Reporting and Analyzing Inventory
FOR INSTRUCTOR USE ONLY
6-61
Solution 207 (Cont.)
(c) There are 120 units in ending inventory. They are comprised of the first units purchased
when LIFO is assumed.
3/1 100 @ $40 = $4,000
3/3 20 @ $50 = 1,000
120 units $5,000 = Ending inventory
Ex. 208
Torrey Company uses the periodic inventory system to account for inventories. Information
related to Torrey Company’s inventory at October 31 is given below:
October 1 Beginning inventory 400 units @ $10.00 = $ 4,000
8 Purchase 800 units @ $10.40 = 8,320
16 Purchase 600 units @ $10.80 = 6,480
24 Purchase 200 units @ $11.60 = 2,320
Total units and cost 2,000 units $21,120
Instructions
1. Show computations to value the ending inventory using the FIFO cost assumption if 500 units
remain on hand at October 31.
2. Show computations to value the ending inventory using the weighted-average cost method if
500 units remain on hand at October 31.
3. Show computations to value the ending inventory using the LIFO cost assumption if 500 units
remain on hand at October 31.
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
FOR INSTRUCTOR USE ONLY
6-62
Ex. 209
Hanlin Company uses the periodic inventory system to account for inventories. Information
related to Hanlin Company’s inventory at January 31 is given below:
January 1 Beginning inventory 400 units @ $12.00 = $ 4,800
8 Purchase 800 units @ $12.40 = 9,920
16 Purchase 600 units @ $12.80 = 7,680
24 Purchase 200 units @ $13.20 = 2,640
Total units and cost 2,000 units $25,040
Instructions
1. Show computations to value the ending inventory using the FIFO cost assumption if 600 units
remain on hand at January 31.
2. Show computations to value the ending inventory using the weighted-average cost method if
600 units remain on hand at January 31.
3. Show computations to value the ending inventory using the LIFO cost assumption if 600 units
remain on hand at January 31.
Reporting and Analyzing Inventory
FOR INSTRUCTOR USE ONLY
6-63
Ex. 210
Johnson Company reports the following for the month of June.
Date
Explanation
Units
Unit Cost
Total Cost
June 1
Inventory
225
$5
$1,125
12
Purchase
525
6
3,150
23
Purchase
750
7
5,250
30
Inventory
280
(a) Compute the cost of the ending inventory and the cost of goods sold under (1) FIFO, (2)
LIFO, and (3) average cost.
(b) Which costing method gives the highest ending inventory? The highest cost of goods sold?
Why?
(c) How do the average-cost values for ending inventory and cost of goods sold relate to ending
inventory and cost of goods sold for FIFO and LIFO?
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
FOR INSTRUCTOR USE ONLY
6-64
Solution 210 (Cont.)
Ex. 211
Wolf Camera Shop Inc. uses the lower-of-cost-or-market basis for its inventory. The following
data are available at December 31.
Market
Units
Cost/Unit
Value/Unit
Cameras
Minolta
5
$175
$168
Canon
7
148
152
Light Meters
Vivitar
15
125
119
Kodak
10
120
135
Instructions
What amount should be reported on Wolf Camera Shop’s financial statements, assuming the
lower-of-cost-or-market rule is applied?
Ex. 212
This information is available for Groneman, Inc. for 2013 and 2014.
(in millions)
2013
2014
Beginning inventory
$ 2,290
$ 2,522
Ending inventory
2,522
2,618
Cost of goods sold
24,351
23,099
Sales
43,251
43,232
Instructions
Calculate the inventory turnover, days in inventory, and gross profit rate for Groneman., Inc. for
2013 and 2014. Comment on any trends.
Reporting and Analyzing Inventory
FOR INSTRUCTOR USE ONLY
6-65
Ex. 213
Burnham Company reported the following summarized annual data at the end of 2014:
Sales revenue $1,600,000
Cost of goods sold* 900,000
Gross margin 700,000
Operating expenses 400,000
Income before income taxes $ 300,000
*Based on an ending FIFO inventory of $250,000.
The income tax rate is 30%. The controller of the company is considering a switch from FIFO to
LIFO. He has determined that on a LIFO basis, the ending inventory would have been $205,000.
Instructions
(a) Restate the summary information on a LIFO basis.
(b) What effect, if any, would the proposed change have on Burnham’s income tax expense, net
income, and cash flows?
(c) If you were an owner of this business, what would your reaction be to this proposed change?
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
FOR INSTRUCTOR USE ONLY
6-66
Solution 213 (Cont.)
Ex. 214
The following information is available from the annual reports of Young and Olde:
(Amounts in millions)
Young Olde
2014 ending Inventory $ 6,031 $ 4,816
2013 ending inventory 6,162 5,044
Cost of goods sold 25,937 31,983
Sales revenue 29,656 36,704
2014 LIFO reserve 227 —
2013 LIFO reserve 225 —
Instructions
(a) Calculate the inventory turnover and days in inventory for both companies.
(b) Calculate Young’s inventory turnover after adjusting for the LIFO reserve. Young uses the
LIFO inventory method.
(c) What conclusion concerning the management of inventory can be drawn from these data?
Reporting and Analyzing Inventory
FOR INSTRUCTOR USE ONLY
6-67
Solution 214 (Cont.)
Ex. 215
The following information is available for Wallace Company for 2014. Wallace uses the LIFO
inventory method.
Beginning inventory $ 600,000
Ending inventory 700,000
Beginning LIFO reserve 200,000
Ending LIFO reserve 300,000
Cost of goods sold 5,980,000
Sales 8,000,000
Instructions
(a) Calculate the inventory turnover and days in inventory for Wallace Company based on LIFO.
(b) Calculate the inventory turnover and days in inventory after adjusting for the LIFO reserve.
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
6-68
Solution 215 (Cont.)
*Ex. 216
Woodson Company sells many products. Gizmo is one of its popular items. Below is an analysis
of the inventory purchases and sales of Gizmo for the month of March. Woodson Company uses
the perpetual inventory system.
Purchases Sales
Units Unit Cost Units Selling Price/Unit
3/1 Beginning inventory 100 $40
3/3 Purchase 60 $50
3/4 Sales 60 $80
3/10 Purchase 200 $55
3/16 Sales 90 $90
3/19 Sales 70 $90
3/25 Sales 60 $90
3/30 Purchase 40 $60
Instructions
(a) Using the FIFO assumption, calculate the amount charged to cost of goods sold for March.
(Show computations)
(b) Using the LIFO assumption, calculate the amount assigned to the inventory on hand on
March 31. (Show computations)
Reporting and Analyzing Inventory
FOR INSTRUCTOR USE ONLY
6-69
*Solution 216 (Cont.)
*Ex. 217
Grayson Company sells many products. Gizmo is one of its popular items. Below is an analysis of
the inventory purchases and sales of Gizmo for the month of March. Grayson Company uses the
perpetual inventory system.
Purchases Sales
Units Unit Cost Units Selling Price/Unit
3/1 Beginning inventory 100 $55
3/3 Purchase 60 $60
3/4 Sales 60 $120
3/10 Purchase 200 $65
3/16 Sales 90 $130
3/19 Sales 70 $130
3/25 Sales 50 $130
3/30 Purchase 40 $75
Instructions
(a) Using the FIFO assumption, calculate the amount charged to cost of goods sold for March.
(Show computations)
(b) Using the FIFO assumption, calculate the value of ending inventory for March.
(c) Using the moving average cost method, calculate the amount assigned to the inventory on
hand on March 31. (Show computations)
(d) Using the LIFO assumption, calculate the amount assigned to the inventory on hand on
March 31. (Show computations)
(e) Using the LIFO assumption, calculate the amount charged to cost of goods sold for March.
(Show computations)
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
FOR INSTRUCTOR USE ONLY
6-70
Reporting and Analyzing Inventory
6-71
*Ex. 218
Plato Company reports the following for the month of June.
Date
Explanation
Units
Unit Cost
Total Cost
June 1
Inventory
225
$5
$1,125
12
Purchase
525
6
3,150
23
Purchase
750
7
5,250
30
Inventory
330
Instructions
(a) Calculate the cost of the ending inventory and the cost of goods sold for each cost flow
assumption, using a perpetual inventory system. Assume a sale of 570 units occurred on
June 15 for a selling price of $8 and a sale of 600 units on June 27 for $9. (Note: For the
average-cost method, round unit cost to three decimal places.)
(b) Why is the average unit cost not $6 [($5 + $6 + $7) 3 = $6]?
Date
June 12
(525 @ $6) $3,150
(225 @ $5)
June 15
(225 @ $5)
June 23
(750 @ $7) $5,250
(180 @ $6)
June 27
(180 @ $6)
Date
June 12
(525 @ $6) $3,150
(225 @ $5)
June 15
(525 @ $6)
June 23
(750 @ $7) $5,250
(180 @ $5)
(180 @ $5)
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
FOR INSTRUCTOR USE ONLY
6-72
*Solution 218 (Cont.)
*Ex. 219
Carter Company reported these income statement data for a 2-year period.
2014
2013
Sales
$250,000
$210,000
Beginning inventory
40,000
30,000
Cost of goods purchased
202,000
173,000
Cost of goods available for sale
242,000
203,000
Ending inventory
50,000
40,000
Cost of goods sold
192,000
163,000
Gross profit
$ 58,000
$ 47,000
Carter Company uses a periodic inventory system. The inventories at January 1, 2013, and
December 31, 2014, are correct. However, the ending inventory at December 31, 2013, is
overstated by $4,000.
Instructions
(a) Prepare correct income statement data for the 2 years.
(b) What is the cumulative effect of the inventory error on total gross profit for the 2 years?
Reporting and Analyzing Inventory
FOR INSTRUCTOR USE ONLY
6-73
Solution 219 (15 min.)
*Ex. 220
For each of the independent events listed below, analyze the impact on the indicated items at the
end of the current year by placing the appropriate code letter in the box under each item.
Code: O = item is overstated
U = item is understated
NA = item is not affected
Items
Stockholders’ Cost of Net
Events Assets Equity Goods Sold Income
1. The ending inventory in the previous period
was overstated.
_______________________________________________________________________________________________________________________
2. A physical count of goods on hand at the
end of the current year resulted in some
goods being counted twice.
_______________________________________________________________________________________________________________________
3. Goods purchased on account in December
of the current year and shipped FOB
shipping point were recorded as purchases,
but were not included in the count of goods
on hand on December 31 because they had
not arrived by December 31.
_______________________________________________________________________________________________________________________
4. Goods purchased on account in December
of the current year and shipped FOB
destination were recorded as purchases, but
were not included in the count of goods on
hand on December 31 because they had not
arrived by December 31.
_______________________________________________________________________________________________________________________
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
FOR INSTRUCTOR USE ONLY
6-74
*Ex. 220 (Cont.)
5. The internal auditors discovered that the
ending inventory in the previous period was
understated $15,000 and that the ending
inventory in the current period was
overstated $25,000.
*Ex. 221
Condensed income statements for Swift Corporation are shown below for two years.
2013 2014
Sales $75,000 $90,000
Cost of Goods Sold 45,000 54,000
Gross Profit $30,000 $36,000
Operating Expense 15,000 15,000
Net Income $15,000 $21,000
Compute the corrected net income for 2013 and 2014 assuming that the inventory as of the end
of 2013 was mistakenly understated by $7,000.
2013 $ __________ 2014 $__________