M7–14
(a) Perpetual FIFO
Goods in Inventory
Goods Sold
Unit
Unit
Total
Date
Description
Units
Cost
Units
Cost
Cost
July 1
Beginning inventory
2,000
$ 40
July 5
Sold 1,000 units
(1,000)
40
1,000
$ 40
$40,000
July 13
Purchased
6,000
44
July 17
Sold 3,000 units
(1,000)
(2,000)
40
44
1,000
2,000
40
44
40,000
88,000
July 25
Purchased
8,000
50
July 27
Sold 5,000 units
(4,000)
(1,000)
44
50
4,000
1,000
44
50
176,000
50,000
Total
7,000
9,000
$394,000
(b) Perpetual LIFO
Goods in Inventory
Goods Sold
Unit
Unit
Total
Date
Description
Units
Cost
Units
Cost
Cost
July 1
Beginning inventory
2,000
$ 40
July 5
Sold 1,000 units
(1,000)
40
1,000
$ 40
$40,000
July 13
Purchased
6,000
44
July 17
Sold 3,000 units
(3,000)
44
3,000
44
132,000
July 25
Purchased
8,000
50
July 27
Sold 5,000 units
(5,000)
50
5,000
50
250,000
Total
7,000
9,000
$422,000
M7–15
Remaining
Perpetual FIFO
Units
Unit Cost
Total Cost
Inventory Value
a)
Purchase January 1
300
$7.00
$2,100
$2,100
b)
Purchase January 8
450
8.00
3,600
5,700
c)
Sale
(300)
7.00
(2,100)
3,600
(300)
8.00
(2,400)
1,200
d)
Purchase January 29
750
9.00
6,750
7,950
Ending Inventory
$7,950
[(150 x $8) + (750 x $9)]
Cost of Goods Sold
$4,500
[(300 x $7) + (300 x $8)]
Remaining
Perpetual LIFO
Units
Unit Cost
Total Cost
Inventory Value
a)
Purchase January 1
300
$7.00
$2,100
$2,100
b)
Purchase January 8
450
8.00
3,600
5,700
c)
Sale
(450)
8.00
(3,600)
2,100
(150)
7.00
(1,050)
1,050
d)
Purchase January 29
750
9.00
6,750
7,800
Ending Inventory
$7,800
[(150 x $7) + (750 x $9)]
Cost of Goods Sold
$4,650
[(450 x $8) + (150 x $7)]
Perpetual Weighted Average
Remaining
Units
Unit Cost
Total Cost
Inventory Value
a)
Purchase January 1
300
$7.00
$2,100
$2,100
b)
Purchase January 8
450
8.00
3,600
5,700
Available for Sale
750
5,700
c)
Sale
(600)
7.60*
(4,560)
1,140
d)
Purchase January 29
750
9.00
6,750
7,890
Ending Inventory
$7,890
[(150 x $7.60) + (750 x $9)]
Cost of Goods Sold
$4,560
[(600 x $7.60)]
M7–16
To determine the effects of inventory errors on the financial statements in both the
current year and the following year, use the cost of goods sold equation. An error that
understates 2015 ending inventory by $10,000 would have the following effects:
2015
Beginning Inventory
Accurate
+ Purchases of merchandise during the year
Accurate
– Ending Inventory
Understated by $10,000
= Cost of Goods Sold
Overstated by $10,000
Gross Profit
Understated by $10,000
2016
Beginning Inventory
Understated by $10,000
+ Purchases of merchandise during the year
Accurate
– Ending Inventory
Accurate
= Cost of Goods Sold
Understated by $10,000
Gross Profit
Overstated by $10,000
M7–17
2015
Beginning Inventory
Accurate
+ Purchases of merchandise during the year
Accurate
– Ending Inventory
Overstated by $100,000
= Cost of Goods Sold
Understated by $100,000
Gross Profit
Overstated by $100,000
2016
Beginning Inventory
Overstated by $100,000
+ Purchases of merchandise during the year
Accurate
– Ending Inventory
Accurate
= Cost of Goods Sold
Overstated by $100,000
Gross Profit
Understated by $100,000
7–14 Solutions Manual
© 2016 by McGraw–Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
ANSWERS TO EXERCISES
E7–1
No
(a)
On November 2, SCC received goods on consignment from Apparel Corp.
No
(b)
On October 31, SCC received goods on consignment from Apparel Corp.
Yes
(c)
Goods in transit to SCC were shipped by Shoe, Inc. on October 31, FOB
shipping point.
No
(d)
Goods in transit to SCC were shipped by Shoe, Inc, on October 31, FOB
destination.
E7–2
Inventory
Cost of Goods Sold
Present Balance
+$ 70,000
+$ 420,000
a.
–10,000
–
b.
–5,000
–
c.
+8,000
–8,000
d.
–3,000
+3,000
Appropriate Balance
$ 60,000
$ 415,000
E7–3
(a)
Accounts Payable …………………………………………….………
10,000
Inventory …………………………………………………….…
10,000
(b)
Supplies ………………………………………………………….………
5,000
Inventory …………………………………………………….…
5,000
(c)
Inventory …………………………………………………………………
8,000
Cost of Goods Sold ………………………………………………
8,000
Sales Revenue ……………………………………………………….
15,000
Accounts Receivable …………………………………….………
15,000
(d)
Cost of Goods Sold …………………………………………..………
3,000
Inventory …………………………………………………….…
3,000
E7–4
Req. 1
Beginning Inventory
12 units x $8
$ 96
+ Purchase
38 units x $9
342
+ Purchase
20 units x $11
220
Goods Available for Sale
70 units
$ 658
Ending Inventory Units = 24.
a)
FIFO
Goods Available for Sale
$ 658
– Ending Inventory (LIST) (4 × $9) + (20 x $11)
256
Cost of Goods Sold (FIFO) (12 x $8) + (34 × $9)
$ 402
b)
LIFO
Goods Available for Sale
$ 658
– Ending Inventory (FIST) (12 × $9) + (12 x $8)
204
Cost of Goods Sold (LIFO) (20 × $11) + (26 x $9)
$ 454
c)
Weighted average unit cost: Cost of Goods Available for Sale $658
# Units Available for Sale 70 units
Weighted Average
Goods Available for Sale
$ 658.00
– Ending Inventory (24 × $9.40)
225.60
Cost of Goods Sold (46 × $9.40)
$ 432.40
Req. 2
Using FIFO will result in reporting the highest net income because Cost of Goods Sold
is the lowest when using FIFO in times of rising unit costs.
= $9.40 per unit
E7–5
Req. 1
Beginning Inventory
120 units x $ 80
$ 9,600
+ Purchase
380 units x $ 90
34,200
+ Purchase
200 units x $110
22,000
Goods Available for Sale
700 units
$ 65,800
Req. 2
Goods Available for Sale
$ 65,800
Cost of Goods Sold (FIFO) (120 x $80) + (120 × $90)
Goods Available for Sale
$ 65,800
Cost of Goods Sold (LIFO) (200 × $110) + (40 x $90)
Goods Available for Sale
$ 65,800
Cost of Goods Sold (240 × $94)
E7–6
Req. 1
Beginning Inventory
300 units x $12
$ 3,600
+ Purchase
900 units x $10
9,000
+ Purchase
800 units x $13
10,400
Goods Available for Sale
2,000 units
$ 23,000
Req. 2
Goods Available for Sale
Cost of Goods Sold (FIFO) (300 x $12) + (600 × $10)
Goods Available for Sale
Cost of Goods Sold (LIFO) (800 × $13) + (100 x $10)
E7–6 (continued)
Req. 4 ORION IRON CORP.
Income Statement
FIFO
LIFO
Weighted
Average
Sales Revenue1
$36,000
$36,000
$36,000
Cost of Goods Sold
9,600
11,400
10,350
Gross Profit
26,400
24,600
25,650
Operating Expenses
19,500
19,500
19,500
Income from Operations
$6,900
$5,100
$6,150
Computations:
(1) Sales: (300 units @ $40) + (600 units @ $40) = $36,000
Req. 5
Comparison of Amounts
FIFO
LIFO
Weighted
Average
Income from Operations
$ 6,900
$ 5,100
$ 6,150
Ending Inventory
13,400
11,600
12,650
The above table demonstrates that the operating income difference when comparing
any two cases is exactly the same as the inventory difference. Differences in inventory
have a dollar–for–dollar effect on Income from Operations. The method with the highest
ending inventory always has the highest Income from Operations. The weighted
average method always falls between the FIFO and LIFO methods.
Req. 6
The LIFO method minimizes income taxes because it reports less taxable income as a
result of using higher unit costs (in this case) to calculate Cost of Goods Sold. A higher
Cost of Goods Sold means less Income from Operations and therefore reduces income
taxes.
E7–7
Req. 1
Beginning Inventory
3,000 units x $ 8
$ 24,000
+ Purchase
9,500 units x $ 9
85,500
+ Purchase
5,000 units x $11
55,000
Goods Available for Sale
17,500 units
$ 164,500
Req. 2
Ending Inventory Units = Units Available – Units Sold = 17,500 – 12,000 = 5,500 units.
Req. 3
FIFO
Goods Available for Sale
$ 164,500
– Ending Inventory (LIST) (5,000 × $11) + (500 x $9)
59,500
Cost of Goods Sold (FIFO) (3,000 x $8) + (9,000 × $9)
$ 105,000
LIFO
Goods Available for Sale
$ 164,500
– Ending Inventory (FIST) (3,000 × $8) + (2,500 x $9)
46,500
Cost of Goods Sold (LIFO) (5,000 × $11) + (7,000 x $9)
$ 118,000
Weighted average unit cost: $164,500
17,500 units
Weighted Average
Goods Available for Sale
$ 164,500
– Ending Inventory (5,500 × $9.40)
51,700
Cost of Goods Sold (12,000 × $9.40)
$ 112,800
Req. 4 SCORESBY INC.
Income Statement
For the Year Ended December 31
FIFO
LIFO
Weighted
Average
Sales Revenue [(4,000 x $29) + (8,000 x $31)]
$364,000
$364,000
$364,000
Cost of Goods Sold
105,000
118,000
112,800
Gross Profit
259,000
246,000
251,200
Operating Expenses
250,000
250,000
250,000
Income (Loss) from Operations
$ 9,000
$ (4,000)
$ 1,200
= $9.40 per unit
E7–7 (continued)
Req. 5
Comparison of Amounts
Case A
Case B
Case C
FIFO
LIFO
Weighted
Average
Income from Operations
$ 9,000
($4,000)
$ 1,200
Ending Inventory
59,500
46,500
51,700