Chapter 06 – Inventories and Cost of Sales
Chapter 6
Inventories and Cost of Sales
QUESTIONS
1. (a) FIFO: The cost of the first (earliest) items purchased in inventory flow to cost of
2. Merchandise inventory is disclosed on the balance sheet as a current asset. It is
3. Incidental costs sometimes are ignored in computing the cost of inventory because
4. LIFO will result in the lower cost of goods sold when costs are declining because it
5. The full-disclosure principle requires that the nature of the accounting change, the
6. No; changing the inventory method each period would violate the accounting
7. No; the consistency concept does not preclude changes in accounting methods from
8. Many people make important business decisions based on period-to-period
fluctuations in a company’s financial numbers, including gross profit and net
6-365
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Chapter 06 – Inventories and Cost of Sales
9. An inventory error that causes an understatement (or overstatement) for net income
in one accounting period, if not corrected, will cause an overstatement (or
10. Market usually means replacement cost of inventory when applied in the LCM.
11. The accounting constraint of conservatism guides preparers of accounting reports to
13.BFor interim reporting, companies can estimate costs of goods sold and ending
15. Cost of goods available for sale equals ending inventory plus cost of sales. As of
16. Cost of goods available for sale equals ending inventory plus cost of sales. As of
December 31, 2013, this is computed as (in KRW millions):
17. Merchandise inventory (in KRW millions) comprises 17.3% (computed as
6-366
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Chapter 06 – Inventories and Cost of Sales
QUICK STUDIES
Quick Study 6-1 (10 minutes)
Units in ending inventory
Units stored in basement…………………………….. 1,300 units
Quick Study 6-2 (10 minutes)
Cost……………………………………………………………$14,000
Plus
The $150 advertising cost and the $1,250 cost for sales staff salaries are
included in operating expenses—not part of inventory costs. Those two
costs are not necessary to get the vehicle in a place and condition for sale.
Quick Study 6-3 (10 minutes)
Beginning inventory……………………………… 10 units @ $60 $ 600
Plus
1st week purchase………………………………… 10 units @ $61 610
6-367
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Chapter 06 – Inventories and Cost of Sales
Quick Study 6-4 (10 minutes)
FIFO—Perpetual
Date Goods Purchased Cost of Goods Sold Inventory Balance
1/1 320 @ $3.00 = $ 960.00
1/9 80 @ $3.20 320 @ $3.00
Alternate solution format
Quick Study 6-5 (10 minutes)
LIFO—Perpetual
Date Goods Purchased Cost of Goods Sold Inventory Balance
1/1 320 @ $3.00 = $ 960.00
1/9 80 @ $3.20 320 @ $3.00
80 @ $3.20 = $1,216.00
Alternate solution format
6-368
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
}
Chapter 06 – Inventories and Cost of Sales
Quick Study 6-6 (10 minutes)
Weighted Average—Perpetual
Date Goods Purchased Cost of Goods Sold Inventory Balance
1/1 320 @ $3.00 = $ 960.00
1/9 80 @ $3.20 320 @ $3.00
Alternate solution format
Weighted average:
320 @ $3.00 = $ 960.00
Quick Study 6-7A (10 minutes)
Ending Cost of
FIFO—Periodic Inventory Goods Sold
FIFO
Quick Study 6-8A (10 minutes)
Ending Cost of
LIFO—Periodic Inventory Goods Sold
LIFO
6-369
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Chapter 06 – Inventories and Cost of Sales
6-370
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Chapter 06 – Inventories and Cost of Sales
Quick Study 6-9A (10 minutes)
Ending Cost of
Weighted Average—Periodic Inventory Goods Sold
Weighted Average ($1,550/ 500 = $3.10 cost per unit)
Quick Study 6-10 (25 minutes)
FIFO—Perpetual
Date Goods Purchased Cost of Goods Sold Inventory Balance
12/ 7 10 @ $ 6 = $ 60 10 @ $ 6 = $ 60.00
Quick Study 6-11
LIFO—Perpetual
Date Goods Purchased Cost of Goods Sold Inventory Balance
12/7 10 @ $ 6 = $ 60 10 @ $ 6 = $ 60
6-371
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Chapter 06 – Inventories and Cost of Sales
Quick Study 6-12
Weighted Average—Perpetual
Date Goods Purchased Cost of Goods Sold Inventory Balance
12/7 10 @ $6 = $60 10 @ $6 = $ 60
Quick Study 6-13
Specific Identification—Perpetual
Ending inventory under specific identification:
Quick Study 6-14A (10 minutes)
Ending Cost of
FIFO—Periodic Inventory Goods Sold
FIFO
6-372
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Chapter 06 – Inventories and Cost of Sales
Quick Study 6-15A (10 minutes)
Ending Cost of
LIFO—Periodic Inventory Goods Sold
LIFO
Quick Study 6-16A (10 minutes)
Ending Cost of
Weighted Average—Periodic Inventory Goods Sold
*If unit cost is not rounded, then ending inventory is $340 and cost of goods sold is $170.
Quick Study 6-17A (10 minutes)
Ending Cost of
Specific Identification—Periodic Inventory Goods Sold
Specific Identification
Quick Study 6-18 (10 minutes)
1.LIFO
3.LIFO
Quick Study 6-20 (15 minutes)
a.Overstates 2015 cost of goods sold.
b.Understates 2015 gross profit.
Quick Study 6-21 (10 minutes)
Inventory turnover = Cost of goods sold/Average merchandise inventory
Days’ sales in inventory = Ending Inventory/Costs of goods sold x 365
6-374
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.