Chapter 6 – Inventory and Cost of Goods Sold
Chapter 6
Inventory and Cost of Goods Sold
REVIEW QUESTIONS
Question 6-1 (LO 6-1)
Inventory includes items a company intends for sale to customers. Inventory also includes items that
Question 6-2 (LO 6-1)
Question 6-3 (LO 6-1)
Raw materials inventory includes the cost of components that will become part of the finished
Question 6-4 (LO 6-2)
The cost of goods (or inventory) available for sale equals the cost of beginning inventory plus
Question 6-5 (LO 6-2)
The balance of cost of goods sold in the income statement represents the cost of inventory sold
Question 6-6 (LO 6-2)
A multiple-step income statement reports multiple levels of profitability. Gross profit equals net
Chapter 6 – Inventory and Cost of Goods Sold
6-2 Financial Accounting, 5e
Answers to Review Questions (continued)
Question 6-7 (LO 6-3)
Because of the large number of inventory transactions for most companies and the high volatility in
Question 6-8 (LO 6-3)
The three most common inventory cost flow assumptions are FIFO (first-in, first-out), LIFO (last-in,
Question 6-9 (LO 6-4)
FIFO results in the highest reported amount for ending inventory when inventory costs are rising.
Question 6-10 (LO 6-4)
FIFO results in the highest reported amount of net income when inventory costs are rising. The
Question 6-11 (LO 6-4)
Since FIFO assumes the first purchases sell first, the amount it reports for ending inventory (in the
Question 6-12 (LO 6-4)
Question 6-13 (LO 6-5)
The perpetual inventory system maintains a continual – or perpetual – record of inventory purchased
Question 6-14 (LO 6-5)
Freight charges add to the cost of inventory, while purchase discounts and purchase returns reduce
the cost of inventory.
Chapter 6 – Inventory and Cost of Goods Sold
Answers to Review Questions (continued)
Question 6-15 (LO 6-6)
Cost of inventory is the net cost of purchases and freight, less purchase discounts, returns, and
Question 6-16 (LO 6-6)
Question 6-17 (LO 6-6)
The entry to adjust from cost to net realizable value for inventory write-downs includes a debit to
cost of goods sold (increase to expenses) and a credit to inventory (decrease to assets). The
adjustment has the following effects:
Question 6-18 (LO 6-6)
Firms are required to report the falling value of inventory but not allowed to report the increasing
Question 6-19 (LO 6-7)
The inventory turnover ratio equals cost of goods sold divided by average inventory. The ratio shows
Chapter 6 – Inventory and Cost of Goods Sold
6-4 Financial Accounting, 5e
Answers to Review Questions (continued)
Question 6-20 (LO 6-7)
Gross profit equals net sales minus cost of goods sold. The gross profit ratio equals gross profit
Question 6-21 (LO 6-8)
Under the periodic system, the sale of inventory is recorded by increasing an asset account (cash or
Question 6-22 (LO 6-8)
The purposes of the period-end adjustment are to (1) update the balance of inventory for its ending
amount, (2) record cost of goods sold, and (3) close the temporary purchases accounts to zero.
Question 6-23 (LO 6-9)
Understating ending inventory in the current year will have the following effects in the current year:
(a) assets (inventory) = understated
Question 6-24 (LO 6-9)
Understating ending inventory in the current year will have the following effects in the following
year:
(a) assets (inventory) = no effect
Chapter 6 – Inventory and Cost of Goods Sold
BRIEF EXERCISES
Brief Exercise 6-1 (LO 6-1)
1.
b.
2.
a.
3.
c.
Brief Exercise 6-2 (LO 6-1)
1.
c.
2.
a.
3.
b.
Brief Exercise 6-3 (LO 6-2)
Beginning inventory
$ 8,000
+
Purchases
23,000
Cost of goods available for sale
Ending inventory
Cost of goods sold
Chapter 6 – Inventory and Cost of Goods Sold
6-6 Financial Accounting, 5e
Brief Exercise 6-4 (LO 6-2)
Company
Cost of
goods sold
Gross
profita
Operating
expenses
Net
incomeb
Lennon
(a) $10,000
$ 8,000
$3,500
$4,500
Chapter 6 – Inventory and Cost of Goods Sold
Brief Exercise 6-5 (LO 6-3)
Date
Transaction
Number
of units
Unit
cost
Ending
Inventory
Nov. 3
Purchase
40
$90
$3,600
Date
Transaction
Number
of units
Unit
cost
Goods Sold
Jan. 1
Beginning inventory
$82
$ 4,920
May 5
Purchase
Nov. 3
Purchase
14,400
Brief Exercise 6-6 (LO 6-3)
Date
Transaction
Number
of units
Unit
cost
Ending
Inventory
Date
Transaction
Number
of units
Unit
cost
Cost of
Goods Sold
Jan. 1
Beginning inventory
20
$82
$ 1,640
May 5
Purchase
Nov. 3
Purchase
18,000
Chapter 6 – Inventory and Cost of Goods Sold
Brief Exercise 6-7 (LO 6-3)
Date
Transaction
Number
of units
Unit
cost
Total
Cost
Jan. 1
Beginning inventory
60
$82
$ 4,920
May 5
Purchase
250
Nov. 3
Purchase
510
Brief Exercise 6-8 (LO 6-3)
Date
Transaction
Number
of units
Unit
cost
Ending
Inventory
May 5
Purchase
20
$85
$1,700
Nov. 3
Purchase
20
40
Date
Transaction
Number
of units
Unit
cost
Jan. 1
Beginning inventory
60
$82
May 5
Purchase
230
Nov. 3
Purchase
180
470
Brief Exercise 6-9 (LO 6-4)
Inventory
Costs
Higher
total assets
Higher
cost of goods sold
Higher
net income
Rising
Declining
Chapter 6 – Inventory and Cost of Goods Sold
Brief Exercise 6-10 (LO 6-5)
February 2
Debit
Credit
Inventory
40,000
Accounts Payable
40,000
(Purchase inventory on account)
March 17
Debit
Credit
Accounts Receivable
60,000
Sales Revenue
60,000
Inventory
40,000
(Cost of inventory sold)
Brief Exercise 6-11 (LO 6-5)
February 2
Debit
Credit
Inventory
40,000
Accounts Payable
40,000
(Purchase inventory on account)
February 2
Debit
Credit
Inventory
Cash
(Pay freight charges)
Chapter 6 – Inventory and Cost of Goods Sold
6-10 Financial Accounting, 5e
Brief Exercise 6-12 (LO 6-5)
February 2
Debit
Credit
Inventory
60,000
Accounts Payable
60,000
(Purchase inventory on account)
February 5
Debit
Credit
Accounts Payable
Inventory
($4,000 = 100 units × $40 unit cost)
Brief Exercise 6-13 (LO 6-5)
February 2
Debit
Credit
Inventory
40,000
Accounts Payable
40,000
(Purchase inventory on account)
February 10
Debit
Credit
Accounts Payable
40,000
Cash
($1,200 = $40,000 × 3%)
Chapter 6 – Inventory and Cost of Goods Sold
Brief Exercise 6-14 (LO 6-6)
Inventory
Quantity
Lower of Cost
and NRV
per unit
Ending
Inventory
Ski jackets
Skis
Brief Exercise 6-15 (LO 6-6)
Inventory
Quantity
Lower of Cost
and NRV
per unit
Ending
Inventory
Optima cameras
Inspire speakers
Chapter 6 – Inventory and Cost of Goods Sold
6-12 Financial Accounting, 5e
Brief Exercise 6-16 (LO 6-7)
=
=
=
Average days
in inventory
=
365
=
365
Inventory turnover ratio
3.6
=
101.4 days
=
Brief Exercise 6-17 (LO 6-8)
February 2
Debit
Credit
Purchases
40,000
March 17
Debit
Credit
No entry for cost of goods sold
Chapter 6 – Inventory and Cost of Goods Sold
Brief Exercise 6-18 (LO 6-8)
February 2
Debit
Credit
Purchases
40,000
Accounts Payable
40,000
(Purchase inventory on account)
February 2
Debit
Credit
Cash
Brief Exercise 6-19 (LO 6-8)
February 2
Debit
Credit
Purchases
60,000
Accounts Payable
60,000
(Purchase inventory on account)
February 5
Debit
Credit
Accounts Payable
Purchase Returns
($4,000 = 100 units × $40 unit cost)
Chapter 6 – Inventory and Cost of Goods Sold
6-14 Financial Accounting, 5e
Brief Exercise 6-20 (LO 6-8)
February 2
Debit
Credit
Purchase
40,000
Accounts Payable
40,000
(Purchase inventory on account)
February 10
Accounts Payable
40,000
Purchase Discounts
($1,200 = $40,000 × 3%)
Brief Exercise 6-21 (LO 6-9)
Overstating ending inventory by $15,000 has the following effects:
Current year
Cost of goods sold is understated by $15,000.
Gross profit is overstated by $15,000.
Chapter 6 – Inventory and Cost of Goods Sold
Brief Exercise 6-22 (LO 6-9)
Overstating ending inventory by $15,000 has the following effects:
Current year
Inventory is overstated by $15,000.
Chapter 6 – Inventory and Cost of Goods Sold
6-16 Financial Accounting, 5e
EXERCISES
Exercise 6-1 (LO 6-2)
Beginning inventory
$ 55,000
Chapter 6 – Inventory and Cost of Goods Sold
Exercise 6-2 (LO 6-2)
Wayman Corporation
Multiple-step Income Statement
For the year ended December 31, 2021
Sales revenue
$390,000
Cost of goods sold
130,000
Gross profit
$260,000
Salaries expense
40,000
Utilities expense
50,000
Advertising expense
30,000
Interest expense
Exercise 6-3 (LO 6-2)
Requirement 1
Tisdale Incorporated
Multiple-step Income Statement
For the year ended December 31, 2021
Exercise 6-4
Chapter 6 – Inventory and Cost of Goods Sold
6-20 Financial Accounting, 5e
(LO 6-3)
Requirement 1 FIFO
(a)