BRIEF EXERCISE 6-4
Average unit cost is $6.89 computed as follows:
BRIEF EXERCISE 6-5
(a) FIFO would result in the highest net income.
(b) FIFO would result in the highest ending inventory.
BRIEF EXERCISE 6-6
Cost of good sold under:
LIFO
FIFO
Purchases
$6 X 120
$6 X 120
$7 X 200
$7 X 200
$8 X 140
$8 X 140
Cost of goods available for sale
$ 3,240
$ 3,240
Less: Ending inventory
1,140
1,400
Cost of goods sold
$ 2,100
$ 1,840
the company can expect to earn in future periods.
BRIEF EXERCISE 6-7
Inventory Categories
Cost
Market
LCM
Cameras
$12,000
$12,100
$12,000
Camcorders
9,500
9,700
9,500
DVD players
14,000
12,800
12,800
Total valuation
$34,300
BRIEF EXERCISE 6-8
Total assets in the balance sheet will be understated by the amount that
BRIEF EXERCISE 6-9
Inventory turnover:
$270,000
$60,000 + $40,000
÷ 2
=
$270,000
$50,000
= 5.4
Days in inventory:
365
5.4
= 67.6 days
*BRIEF EXERCISE 6-10
(a) FIFO Method
Product E2-D2
Date
Purchases
Cost of
Goods Sold
Balance
May 7
(50 @ $10) $500
(50 @ $10) $500
June 1
(26 @ $10) $260
(24 @ $10) $240
July 28
(30 @ $13) $390
(24 @ $10)
} $630
(30 @ $13)
Aug. 27
(24 @ $10)
} $448
(16 @ $13)
(14 @ $13) $182
*BRIEF EXERCISE 6-10 (Continued)
(b) LIFO Method
Product E2-D2
Date
Purchases
Cost of
Goods Sold
Balance
May 7
(50 @ $10) $500
(50 @ $10) $500
June 1
(26 @ $10) $260
(24 @ $10) $240
July 28
(30 @ $13) $390
(24 @ $10)
} $630
(30 @ $13)
Aug. 27
(30 @ $13)
} $490
(10 @ $10)
(14 @ $10) $140
(c) Average-Cost
Product E2-D2
Date
Purchases
Cost of
Goods Sold
Balance
May 7
(50 @ $10) $500
(50 @ $10) $500
June 1
(26 @ $10) $260
(24 @ $10) $240
July 28
(30 @ $13) $390
(54 @ $11.67)* $630
Aug. 27
(40 @ $11.67) $467
(14 @ $11.67) $163
*($240 + $390) ÷ 54
*BRIEF EXERCISE 6-11
(1) Net sales ………………………………………………………………….. $330,000
(2) Cost of goods available for sale ………………………………… $230,000
*BRIEF EXERCISE 6-12
At Cost
At Retail
Goods available for sale
$38,000
$50,000
Net sales
40,000
Ending inventory at retail
$10,000
SOLUTIONS FOR DO IT! REVIEW EXERCISES
DO IT! 6-1
Inventory per physical count ……………………………………………. $300,000
Inventory out on consignment …………………………………………. 26,000
DO IT! 6-2
Cost of goods available for sale = (3,000 X $5) + (8,000 X $7) = $71,000
(a) FIFO: $71,000 – (1,600 X $7) = $59,800
DO IT! 6-3
these figures, $476,000.
(b)
2014
2015
Ending inventory
$31,000 understated
No effect
Cost of goods sold
$31,000 overstated
$31,000 understated
Stockholders’ equity
$31,000 understated
No effect
DO IT! 6-4
2014
2015
Inventory turnover
$1,200,000
=
6
$1,425,000
=
8.9
($180,000 + $220,000)/2
($220,000 + $100,000)/2
Days in inventory
365 ÷ 6 = 60.8 days
365 ÷ 8.9 = 41 days
The company experienced a very significant decline in its ending inventory
as a result of the just-in-time inventory. This decline improved its inventory
SOLUTIONS TO EXERCISES
EXERCISE 6-1
EXERCISE 6-2
Ending inventory—as reported …………………………………………….. $740,000
1. Subtract from inventory: The goods belong to
Harmon Corporation. Schuda is merely holding
5. Add to inventory: Reza Sales ordered goods
with a cost of $8,000. Schuda should record the
EXERCISE 6-2 (Continued)
6. Subtract from inventory: GAAP require that inventory
be valued at the lower of cost or market. Obsolete parts
EXERCISE 6-3
(a) FIFO Cost of Goods Sold
(b) It could choose to sell specific units purchased at specific costs if it
wished to impact earnings selectively. If it wished to minimize earnings
(c) I recommend they use the FIFO method because it produces a more
appropriate balance sheet valuation and reduces the opportunity to
manipulate earnings.
(The answer may vary depending on the method the student chooses.)
EXERCISE 6-4
(a) FIFO
Beginning inventory (26 X $97) …………………………….. $ 2,522
Purchases
Sept. 12 (45 X $102) ……………………………………….. $4,590
Sept. 19 (20 X $104) ……………………………………….. 2,080
EXERCISE 6-4 (Continued)
Proof
Date
Units
Unit Cost
Total Cost
9/1
26
$ 97
$ 2,522
9/12
45
102
4,590
9/19
20
104
2,080
9/26
30
105
3,150
121
$12,342
LIFO
Cost of goods available for sale………………………………………………… $14,442
Proof
Date
Units
Unit Cost
Total Cost
9/26
50
$105
$ 5,250
9/19
20
104
2,080
9/12
9/1
45
6
102
97
4,590
582
121
$12,502
(b)
FIFO $2,100 (ending inventory) + $12,342 (COGS) = $14,442
}
Cost of
goods
available
for sale
LIFO $1,940 (ending inventory) + $12,502 (COGS) = $14,442
EXERCISE 6-5
FIFO
Beginning inventory (30 X $8) ………………………………………. $240
Purchases
May 15 (25 X $11) ………………………………………………….. $275
EXERCISE 6-5 (Continued)
Proof
Date
Units
Unit Cost
Total Cost
5/1
30
$ 8
$240
5/15
25
11
275
5/24
10
12
120
65
$635
LIFO
Proof
Date
Units
Unit Cost
Total Cost
5/24
35
$12
$420
5/15
25
11
275
5/1
5
8
40
65
$735
EXERCISE 6-6
(a) FIFO
LIFO
Cost of goods available for sale ……………………….. $5,500
EXERCISE 6-6 (Continued)
(b) The FIFO method will produce the higher ending inventory because
costs have been rising. Under this method, the earliest costs are
(c) The LIFO method will produce the higher cost of goods sold for Kaleta
Company. Under LIFO the most recent costs are charged to cost of
EXERCISE 6-7
(a) (1) FIFO
Beginning inventory …………………………………… $10,000
(2) LIFO
Beginning inventory …………………………………… $10,000
(3) AVERAGE-COST
Beginning inventory …………………………………… $10,000
Purchases …………………………………………………. 26,000
lower costs are matched with revenues.
(c) The use of FIFO would result in inventories approximating current cost in
the balance sheet, since the more recent units are assumed to be on hand.
year since income will be lower.