Great Adventures, Inc.
Partial Income Statement
For the year ended December 31, 2016
Sales revenue $60,000
Cost of goods sold (32,900)
Gross profit $27,100
Inventory
items
Cost
per unit
Market
per unit
Lower-of-c
ost-or-mark
et
per unit Quantity
Total
lower-of-co
st-or-marke
t
MU
watches $180 $100 $100 70 $7,000
Dec. 31, 2016 Debit Credit
Cost of Goods Sold 5,600
AP6-1 (continued)
Requirement 1 (b)
Requirement 2 (a)
Great Adventures, Inc.
Partial Income Statement
For the year ended December 31, 2016
Sales revenue $60,000
Cost of goods sold (38,500) a
The
company uses the lower of weighted-average cost or market value.
The amount of inventory reported in the balance sheet is $332,452.
The company refers to cost of goods sold as cost of sales.
The amount of cost of goods sold reported in the income statement is
= Cost of goods sold = $2,085,480 = 6.0
a The amount of the inventory write-down equals the difference between the cost of
Requirement 2 (b)
Great Adventures reports its inventory in the balance sheet at the
AP6-1 (concluded)
Requirement 2 (c)
a Cost of goods sold includes the write-down of inventory of $5,600 calculated in
Additional Perspective 6-2
Requirement 1
Requirement 2
Requirement 3
Requirement 4
Requirement 5
turnover ratio
Average days
2012 2011 2010
Gross profit
Operating expenses =$995,716 = 0.29
The company uses the lower of weighted-average
cost or market value.
The amount of inventory reported in the balance sheet is $103,853.
The company refers to cost of goods sold as cost of sales.
The amount of cost of goods sold reported in the income statement is
Inventory
Average days
2012 2011 2010
Gross profit
Requirement 6
Requirement 7
Additional Perspective 6-3
Requirement 1
Requirement 2
Requirement 3
Requirement 4
Requirement 5
Requirement 6
Operating expenses =$241,140 = 0.21
American Eagle’s percentage of inventory to total
American
Eagle Buckle
Inventory
Average days
American
Eagle Buckle
Gross profit
American
Eagle Buckle
Operating expenses = 0.29 0.21
Requirement 7
Requirement 1
Requirement 2
Requirement 3
Requirement 4
Additional Perspective 6-5
What is the issue?
When the market value of inventory falls below its cost, companies are required to
write down inventory, resulting in a loss being reported in the income statement. The
The financial effects of reporting this decline in inventory value will have severe
consequences on the company’s ongoing operations. The company’s creditors will
Who are the parties involved?
Jim knows the importance to the company of reporting acceptable profits in 2015. If
profits are too low, Jim will lose his job and so will all of his coworkers. However,
reporting the sale would lead to misstated financial statements. Even if creditors are
fooled for a short while, the company’s lack of profitability will eventually be
What factors should Jim consider in making his decision?
Jim doesn’t want to be the one to blame for everyone losing their job. If he allows the
“fake” sale to be reported, he and his coworkers will have time to start looking for
However, as the person responsible for preparing financial statements, Jim has an
ethical responsibility to investors and creditors to accurately report the financial
Additional Perspective 6-6
(Note to instructor: Amounts are based on annual reports filed December 31, 2012)
Requirement 1
($ in millions)
Coca-Cola PepsiCo
Gross profit
ratio =Gross profit =$28,964 $34,201
Net sales $48,017 $65,492
Coca-Cola PepsiCo
Inventory
turnover ratio =Cost of goods sold =$19,053 $31,291
Average inventory ($3,264+$3,092)/2 ($3,581+$3,827)/2
Average days
in inventory =365 =365 365
Inventory turnover ratio 6.0 8.4
As indicated by the higher gross profit ratio, Coca-Cola is able to
generate more profit selling its inventory (beverages) than PepsiCo is
selling its inventory (beverages and snack foods). However, PepsiCo’s inventory turns
Requirement 2
Date Transaction
Number
of units
Unit
cost
Ending
Inventory
Aug. 22 Purchase 30 $600 $18,000
Oct. 29 Purchase 80 640 51,200
Date Transaction
Number
of units
Unit
cost
Cost of
Goods Sold
Jan. 1 Beginning inventory 150 $540 $ 81,000
Mar. 8 Purchase 120 570 68,400
Additional Perspective 6-7
Students should discuss the following issues.
For FIFO,
– FIFO assumes that the first units purchased are sold first.
– It is likely that FIFO more closely matches the actual flow of inventory.
– By more closely matching actual flow, FIFO results in a better approximate
– If inventory costs are rising, which is typically the case for most businesses,
For LIFO,
– LIFO assumes that the last units purchased are sold first.
– LIFO may better match current inventory costs with current inventory sales,
resulting in a more accurate measure of profitability in the income statement.
– If inventory costs are rising, which is typically the case for most businesses,
– If inventory costs are declining, LIFO results in a higher amount being reported
Additional Perspective 6-8
Requirement 1
Date Transaction
Number
of units
Unit
cost
Ending
Inventory
Oct. 29 Purchase 50 $640 $32,000
Date Transaction
Number
of units
Unit
cost
Cost of
Goods Sold
Jan. 1 Beginning inventory 150 $540 $ 81,000
Mar. 8 Purchase 120 570 68,400
Aug. 22 Purchase 100 600 60,000
* First 340 units purchased are assumed sold
Requirement 2
* First 400 units purchased are assumed sold
Requirements 3 and 4
2015 2016
(a) ending inventory Overstatement No Effect
(b) retained earnings Overstatement No Effect