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5-6
ANSWERS TO QUESTIONS - CHAPTER 5
1. (1.) Specific Identification - The inventory cost flow method that
(2.) First In, First Out - The inventory cost flow method that assumes
that the first items purchased are the first items sold for the
purpose of computing cost of goods sold and inventory.
2. One advantage of the specific identification method is that both the
inventory account and cost of goods sold reflect the actual amounts on
3. FIFO allocates the cost of the first units purchased to the first units
sold; consequently, in a period of rising prices, this would produce a
turnover.
4. LIFO allocates the cost of the last units purchased to the first units sold;
consequently, in a period of rising prices, this would produce a lower
5-7
5. In an inflationary period, i.e., a period where prices are consistently
rising, FIFO will produce the highest amount of income. This is true
6. In an inflationary period, FIFO will produce the largest amount of total
assets. (Refer to the discussion for Question 5.) The unsold items,
7. Flow of costs refers to the assumption that is made for the purpose of
determining the cost of inventory items that are sold when preparing
financial statements. The cost flow assumption that a business makes
8. In a world where there is no income tax, the choice of cost flow
method would not affect the statement of cash flows because it is
simply allocating some of the cost of inventory purchased to expense
5-8
9. Key Company (first year of operations):
Beginning inventory $ -0-
Merchandise purchased 1,000 units @ $25 25,000
10. The amount of cost of goods sold for Key Company will be different
using different cost flow assumptions because the units purchased
during the second year have a different cost than those purchased the
previous year.
11. Since the prices of the inventory are increasing, it may be
advantageous to use FIFO for financial statement purposes because it
5-9
consequently the net income and income tax paid will be lower. Since
method.
12. In an inflationary period, for a business subject to income tax, LIFO
13. A deflationary period, i.e., a period of falling prices, would produce
results opposite of those for an inflationary period. FIFO would
14. "Lower of cost or market" is an accounting convention that helps to
reduce overstating inventory (assets) when the market value of certain
15. For merchandise that has declined in value, the "lower-of-cost-or-
16. In certain situations it is not possible or practical to take a complete
inventory. One such situation is when the inventory or part of it has
been destroyed by some disaster or similar event. Another situation
17. It is generally easier to manipulate net income when a periodic
5-10
The only measurement available is the amount of inventory still on
hand. There is no control over the amount that was sold, damaged, or
stolen. In addition, if the inventory is counted wrong or priced wrong,
19. When using the periodic method, ending inventory that is overstated
at the end of 2016, but is corrected at the end of 2017 will result in the
following:
2016 Income Statement:
20. The inventory turnover tells the user how many times on average
21. Discount merchandisers such as Walmart and Kmart should have a
5-11
EXERCISE 5-1A
a. LIFO
c. FIFO
d. LIFO
e. FIFO
5-12
EXERCISE 5-2A
Jones Co.
First Purchase
$1,060
Second Purchase
1,380
Total
$2,440
(a)
(b)
(c)
FIFO
LIFO
W. AVG.
Cost of Goods Sold
$1,060
$1,380
$1,220*
Ending Inventory
1,380
1,060
1,220*
*Average Cost per Unit: $2,440 2 = $1,220
EXERCISE 5-3A
The Cortez Company Inventory Purchases
Beginning Inventory
100
@
$60
=
$ 6,000
First Purchase
150
@
68
=
10,200
Second Purchase
200
@
72
=
14,400
Goods Available for Sale
450
$30,600
a.
Cost of Goods Sold:
FIFO
Units
Unit Cost
Cost of Goods Sold
From Beginning Inventory
100
@
$60
=
$ 6,000
From First Purchase
150
@
68
=
10,200
From Second Purchase
20
@
72
=
1,440
Total
270
$17,640
5-14
EXERCISE 5-4A
a. (1) Mason Company
FIFO
Sales (370 @ $90)
$33,300
Cost of Goods Sold:
From Beginning Inv.
90 units @ $40
=
$ 3,600
From Purchases
280 units @ $45
=
12,600
(16,200)
Gross Margin
$17,100
LIFO
Sales (370 @ $90)
$33,300
Cost of Goods Sold:
From Purchases
310 units @ $45
=
$13,950
From Beg. Inv.
60 units @ $40
=
2,400
(16,350)
Gross Margin
$16,950
Weighted Average
Sales (370 @ $90)
$33,300
Cost of Goods Sold:
Average Cost per Unit
370 @ $43.8751
=
$16,2342
(16,234)
Gross Margin
$17,066
5-15
EXERCISE 5-4A (cont.)
b.
FIFO
LIFO
Weighted
Avg.
Sales
$33,300
$33,300
$33,300
Cost of Goods Sold
(16,200)
(16,350)
(16,234)
Gross Margin
17,100
16,950
17,066
Operating Expenses
4,100
4,100
4,100
Net Income
$13,000
$12,850
$12,966
c.
Ending Inventory
FIFO
30 @ $45
=
$1,350
LIFO
30 @ $40
=
1,200
Weighted Average
30 @ $43.875
=
1,316*
5-16
EXERCISE 5-5A
The Shirt Shop
Summary of Purchase Transactions
1/20
Purchased Units
400
@
$8
=
$3,200
4/21
Purchased Units
200
@
10
=
2,000
7/25
Purchased Units
280
@
13
=
3,640
9/19
Purchased Units
90
@
15
=
1,350
Available for Sale
970
$10,190
a. (1)
FIFO
Units
Unit
Cost
Total
Ending Inventory
From 9/19 Purchase
90
@
$15
$1,350
From 7/25 Purchase
70
@
$13
910
Total Ending Inventory
160
$2,260
a. (2)
LIFO
Units
Unit
Cost
Total
Ending Inventory
From 1/20 Purchase
160
@
$8
$1,280
Total Ending Inventory
160
$1,280
a. (3)
Weighted Average
Total Cost
Total Units
=
Cost per Unit
$10,190
970
=
$10.51
Ending Inventory
160 units @ $10.51 =
$1,681.60
*rounded
5-17
EXERCISE 5-5A (cont.)
b.
Note: The purchase entries are the same for all three methods.
The Shirt Shop
General Journal
Date
Account Title
Debit
Credit
Jan. 20
Merchandise Inventory
3,200
Cash
3,200
Apr. 21
Merchandise Inventory
2,000
Cash
2,000
July 25
Merchandise Inventory
3,640
Cash
3,640
Sept. 19
Merchandise Inventory
1,350
Cash
1,350
(1) FIFO Sales and Cost of Goods Sold
2016
Cash (810 x $20)
16,200
Sales Revenue
16,200
2016
Cost of Goods Sold ($10,190 − $2,260)
7,930
Merchandise Inventory
7,930
(2) LIFO Sales and Cost of Goods Sold
2016
Cash
16,200
Sales Revenue
16,200
2016
Cost of Goods Sold ($10,190 − $830)
8,910
Merchandise Inventory
8,910
(3) Weighted Average Sales and Cost of Goods Sold
2016
Cash
16,200
Sales Revenue
16,200
2016
Cost of Goods Sold ($10,190− $1,677)
8,513
Merchandise Inventory
8,513
5-18
EXERCISE 5-5A b. (cont.)
(1) FIFO
Cash
Sales Revenue
2016 16,200
1/20 3,200
2016 16,200
4/21 2,000
Bal. 16,200
7/25 3,640
9/19 1,350
Cost of Goods Sold
Bal. 6,010
2016 7,930
Bal. 7,930
Merchandise Inventory
1/20 3,200
4/21 2,000
7/25 3,640
9/19 1,350
2016 7,930
Bal. 2,260
(2) LIFO
Cash
Sales Revenue
2016 16,200
1/20 3,200
2016 16,200
4/21 2,000
Bal. 16,200
7/25 3,640
9/19 1,350
Cost of Goods Sold
Bal. 6,010
2016 8,910
Bal. 8,910
Merchandise Inventory
1/20 3,200
4/21 2,000
7/25 3,640
9/19 1,350
2016 8,910
Bal. 1,280
5-19
EXERCISE 5-5A b. (cont.)
(3) Weighted Average
Cash
Sales Revenue
2016 16,200
1/20 3,200
2016 16,200
4/21 2,000
Bal. 16,200
7/25 3,640
9/19 1,350
Cost of Goods Sold
Bal. 6,010
2016 8,513
Bal. 8,513
Merchandise Inventory
1/20 3,200
4/21 2,000
7/25 3,640
9/19 1,350
2016 8,513
Bal. 1,677
5-20
EXERCISE 5-5A (cont.)
c.
FIFO
Sales (810 units @ $20)
$16,200
Cost of Goods Sold
Cost of Goods Avail. for Sale*
$10,190
Less: Ending Inventory
(2,260)
Cost of Goods Sold
(7,930)
Gross Margin
$ 8,270
LIFO
Sales (810 units @ $20)
$16,200
Cost of Goods Sold
Cost of Goods Avail. for Sale*
$10,190
Less: Ending Inventory
(1,280)
Cost of Goods Sold
(8,910)
Gross Margin
$ 7,290
*This amount is computed in the Summary of Purchase Transactions at the
beginning of the problem.
Difference in Gross Margin: $8,270 − $7,290 = $980
Note to Instructor: Cost of goods sold can be computed on a units-sold
basis rather than subtracting ending inventory from goods available for
sale.
5-21
EXERCISE 5-6A
a. (1) FIFO
Date
Account Title
Debit
Credit
Apr. 1
Merchandise Inventory (2,000 x $35)
70,000
Cash
70,000
Oct. 1
Merchandise Inventory (600 x $38)
22,800
Cash
22,800
Sales
Cash (2,700 x $90)
243,000
Sales Revenue
243,000
Cost of Sales
Cost of Goods Sold*
93,400
Merchandise Inventory
93,400
Op. Exp.
Operating Expenses
41,500
Cash
41,500
Tax Exp.
Income Tax Expense**
32,430
Cash
32,430
*Beg. Inv. 400 @ $30 $12,000
4/1 2,000 @ $35 70,000
10/1 300 @ $38 11,400
Cost of Goods Sold $93,400
**$243,000 – $93,400 – $41,500 = $108,100 x .30 = $32,430
5-22
EXERCISE 5-6A a. (cont.)
(1) FIFO
Cash
Common Stock
Bal. 75,000
Bal. 50,000
2016 243,000
4/1 70,000
10/1 22,800
Retained Earnings
Op. Exp. 41,500
Bal. 37,000
Tax 32,430
Bal. 151,270
Sales Revenue
2016 243,000
Merchandise Inventory
Bal. 12,000
Cost of Goods Sold
4/1 70,000
2016 93,400
10/1 22,800
2016 93,400
Bal. 11,400
Operating Expenses
2016 41,500
Income Tax Expense
2016 32,430
5-23
EXERCISE 5-6A a. (cont.)
(2) LIFO
Date
Account Title
Debit
Credit
Apr. 1
Merchandise Inventory
70,000
Cash (3,000 x $22)
70,000
Oct. 1
Merchandise Inventory
22,800
Cash (600 x $38)
22,800
Sales
Cash
243,000
Sales Revenue
243,000
Cost of Sales
Cost of Goods Sold*
95,800
Merchandise Inventory
95,800
Op. Exp.
Operating Expenses
41,500
Cash
41,500
Tax Exp.
Income Tax Expense**
31,710
Cash
31,710
*10/1 600 @ $38 $22,800
4/1 2,000 @ $35 70,000
Beg. Inv. 100 @ $30 3,000
Cost of Goods Sold $95,800
**$243,000 – $95,800 – $41,500 = $105,700 x .30 = $31,710
5-24
EXERCISE 5-6A a. (cont.)
(2) LIFO
Cash
Common Stock
Bal. 75,000
Bal. 50,000
2016 243,000
4/1 70,000
10/1 22,800
Retained Earnings
Op. Exp. 41,500
Bal. 37,000
Tax 31,710
Bal. 151,990
Sales Revenue
2016 243,000
Merchandise Inventory
Bal. 12,000
Cost of Goods Sold
4/1 70,000
2016 95,800
10/1 22,800
2016 95,800
Bal. 9,000
Operating Expenses
2016 41,500
Income Tax Expense
2016 31,710
5-25
EXERCISE 5-6A (cont.)
b.
Parvin Company
Income Statements
For the Year Ended December 31, 2016
FIFO
Sales (2,700 @ $90)
$243,000
Cost of Goods Sold:
From Beginning Inv.
400 units @ $30
=
$12,000
From 4/1 Purchase
2,000 units @ $35
=
70,000
From 10/1 Purchase
300 units @ $38
=
11,400
Cost of Goods Sold
(93,400)
Gross Margin
149,600
Operating Expenses
(41,500)
Income Before Tax
108,100
Income Tax Expense
$108,100 x 30%
(32,430)
Net Income
$ 75,670
LIFO
Sales (2,700 @ $90)
$243,000
Cost of Goods Sold:
From 10/1 Purchase
600 units @ $38
=
$22,800
From 4/1 Purchase
2,000 units @ $35
=
70,000
From Beginning Inv.
100 units @ $30
=
3,000
Cost of Goods Sold
(95,800)
Gross Margin
147,200
Operating Expenses
(41,500)
Income Before Tax
105,700
Income Tax Expense
$105,700 x 30%
(31,710)
Net Income
$ 73,990
