CHAPTER 8
Valuation of Inventories: A Cost-Basis Approach
ASSIGNMENT CLASSIFICATION TABLE (BY TOPIC)
Topics
Questions
Brief
Exercises
Exercises
Problems
Concepts
for Analysis
1.
Inventory accounts;
determining quantities,
1, 2, 3, 4, 5,
6, 7, 8, 9,
1, 3, 9
1, 2, 3,
4, 5
1, 2, 3
1, 2, 3, 6,
2.
Perpetual vs. periodic.
2, 6
4, 5, 8, 9, 17,
20
4, 5, 6, 7.
8, 9
3.
Recording of discounts.
11, 14
6, 7
3
4
19, 20, 21,
22, 23
9, 10
5.
Inventory accounting
changes.
12
10
6.
Inventory errors.
17, 18
8, 9
13, 14, 15,
16
20, 21, 22,
23
ASSIGNMENT CLASSIFICATION TABLE (BY LEARNING OBJECTIVE)
Learning Objectives
Brief
Exercises
Problems
Concepts
for Analysis
1.
Describe inventory
classifications and
different inventory
systems.
1, 2
2
Identify the goods and
costs include in
inventory.
3, 9
2, 3
1, 2, 3, 4
3.
Compare the cost flow
assumptions used to
account for inventories.
4, 5, 6, 7
1, 4, 5, 6,
7, 8, 9, 10
5, 6
4.
Determine the effects of
inventory errors on the
financial statements.
8, 9
Describe the LIFO cost
flow assumption.
7, 8, 9, 10
ASSIGNMENT CHARACTERISTICS TABLE
Item
Description
Level of
Difficulty
Time
(minutes)
E8.1
Inventoriable costs.
Moderate
15–20
E8.2
Inventoriable costs.
Moderate
10–15
E8.3
Inventoriable costs.
Simple
10–15
E8.4
Inventoriable costs—perpetual.
Simple
10–15
E8.5
Determining merchandise amounts—periodic.
Simple
10–20
E8.6
Purchases recorded net.
Simple
10–15
E8.7
Purchases recorded, gross method.
Simple
20–25
E8.8
Periodic versus perpetual entries.
Moderate
15–25
E8.9
FIFO and average cost determination.
Moderate
20–25
E8.10
FIFO and average cost inventory.
Moderate
15–20
E8.11
Compute FIFO and average cost—periodic.
Moderate
15–20
E8.12
FIFO and average cost—income statement presentation.
Simple
15–20
E8.13
Inventoriable costs-error adjustments
Moderate
15–20
E8.14
Inventory errors, periodic.
Simple
10–15
E8.15
Inventory errors.
Simple
10–15
E8.16
Inventory errors.
Moderate
15–20
E8.17
FIFO and LIFO—periodic and perpetual.
Moderate
15–20
E8.18
FIFO, LIFO, and average cost determination.
Moderate
20–25
E8.19
FIFO, LIFO, average cost inventory.
Moderate
15–20
E8.20
FIFO and LIFO, periodic and perpetual.
Simple
10–15
E8.21
FIFO and LIFO, income statement presentation.
Simple
15–20
E8.22
FIFO and LIFO effects.
Moderate
20–25
E8.23
FIFO and LIFO—periodic.
Simple
10–15
P8.1
Various inventory issues.
Moderate
25–35
P8.2
Inventory adjustments.
Moderate
25–35
P8.3
Purchases recorded gross and net.
Simple
20–25
P8.4
Compute specific identification, FIFO, and average cost.
30–40
P8.5
Compute FIFO and average cost.
25–35
and perpetual.
ASSIGNMENT CHARACTERISTICS TABLE (Continued)
Item
Description
Level of
Difficulty
Time
(minutes)
P8.7
Compute FIFO, LIFO, and average cost.
Complex
40–55
P8.8
Compute FIFO, LIFO, and average cost.
Complex
40–55
and perpetual.
P8.10
Financial statement effects of FIFO and LIFO.
Moderate
30–40
CA8.1
Inventoriable costs.
Moderate
15–20
CA8.2
Inventoriable costs.
Moderate
15–25
CA8.3
Inventoriable costs.
Moderate
25–35
CA8.4
Accounting treatment of purchase discounts.
15–25
CA8.5
Average cost and FIFO.
15–20
CA8.6
Inventory choices—ethical issues
Moderate
20–25
ANSWERS TO QUESTIONS
1. In a merchandising concern, inventory normally consists of only one category, that is the product
awaiting resale. In a manufacturing concern, inventories consist of raw materials, work in process,
2. (a) Inventories are unexpired costs and represent future benefits to the owner. A statement of
financial position includes a listing of all unexpired costs (assets) at a specific point in time.
Because inventories are assets owned at the specific point in time for which a statement of
3. In a perpetual inventory system, data are available at any time on the quantity and dollar amount
of each item of material or type of merchandise on hand. A physical inventory means that
4. No. Mishima, Inc. should not report this amount on its statement of financial position. As
5. Product financing arrangements are essentially off-balance-sheet financing devices. These arrange-
ments make it appear that a company has sold its inventory or never taken title to it so they can
6. (a) Inventory.
(b) Not shown, possibly in a note to the financial statements if material.
7. Yang can consider the inventory sold if it can reasonably estimate the amount of returns. The
8. Holland can consider goods sold with right of return as revenue if it can reasonably estimate the
returns. Holland will consider the goods sold as long as it can estimate bad debts accurately.
LO: 2, Bloom: C, Difficulty: Simple, Time: 3-5, AACSB: Communication, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication
Questions Chapter 8 (Continued)
9. Cost, which has been defined generally as the price paid or consideration given to acquire an
asset, is the primary basis for accounting for inventories. As applied to inventories, cost means the
10. By their nature, product costs “attach” to the inventory and are recorded in the inventory account.
These costs are directly connected with the bringing of goods to the place of business of the buyer
and converting such goods to a salable condition. Such charges would include freight charges on
goods purchased, other direct costs of acquisition, and labor and other production costs incurred
11. Cash discounts (purchase discounts) should not be accounted for as income when payments are
made. Income should be recognized when a performance obligation is satisfied (when the
12. Companies usually expense interest costs. Interest costs are considered a cost of financing and
are generally expensed as incurred. IFRS indicates that companies should only capitalize interest
13. Biestek should account for the usual spoilage as a cost of its inventory, but the unusual spoilage
14. €60.00, €63.00, €61.80. (Freight-In not included for discount because it might be paid to different
party.)
LO: 1,2, Bloom: AP, Difficulty: Simple, Time: 5-7, AACSB: Analytic, AICPA BB: Critical Thinking, AICPA FC: Reporting, AICPA PC: Problem Solving
15. Arguments for the specific identification method are as follows:
(1) It provides an accurate and ideal matching of costs and revenues because the cost is specifi–
cally identified with the sales price.
Questions Chapter 8 (Continued)
Arguments against the specific identification method include the following:
(1) The cost of using it restricts its use to goods of high unit value.
16. The first-in, first-out method approximates the specific identification method when the physical flow
of goods is on a FIFO basis. When the goods are subject to spoilage or deterioration, FIFO is
particularly appropriate. In comparison to the specific identification method, an attractive aspect of
FIFO is the elimination of the danger of artificial determination of income by the selection of
advantageously priced items to be sold. The basic assumption is that costs should be charged in
the order in which they are incurred. As a result, the inventories are stated at the latest costs.
Where the inventory is consumed and valued in the FIFO manner, there is no accounting recognition
of unrealized gain or loss. A criticism of the FIFO method is that it maximizes the effects of price
fluctuations upon reported income because current revenue is matched with the oldest costs which are
17. Beckham should explain to the Swiss president that an error in the ending inventory of 2019 also
affects the beginning inventory of 2020. For example, understating the 2019 ending inventory
18. This omission would have no effect upon the net income for the year, since the purchases and the
ending inventory are understated in the same amount. With respect to financial position, both the
*19. In times of rising prices, LIFO results in lower income, lower taxes, and lower inventory on the
statement of financial position. In times of falling prices, the results are just the opposite.
LO: 5, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: Communication, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication
SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 8.1
RIVERA A.S.
Statement of Financial Position (Partial)
December 31
Current assets
Inventories
Finished goods ……………………………………
₺170,000
Work in process ………………………………….
Raw materials ……………………………………..
Prepaid insurance ………………………………………
Receivables (net) ………………………………………..
Cash ………………………………………………………….
BRIEF EXERCISE 8.2
Inventory (150 X €34) ……………………………………………….
5,100
Accounts Payable …………………………………………..
5,100
Accounts Payable (6 X €34) ……………………………………..
Inventory ……………………………………………………….
Accounts Receivable (125 X €50) …………………………..
6,250
Sales ………………………………………………………………
6,250
Cost of Goods Sold (125 X €34)…………………………..
4,250
BRIEF EXERCISE 8.3
Purchase price ………………………………………………………………
¥45,000,000
Import duties …………………………………………………………………
Transportation costs ………………………………………………………
125,000
BRIEF EXERCISE 8.4
Weighted average cost per unit
€7,550
=
€ 6.57
1,150
Cost of goods available for sale
Deduct ending inventory
BRIEF EXERCISE 8.5
Ending inventory:
June 23
400 X €8
=
€3,200
June 15
150 X €6
=
900
€4,100
Deduct ending inventory
BRIEF EXERCISE 8.6
Weighted average cost per unit
$11,850
=
$ 11.85
1,000
Cost of goods available for sale
Deduct ending inventory
BRIEF EXERCISE 8.7
Ending inventory:
April 23
350 X $13
=
$ 4,550
April 15
50 X $12
=
600
Ending inventory
$ 5,150
Cost of goods available for sale
$11,850
Deduct ending inventory
5,150
BRIEF EXERCISE 8.8
Cost of goods sold as reported ……………………………………….
$1,400,000
Overstatement of 12/31/18 inventory ……………………………….
(110,000)
Overstatement of 12/31/19 inventory ……………………………….
12/31/19 retained earnings as reported…………………………….
Overstatement of 12/31/19 inventory ……………………………….
BRIEF EXERCISE 8.9
December 31 inventory per physical count ………………………
$200,000
22,000
*BRIEF EXERCISE 8.10
Ending inventory:
April 1 250 X $10 =
$ 2,500
April 15 150 X $12 =
1,800
Cost of goods available for sale
$11,850
Deduct ending inventory
4,300
SOLUTIONS TO EXERCISES
EXERCISE 8.1 (15–20 minutes)
Items 2, 3, 5, 8, 10, 13, 14, 16, and 17 would be reported as inventory in the
financial statements.
The following items would not be reported as inventory:
1. Cost of goods sold in the income statement.
4. Not reported in the financial statements.
6. Cost of goods sold in the income statement.
EXERCISE 8.2 (10–15 minutes)
Inventory per physical count …………………………………………………
$441,000
Goods in transit to customer, f.o.b. destination ……………………..
+ 33,000
Goods in transit from vendor, f.o.b. shipping point…………………
+ 51,000
EXERCISE 8.3 (10–15 minutes)
1. Include. Title to merchandise passes to customer only when it is
shipped.
4. Do not include. Goods received on consignment remain the property
of the consignor.
EXERCISE 8.4 (10–15 minutes)
1.
Raw Materials Inventory …………………………….
8,100
Accounts Payable ……………………………..
8,100
2.
No adjustment necessary.
3.
Raw Materials Inventory …………………………….
Accounts Payable ……………………………..
4.
Accounts Payable ……………………………………..
7,500
Raw Materials Inventory …………………….
7,500
5.
Raw Materials Inventory …………………………….
Accounts Payable ……………………………..
EXERCISE 8.5 (10–20 minutes)
2018
2019
2020
Sales ………………………………………………
£290,000
£360,000
£410,000
Sales Returns …………………………………
6,000
13,000
10,000
Net Sales ………………………………………..
284,000
347,000
400,000
Beginning Inventory ………………………..
32,000
37,000**
Ending Inventory …………………………….
37,000
34,000
Purchases ………………………………………
247,000
260,000
Purchase Returns and Allowances …..
5,000
10,000
8,000
12,000
Cost of Good Sold …………………………..
238,000
256,000
Gross Profit on Sales ………………………
91,000
97,000
*This was given as the beginning inventory for 2019.
EXERCISE 8.6 (10–15 minutes)
(a)
May 10
Purchases ……………………………………………………….
19,600
Accounts Payable
(£20,000 X .98) …………………………..
19,600
May 11
Purchases ……………………………………………………….
14,850
Accounts Payable
(£15,000 X .99) …………………………..
14,850
May 19
Accounts Payable …………………………..
19,600
Cash ……………………………………………………….
19,600
May 24
Purchases ……………………………………………………….
11,270
Accounts Payable
11,270
EXERCISE 8.6 (Continued)
(b)
May 31
Purchase Discounts Lost …………………………..
150
Accounts Payable
(£15,000 X .01) ……………………………………………..
(Discount lost on purchase
of May 11, £15,000, terms
1/15, n/30)
EXERCISE 8.7 (20–25 minutes)
(a)
Feb. 1
Inventory [¥12,000 – (¥12,000 X 10%)] ………………………
10,800
Accounts Payable …………………………..
10,800
Feb. 4
Accounts Payable
[¥3,000 – (¥3,000 X 10%)] …………………………..
2,700
Inventory……………………………………………………….
2,700
Feb. 13
Accounts Payable (¥10,800 – ¥2,700) ……………………….
8,100
Inventory (3% X ¥8,100) …………………………..
Cash ……………………………………………………….
7,857
(b)
Feb. 1
Purchases [¥12,000 – (¥12,000 X 10%)] …………………….
10,800
Accounts Payable …………………………..
10,800
Feb. 4
Accounts Payable
[¥3,000 – (¥3,000 X 10%)] …………………………..
2,700
Purchase Returns and Allowances ………………….
2,700
Feb. 13
Accounts Payable (¥10,800 – ¥2,700) ……………………….
8,100
Cash ……………………………………………………….
7,857
EXERCISE 8.7 (Continued)
(c)
Purchase price (list) ……………………………………
¥12,000
Less: Trade discount (10% X ¥12,000) …………
1,200
Price on which cash discount based ……………
Less: Cash discount (3% X ¥10,800) ……………
324
EXERCISE 8.8 (15–25 minutes)
(a)
Jan. 4
Accounts Receivable ……………………….
640
Sales (80 X $8) …………………………
640
Jan. 11
Purchases ($150 X $6.50) …………………
975
Accounts Payable ……………………
975
Jan. 13
Accounts Receivable ……………………….
1,050
Sales (120 X $8.75) …………………..
1,050
Jan. 20
Purchases (160 X $7) ……………………….
1,120
Accounts Payable ……………………
1,120
Jan. 27
Accounts Receivable ……………………….
900
Sales (100 X $9) ……………………….
900
Jan. 31
Inventory ($7 X 110) …………………………
770
Cost of Goods Sold ………………………….
1,925*
Purchases ($975 + $1,120) ………..
2,095
Inventory (100 X $6) …………………
600
EXERCISE 8.8 (Continued)
(b)
Sales ($640 + $1,050 + $900)………………
$2,590
Cost of goods sold …………………………...
1,925
Gross profit ……………………………………..
$ 665
(c)
Jan. 4
Accounts Receivable …………………………..
640
Sales (80 X $8) …………………………..
640
Cost of Goods Sold…………………………………………………
480
Inventory (80 X $6) …………………………..
Jan. 11
Inventory ……………………………………………………….
975
Accounts Payable (150 X $6.50) …………………………..
975
Jan. 13
Accounts Receivable …………………………..
1,050
Sales (120 X $8.75) …………………………..
1,050
Cost of Goods Sold…………………………………………………
770
(100 X $6.50)] …………………………..
Jan. 20
Inventory ……………………………………………………….
1,120
Accounts Payable (160 X $7) …………………………..
1,120
Jan. 27
Accounts Receivable …………………………..
900
Sales (100 X $9) …………………………..
900
Cost of Goods Sold…………………………………………………
(d)
Sales ……………………………………………….
$2,590
Cost of goods sold
EXERCISE 8.9 (20–25 minutes)
(a)
1.
FIFO
500 @ $6.79 =
$3,395
300 @ $6.60 =
2.
Average cost
Total cost
=
$33,655*
= $6.35 average cost per unit
Total units
5,300
(b)
1.
FIFO
500 @ $6.79 =
$3,395
300 @ $6.60 =
EXERCISE 8.9 (Continued)
2. Average cost.
Purchased
Sold
Balance
Date
No. of
units
Unit
cost
No. of
units
Unit
cost
No. of
units
Unit
cost
Amount
April 1
600
$6.0000
$3,600
3
500
$6.000
100
6.0000
600
4
1,500
$6.08
1,600
6.0750
9,720
8
800
6.40
2,400
6.1833
14,840
9
1,300
6.1833
1,100
6.1833
6,802
600
6.1833
500
6.1833
3,092
1,200
6.50
1,700
6.4071
10,892
700
6.60
2,400
15,512
1,200
6.4633
1,200
6.4633
7,756
900
6.4633
300
6.4633
1,939
500
6.79
800
6.6675
5,334
EXERCISE 8.10 (15–20 minutes)
(a) ESPLANADE SA
Computation of Inventory for Product BAP
Under Specific Identification Inventory Method
March 31, 2019
Units
Unit Cost
Total Cost
EXERCISE 8.10 (Continued)
(b) ESPLANADE SA
Computation of Inventory for Product BAP
Under FIFO Inventory Method
March 31, 2019
Units
Unit Cost
Total Cost
March 26, 2019 ………………………….
600
R$12.00
R$ 7,200
February 16, 2019 ……………………..
January 25, 2019 (portion) …………
March 31, 2019, inventory ………….
(c) ESPLANADE SA
Computation of Inventory for Product BAP
Under Weighted-Average Inventory Method
March 31, 2019
Units
Unit Cost
Total Cost
Beginning inventory ………………….
600
R$ 8.00
R$ 4,800
January 5, 2019 …………………………
January 25, 2019 ……………………….
1,300
February 16, 2019 ……………………..
Weighted-average cost
($43,700 ÷ 4,400) …………………….
R$ 9.93*
March 31, 2019, inventory ………….