Chapter 06 – Inventories and Cost of Sales
Quick Study 6-22B (15 minutes)
Goods available for sale
Inventory, January 1……………………………………………………………..$190,000
Cost of goods purchased (net)…………………………….…….….…….. 352,000
Quick Study 6-23 (10 minutes)
a. Both IFRS and U.S. GAAP provide broad and similar guidance on the
accounting for items and costs making up merchandise inventory.
b. Yes, companies reporting under IFRS can apply cost flow assumptions
c. U.S. GAAP prohibits any later increase in the recorded value of
inventory that had been written down even if that decline in value is
EXERCISES
Exercise 6-1 (10 minutes)
1. The title will pass at “destination” which is Harlow Company’s
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Chapter 06 – Inventories and Cost of Sales
2. The consignor is Harris Company. The consignee is Harlow Company.
consigned goods in its inventory.
Exercise 6-2 (10 minutes)
Cost of inventory (estate’s contents)
Price…………………………………………………….…….…….…….…... $75,000
Exercise 6-3 (45 minutes)
a. Specific identification
Ending inventory—180 units from January 30, 5 units from January 20, and 15
units from beginning inventory
Ending Cost of
Specific Identification Inventory Goods Sold
(180 x $4.50) + (5 x $5.00) + (15 x $6.00)......... $ 925
$1,950 [Total Goods Available] – $925 [Ending Inventory]....... $1,025
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Chapter 06 – Inventories and Cost of Sales
Exercise 6-3 (continued)
b. Weighted Average—Perpetual
Date Goods Purchased Cost of Goods Sold Inventory Balance
1/1 140 @ $6.00 = $ 840.00
1/10 100 @ $6.00 = $ 600.00 40 @ $6.00 = $ 240.00
1/20 60 @ $5.00 40 @ $6.00 = $ 540.00
60 @ $5.00
(avg. cost is $5.40)
c. FIFO—Perpetual
Date Goods Purchased Cost of Goods Sold Inventory Balance
1/1 140 @ $6.00 = $ 840.00
1/10 100 @ $6.00 = $ 600.00 40 @ $6.00 = $ 240.00
1/20 60 @ $5.00 40 @ $6.00 = $ 540.00
60 @ $5.00
d. LIFO—Perpetual
Date Goods Purchased Cost of Goods Sold Inventory Balance
1/1 140 @ $6.00 = $ 840.00
1/10 100 @ $6.00 = $ 600.00 40 @ $6.00 = $ 240.00
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Education.
Chapter 06 – Inventories and Cost of Sales
Exercise 6-3 (Concluded)
Alternate Solution Format for FIFO and LIFO Perpetual
Ending Cost of
Computations Inventory Goods Sold
c. FIFO
(180 x $4.50) + (20 x $5.00)……………………………………….. $ 910.00
(100 x $6.00) + (40 x $6.00) + (40 x $5.00)………….….…… $1,040.00
Exercise 6-4 (20 minutes)
LAKER COMPANY
Income Statements
For Month Ended January 31
Specific
Identification
Weighted
Average FIFO LIFO
Sales……………………….…….…$2,700.00 $2,700.00 $2,700.00 $2,700.00
(180 units x $15 price)
Cost of goods sold……….….. 1,025.00 1,032.00 1,040.00 1,020.00
Net income………..….….……...$ 255.00 $ 250.80 $ 246.00 $ 258.00
1. LIFO method results in the highest net income of $258.00.
2. Weighted average net income of $250.80 falls between the FIFO net
income of $246.00 and the LIFO net income of $258.00.
3. If costs were rising instead of falling, then the FIFO method would yield
the highest net income.
Exercise 6-5A (35 minutes)
Ending Cost of
Periodic Inventory Computations Inventory Goods Sold
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Chapter 06 – Inventories and Cost of Sales
a. Specific Identification—Periodic
(180 x $4.50) + (5 x $5.00) + (15 x $6)..…….….......$ 925.00
$1,950 [Total Goods Available] – $925 [Ending Inventory]............ $1,025.00
d. LIFO—Periodic
(140 x $6.00) + (60 x $5.00)………………………….…..$1,140.00
(180 x $4.50)……………………………….…….…….….…. $ 810.00
*rounded to dollars and cents
Exercise 6-6 (20 minutes)
LAKER COMPANY
Income Statements
For Month Ended January 31
Specific
Identification
Weighted
Average FIFO LIFO
Sales……………………….…….…$2,700.00 $2,700.00 $2,700.00 $2,700.00
(180 units x $15 price)
Cost of goods sold……….….. 1,025.00 923.40 1,040.00 810.00
Gross profit……………..….…...1,675.00 1,776.60 1,660.00 1,890.00
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Chapter 06 – Inventories and Cost of Sales
1. LIFO method results in the highest net income of $384.00.
Exercise 6-7 (20 minutes)
a. FIFO—Perpetual
Date Goods Purchased Cost of Goods Sold Inventory Balance
1/1 200 @ $10 = $ 2,000
1/10 150 @ $10 = $ 1,500 50 @ $10 = $ 500
10/5 100 @ $15
330 @ $20 = $ 8,100 120 @ $20 = $ 2,400
10/26 100 @ $25 = $2,500 120 @ $20
______ 100 @ $25 = $ 4,900
$13,850
b. LIFO—Perpetual
Date Goods Purchased Cost of Goods Sold Inventory Balance
1/1 200 @ $10 = $ 2,000
1/10 150 @ $10 = $ 1,500 50 @ $10 = $ 500
3/14 350 @ $15 = $ 5,250 50 @ $10 = $ 5,750
350 @ $15
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Chapter 06 – Inventories and Cost of Sales
10/5 50 @ $10
430 @ $20 = $8,600 50 @ $15 = $ 1,650
20 @ $20
Chapter 06 – Inventories and Cost of Sales
Exercise 6-7 (Concluded)
Alternate Solution Format
Ending Cost of
Inventory Goods Sold
a. FIFO
(100 x $25) + (120 x $20)…………………………………………..…... $4,900
(150 x $10) + (50 x $10) + (250 x $15) +
FIFO Gross Margin
Sales revenue (880 units sold x $40 selling price)…..…….…….…... $35,200
Less: FIFO cost of goods sold…………………….….….…….…….……... 13,850
Gross profit………………………………………………….….…….…….…….….. $21,350
LIFO Gross Margin
Exercise 6-8 (15 minutes)
a. Specific Identification method—Cost of goods sold
Cost of goods available for sale………………………….…….….… $18,750
Ending inventory under specific identification
b. Specific Identification method—Gross margin
Sales revenue (880 units sold x $40 selling price)……………. $35,200
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Chapter 06 – Inventories and Cost of Sales
Exercise 6-9A (20 minutes)
Cost of goods available for sale = $18,750 (given in Exercise 6-7)
Ending Cost of
Periodic Inventory System Inventory Goods Sold
a. FIFO—Periodic
(100 x $25) + (120 x $20)………………………………..…… $4,900
(200 x $10) + (350 x $15) + (330 x $20)....….............. $13,850
b. LIFO—Periodic
c.
FIFO—Periodic Gross Margin
Sales revenue (880 units sold x $40 selling price)…………….. $35,200
Less: FIFO cost of goods sold……………………………………..…. 13,850
Gross margin………………………………………………………..…….….. $21,350
LIFO—Periodic Gross Margin
Exercise 6-10 (15 minutes)
Per Unit Total Total LCM Applied
to Items
Inventory Items Unit
s
Cost Market Cost Market
Helmets........... 24 $50 $54 $1,200 $1,296 $1,200
Bats……………… 17 78 72 1,326 1,224 1,224
Lower of cost or market of inventory by product = $7,394
Exercise 6-11 (20 minutes)
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1. a. LIFO ratio computations
LIFO current ratio (2015) = $220/$200 = 1.1
LIFO inventory turnover (2015) = $740/ [($110+$160)/2] = 5.5
LIFO days’ sales in inventory (2015) = ($160/$740) x 365 = 78.9 days
b. FIFO ratio computations
*$220 + ($240 – $160)
2. The use of LIFO versus FIFO for Cruz markedly impacts the ratios computed.
Specifically, LIFO makes Cruz appear worse in comparison to FIFO numbers
on the current ratio (1.1 vs. 1.5) but better on inventory turnover (5.5 vs. 3.8)
Exercise 6-12 (25 minutes)
1. Correct gross profit = $850,000 – $500,000 = $350,000 (for each year)
2. Reported income figures
Year 2014 Year 2015 Year 2016
Sales…………..………..….. $850,000 $850,000 $850,000
Cost of goods sold
Beginning inventory..... $250,000 $230,000 $250,000
Cost of purchases........ 500,000
500,000
500,000
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