CHAPTER 6
Inventories
ASSIGNMENT CLASSIFICATION TABLE
Learning Objectives
Questions
Brief
Exercises
Do It!
Exercises
A
Problems
1. Discuss how to classify
and determine inventory.
1, 2, 3, 4, 5,
6
1, 2
1
1, 2
1A
2. Apply inventory cost flow
methods and discuss their
financial effects.
7, 8, 9, 10,
11, 12, 19
3, 4, 5
2
3, 4, 5, 6, 7,
8
2A, 3A, 4A,
5A, 6A, 7A
3. Indicate the effects of
inventory errors on the
financial statements.
6
3
4. Explain the statement
presentation and analysis
of inventory.
13, 14, 15,
17, 18
4
*5. Apply the inventory cost
flow methods to perpetual
inventory records.
20, 21
9
15, 16, 17
8A, 9A
*6. Describe the two methods
of estimating inventories.
22, 23, 24,
ASSIGNMENT CHARACTERISTICS TABLE
Problem
Number
Description
Difficulty
Level
Time Allotted
(min.)
1A
Determine items and amounts to be recorded in inventory.
Moderate
15–20
2A
Determine cost of goods sold and ending inventory using
FIFO, LIFO, and average-cost with analysis.
Simple
30–40
3A
Determine cost of goods sold and ending inventory using
FIFO, LIFO, and average-cost with analysis.
Simple
30–40
4A
Compute ending inventory, prepare income statements, and
answer questions using FIFO and LIFO.
Moderate
30–40
6A
Compare specific identification, FIFO, and LIFO under
periodic method; use cost flow assumption to justify price
increase.
Moderate
20–30
7A
Compute ending inventory, prepare income statements, and
answer questions using FIFO and LIFO.
Moderate
30–40
Calculate cost of goods sold and ending inventory under
LIFO, FIFO, and moving-average cost, under the perpetual
system; compare gross profit under each assumption.
Moderate
30–40
*10A
Compute gross profit rate and inventory loss using gross
profit method.
Moderate
30–40
*11A
Compute ending inventory using retail method.
Moderate
20–30
WEYGANDT ACCOUNTING PRINCIPLES 11E
CHAPTER 6
INVENTORIES
Number
LO
BT
Difficulty
Time (min.)
BE1
1
C
Simple
4–6
BE2
1
K
Simple
2–4
BE3
2
AP
Simple
4–6
BE4
2
AP
Simple
2–4
2
AP
Simple
2–4
BE6
3
AP
Moderate
6–8
BE7
4
AP
Simple
4–6
BE8
4
AN
Simple
4–6
BE9
5
AP
Simple
4–6
BE10
6
AP
Simple
8–10
BE11
6
AP
Simple
4–6
DI1
1
AN
Simple
4–6
DI2
2
AP
Simple
6–8
DI3
3
AP
Simple
6–8
4
AP
Simple
4–6
EX1
1
AN
Simple
4–6
EX2
1
AN
Simple
EX3
2
AN, E
Moderate
6–8
EX4
2
AN, E
Simple
8–10
EX5
2
AP
Simple
6–8
EX6
2
AP
Simple
8–10
EX7
2
AP
Simple
8–10
EX8
2
AP
Simple
6–8
EX9
3
AP
Simple
6–8
EX10
3
AP
Simple
4–6
EX11
4
AN
Simple
6–8
EX12
4
AN
Simple
EX13
4
AP
Simple
EX14
4
AP
Simple
8–10
EX15
5
AP
Simple
8–10
INVENTORIES (Continued)
Number
LO
BT
Difficulty
Time (min.)
EX17
5
AP, E
Moderate
12–15
EX18
6
AP
Simple
8–10
EX19
6
AP
Simple
10–12
EX20
6
AP
Moderate
10–12
P1A
1
AN
Moderate
15–20
P2A
2
AP
Simple
30–40
P3A
2
AP
Simple
30–40
P4A
2
AN
Moderate
30–40
P5A
2
AP, E
Moderate
30–40
P6A
2
AP, E
Moderate
20–30
P7A
2
AN
Moderate
30–40
P8A
5
AP, E
Moderate
30–40
P9A
5
AP
Moderate
40–50
P10A
6
AP
Moderate
30–40
P11A
6
AP
Moderate
20–30
BYP1
2, 4
AP
Simple
10–15
BYP2
4
E
Simple
10–15
4
E
Simple
10–15
BYP4
2, 4
AN
Simple
10–15
BYP5
4, 6
AP
Moderate
20–25
BYP6
3
AN
Simple
10–15
BYP7
2
E
Simple
10–15
BYP8
3
E
Simple
10–15
BYP9
2, 4
AP
Simple
10–15
BLOOM’ S TAXONOMY TABLE
Correlation Chart between Bloom’s Taxonomy, Learning Objectives and End–of-Chapter Exercises and Problems
Learning Objective
Knowledge
Comprehension
Application
Analysis
Synthesis
Evaluation
1. Discuss how to classify and determine
inventory.
Q6-2
Q6-6
BE6-2
Q6-1
Q6-3
Q6-4
BE6-1
Q6-5
E6-1
DI6-1
E6-1
E6-2
P6–1A
2. Apply inventory cost flow methods
Q6-8
Q6-7
BE6-3
E6-6
P6–3A
E6-3
E6-3
3. Indicate the effects of inventory
errors on the financial statements.
Q6–16
BE6-6
DI6-3
E6-9
E6–10
4. Explain the statement presentation
and analysis of inventory.
Q6–13
Q6–17
BE6-7 E6–11
BE6-8 E6–12
DI6-4 E6–13
E6-14
Q6–14
Q6–15
Q6–18
*5. Apply the inventory cost flow methods
Q6–20
BE6-9
E6–17
BE6-9
E6–16
Broadening Your Perspective
FASB
Codification
Financial Reporting
Decision Making
Across the
Real-World
Focus
Communication
Comp. Analysis
All About You
Ethics Case
6-6 Copyright © 2015 John Wiley & Sons, Inc. Weygandt, Accounting Principles, 12/e, Solutions Manual (For Instructor Use Only)
ANSWERS TO QUESTIONS
1. Agree. Effective inventory management is frequently the key to successful business operations.
Management attempts to maintain sufficient quantities and types of goods to meet expected
customer demand. It also seeks to avoid the cost of carrying inventories that are clearly in excess
of anticipated sales.
2. Inventory items for a merchandising company have two common characteristics: (1) they are
owned by the company and (2) they are in a form ready for sale in the ordinary course of
business.
5. Inventoriable costs are $3,020 (invoice cost $3,000 + freight charges $50 – purchase discounts $30).
The amount paid to negotiate the purchase is a buying cost that normally is not included in the
cost of inventory because of the difficulty of allocating these costs. Buying costs are expensed in
the year incurred.
6. FOB shipping point means that ownership of the goods in transit passes to the buyer when the
public carrier accepts the goods from the seller. FOB destination means that ownership of the
goods in transit remains with the seller until the goods reach the buyer.
7. Actual physical flow may be impractical because many items are indistinguishable from one
another. Actual physical flow may be inappropriate because management may be able to
manipulate net income through specific identification of items sold.
8. The major advantage of the specific identification method is that it tracks the actual physical flow
of the goods available for sale. The major disadvantage is that management could manipulate
net income.
Questions Chapter 6 (Continued)
12. Oscar Company may experience severe cash shortages if this policy continues. All of its net
income is being paid out as dividends, yet some of the earnings must be reinvested in inventory
to maintain inventory levels. Some earnings must be reinvested because net income is computed
with cost of goods sold based on older, lower costs while the inventory must be replaced at
current, higher costs. Because of this factor, net income under FIFO is sometimes referred to as
“phantom profits.”
15. Warnke Stores should report the toasters at $27 each for a total of $540. The $27 is the lower of cost
or market. It is used because it is the lower of the inventory’s cost and current replacement cost.
16. (a) Sayaovang Company’s 2016 net income will be understated $7,000; (b) 2017 net income will
be overstated $7,000; and (c) the combined net income for the two years will be correct.
17. Dreher Company should disclose: (1) the major inventory classifications, (2) the basis of
accounting (cost or lower of cost or market), and (3) the costing method (FIFO, LIFO, or average
cost).
18. An inventory turnover that is too high may indicate that the company is losing sales opportunities
because of inventory shortages. Inventory outages may also cause customer ill will and result in
lost future sales.
*21. In a periodic system, the average is a weighted average based on total goods available for sale for the
period. In a perpetual system, the average is a moving average of goods available for sale after
each purchase.
*22. Inventories must be estimated when: (1) management wants monthly or quarterly financial
statements but a physical inventory is only taken annually and (2) a fire or other type of casualty
makes it impossible to take a physical inventory.
Questions Chapter 6 (Continued)
*23. In the gross profit method, the average is the gross profit rate, which is gross profit divided by net
sales. The rate is often based on last year’s actual rate. The gross profit rate is applied to net sales
in using the gross profit method.
*24. The estimated cost of the ending inventory is $40,000:
Net sales ………………………………………………………………………………………………….. $400,000
Less: Gross profit ($400,000 X 35%) ……………………………………………………………. 140,000
*25. The estimated cost of the ending inventory is $28,000:
Ending inventory at retail: $40,000 = ($120,000 – $80,000)
SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 6-1
(a) Ownership of the goods belongs to Peosta. Thus, these goods should
be included in Peosta’s inventory.
(b) The goods in transit should not be included in the inventory count
because ownership by Peosta does not occur until the goods reach
the buyer.
BRIEF EXERCISE 6-2
Physical inventory $200,000
Add: Goods purchased from Pelzer 25,000
BRIEF EXERCISE 6-3
(a) The ending inventory under FIFO consists of 200 units at $8 + 180 units
at $7 for a total allocation of $2,860 or ($1,600 + $1,260).
BRIEF EXERCISE 6-4
Average unit cost is $6.89 computed as follows:
300 X $6 = $1,800
400 X $7 = 2,800
BRIEF EXERCISE 6-5
(a) FIFO would result in the highest net income.
(b) FIFO would result in the highest ending inventory.
BRIEF EXERCISE 6-6
The understatement of ending inventory caused cost of goods sold to be
BRIEF EXERCISE 6-7
Inventory Categories
Cost
Market
LCM
Cameras
$12,000
$12,300
$12,000
Camcorders
Blu-ray players
Total valuation
BRIEF EXERCISE 6-8
Inventory turnover:
( )
$270,000
$56,000 + $40,000 ÷ 2
=
$270,000
$48,000
= 5.6
*BRIEF EXERCISE 6-9
(a) FIFO Method
Product E2-D2
Date
Purchases
Cost of
Goods Sold
Balance
May 7
(50 @ $10) $500
(50 @ $10) $500
June 1
July 28
(30 @ $13)
Aug. 27
*BRIEF EXERCISE 6-9 (Continued)
(b) LIFO Method
Product E2-D2
Date
Purchases
Cost of
Goods Sold
Balance
May 7
(50 @ $10) $500
(50 @ $10) $500
June 1
July 28
(30 @ $13) $390
(30 @ $13)
Aug. 27
(30 @ $13)
(10 @ $10)
(c) Average-Cost
Product E2-D2
Date
Purchases
Cost of
Goods Sold
Balance
May 7
(50 @ $10) $500
(50 @ $10) $500
June 1
July 28
Aug. 27
(40 @ $11.67) $467
*BRIEF EXERCISE 6-10
(1) Net sales ………………………………………………………………….. $340,000
Less: Estimated gross profit (35% X $340,000) ………….. 119,000
*BRIEF EXERCISE 6-11
At Cost
At Retail
Goods available for sale
$38,000
$50,000
Less: Net sales
Ending inventory at retail
$10,000
SOLUTIONS FOR DO IT! REVIEW EXERCISES
DO IT! 6-1
Inventory per physical count ……………………………………………. $300,000
DO IT! 6-2
Cost of goods available for sale = (3,000 X $5) + (8,000 X $7) = $71,000
Ending inventory = 3,000 + 8,000 – 9,400 = 1,600 units
DO IT! 6-3
2016
2017
Ending inventory
$27,000 understated
No effect
$27,000 understated
No effect
DO IT! 6-4
(a) The lowest value for each inventory type is: Small $64,000, Medium
(b)
2016
2017
Inventory turnover
$1,200,000
=
6
$1,425,000
=
8.9
($180,000 + $220,000)/2
($220,000 + $100,000)/2
SOLUTIONS TO EXERCISES
EXERCISE 6-1
Ending inventory—physical count ………………………………………… $297,000
1. No effect—title passes to purchaser upon shipment
when terms are FOB shipping point ……………………………. 0
2. No effect—title does not transfer to Wilfred until
EXERCISE 6-2
Ending inventory—as reported ……………………………………………… $740,000
1. Subtract from inventory: The goods belong to
Kroeger Corporation. Depue is merely holding
them as a consignee …………………………………………………… (250,000)
2. No effect—title does not pass to Depue until
goods are received (Jan. 3) …………………………………………. 0
3. Subtract from inventory: Office supplies should
be carried in a separate account. They are not
EXERCISE 6-2 (Continued)
6. Subtract from inventory: GAAP require that inventory
EXERCISE 6-3
(a) FIFO Cost of Goods Sold
(b) It could choose to sell specific units purchased at specific costs if it
wished to impact earnings selectively. If it wished to minimize earnings
(c) I recommend they use the FIFO method because it produces a more
EXERCISE 6-4
(a) FIFO
Beginning inventory (26 X $97) …………………………….. $ 2,522
Purchases
Sept. 12 (45 X $102) ……………………………………….. $4,590
EXERCISE 6-4 (Continued)
Proof
Date
Units
Unit Cost
Total Cost
9/1
26
$ 97
$ 2,522
9/12
45
102
4,590
9/19
20
104
2,080
9/26
105
LIFO
Cost of goods available for sale …………………………..……………………. $14,442
Proof
Date
Units
Unit Cost
Total Cost
9/26
50
$105
$ 5,250
9/19
20
104
2,080
9/1
6
582
(b)
FIFO $2,100 (ending inventory) + $12,342 (COGS) = $14,442
Cost of
goods
EXERCISE 6-5
FIFO
Beginning inventory (30 X $8) ………………………………………. $240
Purchases
May 15 (25 X $11) ………………………………………………….. $275
EXERCISE 6-5 (Continued)
Proof
Date
Units
Unit Cost
Total Cost
5/1
30
$ 8
$240
5/15
5/24
LIFO
Cost of goods available for sale ………………………………………………… $935
Proof
Date
Units
Unit Cost
Total Cost
5/24
35
$420
5/15
5/1
EXERCISE 6-6
(a) FIFO
Beginning inventory (200 X $5) …………………………. $1,000
Purchases
June 12 (400 X $6) …………………………..………… $2,400
June 23 (300 X $7) …………………………..………… 2,100 4,500
LIFO
Cost of goods available for sale ……………………….. $5,500
EXERCISE 6-6 (Continued)
(b) The FIFO method will produce the higher ending inventory because
costs have been rising. Under this method, the earliest costs are
assigned to cost of goods sold and the latest costs remain in ending
$4,800 or ($5,500 – $700) under FIFO.
EXERCISE 6-7
(a) (1) FIFO
Beginning inventory …………………………………… $10,000
(2) LIFO
Beginning inventory …………………………………… $10,000
Purchases …………………………………………………. 26,000
Cost of goods available for sale ………………….. 36,000
(3) AVERAGE-COST
Beginning inventory …………………………………… $10,000
(b) The use of FIFO would result in the highest net income since the earlier
lower costs are matched with revenues.
EXERCISE 6-8
(a)
Cost of Goods
Available for Sale
$5,500
÷
Total Units
Available for Sale
900
=
Weighted Average
Unit Cost
$6.11
(b) Ending inventory is lower than FIFO ($700) and higher than LIFO ($500).
In contrast, cost of goods sold is higher than FIFO ($4,800) and
EXERCISE 6-9
2016
2017
Beginning inventory …………………………………….. $ 20,000 $ 27,000
EXERCISE 6-10
(a)
2016
2017
Sales ……………………………………………………….. $220,000 $250,000
Cost of goods sold