set up ending inventory based on
physical count.

## c. Cost of Goods Sold 1,135

Purchases 1,135
Transfer purchases to COGS.

(continued) E6A-4A

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Req.3 Posting general journal entries

## Cost of Goods Sold

Beginning Inventory Ending Inventory
295 413
Purchases
1,153
Cost of goods sold
1,035

## Beginning inventory 295

Goods available 1,448
Less: Ending inventory 413
Cost of goods sold 1,035

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(10-15 min.) E6A-5B

Inventory
Begin. Bal. (6 units @ \$60)
360
Purchases
Dec 8 (4 units @ \$60) Cost of goods
240 sold
15 (13 units @ \$70)
910
26 ( 2 unit @ \$80) (16 units @ \$?) ?
160
Ending Bal. ( 9 units @ \$?) ?

## Cost of Goods Sold Ending Inventory

(1)

Specific
unit (6@ \$60) + (8 @ \$70) + (4 @ \$60) + (5 @ \$70) = \$590
cost (2 @ \$80) =\$1,080

(2)Average
cost (16 \$66.8*) = \$1,069 (9 \$66.8*) = \$601

_____
(\$360 + 240 + 910 + 160)
*Average cost per unit = = \$66.8
(6 + 4 + 13 + 2)

(3) FIFO
(10@ \$60) + (6@ \$70) = \$1,020 (7@ \$70) + (2@ \$80) = \$650

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(4) LIFO (2 @ \$80) + (13@ \$70) \$1,1 (9 @ \$60) = \$540
+ (1@ \$60) = 30

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(10-15 min.) E6A-6B

## Reqs. 1 & 2 (Journal entries)

General Journal
1. Purchases 1,310
Accounts Payable 1,310
Purchased inventory on account

## 2. Accounts Receivable 5,040

Sales Revenue 5,040
Sold inventory on account

## 3. End-of-period entries to update

inventory and record Cost of Goods
Sold:

## a. Cost of Goods Sold 360

Inventory (beginning balance) 360
Transfer beginning inventory to COGS

## b. Inventory (ending balance) 540

Cost of Goods Sold 540
Set up ending inventory based on
physical count

## c. Cost of Goods Sold 1,310

Purchases 1,310
Transfer purchases to COGS

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(continued) E6A-6B

## Cost of Goods Sold

Beginning Inventory Ending Inventory
360 540
Purchases
1,310
Cost of goods sold
1,130

## Beginning inventory \$ 360

Goods available 1,670
Less: Ending inventory 540
Cost of goods sold \$1,130

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Appendix Problems

## (20-25 min.) P6A-7A

Req. 1

Inventory
Begin. Bal. (48 units @ \$16)
768
Purchases
Jul 8 (80 units @ \$17) Cost of goods
1,360 sold
30 (22 units @ \$18 (90 units @ \$?) ?
396
Ending Bal. (60 units @ \$?) ?

## Cost of Goods Sold Ending Inventory

FIFO
(48@ \$16) + (42@ \$17) = \$1,482 (22@ \$18) + (38@ = \$1,042
\$17)

Req. 2

## Date Units Sold Selling Total Revenue

Price
July 3 19 \$69 \$1,311
July 11 29 \$69 \$2,001
July 19 3 \$71 \$ 213
July 24 35 \$71 \$2,485
July 30 4 \$71 \$ 284
Total 90 \$6,294

Watercress Outlet
Income Statement (Partial)

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Sales revenue \$6,294
Cost of goods sold:
Beginning inventory \$ 768
Purchases 1,756
Goods available 2,524
Ending inventory (1,042)
Cost of goods sold 1,482
Gross profit \$4,812

## General Journal (Amounts in

Thousa
nds)
1. Purchases \$2,040
Accounts Payable 2,040
Purchased inventory on account

## 2. Accounts Receivable 2,380

Cash 1,020
Sales Revenue 3,400
Sold inventory for cash and on
account

## 3. End-of-period entries to update

inventory and record Cost of
Goods Sold:

## a. Cost of Goods Sold 560

Inventory (beginning balance) 560
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Transfer beginning inventory to
COGS

## b. Inventory (ending balance) 680

Cost of Goods Sold 680
Set up ending inventory based on
physical count

## c. Cost of Goods Sold 2,040

Purchases 2,040
Transfer purchases to COGS

(continued) E6A-8A
Req. 2
Halton Desserts, Inc.
Income Statement (Partial)

## Sales revenue \$3,400

Cost of goods sold:
Beginning inventory \$560
Purchases 2,040
Goods available 2,600
Ending inventory (680)
Cost of goods sold 1,920
Gross Profit \$1,480

Cost-of-Goods-Sold Model

## Beginning inventory \$560

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Goods available 2,600
Less: Ending inventory 680
Cost of goods sold \$1,920

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(20-25 min.) P6A-9B
Req. 1
Inventory
Begin. Bal. (50 units @ \$19)
950
Purchases
Jan 8 (77 units @ \$20) Cost of goods
1,540 sold
30 (19 units @ \$21) (96 units @ \$?) ?
399
Ending Bal. (49 units @ \$?) ?

## (19@ \$21) + (31@

FIFO (50@ \$19) + (46@ \$20) = \$1,870 = \$1,019
\$20)

Req. 2

## Date Units Sold Selling Total Revenue

Price
Jan 3 17 \$71 \$1,207
Jan 11 33 \$71 \$2,343
Jan 19 2 \$73 \$ 146
Jan 24 39 \$73 \$2,847
Jan 31 5 \$73 \$ 365
Total 96 \$6,908

Championship Outlet
Income Statement (Partial)
Sales revenue \$6,908
Cost of goods sold:
Beginning inventory \$ 950
Purchases 1,939
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Goods available 2,899
Ending inventory (998)
Cost of goods sold 1,870
Gross profit \$5,038

## General Journal (thousands)

1. Purchases 2,000
Accounts Payable 2,000
Purchased inventory on account

## 2. Accounts Receivable 2,850

Cash 950
Sales Revenue 3,800
Sold inventory for cash and on
account

## 3. End-of-period entries to update

inventory and record Cost of Goods
Sold:

## a. Cost of Goods Sold 530

Inventory (beginning balance) 530
Transfer beginning inventory to COGS.

## b. Inventory (ending balance) 650

Cost of Goods Sold 650
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Set up ending inventory based on
physical count.

## c. Cost of Goods Sold 2,000

Purchases 2,000
Transfer purchases to COGS.

(continued)
E6A-10B
Req. 2

## Just Desserts, Inc.

Income Statement (Partial)

Sales revenue \$
3,800
Cost of goods sold:
Beginning \$ 530
inventory
Purchases 2,000
Goods available 2,530
Ending inventory (650)
Cost of goods sold 1,880
Gross Profit \$
1,920
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Cost-of-Goods-Sold Model