Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 5
Chapter 5
Inventories and Cost of Sales
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. LIFO will result in the lower cost of goods sold when costs are declining because it
assigns the most recent, lower cost purchases to cost of goods sold.
4. Many people make important business decisions based on period-to-period
fluctuations in a company’s financial numbers, including gross profit and net
5. An inventory error that causes an understatement (or overstatement) for net income
in one accounting period, if not corrected, will cause an overstatement (or
6. Market as used in the LCM rule refers to replacement cost for LIFO, but net
realizable value for FIFO, WA, and SI.
7. Factors that contribute to inventory shrinkage are breakage, loss, deterioration,
Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 5
10. Cost of goods available for sale equals ending inventory plus cost of sales. It is
11. Cost of goods available for sale equals ending inventory plus cost of sales. It is
12. Inventory comprises 17.0% (computed as ₩24,983,355 / ₩146,982,464) of
Samsung’s current assets as of December 31, 2017 (in KRW millions).
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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
610
2nd week purchase ………………………………..
10 units @ $62
3rd week purchase …………………………………
10 units @ $65
4th week purchase …………………………………
10 units @ $70
50 units
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Quick Study 5-4 (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
80 @ $3.20
= $1,216.00
1/25
320 @ $3.00
80 @ $3.20
= $1,550.00
100 @ $3.34
1/26
30 @ $3.20 = 96.00
50 @ $3.20
100 @ $3.34
Quick Study 5-5 (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
}
}
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Quick Study 5-6 (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
(avg. cost is $3.04)
1/25
320 @ $3.00
100 @ $3.34
(avg. cost is $3.10)
Alternate solution format
Weighted average:
320
@ $3.00 =
$ 960.00
Quick Study 5-7A (10 minutes)
Ending Cost of
FIFO—Periodic Inventory Goods Sold
FIFO
Quick Study 5-8A (10 minutes)
Ending Cost of
LIFO—Periodic Inventory Goods Sold
Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 5
Quick Study 5-9A (10 minutes)
Ending Cost of
Weighted Average—Periodic Inventory Goods Sold
Quick Study 5-10 (25 minutes)
FIFO—Perpetual
Date
Goods Purchased
Cost of Goods Sold
Inventory Balance
12/ 7
10 @ $ 6 = $ 60
10 @ $ 6
= $ 60.00
Quick Study 5-11 (25 minutes)
LIFO—Perpetual
Date
Goods Purchased
Cost of Goods Sold
Inventory Balance
12/7
10 @ $ 6 = $ 60
10 @ $ 6
= $ 60
20 @ $12
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Quick Study 5-12
Weighted Average—Perpetual (25 minutes)
Quick Study 5-13 (10 minutes)
Quick Study 5-14A (10 minutes)
Ending Cost of
FIFO—Periodic Inventory Goods Sold
FIFO
Date
Goods Purchased
Cost of Goods Sold
Inventory Balance
12/7
10 @ $6 = $60
10 @ $6
= $ 60
12/15
15 @ $10
Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 5
Quick Study 5-15A (10 minutes)
Ending Cost of
LIFO—Periodic Inventory Goods Sold
Quick Study 5-16A (10 minutes)
Ending Cost of
Weighted Average—Periodic Inventory Goods Sold
Quick Study 5-17A (10 minutes)
Ending Cost of
Specific Identification—Periodic Inventory Goods Sold
Quick Study 5-18 (10 minutes)
1. LIFO
Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 5
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 Year 1 cost of goods sold (because EI too low).
Quick Study 5-21 (10 minutes)
Inventory turnover = Cost of goods sold/Average merchandise inventory
Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 5
Quick Study 5-22B (15 minutes)
Goods available for sale
Net sales at retail …………………………..…………………………..
Estimated cost of goods sold [$685,000 x (1 – 44%)] ……………………..
Quick Study 5-23 (10 minutes)
Cost ……………………………………………………………..
$9,000
Plus
Transportation-in ……………………………………….
280
Shipping insurance ……………………………………
135
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EXERCISES
Exercise 5-1 (10 minutes)
1. Answer: Barr Co.
2. The consignor is Parris Company. The consignee is Harlow Company.
Exercise 5-2 (10 minutes)
Cost of inventory
Exercise 5-3 (45 minutes)
a. Specific identification
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
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Exercise 5-3 (continued)
b. Weighted Average—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
1/20
(avg. cost is $5.40)
1/25
80 @ $5.40 = $ 432.00
20 @ $5.40
= $ 108.00
(avg. cost is $4.59)
c. FIFO—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
1/20
1/25
40 @ $6.00
1/30
180 @ $4.50
d. LIFO—Perpetual
Date
Goods Purchased
Cost of Goods Sold
Inventory Balance
1/1
140 @ $6.00
= $ 840.00
1/20
1/25
60 @ $5.00
1/30
180 @ $4.50
335
Exercise 5-3 (Concluded)
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 5-4 (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)
1. LIFO method results in the highest net income of $258.00.
2. Weighted average net income of $250.80 falls between the FIFO net
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Exercise 5-5A (35 minutes)
Ending Cost of
Periodic Inventory Computations Inventory Goods Sold
a. Specific Identification—Periodic
(180 x $4.50) + (5 x $5.00) + (15 x $6) ………………. $ 925.00
c. FIFO—Periodic
(180 x $4.50) + (20 x $5.00) …………………………….. $ 910.00
(140 x $6.00) + (40 x $5.00) …………………………….. $1,040.00
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Exercise 5-6 (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. LIFO method results in the highest net income of $384.00.
2. Weighted average net income of $315.96 falls between the FIFO net
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Exercise 5-7 (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
50 @ $10
= $ 5,750
350 @ $15
3/15
7/30
450 @ $20 = $9,000
450 @ $20
10/5
120 @ $20
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
50 @ $10
350 @ $15
3/15
50 @ $10
7/30
450 @ $20 = $ 9,000
50 @ $10
50 @ $15
10/5
50 @ $10
50 @ $15
10/26
100 @ $25 = $ 2,500
50 @ $10
50 @ $15
20 @ $20
= $ 4,150
_______
100 @ $25
$14,600
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Exercise 5-7 (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
Less: FIFO cost of goods sold ………………………………………………..
13,850
Gross profit …………………………………………………………………………….
$21,350
LIFO Gross Margin
Sales revenue (880 units sold x $40 selling price) …………………….
$35,200
Less: LIFO cost of goods sold ………………………………………………..
14,600
Exercise 5-8 (15 minutes)
a. Specific Identification method—Cost of goods sold
Cost of goods available for sale ………………………………………
$18,750
b. Specific Identification method—Gross margin
Sales revenue (880 units sold x $40 selling price) …………….
$35,200
Less: Specific identification cost of goods sold ………………
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Exercise 5-9A (20 minutes)
Ending Cost of
Periodic Inventory System Inventory Goods Sold
a. FIFO—Periodic
(100 x $25) + (120 x $20) …………………………………….. $4,900
c.
FIFO—Periodic Gross Margin
Sales revenue (880 units sold x $40 selling price) …………….
$35,200
Less: FIFO cost of goods sold ………………………………………..
13,850
Gross margin ……………………………………………………….………….
$21,350
$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
Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 5
Exercise 5-11 (20 minutes)
1. a. LIFO ratio computations
LIFO current ratio (Year 2) = $220/$200 = 1.1
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
on the current ratio (1.1 vs. 1.5) but better on inventory turnover (5.5 vs. 3.8)
Exercise 5-12 (25 minutes)
2. Reported income figures
Year 1
Year 2
Year 3
Sales …………………………….
$850,000
$850,000
$850,000
Cost of goods sold
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Exercise 5-13 (20 minutes)
Year 2 Inventory turnover Year 2 Days’ Sales in Inventory
$426,650/[($92,500 + $87,750)/2] $87,750/$426,650 x 365 days = 75.1 days
= 4.7 times
Exercise 5-14A (20 minutes)
Ending
Inventory
Cost of
Goods Sold
a. Specific identification
(50 x $2.90) + (50 x $2.80) + (50 x $2.50) ………….
$410.00
$3,855 [Goods Available] – $410.00 [Ending Inventory] …………
$3,445.00
b. Weighted average ($3,855/1,500 = $2.57)
150 x $2.57 [rounded to cents] ………………………………….
$3,855 [Goods Available] – $385.50 [Ending Inventory] …………
(150 x $2.90)…………………………………………………..
d. LIFO
(96 x $2.00) + (54 x $2.25) …………………………..…..