FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
E6-39B
(15-20 min.)
Requirement
Solution:
a. 64,000$
b. 42,000$
c.
Req. 1
Net sales $106,000
Cost of goods sold
Beginning inventory $22,000
Net purchases 62,000
Cost of goods available 84,000
Gross profit 42,000
Operating and other expenses 40,000
1. Prepare the income statement for Baker Company for the year ended
December 31, 2016. Use the cost-of-goods-sold model to compute cost
of goods sold. Baker’s operating and other expenses for the year were
$40,000. Ignore income tax.
Must first solve for d
Income Statement
Year Ended December 31, 2016
$22,000 + $62,000 − $20,000 = $64,000
$106,000 − $64,000 = $42,000
Baker Company
Chapter 6: Inventory and Cost of Goods Sold Page 41 of 96
d. 95,000$
e. 91,000$
h. 56,000$
$136,000 − $41,000= $95,000
$136,000 − $41,000= $95,000
c = $90,000
$64,000 + $27,000 = $91,000
$85,000 − $29,000 = $56,000
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
E6-40B
(20-30 min.)
Solution:
Req. 1
Company Inventory Turnover
Baker $42
$106
Req. 2
Thomas has the highest gross profit percentage, 65.9%. Ethan has the
lowest gross profit percentage, 29.7%.
3.0
Compute all ratio values to answer the following questions:
1. Which company has the highest, and which company has the lowest, gross
profit percentage?
2. Which company has the highest, and which has the lowest, rate of inventory
turnover? Based on your figures, which company appears to be the most
profitable?
Gross Profit
Percentage
=
$64
=
($22 + $20) / 2
39.6%
times
Chapter 6: Inventory and Cost of Goods Sold Page 42 of 96
$136
times
times
times
=
=
65.9%
=
=
=
($32 + $25) / 2
=
30.1%
29.7%
2.6
2.2
4.0
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
E6-41B
(15 min.)
Solution:
Req. 1 and 2
1
FIFO
Gross profit percentage =$136,000 − $82,960
$136,000
Req. 3
Req. 4
2
LIFO
$136,000 − $99,280
$136,000
Thurston & Talty need to know the company’s gross profit percentage and rate of
inventory turnover for 2016 under
1. FIFO.
2. LIFO.
Which method produces a higher gross profit percentage? Inventory turnover?
Chapter 6: Inventory and Cost of Goods Sold Page 43 of 96
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
E6-42B
(10-15 min.)
Requirement
Solution:
Millions
Budgeted cost of goods sold ($6,900 × 1.14) $7,866
Year ended January 31, 2016:
1. One of the most important decisions a manager makes is how much
inventory to buy. How much inventory should FunToys purchase during the
upcoming year to reach its budget?
Chapter 6: Inventory and Cost of Goods Sold Page 44 of 96
Budgeted cost of goods available 9,966
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
E6-43B
(10-15 min.)
Solution:
Beginning inventory $49,300
Net purchases 61,000
Cost of goods available 110,300
Estimate the cost of the inventory destroyed by the fire. Identify another reason
that owners and managers use the gross profit method to estimate inventory.
Chapter 6: Inventory and Cost of Goods Sold Page 45 of 96
Another reason that managers use the gross profit method to
estimate ending inventory is to test the reasonableness of ending
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
E6-44B
(10-15 min.)
Solution:
Sales revenue $144,000 $115,000
Cost of goods sold:
Blue Sky Marine Supply
Income Statement (Corrected)
Years Ended April 30, 2016 and 2015
Prepare the corrected comparative income statements for the two-year period,
complete with a heading for the statements. How well did Blue Sky really
perform in 2016 as compared with 2015?
2016
2015
Chapter 6: Inventory and Cost of Goods Sold Page 46 of 96
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
Quiz
Q6-45 a ($3,700 + $6,600 − $5,200 = $5,100)
Q6-46 d($7,300 − $5,200 = $2,100)
Q6-47 a
Chapter 6: Inventory and Cost of Goods Sold Page 47 of 96
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
P6-62A
(20-30 min.)
Requirements
Solution:
Req. 1
Inventory 8,920,000
Accounts Payable 8,920,000
Accounts Payable 8,592,000
1. Make summary journal entries to record the store’s transactions for the year ended
January 31, 2016. Big Box uses a perpetual inventory system. Round average cost
per unit to two decimal places and round all other amounts to the nearest dollar.
2. Prepare a T-account to show the activity in the Inventory account.
3. Prepare the store’s income statement for the year ended January 31, 2016. Show
totals for gross profit, income before tax, and net income.
Chapter 6: Inventory and Cost of Goods Sold Page 48 of 96
Accounts Receivable 10,177,500
Sales Revenue 15,477,500
Cost of Goods Sold (151,000 × $62.20*) 9,392,200
Operating Expenses 2,500,000
Income Tax Expense 1,075,590
Income Tax Payable (see Req. 3) 1,075,590
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
Req. 2
Beg. bal. 1,060,000
Req. 3
Sales revenue $15,477,500
Gross profit 6,085,300
Income before tax 3,585,300
Inventory
Big Buy Store, Rosedale
Income Statement
Year Ended January 31, 2016
Chapter 6: Inventory and Cost of Goods Sold Page 49 of 96
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
P6-63A
(20-30 min.)
Requirements
Solution:
Req. 1
The store uses FIFO.
Req. 2
19 × $32 =722$
Req. 3
1. Determine the cost of goods sold and ending inventory amounts for March
under the average cost, FIFO cost, and LIFO cost. Round average cost per unit to
two decimal places, and round all other amounts to the nearest dollar.
2. Explain why cost of goods sold is highest under LIFO. Be specific.
3. Prepare the Armed Forces Surplus income statement for March. Report gross
profit. Operating expenses totaled $5,000. Armed Forces Surplus uses average
costing for inventory. The income tax rate is 35%.
Cost of goods sold:
Chapter 6: Inventory and Cost of Goods Sold Page 50 of 96
28 × 38 = 1,064
10 × 40 = 400
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
P6-64A
(20-30 min.)
Requirements
Solution:
Req. 1
Beg. bal.
(80 units @ $15)
1,200
Purchases:
Cost of Goods Sold
Req. 2
Inventory
1. Determine the cost of goods sold and ending inventory amounts for Mar.
under the average cost, FIFO cost, and LIFO cost. Round average cost per unit
to two decimal places, and round all other amounts to the nearest dollar.
2. Explain why cost of goods sold is highest under LIFO. Be specific.
3. Prepare the Camp Surplus income statement for Mar.. Report gross profit.
Operating expenses totaled $3,250. Camp Surplus uses average costing for
inventory The income tax rate is 30%.
Ending Inventory
Chapter 6: Inventory and Cost of Goods Sold Page 51 of 96
(100 units @ $20)
2,000
(120 units @ $25)
3,000
1,500 ?
(54 units @ $?)
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
Req. 3
Sales revenue (296 x $45) $13,320
Income Statement
Month Ended March 31, 2016
LIFO cost of goods sold is highest because (a) prices are rising and (b) LIFO
Armed Forces Surplus
Chapter 6: Inventory and Cost of Goods Sold Page 52 of 96
Cost of goods sold 6,512
Gross profit 6,808
Operating expenses 5,000
Income before income taxes 1,808
Income tax expense (35%) 633
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
P6-65A
(30-40 min.)
Requirements
Solution:
Req. 1
AVERAGE FIFO LIFO
Average cost COGS = 9,050 × $7.40
FIFO COGS = (700 @ $6.00) + (400 @ $7.00) + (7,950 @ $7.50)
Req. 2
Aldrin Aviation
($4,200 + $2,800 + $63,000 + $4,000)
Average cost per
Partial Income Statement
Year Ended July 31, 2016
1. Prepare a partial income statement through gross profit under the average,
FIFO, and LIFO methods. Round average cost per unit to two decimal places
and all other amounts to the nearest dollar.
2. Which inventory method would you use to minimize income tax? Explain why
this method causes income tax to be the lowest.
Computations of cost of goods sold
Chapter 6: Inventory and Cost of Goods Sold Page 53 of 96
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
P6-66A
(15-30 min.)
Requirements
Solution:
90,000
90,000
a. What accounting action should Dixson take in this situation?
b. Give any journal entry required.
c. At what amount should Dixson report Inventory on the balance sheet?
d. At what amount should the company report Cost of Goods Sold on the income
statement?
e. Discuss the accounting principle or concept that is most relevant to this situation.
Dixson Trade Mart should apply the lower-of-cost-or-market rule to account for
inventories. The current replacement cost of ending inventory is less than
To write inventory down to market value.
Cost of Goods Sold
Inventory
Inventory at market (which is lower than
a.
BALANCE SHEET
c.
b.
Chapter 6: Inventory and Cost of Goods Sold Page 54 of 96
Cost of goods sold ($410,000 + $90,000)
d.
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
P6-67A
(20-25 min.)
Requirements
Solution:
Req. 1
Gross profit percentage:
Sales 600$ 7,000$
Req. 2
1. Compute the gross profit percentage and the rate of inventory turnover for
Pastry People, and Captain Coffee for 2016.
2. Based on these statistics, which company looks more profitable? Why? What
other expense category should we consider in evaluating these two companies?
Pastry People
Coffee Time Corp.
Dollars in Millions
These statistics are unclear. The numbers suggest that Coffee Time
Chapter 6: Inventory and Cost of Goods Sold Page 55 of 96
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
P6-68A
(25-30 min.)
Requirements
Solution:
Req. 1
Beginning inventory $57,400
Purchases $490,300
Less: Purchase discounts
(11,000)
Req. 2
Sales revenue $647,000
1. Estimate the cost of the lost inventory using the gross profit method.
2. Prepare the income statement for March 1 to March 15 for this product through
gross profit. Show the detailed computations of cost of goods sold in a separate
schedule.
(estimate of ending inventory by the gross profit method)
Watertown Company
Income Statement (partial)
Two Week Period Ending March 15 (date of the fire)
Chapter 6: Inventory and Cost of Goods Sold Page 56 of 96
Cost of goods available 465,900
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
$57,400
$490,300
(11,000)
Cost of goods sold:
Beginning inventory
Purchases
Less: Purchases discounts
Chapter 6: Inventory and Cost of Goods Sold Page 57 of 96
Cost of goods available for sale
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
P6-69A
(20-25 min.)
Requirements
Solution:
Req. 1
Cost of sales, budgeted ($724,000 × 1.10) $796,400
+ Ending inventory, budgeted 82,000
Req. 2
Sales ($961,000 × 1.10) $1,057,100
Cost of sales ($724,000 × 1.10) 796,400
Gross profit 260,700
Net income $158,000
1. One of the most important decisions a manager makes is the amount of
inventory to purchase. Show how to determine the amount of inventory to purchase
in 2016.
2. Prepare the store’s budgeted income statement for 2016 to reach the target net
income of $158,000. To reach this goal, operating expenses must decrease by
$3,300.
Gary’s Convenience Stores
Budgeted Income Statement
Year Ended December 31, 2016
Chapter 6: Inventory and Cost of Goods Sold Page 58 of 96
= Cost of goods available 878,400
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
P6-70A
(15-20 min.)
Requirements
Solution:
Req. 1 (corrected income statements)
Net sales revenue $42 $39 $36
Cost of goods sold:
Beginning inventory $15 $13 $8
Req. 2
Req. 3
1. Show corrected income statements for each of the three years.
2. How much did these assumed corrections add to or take away from
Brilliant’s total net income over the three-year period? How did the
corrections affect the trend of net income?
3. Will Brilliant’s shareholders still be happy with the company’s trend of
net income? Give the reason for your answer.
2016
2015
2014
Brilliant Home Store
Income Statement (adapted; amounts in millions)
Years Ended December 31, 2016, 2015, and 2014
Chapter 6: Inventory and Cost of Goods Sold Page 59 of 96
Gross profit 8 13 15
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
P6-71B
(20-30 min.)
Requirements
Solution:
Req. 1
Inventory 8,679,000
Accounts Payable 8,679,000
Accounts Payable 8,351,000
Cash 8,351,000
1. Make summary journal entries to record the store’s transactions for the year
ended June 30, 2016. Super Value uses a perpetual inventory system. Round
average cost per unit to two decimal places and round all other amounts to the
nearest dollar.
2. Prepare a T-account to show the activity in the Inventory account.
3. Prepare the store’s income statement for the year ended January 31, 2016. Show
totals for gross profit, income before tax, and net income.
Chapter 6: Inventory and Cost of Goods Sold Page 60 of 96
Accounts Receivable 10,072,500
Sales Revenue 15,272,500
Cost of Goods Sold (149,000 × $60.01*) 8,941,490*
Operating Expenses 3,250,000
Cash ($3,250,000 × 0.70) 2,275,000
Income Tax Expense 1,078,354
Income Tax Payable (see Req. 3) 1,078,354