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CHAPTER 5 • INVENTORIES AND COST OF GOODS SOLD 5-41
PROBLEM 5-13 (Concluded)
b. FIFO:
Ending inventory 1,000 × $ 6 = $ 6,000
1,500 × 7 = 10,500
2,500 $ 16,500
2. Income statements for the year ended December 31, 2016:
Weighted
Average
FIFO LIFO
Sales* .......................................................... $150,000 $150,000 $150,000
Cost of goods sold ....................................... 107,500 112,500 104,000
3. Weaver can minimize its tax bill by using FIFO. In a period of declining prices, FIFO
4. A company is not free to change inventory methods from year to year to take advan-
5-42 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
LO 1,7,9 PROBLEM 5-14 INTERPRETING GANNETT CO.’S INVENTORY ACCOUNTING
POLICY
1. Newsprint costs are comparable to raw materials in a manufacturing company. A
ALTERNATE PROBLEMS
LO 1 PROBLEM 5-1A INVENTORY COSTS IN VARIOUS BUSINESSES
1. Classification of an item as inventory depends on the company’s intent. DVDs
offered by the company for resale should be classified as part of inventory and
LO 4 PROBLEM 5-2A MAKING BUSINESS DECISIONS: ANALYZING COCA-COLA’S
GROSS PROFIT RATIO
Part A. Ratio Analysis Model
1. Formulate the Question:
How many cents on the dollar does Coca-Cola have available to cover expenses
other than cost of goods sold and to earn a profit?
CHAPTER 5 • INVENTORIES AND COST OF GOODS SOLD 5-43
PROBLEM 5-2A (Continued)
3. Calculate the Ratio:
Gross Profit Ratio = Gross Profit
Net Sales
4. Compare the Ratio with Other Ratios:
Gross Profit Ratio
Coca-Cola PepsiCo
Year Ended Year Ended Year Ended Year Ended
December 31, 2014 December 31, 2013 December 27, 2014 December 28, 2013
61.1% 60.7% 53.7% 53.0%
Calculations:
5. Interpret the Ratios:
For every dollar of sales, Coca-Cola has 61.1 cents available after deducting the
5-44 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
PROBLEM 5-2A (Concluded)
Part B. Business Decision Model
1. Formulate the Question:
After considering all relevant information, should I invest in the common stock of
Coca-Cola?
2. Gather Information from the Financial Statements and Other Sources:
The information will come from a variety of sources, not limited to but including:
a. The balance sheet provides information about liquidity.
3. Analyze the Information Gathered:
The information gathered in (2) above must be analyzed. Among the relevant
questions that must be answered are the following:
a. Refer to part (5) of the Ratio Analysis Model for a comparison of the gross profit
ratios for Coca-Cola and its competitor, PepsiCo, over the last two years. Which
company has a higher percentage of its sales dollars available to cover operating
costs?
4. Make the Decision:
Taking into account all of the various sources of information, decide either to buy
stock in Coca-Cola or find an alternative use for the money.
5. Monitor Your Decision:
If you decide to buy the stock, you will need to monitor your investment periodically.
CHAPTER 5 • INVENTORIES AND COST OF GOODS SOLD 5-45
LO 7 PROBLEM 5-3A EVALUATION OF INVENTORY COSTING METHODS
1. No, the three companies will not be equally affected by the decline in prices. If the
decline continues, Company Y (FIFO) will begin to show higher cost of goods sold
LO 8 PROBLEM 5-4A INVENTORY ERROR
1. Revised income statements: 2016 2015
Revenues .......................................................................... $35,982 $26,890
Cost of goods sold ............................................................ 12,094** 10,412*
Gross profit .................................................................. $23,888 $16,478
Revised balance sheets: 12/31/16 12/31/15
Cash ................................................................................. $ 9,400 $ 4,100
Inventory ........................................................................... 4,500 4,900*
5-46 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
PROBLEM 5-4A (Concluded)
2. Current ratio:
Before revision: Cash + Inventory + Other Current Assets
Current Liabilities
$10,750 = 1.01 to 1
3. Net income for two years, before revision: $6,400 + $9,900 = $16,300
Net income for two years, after revision: $5,900 + $10,400 = $16,300
Thus, there is no net over- or understatement of net income for the two-year period.
4. Even though the error counterbalances over the two-year period, it is still important
to restate the statements for the two years. It is important for comparative purposes
that the correct amount of net income be known for each of the two years. The com-
CHAPTER 5 • INVENTORIES AND COST OF GOODS SOLD 5-47
LO 10 PROBLEM 5-5A MAKING BUSINESS DECISIONS: ANALYZING WAL-MART’S
INVENTORY TURNOVER RATIO
Part A. Ratio Analysis Model
1. Formulate the Question:
How many times a year does Wal-Mart turn over its inventory?
2. Gather the Information from the Financial Statements:
3. Calculate the Ratio:
Inventory Turnover Ratio = Cost of Goods Sold
Average Inventory
4. Compare the Ratio with Other Ratios:
Inventory Turnover Ratio
Wal-Mart Target
Year Ended Year Ended Year Ended Year Ended
January 31, 2014 January 31, 2013 February 1, 2014 February 2, 2013
8.1 times 8.3 times 6.1 times 6.4 times
Calculations:
Wal-Mart:
5-48 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
PROBLEM 5-5A (Continued)
5. Interpret the Ratios:
Wal-Mart turned over its inventory 8.1 times during the most recent year. This
Part B. Business Decision Model
1. Formulate the Question:
After considering all relevant information, should I invest in the common stock of
Wal-Mart?
2. Gather Information from the Financial Statements and Other Sources:
The information will come from a variety of sources, not limited to but including:
a. The balance sheet provides information about liquidity.
3. Analyze the Information Gathered:
The information gathered in (2) above must be analyzed. Among the relevant
questions that must be answered are the following:
a. Refer to part (5) of the Ratio Analysis Model for a comparison of the turnover
ratios for Wal-Mart and its competitor, Target, over the last two years. Which
4. Make the Decision:
Taking into account all of the various sources of information, decide either to buy
stock in Wal-Mart or find an alternative use for the money.
CHAPTER 5 • INVENTORIES AND COST OF GOODS SOLD 5-49
PROBLEM 5-5A (Concluded)
5. Monitor Your Decision:
LO 11 PROBLEM 5-6A EFFECTS OF CHANGES IN INVENTORY AND ACCOUNTS
PAYABLE BALANCES ON STATEMENT OF CASH FLOWS
1. Statement of cash flows:
CARPETLAND CITY
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2016
Net income ........................................................................ $ 78,500
2. Memo to the president:
TO: President of Carpetland City
FROM: Student’s name
DATE: January 20, 2017
SUBJECT: Cash Flows
5-50 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
ALTERNATE MULTI-CONCEPT PROBLEMS
LO 2,3,11 PROBLEM 5-7A PURCHASES AND SALES OF MERCHANDISE, CASH FLOWS
1. Journal entries:
Journal Oct. 10 Accounts Payable .................................. 245
Entry Cash ................................................. 245
Analysis To record payment on account.
.
Balance Sheet Income Statement
=
ASSETS LIABILITIES +
STOCKHOLDERS’
EQUITY REVENUES – EXPENSES =
NET
INCOME
Cash (245)
Accounts Payable (245)
CHAPTER 5 • INVENTORIES AND COST OF GOODS SOLD 5-51
PROBLEM 5-7A (Continued)
Journal Oct. 25 Cash ....................................................... 600
Entry Sales Revenue ................................. 600
Analysis To record cash sales: 3 × $200.
Balance Sheet Income Statement
ASSETS = LIABILITIES +
STOCKHOLDERS’
EQUITY REVENUES – EXPENSES =
NET
INCOME
Cash 600
600
Sales Rev-
enue 600
600
2. Units on hand on October 31:
October 1 purchase ..................................................... 3 units
5-52 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
PROBLEM 5-7A (Concluded)
3. Cash balance at end of month:
Beginning cash balance .............................................. $2,000
October 10 payment .................................................... (245)
LO 2,3,4 PROBLEM 5-8A WALGREEN’S SALES, COST OF GOODS SOLD, AND GROSS
PROFIT
1. Summary journal entries for the year ended August 31, 2014 (in millions):
Journal Cash ................................................................... 2,632
Entry Accounts Receivable .................................... 2,632
Analysis To record collection of beginning accounts
receivable.
Journal Accounts Receivable .......................................... 76,392
Entry Sales ............................................................ 76,392
Analysis To record sales on account.
Balance Sheet Income Statement
PROBLEM 5-8A (Concluded)
Journal Cash ................................................................... 73,174
Entry Accounts Receivable ................................... 73,174
Analysis To record cash collections: $76,392 – $3,218.
Balance Sheet Income Statement
2. Walgreen’s would deduct sales returns and allowances, and the amount of any sales
discounts taken by its customers from sales, to arrive at the amount of net sales
reported on its income statement.
3. Cost of Goods Sold section of 2014 income statement (in millions):
Inventory, August 31, 2013 .......................................................... $ 6,852
Cost of goods purchased ............................................................. 54,047**
4. Gross profit ratios:
(In millions) 2014 2013
Net sales ................................................................. $ 76,392 $ 72,217
Cost of sales ........................................................... 54,823 51,098
5-54 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
LO 2,3 PROBLEM 5-9A FINANCIAL STATEMENTS
1. Cost of goods sold for 2016:
Beginning inventory .......................................................... $ 6,400
2. Net income for 2016:
Net sales ........................................................................... $111,760
Cost of goods sold [from part (1)] ...................................... 62,483
Gross profit .................................................................. $ 49,277
3. LLOYD INC.
BALANCE SHEET
AT DECEMBER 31, 2016
Assets
Cash ................................................................................. $22,340
Accounts receivable .......................................................... 56,359
Inventory ........................................................................... 5,900
Total assets ................................................................. $84,599
CHAPTER 5 • INVENTORIES AND COST OF GOODS SOLD 5-55
LO 5,6,7 PROBLEM 5-10A COMPARISON OF INVENTORY COSTING METHODS—
PERIODIC SYSTEM
1. Cost of Ending
Goods Sold Inventory Total
a. Weighted average .................................. $5,120 $4,655 $9,775
b. FIFO ....................................................... 4,875 4,900 9,775
c. LIFO ....................................................... 5,375 4,400 9,775
b. Ending inventory:
600 × $5.00 = $3,000
400 × 4.75 = 1,900
1,000 $4,900
Cost of goods sold:
300 × $4.00 = $1,200
500 × 4.50 = 2,250
300 × 4.75 = 1,425
1,100 $4,875
