FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
Req. 2
Beg. bal. 742,000
Req. 3
Sales revenue 15,272,500$
Cost of goods sold 8,941,490
Gross profit 6,331,010
Income before tax 3,081,010
Income tax expense (35%) 1,078,354
Net income 2,002,656$
Inventory
Super Value Store in Madison
Income Statement
Year Ended January 31, 2016
Chapter 6: Inventory and Cost of Goods Sold Page 61 of 96
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
P6-72B
(20-30 min.)
Requirements
Solution:
Req. 1
The store uses FIFO.
Req. 2
17 × $35 =$595
Req. 3
1. The preceding data are taken from the store’s perpetual inventory records.
Which cost method does the store use? Explain how you arrived at your answer.
2. Determine the store’s cost of goods sold for March. Also compute gross profit for
March.
3. What is the cost of the store’s March 31 inventory of running shoes?
Cost of goods sold
Chapter 6: Inventory and Cost of Goods Sold Page 62 of 96
32 × 35 = 1,120
12 × 37 = 444
34 × 37 = 1,258
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
P6-73B
(20-30 min.)
Requirements
Solution:
Req. 1
Beg. bal. (80 units @ $20) 1,600
Purchases:
Req. 2
1. Determine the cost of goods sold and ending inventory amounts for May
under the average cost, FIFO cost, and LIFO cost. Round the 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 Military Surplus’s income statement for May. Report gross profit.
Operating expenses totaled $3,500. Military Surplus uses average costing for
inventory. The income tax rate is 30%.
Inventory
Cost of Goods Sold
Ending Inventory
Chapter 6: Inventory and Cost of Goods Sold Page 63 of 96
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
Req. 3
Sales revenue (318 × $47) 12,870$
Cost of goods sold 7,722
Student responses may vary.
LIFO results in the highest cost of goods sold because (a) the company’s prices
Military Surplus
Income Statement
Month Ended May 31, 2016
Chapter 6: Inventory and Cost of Goods Sold Page 64 of 96
Gross profit 5,148
Operating expenses 3,500
Income before income taxes 1,648
Income tax expense (30%) 494
Net income 1,154$
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
P6-74B
(30-40 min.)
Requirements
Solution:
Req. 1 (partial income statements)
AVERAGE FIFO LIFO
Req. 2
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 whole dollar.
2. Which inventory method would you use to minimize income tax? Explain why
this method causes income tax to be the lowest.
Buzz Aviation
Income Statement
Year Ended July 31, 2016
Computations of cost of goods sold:
Chapter 6: Inventory and Cost of Goods Sold Page 65 of 96
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
P6-75B
(15-20 min.)
Requirements
Solution:
Inventory at market (which is lower than
a. What accounting action should Mahtomedi take in this situation?
b. Give any journal entry required.
c. At what amount should Mahtomedi 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.
a.
Mahtomedi Trade Mart should apply the lower-of-cost-or-market rule to account
e.
Relevance and representational faithfulness are the reasons to account for
c.
BALANCE SHEET
Chapter 6: Inventory and Cost of Goods Sold Page 66 of 96
To write inventory down to market value.
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
P6-76B
(20-30 min.)
Requirements
Solution:
Req. 1
Gross profit percentage:
Req. 2
1. Compute the gross profit percentage and the rate of inventory
turnover for Frosted Donut and Coffee Bean 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?
From these statistics, it’s hard to tell whether Froster Donut or Coffee
Bean is more profitable. Froster Donut has a much faster inventory
Coffee Bean Corp.
Froster Donut,
Inc.
Millions
Millions
Chapter 6: Inventory and Cost of Goods Sold Page 67 of 96
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
P6-77B
(25-30 min.)
Requirements
Solution:
Req. 1
Beginning inventory $57,600
Purchases $490,600
Less: Purchase discounts (14,000)
Req. 2
Sales revenue 648,000$
1. Estimate the cost of the lost inventory using the gross profit method.
2. Prepare the income statement for July 1 through July 15 for this product
through gross profit. Show the detailed computation of cost of goods sold in
a separate schedule.
(estimate of ending inventory by the gross profit method)
Thompson Company
Income Statement (partial)
Two Week Period ending July 15 (date of the fire)
Chapter 6: Inventory and Cost of Goods Sold Page 68 of 96
Cost of goods available 463,900
Sales revenue $648,000
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
*Cost of goods sold:
57,600$
$490,600
Beginning inventory
Purchases
Chapter 6: Inventory and Cost of Goods Sold Page 69 of 96
Less: Purchases discounts
Cost of goods available for sale
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
P6-78B
(20-25 min.)
Requirements
Solution:
Req. 1
Cost of sales, budgeted ($721,000 × 1.05) $757,050
+ Ending inventory, budgeted 77,000
Req. 2
Sales ($957,000 × 1.05) $1,004,850
Cost of sales ($721,000 × 1.05) 757,050
Gross profit 247,800
Net income $154,000
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 $154,000. To reach this goal, operating expenses must decrease
by $19,200.
Maroney‘s Convenience Stores
Budgeted Income Statement
Year Ended December 31, 2016
Chapter 6: Inventory and Cost of Goods Sold Page 70 of 96
= Cost of goods available 834,050
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
P6-79B
(15-20 min.)
Requirements
Solution:
Req. 1 (corrected income statements)
Net sales revenue $39 $36 $33
Cost of goods sold:
Req. 2
1. Show corrected income statements for each of the three years.
2. How much did these assumed corrections add to or take away from
Columbia’s total net income over the three-year period? How did the corrections
affect the trend of net income?
3. Will Columbia’s shareholders still be happy with the company’s trend of net
income? Give the reason for your answer.
The corrections did not change total net income over the three-year
Columbia Furniture
Income Statement (adapted; amounts in millions)
Years Ended December 31, 2016, 2015, and 2014
2016
2015
2014
Chapter 6: Inventory and Cost of Goods Sold Page 71 of 96
Gross profit 10 11 18
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
E6-80
(5-10 min.)
Solution:
a. Use FIFO.
b. Use FIFO.
a. Inventory costs are decreasing, and your company’s board of directors wants to
minimize income taxes.
b. Inventory costs are increasing, and the company prefers to report high income.
c. Suppliers of your inventory are threatening a labor strike, and it may be difficult for
your company to obtain inventory. This situation could increase your income taxes.
d. Inventory costs have been stable for several years, and you expect costs to remain
stable for the indefinite future. (Give the reason for your choice of method.)
e. Inventory costs are increasing. Your company uses LIFO and is having an
unexpectedly good year. It is near year-end, and you need to keep net income from
increasing too much in order to save on income tax.
f. Company management, like that of Apple and Pottery Barn, prefers a middle-of-the-
road inventory policy that avoids extremes.
Chapter 6: Inventory and Cost of Goods Sold Page 72 of 96
e. Buy inventory late in the year.
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
E6-81
(20-30 min.)
Requirements
Solution:
Req. 1
LIFO cost of goods sold =
1. From purchase in December (35 @ $1,400) $49,000
Req. 2
(this would have avoided a LIFO liquidation-that is,
kept year-end inventory at the same level it was at the
beginning of the year)
1. From purchase in December (61* @ $1,400) $85,400
Cost of goods sold with the additional year-end purchase
1. Compute Uptown’s cost of goods sold for evening gowns in 2016.
2. Compute what cost of goods sold would have been if Uptown had purchased
enough inventory in December—at $1,400 per evening gown—to keep year-end
inventory at the same level it was at the beginning of the year.
Chapter 6: Inventory and Cost of Goods Sold Page 73 of 96
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
E6-82
(20-30 min.)
Requirement
Solution:
Dollars in millions 2016 2015 2016
Sales 37.9$ 36.8$ 34.5$
1. Evaluate the trend of AMart’s results of operations during 2014 through 2016.
Consider the trends of sales, gross profit, and net income. Track the gross profit
percentage and the rate of inventory turnover in each year. Also discuss the role that
selling expenses must have played in A Mart’s difficulties.
Both the gross profit percentage and the rate of inventory turnover dropped during
this period. The gross profit percentage dropped significantly. This suggests that A
Sales increased, the gross profit increased then dropped, and net income slid into a
net loss, as shown here:
Chapter 6: Inventory and Cost of Goods Sold Page 74 of 96
Cost of sales 30.7 29.2 27.2
Gross profit 7.2 7.6 7.3
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
P6-83
(20-30 min)
Requirements
Solution:
Req. 1
Beginning inventory 309,000$
Req. 2
Inventory 3,960,000
Accounts Payable 3,960,000
Beg. Bal 309,000
1. Show the computation of LifeTech’s cost of goods sold in 2015 using the LIFO
method. Refer to Appendix 6B for an illustration.
2. Prepare summary journal entries for 2015 for LifeTech’s purchases of inventory
(assume all purchases are on account), sales (assume all are on account), and cost
of goods sold. Prepare a T-account for inventory and post these transactions into the
T-account. The company uses the perpetual inventory method.
3. Show the computation of LifeTech’s cost of goods sold for 2015 using the FIFO
method.
4. Compute the gross profit percentage for 2015 for both FutureNow and LifeTech
using FIFO figures for both.
5. Compute the inventory turnover for 2015 for both FutureNow and LifeTech using
FIFO figures for both.
6. Which company appears stronger? Support your answer.
Inventory
Chapter 6: Inventory and Cost of Goods Sold Page 75 of 96
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
Req. 3
Beginning inventory ($21,000 higher under FIFO) 330,000$
+ Purchases 3,960,000
Req. 4
Req. 5
Req. 6
LifeTech has a higher gross profit percentage which indicates that LifeTech has a
Chapter 6: Inventory and Cost of Goods Sold Page 76 of 96
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
Decision Case 1
(50-60 min.)
Requirements
Solution:
Req 1
FIFO LIFO
Sales revenue 1,200,000$ 1,200,000$
Req. 2
FIFO LIFO
Student responses may vary.
Jubilee Corporation
Income Statement
1. To aid company decision making, prepare income statements under FIFO and under
LIFO.
2. Compare the net income under FIFO with net income under LIFO. Which method
produces the higher net income? What causes this difference? Be specific.
Chapter 6: Inventory and Cost of Goods Sold Page 77 of 96
Gross profit 615,000$ 555,000$
Income before income
tax expense 415,000$ 355,000$
Income tax expense
($415,000 × .40) 166,000$
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
Decision Case 2
(15-25 min.)
Requirements
Solution:
Req. 1
Req. 2
1. Company A uses the LIFO inventory method and discloses its use of the LIFO
method in notes to the financial statements. Company B uses the FIFO method
to account for its inventory. Company B does not disclose which inventory
method it uses. Company B reports a higher net income than Company A. In
which company would you prefer to invest? Give your reason.
2. Representational faithfulness is an accepted accounting concept. Would you
want management to be faithful in representing its accounting for inventory if you
were a shareholder or a creditor of a company? Give your reason.
This question provides a rich setting for a class discussion. There’s no single
Yes, the authors would prefer managers to be faithful in representing the
disclosures for inventory — for all the reasons accountants are transparent and
Chapter 6: Inventory and Cost of Goods Sold Page 78 of 96