Chapter 05 – Reporting and Analyzing Inventories
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
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
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
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
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
3. If costs were rising instead of falling, then the FIFO method would yield
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
1. LIFO method results in the highest net income of $384.00.
2. Weighted average net income of $315.96 falls between the FIFO net
3. If costs were rising instead of falling, then the FIFO method would yield
Exercise 5-7 (Concluded)
Alternate Solution Format
Ending Cost of
Inventory Goods Sold
a. FIFO
Exercise 5-11 (20 minutes)
1. a. LIFO ratio computations
LIFO current ratio (2013) = $220/$200 = 1.1
LIFO inventory turnover (2013) = $740/ [($110+$160)/2] = 5.5
2. The use of LIFO versus FIFO for Cruz markedly impacts the ratios computed.
Specifically, LIFO makes Cruz appear worse in comparison to FIFO numbers
on the current ratio (1.1 vs. 1.5) but better on inventory turnover (5.5 vs. 3.8)
Exercise 5-12 (25 minutes)
1. Correct gross profit = $850,000 – $500,000 = $350,000 (for each year)
2. Reported income figures
Year 2012
Year 2013
Year 2014
Sales …………………………….
$850,000
$850,000
$850,000
Cost of goods sold
Beginning inventory …..
$250,000
$230,000
$250,000
Cost of purchases ………
500,000
500,000
500,000
Good available for sale ……
750,000
730,000
750,000
Ending inventory ………..
230,000
250,000
250,000
Cost of goods sold ……..
520,000
480,000
500,000
Gross profit ………………….
$330,000
$370,000
$350,000
Exercise 5-15A (20 minutes)
Periodic Inventory
Ending
Inventory
Cost of
Goods Sold
a. Specific Identification
(50 x $2.80) + (10 x $2.00) ……………………………….
$160.00
$2,540.00 [Goods Available] – $160.00 [Ending Inventory] …….
$2,380.00
b. Weighted Average ($2,540.00/1,000 = $2.54)
(60 x $2.54)…………………………………………………….
152.40
$2,540.00 [Goods Available] – $152.40 [Ending Inventory] …….
2,387.60
c. FIFO
(22 x $2.00) + (38 x 2.30) …………………………………
131.40
(138 x $3.00) + (300 x $2.80) + (502 x $2.30) …….
2,408.60
d. LIFO
(60 x $3.00)…………………………………………………….
180.00
(22 x $2.00) + (540 x $2.30) + (300 x $2.80) +
(78 x $3.00) ……………………………………………….
2,360.00
Income effect: LIFO provides the lowest cost of goods sold, the
highest gross profit, and the highest net income, which is expected
during a period of declining costs.
Exercise 5-16B (20 minutes)
At Cost
At Retail
Goods available for sale
Beginning inventory …………………………………………...
$ 63,800
$128,400
Cost of goods purchased …………………………………...
115,060
196,800
Goods available for sale ……………………………………..
$178,860
325,200
Deduct net sales at retail ……………………………………....
260,000
Ending inventory at retail ……………………………………....
$ 65,200
Cost ratio: ($178,860/$325,200) = 0.55 ………………………..
Ending inventory at cost ($65,200 x 55%) ……………....
$ 35,860