1. The receiving report should be reconciled to the initial purchase order and the vendor’s invoice
b
efore recording or paying for inventory purchases. This procedure will verify that the inventory
received matches the type and quantity of inventory ordered. It also verifies that the vendor’s invoic
e
is charging the company for the actual quantity of inventory received at the agreed-upon price.
2. A physical inventory should be taken periodically to test the accuracy of the perpetual records. In
addition, a physical inventory will identify inventory shortages or shrinkage.
3. No, they are not techniques for determining physical quantities. The terms refer to cost flow
assumptions, which affect the determination of the cost prices assigned to items in the inventory.
4. a. LIFO c. LIFO
b. FIFO d. FIFO
5. FIFO
6. LIFO. In periods of rising prices, the use of LIFO will result in the lowest net income and thus the
lowest income tax expense.
7. The merchandise should be valued using the lower of its cost of $1,350 or its market (net realizable)
value of $1,295 ($1,475
–
$180). Thus, the merchandise should be valued at its market value of
$1,295.
8. a. Gross profit for the year was understated by $14,750.
b. Merchandise inventory and owner’s equity were understated by $14,750.
9. Bibbins Company. Since the merchandise was shipped FOB shipping point, title passed to
Bibbins Company when it was shipped and should be reported in Bibbins Company’s financial
statements at May 31, the end of the fiscal year.
10. Manufacturer’s. The manufacturer retains title until the goods are sold. Thus, any unsold merchandis
at the end of the year is part of the manufacturer’s (consignor’s) inventory, even though the
merchandise is in the hands of the retailer (consignee).
CHAPTER 7
INVENTORIES
DISCUSSION QUESTIONS
CHAPTER 7 Inventories
PE 7–1A
a. First-in, first-out (FIFO)
$112 ($55 + $57)
$116 ($58 × 2)
$28 ($90 – $62)
$32 ($90 – $58)
PE 7–1B
a. First-in, first-out (FIFO)
$50 ($110 – $60)
$120 ($60 × 2)
PE 7–2A
a. Cost of merchandise sold (January 25):
25 units @ $100 $2,500
PE 7–2B
a. Cost of merchandise sold (July 24):
6 units @ $15 $ 90
$60 ($110 – $50)
$130 ($60 + $70)
June
June 30
Gross Profit Ending Inventory
PRACTICE EXERCISES
Gross Profit
November
Ending Inventory
November 30
$119 ($57 + $62)
$35 ($90 – $55)
PE 7–3A
a.
Cost of merchandise sold (April 27):
b. Inventory, April 30:
120 units @ $8 $ 960
PE 7–3B
a. Cost of merchandise sold (March 27):
b. Inventory, March 31:
45 units @ $18 $ 810
PE 7–4A
a. Weighted average unit cost: $88
Inventory total cost after purchase on May 23:
PE 7–4B
a. Weighted average unit cost: $9.50
Inventory total cost after purchase on October 22:
125 units @ $8 $1,000
CHAPTER 7 Inventories
PE 7–5A
a. First-in, first-out (FIFO) method: $90,720 = 14 units × $6,480
PE 7–5B
a. First-in, first-out (FIFO) method: $20,094 = (40 units × $357) + (17 units × $342)
PE 7–6A
Market
Value per
Cost Unit (Net
Inventory per Realizable
Commodity Quantity Unit Value) Cost Market LCM
Raven 10 1,200 $115 $112 $138,000 $134,400 $134,400
PE 7–6B
Market
Value per
Cost Unit (Net
Inventory per Realizable
Commodity Quantity Unit Value) Cost Market LCM
JFW1 6,330 $10 $11 $ 63,300 $ 69,630 $ 63,300
Total
Total
PE 7–7A
Balance Sheet:
Merchandise inventory understated*…………………
Current assets understated……………………………
Total assets understated…………………………………
Owner’s equity understated……………………………
Cost of merchandise sold overstated…………………
Gross profit understated…………………………………
Net income understated…………………………………
(11,600)
(11,600)
(11,600)
PE 7–7B
Balance Sheet:
Merchandise inventory overstated*……………………
Current assets overstated………………………………
Total assets overstated…………………………………
Owner’s equity overstated………………………………
Cost of merchandise sold understated………………
Gross profit overstated…………………………………
Net income overstated……………………………………
8,780
8,780
$8,780
$(11,600)
(11,600)
(11,600)
Overstatement (Understatement)
Amount of Misstatement
Amount of Misstatement
Overstatement (Understatement)
8,780
8,780
CHAPTER 7 Inventories
PE 7–8A
a.
Cost of merchandise sold
Inventories:
Beginning of year
End of year
$819,000
$774,000
b.
Cost of merchandise sold
Average daily cost of
merchandise sold
$819,000
$774,000
c. The increase in the inventory turnover from 4.8 to 5.5 and the decrease in the
2016 2015
$12,341.1 $10,178.6
$4,504,500
$3,715,200
Inventory Turnover
Number of Days’ Sales
in Inventory
$788,000
$760,000
$850,000
$788,000
2016 2015
$4,504,500
$3,715,200
PE 7–8B
a.
Cost of merchandise sold
Inventories:
Beginning of year
$805,000
$755,000
b.
Cost of merchandise sold
Average daily cost of
merchandise sold
$805,000
$755,000
c. The decrease in the inventory turnover from 5.3 to 4.8 and the increase in the
2016 2015
2016 2015
$770,000
$740,000
$3,864,000
$4,001,500
Inventory Turnover
Number of Days’ Sales
in Inventory
$4,001,500
$10,586.3 $10,963.0
$3,864,000
($3,864,000 ÷ 365 days) ($4,001,500 ÷ 365 days)
CHAPTER 7 Inventories
Ex. 7–1
Switching to a perpetual inventory system will strengthen Triple Creek Hardware’s
internal controls over inventory because the store managers will be able to keep
track of how much of each item is on hand. This should minimize shortages of
Ex. 7–2
a. Appropriate. The inventory tags will protect the inventory from customer theft.
b. Inappropriate. The control of using security measures to protect the inventory
is violated if the stockroom is not locked.
EXERCISES
CHAPTER 7 Inventories
Ex. 7–3
a.
Unit Total Unit Total Unit Total
Quantity Cost Cost Quantity Cost Cost Quantity Cost Cost
June 1240 78 18,720
10 180 78 14,040 60 78 4,680
Date
Portable DVD Players
Purchases Cost of Merchandise Sold Inventory
CHAPTER 7 Inventories
Ex. 7–4
Unit Total Unit Total Unit Total
Quantity Cost Cost Quantity Cost Cost Quantity Cost Cost
Jun. 1240 78 18,720
10 180 78 14,040 60 78 4,680
15 280 80 22,400 60 78 4,680
Date
Portable DVD Players
Purchases Cost of Merchandise Sold Inventory
CHAPTER 7 Inventories
Ex. 7–5
a.
Unit Total Unit Total Unit Total
Quantity Cost Cost Quantity Cost Cost Quantity Cost Cost
May 11,550 44 68,200
10 720 45 32,400 1,550 44 68,200
720 45 32,400
Date
Prepaid Cell Phones
Purchases Cost of Merchandise Sold Inventory
CHAPTER 7 Inventories
Ex. 7–6
Unit Total Unit Total Unit Total
Quantity Cost Cost Quantity Cost Cost Quantity Cost Cost
May 11,550 44 68,200
10 720 45 32,400 1,550 44 68,200
720 45 32,400
Date
Prepaid Cell Phones
Purchases Cost of Merchandise Sold Inventory
CHAPTER 7 Inventories
Ex. 7–7
a. $22,880 ($4.40 × 5,200 units)
b. $22,000 [($4.00 × 1,200 units) + ($4.20 × 2,000 units) + ($4.40 × 2,000 units)] = $4,800 + $8,400 + $8,800
Ex. 7–8
Cost of Merchandise Sold
Unit Total Unit Total Total
Quantity Cost Cost Quantity Cost Cost Quantity Unit Cost Cost
Jan. 1 10,000 75.00 750,000
Mar. 18 8,000 75.00 600,000 2,000 75.00 150,000
Ex. 7–9
Cost of Merchandise Sold
Unit Total Unit Total Total
Quantity Cost Cost Quantity Cost Cost Quantity Unit Cost Cost
Jan. 1 4,000 20.00 80,000
Apr. 19 2,500 20.00 50,000 1,500 20.00 30,000
Date
Inventory
Inventory
Date
Purchases
Purchases
7-13
CHAPTER 7 Inventories
7-14
Ex. 7–10
Cost of Merchandise Sold
Unit Total Unit Total Total
Quantity Cost Cost Quantity Cost Cost Quantity Unit Cost Cost
Jan. 14,000 20.00 80,000
Apr. 19 2,500 20.00 50,000 1,500 20.00 30,000
June 30 6,000 24.00 144,000 1,500 20.00 30,000
Date
InventoryPurchases
CHAPTER 7 Inventories
Ex. 7–11
Inventory
Unit Total Unit Total Total
Quantity Cost Cost Quantity Cost Cost Quantity Unit Cost Cost
Jan. 1 4,000 20.00 80,000
Apr. 19 2,500 20.00 50,000 1,500 20.00 30,000
June 30 6,000 24.00 144,000 1,500 20.00 30,000
Ex. 7–12
a. $15,400 (220 units at $70)
b. $13,280 (200 units at $60 plus 20 units at $64) = $12,000 + $1,280
Date
Cost of Merchandise SoldPurchases
CHAPTER 7 Inventories
Ex. 7–13
Merchandise Merchandise
Inventory Method Inventory Sold
a. FIFO $6,228 $16,472
a. First-in, first-out:
Merchandise inventory:
98 units at $60…………………………………………………..…………… $ 5,880
units……………………………………………………..……………………
$22,700 – $6,228…………………………………….……………………………
104
units…………………………………………………………………………
$5,630
Merchandise sold:
$22,700 – $5,630……………………………………………..……………………
$17,070
c. Weighted average cost:
104 units at $56.75 ($22,700 ÷ 400 units)……………………………………
$22,700 – $5,902…………………………………………………………………
Cost
CHAPTER 7 Inventories
Ex. 7–14
a. 1. FIFO inventory > (greater than) LIFO inventory
3. FIFO net income > (greater than) LIFO net income
b. In periods of rising prices, the income shown on the company’s tax return
would be lower if LIFO rather than FIFO were used; thus, there is a tax advantage
of using LIFO.
Note to Instructors: The federal tax laws require that if LIFO is used for tax
purposes, LIFO must also be used for financial reporting purposes. This is
Ex. 7–15
Market
Value per
Cost Unit (Net
Inventory per Realizable
Quantity Unit Value) Cost Market LCM
80 $140 $125 $11,200 $10,000 $10,000
120 90 112 10,800 13,440 10,800
Ex. 7–16
The merchandise inventory would appear in the Current Assets section, as
follows:
Commodity
Aspen
Ash
Total
CHAPTER 7 Inventories
Ex. 7–17
a.
Merchandise inventory*…………………………………………
$5,200 understated
Current assets……………………………………………………
Total assets………………………………………………………
Owner’s equity……………………………………………………
b.
Cost of merchandise sold………………………………………
$5,200 overstated
Gross profit………………………………………………………
Net income………………………………………………………
c.
Cost of merchandise sold………………………………………
$5,200 understated
Gross profit………………………………………………………
Net income………………………………………………………
d. The December 31, 2017, balance sheet would be correct, since the 2016
Ex. 7–18
a.
Merchandise inventory*…………………………………………
$8,650 overstated
Current assets……………………………………………………
Total assets………………………………………………………
Owner’s equity……………………………………………………
b.
Cost of merchandise sold………………………………………
$8,650 understated
Gross profit………………………………………………………
Net income………………………………………………………
c.
Cost of merchandise sold………………………………………
$8,650 overstated
Gross profit………………………………………………………
Net income………………………………………………………
d. The December 31, 2017, balance sheet would be correct, since the 2016
Balance Sheet
Income Statement
Income Statement
Income Statement
Balance Sheet
Income Statement
CHAPTER 7 Inventories
Ex. 7–19
When an error is discovered affecting the prior period, it should be corrected. In
this case, the merchandise inventory account should be debited and the owner’s
Ex. 7–20
a. Apple: 112.1 {$87,846,000 ÷
[($776,000 + $791,000) ÷ 2]}
American Greetings: 3.8 {$741,645 ÷
[($179,730 + $208,945) ÷
2]}
CHAPTER 7 Inventories
Ex. 7–21
$5,040.0
195.9
b. The number of days’ sales in inventory and the inventory turnover ratios are
relatively the same for Kroger and Safeway. Whole Foods has a significantly
c. If Kroger matched Whole Foods days’ sales in inventory, then its hypothetical
ending inventory would be determined as follows,
Thus, the additional cash flow that would have been generated is the difference
between the actual average inventory and the hypothetical average inventory,
as follows:
Actual average inventory……………………………………
…
$5,040.0 million
Hypothetical average inventory……………………………
…
2,154.9 million
($71,494 ÷ 365)
($5,114 + $4,966) ÷ 2
Inventory Turnover =
Average Inventory
11 days
Kroger: $71,494
=X
Number of Days’ Sales in Inventory
=
14.2
=
Cost of Goods Sold
= 26 days=
a.
Kroger: ($5,114 + $4,966) ÷ 2
$71,494 ÷ 365
Cost of Goods Sold ÷ 365
Average Inventory
Number of Days’ Sales in Inventory = Average Inventory
Cost of Goods Sold ÷ 365