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DQ1.
Discussion Questions
Both are important. Accrual accounting is essential to dividing inventory between
CHAPTER 7—Solutions
INVENTORIES
what benefits the current period (cost of goods sold) and what benefits the next
7-1
© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
**
Rounded
SE1. Inventory Concepts
SE2. Specific Identification Method
SE4. FIFO Method: Periodic Inventory System
Short Exercises
7-2
© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
Average-
Cost FIFO LIFO
Method Method Method
Cost
Units per Unit Amount*
SE7. Average-Cost Method: Perpetual Inventory System
*Rounded
Method
The average-cost method produces results between LIFO and FIFO.
valuation.
SE6. Effects of Inventory Costing Methods and Changing Prices
Specific
Identification
Periodic Inventory System
7-3
© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
Cost
Units per Unit
Cost
Units per Unit
SE9. LIFO Method: Perpetual Inventory System
SE8. FIFO Method: Perpetual Inventory System
7-4
© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
Cost Retail
365
Average Inventory
Number of Days in a Year
*Rounded
$2,200,000
SE10. Retail Inventory Method
=
=
times*
days
Days' Inventory on Hand
$520,000 = 4.2
7-5
© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
E2A. Periodic Inventory System and Inventory Costing Methods
1. Specific identification method
Ending inventory
2. Average-cost method
Exercises: Set A
E1A. Accounting Conventions and Inventory Valuation
a conservative inventory method in these circumstances as well. Under LIFO, the earlier
higher prices in inventory needed to be adjusted downward.
change be disclosed and the effects of the change described. Following the lower-of-cost-
or-market rule for valuing inventory is a conservative method of accounting because it an-
ticipates losses. Fewer adjustments will be anticipated in the future because under FIFO,
the most recent prices, which are declining, are used to price inventory. As a result, this is
According to the convention of consistency, a company must follow the same accounting
principles from year to year. Thus, a change to FIFO would violate this convention. If the
7-6
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5.
Year 1 Year 2 Year 3
Year 1 Year 2 Year 3
3.
E2A. Periodic Inventory System and Inventory Costing Methods (Concluded)
Under the FIFO method, the ending inventory takes on the unit price of the pur-
2. LIFO method
E3A. Periodic Inventory System and Inventory Costing Methods
1. FIFO method
In this period of rising prices, the FIFO method resulted in the highest value for inven-
tory on the balance sheet and the lowest cost of goods sold on the income statement,
bringing about the highest net income. The LIFO method resulted in the lowest value
4. LIFO method
7-7
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* units × $30 =
units × $33 =
2.
E4A. Periodic Inventory System and Inventory Costing Methods
$11,100
150 $ 4,500
result, the gross margin under LIFO was $2,400 ($33,300 – $30,900) less than it was
under FIFO. The average-cost method falls between the other two methods.
200 6,600
The unit cost of merchandise rose steadily during the month of June. When prices
are rising, LIFO results in the most recent (highest) costs being assigned to cost of
goods sold and the earliest (lowest) costs being carried forward as inventory. As a
7-8
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1. FIFO LIFO
Method Method
$1,830,000 $1,830,000
Sales
Less ending inventory
Cost of goods sold:
Beginning inventory
Cost of goods available for sale
E5A. Effects of Inventory Costing Methods on Cash Flows
as prices are increasing, LIFO will usually result in lower income taxes and thus a
better cash flow than FIFO.
goods sold and deducted from sales instead of beginning inventory (at $12). As long
7-9
© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
