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
the expense of tracking such costs on a precise basis can outweigh the benefits
4. LIFO will result in the lower cost of goods sold when costs are declining because it
assigns the most recent, lower cost purchases to cost of goods sold.
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
concept of consistency.
7. No; the consistency concept does not preclude changes in accounting methods
8. Many people make important business decisions based on period-to-period
fluctuations in a company’s financial numbers, including gross profit and net
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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
12. Factors that contribute to inventory shrinkage are breakage, loss, deterioration,
decay, and theft.
15. Cost of goods available for sale equals ending inventory plus cost of sales. As of
September 28, 2013, this is computed as ($ millions):
Ending Inventory of $1,764 + Cost of Sales of $106,606 = $108,370
16. Cost of goods available for sale equals ending inventory plus cost of sales. As of
17. Merchandise inventory (in KRW millions) comprises 17.3% (computed as
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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
Less damaged (unsalable) units……………..….…. (20)
Quick Study 6-2 (10 minutes)
Cost………………………………..….…….….…….…….…$14,000
Plus
Transportation-in……………………..….….…….….. 250
The $150 advertising cost and the $1,250 cost for sales staff salaries are
Quick Study 6-3 (10 minutes)
Beginning inventory……………..….….…….….. 10 units @ $60 $ 600
Plus
1st week purchase………………………….….….. 10 units @ $61 610
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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
80 @ $3.20 = $1,216.00
Alternate solution format
FIFO: 100 @ $3.34 = $ 334.00
50 @ $3.20 = 160.00
150 $ 494.00 Ending inventory cost
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
Alternate solution format
LIFO: 150 @ $3.00 = $ 450.00 Ending inventory cost
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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
80 @ $3.20 = $1,216.00
(avg. cost is $3.04)
Alternate solution format
Weighted average:
320 @ $3.00 = $ 960.00
150 units @ $3.10 = $ 465.00 Ending inventory cost
Quick Study 6-7A (10 minutes)
Ending Cost of
FIFO—Periodic Inventory Goods Sold
Quick Study 6-8A (10 minutes)
Ending Cost of
LIFO—Periodic Inventory Goods Sold
LIFO
(150 x $3.00)…………………………..….…….….…….…$450.00
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Chapter 06 – Inventories and Cost of Sales
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Chapter 06 – Inventories and Cost of Sales
Quick Study 6-9A (10 minutes)
Ending Cost of
Weighted Average—Periodic Inventory Goods Sold
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
12/14 20 @ $12 = $240 10 @ $ 6 = $300.00
20 @ $12
Quick Study 6-11
LIFO—Perpetual
Date Goods Purchased Cost of Goods Sold Inventory Balance
12/7 10 @ $ 6 = $ 60 10 @ $ 6 = $ 60
12/14 20 @ $12 = $240 10 @ $ 6 = $300
20 @ $12
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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
12/14 20 @ $12 = $240 10 @ $6 = $300
20 @ $12
(avg cost is $10)
Quick Study 6-13
Specific Identification—Perpetual
Quick Study 6-14A (10 minutes)
Ending Cost of
FIFO—Periodic Inventory Goods Sold
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Chapter 06 – Inventories and Cost of Sales
Quick Study 6-15A (10 minutes)
Ending Cost of
LIFO—Periodic Inventory Goods Sold
LIFO
(10 x $6) + (20 x $12)………………………………... $300
(15 x $14) ……………………………….…….….…….. $210
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
Quick Study 6-18 (10 minutes)
1.LIFO
2. FIFO
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Chapter 06 – Inventories and Cost of Sales
Quick Study 6-19 (20 minutes)
Per Unit Total Total LCM – Items
Inventory Items Units Cost Market Cost Market
Mountain bikes 11 $600 $550 $ 6,600 $ 6,050 $ 6,050
Skateboards 13 350 425 4,550 5,525 4,550
Quick Study 6-20 (15 minutes)
a.Overstates 2015 cost of goods sold.
Quick Study 6-21 (10 minutes)
Inventory turnover = Cost of goods sold/Average merchandise inventory
= $1,200,000 / [($140,000 + $180,000)/2 ] = 7.50 times
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