Chapter 07 – Reporting and Interpreting Cost of Goods Sold and Inventory
P7–7.
Req. 1
Projected
change
No change from
beginning of year
Inventory
=
Cost of Goods Sold
$7,283,566
=
$7,283,566
=
Turnover
Average Inventory
$483,555*
$582,500**
Chapter 07 – Reporting and Interpreting Cost of Goods Sold and Inventory
P7–9.
Req. 1
2014 2015 2016 2017
Sales revenue $2,025,000 $2,450,000 $2,700,000 $2,975,000
Cost of goods sold 1,505,000 1,645,000* 1,764,000* 2,113,000
Gross profit 520,000 805,000 936,000 862,000
Expenses 490,000 513,000 538,000 542,000
Similarly, because this error was carried over automatically to 2016 as the beginning
inventory, cost of goods sold for 2016 was overstated and 2016 net income
understated. The amounts for 2014 and 2017 were not affected. This is called a self–
correcting or counterbalancing error. Cumulative net income for the four-year period
was not affected.
Req. 2
$918,000 ÷ $2,700,000 = .34
$862,000 ÷ $2,975,000 = .29
After correction:
No change .26
$805,000 ÷ $2,450,000 = .33
Correct income tax expense 87,600 119,400
Chapter 07 – Reporting and Interpreting Cost of Goods Sold and Inventory
ALTERNATE PROBLEMS
AP7−1.
a) Goods available for sale for all methods:
1. Average cost:
Average unit cost $53,475 ÷ 1,550=$34.50.
2. First-in, first-out:
Ending inventory (460 units x $37) +
3. Last-in, first-out:
Ending inventory (390 units x $32) +
(340 units x $34.25) $24,125
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4. Specific identification:
Ending inventory (658 units x $34.25) +
Chapter 07 – Reporting and Interpreting Cost of Goods Sold and Inventory
AP7–2.
Req. 1
NEWRIDGE COMPANY
Partial Income Statement
For the Month Ended January 31, 2015
(a) (b) (c) (d)
Average Specific
*Sales revenue = 240 units @ $16 = $3,840.
**Cost of Goods Sold Amounts:
a)
Average Cost
Number of Units
x
Unit Cost
=
Total
Cost
120
x
$8
=
$ 960
380
x
9
=
3,420
200
x
11
=
2,200
700
Available
for Sale
$6,580
=
$6,580
=
$9.40 per unit
700 units
Cost of Goods Sold
=
$9.40 x 240 units
=
$2,256
b)
FIFO
First Units in (Beginning Inventory)
Next Units in (January 12)
Total Cost of Goods Sold (FIFO)
c)
LIFO
Last Units in (January 26)
Next Units in (January 12)
40
Chapter 07 – Reporting and Interpreting Cost of Goods Sold and Inventory
AP7–2. (continued)
Req. 3
Because LIFO reports a lower pretax income than FIFO for the reasons given in
Chapter 07 – Reporting and Interpreting Cost of Goods Sold and Inventory
AP7–3. (continued)
Req. 3
When prices are rising, LIFO derives a more favorable cash position (than FIFO) equal
to the difference in income tax. In contrast, when prices are falling, FIFO derives a
more favorable cash position equal to the difference in income tax.
Req. 4
AP7–4.
Req. 1
COLCA COMPANY
Income Statements Corrected
2014 2015 2016 2017
Sales revenue $60,000 $63,000 $65,000 $68,000
CP7–1
Req. 1
The company held $378,426 thousand of merchandise inventory at the end of the
current year. This is disclosed on the balance sheet.
Req. 2
The company purchased $2,108,695 thousand during the current year. The beginning
and ending inventory balances are disclosed on the balance sheet and cost of goods
Chapter 07 – Reporting and Interpreting Cost of Goods Sold and Inventory
CP7–3
Req. 1
American Eagle
Outfitters
Urban Outfitters
Inventory
=
Cost of Goods Sold
$2,031,477
=
5.98
$1,613,265
=
Turnover
Average Inventory
339,817*
239,817**
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CP7–4.
Req. 1 Production costs included in inventory become cost of goods sold expense on
the income statement in the period the goods are sold.
CP7–5.
Req. 1
Caterpillar
2011
2010
2009
Inventories – LIFO
$14,544
$9,587
$6,360
Plus: LIFO Reserve
2,422
2,575
3,022
Inventories – FIFO
$16,966
$12,162
$9,382
Cost of goods sold: LIFO
$43,578
$30,367
+ Beginning LIFO Reserve
2,575
3,022
– Ending LIFO Reserve
2,422
2,575
Cost of goods sold: FIFO
$43,731
$30,814
Chapter 07 – Reporting and Interpreting Cost of Goods Sold and Inventory
CP7–5. (continued)
DEERE (as provided)
2011 LIFO 5.9
2011 FIFO 4.2
Req. 2
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CP7–6.
2. The decrease in pre-tax income was $28,165,000. Thus, ending inventory was
decreased by $28,165,000 and cost of goods sold was increased by $28,165,000.
3. This $9,858,000 tax postponement is significant and is likely to be the main reason
that management adopted LIFO. A decrease in net income is normally a negative
Chapter 07 – Reporting and Interpreting Cost of Goods Sold and Inventory
CP7–7.
1. The Company understated purchases by $47.3 million. This causes cost of
2. The restatement of the purchases caused the board to rescind management’s
3. If it is assumed that bonuses are a fixed portion of net income, the bonus rate
can be roughly estimated using the amounts computed in parts 1 and 2.
4. The Board likely tied management compensation to net income to align the
interests of management with that of shareholders. Typically, increases in net
CP7–8.
The solution to this case will depend on the company and/or accounting period selected
for analysis.
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CC7.
Req. 1
ITEM A. First–In, First–Out (FIFO) Last–In, First–Out (LIFO)
Cost of Goods Sold
Units
Unit Cost
Total Cost
40
$6
$240
80
8
640
40
9
360
Total
$1,240
ITEM B. First–In, First–Out (FIFO) Last–In, First–Out (LIFO)
Cost of Goods Sold
Units
Unit Cost
Total Cost
40
$6
$240
80
5
400
40
3
120
Total
$760
Req. 2
ITEM A.
(a) Net income: You should recommend FIFO because the lower amount of cost of
Cost of Goods Sold
Units
Unit Cost
Total Cost
100
$9
$900
60
8
480
Total
$1,380
Cost of Goods Sold
Units
Unit Cost
Total Cost
100
$3
$300
60
5
300
Total
$600