Chapter 6 – Inventory and Cost of Goods Sold
6-96 Financial Accounting, 5e
Additional Perspective 6-1 (in General Ledger)
Students will be given the following existing trial balance.
Great Adventures, Inc.
Trial Balance
December 31, 2022
Accounts
Debit
Credit
Cash
$ 36,770
Accounts Receivable
24,000
Allowance for Uncollectible Accounts
$ 2,400
Inventory
-0-
Equipment
45,000
Accumulated Depreciation
Accounts Payable
Interest Payable
Income Tax Payable
Notes Payable
30,000
Common Stock
20,000
Retained Earnings
33,450
Service Revenue
44,500
Sales Revenue
-0-
Interest Revenue
120
Sales Discounts
350
Cost of Goods Sold
-0-
Depreciation Expense
Insurance Expense
Rent Expense
Salaries Expense
24,000
Supplies Expense
500
Bad Debt Expense
Interest Expense
Income Tax Expense
14,500
$172,520
Chapter 6 – Inventory and Cost of Goods Sold
Additional Perspective 6-1 (in General Ledger, continued)
Jul. 17, 2022
Credit
Inventory
Accounts Payable
7,500
(Purchase inventory on account)
Cash
Sales Revenue
(Sell inventory on account)
Cost of Goods Sold
Aug. 12, 2022
Inventory
Cash
6,400
(Purchase inventory with cash)
Aug. 22, 2022
Accounts Receivable
Sales Revenue
15,000
(Sell inventory on account)
Inventory
4,700
Sep. 19, 2022
Accounts Payable
Cash
7,500
(Pay on account)
Sep. 27, 2022
Cash
(Receive on account)
Chapter 6 – Inventory and Cost of Goods Sold
6-98 Financial Accounting, 5e
Oct. 27, 2022
Inventory
13,600
Cash
13,600
(Purchase inventory with cash)
Nov. 20, 2022
Cash
45,000
Cost of Goods Sold
15,100
Inventory
18,000
Accounts Payable
18,000
(Purchase inventory on account)
Dec. 8, 2022
Accounts Receivable
20,000
(Sell inventory on account)
Cost of Goods Sold
Dec. 31, 2022
Cost of Goods Sold
a The amount of the inventory write-down equals the difference between the cost of
the 70 MU watches ($12,600) and their net realizable value ($7,000)
Chapter 6 – Inventory and Cost of Goods Sold
Additional Perspective 6-1 (in General Ledger, continued)
Great Adventures, Inc.
Income Statement
For the period ended December 31, 2022
Service revenue
$ 44,500
Sales revenue
Cost of goods sold
Gross profit
$105,650
Depreciation Expense
16,000
Insurance Expense
4,800
Rent Expense
2,400
Salaries Expense
24,000
Supplies Expense
Total operating expenses
Operating income (loss)
55,550
Interest revenue
120
Interest expense
(1,800)
Income tax expense
Chapter 6 – Inventory and Cost of Goods Sold
6-100 Financial Accounting, 5e
Additional Perspective 6-1 (in General Ledger, continued)
Great Adventures, Inc.
Balance Sheet
December 31, 2022
Assets
Liabilities
Current assets:
Current liabilities:
Cash
$ 83,270
Accounts payable
$ 20,800
Accounts receivable
50,000
Interest payable
750
Allow for Uncoll Accts
(2,400)
Income tax payable
14,500
Inventory
Total current assets
Long-term assets:
Total assets
Chapter 6 – Inventory and Cost of Goods Sold
Additional Perspective 6-1 (in General Ledger, concluded)
Dec. 31, 2022
Debit
Credit
Service Revenue
44,500
Sales Revenue
100,000
Interest Revenue
Dec. 31, 2022
Retained Earnings
104,900
Cost of Goods Sold
38,500
Depreciation Expense
16,000
Insurance Expense
4,800
Salaries Expense
24,000
Supplies Expense
Bad Debt Expense
Interest Expense
1,800
Chapter 6 – Inventory and Cost of Goods Sold
6-102 Financial Accounting, 5e
Additional Perspective 6-2
($ in thousands)
Requirement 1
The amount of inventory reported in the balance sheet is $398,213. This amount
Requirement 2
The company refers to cost of goods sold as cost of sales.
Requirement 3
The amount of cost of goods sold reported in the income statement is $2,425,044. This
amount represents the cost of inventory sold during the year.
Requirement 4
Requirement 5
2018
2017
2016
Requirement 6
Chapter 6 – Inventory and Cost of Goods Sold
Additional Perspective 6-3
($ in thousands)
Requirement 1
The amount of inventory reported in the balance sheet is $118,007. This amount
Requirement 2
The company refers to cost of goods sold as cost of sales.
amount represents the cost of inventory sold during the year.
Requirement 4
Inventory
turnover ratio
=
Cost of goods sold
=
$533,357
=
4.4
Average inventory
$121,850.5
=
=
Requirement 5
2018
2017
2016
Gross profit
ratio
=
Gross profit
=
41.6%
40.7%
43.0%
Net sales
=
Chapter 6 – Inventory and Cost of Goods Sold
6-104 Financial Accounting, 5e
Additional Perspective 6-4
Requirement 1
American Eagle’s percentage of inventory to total assets is 21.9%. Buckle’s
percentage of inventory to total assets is 21.9%.
Requirement 2
American
Requirement 3
American
Eagle
Buckle
Gross profit
ratio
=
Gross profit
=
36.1%
41.6%
Net sales
Buckle shows greater profitability.
Requirement 4
=
28.1%
26.9%
Net sales
American
Chapter 6 – Inventory and Cost of Goods Sold
Additional Perspective 6-5
1. Increase in income before taxes.
By recording the fictitious sale, income before taxes will increase by the amount of
2. Decrease in total assets and decrease in income before taxes.
3. Yes.
Reporting the sale would lead to misstated financial statements. Even if creditors are
fooled for a short while, the company’s lack of profitability will eventually be
4. No.
Under generally accepted accounting principles, the sale does not transfer control or
risk of ownership of the inventory, so it should not be recorded. However, the decision
is difficult. If profits are too low, Jim will lose his job and so will all of his coworkers.
6-106 Financial Accounting, 5e
Chapter 6 – Inventory and Cost of Goods Sold
Additional Perspective 6-6
(Note to instructor: Amounts are based on annual reports filed December 31, 2016)
Requirement 1
($ in millions)
Coca-Cola
PepsiCo
Coca-Cola
PepsiCo
Inventory
turnover
ratio
=
Cost of goods sold
=
$16,465
$28,209
Average inventory
($2,625+$2,902)/2
($2,723+$2,720)/2
Requirement 2
As indicated by the higher gross profit ratio, Coca-Cola is able to generate more profit
selling its inventory (beverages) than PepsiCo is selling its inventory (beverages and
snack foods). However, PepsiCo’s inventory turns over much faster. On average,
Chapter 6 – Inventory and Cost of Goods Sold
6-108 Financial Accounting, 5e
Additional Perspective 6-7
Students should discuss the following issues.
For FIFO,
– FIFO assumes that the first units purchased are sold first.
For LIFO,
– LIFO assumes that the last units purchased are sold first.
– LIFO may better match current inventory costs with current inventory sales,
Chapter 6 – Inventory and Cost of Goods Sold
Additional Perspective 6-8
Requirement 1
Date
Transaction
Number
of units
Unit
cost
Ending
Inventory
Aug. 22
Purchase
30
$600
$18,000
Oct. 29
Purchase
80
640
51,200
110
$69,200
Date
Transaction
of units
cost
Goods Sold
Jan. 1
Beginning inventory
Mar. 8
Purchase
570
68,400
Aug. 22
Purchase
600
42,000
Requirement 2
Date
Transaction
Number
of units
Unit
cost
Ending
Inventory
Oct. 29
Purchase
50
$640
$32,000
Date
Transaction
Number
of units
Unit
cost
Cost of
Goods Sold
Jan. 1
Beginning inventory
150
$540
$ 81,000
Mar. 8
Purchase
570
68,400
Aug. 22
Purchase
600
60,000
Oct. 29
Purchase
640
19,200
Requirements 3 and 4
2021
2022
(a) ending inventory
Overstatement
No Effect
(b) retained earnings
(c) cost of goods sold
(d) net income
Overstatement
Understatement
Chapter 6 – Inventory and Cost of Goods Sold
6-110 Financial Accounting, 5e