542 CHaPTEr 16 • INvENTOry
ClaSSrOOM aCTIvITy
Ask students to name categories of
goods whose current market value
might be lower than the cost. Typical
responses would be electronic and
computer equipment that has been
replaced with newer and cheaper
models or “out-of-fashion” clothing
or accessories.
Specific examples in electronics
• Electronic books, e-readers, and
iPads
• High-definition television and 3-D
television
REVIEW EXERCISES
1. Calculate the total number of Sonic Blu-ray players available for sale and the cost of goods
available for sale from the following inventory figures at Superior Electronics.
Superior Electronics
Sonic Blu-ray Player Inventory
Date
Units
Purchased Cost per Unit
Total
Cost
Beginning Inventory, January 1 40 $125
$5,000
25
16
SECTION I
SolutionStrategy
In this example, the cost and market price are given. We begin by choosing the lower of cost or
market and then extending each item to the Amount column. For example, the Style #44 blouse
will be valued at the cost, $27.50, because it is less than the market price, $31.25. The extension
would be 40 × $27.50 = $1,100.00.
Item Description Quantity
Unit Price Valuation
Basis AmountCost Market
Blouses Style #44 40 $ 27.50 $ 31.25 Cost $ 1,100.00
tryitexerciSe 4
Determine the value of the following inventory for the Personal Touch Gift Shop by using the
lower-of-cost-or-market rule.
Description Quantity
Unit Price Valuation
Basis AmountCost Market
Lamps 75 $ 9.50 $ 9.20
CHECK YOUR ANSWERS WITH THE SOLUTIONS ON PAGE 563.
85461_ch16_hr_534-568_1.indd 542 9/23/15 5:04 PM
SECTION I • INvENTOry valuaTION 543
2. When the buyer for Superior Electronics (Exercise 1) took physical inventory of the Blu-ray
players on July 31, 64 units remained in inventory.
a. Calculate the dollar value of the 64 Blu-ray players by using FIFO.
Units Cost/Unit Total
25 $135 $3,375
b. Calculate the dollar value of the 64 Blu-ray players by using LIFO.
Units Cost/Unit Total
c. Calculate the dollar value of the 64 Blu-ray players by using the average cost method.
Round average cost to the nearest cent.
3. Calculate the total number of units available for sale and the cost of goods available for sale
from the following inventory of oil filters for Advance Auto Parts.
Advance Auto Parts
Oil Filter Inventory
Date Units Purchased Cost per Unit Total Cost
Beginning Inventory, January 1 160 $1.45
$ 232.00
4. When the merchandise manager of Advance Auto Parts took physical inventory of the oil filters
on December 31, it was found that 550 remained in inventory.
a. Calculate the dollar value of the 550 oil filters by using FIFO.
b. Calculate the dollar value of the 550 oil filters by using LIFO.
Units Cost/Unit Total
c. Calculate the dollar value of the 550 filters by using the average cost method.
Advance Auto Parts began as a
George Bergeman
85461_ch16_hr_534-568_1.indd 543 9/23/15 5:04 PM
544 CHaPTEr 16 • INvENTOry
5. The following data represents the inventory for home burglar alarm systems at First Alert
Security Corporation.
First Alert Security Corporation
Burglar Alarm Systems Inventory
Date Units Cost per Unit Total Cost
Beginning Inventory, January 1 235 $140.00
$32,900
a. How many alarm systems did First Alert Security have available for sale?
b. What is the total cost of the alarm systems available for sale?
c. If physical inventory on December 31 showed 167 alarm systems on hand, calculate
their dollar value by using FIFO.
d. Calculate the value of the 167 alarm systems by using LIFO.
e. Calculate the dollar value of the 167 alarm systems by using the average cost method.
6. The following data represent the inventory figures for 55-gallon fish tanks at Something’s
Fishy.
Something’s Fishy
55-Gallon Fish Tanks Inventory
Amount
January 1 Beginning
Inventory
42 units @ $38.00
$ 1,596.00
a. How many fish tanks did Something’s Fishy have available for sale?
322
b. Calculate the total cost of the tanks available for sale.
c. If physical inventory on December 31 showed 88 tanks on hand, calculate their dollar value
by using FIFO.
85461_ch16_hr_534-568_1.indd 544 9/23/15 5:04 PM
SECTION I • INvENTOry valuaTION 545
d. Calculate the value of the 88 tanks by using LIFO.
e. Calculate the dollar value of the 88 tanks by using the average cost method.
7. Determine the value of the following inventory for A Nose for Clothes Boutique by using the
lower-of-cost-or-market rule.
A Nose for Clothes Boutique
Description Quantity
Unit Price Valuation
Basis AmountCost Market
Jackets 56 $124 $128
Cost
$ 6,944
2,754
5,125
8. Determine the value of the following inventory for Nichols Hardware by using the
lower-of-cost-or-market rule.
True Value Hardware
Power Tool Inventory
Description Quantity
Unit Price Valuation
Basis AmountCost Market
10-piece drill bit set 14 $25.60 $26.20
Cost
$ 358.40
9. Determine the value of the following inventory for the Rainbow Gardens Emporium by using
the lower-of-cost-or-market rule.
Rainbow Gardens Emporium
Description Quantity
Unit Price Valuation
Basis AmountCost Market
Dish Sets 220 $36 $33
Market
$ 7,260
a group of individual store owners.
Collectively, store operators own their
wholesale distributor, which is True
Value Company. To become a member,
you must purchase 60 shares of Class
A common stock per store. In addition
to acquiring the stock, there are other
financial considerations to be made
in order to cover inventory, fixtures,
AP Images/Amy Sancetta
85461_ch16_hr_534-568_1.indd 545 9/23/15 5:04 PM
546 Chapter 16 • INveNtOrY
retail methodMethod of inventory
estimation used by most retailers based on
a comparison of goods available for sale at
cost and at retail.
Inventory Estimation
In Section I of this chapter, we learned to calculate the value of ending inventory with several
methods using a physical count at the end of the accounting year. Most companies, however,
require inventory figures more frequently than the once-a-year physical inventory. Monthly
and quarterly financial statements, for example, may be prepared with inventory estimates
rather than expensive physical counts or perpetual inventory systems. In addition, when
estimating the value of ending inventory
by using the retail method
The retail method of inventory estimation is used by retail businesses of all types and sizes,
from Walmart and Sears to the corner grocery store. To use this method, the company must
have certain figures in its accounting records, including the following:
a. Beginning inventory at cost price and at retail (selling price)
16-5
Section ii
16
BusInEss DEcIsIon: In or out?
10. You are the accounting manager of Kleen and Green Janitorial Supply, Inc., of Chicago. One
of your junior accountants is working on the December 31 year-end inventory figures and has
asked for your help in determining which of several transactions belong in the ending inventory.
From the following inventory scenarios, decide which should be included in the year-end inven-
tory and which should not. Hint: Refer to Exhibit 7-3, Shipping Terms, page 193.
a. An order for a floor buffer and three different floor conditioning attachments shipped on
December 31, FOB Chicago, and is expected to arrive on January 4.
b. An order for six drums of floor wax and four drums of wax stripper was shipped to a
Detroit customer on December 31, FOB Detroit, and should arrive on January 2.
c. An order for 5 foot-operated mop buckets and 12 rag mops will be shipped on January 3.
d. A floor cleaning machine was returned on December 28 for warranty repair and is sched-
uled to be return-shipped on January 6.
e. Two cases of window wipes were shipped on December 30 FOB destination and are due
to arrive on January 5.
f. A carton of 12 one-gallon bottles of window washing solution and 8 boxes of streak-free
window washing cloths were ordered on December 30 and are due to be shipped on January 3.
in the
Business World
85461_ch16_hr_534-568_2.indd 546 9/23/15 5:04 PM
550 Chapter 16 • INveNtOrY
rEvIEw ExErcIsEs
1. Using the retail method, estimate the value of the ending inventory at cost on June 30 from the
following information for Perfume Bazaar. Round the cost ratio to the nearest whole percent.
Perfume Bazaar
Financial Highlights
June 1–June 30
Cost Retail
Beginning inventory, June 1 $43,000 $92,000
2. Using the retail method, estimate the value of the ending inventory at cost on September 30 from
the following information for Scandinavian Furniture Designs, Inc. Round the cost ratio tothe
nearest tenth of a percent.
Scandinavian Furniture Designs, Inc.
September 1–September 30
Cost Retail
Beginning Inventory, September 1 $150,000 $450,000
Purchases (September) 90,000 270,000
Net Sales (September) $395,000
3. Using the retail method, estimate the value of the ending inventory at cost on November 30 from
the following information for Imperial Imports. Round the cost ratio to the nearest whole percent.
Imperial Imports
Financial Highlights
November 1–November 30
Cost Retail
Beginning inventory, November 1 $137,211 $328,500
Net purchases (November) 138,849 313,500
Net sales (November) $205,400
16
Section ii
85461_ch16_hr_534-568_2.indd 550 9/23/15 5:04 PM
seCtION II • INveNtOrY estImatION 551
4. Rambo Plumbing Supply maintains a gross margin of 40% on all of its kitchen sinks and faucet
sets. In November, Rambo had a beginning inventory of $178,400, net purchases of $91,200,
and net sales of $215,800. Use the gross profit method to estimate the cost of ending inventory.
Beginning inventory, Nov. 1 $178,400 Estimated cost of goods sold = 215,800(100% – 40%)
5. Omni Fitness Equipment, Inc., maintains a gross margin of 55% on all its weight training products.
In April, Omni had a beginning inventory of $146,000, net purchases of $208,000, and net sales of
$437,000. Use the gross profit method to estimate the cost of ending inventory.
6. Hirst Electrical Supplies maintains a gross margin of 58% on all of its merchandise. In June,
the company had a beginning inventory of $468,500, net purchases of $88,600, and net sales of
7. The following data represent the inventory figures for Hot Shot Welding Supply, Inc. Using the
retail method, estimate the value of the ending inventory at cost on January 31. Round the cost
ratio to the nearest tenth of a percent.
Hot Shot Welding Supply, Inc.
January 1–January 31
Cost Retail
Beginning Inventory, January 1 $50,000 $120,000
Net purchases (January) 90,000 216,000
85461_ch16_hr_534-568_2.indd 551 9/23/15 5:04 PM
552 Chapter 16 • INveNtOrY
8. You are the warehouse manager for Discovery Kitchen Supplies. On a Sunday in May, you
receive a phone call from the owner. He states that the entire building and contents were destroyed
by fire. For the police report and the insurance claim, the owner has asked you to estimate the
value of the lost inventory. Your records, which luckily were backed up on the hard drive of your
home computer, indicate that at the time of the fire, the net sales to date were $615,400 and the
purchases were $232,600. The beginning inventory on January 1 was $312,000. For the past three
years, the company has operated at a gross margin of 60%. Use the gross profit method to calcu–
late your answer.
BusInEss DEcIsIon: ovEr or unDEr?
9. You own Bristol Marine, a retailer of boats, motors, and marine accessories. The store manager has
just informed you that the amount of the physical inventory was incorrectly reported as $540,000
instead of the correct amount of $450,000. Unfortunately, yesterday you sent the quarterly financial
statements to the stockholders. Now you must send revised statements and a letter of explanation.
a. What effect did the error have on the items of the balance sheet for Bristol? Express your
answer as overstated or understated for the items affected by the error.
b. What effect will the error have on the items of the income statement for Bristol?
c. Did this error make the Bristol quarterly results look better or worse than they actually were?
inventory turnover and targets
In Chapter 15, we learned to use inventory turnover as one of the financial statement effi-
ciency ratios. To review, inventory turnover, or stock turnover, is the number of times during
an operating period that the average dollars invested in merchandise inventory was theoreti-
cally sold out or turned over.
Generally, the more expensive the item, the lower the turnover rate. For example, furni-
ture and fine jewelry items might have a turnover rate of three or four times per year, whereas
a grocery store might have a turnover of 15 or 20 times per year, or more. In this section, we
inventory, or stock, turnoverThe
number of times during an operating
period that the average dollars invested in
merchandise inventory was theoretically
sold out or turned over. May be calculated
in retail dollars or in costdollars.
16
Section iii
85461_ch16_hr_534-568_2.indd 552 9/23/15 5:04 PM
556 ChApTER 16 • INVENTORY
Step 3. The actual inventory turnover for F-Stop is 3.6 times per year compared with the industry
standard of five times. This indicates that the company is carrying too much inven–
tory. Let’s calculate the target average inventory F-Stop should carry to meet industry
standards.
tryitexerciSe 9
Satellite Communications, Inc., had net sales of $2,650,000 for the year. The beginning inventory
at retail was $495,000, and the ending inventory at retail amounted to $380,000. The inventory
turnover at retail published as the standard for a business of this size is seven times. Calculate the
ClASSROOm ACTIVITY
In groups, have students research the
inventory turnover rates for various
types of business. This information
can be found in U.S. Department
Review exeRcises
assuming that all net sales figures are at retail and all cost of goods sold figures are at
cost,calculate the average inventory and inventory turnover for the following. If the actual
turnover is less than the published rate, calculate the target average inventory necessaryto
come up to industry standards. round inventories to the nearest dollar and inventory
turnovers to the nearest tenth.
SECTION III
16
9. Bubbles Bath Boutique had net sales of $245,300 for the year. The beginning inventory at retail
was $62,600, and the ending inventory at retail was $54,200.
a. What was the average inventory at retail?
2
b. What was the inventory turnover rounded to the nearest tenth?
Net Sales
Cost of
Goods Sold
Beginning
Inventory
Ending
Inventory
Average
Inventory
Inventory
Turnover
Published
Rate
Target Average
Inventory
1. $500,000 $50,000 $70,000 $60,000 8.3 10.0 $50,000.00
2. $335,000 $48,000 $56,000 $52,000 6.4 6.0 Above
section iii • INVENTORY TURNOVER AND TARGETS 557
10. A Circle K convenience store had net sales of $1,350,000 for the six months ending June 30.
The beginning inventory at retail was $87,300, and the ending inventory at retail was $72,100.
a. What was the average inventory at retail?
b. What was the inventory turnover rounded to the nearest tenth?
11. The Gourmet’s Delight, a cooking equipment wholesaler, had cost of goods sold of
$458,900 for the year. The beginning inventory at cost was $83,600, and the ending
inventory at cost was $71,700.
a. What was the average inventory at cost?
2
b. What was the inventory turnover rounded to the nearest tenth?
12. Riverside Industries had cost of goods sold of $359,700 for the year. The beginning
inventory at cost was $73,180, and the ending inventory at cost was $79,500.
a. What was the average inventory at cost?
b. What was the inventory turnover rounded to the nearest tenth?
13. Summit Supply is an electrical parts wholesaler. Last year its average inventory at cost was
$132,500 and its cost of goods sold was $690,400. The inventory turnover rate published for a
business of this size is 5.5 times.
a. Calculate the actual inventory turnover rate at cost for Summit Supply. Round to the nearest tenth.
b. If the turnover rate is below the industry average of 5.5 times, calculate the target average
inventory needed to match the industry standard.
14. Kwik-Mix Concrete Corporation had cost of goods sold of $1,250,000 for the third quarter.
The beginning inventory at cost was $135,000, and the ending inventory at cost amounted to
$190,900. The inventory turnover rate published as the industry standard for a business of this
size is 9.5 times.
a. Calculate the average inventory and actual inventory turnover rate for the company.
b. If the turnover rate is less than 9.5 times, calculate the target average inventory needed to
theoretically come up to industry standards.
Circle K has been one of North
America’s most popular and successful
operators of convenience stores for more
than 50 years. Today there are more than
3,300 Circle K locations across the United
To become a Circle K franchisee,
of Alimentation Couche-Tard, Inc.,
based in Quebec, Canada. It’s the
second-largest convenience store
operator in North America and the
2
558 ChApTER 16 • INVENTORY
DvD/Blu-ray and Streaming
Streaming of videos is expected to
overtake Blu-ray/DVD videos within
another couple of years, as home
Internet connections continue to
getfaster.
© Sergey Ash/Shutterstock.com
15. Trophy Masters had net sales for the year of $145,000. The beginning inventory at retail was
$36,000, and the ending inventory at retail amounted to $40,300. The inventory turnover rate
published as the industry standard for a business of this size is 4.9 times.
a. Calculate the average inventory and actual inventory turnover rate for the company.
b. If the turnover rate is less than 4.9 times, calculate the target average inventory needed to
theoretically come up to industry standards.
BUsiNess DecisiON: KeeP YOUR eYe ON THe FeeT
16. Another way to look at the concept of inventory turnover is by measuring sales per square foot.
Taking the average inventory at retail and dividing it by the number of square feet devoted to a
particular product will give you average sales per square foot. When you multiply this figure
by the inventory turnover rate, you get the annual sales per square foot.
It is important to know the amount of sales per square foot your merchandise is producing,
both on average and annually. These figures should be tracked monthly and compared with
industry standards for businesses of similar size and type.
You own Electron Magic, a large multi product electronics store in a regional mall. The store
has 10,000 square feet of selling space divided into five departments.
a. From the table below, calculate the average and annual sales per square foot. Then calculate
the annual sales for each department and the total sales for the entire store.
Electron Magic—2014 Sales
Department
Square
Feet
Average
Inventory
at Retail
Average
Sales per
Sq. Foot
Inventory
Turnover
Annual
Sales per
Sq. Foot
Departmental
Annual Sales
b. If industry standards for this size store and type of merchandise is $200 per square foot in
annual sales, which departments are below standards? What can be done to improve the
situation?
c. (Optional) Use the Internet to research and share with the class the current “industry
standard” sales per square foot and inventory turnover rates for the merchandise categories
of your store.
85461_ch16_hr_534-568_3.indd 558 9/23/15 5:04 PM