Chapter 07 – Reporting and Interpreting Cost of Goods Sold and Inventory
Solutions Chapter 7 – Set B Exercises – Libby 8e
E7–1B
Item
Amount
Explanation
Ending inventory (physical count on
December 31, 2014)
$36,500
Per physical inventory.
a.
Goods purchased and in transit
+ 1,700
Goods purchased and in transit,
F.O.B. shipping point, are owned by
the purchaser.
b.
Samples out on trial to customer
+ 1,825
Samples held by a customer on trial
are still owned by the vendor; no sale
or transfer of ownership has occurred.
c.
Goods in transit to customer
0
Goods shipped to customers, F.O.B.
shipping point, are owned by the
customer because ownership passed
when they were delivered to the
transportation company. The
inventory correctly excluded these
items.
d.
Goods sold and in transit
+ 1,850
Goods sold and in transit, F.O.B.
destination, are owned by the seller
until they reach destination.
Correct inventory, December 31, 2014
$41,875
E7–2B.
(Bold for missing amounts only.)
Case
Sales
Revenue
Beg.
Inven-
tory
Pur-
chases
Total
Avail-
able
Ending
Inventory
Cost of
Goods
Sold
Gross
Profit
Ex–
penses
Pretax
Income
or
(Loss)
A
$ 655
$115
$800
$915
$400
$515
$140
$130
$10
B
1,300
250
900
1,150
300
850
450
150
300
C
600
105
350
455
300
155
445
125
320
D
1,800
250
550
800
300
500
1,300
300
1,000
E
1,200
200
1,000
1,200
500
700
500
575
(75)
© 2014 by McGraw-Hill Global Education Holdings, LLC. This is proprietary material solely for authorized instructor use. Not authorized for
sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in
whole or part.
2
E7–3B.
Average
Units FIFO LIFO Cost
Cost of goods sold:
Beginning inventory ($15) …………… 12,000 180,000 180,000 180,000
E7–4B.
Req. 1 REFLECTION COMPANY
Income Statement
For the Year Ended December 31, 2015
Case A Case B
FIFO LIFO
Ending inventory3 …………………..
155,000 118,000
Cost of goods sold …………… 128,000 165,000
Gross profit ……………………………… 532,000 495,000
Expenses ……………………………… 295,000 295,000
Pretax income ……………………………… $237,000 $200,000
© 2014 by McGraw-Hill Global Education Holdings, LLC. This is proprietary material solely for authorized instructor use. Not authorized for
sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in
whole or part.
3
Beginning inventory 4,000 $12 $ 48,000
Purchase, April 11, 2015 10,000 10 100,000
Purchase, June 1, 2015 9,000 15 135,000
Goods available for sale 23,000 $283,000
(3) Ending inventory (23,000 available – 12,000 units sold = 11,000 units):
(7,000 units @ $10 = $70,000) = $118,000.
Req. 2
Comparison of Amounts
Case A Case B
FIFO LIFO
Pretax Income $237,000 $200,000
effect on pretax income.
Req. 3
LIFO may be preferred for income tax purposes because it reports less taxable income (when
© 2014 by McGraw-Hill Global Education Holdings, LLC. This is proprietary material solely for authorized instructor use. Not authorized for
sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in
whole or part.
5
E7–6B.
Req. 1
Average
FIFO LIFO Cost
Cost of goods sold:
Beginning inventory (400 units @ $25) …….. $10,000 $10,000 $10,000
Purchases (475 units @ $36) …………………. 17,100 17,100 17,100
LIFO: (400 units x $25) + (175 units x $36) = $16,300.
Weighted Average: Units Cost
400 $10,000
475 17,100
875 $27,100 = weighted-average unit cost of $30.97.
Gross profit ……………………………………………….. 9,300 6,000 7,508
Expenses ……………………………………………….. 2,700 2,700 2,700
Pretax income $ 6,600 $ 3,300 $ 4,808
Req. 3
Ranking in order of favorable cash flow: The higher rankings are given to the methods that
produce the lower income tax expense because lower income tax expense results in higher
© 2014 by McGraw-Hill Global Education Holdings, LLC. This is proprietary material solely for authorized instructor use. Not authorized for
sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in
whole or part.
6
(3) FIFO–produces the highest pretax income and, as a result, the highest income tax. This
E7–7B.
Item
Quantity
Total Cost
Total Market
LCM
Valuation
A
57
x
$16
=
$ 912
x
$13
=
$741
$741
B
87
x
31
=
2,697
x
45
=
3,915
2,697
C
17
x
49
=
833
x
53
=
901
833
D
77
x
26
=
2,002
x
31
=
2,387
2,002
E
357
x
11
=
3,927
x
6
=
2,142
2,142
Total
$10,371
$10,086
$8,415
Inventory valuation that should be used (LCM) = $8,415
E7–8B.
Req. 1
Inventory turnover
=
Cost of Goods Sold
=
$52,144
=
44.43
Average Inventory
($1,380 + $967)/2
Average days to sell inventory = 365 / inventory turnover = 365 / 44.43 = 8.2 days
Req. 2
© 2014 by McGraw-Hill Global Education Holdings, LLC. This is proprietary material solely for authorized instructor use. Not authorized for
sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in
whole or part.
7
E7–9B.
Case A – FIFO:
Goods available for sale for FIFO:
Units (19 + 23 + 47) …………………………………………………… 89
Amount ($285 + 322 + 893) ………………………………………… $1,500
