Chapter 6
Inventory & Cost of Goods Sold
Short Exercises
(10-15 min.) S 6-1
1. (Journal entries)
Inventory ………………………………………………
120,000
Accounts Payable ……………………………..
120,000
Accounts Receivable …………………………….
165,000
Sales Revenue …………………………………..
165,000
Cost of Goods Sold ……………………………….
84,000
Inventory ($120,000 × .70) …………………..
84,000
Cash ($165,000 × .35) …………………………….
57,750
Accounts Receivable …………………………
57,750
2. (Financial statements)
BALANCE SHEET
Current assets:
Inventory ($120,000 − $84,000) ………………………..
$ 36,000
INCOME STATEMENT
Sales revenue ……………………………………………………..
$165,000
Cost of goods sold ………………………………………………
84,000
Gross profit ………………………………………………………..
$ 81,000
Inc.
(10-15 min.) S 6-2
City Copy Center
Income Statement
Year Ended December 31
Average
FIFO
LIFO
Sales revenue (600 × $19.50)
$11,700
$11,700
$11,700
Cost of goods sold (600 × $9.70*)
5,820
(100 × $8.40) + (500 × $9.90)
5,790
(600 × $9.90)
5,940
Gross profit
5,880
5,910
5,760
Operating expenses
3,750
3,750
3,750
Net income
$ 2,130
$ 2,160
$ 2,010
_____
*Average cost per unit:
Beginning inventory (100 @ $8.30) ……………………………..
$ 830
Purchases (700 @ $9.90) …………………………………………….
6,930
Cost of goods available ……………………………………………..
$7,760
Average cost per unit $7,760 / 800 units …………………
$ 9.70
(10-15 min.) S 6-3
City Copy Center
Income Statement
Year Ended December 31
Average
FIFO
LIFO
Sales revenue (600 × $19.50)
$11,700
$11,700
$11,700
Cost of goods sold (600 × $9.70*)
5,820
(100 × $8.40) + (500 × $9.90)
5,790
(600 × $9.90)
______
______
5,940
Gross profit
5,880
5,910
5,760
Operating expenses
3,750
3,750
3,750
Income before income tax
$ 2,130
$ 2,160
$ 2,010
Income tax expense (40%)
$ 852
$ 864
$ 804
*From S 6-2
Inc.
(5 min.) S 6-4
Univision.com managers can purchase a large amount of inventory
before year end. Under LIFO, these high inventory costs go directly to
(5-10 min.) S 6-5
BALANCE SHEET
Current assets:
Inventories, at market (which is lower than cost) ………..
$ 52,000
INCOME STATEMENT
Cost of goods sold [$380,000 + ($56,000 − $52,000)] ……….
$384,000
(10-15 min.) S 6-6
FIFO 1. Maximizes reported income.
Specific
unit cost 2. Used to account for automobiles, jewelry, and art
objects.
FIFO 3. Results in a cost of ending inventory that is close to
the current cost of replacing the inventory.
Inc.
(5-10 min.) S 6-7
Dollars in Millions
Gross profit percentage
=
$53,376 − $24,437
=
54.2%
$53,376
Inventory turnover
=
$24,437
=
8.8 times
($2,672 + $2,908) / 2
(5-10 min.) S 6-8
Beginning inventory ………………………………………….
$ 15,000
+
Purchases ………………………………………………………..
420,000
=
Cost of goods available …………………………………….
435,000
−
Cost of goods sold:
Sales revenue ………………………………….
$870,000
Less estimated gross profit (60%) ……..
(522,000)
Estimated cost of goods sold …………………………
(348,000)
=
Estimated cost of ending inventory ……………………
$ 87,000
(5 min.) S 6-9
1. Last year’s reported gross profit was understated.
Correct gross profit last year was $3.8 million ($2.7 + $1.1).
(5-10 min.) S 6-10
1. Unethical. The company falsified its purchases, cost of goods sold,
and net income in order to evade taxes.
Inc.
Exercises
(15-20 min.) E 6-11A
Req. 1
Perpetual System
1.
Purchases:
Inventory ………………………………………………..
68,000
Accounts Payable ……………………………….
68,000
2.
Sales:
Cash ($115,000 × .17) ………………………………
19,550
Accounts Receivable ($115,000 × .83) ………
95,450
Sales Revenue …………………………………….
115,000
Cost of Goods Sold …………………………………
57,000
Inventory …………………………………………….
57,000
Req. 2
BALANCE SHEET
Current assets:
Inventory……………………………….
$26,000
INCOME STATEMENT
Sales revenue…………………………….
$115,000
Cost of goods sold………………………
57,000
Gross profit……………………………….
$58,000
(15-25 min.) E 6-12A
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
Req. 1
Inventory ($1,248 + $2,145) ……………………..
3,393
Accounts Payable ………………………………
3,393
Req. 2
Accounts Receivable (17 @ $600) ……………
10,200
Sales Revenue …………………………………..
10,200
Cost of Goods Sold ………………………………..
2,683*
Inventory …………………………………………..
2,683
Req. 3
Sales revenue …………………………..………..
$10,200
Cost of goods sold ……………………………..
2,683
Gross profit ………………………………………..
$ 7,517
Ending inventory
($775 + $1,248 + $2,145 − $2,683) …….
$1,485**
_____
*(5 @ $155) + (8 @ $156) + (4 @ $165) = $2,683
**Or, (9 @ $165) = $1,485
Inc.
(10-15 min.) E 6-13A
Req. 1
Inventory
Beg. bal.
(5 units @ $155) 775
Purchases
Jan. 15
(8 units @ $156) 1,248
Cost of goods sold
26
(13 units @ $165) 2,145
(17 units @ $?)
?
End. bal.
(9 units @ $?) ?
Cost of Goods Sold
Ending Inventory
(a) Specific
unit cost
(2 @ $155) +
(8 @ $156) +
(7 @ $165)
=
$2,713
(3 @ $155) +
(6 @ $165)
=
$1,455
(b)Average
cost
(17 × $160.31*)
=
$2,725
(9 × $160.31*)
=
$1,443
(c) FIFO
(5 @ $155) +
(8 @ $156) +
(4 @ $165)
=
$2,683
(9 @ $165)
=
$1,485
(d) LIFO
(13 @ $165) +
( 4 @ $156)
=
$2,769
(5 @ $155) +
(4 @ $156)
=
$1,399
_____
*Average cost per
unit
=
($775 + $1,248 + $2,145)
=
$160.31
(5 + 8 + 13)
Req. 2
LIFO produces the highest cost of goods sold, $2,769.
(10 min.) E 6-14A
Cost of goods sold:
LIFO ($2,769) − FIFO ($2,683) …………………………………..
$ 86
× Income tax rate ……………………………………………………
× .28
Tax savings advantage of LIFO ……………………………………
$ 24
Inc.
(15 min.) E 6-15A
Req. 1
a.
FIFO
Cost of goods sold:
(11 @ $45) …………………………………….
$495
Ending inventory:
(4 @ $69) + (3 @ $45) …………………….
$411
b.
LIFO
Cost of goods sold:
(4 @ $69) + (7 @ $45) …………………….
$591
Ending inventory:
(7 @ $45) ………………………………………
$315
Req. 2
MusicWorld.net
Income Statement
Month Ended June 30, 2014
Sales revenue (11 @ $112) ……………………………………..
$1,232
Cost of goods sold ………………………………………………..
495
Gross profit …………………………………………………………..
737
Operating expenses ………………………………………………
340
Income before income tax………………………………………
397
Income tax expense (40%) ……………………………………..
159
Net income ……………………………………………………………
$ 238
(15 min.) E 6-16A
Req. 1
Gross profit:
FIFO
LIFO
Sales revenue …………………………………………….
$850,000
$850,000
Cost of goods sold
FIFO: 65,000 × $7 ……………………………………
455,000
LIFO: (40,000 × $4.20) + (10,000 × $5.10)
+ (15,000 × $7) …………………………….
324,000
Gross profit ……………………………………………….
$395,000
$526,000
Req. 2
Gross profit under FIFO and LIFO differ because inventory costs
decreased during the period.
(5-10 min.) E 6-17A
Debbie’s Garden Supplies
Income Statement (partial)
Year Ended October 31, 2014
Sales revenue ………………………………………………………………..
$246,000
Cost of goods sold [$120,000 + ($33,000 − $31,500)] …………
121,500
Gross profit ……………………………………………………………………
$124,500
Note: Cost is used for beginning inventory because cost is lower than
Inc.
(15-20 min.) E 6-18A
a.
$136,000
$41,000 + $132,000 − $37,000 = $136,000
b.
$117,000
$253,000 − $136,000 = $117,000
c.
Must first solve for d
d.
$ 93,000
$137,000 − $44,000 = $93,000
c.
$ 88,000
$26,000 + c − $93,000 = $21,000;
c = $88,000
e.
$ 97,000
$62,000 + $35,000 = $97,000
f.
$ 32,000
f + $54,000 − $24,000 = $62,000; f = $32,000
g.
$ 5,000
$9,000 + $29,000 − g = $33,000; g = $5,000
h.
$ 49,000
$82,000 − $33,000 = $49,000
Req. 1
Cailley Company
Income Statement
Year Ended December 31, 2014
Net sales ……………………………………….
$253,000
Cost of goods sold
Beginning inventory…………………..
$ 41,000
Net purchases …………………………..
132,000
Cost of goods available ……………..
173,000
Ending inventory ……………………….
(37,000)
Cost of goods sold …………………….
136,000
Gross profit ……………………………………
117,000
Operating and other expenses ………..
72,000
Net income …………………………………….
$ 45,000
(20-30 min.) E 6-19A
Req. 1
Company
Gross Profit
Percentage
Inventory Turnover
Cailley
$117
=
46.2%
$136
=
3.5 times
$253
($41 + $37) / 2
Durango
$44
=
32.1%
$93
=
4 times
$137
($26 + $21) / 2
Hartt
$35
=
36.1%
$62
=
2.2 times
$97
($32 + $24) / 2
Rosen
$49
=
59.8%
$33
=
4.7 times
$82
($9 + $5) / 2
Req. 2
Rosen has the highest gross profit percentage, 59.8%. Durango has the
lowest gross profit percentage, 32.1%.
Inc.
(15 min.) E 6-20A
Req. 1 and 2
1
2
FIFO
LIFO
Gross profit percentage
=
$154,000 − $80,900
$154,000 − $84,900
$154,000
$154,000
= 47.5%
= 44.9%
Inventory turnover
=
$80,900
$84,900
($18,000 + $23,000) / 2
($8,000 + $19,000) / 2
= 3.9 times
= 6.3 times
Req. 3
Req. 4
(10-15 min.) E 6-21A
Year ended January 31, 2014
Millions
Budgeted cost of goods sold ($6,500 × 1.12) …………………….
$7,280
Budgeted ending inventory ……………………………………………..
2,100
Budgeted cost of goods available ……………………………………
9,380
Actual beginning inventory ……………………………………………..
(1,800)
Budgeted purchases ………………………………………………………
$7,580
(10-15 min.) E 6-22A
Beginning inventory ………………………………………..
$ 45,700
Net purchases ………………………………………………..
62,300
Cost of goods available …………………………………..
108,000
Estimated cost of goods sold:
Net sales revenue ………………………………………
$107,600
Less: estimated gross profit of 45% …………….
(48,420)
Estimated cost of goods sold ……………………..
59,180
Estimated cost of inventory destroyed ……………..
$ 48,820
Another reason that managers use the gross profit method to estimate
ending inventory is to test the reasonableness of ending inventory.
Inc.
(10-15 min.) E 6-23A
Lake Anna Marine Supply
Income Statement (Corrected)
Years Ended June 30, 2014 and 2013
2014
2013
Sales revenue
$216,000
$191,000
Cost of goods sold:
Beginning inventory
$18,600
$ 11,500
Net purchases
105,000
88,000
Cost of goods avail.
123,600
99,500
Ending inventory
(18,000)
(18,600)*
Cost of goods sold
105,600
80,900
Gross profit
110,400
110,100
Operating expenses
51,000
46,000
Net income
$ 59,400
$ 64,100
_____
*$15,000 + $3,600 = $18,600
Lake Anna Marina Supply actually performed poorly in 2014, compared
to 2013, with net income down from $64,100 to $59,400.
(15-20 min.) E 6-24B
Req. 1
Perpetual System
1.
Purchases:
Inventory ………………………………………………..
72,000
Accounts Payable ……………………………….
72,000
2.
Sales:
Cash ($108,000 × .21)……………………………….
22,680
Accounts Receivable ($108,000 × .79) ……….
85,320
Sales Revenue …………………………………….
108,000
Cost of Goods Sold …………………………………
56,000
Inventory …………………………………………….
56,000
Req. 2
BALANCE SHEET
Current assets:
Inventory …………………………………………..
$ 28,000
INCOME STATEMENT
Sales revenue ………………………………………..
$108,000
Cost of goods sold …………………………………
56,000
Gross profit …………………………………………..
$ 52,000
Inc.
(15-25 min.) E 6-25B
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
Req. 1
Inventory ($1,376 + $2,520) ………………………..
3,896
Accounts Payable ………………………………..
3,896
Req. 2
Accounts Receivable (17 @ $575) ……………..
9,775
Sales Revenue ……………………………………..
9,775
Cost of Goods Sold…………………………………..
2,936*
Inventory ……………………………………………..
2,936
Req. 3
Sales revenue ……………………………………..
$9,775
Cost of goods sold………………………………
2,936
Gross profit ………………………………………..
$6,839
Ending inventory
($1,020 + $1,376 + $2,520 − $2,936) …..
$1,980**