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6-96
P6A-37B, cont.
Requirement 1, cont.
FIFO Cost of Goods Sold:
Cost of Goods Available for Sale
$ 19,680
Ending Merchandise Inventory
(11,080)
P6A-37B, cont.
Requirement 1, cont.
Weighted-average
cost per unit
=
$19,680 cost of goods available for sale
/ 240 units available for sale
=
$9,020
Requirement 2
Gross profit is $14,400 using FIFO, $13,520 using LIFO, and $13,980 using weighted-average.
Calculations:
Requirement 3
LIFO results in the lowest income taxes and FIFO results in the highest net income. Under LIFO, the
last costs into inventory are the first costs out to cost of goods sold. When inventory costs are rising,
LIFO results in the highest cost of goods sold; thus, the lowest gross profit, net income, and taxable
6-98
Continuing Problem
P6-38 Accounting for inventory using the perpetual inventory system—FIFO
This problem continues the Daniels Consulting situation from Problem P5-45
in Chapter 5. Consider the January transactions for Daniels Consulting that were presented in Chapter 5.
(Cost data have been removed from the sale transactions.) Daniels uses the perpetual inventory system.
Requirements
1. Prepare perpetual inventory records for January for Daniels using the FIFO inventory costing
method. (Note: You must calculate the cost of goods sold on the 18th, 28th, and 31st.)
2. Journalize the transactions for January 18th, 28th, and 31st (adjusting entry d only) using the
perpetual inventory record created in Requirement 1.
SOLUTION
Requirement 1
Perpetual Inventory Record: FIFO
Purchases
Cost of Goods Sold
Inventory on Hand
Date
Quantity
Unit
Cost
Total Cost
Quantity
Unit
Cost
Total Cost
Quantity
Unit
Cost
Total Cost
Jan. 7
50 units
× $ 22(a)
= $ 1,100(a)
50 units
× $ 22
= $ 1,100
6-100
P6-38, cont.
Requirement 1, cont.
Calculations:
Unit cost of inventory purchased
=
Total cost / Total number of units
Requirement 2
Date
Accounts and Explanation
Debit
Credit
Jan. 18
Accounts Receivable
2,625
Sales Revenue
2,625
Sales on account.
Cost of Goods Sold
880 (e)
Software Inventory
880 (e)
Recorded the cost of goods sold.
Practice Set
This problem continues the Crystal Clear Cleaning problem begun in Chapter 2 and continued through
Chapter 5.
P6-39 Accounting for inventory using the perpetual inventory system—FIFO
Consider the December transactions for Crystal Clear Cleaning that were presented in Chapter 5. (Cost
data have been removed from the sale transactions.) Crystal Clear uses the perpetual inventory system.
Requirements
1. Prepare perpetual inventory records for December for Crystal Clear Cleaning using the FIFO
inventory costing method. (Note: You must calculate the cost of goods sold on the 11th, 28th, and
31st.)
2. Journalize the transactions for December 11th, 28th, and 31st (adjusting entry a only) using the
perpetual inventory record created in Requirement 1.
6-102
SOLUTION
Requirement 1
Perpetual Inventory Record: FIFO
Purchases
Cost of Goods Sold
Inventory on Hand
Date
Quantity
Unit
Cost
Total Cost
Quantity
Unit
Cost
Total Cost
Quantity
Unit
Cost
Total Cost
Dec. 2
475 units
× $ 6.00(a)
= $ 2,850
475 units
× $ 6.00
= $ 2,850
$ 2,850
P6-39, cont.
Requirement 1, cont.
Calculations:
Unit cost of inventory purchased
=
Total cost / Total number of units
(a) Dec. 2 purchase:
=
$2,850 / 475 units
=
$6.00 per unit
P6-39, cont.
Requirement 1, cont.
December 12:
Amount due,
net of purchase return
=
$2,850 cost of 475 units – $450 cost of 75 units returned
=
$2,400
P6-39, cont.
Requirement 2
Date
Accounts and Explanation
Debit
Credit
Dec. 11
Accounts Receivable
3,990
Sales Revenue
3,990
Sales on account.
6-106
Critical Thinking
Decision Case 6-1
Suppose you manage Campbell Appliance. The store’s summarized financial state- ments for 2017, the
most recent year, follow:
Assume that you need to double net income. To accomplish your goal, it will be very difficult to raise
the prices you charge because there is a discount appliance store nearby. Also, you have little control
over your cost of goods sold because the appliance manufacturers set the amount you must pay.
Identify several strategies for doubling net income.
SOLUTION
Strategies for doubling net income include the following:
• Analyze the mix and level of operating expenses to identify opportunities to increase efficiencies
Fraud Case 6-1
Ever since he was a kid, Carl Montague wanted to be a pro football player. When that didn’t work out,
he found another way to channel his natural competitive spirit: He bought a small auto parts store in
Kentucky that was deep in red ink (negative earnings). At the end of the year, he created “ghost”
inventory by recording fake inventory purchases. He offset these transactions by “adjustments” to Cost
of Goods Sold, thereby boosting profit and strengthening the balance sheet. Fortified with great
financials, he got bank loans that allowed him to build up a regional chain of stores, buy a local sports
franchise, and take on the lifestyle of a celebrity. When the economy in the region tanked, he could no
longer cover his losses with new debt or equity infusions, and the whole empire fell like a house of
cards.
Requirements
1. Name several parties that could have been hurt by the actions of Carl Montague.
2. What kind of adjustment to Cost of Goods Sold (debit or credit) would have the effect of boosting
earnings?
SOLUTION
Requirement 1
Parties that could have been hurt by the actions of Carl Montague include creditors who weren’t paid
Requirement 2
6-108
Financial Statement Case 6-1
The notes are an important part of a company’s financial statements, giving valuable details that would
Requirements
1. Which inventory costing method does Starbucks use? How does Starbucks value its inventories? See
Note 1.
2. By using the cost of goods sold formula, you can compute net purchases, which are not reported in
the Starbucks statements. How much were Starbucks’s inventory purchases during the year ended
September 29, 2013?
3. Determine Starbucks’s inventory turnover and days’ sales in inventory for the year ended September
29, 2013. (Round each ratio to one decimal place.) How do Starbucks’s inventory turnover and days’
sales in inventory compare with Green Mountain Coffee Roasters, Inc.’s for the year ended
September 28, 2013? Explain.
SOLUTION
Requirement 1
Requirement 2
Starbucks’s net purchases of inventory were $6,252 (in millions) during the year ended September 29,
2013.
Calculations:
Financial Statement Case 6-1, cont.
Requirement 3
For the fiscal year ended September 28, 2013, Green Mountain Coffee Roasters had an inventory
turnover of 3.79 times and days’ sales in inventory of 96.3 days.
For the fiscal year ended September 29, 2013, Starbucks’ inventory turnover is 5.4 times, and days’
sales in inventory is 67.6 days.
Team Project 6-1
Obtain the annual reports of as many companies as you have team members—one company per team
member. Most companies post their financial statements on their Web sites.
Requirements
1. Identify the inventory method used by each company.
2. Compute each company’s gross profit percentage, inventory turnover, and days’ sales in inventory
for the most recent two years.
3. For the industries of the companies you are analyzing, obtain the industry averages for gross profit
percentage and inventory turnover from Robert Morris Associates, Annual Statement Studies; Dun
and Bradstreet, Industry Norms and Key Business Ratios; or Leo Troy, Almanac of Business and
Industrial Financial Ratios.
4. How well does each of your companies compare with the average for its industry? What insight
about your companies can you glean from these ratios?
SOLUTION
