(25-30 min.) P 6-68A
Req. 1 (estimate of ending inventory by the gross profit method)
Beginning inventory ………………………………..
$ 57,400
Purchases ………………………………………………
$490,300
Less: Purchase discounts ……………………
(11,000)
Purchase returns ………………………..
(70,800)
Net purchases …………………………………….
408,500
Cost of goods available …………………………..
465,900
Cost of goods sold:
Sales revenue ……………………………………..
Less: Estimated gross profit of 39%……..
Estimated cost of goods sold ………………
Estimated cost of ending inventory ………….
(continued) P 6-68A
Req. 2 (income statement through gross profit)
Watertown Company
Income Statement (partial)
Two Week Period Ending March 15 (date of the fire)
Net sales revenue ………………………………………
Cost of goods sold …………………………………….
Gross profit ………………………………………………
_____
*Cost of goods sold:
Beginning inventory ……………………………………….
$ 57,400
Purchases ………………………………..
Purchase returns …………….
Cost of goods available for sale ……………………..
Cost of goods sold…………………………………………
$394,670
(20-25 min.) P 6-69A
Req. 1
Cost of sales, budgeted ($724,000 × 1.10) ………….
$ 796,400
+ Ending inventory, budgeted ……………………………..
82,000
= Cost of goods available …………………………..……….
878,400
= Purchases, budgeted ……………………………………….
$ 814,400
Req. 2
Gary’s Convenience Stores
Budgeted Income Statement
Year Ended December 31, 2016
Sales ($961,000 × 1.10) ……………………………………….
$1,057,100
Cost of sales ($724,000 × 1.10) …………………………...
796,400
Gross profit ……………………………………………………….
Net income ………………………………………………………..
(15-20 min.) P 6-70A
Req. 1 (corrected income statements)
Brilliant Home Store
Income Statement (adapted; amounts in millions)
Years Ended December 31, 2016, 2015, and 2014
2016
2015
2014
Net sales revenue …………………….
$42
$39
$36
Cost of goods sold:
Beginning inventory …………….
$15
$13
$ 8
Net purchases ……………………..
Cost of goods available ……….
Ending inventory …………………
Gross profit ……………………………..
Operating expenses ………………….
6
Net income ………………………………
$ 2
(continued) P 6-70A
Req. 2
The corrections did not change total net income over the three-year
period. But the corrections drastically altered the trend of net income —
from an increasing pattern to a decreasing pattern.
(20-30 min.) P 6-71B
Req. 1
Inventory …………………………………………………..
8,679,000
Accounts Payable …………………………………
8,679,000
Accounts Payable ……………………………………..
8,351,000
Cash …………………………………………………….
8,351,000
Cash …………………………………………………………
5,200,000
Accounts Receivable …………………………………
10,072,500
Sales Revenue ………………………………………
15,272,500
Cost of Goods Sold (149,000 × $60.01*) ………
Inventory ………………………………………………
8,941,490
Operating Expenses …………………………………..
3,250,000
Accrued Liabilities ($3,250,000 × 0.30) ……
Income Tax Expense ………………………………….
1,078,354
Income Tax Payable (see Req. 3) ……………
1,078,354
(continued) P 6-71B
Req. 2
Inventory
Beg. bal.
742,000
Purchases
COGS
End. bal.
Req. 3
Super Value Store in Madison
Income Statement
Year Ended January 31, 2016
Sales revenue ……………………………………….
$15,272,500
Cost of goods sold ……………………………….
8,941,490
Gross profit ………………………………………….
6,331,010
Operating expenses ………………………………
3,250,000
Income before tax …………………………………
Income tax expense (35%) …………………….
Net income …………………………………………..
(20-30 min.) P 6-72B
Req. 1
The store uses FIFO.
This is apparent from the flow of costs out of inventory. For example, the
Req. 2
Cost of goods sold:
17
×
$35
=
$ 595
Sales [(49 units × $70) + (46 x $71)] …………………………...
$6,696
(3,417)
Gross profit ……………………………………………………………..
Req. 3
Cost of March 31 inventory (18 x $39) + (37 × $37) =
$ 2,071
(20-30 min.) P 6-73B
Req. 1
Inventory
Beg. bal.
(80 units @ $20) 1,600
Purchases:
May 6
(100 units @ $25) 2,500
18
Cost of goods sold
26
(50 units @ $35) 1,750
(286 units @ $?)
End. bal.
Cost of Goods Sold
Ending Inventory
Average cost
286 × $27* = $7,722
64 × $27* = $1,728
FIFO
(80 @ $20) +
= $7,280
(50 @ $35) +
= $2,170
(continued) P 6-73B
Req. 2
LIFO results in the highest cost of goods sold because (a) the
company’s prices are rising and (b) LIFO assigns the cost of the latest
inventory purchases to cost of goods sold. When costs are rising, these
latest inventory costs are the highest, and that makes cost of goods sold
the highest under LIFO.
Student responses may vary.
Req. 3
Military Surplus
Income Statement
Month Ended May 31, 2016
Sales revenue (286 × $45) ………………………………
$12,870
Cost of goods sold ………………………………………..
7,722
Gross profit …………………………………………………..
Operating expenses ………………………………………
3,500
Income before income taxes …………………………..
Income tax expense (30%) ……………………………..
(30-40 min.) P 6-74B
Req. 1 (partial income statements)
Buzz Aviation
Income Statement
Year Ended July 31, 2016
AVERAGE
FIFO
LIFO
Sales revenue
$114,878
$114,878
$114,878
Cost of goods sold
59,866
59,325
61,068
Gross profit
$ 55,012
$ 55,553
$ 53,810
Computations of cost of goods sold:
Average cost
=
($3,300 + $3,600 + $52,500 + $7,200)
=
$7.40
per case
(600 + 500 + 7,000 + 900)
Average cost COGS = 8,090 × $7.40
FIFO COGS
(600 @ $5.50) + (500 @ $7.20) + (6,990 @ $7.50)
LIFO COGS
(900 @ $8.00) + (7,000 @ $7.50) + (190 @ $7.20)
Req. 2
Use LIFO to minimize income taxes. LIFO reports the highest cost of goods sold and the lowest gross
profit and net income.
(15-20 min.) P 6-75B
a. Mahtomedi Trade Mart should apply the lower-of-cost-or-market rule
to account for inventories. The current replacement cost of ending
b.
Cost of Goods Sold ……………..
75,000
Inventory ……………………….
To write inventory down to market value.
Mahtomedi Trade Mart should report the following in its financial
statements:
c.
BALANCE SHEET
Inventory, at market (which is lower than cost
of $270,000) ………………………………………………………
$195,000*
d.
INCOME STATEMENT
Cost of goods sold ($820,000 + $75,000) …………………
$895,000
e. Relevance and representational faithfulness are the reasons to
account for inventory at the lower of cost or market value.
Representational faithfulness directs accountants to report inventory at
(20-30 min.) P 6-76B
Req. 1
Frosted Donut, Inc.
Coffee Bean Corp.
Millions
Millions
Gross profit percentage:
Sales…………………….
$700
$6,000
Cost of sales……………
Gross profit…………….
$3,300
Gross profit
$140
= 20.0%
$3,300
= 55.0%
percentage:
$700
$6,000
Inventory turnover:
Cost of goods sold
Average inventory
Req. 2
From these statistics, it’s hard to tell whether Frosted Donut or Coffee
Bean is more profitable. Frosted Donut has a much faster inventory
(25-30 min.) P 6-77B
Req. 1 (estimate of ending inventory by the gross profit method)
Beginning inventory ………………………………….
$ 57,600
Purchases ………………………………………………..
$490,600
Less: Purchase discounts ……………………
Net purchases ………………………………………
Cost of goods available …………………………….
Cost of goods sold:
Less: Estimated gross profit of 44%……….
Estimated cost of goods sold ………………..
Estimated cost of ending inventory ……………
(continued) P 6-77B
Req. 2 (income statement through gross profit)
Thompson Company
Income Statement (partial)
Two Week Period ending July 15 (date of the fire)
Net sales revenue …………………………………
$648,000
Cost of goods sold ……………………………….
362,880*
(20-25 min.) P 6-78B
Req. 1
Cost of sales, budgeted ($721,000 × 1.05) ……….
$ 757,050
+ Ending inventory, budgeted …………………………..
77,000
= Cost of goods available …………………………………
834,050
= Purchases, budgeted …………………………………….
$ 768,050
Req. 2
Maroney’s Convenience Stores
Budgeted Income Statement
Year Ended December 31, 2016
Sales ($957,000 × 1.05) …………………………………
$1,004,850
Cost of sales ($721,000 × 1.05) ………………………
757,050
93,800
Net income …………………………………………………..
(15-20 min.) P 6-79B
Req. 1 (corrected income statements)
Columbia Home Store
Income Statement (adapted; amounts in millions)
Years Ended December 31, 2016, 2015, and 2014
2016
2015
2014
Net sales revenue …………………….
$39
$36
$33
Cost of goods sold:
Beginning inventory ……………..
$ 13
$ 14
$ 7
Net purchases ………………………
Cost of goods sold ……………….
Gross profit ……………………………..
Operating expenses ………………….
9
9
9
Net income ………………………………
$ 1
$ 9
(continued) P 6-79B
Req. 2
The corrections did not change total net income over the three-year
Req. 3
The shareholders will not be as happy with the corrected trend of net
income, since the company’s profit actually decreased from 2014 to
2016.
Challenge Exercises and Problem
(5-10 min.) E 6-80
a. Use FIFO.
b. Use FIFO.
c. Company is using LIFO.
(20-30 min.) E 6-81
Req. 1
LIFO cost of goods sold =
1.
From purchase in December (35 @ $1,400) ………………..
$ 49,000
2.
From purchase in June (46 @ $1,250) ………………………..
57,500
4.
From beginning inventory (26 @ $1,050) ……………………
LIFO cost of goods sold ………………………………………
$162,600
Req. 2
Cost of goods sold with the additional year-end purchase
(this would have avoided a LIFO liquidation—that is,
kept year-end inventory at the same level it was at the
beginning of the year):
1.
From purchase in December (61* @ $1,400) ……………….
$ 85,400
3.
From purchase in February (24 @ $1,200) ………………….
28,800
Cost of goods sold (with no LIFO liquidation) ………..
$171,700