Chapter 5
Inventories and Cost of Sales
QUESTIONS
1. (a) FIFO: The cost of the first (earliest) items purchased in inventory flow to cost of
2. Merchandise inventory is disclosed on the balance sheet as a current asset. It is
3. Incidental costs sometimes are ignored in computing the cost of inventory because
significant (that is, when such practices do not impact business decisions).
4. LIFO will result in the lower cost of goods sold when costs are declining because it
5. The full-disclosure principle requires that the nature of the accounting change, the
8. Many people make important business decisions based on period-to-period
fluctuations in a company’s financial numbers, including gross profit and net
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9. An inventory error that causes an understatement (or overstatement) for net income
correct themselves.
11. The accounting constraint of conservatism guides preparers of accounting reports
12. Factors that contribute to inventory shrinkage are breakage, loss, deterioration,
decay, and theft.
13.B For interim reporting, companies can estimate costs of goods sold and ending
16. Cost of goods available for sale equals ending inventory plus cost of sales. As of
December 31, 2011, this is computed as (in EUR thousands):
17. Merchandise inventory (EUR thousands) comprises 46.5% (236,988 / 509,708) of
QUICK STUDIES
Quick Study 5-1 (10 minutes)
FIFO—Perpetual
Date
Goods Purchased
Cost of Goods Sold
Inventory Balance
1/1
320 @ $3.00
= $ 960.00
1/9
80 @ $3.20
320 @ $3.00
80 @ $3.20
= $1,216.00
1/25
100 @ $3.34
320 @ $3.00
80 @ $3.20
= $1,550.00
100 @ $3.34
1/26
320 @ $3.00 =$ 960.00
30 @ $3.20 = 96.00
50 @ $3.20
$1,056.00
100 @ $3.34
= $ 494.00
Alternate solution format
FIFO:
100
@ $3.34 =
$ 334.00
50
@ $3.20 =
160.00
150
$ 494.00
Ending inventory cost
Quick Study 5-2 (10 minutes)
LIFO—Perpetual
Date
Goods Purchased
Cost of Goods Sold
Inventory Balance
1/1
320 @ $3.00
= $ 960.00
1/9
80 @ $3.20
320 @ $3.00
80 @ $3.20
= $1,216.00
1/25
100 @ $3.34
320 @ $3.00
80 @ $3.20
= $1,550.00
100 @ $3.34
1/26
100 @ $3.34 =$ 334.00
80 @ $3.20 = 256.00
170 @ $3.00 = 510.00
150 @ $3.00
= $ 450.00
$1,100.00
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308
Quick Study 5-3 (10 minutes)
Weighted Average—Perpetual
Date
Goods Purchased
Cost of Goods Sold
Inventory Balance
1/1
320 @ $3.00
= $ 960.00
1/9
80 @ $3.20
320 @ $3.00
80 @ $3.20
= $1,216.00
(avg. cost is $3.04)
1/25
100 @ $3.34
320 @ $3.00
80 @ $3.20
= $1,550.00
100 @ $3.34
(avg. cost is $3.10)
1/26
350 @ $3.10 = $1,085.00
150 @ $3.10
= $ 465.00
Alternate solution format
Weighted average:
320
@ $3.00 =
$ 960.00
80
@ $3.20 =
256.00
100
@ $3.34 =
334.00
500
$1,550.00
Cost of goods available for sale
$1,550.00/500 = $3.10 weighted average cost per unit
150 units @ $3.10 = $ 465.00 Ending inventory cost
Quick Study 5-4A (10 minutes)
Ending Cost of
FIFO—Periodic Inventory Goods Sold
FIFO
Quick Study 5-5A (10 minutes)
Ending Cost of
LIFO—Periodic Inventory Goods Sold
LIFO
}
}
Quick Study 5-6A (10 minutes)
Ending Cost of
Weighted Average—Periodic Inventory Goods Sold
Weighted Average ($1,550/ 500 = $3.10 cost per unit)
Quick Study 5-7 (10 minutes)
Beginning inventory ……………………………….
10 units @ $60
$ 600
Plus
1st week purchase …………………………………
10 units @ $61
610
2nd week purchase ………………………………..
10 units @ $62
620
3rd week purchase …………………………………
10 units @ $65
650
4th week purchase …………………………………
10 units @ $70
700
Units Available for sale …………………………..
50 units
Cost of Goods Available for Sale …………….
$3,180
Quick Study 5-8 (25 minutes)
FIFO—Perpetual
Date
Goods Purchased
Cost of Goods Sold
Inventory Balance
12/ 7
10 @ $ 6 = $ 60
10 @ $ 6
= $ 60.00
12/14
20 @ $12 = $240
10 @ $ 6
= $300.00
20 @ $12
12/15
10 @ $ 6
15 @ $12
= $180.00
5 @ $12 = $120.00
12/21
15 @ $14 = $210
15 @ $12
= $390.00
______
15 @ $14
$120.00
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310
Quick Study 5-9
LIFO—Perpetual
Date
Goods Purchased
Cost of Goods Sold
Inventory Balance
12/7
10 @ $ 6 = $ 60
10 @ $ 6
= $ 60
12/14
20 @ $12 = $240
10 @ $ 6
= $300
20 @ $12
12/15
15 @ $12 = $180
10 @ $ 6
= $120
5 @ $12
12/21
15 @ $14 = $210
10 @ $ 6
5 @ $12
= $330
____
15 @ $14
$180
Quick Study 5-10
Weighted Average—Perpetual
Quick Study 5-11
Specific Identification—Perpetual
Ending inventory under specific identification:
Quick Study 5-12A (10 minutes)
Ending Cost of
FIFO—Periodic Inventory Goods Sold
FIFO
Date
Goods Purchased
Cost of Goods Sold
Inventory Balance
12/7
10 @ $6 = $60
10 @ $6
= $ 60
12/14
20 @ $12 = $240
10 @ $6
= $300
20 @ $12
(avg cost is $10)
12/15
15 @ $10 =$150
15 @ $10
= $150
12/21
15 @ $14 = $210
15 @ $10
= $360
____
15 @ $14
$150
(avg cost is $12)
}
}
Quick Study 5-13A (10 minutes)
Ending Cost of
LIFO—Periodic Inventory Goods Sold
LIFO
Quick Study 5-14A (10 minutes)
Ending Cost of
Weighted Average—Periodic Inventory Goods Sold
Weighted Average ($510/ 45 = $11.33 cost per unit)*
Quick Study 5-15A (10 minutes)
Ending Cost of
Specific Identification—Periodic Inventory Goods Sold
Specific Identification
Quick Study 5-16 (10 minutes)
Quick Study 5-17 (10 minutes)
Units in ending inventory
Units stored in basement …………………………..
1,300
units
Less damaged (unsalable) units ……………….……
(20)
Plus units in transit ………………………………….……
350
Plus units on consignment …………………………..
80
Total units in ending inventory ………………………
1,710
units
Quick Study 5-18 (10 minutes)
Cost ……………………………………………………….
$14,000
Plus
Transportation-in ………………………………….……
250
Import duties ………………………………………..……
900
Insurance ……………………………………………..……
300
Inventory Cost ……………………………………..……
$15,450
The $150 advertising cost and the $1,250 cost for sales staff salaries are
included in operating expenses—not part of inventory costs. Those two
costs are not necessary to get the vehicle in a place and condition for sale.
Quick Study 5-19 (20 minutes)
Per Unit
Total
Total
LCM –
Items
Inventory Items
Units
Cost
Market
Cost
Market
Mountain bikes
11
$600
$550
$ 6,600
$ 6,050
$ 6,050
Skateboards
13
350
425
4,550
5,525
4,550
Gliders
26
800
700
20,800
18,200
18,200
$31,950
$29,775
$28,800
LCM applied to each product ………………………………………………
$28,800
Quick Study 5-20 (15 minutes)
a. Overstates 2013 cost of goods sold.
Quick Study 5-21 (10 minutes)
Inventory turnover = Cost of goods sold/Average merchandise inventory
Quick Study 5-22B (15 minutes)
Goods available for sale
Inventory, January 1 …………………………………………….…………
$190,000
Cost of goods purchased (net) ……………………………..………………
352,000
Goods available for sale (at cost) …………………………..
542,000
Net sales at retail ……………………………………………………….
$685,000
Estimated cost of goods sold [$685,000 x (1 – 44%)] ……..………………
(383,600)
Estimated September 5 inventory destroyed …………..………………
$158,400
Quick Study 5-23 (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.
Specifically, merchandise inventory includes all items that a company
allows reversals of those write-downs up to the original acquisition
cost.
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314
EXERCISES
Exercise 5-1 (10 minutes)
1. The consignor is Harris Company. The consignee is Harlow Company.
The consignor, Harris Company, should include any unsold and
consigned goods in its inventory.
2. The title will pass at “destination” which is Harlow Company’s receiving
Exercise 5-2 (10 minutes)
Cost of inventory (estate’s contents)
Price …………………………………………………………………………….
$75,000
Transportation-in ………………………………………………………….
2,400
Insurance on shipment ………………………………………………….
300
Cleaning and refurbishing ……………………………………………..
980
Total cost of inventory …………………………………………………..
$78,680
Exercise 5-3 (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
Exercise 5-3 (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)
1/25
80 @ $5.40 = $ 432.00
20 @ $5.40
= $ 108.00
1/30
180 @ $4.50
20 @ $5.40
= $ 918.00
$1,032.00
180 @ $4.50
(avg. cost is $4.59)
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
1/25
40 @ $6.00
40 @ $5.00
20 @ $5.00
= $ 100.00
1/30
180 @ $4.50
20 @ $5.00
= $ 910.00
$1,040.00
180 @ $4.50
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
1/20
60 @ $5.00
40 @ $6.00
= $ 540.00
60 @ $5.00
1/25
60 @ $5.00
20 @ $6.00
20 @ $6.00
= $ 120.00
1/30
180 @ $4.50
20 @ $6.00
= $ 930.00
$1,020.00
180 @ $4.50
= $ 440.00
= $ 420.00
Exercise 5-3 (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
d. LIFO
Exercise 5-4 (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
Gross profit ……………………..
1,675.00
1,668.00
1,660.00
1,680.00
Expenses …………………….…..
1,250.00
1,250.00
1,250.00
1,250.00
Income before taxes …….…..
425.00
418.00
410.00
430.00
Income tax expense (40%) ..……
170.00
167.20
164.00
172.00
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
Exercise 5-5A (35 minutes)
Ending Cost of
Periodic Inventory Computations Inventory Goods Sold
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
b. Weighted Average—Periodic
c. FIFO—Periodic
d. LIFO—Periodic
*rounded to dollars and cents
Exercise 5-6 (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
Expenses …………………….…..
1,250.00
1,250.00
1,250.00
1,250.00
Income before taxes …….…..
425.00
526.60
410.00
640.00
Income tax expense (40%) ..……
170.00
210.64
164.00
256.00
Net income ………………….…..
$ 255.00
$ 315.96
$ 246.00
$ 384.00
Exercise 5-7 (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
3/14
350 @ $15 = $5,250
50 @ $10
= $ 5,750
350 @ $15
3/15
50 @ $10
100 @ $15
= $ 1,500
250 @ $15 = $ 4,250
7/30
450 @ $20 = $9,000
100 @ $15
= $10,500
450 @ $20
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
3/15
50 @ $10
= $ 1,250
300 @ $15 = $ 4,500
50 @ $15
7/30
450 @ $20 = $ 9,000
50 @ $10
50 @ $15
= $ 10,250
450 @ $20
10/5
50 @ $10
430 @ $20 = $8,600
50 @ $15
= $ 1,650
20 @ $20
10/26
100 @ $25 = $ 2,500
50 @ $10
50 @ $15
20 @ $20
= $ 4,150
_______
100 @ $25
$14,600