Financial Accounting, 9/e 7-21
E7–11. (continued)
Req. 3
When prices are falling, the opposite effect occurs–LIFO produces higher net income
and less favorable cash flow than does FIFO.
E7–12.
Item
Quantity
Total Cost
Total Market
LCM
Valuation
A
50
x
$15
=
$ 750
x
$12
=
$600
$ 600
B
80
x
=
2,400
x
=
2,400
C
10
x
=
x
=
520
D
70
x
=
x
=
2,100
E
x
=
x
=
E7–13.
Req. 1
Item
Quantity
Total Cost
Total Market
LCM
Valuation
A
30
x
$20
=
$ 600
x
$15
=
$ 450
$ 450
B
55
x
=
x
=
2,420
C
35
x
=
x
55
=
D
x
=
x
32
=
$5,025
Req. 2
The write-down to lower of cost or market will increase cost of goods sold expense by
the amount of the write-down, $150:
Financial Accounting, 9/e 7-23
E7–14.
Req. 1
Inventory turnover
=
Cost of Goods Sold
=
$48,260
=
35.68
Average Inventory
($1,301+$1,404)/2
Req. 2
The inventory turnover ratio reflects how many times average inventory was produced
and sold during the period. Thus, Dell produced and sold its average inventory nearly
E7–15.
CASE A – FIFO:
Goods available for sale for FIFO:
Units (19 + 25 + 50) …………………………………………….. 94
Amount ($304 + 325 + 950) ………………………………….. $1,579
CASE B – LIFO:
Goods available for sale for LIFO:
Units (19 + 25 + 50) …………………………………………….. 94
Amount ($228 + 325 + 950) ………………………………….. $1,503
Ending inventory: 94 units – 65 units = 29.
Financial Accounting, 9/e 7-25
E7–16.
Req. 1 The reported ending inventory for Ford was $5,901 million. If FIFO were used
exclusively, the ending inventory would have been $928 million higher than
reported, or $6,829 million.
Req. 2 The restated cost of goods sold amount must reflect the restatement of both
beginning and ending inventory:
E7–17.
Req. 1 The reported ending inventory was $43,112 thousand. If FIFO were used
exclusively, the ending inventory would have been $6,964 thousand higher than
reported, or $50,076 thousand.
Req. 2 The restated cost of goods sold amount must reflect the restatement of both
beginning and ending inventory:
E7–18.
Req. 1
When the ending inventory is overstated, cost of goods sold is understated which in turn
results in an overstatement of net income. Gibson’s income from operations should be
Req. 2
The incorrect accounts can be summarized as follows:
(a) Year of (b) Subsequent
Account Error Year
Beginning inventory correct overstated
Cost of goods sold understated overstated
Financial Accounting, 9/e 7-27
E7–19.
Req. 1
The $600 understatement of ending inventory produced pretax income amounts that
Req. 2
The error caused the pretax income for each quarter to be incorrect [see (1) above];
therefore, it produced incorrect EPS amounts for each quarter.
Req. 3
First Quarter Second Quarter
Sales revenue …………………………………. $11,000 $18,000
Cost of goods sold:
Req. 4
1st Quarter
2nd Quarter
Incorrect
Correct
Error
Incorrect
Correct
Error
Beginning inventory
$4,000
$4,000
No error
$3,800
$4,400
$600 under
Ending inventory
No error
Cost of goods sold
Gross profit
10,200
Pretax income
7-28 Solutions Manual
E7–20.
Current Year Previous Year Change
Inventory $ 3,827 – $ 3,372 = $455
A/P 11,757 – 10,923 = 834
E7–21. (Supplement A)
Req. 1
This actual footnote from ConocoPhillips illustrates the impact of “dipping into a LIFO
layer.” Under LIFO, the cost of recently purchased items is assigned to cost of goods
E7–22. (Supplement B)
Req. 1
a. First–In, First–Out (FIFO) Periodic Calculation:
Cost of Goods Sold
Units
Unit Cost
Total Cost
300
$7
$2,100
450
150
$7,050
b. First–In, First–Out (FIFO) Perpetual Calculation:
Cost of Goods Sold
Date
of Sale
Units
Unit Cost
Total Cost
Jan.
12
300
$7
$2,100
30
400
150
c. Last–In, First–Out (LIFO) Periodic Calculation:
Cost of Goods Sold
Units
Unit Cost
Total Cost
750
$9
$6,750
150
$7,950
d. Last–In, First–Out (LIFO) Perpetual Calculation:
Cost of Goods Sold
Date
of Sale
Units
Unit Cost
Total Cost
12
350
$8
$2,800
Req. 2
You should recommend LIFO because the higher amount of cost of goods sold will
decrease income before taxes and taxes paid. You should recommend the periodic
calculation because it results in a higher amount for cost of goods sold which will
decrease income before taxes and taxes paid. In practice, it also substantially reduces
record keeping costs.
E7–23. (Supplement C)
Req. 1
Accounts receivable (+A) ……………………………………………
1,500
Sales (+R, +SE) ……………………………………………………
1,500
Cost of goods sold (+E, −SE) ………………………………………
975
Inventory (−A) …………………………..…………………………..
975
Req. 2
Cash (+A) ($1,500 x 0.98) …………………………………………..
1,470
Sales discounts (+XR, −R, −SE) ($1,500 x 0.02) ……………
Accounts receivable (−A) ……………………………………….
Req. 3
Cash (+A) …………………………………………………………………
1,500
Accounts receivable (−A) ……………………………………….
Req. 4
Inventory (+A) ……………………………………………………….
Accounts payable (+L)……………………………………………
Req. 5
Accounts payable (−L) …………………………..……………………
Req. 6
Accounts payable (−L) …………………………..……………………
Financial Accounting, 9/e 7-31
PROBLEMS
P7–1.
Item
Amount
Explanation
Ending inventory (physical count on
December 31, current year)
$80,000
Per physical inventory.
a.
Goods out on trial to customer
+ 900
Goods held by a customer on trial
are still owned by the vendor; no
sale or transfer of ownership has
occurred.
d.
Goods held for customer pickup
– 1,750
The goods sold, but held for
customer pickup, are owned by the
customer. Ownership has passed.
e.
Goods purchased and in transit
+ 3,550
Goods purchased and in transit,
F.O.B. shipping point, are owned
by the purchaser.
Goods sold and in transit
+ 700
Goods sold and in transit, F.O.B.
destination, are owned by the seller
until they reach destination.
g.
Goods held on consignment
Goods held on consignment are
owned by the consignor (the
manufacturer), not by the
consignee.
Correct inventory, December 31,
current year
$77,700
b.
Goods in transit from supplier
Goods shipped by a supplier,
F.O.B. destination, are owned by
the supplier until delivery at
destination.
excluded these items.
P7–2.
a) Goods available for sale for all methods:
Unit Total
Units Cost Cost
January 1–Beginning inventory 400 $3.00 $ 1,200
b) and c)
1. Average cost:
Average unit cost $4,060 ÷ 1,160 = $3.50
Ending inventory (300 units x $3.50) $1,050
Cost of goods sold1 ($4,060 – $1,050) $3,010
1 Direct computation of Cost of goods sold: (860 units x $3.50) = $3,010
3. Last-in, first-out:
Ending inventory (300 units x $3.00) 900
Cost of goods sold3 ($4,060 – $900) $3,160
3 Direct computation of Cost of goods sold: [(100 units @ $3) + (300 units @ $3.40)
+ (460 units @ $4)] = $3,160
Financial Accounting, 9/e 7-33
P7–3.
Req. 1
DONNER COMPANY
Partial Income Statement
For the Month Ended January 31, current year
(a) (b) (c) (d)
Average Specific
Cost FIFO LIFO Identification
Sales revenue* $9,920 $9,920 $9,920 $9,920
Average Specific
Units Cost FIFO LIFO Identification
Beginning inventory 500 $2,365 $2,365 $2,365 $2,365
Purchases (net)*** 760 4,880 4,880 4,880 4,880
Goods available for sale 1,260 7,245 7,245 7,245 7,245
Ending inventory**** 640 3,680 4,160 3,205 3,994.90
Cost of goods sold***** 620 $3,565 $3,085 $4,040 $3,250.10
P7–3. (continued)
Req. 1 (continued)
b. FIFO: 160 units @ $8 = $1,280
480 units @ $6 = 2,880
640 $4,160
*****Cost of goods sold (direct computations):
a. Average cost: Units Amount
Beginning inventory 500 $2,365
Purchases (per above) 760 4,880
1,260 $7,245
Average cost:
$7,245 ÷ 1,260 units = $5.75
Cost of goods sold:
620 units x $5.75 = $3,565
Financial Accounting, 9/e 7-35
P7–3. (continued)
Req. 2
FIFO reports a higher pretax income than LIFO because (1) prices are rising and (2)
Req. 4
LIFO will provide a more favorable cash flow than FIFO of $286.50 because less cash
P7–4.
Req. 1
Sales revenue $1,151,500
Cost of goods sold* (42 @ $10,000) + (5 @ $12,000) 480,000
Req. 2
Sales revenue $1,151,500
Cost of goods sold** (20 @ $9,000) + (27 @ $10,000) 450,000
Req. 3
Pretax income increased by $30,000 because of the decision to purchase the additional
units at the end of the year. This decision provided lower cost units to allocate to cost of
goods sold, which increased pretax income.
Financial Accounting, 9/e 7-37
P7–5.
Req. 1
Prices Rising Prices Falling
A B C D
FIFO LIFO FIFO LIFO
Sales revenue (500 units) $15,000 $15,000 $15,000 $15,000
Cost of goods sold:
Beginning inventory
(300 units) 3,300 3,300 3,600 3,600
Purchases (400 units) 4,800 4,800 4,400 4,400
*Inventory computations:
(a) FIFO: 200 units @ $12.00 = $2,400
(b) LIFO: 200 units @ $11.00 = 2,200
(c) FIFO: 200 units @ $11.00 = 2,200
Req. 2
The above tabulation demonstrates that when prices are rising, FIFO gives a higher net
income than LIFO. When prices are falling, the opposite effect results. The difference
P7–5. (continued)
Req. 3
When prices are rising, LIFO derives a more favorable cash position (than FIFO) equal
to the difference in income tax. In contrast, when prices are falling, FIFO derives a
more favorable cash position equal to the difference in income tax.
Req. 4
Either method can be defended reasonably. If one focuses on current income and EPS,
FIFO derives a more favorable result (higher than LIFO when prices are rising).
Financial Accounting, 9/e 7-39
P7–6.
Req. 1
JAFFA COMPANY
Income Statement (LCM basis)
For the Year Ended December 31, current year
Sales revenue $300,000
Cost of goods sold:
Beginning inventory $ 33,000
Purchases 184,000
Replacement
Item Quantity Original Cost Cost (Market) LCM Valuation
A 3,050 x $3 = $ 9,150 x $4 = $12,200 $ 9,150
B 1,500 x 5.5 = 8,250 x 3.5 = 5,250 5,250
Req. 2
Amount of
FIFO LCM Change
Item Changed Cost Basis Basis (Decrease)
Ending inventory $ 50,450 $ 37,850 ($12,600)
Cost of goods sold 166,550 179,150 12,600
Gross profit 133,450 120,850 (12,600)
P7–6. (continued)
Req. 2 (continued)
Analysis
Ending inventory, cost of goods sold, gross profit, and pretax income each
changed by the change in the valuation of the ending inventory.
Req. 3
The inventory costing methods (average cost, FIFO, LIFO, and specific identification)
apply the cost and matching principles. Cost of goods sold, under these principles, is
the actual cost incurred for the merchandise sold during the period; this cost is matched
with sales revenue of the period.
Req. 4
LCM reduced pretax income and income tax expense. There was a cash savings of
$3,780 for the current year (assuming the LCM results are included on the income tax
return). In subsequent periods pretax income will be greater by the $12,600 and hence,