Chapter 5
Reporting and Analyzing Inventories
QUESTIONS
1. (a) FIFO: The cost of the first (earliest) items purchased in inventory flow to cost of
2. Merchandise inventory is disclosed on the balance sheet as a current asset. It is
3. Incidental costs sometimes are ignored in computing the cost of inventory because
the expense of tracking such costs on a precise basis can outweigh the benefits
8. Many people make important business decisions based on period-to-period
fluctuations in a company’s financial numbers, including gross profit and net
9. An inventory error that causes an understatement (or overstatement) for net income
11. The accounting constraint of conservatism guides preparers of accounting reports
QUICK STUDIES
Quick Study 5-1 (10 minutes)
Units in ending inventory
Units stored in basement …………………………..
Less damaged (unsalable) units …………………….
Quick Study 5-2 (10 minutes)
Cost ……………………………………………………….
$14,000
Plus
Quick Study 5-3 (10 minutes)
Beginning inventory ……………………………….
10 units @ $60
$ 600
Plus
1st week purchase …………………………………
10 units @ $61
2nd week purchase ………………………………..
10 units @ $62
3rd week purchase …………………………………
10 units @ $65
4th week purchase …………………………………
10 units @ $70
Units Available for sale …………………………..
50 units
Quick Study 5-4 (10 minutes)
Ending Cost of
FIFO—Periodic Inventory Goods Sold
FIFO
Quick Study 5-5 (10 minutes)
Ending Cost of
LIFO—Periodic Inventory Goods Sold
LIFO
Quick Study 5-6 (10 minutes)
Ending Cost of
Weighted Average—Periodic Inventory Goods Sold
Quick Study 5-7A (10 minutes)
FIFO—Perpetual
Date
Goods Purchased
Cost of Goods Sold
Inventory Balance
1/1
320 @ $3.00
= $ 960.00
1/9
80 @ $3.20
320 @ $3.00
1/25
320 @ $3.00
100 @ $3.34
1/26
30 @ $3.20 = 96.00
100 @ $3.34
Quick Study 5-8A (10 minutes)
LIFO—Perpetual
Date
Goods Purchased
Cost of Goods Sold
Inventory Balance
1/1
320 @ $3.00
= $ 960.00
1/9
80 @ $3.20
320 @ $3.00
80 @ $3.20
= $1,216.00
1/25
320 @ $3.00
80 @ $3.20
= $1,550.00
100 @ $3.34
1/26
80 @ $3.20 = 256.00
150 @ $3.00
Quick Study 5-9A (10 minutes)
Weighted Average—Perpetual
Date
Goods Purchased
Cost of Goods Sold
Inventory Balance
1/1
320 @ $3.00
= $ 960.00
1/9
80 @ $3.20
320 @ $3.00
80 @ $3.20
= $1,216.00
1/25
100 @ $3.34
= $1,550.00
}
Alternate solution format
Weighted average:
320
@ $3.00 =
$ 960.00
}
Quick Study 5-10 (10 minutes)
Ending Cost of
FIFO—Periodic Inventory Goods Sold
FIFO
Quick Study 5-11 (10 minutes)
Ending Cost of
LIFO—Periodic Inventory Goods Sold
LIFO
Quick Study 5-12 (10 minutes)
Ending Cost of
Weighted Average—Periodic Inventory Goods Sold
Weighted Average ($510/ 45 = $11.33 cost per unit)*
Quick Study 5-13 (10 minutes)
Ending Cost of
Specific Identification—Periodic Inventory Goods Sold
Specific Identification
Quick Study 5-14A (20 minutes)
FIFO—Perpetual
Date
Goods Purchased
Cost of Goods Sold
Inventory Balance
12/ 7
10 @ $ 6 = $ 60
10 @ $ 6
= $ 60.00
20 @ $12
Quick Study 5-15A (20 minutes)
LIFO—Perpetual
Date
Goods Purchased
Cost of Goods Sold
Inventory Balance
12/7
10 @ $ 6 = $ 60
10 @ $ 6
= $ 60
20 @ $12
Quick Study 5-16A (25 minutes)
Weighted Average—Perpetual
Date
Goods Purchased
Cost of Goods Sold
Inventory Balance
12/7
10 @ $6 = $60
10 @ $6
= $ 60
20 @ $12 = $240
12/15
15 @ $10
Quick Study 5-17A (15 minutes)
Specific Identification—Perpetual
Quick Study 5-18 (10 minutes)
1. LIFO
Quick Study 5-19 (20 minutes)
Per Unit
Total
Total
LCM –
Items
Inventory Items
Units
Cost
Market
Cost
Market
Mountain bikes
11
$600
$550
$ 6,600
$ 6,050
$ 6,050
Skateboards
Gliders
Quick Study 5-20 (15 minutes)
a. Overstates 2016 cost of goods sold.
Quick Study 5-21 (10 minutes)
Inventory turnover = Cost of goods sold/Average merchandise inventory
Quick Study 5-22B (15 minutes)
Goods available for sale
Inventory, January 1 ……………………………………………………….
$190,000
Net sales at retail ……………………………………………………….
Estimated cost of goods sold [$685,000 x (1 – 44%)] ……………………..
Quick Study 5-23 (10 minutes)
a. Both IFRS and U.S. GAAP provide broad and similar guidance on the
accounting for items and costs making up merchandise inventory.
c. U.S. GAAP prohibits any later increase in the recorded value of
EXERCISES
Exercise 5-1 (10 minutes)
1. The title will pass at “destination” which is Harlow Company’s
2. The consignor is Harris Company. The consignee is Harlow Company.
Exercise 5-2 (10 minutes)
Cost of inventory (estate’s contents)
Price …………………………………………………………………………….
$75,000
Transportation-in ………………………………………………………….
Insurance on shipment ………………………………………………….
Cleaning and refurbishing ……………………………………………..
Exercise 5-3 (35 minutes)
Ending Cost of
Periodic Inventory Computations Inventory Goods Sold
a. Specific Identification—Periodic
b. Weighted Average—Periodic
($1,950 / 380 units = $5.13* average cost per unit)
Exercise 5-3 (concluded)
Ending Cost of
Periodic Inventory Computations Inventory Goods Sold
c. FIFO—Periodic
d. LIFO—Periodic
Exercise 5-4 (20 minutes)
LAKER COMPANY
Income Statements
For Month Ended January 31
Specific
Identification
Weighted
Average
FIFO
LIFO
Sales ………………………………..
$2,700.00
$2,700.00
$2,700.00
$2,700.00
(180 units x $15 price)
Exercise 5-5A (45 minutes)
a. Specific identification—Perpetual
Ending inventory—180 units from January 30, 5 units from January 20, and 15
units from beginning inventory
Ending Cost of
Specific Identification Inventory Goods Sold
b. Weighted Average—Perpetual
Date
Goods Purchased
Cost of Goods Sold
Inventory Balance
1/1
140 @ $6.00
= $ 840.00
1/10
= $ 240.00
1/20
1/30
c. FIFO—Perpetual
Date
Goods Purchased
Cost of Goods Sold
Inventory Balance
1/1
140 @ $6.00
= $ 840.00
1/10
= $ 240.00
1/20
1/25
40 @ $6.00
40 @ $5.00
1/30
180 @ $4.50
Exercise 5-5A (continued)
d. LIFO—Perpetual
Date
Goods Purchased
Cost of Goods Sold
Inventory Balance
1/1
140 @ $6.00
= $ 840.00
1/10
100 @ $6.00 = $ 600.00
40 @ $6.00
= $ 240.00
Alternate Solution Format for FIFO and LIFO Perpetual
Ending Cost of
Computations Inventory Goods Sold
c. FIFO
(180 x $4.50) + (20 x $5.00) ……………………………………….. $ 910.00
Exercise 5-6A (20 minutes)
LAKER COMPANY
Income Statements
For Month Ended January 31
Specific
Identification
Weighted
Average
FIFO
LIFO
Sales ………………………………..
$2,700.00
$2,700.00
$2,700.00
$2,700.00
(180 units x $15 price)
1,680.00
Income tax expense (40%) ……..
Exercise 5-7 (20 minutes)
Cost of goods available for sale = $18,750 (given in Exercise 5-7)
Ending Cost of
Periodic Inventory System Inventory Goods Sold
a. FIFO—Periodic
c.
FIFO—Periodic Gross Margin
Sales revenue (880 units sold x $40 selling price) …………….
$35,200
Gross margin …………………………………………………………………..
$21,350
Sales revenue (880 units sold x $40 selling price) …………….
$35,200
Exercise 5-8 (15 minutes)
a. Specific Identification method—Cost of goods sold
Cost of goods available for sale ………………………………………
$18,750
Ending inventory under specific identification
b. Specific Identification method—Gross margin
Sales revenue (880 units sold x $40 selling price) …………….
$35,200
Exercise 5-9A (20 minutes)
a. FIFO—Perpetual
Date
Goods Purchased
Cost of Goods Sold
Inventory Balance
1/1
200 @ $10
= $ 2,000
1/10
150 @ $10 = $ 1,500
50 @ $10
= $ 500
3/14
350 @ $15 = $5,250
3/15
7/30
450 @ $20 = $9,000
450 @ $20
10/5
10/26
100 @ $25 = $2,500
b. LIFO—Perpetual
Date
Goods Purchased
Cost of Goods Sold
Inventory Balance
1/1
200 @ $10
= $ 2,000
1/10
150 @ $10 = $ 1,500
50 @ $10
= $ 500
3/14
350 @ $15 = $ 5,250
350 @ $15
3/15
7/30
450 @ $20 = $ 9,000
10/5
10/26
100 @ $25 = $ 2,500
Exercise 5-9A (Concluded)
Alternate Solution Format
Ending Cost of
Inventory Goods Sold
a. FIFO
(100 x $25) + (120 x $20) ………………………………………………… $4,900
FIFO Gross Margin
Sales revenue (880 units sold x $40 selling price) …………………….
$35,200
Gross profit …………………………………………………………………………….
$21,350
Sales revenue (880 units sold x $40 selling price) …………………….
$35,200
Exercise 5-10 (15 minutes)
Per Unit
Total
Total
LCM Applied
to Items
Inventory Items
Units
Cost
Market
Cost
Market
Helmets ………..
24
$50
$54
$1,200
$1,296
$1,200
17
38
Uniforms ………
42
Exercise 5-11 (20 minutes)
1. a. LIFO ratio computations
LIFO current ratio (2016) = $220/$200 = 1.1
b. FIFO ratio computations
2. The use of LIFO versus FIFO for Cruz markedly impacts the ratios computed.
Specifically, LIFO makes Cruz appear worse in comparison to FIFO numbers
Exercise 5-12 (25 minutes)
2. Reported income figures
Year 2015
Year 2016
Year 2017
Sales …………………………….
$850,000
$850,000
$850,000
Cost of goods sold
Exercise 5-13 (20 minutes)
2015 Inventory turnover 2015 Days’ Sales in Inventory
Exercise 5-14 (20 minutes)
Ending
Inventory
Cost of
Goods Sold
a. Specific identification
(50 x $2.90) + (50 x $2.80) + (50 x $2.50) ………….
150 x $2.57 [rounded to cents] ………………………………….
385.50
c. FIFO
(150 x $2.90)…………………………………………………..
435.00
Exercise 5-15 (20 minutes)
Periodic Inventory
Ending
Inventory
Cost of
Goods Sold
a. Specific Identification
(50 x $2.80) + (10 x $2.00) ……………………………….
$160.00
$2,540.00 [Goods Available] – $160.00 [Ending Inventory] …….
$2,380.00
(60 x $2.54)…………………………………………………….
$2,540.00 [Goods Available] – $152.40 [Ending Inventory] …….
(22 x $2.00) + (38 x 2.30) …………………………………
(138 x $3.00) + (300 x $2.80) + (502 x $2.30) …….
(60 x $3.00)…………………………………………………….
Income effect: LIFO provides the lowest cost of goods sold, the
Exercise 5-16B (20 minutes)
At Cost
At Retail
Goods available for sale
Beginning inventory ……………………………………………
$ 63,800
$128,400
Cost of goods purchased ……………………………………
Goods available for sale ……………………………………..
$178,860
$ 65,200