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Problem 6-8BA (30 minutes)
Part 1
SHEPARD COMPANY
Income Statements Comparing FIFO, LIFO, and Weighted Average
For Year Ended December 31, 2015
FIFO LIFO
Weighted
Average
Sales............................................................. $400,000 $400,000 $400,000
Cost of goods sold
Inventory, Dec. 31, 2014............................. 48,720 48,720 48,720
Supporting calculations
FIFO LIFO
Weighted
Average
Dec. 31, 2014, inventory (840 x $58).................... $ 48,720 $ 48,720 $ 48,720
Purchases
600 x $59 = $ 35,400
Problem 6-8BA (Concluded)
Part 2
If Shepard Company had been experiencing decreasing costs in the
acquisition of inventory, we would observe the opposite results in our
Part 3
Advantages
LIFO: Assuming a trend of increasing costs, the advantage of using LIFO is
Disadvantages
LIFO: Assuming a trend of increasing costs, the disadvantage of using
FIFO: The disadvantage of using FIFO is that it will produce a greater tax
Problem 6-9BB (25 minutes)
Part 1
MACKLIN COMPANY
Estimated Inventory
December 31
At Cost At Retail
Goods available for sale
Beginning inventory............................................. $ 90,022 $115,610
Part 2
MACKLIN COMPANY
Inventory Shortage
December 31
At Cost At Retail
Estimated inventory (from part 1)............................$66,555.00 $98,600.00
Problem 6-10BB (25 minutes)
OTINGO EQUIPMENT CO.
Estimated Inventory at March 31
At Cost At Retail
Goods available for sale
Inventory, January 1....................................... $ 802,880
Cost of goods purchased.............................. 2,209,636
SERIAL PROBLEM — SP 6
Serial Problem — SP 6, Business Solutions (20 minutes)
Part A
1.
Per Unit Total Total
Inventory Items Units Cost Market Cost Market
Office productivity........... 3 $ 76 $ 74 $228 $222
Assuming LCM is applied to the “whole of inventory,” the $704 total cost
of inventory is less than the $710 total market value. Thus, the company
would not adjust the currently reported inventory value of $704.
Serial Problem — SP 6, Business Solutions (concluded)
2.
Per Unit Total Total LCM Applied
Inventory Items Units Cost Market Cost Market To Items
Office productivity....... 3 $ 76 $ 74 $228 $222 $222
Assuming LCM is applied to the “items of inventory,” the $692 market
Part B
1. Ratio computations for the three months ended March 31, 2016:
Inventory Turnover = Cost of Goods Sold / Average Inventory
Days’ Sales in Inventory = (Ending Inventory/Cost of Goods Sold) x 365
2. Business Solutions outperforms its competitors on both ratios. Its
Reporting in Action — BTN 6-1
($ millions for all parts)
3. Apple’s inventories are its second smallest asset at September 28,
4. Reviewing notes to its financial statements, we see from Note 1 under
5. a. Inventory turnover =
b. Days’ sales in inventory = x 365
6. Solution depends on the financial statement information obtained.
Cost of sales
Average inventory
Ending inventory
Cost of sales
Comparative Analysis — BTN 6-2
($ thousands)
1. Inventory turnover =
Apple — current year
Google — current year
Cost of sales
Average inventory
$25,858
Comparative Analysis (Concluded)
2. Days’ sales in inventory = x 365
Current year — Apple’s days’ sales in inventory
One year prior —Apple’s days’ sales in inventory
Two years prior—Apple’s days’ sales in inventory
Current year — Google’s days’ sales in inventory
One year prior —Google’s days’ sales in inventory
Two years prior—Google’s days’ sales in inventory
3. For the most recent year, Apple manages its inventory more efficiently
than does Google. Apple’s inventory turnover is higher, and its days’
sales in inventory is only slightly longer. For the prior year, Apple also
Ending Inventory
Costs of Goods Sold
Ethics Challenge — BTN 6-3
1. Profit Margin: In an economic environment of rising costs, the use of
FIFO results in a lower cost of goods sold than LIFO. If cost of goods
sold is lower, then net income will be higher. A higher net income will
2. First, it is true that managers have discretion in choosing an inventory
costing method. It appears, however, that Golf Challenge’s owner does
Second, the consistency concept does not allow frequent changes in
inventory costing methods by management. If Golf Challenge’s owner
Third, the full disclosure principle requires the owner to disclose to the
Finally, if LIFO is currently being used for tax reporting, then the tax
Communicating in Practice — BTN 6-4
[Note: An acceptable memorandum format should be used.]
The body of the memo would likely recommend use of the LIFO method for
this start-up business. The memo should explain that this would allow for
the matching of the most recent (higher) costs against revenue through
cost of goods sold. It should further explain that this would result in a
lower net income (and taxable income) and, therefore, lower tax (cash)
payments. The justification for this method is a better matching of current
costs against revenue to more fairly reflect the results of operation. A
statement could be made that the actual physical flow of goods does not
dictate the inventory method a business uses.
Taking It to the Net — BTN 6-5
1. Apple designs, manufactures, and markets mobile communication and
2. Its summary of significant accounting policies (Note 1) reports:
3. Its gross margin for fiscal 2013 is ($ millions)
Sales.................................................................... $ 170,910
Comment: Its gross margin ratio is slightly lower than the industry
average gross margin ratio of 40%.
4. 2013 Inventory turnover* =
2013 Days’ sales in inventory* =
* $ millions
Comment: Its inventory turnover is higher (more favorable) than the
