Problem 8–11
Requirement 1
Sales (27,000 units x $2,000) $54,000,000
Requirement 2
Sales (27,000 units x $2,000) $54,000,000
8–62 Intermediate Accounting, 8/e
Problem 8–11 (concluded)
Requirement 3
The gross profit and gross profit ratio are higher applying the requirement 2
assumption of 15,000 units purchased because of the LIFO liquidation profit that
results. When inventory quantity declines during a reporting period, LIFO inventory
layers carried at costs prevailing in prior years are “liquidated” or assumed sold in the
Requirement 4
Sales (27,000 units x $2,000) $54,000,000
Cost of goods sold:
5,000 units x $700 $ 3,500,000
4,000 units x $800 3,200,000
Requirement 5
The number of units purchased has no effect on FIFO cost of goods sold. When
Problem 8–12
Requirement 1
Allowance for uncollectible accounts
Balance, beginning of year $7
Requirement 2
Accounts receivable analysis:
Balance, beginning of year ($583 + 7) $ 590
Add: Credit sales 6,255
Requirement 3
Cost of goods sold for 2016 would have been $130 million lower had Inverness
used the average cost method for its entire inventory. While beginning inventory
would have been $350 million higher, ending inventory also would have been higher
Requirement 4
a. Receivables turnover ratio = $6,255 = 9.73 times
8–64 Intermediate Accounting, 8/e
Problem 8–12 (concluded)
Requirement 5
If inventory costs are increasing, when inventory quantity declines during a
Problem 8–13
Ending
Ending Inventory Inventory Layers Inventory Layers Inventory
Date at Base Year Cost at Base Year Cost Converted to Cost DVL Cost
1/1/16 $400,000
= $400,000 $400,000 (base) $400,000 x 1.00 = $400,000 $400,000
1.00
Problem 8–14
Ending
Ending Inventory Inventory Layers Inventory Layers Inventory
Date at Base Year Cost at Base Year Cost Converted to Cost DVL Cost
1/1/16 $150,000
= $150,000 $150,000 (base) $150,000 x 1.00 = $150,000 $150,000
1.00
8–66 Intermediate Accounting, 8/e
Problem 8–15
Ending
Ending Inventory Inventory Layers Inventory Layers Inventory
Date at Base Year Cost at Base Year Cost Converted to Cost DVL Cost
1/1/16 $260,000
= $260,000 $260,000 (base) $260,000 x 1.00 = $260,000 $260,000
1.00
Problem 8–16
Ending
Ending Inventory Inventory Layers Inventory Layers Inventory
Date at Base Year Cost at Base Year Cost Converted to Cost DVL Cost
(1) $150,000 $125,000 = 1.20 (2018 cost index)
8–68 Intermediate Accounting, 8/e
Judgment Case 8–1
Advance warning of the company’s impending bankruptcy existed at the date of
CASES
Real World Case 8–2
Requirement 1
Identifying items that should be included in inventory is difficult due to goods in
transit, goods on consignment, and sales returns.
Goods in transit. Inventory shipped f.o.b. shipping point is included in the
Requirement 2
In addition to the direct acquisition costs such as the price paid and transportation
costs to obtain inventory, the costs of unloading, unpacking, and preparing inventory
Requirement 3
Sport Chalet considers cost to include the direct cost of merchandise and inbound
8–70 Intermediate Accounting, 8/e
Judgment Case 8–3
1. a. The specific identification method requires each unit to be clearly
distinguished from similar units either by description, identification number, location,
b. It is appropriate for Happlia to use the specific identification method
because each appliance is expensive, and easily identified by number and description.
2. a. Happlia should include in inventory carrying amounts all necessary and
reasonable costs to get an appliance into a useful condition and place for sale.
b. Examples of inventoriable costs include the unit invoice price, plus an
3. The 2016 income statement should report in cost of goods sold all
Communication Case 8–4
Suggested Grading Concepts and Grading Scheme:
Content (70%)
_______ 20 Describes the differential effect on ending inventory
and cost of goods sold of using FIFO versus LIFO
when
_____ Prices are increasing.
_____ Prices are decreasing.
_______ 25 Discusses the various motivating factors that
might influence the choice of inventory method.
______ The actual physical flow of product.
______ The better match of expenses with revenues
provided by LIFO.
______ The effect on the balance sheet.
______ The effect on reported income and income
taxes.
______ The cost of implementation of LIFO.
_______ 10 Discusses briefly the methods available to
simplify LIFO.
_______ 15 Discusses the IRS conformity rule with respect to
LIFO and the relaxation of the rule that allows a
a company using LIFO to present supplemental
non-LIFO disclosures.
______
_______ 70 points
Writing (30%)
_______ 6 Terminology and tone appropriate to the audience of
a company president.
_______ 12 Organization permits ease of understanding.
_____ Introduction that states purpose.
_____ Paragraphs that separate main points.
_______ 12 English
_____ Sentences grammatically clear and well organized,
concise.
_____ Word selection.
_____ Spelling.
_____ Grammar and punctuation.
______
_______ 30 points
Communication Case 8–5
LIFO produces a higher cost of goods sold, lower taxable income, and therefore
lower income taxes currently payable than FIFO only in periods when the costs of the