000 Merged

10/9/2019 BUSAC 186 5818 FALL 2019 ONLINE-Hira Malik
Student: Hira Malik Course: BUSAC 186 5818 FALL 2019 ONLINE
Instructor: Arek Puzia Book: Thomas/Tietz: Financial Accounting, 12e
Date: 10/09/19 Time: 23:00
5. The word market as used in "the lower of cost or market" generally means
A. net realizable value.

B. liquidation price.
C. retail market price.
D. original cost.
YOU ANSWERED: D.
https://xlitemprod.pearsoncmg.com/api/v1/print/accounting 1/1
Date: 10/12/19 Time: 11:55
Delaware Company sold 20,000 jars of its organic honey in the most current year for $8 per jar. The company had paid $1.50
per jar of honey. (Assume that sales returns are nonexistent.) Calculate the following:
1. Sales revenue
2. Cost of goods sold
3. Gross profit
Sales revenue is based on the sale price of the inventory sold. We know that Delaware Company sold 20,000 jars of its organic
honey for $8 per jar. To calculate the sales revenue, we must multiply the number of units of jars sold by the sale price per jar.
Go ahead and calculate the sales revenue.
Number of units of Sale price per unit

inventory sold x of inventory = Sales revenue
20,000 x $ 8 = $ 160,000
Cost of goods sold is based on the cost of inventory sold. We know that Delaware Company sold 20,000 jars of its organic
honey and paid $1.50 per jar of honey. To calculate the cost of goods sold, we must multiply the number of units of jars sold by
the cost paid per jar. Go ahead and calculate the cost of goods sold.
Number of units of Cost per unit Cost of goods

inventory sold x of inventory = sold
20,000 x $ 1.50 = $ 30,000
Gross profit, also called gross margin, is the excess of sales revenue over cost of goods sold. It is called gross profit (margin)
because operating expenses have not yet been subtracted. The sales revenue and cost of goods sold you have calculated
above have been entered into the table for you. Go ahead and calculate the gross profit.
Sales revenue - Cost of goods sold = Gross profit

$ 160,000 - $ 30,000 = $ 130,000
YOU ANSWERED: Number of units of Sale price per unit

inventory sold x of inventory = Sales revenue
nothing x nothing = nothing
Number of units of Cost per unit Cost of goods

inventory sold x of inventory = sold
20,000 x nothing = nothing
Sales revenue - Cost of goods sold = Gross profit

$ 160,000 - $ 30,000 = nothing
Date: 10/12/19 Time: 11:55
5. Marcy Corporation purchased inventory costing $125,000 and sold 75% of the goods for $168,750. All purchases and sales
were on account. Marcy later collected 25% of the accounts receivable. Assume that sales returns are nonexistent.
Read the requirements1.
1. Journalize these transactions for Marcy, which uses the perpetual inventory system.
Journalize the purchase of inventory. (Record debits first, then credits. Exclude explanations from any journal entries.)
Journal
Accounts Debit Credit
Inventory 125,000
Accounts Payable 125,000
Journalize the sale.
Journal
Accounts Receivable 168,750
Sales Revenue 168,750
Record the cost of goods sold portion of the sale.
Journal
Cost of Goods Sold 93,750
Inventory 93,750
Record the collection of 25% of the accounts receivable.
Journal
Cash 42,188
2. For these transactions, show what Marcy will report for inventory, revenues, and expenses on its financial statements at
the end of the month. Report gross profit on the appropriate statement. Assume beginning inventory is $0. (If a box is not
used in the table leave the box empty; do not enter a label or enter a zero.)
Determine what the company will report on the balance sheet:
Balance Sheet
Assets
Current assets:
$
Inventory 31,250
Determine what the company will report on the income statement:
Income Statement
Sales revenue $ 168,750
Cost of goods sold 93,750
Gross profit $ 75,000
1: Requirements
1. Journalize these transactions for Marcy, which uses the perpetual inventory system.
2. For these transactions, show what Marcy will report for inventory, revenues, and expenses on its financial statements
at the end of the month. Report gross profit on the appropriate statement. Assume beginning inventory is $0.
YOU ANSWERED: Journal

nothing nothing nothing
Journal
Journal
Journal
Balance Sheet
Assets
Current assets:
nothing nothing
nothing nothing
nothing nothing
Income Statement
nothing nothing
nothing nothing
nothing nothing
Date: 10/09/19 Time: 22:32
Use the following data of Seaspray Company:

1
(Click the icon to view the data.)
Seaspray's total cost of goods available for sale would be:
The cost of goods available for sale, under all accounting methods, is determined the same way. Beginning inventory plus
purchases equals the cost of goods available for sale. Use the table below to determine the cost of goods available for sale for
Seaspray Company.
Units Unit Cost Total Cost

Beginning inventory 18 $ 120 $ 2,160
Purchases 43 125 5,375
61 $ 7,535
Cost of goods available for sale
1: Data Table
Unit Total
Units Cost Cost
Purchase on July 3 43 125 5,375
Sales 55 ? ?
YOU ANSWERED: Units Unit Cost Total Cost

Purchases 43 125 5,375
nothing nothing
Cost of goods available for sale
Date: 10/09/19 Time: 22:32
Use the following data of Stingray Company:

1
Stingray's cost of goods sold using the average-cost method would be:
Inventory is the first asset on the balance sheet for which a manager can decide which accounting method to use. The
accounting method selected affects the profits to be reported, the amount of income tax to be paid (if applicable), and the values
of the ratios derived from the balance sheet.
Determining the cost of inventory is easy when the unit cost remains constant, but the unit cost usually changes based on
market conditions. For example, prices often rise. A gallon of gas may cost $2.25 on October 20th, $2.50 on October 25th, and
$2.75 on October 31st. Suppose a gas station sells 100 gallons of gas on November 1st. How many of those gallons cost them
$2.25, how many cost $2.50, and how many cost $2.75?
To compute cost of goods sold and the cost of ending inventory still on hand, we must assign unit cost to the items. One of the
generally accepted inventory methods is the average cost method.
The average-cost method, sometimes called the weighted-average method, is based on the average cost of inventory during
the period. To calculate the weighted-average cost of goods sold, you must first calculate the total number of units available to
be sold, as well as the total cost of the goods available to be sold. Complete the following table.
Inventory Number of units x Cost per unit = Subtotal cost

Beginning 22 x $ 110 = $ 2,420
Purchased 33 x 125 = 4,125
55 $ 6,545
Total Units Total Cost =
Now calculate the average cost of a single unit available for sale. The subtotals determined in the previous step represent the
cost of goods available for sale and the units available for sale.
Cost of goods available / Number of units available = Average cost per unit
$ 6,545 / 55 = $ 119
Finally, calculate the cost of goods sold under the average-cost method using the units sold and average cost per unit you
calculated above.
Units sold x Cost per unit = Cost of goods sold

45 x $ 119 = $ 5,355
1: Data Table
Unit Total
Units Cost Cost
Sales 45 ? ?
YOU ANSWERED: Inventory Number of units x Cost per unit = Subtotal cost
Beginning 22 x $ 110 = $ 2,420
Purchased 33 x 125 = 4,125
nothing nothing
Total Units Total Cost =
$ 6,545 / 55 = nothing

45 x $ 119 = nothing
Date: 10/09/19 Time: 22:33
Use the following data of Sunspot Company:

Sunspot's ending inventory using the FIFO method would be:
FIFO (first-in, first-out) costing is consistent with the physical movement of inventory for most companies. That is, they sell their
oldest inventory first. Under FIFO, the cost of ending inventory is always based on the latest costs incurred.
When using FIFO we look at the beginning inventory and each purchase of inventory as being separate layers, with each layer
having its own cost. Remember, with FIFO the units sold are assigned the oldest costs first, so the cost of ending inventory is
always based on the latest costs incurred.
Let's begin by determining the cost of goods available for sale, using the table below.
Units x Unit Cost = Total Cost

Beginning inventory 18 x $ 125 = $ 2,250
Purchase on July 3 25 x 135 = 3,375
Cost of goods available for sale $ 5,625
Next, let's calculate the cost of goods sold. We must determine the number of units sold1 from the July 3rd purchase prior to
determining total cost of goods sold. Use the table below to calculate cost of goods sold.

Cost of goods sold
Less: Total cost of goods sold $ 5,220
Complete the table to determine the ending inventory under the FIFO method.


Cost of goods sold
Less: Total cost of goods sold $ (5,220)
Ending inventory $ 405
1: Definition
Number of units sold - Beginning inventory units = Number of units sold in 2nd layer
40 - 18 = ?
YOU ANSWERED: Units x Unit Cost = Total Cost

Cost of goods available for sale nothing

Cost of goods sold
Beginning inventory nothing x $ 125 = nothing
Purchase on July 3 nothing x 135 = nothing
Less: Total cost of goods sold nothing


Cost of goods sold
Less: Total cost of goods sold $ (5,220)
Ending inventory nothing
Date: 10/09/19 Time: 22:34
Use the following data of Beeline Company:

1
Beeline's cost of goods sold using the LIFO method would be:
Under LIFO (last-in, first-out), cost of goods sold comes from the newest - the most recent - purchases. LIFO dictates that the
units sold will be assigned costs from the newest layer first. Then, if there are any remaining units, those will be assigned the
next most recent cost.
Recall that in this problem we have two layers of cost; (1) the cost of the beginning inventory and (2) the cost of the inventory
purchased July 3. Remember, the units sold are assigned the most recent costs first. We know that Beeline sold a total of 55
units. There were 33 units purchased during the period; therefore, 33 of the units sold will be assigned a cost of $130 per unit.
The remaining units sold2 will be assigned the beginning inventory unit cost of $110.

Cost of goods sold
Purchase on July 3 33 x $ 130 = $ 4,290
Beginning inventory 22 x 110 = 2,420
Total cost of goods sold $ 6,710
1: Data Table
Unit Total
Units Cost Cost
Sales 55 ? ?
2: Definition
Remaining units sold = 55 - 33 = ?
YOU ANSWERED: Units x Unit Cost = Total Cost

Cost of goods sold
Purchase on July 3 nothing x $ 130 = nothing
Beginning inventory nothing x 110 = nothing
Total cost of goods sold nothing
Date: 10/12/19 Time: 12:00
Buy More Company made total purchases of $315,000 in the most current year. It paid freight in of $4,000 on its purchases.
Freight out, the cost to deliver the merchandise when it was sold to Buy More's customers, totaled $8,600. Of the total
purchases Buy More made during the period, it returned $29,000 of the merchandise. Buy More took advantage of $2,100 of
purchase discounts offered by its vendors. What was Buy More's cost of inventory?
The cost of inventory represents all the costs that the company incurred to bring its inventory to the point of sale.The cost of
inventory includes its basic purchase price, plus freight in, insurance while in transit, and any fees or taxes paid to get the
inventory ready to sell, less returns, allowances, and discounts.
Freight in is the transportation cost, paid by the buyer under terms FOB shipping point1, to move goods from the seller to the
buyer. Freight in is accounted for as part of the cost of inventory. Freight out is paid by the seller, under shipping terms
FOB destination2, and is not part of the cost of inventory. Instead, freight out is considered a delivery expense. It's the seller's
expense of delivering merchandise to customers. As a result, the freight in cost of $4,000 will be included in the cost of
inventory.
A purchase return represents a decrease in inventory and a corresponding decrease in accounts payable because the buyer
returned the goods to the seller (vendor). To document approval of purchase returns, management issues a debit
memorandum, meaning that accounts payable are reduced for the amount of the return. The offsetting credit is to inventory as
the goods are shipped back to the seller (vendor). Purchase returns must reduce the cost of the inventory; thus, the
merchandise return of $29,000 will reduce the cost of the inventory.
A purchase discount is a decrease in the buyer's cost of inventory earned by paying quickly. Many companies offer payment
terms of "2/10 n/30". This means the buyer can take, and the seller grants, a 2% discount for payment within 10 days, with the
final amount due within 30 days. Purchase discount must reduce the cost of the inventory, thus, the $2,100 purchase discounts
that Buy More Unlimited took advantage of will reduce the cost of inventory.
Refer to the information provided and calculate the cost of the inventory.
Purchase price of the inventory $ 315,000
Plus: Freight in 4,000
Less: Purchase returns (29,000)
Less: Purchase discounts (2,100)
$ 287,900
Cost of inventory
1: Definition
FOB (free on board) shipping point (the most common business practice), legal title to the goods passes from the seller to the
purchaser when the inventory leaves the seller's place of business. The purchaser therefore owns the goods while they are in
transit and must pay the transportation costs.
2: Definition
FOB destination, title to the goods does not pass from the seller to the purchaser until the goods arrive at the purchaser's
receiving dock.
YOU ANSWERED: Purchase price of the inventory nothing

Plus: Freight in nothing
Less: Purchase returns nothing
Less: Purchase discounts nothing
nothing
Cost of inventory
Date: 10/12/19 Time: 12:01
7. Buy More Company made total purchases of $265,000 in the most current year. It paid freight in of $2,000 on its purchases.
Freight out, the cost to deliver the merchandise when it was sold to Buy More's customers, totaled $9,600. Of the total
purchases Buy More made during the period, it returned $23,500 of the merchandise. Buy More took advantage of $2,500
of purchase discounts offered by its vendors. What was Buy More's cost of inventory?
Buy More's cost of inventory is $ 241,000 .
YOU ANSWERED: Buy More's cost of inventory is $ nothing .
Date: 10/12/19 Time: 11:59
6. Hamilton Company sold 15,000 jars of its organic honey in the most current year for $12 per jar. The company had paid
$9.50 per jar of honey. (Assume that sales returns are nonexistent.) Calculate the following:
1. Sales revenue
2. Cost of goods sold
3. Gross profit
1. The sales revenue is $ 180,000 .
2. The cost of goods sold is $ 142,500 .
3. The gross profit is $ 37,500 .
YOU ANSWERED: 1. The sales revenue is $ nothing .
2. The cost of goods sold is $ nothing .
3. The gross profit is $ nothing .
Date: 10/12/19 Time: 11:52
3. Which inventory system maintains a running record of inventory on hand, purchased, and sold?
A. Periodic
B. Perpetual
C. Consigned
D. Accrued
YOU ANSWERED: D.
Date: 10/12/19 Time: 11:52
4. How is cost of goods sold classified in the financial statements?
A. As an asset
B. As a liability
C. As a revenue
D. As an expense
Date: 10/12/19 Time: 11:53
Sheri Corporation purchased inventory costing $100,000 and sold 75% of the goods for $145,000. All purchases and sales were
on account. Sheri later collected 30% of the accounts receivable. Assume that sales returns are nonexistent.
1. Journalize these transactions for Sheri, which uses the perpetual inventory system. (Record debits first, then credits. Exclude
explanations from any journal entries.)
Let's start with the journal entry for the purchase of inventory. Recall that the inventory account is used only for goods
purchased for resale. Supplies, equipment, and other assets are recorded in their own accounts. Inventory is an asset until it is
sold. Asset accounts normally carry a debit balance. When a company purchases inventory on account it means that they have
not yet paid cash for the purchase. Think carefully about which accounts are affected by this transaction.
Journal
Inventory 100,000
Now we can journalize the sale. We have been told that all sales are on account. On account means that the company has not
yet received the cash for the sale. Think carefully about which accounts to use to record a sale on account.
Journal
Now we need to record the cost of goods sold portion of the sale. Let's start by calculating the cost of good sold amount. We
have been told that the company sold 75% of the inventory that was purchased. Use the formula to calculate the cost of 75% of
the inventory.
Inventory purchase Percent Cost of

cost x sold = goods sold
$ 100,000 x 75 % = $ 75,000
Now journalize the cost of goods sold using the previous calculation. When recording cost of goods sold, we need to expense
the cost the company incurred for the inventory. We are deducting from the balance of the inventory and recording the expense.
Recall the normal balance2 of the accounts and record the entry.
Journal
Inventory 75,000
Now journalize the collection of 30% of the accounts receivable. Sheri collected 30% of the sale of goods for $145,000
purchased on account. Record an increase in one asset account and a decrease in another. Recall the normal balance3 of the
accounts and record the entry.
Journal
Cash 43,500
2. For these transactions, show what Sheri will report for inventory, revenues, and expenses on its financial statements at the
end of the month. Report gross profit on the appropriate statement. Assume beginning inventory is $0.
Determine what the company will report on the balance sheet. We want to report the ending balance of inventory after both the
purchase and the cost of goods sold has been posted. Check your calculation carefully using the journal entries you prepared
above.
Balance Sheet
Assets
Current assets:
Inventory $ 25,000
Determine what the company will report on the income statement. Recall what accounts are reported on the income statement
and the definition of gross profit. Use the journal entries prepared above to enter the balances.
Income Statement
1: Requirements
1. Journalize these transactions for Sheri, which uses the perpetual inventory system.
2. For these transactions, show what Sheri will report for inventory, revenues, and expenses on its financial statements at the
end of the month. Report gross profit on the appropriate statement. Assume beginning inventory is $0.
2: Definition
Assets = Liabilities + Stockholders' equity

Common Retained
Assets = Liabilities + stock + earnings + Revenues – Expenses – Dividends
DR CR DR CR DR CR DR CR DR CR DR CR DR CR
+ – – + – + – + – + + – + –
3: Definition
Assets = Liabilities + Stockholders' equity

Common Retained
Assets = Liabilities + stock + earnings + Revenues – Expenses – Dividends
DR CR DR CR DR CR DR CR DR CR DR CR DR CR
+ – – + – + – + – + + – + –
YOU ANSWERED: Journal

Journal
Inventory purchase Percent Cost of

cost x sold = goods sold
$ 100,000 x nothing % = nothing
Journal
Journal
Balance Sheet
Assets
Current assets:
nothing nothing
Income Statement
nothing nothing
nothing nothing
nothing nothing
Date: 10/12/19 Time: 11:50
1. The Outdoor Store began 2018 with 70,000 units of inventory that cost $49,000. During 2018, The Outdoor Store
purchased merchandise on account for $304,000:
1
(Click the icon to view the purchases.)
Cash payments on account totaled $214,000 during the year (ignore purchase discounts). The Outdoor Store's sales during
2018 consisted of 510,000 units of inventory for $612,000, all on account. The company uses the FIFO inventory method.
Cash collections from customers were $557,000. Operating expenses totaled $290,100, of which The Outdoor Store paid
$248,000 in cash. The Outdoor Store credited Accrued Liabilities for the remainder. At December 31, The Outdoor Store
accrued income tax expense at the rate of 30% of income before tax.
Requirement 1. Show how The Outdoor Store would compute cost of goods sold for 2018.
Units Total Cost

Units sold from beginning inventory 70,000 $ 49,000
Units sold from Purchase 1 90,000 $ 36,000
510,000 $ 257,000
Cost of goods sold
Requirement 2. Prepare The Outdoor Store's income statement for 2018. Show subtotals for the gross profit and income
before tax.
The Outdoor Store

Income Statement
Year Ended December 31, 2018
Gross profit 355,000
Operating expenses 290,100
Income before tax 64,900
Income tax expense 19,470
$ 45,430
Net income
Requirement 3. Make summary journal entries to record The Outdoor Store's transactions for the year, assuming the
company uses a perpetual inventory system. Explanations are not required. (Record debits first, then credits. Exclude
explanations from any journal entries.)
Begin with the single entry to record the purchases.
Journal Entry
Date Accounts Debit Credit
Inventory 304,000
Next, record the cash payments on account.
Journal Entry
Cash 214,000
Now record the sales made on account. (Do not yet record cash collections for customers or the cost related to the sales.
We will do this in the following journal entries.)
Journal Entry
Record the inventory transaction associated with the sale of merchandise.
Journal Entry
Inventory 257,000
Record the collection of cash from customers.
Journal Entry
Cash 557,000
Record the operating expenses.
Journal Entry
Operating Expenses 290,100
Cash 248,000
Accrued Liabilities 42,100
Finally, record the entry to accrue income tax.
Journal Entry
Income Tax Expense 19,470
Income Tax Payable 19,470
Requirement 4. Determine the FIFO cost of The Outdoor Store's ending inventory at December 31, 2018, two ways:
a. Use a T-account. (Abbreviation used: COGS = cost of goods sold.)
Inventory
Beg bal 49,000
Purchases 304,000 COGS 257,000
End bal 96,000
b. Multiply the number of units on hand by the unit cost.
Number of units in ending inventory 120,000
Unit cost of ending inventory at FIFO $ 0.80
$ 96,000
FIFO cost of ending inventory
Requirement 5. Determine The Outdoor Store's gross profit percentage, rate of inventory turnover, and net income as a
percentage of sales for the year. In The Outdoor Store's industry, a gross profit percentage of 40%, an inventory turnover of
six times per year, and a net income percentage of 7% are considered excellent. How well does The Outdoor Store
compare to these industry averages? (Round your answers to one decimal place, X.X.)
Industry "Better" or "Worse"

Average The Outdoor Store than average?
Gross profit percentage: 40% 58 % Better
Inventory turnover: 6 times 3.5 times Worse
Net income as a percent of sales: 7% 7.4 % Better
1: Data Table
Purchase 1 90,000 units costing $ 36,000

Purchase 2 270,000 units costing 108,000
Purchase 3 200,000 units costing 160,000
2: Requirements
1. Show how The Outdoor Store would compute its cost of goods sold for 2018.
2. Prepare The Outdoor Store's income statement for 2018. Show subtotals for the gross profit and income before tax.
3. Make summary journal entries to record The Outdoor Store's transactions for the year, assuming the company uses a
perpetual inventory system. Explanations are not required.
4. Determine the FIFO cost of The Outdoor Store's ending inventory at December 31, 2018, two ways:
a. Use a T-account.
b. Multiply the number of units on hand by the unit cost.
5. Determine The Outdoor Store's gross profit percentage, rate of inventory turnover, and net income as a percentage of
sales for the year. In The Outdoor Store's industry, a gross profit percentage of 40%, an inventory turnover of six times
per year, and a net income percentage of 7% are considered excellent. How well does The Outdoor Store compare to
these industry averages?
YOU ANSWERED: Units Total Cost

Units sold from beginning inventory nothing nothing
Units sold from Purchase 1 nothing nothing
510,000 nothing
Cost of goods sold
The Outdoor Store

Income Statement
Year Ended December 31, 2018
nothing nothing
nothing nothing
nothing nothing
nothing nothing
nothing nothing
nothing nothing
nothing
Net income
Journal Entry
Journal Entry
Journal Entry
Journal Entry
Journal Entry
Journal Entry
Journal Entry

Inventory
nothing nothing nothing nothing
Number of units in ending inventory nothing
Unit cost of ending inventory at FIFO nothing
nothing
FIFO cost of ending inventory
Industry "Better" or "Worse"

Average The Outdoor Store than average?
Gross profit percentage: 40% nothing % nothing
Inventory turnover: 6 times nothing times nothing
Net income as a percent of sales: 7% nothing % nothing
Date: 10/09/19 Time: 23:26
Putter Corporation had beginning inventory of $35,000 and ending inventory of $41,000. Its net sales were $149,000 and net
purchases were $90,000.
Putter's gross profit for the period is
Gross profit—sales minus cost of goods sold—is a key indicator of a company's ability to sell inventory at a profit.
Merchandisers strive to increase gross profit.
Before we can calculate gross profit, we must first determine cost of goods sold. Use the formula below to calculate cost of
goods sold.
Beginning inventory + Net purchases - Ending inventory = Cost of goods sold

$ 35,000 + $ 90,000 - $ 41,000 = $ 84,000
Now we can calculate gross profit, using the formula below.
Net sales - Cost of goods sold = Gross profit

$ 149,000 - $ 84,000 = $ 65,000
YOU ANSWERED: Beginning inventory + Net purchases - Ending inventory = Cost of goods sold
nothing + nothing - nothing = nothing
Net sales - Cost of goods sold = Gross profit

nothing - $ 84,000 = nothing
Date: 10/12/19 Time: 12:01
8. When does the cost of inventory become an expense?
A. When inventory is delivered to a customer

B. When inventory is purchased from the supplier
C. When payment is made to the supplier
D. When cash is collected from the customer
YOU ANSWERED: B.
Date: 10/09/19 Time: 23:26
Eagle Corporation had beginning inventory of $24,000 and ending inventory of $25,000. Its net sales were $170,000 and net
purchases were $91,000. Cost of goods sold for the period was $90,000.
What is Eagle's gross profit percentage (rounded to the nearest whole percentage)?
Gross profit—sales minus cost of goods sold—is a key indicator of a company's ability to sell inventory at a profit.
Merchandisers strive to increase gross profit percentage, also called the gross margin percentage. Gross profit percentage is
markup stated as a percentage of sales. First, review the formula to calculate the gross profit percentage.
Gross profit
( Net sales - Cost of goods sold ) / Net sales = Gross profit percentage
Now use the formula to calculate the gross profit percentage. (Round your answer to the nearest whole percentage.)
Gross profit
( $ 170,000 - $ 90,000 ) / $ 170,000 = 47 %
YOU ANSWERED: Gross profit

( nothing - nothing ) / nothing = nothing %
Date: 10/09/19 Time: 23:27
Putter Corporation had beginning inventory of $37,000 and ending inventory of $39,000. Its net sales were $165,000 and net
purchases were $78,000. Cost of goods sold for the period was $76,000.
What is Putter's rate of inventory turnover? (Round your answer to one decimal place.)
Inventory turnover, the ratio of cost of goods sold to average inventory, indicates how rapidly inventory is sold. Companies strive
to sell their inventory as quickly as possible because the goods generate no profit until they’re sold. The faster the sales, the
higher the income. The inventory turnover ratio shows how many times the company sold (or turned over) its average level of
inventory during the year.
To determine the inventory turnover rate first we need to calculate the average inventory.
( Beginning inventory + Ending inventory ) / 2 = Average Inventory

( $ 37,000 + $ 39,000 ) / 2 = $ 38,000
The average inventory you just calculated has been entered for you. Enter the cost of goods sold and calculate the inventory
turnover. (Round your answer to one decimal place.)
Cost of goods sold / Average inventory = Inventory turnover

$ 76,000 / $ 38,000 = 2.0
YOU ANSWERED: ( Beginning inventory + Ending inventory ) / 2 = Average Inventory

( nothing + nothing ) / 2 = nothing
Cost of goods sold / Average inventory = Inventory turnover

nothing / $ 38,000 = nothing
Date: 10/12/19 Time: 12:02
Riverside Software began January with $3,400 of merchandise inventory. During January, Riverside made the following entries
for its inventory transactions:
1
(Click the icon to view the transactions.)
How much was Riverside's inventory at the end of January?
Merchandise inventory is the heart of a merchandising business. The cost of inventory on hand is an asset which is reported on
the balance sheet. Inventory's cost shifts from asset to expense when the seller delivers the goods to the buyer.
In order to determine the ending inventory balance for Riverside Software, let's record the inventory transactions directly into the
inventory T-account. The beginning balance has been entered for you. Remember that inventory is an asset account, that is
increased by debits and decreased by credits.
Inventory
Beg Bal 3,400

6,400 5,100
End Bal 4,700
1: Data Table
Inventory 6,400

Sales Revenue 7,300

Inventory 5,100
YOU ANSWERED: Inventory
Beg Bal 3,400

nothing nothing
End Bal nothing nothing
Date: 10/09/19 Time: 22:34
Corse Print Supplies, Inc., sells laser printers and supplies. Assume Corse started the year with 100 containers of ink (average
cost of $9.20 each, FIFO cost of $8.60 each, LIFO cost of $7.90 each). During the year, the company purchased 600 containers
of ink at $9.90 and sold 580 units for $20.00 each. Corse paid operating expenses throughout the year, a total of $3,775. Ignore
income taxes for this exercise.
Prepare Corse's income statement for the current year ended December 31 using the average-cost, FIFO, and LIFO inventory
costing methods. Include a complete statement heading.
accounting method selected affects the profits to be reported, the amount of income tax to be paid (if applicable), and the values
of the ratios derived from the balance sheet.
Determining the cost of inventory is easy when the unit cost remains constant, but the unit cost usually changes based on
market conditions. For example, prices often rise. A gallon of gas may cost $2.25 on October 20th, $2.50 on October 25th, and
$2.75 on October 31st. Suppose a gas station sells 100 gallons of gas on November 1st. How many of those gallons cost them
$2.25, how many cost $2.50, and how many cost $2.75?
To compute cost of goods sold and the cost of ending inventory still on hand, we must assign unit cost to the items. Companies
often use one of the following generally accepted inventory methods:
1. Average-cost method 2. First-in, first-out (FIFO) cost method 3. Last-in, first-out (LIFO) cost method
The methods can have very different effects on reported profits, income taxes, and cash flow. Therefore, companies select their
inventory method with great care.
Before we discuss each of the three inventory costing methods, let's begin by reviewing the appropriate heading for the income
statement.
Corse Print Supplies, Inc.

Income Statement
Year Ended December 31
Now, select the appropriate income statement labels.

Income Statement
Average Cost FIFO LIFO

Sales revenue
Cost of goods sold
Gross profit
Operating expenses
Net income
The first line of our income statement is Sales Revenue. The amount of revenue a company earns is not affected by the
inventory costing method they use. Use the table below to calculate sales revenue for the year. (Enter the price per unit to the
nearest cent. Round your final calculation to the nearest whole dollar.)
Units sold x Price per unit = Sales revenue

580 x $ 20.00 = $ 11,600
Now let's move to inventory costing. The average-cost method, sometimes called the weighted-average method, is based on
the average cost of inventory during the period. To calculate the weighted average cost of goods sold, you must first calculate
the total number of units available to be sold, as well as the total cost of the goods available to be sold. Complete the following
table. (Enter the cost per unit to two decimal places. Round your answer to the nearest whole dollar.)

Beginning 100 x $ 9.20 = $ 920
Purchased 600 x $ 9.90 = 5,940
Total Units 700 Total Cost = $ 6,860
Now calculate the average cost of a single unit available for sale. The subtotals determined in the previous step represent the
cost of goods available for sale and the units available for sale. (Enter the cost per unit to the nearest cent.)
$ 6,860 / 700 = $ 9.80
Finally, calculate the cost of goods sold under the average-cost method using the units sold and average cost per unit you
calculated above. (Enter the cost per unit to the nearest cent. Round your final calculation to the nearest whole dollar.)
Units sold x Cost per unit = Avg cost COGS

580 x $ 9.80 = $ 5,684
Using the table below, calculate net income under the average-cost method. Sales revenue and the average-cost cost of goods
sold have been entered into the statement for you. Go ahead and complete the calculations through net income. Operating
expenses, like sales revenue, are not affected by a change in the inventory costing method.

Income Statement
Gross profit 5,916
$ 2,141
Net income
FIFO costing is consistent with the physical movement of inventory for most companies. That is, they sell their oldest inventory
first. Under FIFO, the cost of ending inventory is always based on the latest costs incurred. In times of increasing inventory
costs, the FIFO inventory costing method will result in a lower cost of goods sold value than the average-cost method because
the oldest inventory (which in times of increasing costs would be the least expensive inventory) are the units that are sold first.
In times of decreasing inventory costs, FIFO will result in a higher cost of goods sold value than the average-cost method.
To calculate the FIFO cost of goods sold, it is helpful to list inventory layers. FIFO (first-in, first-out) dictates that the units sold
will be assigned costs from the oldest layer first. Then if there are any remaining units, those will be assigned the next oldest
layer of cost.
In this problem we have two layers of cost; (1) the cost of the beginning inventory and (2) the cost of the inventory purchased
during the year. To calculate the cost of goods for the FIFO method remember to take the cost of the beginning inventory first
and the remainder from the cost of purchases. (Enter the cost per unit to the nearest cent. Round your calculations to the
nearest whole dollar.)
Inventory cost layer Units sold x Cost per unit = Subtotal cost
Beginning inventory units 100 x $ 8.60 = $ 860
Purchased inventory units 480 x $ 9.90 = $ 4,752
Total units sold 580 FIFO Cost of goods sold = $ 5,612
Now that you have determined sales revenue and FIFO cost of goods sold, enter the amounts into the statement and complete
the calculations through net income. The sales revenue and operating expense amounts have been entered for you.

Income Statement
Sales revenue $ 11,600 $ 11,600
Cost of goods sold 5,684 5,612
Gross profit 5,916 5,988
Operating expenses 3,775 3,775
$ 2,141 $ 2,213
Net income
LIFO is the opposite of FIFO. Under LIFO, cost of goods sold comes from the newest—the most recent—purchases. In times
of increasing inventory costs, the LIFO inventory costing method will result in a higher cost of goods sold value than the
average-cost method because the newest inventory (which in times of increasing costs would be the most expensive inventory)
are the units that are sold first. In times of decreasing inventory costs, LIFO will result in a lower cost of goods sold value than
the average-cost method.
LIFO (last-in, first-out) dictates that the units sold will be assigned costs from the newest layer first. Then, if there are any
remaining units, those will be assigned the next most recent cost.
Recall that in this problem we have two layers of cost; (1) the cost of the beginning inventory and (2) the cost of the inventory
purchased during the year. To calculate the cost of goods sold under the LIFO method we take the cost for the units sold from
the last inventory purchases. In this case, the number of units sold, 580, is less than the number of units purchased during the
year, 600. Therefore, under the LIFO method, all of the units sold will have a unit cost equal to the unit cost of the inventory
purchased during the year. Use the table below to calculate the LIFO value of cost of goods sold for the year. (Enter the cost per
unit to two decimal places. Enter your answer to the nearest whole dollar.)
Units sold x. . LIFO cost per unit = LIFO COGS

580 x $ 9.90 = $ 5,742
Now that you have determined sales revenue and LIFO cost of goods sold, enter the amounts into the statement and complete
the calculations through net income. The sales revenue and operating expense amounts have been entered for you.

Income Statement
Sales revenue $ 11,600 $ 11,600 $ 11,600
Cost of goods sold 5,684 5,612 5,742
Gross profit 5,916 5,988 5,858
Operating expenses 3,775 3,775 3,775
$ 2,141 $ 2,213 $ 2,083

Net income
YOU ANSWERED: Corse Print Supplies, Inc.

Income Statement
nothing
nothing
nothing
nothing
Net income
Units sold x Price per unit = Sales revenue


Beginning nothing x nothing = nothing
Purchased nothing x nothing = nothing
Total Units nothing Total Cost = nothing
$ 6,860 / 700 = nothing
Units sold x Cost per unit = Avg cost COGS

580 x $ 9.80 = nothing

Income Statement
Gross profit nothing
Operating expenses nothing
nothing
Net income
Inventory cost layer Units sold x Cost per unit = Subtotal cost
Beginning inventory units nothing x nothing = nothing
Purchased inventory units nothing x nothing = nothing
Total units sold nothing FIFO Cost of goods sold = nothing

Income Statement
Sales revenue $ 11,600 $ 11,600
Gross profit 5,916 nothing
Operating expenses 3,775 3,775
$ 2,141 nothing
Net income
Units sold x. . LIFO cost per unit = LIFO COGS

580 x nothing = nothing

Income Statement
Sales revenue $ 11,600 $ 11,600 $ 11,600
Gross profit 5,916 5,988 nothing
$ 2,141 $ 2,213 nothing

Net income
Date: 10/09/19 Time: 22:35
Watson Print Supplies, Inc., sells laser printers and supplies. Watson Print Supplies, Inc., is a corporation subject to a 30%
income tax.
1
(Click the icon to view additional information.)
Watson Print Supplies' income statement—excluding the effects of income tax under each of the average-cost, FIFO, and LIFO
inventory costing methods—is given.
2
(Click the icon to view the income statement.)
accounting method selected affects the profits to be reported, the amount of income tax to be paid, and the values of the ratios
derived from the balance sheet.
In periods where the cost of inventory is rising, FIFO produces the highest gross profit (and thus the highest net income before
taxes) because the method presumes that the oldest units (i.e., the lowest cost units) are sold first. Ending inventory has the
highest value under this method as it is valued at the cost of the most recent purchases. In contrast, LIFO has the lowest gross
profit and highest cost of goods sold (and thus the lowest net income before taxes) because the items sold are presumed to
have been the units most recently purchased.
Cost of goods sold and ending inventory valued under the average-cost method will fall somewhere between the FIFO and
LIFO values. Because income tax expense is based on a percentage of net income, the method that yields the lowest net
income before taxes will also yield the lowest income tax expense. In times of increasing inventory costs, the LIFO method will
produce the lowest income tax expense and in times of decreasing inventory costs, the FIFO method will produce the lowest
income tax expense.
Compute Watson's income tax expense under the average-cost, FIFO and LIFO inventory costing methods.
Begin by calculating the income tax expense under each inventory costing method by multiplying the net income before tax by
the tax rate. (Round your answers to the nearest whole dollar.)
Net income before tax x Tax rate % = Income tax expense

Average-cost $ 1,953 x 30 % = $ 586
FIFO method $ 1,995 x 30 % = $ 599
LIFO method $ 1,895 x 30 % = $ 569
To summarize the income tax effect of each of the inventory costing methods, the income tax expense amounts for each
inventory costing method have been entered at the bottom of the income statement.
Watson Print Supplies, Inc.

Income Statement
Sales revenue $ 11,745 $ 11,745 $ 11,745
Gross profit $ 6,003 $ 6,045 $ 5,945
Net income before tax $ 1,953 $ 1,995 $ 1,895
$ 586 $ 599 $ 569

Income tax expense
Which method would you select to (a) maximize income before tax and (b) minimize income tax expense?
Based on the information given to you and the income tax expense calculation performed above, you can see that each method
produces different net income before tax and income tax expense amounts. Depending on a company's strategy, it may want to
yield the highest net income before taxes or pay the least amount in income taxes. Think about which method is best for
Watson's Print Supplies, given each strategy.
1: More Info
Assume Watson started the year with 100 containers of ink (average cost of $9.30 each, FIFO cost of $9.00 each, LIFO cost
of $7.90 each). During the year, the company purchased 600 containers of ink at $10.00 and sold 580 units for $20.25 each.
Watson paid operating expenses throughout the year, a total of $4,050.
2: Data Table
Watson Print Supplies, Inc.

Income Statement
Sales revenue $ 11,745 $ 11,745 $ 11,745
Gross profit 6,003 6,045 5,945
$ 1,953 $ 1,995 $ 1,895

Net income before tax
3: Requirements
Compute the company's income tax expense under the average-cost, FIFO, and LIFO inventory costing methods. Which
method would you select to (a) maximize income before tax and (b) minimize income tax expense? (Round your answer to the
YOU ANSWERED: Net income before tax x Tax rate % = Income tax expense
Average-cost nothing x nothing % = nothing
FIFO method nothing x nothing % = nothing
LIFO method nothing x nothing % = nothing
Date: 10/09/19 Time: 23:21
15. A Mart, Inc., declared bankruptcy. The company reported Requirement

these figures: 1. Evaluate the trend of A Mart's results of operations
1
(Click the icon to view financial information.) during 2016 through 2018. Consider the trends of sales,
gross profit, and net income. Track the gross profit
percentage and the rate of inventory turnover in each
year. Also discuss the role that selling expenses must
have played in the company's recent history.
Evaluate the trend of A Mart's results of operations during 2016 through 2018. Consider the trends of sales, gross profit,
and net income.
First, let's calculate A Mart's gross profit and enter the net income values. (Enter amounts in millions as provided to you in
the problem statement, X.X. Use parentheses or a minus sign to show a net loss.)
Dollars in millions 2018 2017 2016
Sales $ 35.8 $ 35.7 $ 33.9
Cost of sales 28.6 28.1 26.6
$ 7.2 $ 7.6 $ 7.3

Gross profit
Net income (net loss) $ (1.2) $ 0.4 $ 0.5
Comment on the trends of sales, gross profit, and net income from 2016 to 2018.
The sales increased , the gross profit dropped and the net income slid to a net loss .
Track the gross profit percentage and the rate of inventory turnover in each year. Also discuss the role that selling
expenses must have played in the company's recent history.
Begin by calculating A Mart's gross profit percentages. (Enter the gross profit percentage as a percentage rounded to one
tenth of a percent X.X%.)
2018 2017 2016

Gross profit percentage 20.1 % 21.3 % 21.5 %
Now calculate the rate of inventory turnover. (Round intermediary calculations and your answers to one decimal place.)
2018 2017 2016

Inventory turnover 3.7 4.0 4.1
The gross profit percentage dropped and the rate of inventory turnover deteriorated . This suggests that A Mart
was having to discount its merchandise to sell the goods. The end result was a net loss in 2018.
Selling expenses increased significantly, which suggests that A Mart was having to advertise heavily in order to
sell its inventory.
1: Data Table
A Mart, Inc.
Statements of Income
Years Ended December 31
Millions 2018 2017 2016 2015
Sales $ 35.8 $ 35.7 $ 33.9
Cost of sales 28.6 28.1 26.6

Selling expenses 8.3 6.3 6.1
Other expenses 0.1 0.9 0.7
$ (1.2) $ 0.4 $ 0.5

Net income (net loss)
Additional data:
Ending inventory $ 8.4 $ 7.2 $ 7.0 $ 6.0
YOU ANSWERED: Dollars in millions 2018 2017 2016

Sales nothing nothing nothing
Cost of sales nothing nothing nothing

Gross profit
Net income (net loss) nothing nothing nothing
decreased
rose
2018 2017 2016

Gross profit percentage nothing % nothing % nothing %
2018 2017 2016

Inventory turnover nothing nothing nothing
stayed the same

decreased
moderately
Date: 10/09/19 Time: 22:35
Using the average-cost method, calculate the cost of ending inventory and cost of goods sold for Chantler Corporation. (Round
the average cost per unit to the nearest cent.)
1
To compute cost of goods sold and the cost of ending inventory still on hand, we must assign a cost to each unit. Accounting
uses four generally accepted inventory methods2. A company can use any of these methods. The methods can have very
different effects on reported profits, income taxes, and cash flow. Therefore, companies select their inventory method with great
care.
the period. The average cost per unit is calculated by dividing the cost of goods available for sale by the number of units
available for sale. The cost of goods available for sale equals the beginning inventory plus purchases made during the period.
The goods available for sale in units has been provided, you will need to calculate the cost of goods available3 in order to
calculate the average cost per unit. (Round the average cost per unit to the nearest cent.)
$ 3,210 / 300 = $ 10.70
Let's begin with the cost of ending inventory. We know that there is 80 units in the ending inventory. To calculate the cost of
ending inventory you must multiply the units in ending inventory by the average cost per unit you calculated in the preceding
step.
Average cost per unit x Number of units on hand = Ending inventory

$ 10.70 x 80 = $ 856
Now, let's calculate the cost of goods sold. We know that 220 units were sold during the year. To calculate the cost of goods
sold you must multiply the units sold by the average cost per unit.
Average cost per unit x Number of units sold = Cost of goods sold
$ 10.70 x 220 = $ 2,354
1: Data Table
Quantity Unit Cost Total

Beginning inventory 90 $ 10.00 $ 900
Purchases 210 $ 11.00 $ 2,310

Goods available for sale 300
Ending inventory 80
220
Cost of goods sold
2: Definition
1. Specific unit cost method
2. Average cost method
3. First-in, first-out (FIFO) cost method
4. Last-in, first-out (LIFO) cost method
3: Definition
Cost of goods available for sale = $900 + $2,310 = ?
YOU ANSWERED: Cost of goods available / Number of units available = Average cost per unit
nothing / nothing = nothing

$ 10.70 x nothing = nothing
Date: 10/09/19 Time: 23:28
State Technology began the year with inventory of $299,000 and purchased $1,820,000 of goods during the year. Sales for the
year are $3,887,500, and State Technology's gross profit percentage is 60% of sales. Compute State Technology's estimated
cost of ending inventory by using the gross profit method.
Often a business must estimate the value of its goods. A fire may destroy inventory, and the insurance company requires an
estimate of the loss. In this case, the business must estimate the cost of ending inventory because it was destroyed. The gross
profit method, also known as the gross margin method, is widely used to estimate ending inventory. This method uses the
familiar cost-of-goods-sold model:
Beginning inventory
+ Purchases
= Cost of goods available
- Ending inventory
= Cost of goods sold
In this problem, we want to calculate ending inventory. Let's begin by reworking the cost of goods sold formula above to solve
for ending inventory.
Beginning inventory
+ Purchases
= Cost of goods available
- Cost of goods sold
= Ending inventory
Before we can solve for ending inventory, we have to first look at the information we know and then figure out how to solve for
the amounts that we do not know. We have been given beginning Inventory and purchases, so we can easily determine what
the goods available amount will be. Calculate the goods available now.
Beginning inventory $ 299,000
Purchases 1,820,000
Cost of goods available 2,119,000
We have not been given the Cost of Goods Sold amount, but we have been told that sales for the year are $3,887,500 and that
StateTechnology's gross profit percentage is 60% of sales. By reworking the gross profit formula1
we can estimate cost of
goods sold using the information provided.
Begin by selecting the formula to estimate the cost of goods sold for the year:
Estimated cost of goods sold:

Net sales revenue
Less: Estimated gross profit of 60%
Estimated cost of goods sold
Next, calculate the estimated gross profit.
Net sales revenue x Gross profit percentage = Estimated gross profit

$ 3,887,500 x 60 % = $ 2,332,500
Finally, use the table below to calculate State's estimated cost of ending inventory.
Beginning inventory $ 299,000
Purchases 1,820,000
Cost of goods available 2,119,000

Net sales revenue $ 3,887,500
Less: Estimated gross profit of 60% (2,332,500)
Estimated cost of goods sold (1,555,000)
$ 564,000
Estimated cost of ending inventory
1: Definition
Sales − Cost of Goods Sold = Gross Profit
YOU ANSWERED: nothing

+ nothing
= nothing
- nothing
= Ending inventory
Beginning inventory nothing
Purchases nothing
Cost of goods available nothing

nothing
Less: nothing
Estimated cost of goods sold
Net sales revenue x Gross profit percentage = Estimated gross profit

nothing x nothing % = nothing

Net sales revenue $ 3,887,500
Less: Estimated gross profit of 60% (2,332,500)
Estimated cost of goods sold nothing
nothing
Estimated cost of ending inventory
Date: 10/09/19 Time: 22:36
Using the FIFO method, calculate the cost of ending inventory and cost of goods sold for Campini Corporation.
1
care.
Under the FIFO method, the first costs into inventory are the first costs assigned to cost of goods sold—hence, the name
first-in, first-out. Under FIFO, the cost of ending inventory is always based on the latest costs incurred.
Let's begin with the cost of ending inventory. Recall that the cost of ending inventory is always based on the latest costs
incurred. Since the units in ending inventory, 80 units, are less than the amount of units purchase, 210 units, all of the units in
ending inventory will be assigned the unit cost of the purchases, $11.00. Let's calculate the cost of ending inventory.
Unit cost x Number of units on hand = Ending inventory

$ 11.00 x 80 = $ 880
Now, let's calculate the cost of goods sold. Remember, the units sold are assigned the oldest costs first. We know that Campini
sold a total of 220 units. There were 90 units in beginning inventory; therefore, 90 of the units sold will be assigned a cost of
$10.00 per unit. The remaining units sold3 will be assigned the purchases unit cost of $11.00.
Inventory Layer Number of units sold Unit cost Cost of goods sold
Beginning inventory 90 units x $ 10.00 = $ 900
Purchases 130 units x $ 11.00 = 1,430
220 $ 2,330
units
1: Data Table

Beginning inventory 90 $ 10.00 $ 900
Purchases 210 $ 11.00 $ 2,310

Ending inventory 80
220
Cost of goods sold
2: Definition
3: Definition
YOU ANSWERED: Unit cost x Number of units on hand = Ending inventory

Beginning inventory nothing units x nothing = nothing
Purchases nothing units x $ 11.00 = nothing
nothing nothing
units
Date: 10/09/19 Time: 22:36
Using the LIFO method, calculate the cost of ending inventory and cost of goods sold for Creek Corporation.
1
uses four generally accepted inventory method2. A company can use any of these methods. The methods can have very
care.
Under LIFO, the last costs into inventory go immediately to cost of goods sold. Under LIFO, the cost of ending inventory is
always based on the oldest costs—from beginning inventory plus the early purchases of the period.
Let's begin with the cost of ending inventory. Recall that the cost of ending inventory is always based on the oldest costs
incurred. Since the units in ending inventory, 100 units, are less than the beginning inventory, 140 units, all of the units in ending
inventory will be assigned the unit cost of the beginning inventory, $11.00. Let's calculate the cost of ending inventory.

$ 11.00 x 100 = $ 1,100
Now, let's calculate the cost of goods sold. Remember, the units sold are assigned the most recent costs first. We know that
Creek sold a total of 250 units. There were 210 units purchased during the period; therefore, 210 of the units sold will be
assigned a cost of $14.00 per unit. The remaining units sold3 will be assigned the beginning inventory unit cost of $11.00.
Beginning inventory 40 units x $ 11.00 = $ 440
Purchases 210 units x $ 14.00 = 2,940
250 $ 3,380
units
1: Data Table

Beginning inventory 140 $ 11.00 $ 1,540
Purchases 210 $ 14.00 $ 2,940

Ending inventory 100
250
Cost of goods sold
2: Definition
1. Specific unit cost
2. Average cost
3. First-in, first-out (FIFO) cost
4. Last-in, first-out (LIFO) cost
3: Definition
YOU ANSWERED: Unit cost x Number of units on hand = Ending inventory

Beginning inventory nothing units x $ 11.00 = nothing
Purchases nothing units x nothing = nothing
nothing nothing
units
Date: 10/09/19 Time: 22:37
Accounting records for Ontario Corporation yield the following data for the year ended June 30, 2018 (assume sales returns are
non-existent):
1
(Click the icon to view the accounting records.)
Requirement 1. Journalize Ontario's inventory transactions for the year under the perpetual system.
This exercise is not concerned with the costing method of inventory; the amounts are given. What is important is that you know
how to record the inventory transactions. The first transaction is the purchase of inventory on account. "On account" indicates
that the monetary transaction will come later. The asset account is increased as is the liability account. Record the first
transaction of the purchase of inventory on account. (Record debits first, then credits. Exclude explanations from any journal
entries.)
Journal Entry
Jun 30 Inventory 67,000

When inventory is sold it generates a revenue transaction. Recall that revenue and expense accounts are temporary accounts
for holding specific transactions for an accounting period. The asset accounts are increased3 for the cash received and the
portion on account. The revenue account is also increased by the total of the transaction. Now record the next transaction, sale
of inventory. Do not yet record the cost related to the sale. We do this in the next journal entry.
Journal Entry
Jun 30 Accounts Receivable 76,630
Cash 20,370
As part of the revenue entry, the cost of inventory sold needs to be identified and recorded. This entry decreases the asset
account and increases the temporary account for holding cost. Now record the last entry of recording the cost of inventory.
Journal Entry

Jun 30 Cost of Goods Sold 39,000
Inventory 39,000
Requirement 2. Report ending inventory, sales, cost of goods sold, and gross profit on the appropriate financial statement.
The balance sheet reports assets, liabilities and equity of a company at the end of an accounting period. Report the appropriate
asset account on the balance sheet:
Balance Sheet:
Current assets:
Inventory $ 39,000
Recall that the income statement reports the earnings and expenses of a business over a period of time. Gross profit is the
sales revenue reduced by the cost of goods sold. The higher the gross profit, the better for the business. Remember, gross
profit is just a starting point. Business expenses have to be subtracted from gross profit to derive net profit.
Report sales, cost of goods sold, and gross profit on the income statement:
Income Statement:
1: Data Table
.Inventory,
. . . . . . . .June
. . . . 30,
. . . 2017
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 11,000
.Purchases
. . . . . . . . .of. .inventory
. . . . . . . (on
. . . account)
.................................... 67,000
.Sales
. . . . .of. .inventory
. . . . . . . –. .79%
. . . .on
. . account;
. . . . . . . .21%
. . . .for
. . cash
. . . . .(cost
. . . . $39,000)
............ 97,000
.Inventory,
. . . . . . . .June
. . . . 30,
. . . 2018
.......................................... 39,000
2: Requirements
1. Journalize Ontario's inventory transactions for the year under the perpetual system.
2. Report ending inventory, sales, cost of goods sold, and gross profit on the appropriate financial statement.
3: Definition
Accounts Receivable = ($97,000 x 79%) = ?
Cash ($97,000 x 21%) = ?
YOU ANSWERED: Journal Entry

Jun 30 nothing nothing nothing
Journal Entry
Journal Entry
Balance Sheet:
Current assets:
nothing nothing
Income Statement:
nothing nothing
nothing nothing
nothing nothing
Date: 10/09/19 Time: 22:38
Ron Company's inventory records for its retail division show the following at March 31:
1
At March 31, 8 of these units are on hand.
Requirement 1. Journalize for Ron total March purchases in one summary entry, under the perpetual system. All purchases
were on credit.
Recall that when a company makes a purchase on account, the purchase will be paid for at a later date. That means both
Inventory and Accounts Payable are increased. Since this is one summary entry, total all of the purchases3 before entering the
transaction in the journal. Go ahead and make the entry now. (Record debits first, then credits. Exclude explanations from any
journal entries.)
Journal Entry
Inventory 2,515
Requirement 2. Journalize for Ron total March sales and cost of goods sold in two summary entries, under the perpetual
system. The selling price was $600 per unit and all sales were on credit. Assume that Ron uses the FIFO inventory method.

Before we calculate the sales, we need to determine the total amount of units sold. We have been given the beginning inventory
units, the units purchased, and the units remaining in ending inventory. Let's calculate the total units sold:
Beginning units + Units purchased - Units in ending inventory = Units sold

4 + 16 - 8 = 12
Journalize the total March sales. Do not yet record the cost related to the sale. We will do this in the next journal entry.
We have been told that the selling price was $600 per unit and now we know from our calculation above how many units were
sold (12 units). With this information we can calculate the total sales revenue4 amount. Recall that all the sales were on credit
(or "on account"). Recall how sales on account are recorded. (Record debits first, then credits. Exclude explanations from any
journal entries.)
Journal Entry

Sales Revenue 7,200
Under FIFO (first-in, first-out) the units sold come from the oldest inventory layer first. After that layer has been sold the next
oldest units are sold. Let's determine the cost from each layer of inventory that was sold. Remember, we determined that 12
units have been sold. Enter the units sold from each layer and the cost that will be assigned to cost of goods sold for that layer.
Date Inventory Layer Units sold Cost Cost of goods sold

Mar 1 Beginning inventory 4 units x $ 150 = $ 600
15 Purchase 5 units x $ 151 = 755
$ 1,835
12
Journalize the cost of inventory sold assuming FIFO and using the amounts you calculated above. (Record debits first, then
credits. Exclude explanations from any journal entries.)
Journal Entry
Inventory 1,835
Requirement 3. Under FIFO, how much gross profit would Ron earn on for the month ending March 31? What is the FIFO cost
of Ron Company's ending inventory?
Begin by calculating the gross profit using the following formula:
Net sales revenue - Cost of goods sold = Gross profit

$ 7,200 - $ 1,835 = $ 5,365
Based on our cost of goods sold calculation, we know that ending inventory consists of the remaining units that were not sold
from the March 26th layer. The units in the March 26th layer are 8 (11 purchased - 3 sold). Using the cost assigned to each
layer, calculate the ending inventory value.
Date Inventory Layer Units on hand Cost Ending inventory

26 Purchase 8 units x $ 160 = 1,280
$ 1,280
8
Note that the ending inventory can also be computed by subtracting the cost of goods sold ($1,835) from the cost of goods
available for sale ($3,115 = $600 + $755 + $1,760).
1: Data Table
Mar 1 Beginning
. . . . . . .inventory
........... 4 units @ $ 150 = $ 600
15 Purchase
.................... 5 units @ 151 = $ 755
26 Purchase
. . . . . . . . . . . . . . . . . . . . 11 units @ 160 = $ 1,760
2: Requirements
Journalize the following for Ron Company under the perpetual system:
1. Total March purchases in one summary entry. All purchases were on credit.
2. Total March sales and cost of goods sold in two summary entries. The selling price was $600 per unit, and all sales were
on credit. Assume that Ron uses the FIFO inventory method.
3. Under FIFO, how much gross profit would Ron earn on for the month ending March 31? What is the FIFO cost of Ron
Company's ending inventory?
3: Definition
Mar 1 Beginning
........... 4 units @ $ 150 = $ 600
15 Purchase
.................... 5 units @ 151 = 755
26 Purchase
. . . . . . . . . . . . . . . . . . . . 11 units @ 160 = 1,760
4: Definition
Total sales revenue = (12 @ $600) = ?


Journal Entry

Mar 1 Beginning inventory nothing units x $ 150 = nothing
15 Purchase nothing units x $ 151 = nothing
nothing
12
Journal Entry

$ 7,200 - $ 1,835 = nothing

26 Purchase 8 units x $ 160 = nothing
nothing
8
Date: 10/09/19 Time: 22:38
Dundas Company's inventory records for its retail division show the following at August 31:
1
At August 31, 11 of these units are on hand.
Requirement 1. Compute cost of goods sold and ending inventory, using each of the following four inventory methods.
care.
(a) Specific identification, with seven $170 units and four $180 units still on hand at the end
Generally, the specific identification method is used only by businesses that deal in unique inventory items, such as
automobiles, antique furniture, jewels, and real estate. This method is too expensive to use for inventory items that have
common characteristics, such as bushels of wheat, gallons of paint, or auto tires.
Let's begin by calculating the cost of goods sold using this method. We have been told that the following are still on hand at the
end of the period: seven $170 unit(s) and four $180 units. We know that there were 8 $170 units (beginning inventory), 5 $171
units (Aug 15 purchase), and 12 $180 units (Aug 26 purchase) available during the period. Therefore, we can determine how
many of each specific unit was sold. Calculate the cost of goods sold now.

Aug 1 Beginning inventory 1 units x $ 170 = $ 170
14 $ 2,465
Now let's calculate the ending inventory using the specific identification method. We have been told how many of each unit was
still on hand at the end of the period. Use the table below to calculate ending inventory.

Aug 1 Beginning inventory 7 units x $ 170 = $ 1,190
$ 1,910
11
(b) Average cost
The average cost method4, is based on the average cost of inventory (available for sale5) during the period. All of the units
available for sale, regardless of their purchase price, are given the same unit cost under this method. Begin by calculating the
average cost per unit that will be assigned to each unit in ending inventory and cost of goods sold. (Round the average cost per
unit to the nearest cent.)
$ 4,375 / 25 = $ 175.00
The average cost per unit you calculated above will be used to compute the cost of goods sold and ending inventory.
Let's begin with cost of goods sold. We know from the step above that Dundas had 25 units available for sale and we also know
from the information provided that there are 11 units left at the end of the period. Therefore, 14 units were sold. Calculate the
cost of goods sold using average cost. (Round your answer to the nearest whole dollar.)
Average cost per unit x Units sold = Cost of goods sold

$ 175.00 x 14 = $ 2,450
Now calculate ending inventory using the average cost method. (Round your answer to the nearest whole dollar.)
Average cost per unit x Units in ending inventory = Ending inventory

$ 175.00 x 11 = $ 1,925
(c) First-in, first-out (FIFO):
having its own cost. Remember, with FIFO the units sold are assigned the oldest costs first, so the units remaining in ending
inventory will have the most recent costs assigned to them. In this exercise, the most recent cost is from the purchase on the
26th.
Let's begin by calculating the cost of goods sold using FIFO. Remember, the units sold are assigned the oldest costs first. We
know that Dundas sold a total of 14 units. There were 8 units in beginning inventory; therefore, 8 of the units sold will be
assigned a cost of $170 per unit. There were 5 units available from the Aug 15 purchase and 12 units available from the Aug 26
purchase. Use the table below to calculate the cost of goods sold.

$ 2,395
14
Now we need to determine the layers that remain in the ending inventory. In other words, will all the units in ending inventory be
assigned the cost from the purchase on the 26th? Or will there be an additional layer, the cost from the purchase on the 15th, in
ending inventory?
Since each purchase is considered its own layer, only the 12 units purchased on the 26th can be assigned the cost of $180 per
unit. If the units in ending inventory are equal to or less than the amount of units purchased on the 26th, all of the units in ending
inventory will be assigned that unit cost. If the units in ending inventory are greater than the units that were purchased on the
26th, then 12 of the units will have a unit cost of $180, while the rest of the units will have a unit cost from the next most recent
purchase, in this case the purchase on the 15th, of $171 per unit.
Determine the amount of inventory in each of the last two layers. Think carefully, there are 11 units in ending inventory. Is that
greater than or less than the amount of inventory purchased on the 26th? Use the discussion above to help you determine the
ending inventory cost layers. (Enter an amount in each input area, including a "0" for zero balances.)
Date Inventory Layer Units on hand Cost Ending Inventory

26 Purchase 11 units x $ 180 = 1,980
$ 1,980
11
(d) Last-in, first-out (LIFO)
LIFO costing is the opposite of FIFO. Under LIFO, the last costs into inventory go immediately to cost of goods sold. Under
LIFO, the cost of ending inventory is always based on the oldest costs—from beginning inventory plus the early purchases of
the period.
Let's calculate the cost of goods sold using LIFO. Remember, the most recent purchases will be assigned first. Dundas sold 14
units, but there were only 12 units in the most recent inventory layer. (Enter "0" for any zero balances.)

26 Purchase 12 units x $ 180 = 2,160
$ 2,502
14
Now calculate ending inventory using LIFO. We know from the step above that Dundas assigned all the costs from the Aug 26
purchase and a portion of the Aug 15 purchase to cost of goods sold. Therefore, we know that we must assign ending inventory
costs to the remaining units in the Aug 15 layer (=5 - 2) and the beginning inventory layer (=8 - 0). Go ahead and calculate the
ending inventory now.

$ 1,873
11
Requirement 2. Which method produces the highest cost of goods sold? Which method produces the lowest cost of goods
sold? What causes the difference in cost of goods sold?
Let's review the cost of goods sold under each method to determine which method produces the highest and which method
produces the lowest cost of goods sold.
Specific identification Average cost FIFO LIFO

Cost of goods sold $ 2,465 $ 2,450 $ 2,395 $ 2,502
What are the major differences between the methods in calculating the cost of goods sold? Refer to the information given to you
and determine how the trend in purchase prices would affect the cost assigned to the units sold under these methods.
1: Data Table
Aug 1 Beginning
........... 8 units @ $ 170 = $ 1,360
15 Purchase
.................... 5 units @ 171 = $ 855
26 Purchase
. . . . . . . . . . . . . . . . . . . . 12 units @ 180 = $ 2,160
2: Requirements
1. Compute cost of goods sold and ending inventory, using each of the following methods:
a. Specific identification, with seven $170 units and four $180 units still on hand at the end
b. Average cost
c. FIFO
d. LIFO
2. Which method produces the highest cost of goods sold? Which method produces the lowest cost of goods sold? What
causes the difference in cost of goods sold?
3: Four methods
1. Specific identification
2. Average cost
4: Definition
Also called the weighted-average method
5: Definition
Aug1 1 Beginning inventory 8 @ $ 170 = $ 1,360

15 Purchase 5 @ $ 171 = 855
26 Purchase 12 @ $ 180 = 2,160
Goods available for sale ? ?
YOU ANSWERED: Date Inventory Layer Units sold Cost Cost of goods sold
Aug 1 Beginning inventory nothing units x $ 170 = nothing
nothing
nothing

Aug 1 Beginning inventory 7 units x $ 170 = nothing
nothing
11

$ 175.00 x 14 = nothing

$ 175.00 x 11 = nothing

nothing
14

nothing
11

nothing
14

nothing
11
Date: 10/09/19 Time: 22:39
Dundas Company's inventory records for its retail division show the following at January 31:
1
At January 31, 11 of these units are on hand. Dundas Company calculated its cost of goods sold using LIFO as $3,024 and its
cost of goods sold using FIFO as $2,915.
Read the requirement2.
Let's begin by considering the differences between the FIFO and LIFO methods. Under the FIFO method, the first costs into
inventory are the first costs assigned to cost of goods sold. LIFO costing is the opposite of FIFO. Under LIFO, the last costs into
inventory go immediately to cost of goods sold. Inventory methods directly affect income taxes, which must be paid in cash.
When prices are rising, LIFO results in the lowest taxable income and thus the lowest income taxes.
Now let's determine the tax savings of using LIFO instead of FIFO. We must first determine the difference in the cost of goods
sold (expense) as a result of the two methods. Then we can determine the tax savings by multiplying the difference in the
expense by the tax rate. (Round your answer to the nearest cent.)
LIFO FIFO
Cost of goods sold - Cost of goods sold Difference
$ 3,024 - $ 2,915 = $ 109
x income tax rate 40 %
$ 43.60
Tax savings using LIFO
1: Data Table
Jan 1 Beginning
. . . . . . . . . . . 10 units @ $ 160 = $ 1,600
15 Purchase
.................... 5 units @ 161 = $ 805
26 Purchase
. . . . . . . . . . . . . . . . . . . . 14 units @ 170 = $ 2,380
2: Requirement
1. How much in taxes would Dundas Company, save by using the LIFO method versus FIFO? Sales revenue is $9,900,
operating expenses are $1,400, and the income tax rate is 40%. (Round your answer to the nearest whole dollar.)
YOU ANSWERED: LIFO FIFO

$ 3,024 - $ 2,915 = nothing
x income tax rate nothing %
nothing
Date: 10/09/19 Time: 22:39
Stewart Company's inventory records for the most recent year contain the following data:
1
Stewart Company sold a total of 19,200 units during the year.
care.
Requirement 1. Using the average-cost method, compute the cost of goods sold and ending inventory for the year.
The goods available for sale in units has been provided, you will need to calculate the cost of goods available4 and the
number of units available5 in order to calculate the average cost per unit. (Round the average cost per unit to the nearest cent.)
$ 386,000 / 25,000 = $ 15.44
Let's calculate the cost of goods sold. We know that 19,200 units were sold during the year. To calculate the cost of goods sold
you must multiply the units sold by the average cost per unit you calculated in the preceding step.
$ 15.44 x 19,200 = $ 296,448
Now, calculate the cost of ending inventory. To calculate the cost of ending inventory you must multiply the
units in ending inventory6 by the average cost per unit you calculated above.

$ 15.44 x 5,800 = $ 89,552
Requirement 2. Using the FIFO method, compute the cost of goods sold and ending inventory for the year.
Let's begin with the cost of goods sold. Recall, the units sold are assigned the oldest costs first. We know that Stewart sold a
total of 19,200 units. There were 7,000 units in beginning inventory; therefore, 7,000 of the units sold will be assigned a cost of
$14 per unit. The remaining units sold7 will be assigned the purchases unit cost of $16.
Beginning inventory 7,000 units x $ 14.00 = $ 98,000
Purchases 12,200 units x $ 16.00 = 195,200
19,200 $ 293,200
units
Now, let's calculate the cost of ending inventory. Remember that the cost of ending inventory is always based on the latest costs
incurred. Since the units in ending inventory, 5,800 units, are less than the amount of units purchase, 18,000 units, all of the
units in ending inventory will be assigned the unit cost of the purchases, $16. Let's calculate the cost of ending inventory.

$ 16.00 x 5,800 = $ 92,800
Requirement 3. Using the LIFO method, compute the cost of goods sold and ending inventory for the year.
Let's calculate the cost of goods sold. Remember, the units sold are assigned the most recent costs first. We know that Stewart
sold a total of 19,200 units. There were 18,000 units purchased during the period; therefore, 18,000 of the units sold will be
assigned a cost of $16 per unit. The remaining units sold8 will be assigned the beginning inventory unit cost of $14.
19,200 $ 304,800
units
Now calculate the cost of ending inventory. Recall that the cost of ending inventory is always based on the oldest costs incurred.
Since the units in ending inventory, 5,800 units, are less than the beginning inventory, 7,000 units, all of the units in ending
inventory will be assigned the unit cost of the beginning inventory, $14. Let's calculate the cost of ending inventory.

$ 14.00 x 5,800 = $ 81,200
1: Data Table
Quantity Unit Cost

Beginning inventory 7,000 $ 14.00
Purchases during year 18,000 $ 16.00
2: Requirements
1. Using the average-cost method, compute the cost of goods sold and ending inventory for the year.
2. Using the FIFO method, compute the cost of goods sold and ending inventory for the year.
3. Using the LIFO method, compute the cost of goods sold and ending inventory for the year.
3: Definition
4: Definition
Cost of goods available = (7,000 x $14) + (18,000 x $16) = ?
5: Definition
Number of units available = 7,000 + 18,000 = ?
6: Definition
Units in ending inventory = 7,000 + 18,000 - 19,200 = ?
7: Definition
Remaining units sold = 19,200 - 7,000 = ?
8: Definition

19,200 nothing
units

$ 16.00 x 5,800 = nothing
19,200 nothing
units

$ 14.00 x 5,800 = nothing
Date: 10/09/19 Time: 22:40
MusicYear specializes in sound equipment. Company records indicate the following data for a line of speakers:
1
Requirement 1. Determine the amounts that MusicYear should report for cost of goods sold and ending inventory two ways: a.
FIFO and b. LIFO.
The choice of inventory method impacts a company's financial statements. The value of ending inventory, cost of goods sold
and gross profit will depend on the inventory costing method that the business uses.
Let's begin by determining the number of units on hand at the end of the period:
Beginning Units + Purchases - Units Sold = Ending Units

18 + 3 - 11 = 10
a. FIFO
2nd.
know that MusicYear sold a total of 11 units. There were 18 units in beginning inventory. Use the table below to calculate the
cost of goods sold.

$ 616
assigned the cost from the purchase on the 2nd? Or will there be an additional layer—the cost from beginning inventory?
We calculated the number of units in ending inventory to be 10 units. Since each purchase is considered its own layer, only the
3 units purchased on the 2nd can be assigned the cost of $57 per unit. If the units in ending inventory are equal to or less than
the amount of units purchased on the 2nd, all of the units in ending inventory will be assigned that unit cost. If the units in
ending inventory are greater than the units that were purchased on the 2nd, then the remaining units will have a unit cost from
the next most recent purchase, in this case the beginning inventory on the 1st, of $56 per unit. Calculate the ending inventory
now.

$ 563
10
b. LIFO
the period.
Let's calculate the cost of goods sold using LIFO. Remember, the most recent purchase costs will be assigned first. MusicYear
sold 11 units, but there were only 3 units in the most recent inventory layer. Therefore, the remaining units sold will be assigned
the cost per unit from beginning inventory.

$ 619
11
Now calculate ending inventory using LIFO. We know that MusicYear has only 10 units left in ending inventory. Under LIFO, the
cost of ending inventory is based on the oldest costs. Since the number of units in beginning inventory (the oldest layer of
inventory) is greater than the actual number of units remaining in inventory, we know that we will assign a cost of $56 per unit to
each ending inventory unit. Go ahead and calculate the ending inventory now.

$ 560
10
Requirement 2. MusicYear uses the FIFO method. Prepare MusicYear's income statement for the month ended March 31,
2018, reporting gross profit. Operating expenses totaled $320, and the income tax rate was 35%.
Begin by selecting the accounts. Recall the proper presentation for a multi-step income statement. Remember the important
subtotals we display.
MusicYear
Income Statement
Month Ended March 31, 2018
Sales revenue
Cost of goods sold
Gross profit
Operating expenses
Income before income tax
Income tax expense
Net income
Now calculate the sales revenue using the sales quantity and the sales price data provided.
Units sold x Sales price = Sales revenue

Mar 7 6 x $ 91 = $ 546
Mar 13 5 x $ 91 = $ 455
$ 1,001
Now let's complete the income statement through the income before income tax line.The cost of goods sold amount under the
FIFO method has been entered for you.
MusicYear
Income Statement
Cost of goods sold 616
Gross profit 385
Operating expenses 320
Income before income tax 65
Income tax expense
Net income
Now let's calculate the income tax expense the company will report on the income statement. (Round your answer to the
nearest whole number.)
Income before income tax x Income tax rate % = Income tax expense
$ 65 x 35 % = $ 23
Complete the income statement using the tax expense amount you calculated above.
MusicYear
Income Statement
Gross profit 385
Income tax expense 23
$ 42
Net income
1: Data Table
Date Item Quantity Unit Cost Sale Price

Mar 1 Balance
..................... 18 $ 56
2 Purchase
..................... 3 57
7 Sale
..................... 6 $ 91
13 Sale
..................... 5 91
2: Requirements
1. Determine the amounts that MusicYear should report for cost of goods sold and ending inventory two ways: (MusicYear
uses a perpetual inventory system.)
a. FIFO
b. LIFO
2. MusicYear uses the FIFO method. Prepare the company's income statement for the month ended March 31, 2018,
reporting gross profit. Operating expenses totaled $320, and the income tax rate was 35%.
YOU ANSWERED: Beginning Units + Purchases - Units Sold = Ending Units


nothing

nothing
10

nothing
11

Mar 1 Beginning inventory 10 units x $ 56 = nothing
nothing
10
nothing
nothing
nothing
nothing
nothing
nothing
Net income

Mar 7 6 x $ 91 = nothing
nothing
Income before income tax nothing
Income tax expense
Net income
$ 65 x nothing % = nothing
Gross profit 385
nothing
Net income
Date: 10/09/19 Time: 22:40
Suppose a Johnson store in Greendale, Missouri, ended November 2018 with 750,000 units of merchandise that cost $6 each.
Suppose the store then sold 110,000 units for $950,000 during December. Further, assume the store made two large purchases
during December as follows:
1
(Click the icon to view the purchase information.)
Requirement 1. Calculate the store's gross profit under both FIFO and LIFO at December 31.
First, let's determine the cost of goods sold under the FIFO method of inventory valuation. Under the FIFO method, the first
costs into inventory are the first costs assigned to cost of goods sold—hence, the name first-in, first-out. When using FIFO we
look at the beginning inventory and each purchase of inventory as being separate layers, with each layer having its own cost.
Johnson had 750,000 units on hand at the beginning of the month at a unit cost of $6, the inventory value was $4,500,000.
Since Johnson sold only 110,000 units in December, all of the units sold are assigned a unit cost from the beginning inventory
layer. We can calculate our cost of goods sold as follows:

110,000 x $ 6.00 = $ 660,000
LIFO costing is the opposite of FIFO. Under LIFO, the last costs into inventory go immediately to cost of goods sold. Since
Johnson sold 110,000 units in December, a portion of the units will first be assigned costs from the most recent purchase.
Recall that a purchase of 45,000 was made on December 23. All of these units will go into cost of goods sold first. Next we will
take the 50,000 units purchased on December 8. Finally, the remaining 15,000 (=110,000 - 45,000 - 50,000) units be assigned
costs from the beginning inventory layer. We can calculate our cost of goods sold as follows:

December 1 Beginning inventory 15,000 units x $ 6.00 = $ 90,000
8 Purchase 50,000 units x $ 4.10 = 205,000
23 Purchase 45,000 units x $ 3.20 = 144,000
$ 439,000
110,000
We can now enter the FIFO and LIFO cost of goods sold into our formula for gross profit.
FIFO LIFO
Sales revenue $ 950,000 $ 950,000
$ 290,000 $ 511,000
Gross profit
Requirement 2. What caused the FIFO and LIFO gross profit figures to differ?
Under the FIFO method, the first costs into inventory are the first costs assigned to cost of goods sold. LIFO costing is the
opposite of FIFO. Under LIFO, the last costs into inventory go immediately to cost of goods sold. If inventory costs do not
change throughout an accounting period, there will be no difference between FIFO and LIFO inventory values. Differences
between the two methods occur when the cost of inventory increases or decreased throughout an accounting period.
1: Data Table
Dec 8 50,000 units @ $ 4.10 = $ 205,000

23 45,000 units @ $ 3.20 = $ 144,000
2: Requirements
1. Calculate the store's gross profit under both FIFO and LIFO at December 31.
2. What caused the FIFO and LIFO gross profit figures to differ?
YOU ANSWERED: Units sold x Cost per unit = Cost of goods sold

December 1 Beginning inventory nothing units x $ 6.00 = nothing
8 Purchase nothing units x nothing = nothing
nothing
110,000
FIFO LIFO
Sales revenue nothing nothing
nothing nothing
Gross profit
Date: 10/09/19 Time: 22:42
Accounting records for Richmond Corporation yield the following data for the year ended June 30, 2018 (assume sales returns
are non-existent):
1
Requirement 1. Journalize Richmond's inventory transactions for the year under the perpetual system.
This exercise is not concerned with the costing method of inventory; the amounts are given. What is important is that you know
how to record the inventory transactions. The first transaction is the purchase of inventory on account. "On account" indicates
that the monetary transaction will come later. The asset account is increased as is the liability account. Record the first
transaction of the purchase of inventory on account. (Record debits first, then credits. Exclude explanations from any journal
entries.)
Journal Entry
Jun 30 Inventory 51,000

When inventory is sold it generates a revenue transaction. Recall that revenue and expense accounts are temporary accounts
for holding specific transactions for an accounting period. The asset accounts are increased3 for the cash received and the
portion on account. The revenue account is also increased by the total of the transaction. Now record the next transaction, sale
of inventory. Do not yet record the cost related to the sale. We do this in the next journal entry.
Journal Entry
Jun 30 Accounts Receivable 66,400
Cash 16,600
As part of the revenue entry, the cost of inventory sold needs to be identified and recorded. This entry decreases the asset
account and increases the temporary account for holding cost. Now record the last entry of recording the cost of inventory.
Journal Entry

Jun 30 Cost of Goods Sold 55,000
Inventory 55,000
Requirement 2. Report ending inventory, sales, cost of goods sold, and gross profit on the appropriate financial statement.
The balance sheet reports assets, liabilities and equity of a company at the end of an accounting period. Report the appropriate
asset account on the balance sheet:
Balance Sheet:
Current assets:
Inventory $ 8,000
Recall that the income statement reports the earnings and expenses of a business over a period of time. Gross profit is the
sales revenue reduced by the cost of goods sold. The higher the gross profit, the better for the business. Remember, gross
profit is just a starting point. Business expenses have to be subtracted from gross profit to derive net profit.
Report sales, cost of goods sold, and gross profit on the income statement:
Income Statement:
1: Data Table
.Inventory,
. . . . . . . .June
. . . . 30,
. . . 2017
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 12,000
.Purchases
. . . . . . . . .of. .inventory
. . . . . . . (on
. . . account)
.................................... 51,000
.Sales
. . . . .of. .inventory
. . . . . . . –. .80%
. . . .on
. . account;
. . . . . . . .20%
. . . .for
. . cash
. . . . .(cost
. . . . $55,000)
............ 83,000
.Inventory,
. . . . . . . .June
. . . . 30,
. . . 2018
.......................................... 8,000
2: Requirements
1. Journalize Richmond's inventory transactions for the year under the perpetual system.
2. Report ending inventory, sales, cost of goods sold, and gross profit on the appropriate financial statement.
3: Definition
Accounts Receivable = ($83,000 x 80%) = ?
Cash ($83,000 x 20%) = ?

Journal Entry
Journal Entry
Balance Sheet:
Current assets:
nothing nothing
Income Statement:
nothing nothing
nothing nothing
nothing nothing
Date: 10/09/19 Time: 22:42
Dundas Company's inventory records for its retail division show the following at July 31:
1
At July 31, 10 of these units are on hand.
Requirement 1. Journalize for Dundas total July purchases in one summary entry, under the perpetual system. All purchases
were on credit.
Recall that when a company makes a purchase on account, the purchase will be paid for at a later date. That means both
Inventory and Accounts Payable are increased. Since this is one summary entry, total all of the purchases3 before entering the
transaction in the journal. Go ahead and make the entry now. (Record debits first, then credits. Exclude explanations from any
journal entries.)
Journal Entry
Inventory 2,755
Requirement 2. Journalize for Dundas total July sales and cost of goods sold in two summary entries, under the perpetual
system. The selling price was $520 per unit and all sales were on credit. Assume that Dundas uses the FIFO inventory method.

Before we calculate the sales, we need to determine the total amount of units sold. We have been given the beginning inventory
units, the units purchased, and the units remaining in ending inventory. Let's calculate the total units sold:

7 + 16 - 10 = 13
Journalize the total July sales. Do not yet record the cost related to the sale. We will do this in the next journal entry.
We have been told that the selling price was $520 per unit and now we know from our calculation above how many units were
sold (13 units). With this information we can calculate the total sales revenue4 amount. Recall that all the sales were on credit
(or "on account"). Recall how sales on account are recorded. (Record debits first, then credits. Exclude explanations from any
journal entries.)
Journal Entry
Sales Revenue 6,760
Under FIFO (first-in, first-out) the units sold come from the oldest inventory layer first. After that layer has been sold the next
oldest units are sold. Let's determine the cost from each layer of inventory that was sold. Remember, we determined that 13
units have been sold. Enter the units sold from each layer and the cost that will be assigned to cost of goods sold for that layer.

Jul 1 Beginning inventory 7 units x $ 165 = $ 1,155
$ 2,160
13
Journalize the cost of inventory sold assuming FIFO and using the amounts you calculated above. (Record debits first, then
credits. Exclude explanations from any journal entries.)
Journal Entry
Inventory 2,160
Requirement 3. Under FIFO, how much gross profit would Dundas earn on for the month ending July 31? What is the FIFO
cost of Dundas Company's ending inventory?
Begin by calculating the gross profit using the following formula:

$ 6,760 - $ 2,160 = $ 4,600
Based on our cost of goods sold calculation, we know that ending inventory consists of the remaining units that were not sold
from the July 26th layer. The units in the July 26th layer are 10 (11 purchased - 1 sold). Using the cost assigned to each layer,
calculate the ending inventory value.
Jul 1 Beginning inventory 0 units x $ 165 = $ 0

26 Purchase 10 units x $ 175 = 1,750
$ 1,750
10
Note that the ending inventory can also be computed by subtracting the cost of goods sold ($2,160) from the cost of goods
available for sale ($3,910 = $1,155 + $830 + $1,925).
1: Data Table
Jul 1 Beginning
........... 7 units @ $ 165 = $ 1,155
15 Purchase
.................... 5 units @ 166 = $ 830
26 Purchase
. . . . . . . . . . . . . . . . . . . . 11 units @ 175 = $ 1,925
2: Requirements
Journalize the following for Dundas Company under the perpetual system:
1. Total July purchases in one summary entry. All purchases were on credit.
2. Total July sales and cost of goods sold in two summary entries. The selling price was $520 per unit, and all sales were on
credit. Assume that Dundas uses the FIFO inventory method.
3. Under FIFO, how much gross profit would Dundas earn on for the month ending July 31? What is the FIFO cost of
Dundas Company's ending inventory?
3: Definition
Jul 1 Beginning
........... 7 units @ $ 165 = $ 1,155
15 Purchase
.................... 5 units @ 166 = 830
26 Purchase
. . . . . . . . . . . . . . . . . . . . 11 units @ 175 = 1,925
4: Definition
Total sales revenue = (13 @ $520) = ?


Journal Entry

Jul 1 Beginning inventory nothing units x $ 165 = nothing
nothing
13
Journal Entry

$ 6,760 - $ 2,160 = nothing

Jul 1 Beginning inventory 0 units x $ 165 = $ 0
nothing
10
Date: 10/09/19 Time: 22:43
Ken Company's inventory records for its retail division show the following at August 31:
1
At August 31, 10 of these units are on hand.
Requirement 1. Compute cost of goods sold and ending inventory, using each of the following four inventory methods.
care.
(a) Specific identification, with five $165 units and five $175 units still on hand at the end
Generally, the specific identification method is used only by businesses that deal in unique inventory items, such as
automobiles, antique furniture, jewels, and real estate. This method is too expensive to use for inventory items that have
common characteristics, such as bushels of wheat, gallons of paint, or auto tires.
Let's begin by calculating the cost of goods sold using this method. We have been told that the following are still on hand at the
end of the period: five $165 unit(s) and five $175 units. We know that there were 7 $165 units (beginning inventory), 5 $166
units (Aug 15 purchase), and 11 $175 units (Aug 26 purchase) available during the period. Therefore, we can determine how
many of each specific unit was sold. Calculate the cost of goods sold now.

13 $ 2,210
Now let's calculate the ending inventory using the specific identification method. We have been told how many of each unit was
still on hand at the end of the period. Use the table below to calculate ending inventory.

$ 1,700
10
(b) Average cost
The average cost method4, is based on the average cost of inventory (available for sale5) during the period. All of the units
available for sale, regardless of their purchase price, are given the same unit cost under this method. Begin by calculating the
average cost per unit that will be assigned to each unit in ending inventory and cost of goods sold. (Round the average cost per
unit to the nearest cent.)
$ 3,910 / 23 = $ 170.00
The average cost per unit you calculated above will be used to compute the cost of goods sold and ending inventory.
Let's begin with cost of goods sold. We know from the step above that Ken had 23 units available for sale and we also know
from the information provided that there are 10 units left at the end of the period. Therefore, 13 units were sold. Calculate the
cost of goods sold using average cost. (Round your answer to the nearest whole dollar.)

$ 170.00 x 13 = $ 2,210
Now calculate ending inventory using the average cost method. (Round your answer to the nearest whole dollar.)

$ 170.00 x 10 = $ 1,700
(c) First-in, first-out (FIFO):
26th.
know that Ken sold a total of 13 units. There were 7 units in beginning inventory; therefore, 7 of the units sold will be assigned a
cost of $165 per unit. There were 5 units available from the Aug 15 purchase and 11 units available from the Aug 26 purchase.
Use the table below to calculate the cost of goods sold.

$ 2,160
13
assigned the cost from the purchase on the 26th? Or will there be an additional layer, the cost from the purchase on the 15th, in
ending inventory?
Since each purchase is considered its own layer, only the 11 units purchased on the 26th can be assigned the cost of $175 per
unit. If the units in ending inventory are equal to or less than the amount of units purchased on the 26th, all of the units in ending
inventory will be assigned that unit cost. If the units in ending inventory are greater than the units that were purchased on the
26th, then 11 of the units will have a unit cost of $175, while the rest of the units will have a unit cost from the next most recent
purchase, in this case the purchase on the 15th, of $166 per unit.
Determine the amount of inventory in each of the last two layers. Think carefully, there are 10 units in ending inventory. Is that
greater than or less than the amount of inventory purchased on the 26th? Use the discussion above to help you determine the
ending inventory cost layers. (Enter an amount in each input area, including a "0" for zero balances.)

26 Purchase 10 units x $ 175 = 1,750
$ 1,750
10
(d) Last-in, first-out (LIFO)
the period.
Let's calculate the cost of goods sold using LIFO. Remember, the most recent purchases will be assigned first. Ken sold 13
units, but there were only 11 units in the most recent inventory layer. (Enter "0" for any zero balances.)

26 Purchase 11 units x $ 175 = 1,925
$ 2,257
13
Now calculate ending inventory using LIFO. We know from the step above that Ken assigned all the costs from the Aug 26
purchase and a portion of the Aug 15 purchase to cost of goods sold. Therefore, we know that we must assign ending inventory
costs to the remaining units in the Aug 15 layer (=5 - 2) and the beginning inventory layer (=7 - 0). Go ahead and calculate the
ending inventory now.

$ 1,653
10
Requirement 2. Which method produces the highest cost of goods sold? Which method produces the lowest cost of goods
sold? What causes the difference in cost of goods sold?
Let's review the cost of goods sold under each method to determine which method produces the highest and which method
produces the lowest cost of goods sold.
Specific identification Average cost FIFO LIFO

Cost of goods sold $ 2,210 $ 2,210 $ 2,160 $ 2,257
What are the major differences between the methods in calculating the cost of goods sold? Refer to the information given to you
and determine how the trend in purchase prices would affect the cost assigned to the units sold under these methods.
1: Data Table
Aug 1 Beginning
........... 7 units @ $ 165 = $ 1,155
15 Purchase
.................... 5 units @ 166 = $ 830
26 Purchase
. . . . . . . . . . . . . . . . . . . . 11 units @ 175 = $ 1,925
2: Requirements
1. Compute cost of goods sold and ending inventory, using each of the following methods:
a. Specific identification, with five $165 units and five $175 units still on hand at the end
b. Average cost
c. FIFO
d. LIFO
2. Which method produces the highest cost of goods sold? Which method produces the lowest cost of goods sold? What
causes the difference in cost of goods sold?
3: Four methods
1. Specific identification
2. Average cost
4: Definition
Also called the weighted-average method
5: Definition
Aug1 1 Beginning inventory 7 @ $ 165 = $ 1,155

15 Purchase 5 @ $ 166 = 830
26 Purchase 11 @ $ 175 = 1,925
Goods available for sale ? ?
YOU ANSWERED: Date Inventory Layer Units sold Cost Cost of goods sold
nothing
nothing

nothing
10

$ 170.00 x 13 = nothing

$ 170.00 x 10 = nothing

nothing
13

nothing
10

nothing
13

nothing
10
Date: 10/09/19 Time: 22:44
Sherwood Company's inventory records for the most recent year contain the following data:
1
Sherwood Company sold a total of 18,600 units during the year.
care.
Requirement 1. Using the average-cost method, compute the cost of goods sold and ending inventory for the year.
The goods available for sale in units has been provided, you will need to calculate the cost of goods available4 and the
number of units available5 in order to calculate the average cost per unit. (Round the average cost per unit to the nearest cent.)
$ 192,000 / 20,000 = $ 9.60
Let's calculate the cost of goods sold. We know that 18,600 units were sold during the year. To calculate the cost of goods sold
you must multiply the units sold by the average cost per unit you calculated in the preceding step.
$ 9.60 x 18,600 = $ 178,560
Now, calculate the cost of ending inventory. To calculate the cost of ending inventory you must multiply the
units in ending inventory6 by the average cost per unit you calculated above.

$ 9.60 x 1,400 = $ 13,440
Requirement 2. Using the FIFO method, compute the cost of goods sold and ending inventory for the year.
Let's begin with the cost of goods sold. Recall, the units sold are assigned the oldest costs first. We know that Sherwood sold a
total of 18,600 units. There were 4,000 units in beginning inventory; therefore, 4,000 of the units sold will be assigned a cost of
$8 per unit. The remaining units sold7 will be assigned the purchases unit cost of $10.
18,600 $ 178,000
units
Now, let's calculate the cost of ending inventory. Remember that the cost of ending inventory is always based on the latest costs
incurred. Since the units in ending inventory, 1,400 units, are less than the amount of units purchase, 16,000 units, all of the
units in ending inventory will be assigned the unit cost of the purchases, $10. Let's calculate the cost of ending inventory.

$ 10.00 x 1,400 = $ 14,000
Requirement 3. Using the LIFO method, compute the cost of goods sold and ending inventory for the year.
Let's calculate the cost of goods sold. Remember, the units sold are assigned the most recent costs first. We know that
Sherwood sold a total of 18,600 units. There were 16,000 units purchased during the period; therefore, 16,000 of the units sold
will be assigned a cost of $10 per unit. The remaining units sold8 will be assigned the beginning inventory unit cost of $8.
18,600 $ 180,800
units
Now calculate the cost of ending inventory. Recall that the cost of ending inventory is always based on the oldest costs incurred.
Since the units in ending inventory, 1,400 units, are less than the beginning inventory, 4,000 units, all of the units in ending
inventory will be assigned the unit cost of the beginning inventory, $8. Let's calculate the cost of ending inventory.

$ 8.00 x 1,400 = $ 11,200
1: Data Table
Quantity Unit Cost

Beginning inventory 4,000 $ 8.00
Purchases during year 16,000 $ 10.00
2: Requirements
1. Using the average-cost method, compute the cost of goods sold and ending inventory for the year.
2. Using the FIFO method, compute the cost of goods sold and ending inventory for the year.
3. Using the LIFO method, compute the cost of goods sold and ending inventory for the year.
3: Definition
4: Definition
Cost of goods available = (4,000 x $8) + (16,000 x $10) = ?
5: Definition
Number of units available = 4,000 + 16,000 = ?
6: Definition
Units in ending inventory = 4,000 + 16,000 - 18,600 = ?
7: Definition
8: Definition

18,600 nothing
units

$ 10.00 x 1,400 = nothing
18,600 nothing
units

$ 8.00 x 1,400 = nothing
Date: 10/09/19 Time: 22:43
Ontario Company's inventory records for its retail division show the following at December 31:
1
At December 31, 11 of these units are on hand. Ontario Company calculated its cost of goods sold using LIFO as $3,024 and its
cost of goods sold using FIFO as $2,915.
Read the requirement2.
Let's begin by considering the differences between the FIFO and LIFO methods. Under the FIFO method, the first costs into
inventory are the first costs assigned to cost of goods sold. LIFO costing is the opposite of FIFO. Under LIFO, the last costs into
inventory go immediately to cost of goods sold. Inventory methods directly affect income taxes, which must be paid in cash.
When prices are rising, LIFO results in the lowest taxable income and thus the lowest income taxes.
Now let's determine the tax savings of using LIFO instead of FIFO. We must first determine the difference in the cost of goods
sold (expense) as a result of the two methods. Then we can determine the tax savings by multiplying the difference in the
expense by the tax rate. (Round your answer to the nearest cent.)
LIFO FIFO
$ 3,024 - $ 2,915 = $ 109
x income tax rate 35 %
$ 38.15
1: Data Table
Dec 1 Beginning
. . . . . . . . . . . 10 units @ $ 160 = $ 1,600
15 Purchase
.................... 5 units @ 161 = $ 805
26 Purchase
. . . . . . . . . . . . . . . . . . . . 14 units @ 170 = $ 2,380
2: Requirement
1. How much in taxes would Ontario Company, save by using the LIFO method versus FIFO? Sales revenue is $10,800,
operating expenses are $1,700, and the income tax rate is 35%. (Round your answer to the nearest whole dollar.)
YOU ANSWERED: LIFO FIFO

$ 3,024 - $ 2,915 = nothing
x income tax rate nothing %
nothing
Date: 10/09/19 Time: 22:44
MusicPalace specializes in sound equipment. Company records indicate the following data for a line of speakers:
1
Requirement 1. Determine the amounts that MusicPalace should report for cost of goods sold and ending inventory two ways:
a. FIFO and b. LIFO.
The choice of inventory method impacts a company's financial statements. The value of ending inventory, cost of goods sold
and gross profit will depend on the inventory costing method that the business uses.
Let's begin by determining the number of units on hand at the end of the period:
Beginning Units + Purchases - Units Sold = Ending Units

19 + 5 - 13 = 11
a. FIFO
2nd.
know that MusicPalace sold a total of 13 units. There were 19 units in beginning inventory. Use the table below to calculate the
cost of goods sold.

$ 442
assigned the cost from the purchase on the 2nd? Or will there be an additional layer—the cost from beginning inventory?
We calculated the number of units in ending inventory to be 11 units. Since each purchase is considered its own layer, only the
5 units purchased on the 2nd can be assigned the cost of $66 per unit. If the units in ending inventory are equal to or less than
the amount of units purchased on the 2nd, all of the units in ending inventory will be assigned that unit cost. If the units in
ending inventory are greater than the units that were purchased on the 2nd, then the remaining units will have a unit cost from
the next most recent purchase, in this case the beginning inventory on the 1st, of $34 per unit. Calculate the ending inventory
now.

$ 534
11
b. LIFO
the period.
Let's calculate the cost of goods sold using LIFO. Remember, the most recent purchase costs will be assigned first.
MusicPalace sold 13 units, but there were only 5 units in the most recent inventory layer. Therefore, the remaining units sold will
be assigned the cost per unit from beginning inventory.

$ 602
13
Now calculate ending inventory using LIFO. We know that MusicPalace has only 11 units left in ending inventory. Under LIFO,
the cost of ending inventory is based on the oldest costs. Since the number of units in beginning inventory (the oldest layer of
inventory) is greater than the actual number of units remaining in inventory, we know that we will assign a cost of $34 per unit to
each ending inventory unit. Go ahead and calculate the ending inventory now.

$ 374
11
Requirement 2. MusicPalace uses the FIFO method. Prepare MusicPalace's income statement for the month ended March 31,
2018, reporting gross profit. Operating expenses totaled $310, and the income tax rate was 35%.
Begin by selecting the accounts. Recall the proper presentation for a multi-step income statement. Remember the important
subtotals we display.
MusicPalace
Income Statement
Sales revenue
Cost of goods sold
Gross profit
Operating expenses
Income tax expense
Net income
Now calculate the sales revenue using the sales quantity and the sales price data provided.

Mar 7 6 x $ 94 = $ 564
Mar 13 7 x $ 92 = $ 644
$ 1,208
Now let's complete the income statement through the income before income tax line.The cost of goods sold amount under the
FIFO method has been entered for you.
MusicPalace
Income Statement
Gross profit 766
Income tax expense
Net income
Now let's calculate the income tax expense the company will report on the income statement. (Round your answer to the
nearest whole number.)
$ 456 x 35 % = $ 160
Complete the income statement using the tax expense amount you calculated above.
MusicPalace
Income Statement
Gross profit 766
$ 296
Net income
1: Data Table
Date Item Quantity Unit Cost Sale Price

Mar 1 Balance
..................... 19 $ 34
2 Purchase
..................... 5 66
7 Sale
..................... 6 $ 94
13 Sale
..................... 7 92
2: Requirements
1. Determine the amounts that MusicPalace should report for cost of goods sold and ending inventory two ways:
(MusicPalace uses a perpetual inventory system.)
a. FIFO
b. LIFO
2. MusicPalace uses the FIFO method. Prepare the company's income statement for the month ended March 31, 2018,
reporting gross profit. Operating expenses totaled $310, and the income tax rate was 35%.
YOU ANSWERED: Beginning Units + Purchases - Units Sold = Ending Units


nothing

nothing
11

nothing
13

Mar 1 Beginning inventory 11 units x $ 34 = nothing
nothing
11
nothing
nothing
nothing
nothing
nothing
nothing
Net income

nothing
Income before income tax nothing
Income tax expense
Net income
$ 456 x nothing % = nothing
Gross profit 766
nothing
Net income
Date: 10/09/19 Time: 22:45
Suppose a Jones store in Gainesville, Missouri, ended March 2018 with 800,000 units of merchandise that cost $8 each.
Suppose the store then sold 90,000 units for $800,000 during April. Further, assume the store made two large purchases during
April as follows:
1
(Click the icon to view the purchase information.)
Requirement 1. Calculate the store's gross profit under both FIFO and LIFO at April 30.
First, let's determine the cost of goods sold under the FIFO method of inventory valuation. Under the FIFO method, the first
costs into inventory are the first costs assigned to cost of goods sold—hence, the name first-in, first-out. When using FIFO we
look at the beginning inventory and each purchase of inventory as being separate layers, with each layer having its own cost.
Jones had 800,000 units on hand at the beginning of the month at a unit cost of $8, the inventory value was $6,400,000. Since
Jones sold only 90,000 units in April, all of the units sold are assigned a unit cost from the beginning inventory layer. We can
calculate our cost of goods sold as follows:

90,000 x $ 8.00 = $ 720,000
LIFO costing is the opposite of FIFO. Under LIFO, the last costs into inventory go immediately to cost of goods sold. Since
Jones sold 90,000 units in April, a portion of the units will first be assigned costs from the most recent purchase. Recall that a
purchase of 45,000 was made on April 27. All of these units will go into cost of goods sold first. Next we will take the 20,000
units purchased on April 13. Finally, the remaining 25,000 (=90,000 - 45,000 - 20,000) units be assigned costs from the
beginning inventory layer. We can calculate our cost of goods sold as follows:

April 1 Beginning inventory 25,000 units x $ 8.00 = $ 200,000
13 Purchase 20,000 units x $ 6.10 = 122,000
27 Purchase 45,000 units x $ 5.20 = 234,000
$ 556,000
90,000
We can now enter the FIFO and LIFO cost of goods sold into our formula for gross profit.
FIFO LIFO
Sales revenue $ 800,000 $ 800,000
$ 80,000 $ 244,000
Gross profit
Requirement 2. What caused the FIFO and LIFO gross profit figures to differ?
Under the FIFO method, the first costs into inventory are the first costs assigned to cost of goods sold. LIFO costing is the
opposite of FIFO. Under LIFO, the last costs into inventory go immediately to cost of goods sold. If inventory costs do not
change throughout an accounting period, there will be no difference between FIFO and LIFO inventory values. Differences
between the two methods occur when the cost of inventory increases or decreased throughout an accounting period.
1: Data Table
Apr 13 20,000 units @ $ 6.10 = $ 122,000

27 45,000 units @ $ 5.20 = $ 234,000
2: Requirements
1. Calculate the store's gross profit under both FIFO and LIFO at April 30.
2. What caused the FIFO and LIFO gross profit figures to differ?
YOU ANSWERED: Units sold x Cost per unit = Cost of goods sold

April 1 Beginning inventory nothing units x $ 8.00 = nothing
nothing
90,000
FIFO LIFO
Sales revenue nothing nothing
nothing nothing
Gross profit
Date: 10/09/19 Time: 22:45
Fabulous Frames Frame Shop wants to know the effect of different inventory costing methods on its financial statements.
Inventory and purchases data for Jun are:
1
(Click the icon to view the inventory and purchases data.)
If Fabulous Frames Frame Shop uses the FIFO method, the cost of the ending inventory will be
first-in, first-out. Therefore, the cost of the units remaining in ending inventory will be the cost of the newer units. Begin by
reviewing the basic cost of goods sold formula rearranged to calculate ending inventory.
Beginning inventory +. . Purchases -. . Cost of goods sold = Ending inventory
Now calculate the cost of the ending inventory if Fabulous Frames uses the FIFO method by completing the following table:

Balance of beginning inventory after Jun 9 sale 400 $ 15.00 $ 6,000
Balance of purchases inventory after Jun 9 sale 1,200 $ 15.40 18,480
1,600 $ 24,480
Ending inventory
1: Data Table

Jun 1 Beginning inventory 2,100 $ 15.00 $ 31,500
4 Purchase 1,200 $ 15.40 18,480
9 Sale (1,700)
YOU ANSWERED:
Balance of beginning inventory after Jun 9 sale nothing nothing nothing
Balance of purchases inventory after Jun 9 sale nothing nothing nothing
nothing nothing
Ending inventory
Date: 10/09/19 Time: 22:46
Fabulous Frames Frame Shop wants to know the effect of different inventory costing methods on its financial statements.
Inventory and purchases data for Jun follow:
1
(Click the icon to view the inventory and purchases data.)
If Fabulous Frames Frame Shop uses the LIFO method, cost of goods sold will be
LIFO costing is the opposite of FIFO. Under LIFO, the last costs in inventory go immediately to cost of goods sold. Complete the
following table to determine the cost of goods sold if Fabulous Frames uses the LIFO method.

Units sold from purchases 1,800 $ 15.60 $ 28,080
Units sold from beginning inventory 100 $ 15.00 1,500
1,900 $ 29,580
Cost of goods sold
1: Data Table

Jun 1 Beginning inventory 2,600 $ 15.00 $ 39,000
4 Purchase 1,800 $ 15.60 28,080
9 Sale (1,900)
YOU ANSWERED:
Units sold from purchases nothing nothing nothing
Units sold from beginning inventory nothing nothing nothing
1,900 nothing
Cost of goods sold
Date: 10/09/19 Time: 22:46
27. In a period of rising prices,
A. gross profit under FIFO will be higher than under LIFO.

B. LIFO inventory will be greater than FIFO inventory.
C. cost of goods sold under LIFO will be less than under FIFO.
D. net income under LIFO will be higher than under FIFO.
YOU ANSWERED: B.
Date: 10/09/19 Time: 22:47
Best Guy Company purchases inventory in crates of Cash payments on account totaled $7,779,000. During fiscal
merchandise; each crate of inventory is a unit. The fiscal year year 2018, the store sold 155,000 units of merchandise for
of Best Guy ends each January 31. Assume you are dealing $15,887,500, of which $4,500,000 was for cash and the
with a single Best Guy store in Boston, Massachusetts. The balance was on account. Best Guy and all of its stores use the
Boston store began the year with an inventory of 22,000 units average-cost method for inventories. The Boston store's
that cost a total of $1,166,000. During the year, the store operating expenses for the year were $3,000,000. It paid 70%
purchased merchandise on account as follows: in cash and accrued the rest as accrued liabilities. The store
1
(Click the icon to view the purchases.) accrued income tax at the rate of 35%.
Requirement 1. Make summary journal entries to record the store's transactions for the year ended January 31, 2018.
Best Guy and all of its stores use a perpetual inventory system. Round average cost per unit to two decimal places and round
all other amounts to the nearest dollar.
Let's start with the entry to record the purchases.
Remember that the store purchased merchandise on account. Recall that "on account" means that the company has not yet
paid cash for the purchase. To record this transaction, we will increase Inventory and Accounts Payable. (Record debits first,
then credits. Exclude explanations from any journal entries.)
Journal Entry
Jan 31 Inventory 8,107,000
Accounts Payable 8,107,000
Next, record the cash payments on account for $7,779,000.
To record this transaction, we will decrease Accounts Payable and Cash for the amount of the payment.
Journal Entry
Jan 31 Accounts Payable 7,779,000
Cash 7,779,000
Now record the sale of merchandise for $15,887,500, of which $4,500,000 was for cash and the balance was on account.
To record this entry, we must increase cash by the amount of cash received and the difference3 between the cash received and
the sale amount will increase Accounts Receivable. (Do not record the cost related to the sale. We will do this in the next journal
entry.)
Journal Entry
Jan 31 Cash 4,500,000
Accounts Receivable 11,387,500
Sales Revenue 15,887,500
Inventory costs shift from an asset to an expense when the seller delivers the goods to the buyer. In order to record the
expense, we need to calculate the cost of goods sold associated with the sale.
Recall that Best Guy uses the average cost method for inventories. The average-cost method, sometimes called the
weighted-average method, is based on the average cost of inventory during the period. Before we can calculate the cost of
goods sold under the average-cost method, we must first determine the average cost per unit of inventory by dividing the
cost of goods available4 by the number of units available5. Calculate the average cost per unit of inventory now. (Round the
average cost per unit to the nearest cent.)
$ 9,273,000 / 165,000 = $ 56.20
Now, using the average cost per unit that you determined above, calculate the cost of inventory sold during the year.
Number of units sold x Average cost per unit = Cost of goods sold
155,000 x $ 56.20 = $ 8,711,000
Now, let's record the cost related to the sales.
To record this entry, we must shift the cost of the inventory sold that you calculated in the preceding step from the Inventory
account to the Cost of Goods Sold account.
Journal Entry
Jan 31 Cost of Goods Sold 8,711,000
Inventory 8,711,000
Now record the $3,000,000 operating expenses for the year. Best Guy paid 70% in cash and accrued the rest as accrued
liabilities.
To record this entry, we must increase Operating Expenses by $3,000,000, decrease Cash by the amount paid cash6 and
increase Accrued Liabilities for the rest7. (Round your final answers to the nearest whole dollar.)
Journal Entry
Jan 31 Operating Expenses 3,000,000
Cash 2,100,000
Record the entry to accrue income tax.
Before calculating income tax expense you need to determine the income before income tax expense8. The total sales for the
year has been given to us, $15,887,500, and we previously calculated cost of goods sold, $8,711,000. We also know that
operating expenses were $3,000,000 for the year. Let's calculate income tax expense now. (Round your final answers to the
expense x Income tax rate = Income tax expense
$ 4,176,500 x 35 % = $ 1,461,775
Finally, record the entry to accrue income tax expense. To record this entry, we must increase Income Tax Expense and Income
Tax Payable by the amount you calculated in the preceding step.
Journal Entry
Jan 31 Income Tax Expense 1,461,775
Income Tax Payable 1,461,775
Requirement 2. Prepare a T-account to show the activity in the Inventory account.
Post the beginning balance and activity to the T-account and calculate the ending inventory balance. Post the entries you made
above that effect the inventory account and calculate the ending balance. Remember, if an account is debited in a journal entry,
it is debited in the T-account. (Abbreviation used: COGS = cost of goods sold.)
9
(Click the icon to view the completed journal entries.)
Inventory
Beg Bal 1,166,000
Purchases 8,107,000 COGS 8,711,000
End Bal 562,000
Requirement 3. Prepare the store's income statement for the year ended January 31, 2018. Show totals for the gross profit,
income before tax and net income.
Let's begin by selecting the income statement labels.
Best Guy Store in Boston

Income Statement
Year Ended January 31, 2018
Sales revenue
Cost of goods sold

Gross profit
Operating expenses
Income before income tax expense
Income tax expense
Net income (loss)
Now, using the journal entries you prepared above, enter the amounts in the income statement and calculate the appropriate
subtotals.

Income Statement
Sales revenue $ 15,887,500
Cost of goods sold 8,711,000
Gross profit 7,176,500
Operating expenses 3,000,000
Income before income tax expense 4,176,500
Income tax expense 1,461,775
$ 2,714,725
Net income (loss)
1: Data Table
.Jul
. . (31,000
. . . . . . .units
. . . . at
. . $51)
................... $ 1,581,000
.Nov
. . . (51,000
. . . . . . .units
. . . . at
. . $55)
.................. 2,805,000
.Dec
. . . (61,000
. . . . . . .units
. . . . at
. . $61)
.................. 3,721,000
Total.purchases
............................... $ 8,107,000
2: Requirements
1. Make summary journal entries to record the store's transactions for the year ended January 31, 2018. Best Guy and all of
its stores use a perpetual inventory system. Round average cost per unit to two decimal places and round all other
amounts to the nearest dollar.
2. Prepare a T-account to show the activity in the Inventory account.
3. Prepare the store's income statement for the year ended January 31, 2018. Show totals for gross profit, income before
tax, and net income.
3: Definition
Accounts receivable = $15,887,500 - $4,500,000 = ?
4: Definition
Cost of goods available = $1,166,000 + $8,107,000 = ?
5: Definition
Number of units available = 22,000 + 31,000 + 51,000 + 61,000 = ?
6: Definition
Accrued Liabilities = $3,000,000 x 30% = ?
7: Definition
8: Definition
Income before income tax expense = $15,887,500 - $8,711,000 - $3,000,000 = ?
9: Reference
Journal Entry

Cash 7,779,000
Cash 4,500,000
Cost of Goods Sold 8,711,000

Inventory 8,711,000
Operating Expenses 3,000,000

Cash 2,100,000
Income Tax Expense 1,461,775


Jan 31 nothing nothing nothing
Journal Entry
Journal Entry
nothing x $ 56.20 = nothing
Journal Entry

Journal Entry
Income before income tax expense x Income tax rate = Income tax expense
Journal Entry
Inventory


Income Statement
nothing
nothing
nothing
nothing
nothing
nothing
Net income (loss)

Income Statement
Sales revenue nothing
Cost of goods sold nothing
Income before income tax expense nothing
Income tax expense nothing
nothing
Net income (loss)
Date: 10/09/19 Time: 22:48
A Cross Country Sports outlet store began August 2018 with 47 pairs of running shoes that cost the store $30 each. The sale
price of these shoes was $65. During August, the store completed these inventory transactions:
1
(Click the icon to view the inventory transactions.)
To compute cost of goods sold and the cost of ending inventory still on hand, we must assign a unit cost to the items.
Accounting uses four generally accepted inventory methods:
1. Specific identification3
2. Average cost4
3. First-in, first-out (FIFO) cost5
4. Last-in, first-out (LIFO) cost6
A company can use any of these methods. The methods can have very different effects on reported profits, income taxes, and
cash flow. Therefore, companies select their inventory method with great care.
Requirement 1. The preceding data are taken from the store's perpetual inventory records. Which cost method does the store
use? Explain how you arrived at your answer.
The type of cost method a company uses for its inventory system can be determined from its inventory records. By reviewing
the purchase and sale transactions, and in particular the cost of those units, you can identify which lot(s) those units of inventory
had come from. Recall that LIFO stands for Last-In-First-Out, FIFO stands for First-In-First-Out, and weighted-average cost
takes a mathematical average unit cost of the inventory on hand and applies that number to cost the transactions.
Review the given data, the inventory transactions for the month and the problem statement data. The sales transaction after the
first purchase can "tell" you which cost method is used. If the cost from the purchase is used, then the company is using LIFO. If
the beginning inventory cost (the oldest) is used, they are using FIFO. If a new cost is computed, they are using the weighted
average cost.
Requirement 2. Determine the store's cost of goods sold for August. Also compute gross profit for August.
Recall that cost of goods sold is an expense on the income statement. It is the cost of inventory that has been sold in a set
amount of time. We have been given the units sold and the cost of those units sold for every sales transaction during the month.
To determine the total cost of goods sold for the month, we need to tally the cost of each of the sales. Use the table below to
assist you in computing cost of goods sold for the month. (Abbreviation used: COGS = cost of goods sold.)
Units Unit cost COGS

Aug 2 18 x $ 30 = $ 540
13 29 x 30 = 870
18 8 x 32 = 256
22 34 x 32 = 1,088
$ 2,754
Total COGS
We are asked to compute the gross profit for August. Gross profit, also called gross margin, is the excess of sales revenue over
cost of goods sold. We have already calculated Cost of Goods Sold in Requirement 2., but we still need to determine total sales
revenue in order to calculate gross profit. Add the total units sold at each sales price to calculate the total sales revenue for the
month.
Unit sale Sales

Units price revenue
Aug 2 18 x $ 65 = $ 1,170
13 29 x 65 = 1,885
18 8 x 66 = 528
22 34 x 66 = 2,244
$ 5,827
Total Sales Revenue
Using the total sales revenue and cost of goods sold amounts you calculated above, determine the company's gross profit for
the month.

$ 5,827 - $ 2,754 = $ 3,073
Requirement 3. What is the cost of the store's August 31 inventory of running shoes?
Using the discussion above, you can determine that Cross Country Sports is using the FIFO method for inventory because the
sales on the 2nd and 13th are using the cost of $30 from beginning inventory and the sales from the 18th and 22nd are using
the cost of $32 from the first purchase on the 9th. Since the company is using FIFO, the units in ending inventory will be
assigned the most recent costs. Let's first determine how many units are on hand in ending inventory.
Beginning units + Units purchased - Units sold = Ending inventory units

47 + 99 - 89 = 57
Under the FIFO method, our ending inventory will be made up of the latest inventory purchases. Looking at the transaction
detail, we know that the ending inventory is comprised of two layers; the purchase on the 29th, and the purchase on the 9th. We
know this because the units in ending inventory (57) is greater than the total number of units purchased on the 29th (19), but
less than the units purchased on the 29th, plus the units purchased on the 9th (19+80). Let's complete the table below to
determine the total cost of ending inventory:
Units Unit cost Total cost

Units from Inventory Purchased on the 9th 38 x $ 32 = $ 1,216
Units from Inventory Purchased on the 29th 19 x $ 34 = $ 646
Ending Inventory Units and Total Cost 57 $ 1,862
1: Data Table
Units Unit Cost Unit Sale Price

Aug 2 Sale
................ 18 $ 30 $ 65
9 Purchase
................ 80 32
13 Sale
................ 29 30 65
18 Sale
................ 8 32 66
22 Sale
................ 34 32 66
29 Purchase
................ 19 34
2: Requirements
1. The data are taken from the store's perpetual inventory records. Which cost method does the store use? Explain how you
arrived at your answer.
2. Determine the store's cost of goods sold for August. Also compute gross profit for August.
3. What is the cost of the store's August 31 inventory of running shoes?
3: Definition
The specific identification method costs the inventories at the specific cost of the particular unit.
4: Definition
the period.
5: Definition
Under the FIFO method, the first costs into inventory are the first costs assigned to cost of goods sold—hence the name
first-in, first-out.
6: Definition
LIFO (last-in, first-out) costing is the opposite of FIFO. Under LIFO, the last costs into inventory go immediately to cost of
goods sold.
YOU ANSWERED: Units Unit cost COGS

Aug 2 18 x $ 30 = nothing
13 29 x 30 = nothing
18 8 x 32 = nothing
nothing
Total COGS
Unit sale Sales

Units price revenue
Aug 2 18 x $ 65 = nothing
18 8 x 66 = nothing
nothing
Total Sales Revenue

$ 5,827 - $ 2,754 = nothing
Beginning units + Units purchased - Units sold = Ending inventory units

Units Unit cost Total cost

Units from Inventory Purchased on the 9th nothing x nothing = nothing
Units from Inventory Purchased on the 29th nothing x nothing = nothing
Ending Inventory Units and Total Cost 57 nothing
Date: 10/09/19 Time: 22:49
29. A Gold Starr Sports outlet store began December 2018 with 43 pairs of running shoes that cost the store $36 each. The
sale price of these shoes was $70. During December, the store completed these inventory transactions:
1
(Click the icon to view the inventory transactions.)
Requirement 1. The preceding data are taken from the store's perpetual inventory records. Which cost method does the
store use? Explain how you arrived at your answer.
Gold Starr Sports uses FIFO .
This is apparent from the flow of costs out of inventory. For example, the December 13 sale shows unit cost of $36 ,
which came from the beginning inventory . This is how
FIFO, and only FIFO, works.
Requirement 2. Determine the store's cost of goods sold for December. Also compute gross profit for December.
The cost of goods sold is $ 3,258 .
The gross profit for December is $ 2,947 .
Requirement 3. What is the cost of the store's December 31 inventory of running shoes?
The cost of the company's inventory at December 31 is $ 2,290 .
1: Data Table
Units Unit Cost Unit Sales Price

Dec 2 Sale
................ 17 $ 36 $ 70
9 Purchase
................ 80 38
13 Sale
................ 26 36 70
18 Sale
................ 12 38 71
22 Sale
................ 33 38 71
29 Purchase
................ 24 40
2: Requirements
1. The data are taken from the store's perpetual inventory records. Which cost method does the store use? Explain
how you arrived at your answer.
2. Determine the store's cost of goods sold for December. Also compute gross profit for December.
3. What is the cost of the store's December 31 inventory of running shoes?
YOU ANSWERED: the December 8th purchase

LIFO, and only LIFO,
The cost of goods sold is $ 77 .
The gross profit for December is $ 8.
The cost of the company's inventory at December 31 is $ 8.
Date: 10/09/19 Time: 22:50
Air Force Surplus began October 2018 with 100 stoves that cost $15 each. During the month, the company made the following
purchases at cost:
1
(Click the icon to view the purchases.)
The company sold 338 stoves, and at October 31, the ending inventory consisted of 62 stoves. The sales price of each stove
was $45.
Requirement 1. Determine the cost of goods sold and ending inventory amounts for October under the average-cost, FIFO,
and LIFO costing methods. Round the average cost per unit to two decimal places, and round all other amounts to the nearest
dollar.
The average cost method3 is based on the average cost of inventory during the period. All of the units available for sale,
regardless of their purchase price, are given the same unit cost under this method. Before we calculate the average cost per
unit, we need to determine the cost of goods available. Use the table below to determine the units and cost of goods available
as well as the number of units in ending inventory and sold.
Qty Unit cost Total cost

Purchases Oct 6 120 x 25 = 3,000

Oct 18 130 x 30 = 3,900
Oct 26 50 x 32 = 1,600
Units and cost of goods available for sale 400 $ 10,000
Less: Units of ending inventory 62
Units sold 338
Using the calculations from the previous step, we can calculate the average cost per unit that will be assigned to each unit in
ending inventory and cost of goods sold.
$ 10,000 / 400 = $ 25
The average cost per unit you calculated above will be used to compute the cost of goods sold and ending inventory. Let's begin
with cost of goods sold.
$ 25.00 x 338 = $ 8,450
Now calculate ending inventory using the average cost method.

$ 25.00 x 62 = $ 1,550
26th.
know that Air Force Surplus sold a total of 338 units. After reviewing the given information, we can tell that the units sold would
have been comprised of all of the units in beginning inventory, all of the units from the purchase on the 6th, and a portion of the
units from the purchase on the 18th. Use the table below to assist you in determining the units sold and total cost of units sold
from the October 18th inventory layer, and the total cost of goods sold using the FIFO method
Date Inventory layer Units sold Cost Cost of goods sold

Oct 1 Beginning inventory 100 units x $ 15 = $ 1,500
18 Purchase 118 units x $ 30 = 3,540
$ 8,040
338
Now that we have calculated the cost of goods sold under the FIFO method, we can calculate the cost of ending inventory
under the FIFO method in one of two ways. Either approach will provide the same FIFO ending inventory value.
The first way is by rearranging the cost of goods sold formula4. We calculated the cost of goods available for sale above for the
average cost per unit calculation and we just calculated the cost of goods sold under the FIFO method in the preceding step.
Using this information and the rearranged cost of goods sold formula, we know that our ending inventory value under the FIFO
method will be equal to the cost of goods available for sale ($10,000) less the FIFO cost of goods sold ($8,040).
Ending inventory under the FIFO method will be assigned the most recent costs. So a second way to calculate FIFO ending
inventory is to apply those most recent costs to the units on hand. Because our ending inventory units (62) exceed the units
from the most recent (October 26rd) purchase (50), we will need to use two layers to calculate FIFO ending inventory. 50 units
will be assigned the unit costs from the October 26th purchase layer and the remaining units will be assigned the unit costs from
next most recent (the October 18th purchase) layer. Use the table below to calculate the FIFO ending ending inventory using
this approach.
Date Inventory layer Units on hand Cost Ending inventory

Oct 1 Beginning inventory 0 units x $ 15 = $ 0
$ 1,960
62
the period.
We know that the company sold 338 units of inventory. After reviewing the given information, we can tell that the units sold
would have been comprised of all of the units from the purchases on the 26th, the 18th and the 6th, and a portion of the units
from beginning inventory. Use the table below to assist you in determining the units sold and total cost of units sold from the
beginning inventory layer, and the total cost of goods sold using the LIFO method.


18 Purchase 130 units x $ 30 = 3,900
$ 9,070
338
Now that we have calculated the cost of goods sold under the LIFO method, we can calculate the cost of ending inventory
under the LIFO method in one of two ways. Either approach will provide the same LIFO ending inventory value.
The first way is by rearranging the cost of goods sold formula5 that we previously discussed. Using the rearranged formula we
know that our ending inventory value under the LIFO method will be equal to the cost of goods available for sale ($10,000) less
the LIFO cost of goods sold ($9,070).
Ending inventory under the LIFO method will be assigned the oldest costs. So a second way to calculate LIFO ending inventory
is to apply the oldest costs (in order) to the units on hand. We know that there are only 62 stoves in the company's ending
inventory. Since we are assigning the oldest costs to ending inventory, we look to the beginning inventory level first. We know
there were 100 units at the beginning of the period. Since the number of units in ending inventory is less than the number of
units in the beginning inventory layer, we can assign the beginning unit cost to each of the ending units. (Notice that 100 minus
the 38 units assigned to cost of goods sold above equals the 62 units left in ending inventory.) Use the table below to calculate
the LIFO ending ending inventory using this approach.

$ 930
62
Requirement 2. Explain why cost of goods sold is highest under LIFO. Be specific.
In periods where the cost of inventory is rising, FIFO produces the lowest cost of goods sold because the method presumes that
the oldest units (i.e., the lowest cost units) are sold first. Ending inventory has the highest value under this method as it is
valued at the cost of the most recent purchases. In contrast, LIFO has the highest cost of goods sold because the items sold
are presumed to have been the units most recently purchased. Weighted average cost will fall somewhere between FIFO and
LIFO for both cost of goods sold and ending inventory.
Requirement 3. Prepare Air Force Surplus' income statement for October. Report gross profit. Operating expenses totaled
$2,750. The company uses the average costing for inventory. The income tax rate is 32%.
Begin by selecting the appropriate accounts and subtotals. Recall the important subtotals we want displayed and the proper
presentation of a multi-step income statement.
Air Force Surplus

Income Statement
Month Ended October 31, 2018
Sales revenue
Cost of goods sold

Gross profit
Operating expenses
Income before income taxes
Income tax expense
Net income
Now, enter the amounts through the income before income taxes line. The weighted average cost of goods sold amount you
calculated above has been entered for you. Note that you have been given the sales price of each unit to calculate the
total sales6.
Air Force Surplus

Income Statement
Gross profit 6,760
Income before income taxes 4,010
Income tax expense
Net income
Let's calculate income tax expense now: (Round your answer to the nearest whole dollar.)
Income before
income taxes x Income tax rate % = Income tax expense
$ 4,010 x 32 % = $ 1,283
Complete the income statement.
Air Force Surplus

Income Statement
Gross profit 6,760
$ 2,727
Net income
1: Data Table
October 6 120 stoves @ $25 = $ 3,000

18 130 stoves @ $30 = 3,900
26 50 stoves @ $32 = 1,600
2: Requirements
1. Determine the cost of goods sold and ending inventory amounts for October under the average-cost, FIFO, and LIFO
costing methods. Round the average cost per unit to two decimal places, and round all other amounts to the nearest
dollar.
2. Explain why cost of goods sold is highest under LIFO. Be specific.
3. Prepare the Air Force Surplus income statement for October. Report gross profit. Operating expenses totaled $2,750. The
company uses average costing for inventory. The income tax rate is 32%.
3: Definition
Also called the weighted-average method.
4: Definition
Ending Inventory = Cost of Goods Available for Sale − Cost of Goods Sold
5: Definition
Ending Inventory = Cost of Goods Available for Sale − Cost of Goods Sold
6: Definition
Sales revenue = 338 x $45 = ?
YOU ANSWERED: Qty Unit cost Total cost

Beginning inventory nothing x nothing = nothing
Purchases Oct 6 120 x 25 = 3,000
Oct 18 130 x 30 = 3,900
Oct 26 50 x 32 = 1,600
Units and cost of goods available for sale nothing nothing

Less: Units of ending inventory nothing
Units sold nothing
$ 10,000 / 400 = nothing
$ 25.00 x 338 = nothing

$ 25.00 x 62 = nothing

Oct 1 Beginning inventory nothing units x nothing = nothing
nothing
338

nothing
62

Oct 1 Beginning inventory nothing units x $ 15 = nothing
nothing
338

Oct 1 Beginning inventory nothing units x $ 15 = nothing
nothing
62
Air Force Surplus

Income Statement
nothing
nothing
nothing
nothing
nothing
nothing
Net income
Air Force Surplus

Income Statement
Income before income taxes nothing
Income tax expense
Net income
Income before
income taxes x Income tax rate % = Income tax expense
$ 4,010 x nothing % = nothing
Air Force Surplus

Income Statement
Gross profit 6,760
nothing
Net income
Date: 10/09/19 Time: 22:50
The records of Lovett Aviation include the following accounts for inventory of aviation parts at July 31 of the current year:
1
(Click the icon to view the records.)
Before we can prepare the income statements, we must calculate the cost of goods sold under each method.
The average cost method3 is based on the average cost of inventory during the period. All of the units available for sale,
regardless of their purchase price, are given the same unit cost under this method. Before we calculate the average cost per
unit, we need to determine the cost of goods available. Use the table below to determine the units and cost of goods available
as well as the number of units in ending inventory and sold.
Qty Unit cost Total cost

Beginning inventory Aug 1 800 x $ 7.00 = $ 5,600
Purchases Nov 5 500 x $ 7.10 = 3,550
Jan 24 8,100 x $ 7.50 = 60,750
Apr 8 600 x $ 8.50 = 5,100
Units and cost of goods available for sale 10,000 $ 75,000
Less: Units of ending inventory 950
Units sold 9,050
Using the calculations from the previous step, we can calculate the average cost per unit that will be assigned to each unit in
cost of goods sold. (Round the average cost per unit to two decimal places.)
$ 75,000 / 10,000 = $ 7.50
Now calculate the cost of goods sold under the average cost method.

$ 7.50 x 9,050 = $ 67,875
Let's now calculate the cost of goods sold under the FIFO method. Remember, the first units in will be the first units sold.
Determine the amount of units sold from the last layer. This amount will be the difference between the total units sold, and the
units sold from beginning inventory and the first purchase.
Unit sold x Unit Cost = Cost of goods sold

Beginning inventory 800 x $ 7.00 = $ 5,600
Purchases Nov 5 500 x 7.10 = 3,550
Jan 24 7,750 x 7.50 = 58,125
Units sold and FIFO COGS 9,050 $ 67,275
To determine the LIFO values of cost of goods sold, the FIFO table will have to be slightly modified. Remember, under LIFO the
units sold are assigned the most recent cost, leaving the oldest costs in inventory. So you need to determine how much of the
most recent beginning inventory layer was sold and should be included in the cost of goods sold. (Round total cost per inventory
layer and total cost of goods sold to the nearest whole dollar.)

Purchases Nov 5 350 x $ 7.10 = $ 2,485
Jan 24 8,100 x 7.50 = 60,750
Apr 8 600 x 8.50 = 5,100
Units sold and LIFO COGS 9,050 $ 68,335
Requirement 1. Prepare a partial income statement through gross profit under the average, FIFO, and LIFO methods. Round
average cost per unit to two decimal places and all other amounts to the nearest dollar.
First determine the statement labels to report the gross profit.
Lovett Aviation
Partial Income Statement
Year Ended July 31
Sales revenue
Cost of goods sold
Gross profit
Now determine the sales revenue. Remember that the amount of sales revenue will be the same under each method because it
is not affected by the choice of inventory method. The cost of goods sold amounts that were calculated above have been
entered for you.
Lovett Aviation
Partial Income Statement
Year Ended July 31
Average cost FIFO LIFO
Sales revenue $ 130,320 $ 130,320 $ 130,320
Gross profit $ 62,445 $ 63,045 $ 61,985
Requirement 2. Which inventory method would you use to minimize income tax? Explain why this method causes income tax
to be the lowest.
In order to achieve the lowest income tax, we need the inventory method that would produce the lowest net income, and
therefore the highest cost of goods sold. Review the partial income statements you prepared and determine which method
results in the highest cost of goods sold.
Remember that in periods where the cost of inventory is rising, FIFO produces the highest gross profit (and thus the highest net
income before taxes) because the method presumes that the oldest units (i.e., the lowest cost units) are sold first. Ending
inventory has the highest value under this method as it is valued at the cost of the most recent purchases. In contrast, LIFO has
the lowest gross profit and highest cost of goods sold (and thus the lowest net income before taxes) because the items sold are
presumed to have been the units most recently purchased.
1: Data Table
Inventory
Aug 1 Balance 800 units @ $ 7.00 $ 5,600

Nov 5 Purchase 500 units @ $ 7.10 3,550
Jan 24 Purchase 8,100 units @ $ 7.50 60,750
Apr 8 Purchase 600 units @ $ 8.50 5,100
Sales Revenue
Jul 31 9,050 units $130,320
2: Requirements
1. Prepare a partial income statement through gross profit under the average, FIFO, and LIFO methods. Round average cost
per unit to two decimal places and all other amounts to the nearest dollar.
2. Which inventory method would you use to minimize income tax? Explain why this method causes income tax to be the
lowest.
3: Definition
Also called the weighted-average method.
YOU ANSWERED: Qty Unit cost Total cost

Beginning inventory Aug 1 800 x $ 7.00 = $ 5,600
Purchases Nov 5 500 x $ 7.10 = 3,550
Jan 24 8,100 x $ 7.50 = 60,750
Apr 8 600 x $ 8.50 = 5,100
Units and cost of goods available for sale nothing nothing

Less: Units of ending inventory nothing
Units sold nothing

$ 7.50 x 9,050 = nothing

Beginning inventory nothing x nothing = nothing
Purchases Nov 5 nothing x nothing = nothing
Jan 24 nothing x nothing = nothing
Units sold and FIFO COGS 9,050 nothing

Purchases Nov 5 nothing x $ 7.10 = nothing
Jan 24 nothing x 7.50 = nothing
Apr 8 nothing x nothing = nothing
Units sold and LIFO COGS 9,050 nothing
nothing
nothing
Gross profit
Average cost
nothing
67,875
nothing
FIFO
$ 130,320
67,275
nothing
LIFO
$ 130,320
68,335
nothing
Date: 10/09/19 Time: 22:51
Better Buy Company purchases inventory in crates of Cash payments on account totaled $7,412,000. During fiscal
merchandise; each crate of inventory is a unit. The fiscal year year 2018, the store sold 150,000 units of merchandise for
of Better Buy ends each January 31. Assume you are dealing $15,375,000, of which $5,500,000 was for cash and the
with a single Better Buy store in Jackson, Mississippi. The balance was on account. Better Buy and all of its stores use
Jackson store began the year with an inventory of 23,000 units the average-cost method for inventories. The Jackson store's
that cost a total of $1,219,000. During the year, the store operating expenses for the year were $3,750,000. It paid 70%
purchased merchandise on account as follows: in cash and accrued the rest as accrued liabilities. The store
1
(Click the icon to view the purchases.) accrued income tax at the rate of 40%.
Requirement 1. Make summary journal entries to record the store's transactions for the year ended January 31, 2018.
Better Buy and all of its stores use a perpetual inventory system. Round average cost per unit to two decimal places and round
all other amounts to the nearest dollar.
Let's start with the entry to record the purchases.
Remember that the store purchased merchandise on account. Recall that "on account" means that the company has not yet
paid cash for the purchase. To record this transaction, we will increase Inventory and Accounts Payable. (Record debits first,
then credits. Exclude explanations from any journal entries.)
Journal Entry
Next, record the cash payments on account for $7,412,000.
To record this transaction, we will decrease Accounts Payable and Cash for the amount of the payment.
Journal Entry
Jan 31 Accounts Payable 7,412,000
Cash 7,412,000
Now record the sale of merchandise for $15,375,000, of which $5,500,000 was for cash and the balance was on account.
To record this entry, we must increase cash by the amount of cash received and the difference3 between the cash received and
the sale amount will increase Accounts Receivable. (Do not record the cost related to the sale. We will do this in the next journal
entry.)
Journal Entry
Jan 31 Cash 5,500,000
Inventory costs shift from an asset to an expense when the seller delivers the goods to the buyer. In order to record the
expense, we need to calculate the cost of goods sold associated with the sale.
Recall that Better Buy uses the average cost method for inventories. The average-cost method, sometimes called the
weighted-average method, is based on the average cost of inventory during the period. Before we can calculate the cost of
goods sold under the average-cost method, we must first determine the average cost per unit of inventory by dividing the
cost of goods available4 by the number of units available5. Calculate the average cost per unit of inventory now. (Round the
average cost per unit to the nearest cent.)
$ 8,959,000 / 157,000 = $ 57.06
Now, using the average cost per unit that you determined above, calculate the cost of inventory sold during the year.
150,000 x $ 57.06 = $ 8,559,000
Now, let's record the cost related to the sales.
To record this entry, we must shift the cost of the inventory sold that you calculated in the preceding step from the Inventory
account to the Cost of Goods Sold account.
Journal Entry
Jan 31 Cost of Goods Sold 8,559,000
Inventory 8,559,000
Now record the $3,750,000 operating expenses for the year. Better Buy paid 70% in cash and accrued the rest as accrued
liabilities.
To record this entry, we must increase Operating Expenses by $3,750,000, decrease Cash by the amount paid cash6 and
increase Accrued Liabilities for the rest7. (Round your final answers to the nearest whole dollar.)
Journal Entry
Jan 31 Operating Expenses 3,750,000
Cash 2,625,000
Accrued Liabilities 1,125,000
Record the entry to accrue income tax.
Before calculating income tax expense you need to determine the income before income tax expense8. The total sales for the
year has been given to us, $15,375,000, and we previously calculated cost of goods sold, $8,559,000. We also know that
operating expenses were $3,750,000 for the year. Let's calculate income tax expense now. (Round your final answers to the
expense x Income tax rate = Income tax expense
$ 3,066,000 x 40 % = $ 1,226,400
Finally, record the entry to accrue income tax expense. To record this entry, we must increase Income Tax Expense and Income
Tax Payable by the amount you calculated in the preceding step.
Journal Entry
Jan 31 Income Tax Expense 1,226,400
Requirement 2. Prepare a T-account to show the activity in the Inventory account.
Post the beginning balance and activity to the T-account and calculate the ending inventory balance. Post the entries you made
above that effect the inventory account and calculate the ending balance. Remember, if an account is debited in a journal entry,
it is debited in the T-account. (Abbreviation used: COGS = cost of goods sold.)
9
(Click the icon to view the completed journal entries.)
Inventory
Beg Bal 1,219,000
Purchases 7,740,000 COGS 8,559,000
End Bal 400,000
Requirement 3. Prepare the store's income statement for the year ended January 31, 2018. Show totals for the gross profit,
income before tax and net income.
Let's begin by selecting the income statement labels.
Better Buy Store in Jackson

Income Statement
Sales revenue
Cost of goods sold

Gross profit
Operating expenses
Income before income tax expense
Income tax expense
Net income (loss)
Now, using the journal entries you prepared above, enter the amounts in the income statement and calculate the appropriate
subtotals.

Income Statement
Sales revenue $ 15,375,000
Cost of goods sold 8,559,000
Gross profit 6,816,000
Operating expenses 3,750,000
Income before income tax expense 3,066,000
Income tax expense 1,226,400
$ 1,839,600
Net income (loss)
1: Data Table
.Jul
. . (28,000
. . . . . . .units
. . . . at
. . $52)
................... $ 1,456,000
.Nov
. . . (48,000
. . . . . . .units
. . . . at
. . $56)
.................. 2,688,000
.Dec
. . . (58,000
. . . . . . .units
. . . . at
. . $62)
.................. 3,596,000
Total.purchases
............................... $ 7,740,000
2: Requirements
1. Make summary journal entries to record the store's transactions for the year ended January 31, 2018. Better Buy and all
of its stores use a perpetual inventory system. Round average cost per unit to two decimal places and round all other
amounts to the nearest dollar.
2. Prepare a T-account to show the activity in the Inventory account.
3. Prepare the store's income statement for the year ended January 31, 2018. Show totals for gross profit, income before
tax, and net income.
3: Definition
Accounts receivable = $15,375,000 - $5,500,000 = ?
4: Definition
Cost of goods available = $1,219,000 + $7,740,000 = ?
5: Definition
Number of units available = 23,000 + 28,000 + 48,000 + 58,000 = ?
6: Definition
7: Definition
8: Definition
Income before income tax expense = $15,375,000 - $8,559,000 - $3,750,000 = ?
9: Reference
Journal Entry

Cash 7,412,000
Cash 5,500,000
Cost of Goods Sold 8,559,000

Inventory 8,559,000
Operating Expenses 3,750,000

Cash 2,625,000
Accrued Liabilities 1,125,000
Income Tax Expense 1,226,400


Journal Entry
Journal Entry
nothing x $ 57.06 = nothing
Journal Entry

Journal Entry
Income before income tax expense x Income tax rate = Income tax expense
Journal Entry
Inventory


Income Statement
nothing
nothing
nothing
nothing
nothing
nothing
Net income (loss)

Income Statement
Cost of goods sold nothing
Income before income tax expense nothing
Income tax expense nothing
nothing
Net income (loss)

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10/9/2019 BUSAC 186 5818 FALL 2019 ONLINE-Hira Malik

A. net realizable value.

Number of units of Sale price per unit

Number of units of Cost per unit Cost of goods

Sales revenue - Cost of goods sold = Gross profit

YOU ANSWERED: Number of units of Sale price per unit

Number of units of Cost per unit Cost of goods

Sales revenue - Cost of goods sold = Gross profit

Journalize the sale.

Record the cost of goods sold portion of the sale.

Record the collection of 25% of the accounts receivable.

Determine what the company will report on the balance sheet:

Determine what the company will report on the income statement:

Cost of goods sold 93,750

Gross profit $ 75,000

YOU ANSWERED: Journal

Use the following data of Seaspray Company:

Seaspray's total cost of goods available for sale would be:

Units Unit Cost Total Cost

Purchases 43 125 5,375

YOU ANSWERED: Units Unit Cost Total Cost

Purchases 43 125 5,375

Use the following data of Stingray Company:

Inventory Number of units x Cost per unit = Subtotal cost

Purchased 33 x 125 = 4,125

Units sold x Cost per unit = Cost of goods sold

Purchased 33 x 125 = 4,125

Units sold x Cost per unit = Cost of goods sold

Use the following data of Sunspot Company:

Sunspot's ending inventory using the FIFO method would be:

Units x Unit Cost = Total Cost

Purchase on July 3 25 x 135 = 3,375

Cost of goods available for sale $ 5,625

Units x Unit Cost = Total Cost

Purchase on July 3 22 x 135 = 2,970

Less: Total cost of goods sold $ 5,220

Units x Unit Cost = Total Cost

Purchase on July 3 25 x 135 = 3,375

Cost of goods available for sale $ 5,625

Purchase on July 3 22 x 135 = 2,970

Less: Total cost of goods sold $ (5,220)

Ending inventory $ 405

YOU ANSWERED: Units x Unit Cost = Total Cost

Purchase on July 3 25 x 135 = 3,375

Cost of goods available for sale nothing

Units x Unit Cost = Total Cost

Purchase on July 3 nothing x 135 = nothing

Less: Total cost of goods sold nothing

Units x Unit Cost = Total Cost

Purchase on July 3 25 x 135 = 3,375

Cost of goods available for sale $ 5,625

Purchase on July 3 22 x 135 = 2,970

Less: Total cost of goods sold $ (5,220)

Ending inventory nothing

Use the following data of Beeline Company:

Units x Unit Cost = Total Cost

Beginning inventory 22 x 110 = 2,420

Total cost of goods sold $ 6,710

YOU ANSWERED: Units x Unit Cost = Total Cost

Beginning inventory nothing x 110 = nothing

Total cost of goods sold nothing

Purchase price of the inventory $ 315,000

Plus: Freight in 4,000