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30 Minutes, Strong
(1) Average-cost method:
(a) Cost of goods sold on April 28:
8,111$
40,555$
(b) Ending inventory (7 units) at June 30:
(2) First-in, first-out (FIFO) method:
(a) Cost of goods sold on April 28:
32,000$
8,200
40,200$
(b) Ending inventory (7 units) at June 30:
32,800$
25,500
4 units from April 19 purchase @ $8,200
3 units from May 8 purchase @ $8,500
Cost of goods sold (5 units)
4 units from April 1 purchase @ $8,000
PROBLEM 8.2B
a. Cost of goods sold and ending inventory
SEA TRAVEL: PERPETUAL SYSTEM
1 unit from April 19 purchase @ $8,200
Average cost (as of April 28; $73,000 ÷ 9 units)
Cost of goods sold (5 units @ $8,111)
Average unit cost following April 19 purchase:
b. (1)
(2)
(3)
In this situation, the FIFO method will maximize income taxes, as it assigns the oldest (and
Yes. Sea Travel may use LIFO in its financial statements and FIFO in its income tax returns.
Problem 8.2B
SEA TRAVEL: PERPETUAL SYSTEM
The LIFO method will result in the lowest net income, as it assigns the most recent (highest)
(concluded)
20 Minutes, Medium
(1) Average-cost method:
(2) First-in, first-out (FIFO) method:
Ending inventory at June 30:
25,500$
32,800
58,300$
b.
PROBLEM 8.3B
a. Cost of goods sold and ending inventory
SEA TRAVEL: PERIODIC SYSTEM
No. Tax laws require that taxpayers using LIFO for tax purposes must also use the LIFO method
3 units from purchase on May 8 (@ $8,500)
4 units from purchase on April 19 (@ $8,200)
20 Minutes, Medium
a. Shrinkage loss-one lawn mower
100
c.
The only unethical act in this situation was committed by the employee against his employer. There
Cost of Goods Sold
b. Shrinkage loss and LCM adjustment
(1) Shrinkage loss, first-in, first-out (FIFO) method:
(1) Average-cost method:
PROBLEM 8.4B
SAM'S LAWN MAINTENANCE
25 Minutes, Easy
Units Unit Cost Total Cost
a. Inventory and cost of goods sold:
(1) FIFO:
(2) LIFO:
Beginning inventory 15 100$ 1,500$
First purchase 11 101 1,111
Ending inventory, LIFO 26 2,611$
Cost of goods available for sale 11,110$
Less: Ending inventory, LIFO 2,611
Cost of goods sold, LIFO 8,499$
b.
PROBLEM 8.5B
RYAN SOUND
Inventory:
Cost of goods sold:
Inventory:
The FIFO method, by assigning the costs of the most recent purchases to inventory, provides the most
realistic balance sheet amount for inventory in terms of replacement costs. A weakness of the FIFO
20 Minutes, Medium
a.
2018 2017 2016
Net sales 1,000,000$ 920,000$ 840,000$
Cost of goods sold 680,000 590,400 526,000$
b.
The current owners of this business have no basis for being enthusiastic about the trend of gross profit
PROBLEM 8.6B
CITY SOFTWARE
25 Minutes, Medium
a.
b.
75,000$
520,000$
330,000$
41,250 288,750
Gross profit 231,250$
c.
PROBLEM 8.7B
SONG MEISTER
(1) Estimated cost of goods sold:
Cost ratio for the current year:
(1) Restating physical inventory from retail prices to cost:
Physical inventory stated in retail prices
(3) Computation of gross profit:
CDs and recorded music in other formats can easily fit into someone’s pocket and “walk out of the
Net sales
Cost of goods sold:
Cost of goods available for sale
Less: Ending inventory per physical count, at cost
20 Minutes, Strong
a. Computations based on LIFO valuation of inventory:
(1) Inventory turnover rate:
Cost of Goods Sold = 7,996$ 2.86 times
PROBLEM 8.8B
J.C. Penney
30 Minutes, Strong
a.
b.
c.
SOLUTIONS TO CASES
OUR LITTLE SECRET
CASE 8.1
Lee confronts three related ethical issues. The first is that Our Little Secret’s past tax practices have
been both unethical and illegal. Lee should not be involved in such practices or, if she is in a position of
The solution proposed by Frost is unacceptable. To knowingly understate inventory in an income tax
Lee basically has two ethical courses of action to consider. First, she may decide that she does not wish
to associate herself with the company. Therefore, she simply may decline the job. If she chooses this
a.
b. (1)
c.
d.
If the units on order do not arrive before year-end, Jackson Specialties’ gross profit on its year-end
By executing this sale on December 30, management runs a great risk of increasing the amount of
income subject to income taxes by $92,000 (by reporting a $160,000 gross profit on this sale instead of
CASE 8.2
JACKSON SPECIALTIES
20 Minutes, Medium
While LIFO assigns old acquisition costs to inventory, it does not purport to coincide with the physical
Gross profit if the units on order arrive before year-end:
15 Minutes, Medium
a.
b.
c.
The inventory has been lost. It would be unethical to delay recognition of this loss in the hope that it
It is impossible for the company to increase its current ratio from 0.8 to 1 to 1.2 to 1 by purchasing
Millennium's management should be open and honest in dealing with the bank. Most banks work hard
CASE 8.3
DEALING WITH THE BANK
ETHICS, FRAUD & CORPORATE GOVERNANCE
No time limit, Strong
INVENTORY TURNOVER RATES
CASE 8.4
Turnover rates of those companies vary, depending on the year of the most recent 10-K reports used. The
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