Chapter 6 (1)

CHAPTER6 Inventories ASSIGNMENTCLASSIFICATIONTABLE Brief Exercises

Do It!

Exercises

A Problems

B Problems

1, 2, 3, 4, 5, 6

1

1

1, 2

1A

1B

7, 8, 9, 10, 18

2, 3

2

3, 4, 5, 6, 7

2A, 3A, 4A, 5A, 6A, 7A

2B, 3B, 4B, 5B, 6B, 7B

3, 6, 7

2A, 3A, 4A, 5A, 6A, 7A

2B, 3B, 4B, 5B, 6B, 7B

14, 15, 16

8A, 9A

8B, 9B

9, 10

17, 18, 19

10A, 11A

10B, 11B

11

20, 21

12A

12B

StudyObjectives

Questions

1.

Describe the steps in determining inventory quantities.

2.

Explain the accounting for inventories and apply the inventory cost flow methods.

3.

Explain the financial effects of the inventory cost flow assumptions.

4.

Explain the lower-ofcost-or-net realizable value basis of accounting for inventories.

12, 13, 14

5

3

8, 9

5.

Indicate the effects of inventory errors on the financial statements.

15

6

3

10, 11

6.

Compute and interpret the inventory turnover ratio.

16, 17

7

4

12, 13

*7.

Apply the inventory cost flow methods to perpetual inventory records.

19, 20

18

*8.

Describe the two methods of estimating inventories.

21, 22, 23, 24

*9.

Apply the LIFO inventory costing method.

11, 25

4

*Note: All asterisked Questions, Exercises, and Problems relate to material contained in the appendices to the chapter.

Copyright © 2011 John Wiley & Sons, Inc.   Weygandt, IFRS, 1/e, Solutions Manual   (For Instructor Use Only)

6-1

ASSIGNMENTCHARACTERISTICSTABLE Problem Number

Description

Difficulty Level

TimeAllotted (min.)

1A

Determine items and amounts to be recorded in inventory.

Moderate

15–20

2A

Determine cost of goods sold and ending inventory using FIFO and average-cost with analysis.

Simple

30–40

3A

Determine cost of goods sold and ending inventory using FIFO and average-cost with analysis.

Simple

30–40

4A

Compute ending inventory, prepare income statements, and answer questions using FIFO and average-cost.

Moderate

30–40

5A

Calculate ending inventory, cost of goods sold, gross profit, and gross profit rate under periodic method; compare results.

Moderate

30–40

6A

Compare specific identification, FIFO, and average-cost under periodic method; use cost flow assumption to influence earnings.

Moderate

20–30

7A

Compute ending inventory, prepare income statements, and answer questions using FIFO and average-cost.

Moderate

30–40

*8A

Calculate cost of goods sold and ending inventory for FIFO and average-cost, under the perpetual system; compare gross profit under each assumption.

Moderate

30–40

*9A

Determine ending inventory under a perpetual inventory system.

Moderate

40–50

*10A

Estimate inventory loss using gross profit method.

Moderate

30–40

*11A

Compute ending inventory using retail method.

Moderate

20–30

*12A

Apply the LIFO cost method (periodic).

Moderate

15–20

1B

Determine items and amounts to be recorded in inventory.

Moderate

15–20

2B

Determine cost of goods sold and ending inventory using FIFO and average-cost with analysis.

Simple

30–40

3B

Determine cost of goods sold and ending inventory using FIFO and average-cost with analysis.

Simple

30–40

4B

Compute ending inventory, prepare income statements, and answer questions using FIFO and average-cost.

Moderate

30–40

5B

Calculate ending inventory, cost of goods sold, gross profit, and gross profit rate under periodic method; compare results.

Moderate

30–40

6-2

Copyright © 2011 John Wiley & Sons, Inc.   Weygandt, IFRS, 1/e, Solutions Manual   (For Instructor Use Only)

ASSIGNMENTCHARACTERISTICSTABLE(Continued) Problem Number

Description

Difficulty Level

TimeAllotted (min.)

6B

Compare specific identification, FIFO, and average-cost under periodic method; use cost flow assumption to justify price increase.

Moderate

20–30

7B

Compute ending inventory, prepare income statements, and answer questions using FIFO and average-cost.

Moderate

30–40

*8B

Calculate cost of goods sold and ending inventory under FIFO and average-cost, under the perpetual system; compare gross profit under each assumption.

Moderate

30–40

*9B

Determine ending inventory under a perpetual inventory system.

Moderate

40–50

*10B

Compute gross profit rate and inventory loss using gross profit method.

Moderate

30–40

*11B

Compute ending inventory using retail method.

Moderate

20–30

*12B

Apply the LIFO cost method (periodic).

Moderate

15–20

Copyright © 2011 John Wiley & Sons, Inc.   Weygandt, IFRS, 1/e, Solutions Manual   (For Instructor Use Only)

6-3

WEYGANDTIFRS1E CHAPTER6 INVENTORIES Number

SO

BT

Difficulty

Time(min.)

BE1

1

C

Simple

4–6

BE2

2

K

Simple

2–4

BE3

2

AP

Simple

4–6

BE4

3

K

Simple

2–4

BE5

4

AP

Simple

4–6

BE6

5

AN

Simple

4–6

BE7

6

AP

Simple

4–6

BE8

7

AP

Simple

8–10

BE9

8

AP

Simple

4–6

BE10

8

AP

Simple

4–6

BE11

9

AP

Simple

4–6

DI1

1

AN

Simple

4–6

DI2

2

AP

Simple

6–8

DI3

4, 5

AP

Simple

6–8

DI4

6

AP

Simple

4–6

EX1

1

AN

Simple

4–6

EX2

1

AN

Simple

6–8

EX3

2, 3

AN, E

Moderate

6–8

EX4

2

AN, E

Simple

8–10

EX5

2

AP

Simple

6–8

EX6

2, 3

AP, E

Simple

8–10

EX7

2, 3

AP, E

Simple

8–10

EX8

4

AP

Simple

6–8

EX9

4

AP

Simple

4–6

EX10

5

AN

Simple

6–8

EX11

5

AN

Simple

10–12

EX12

6

AP

Simple

10–12

EX13

6

AP

Simple

8–10

EX14

7

AP

Simple

8–10

EX15

7

AP, E

Moderate

12–15

EX16

7

AP, E

Moderate

12–15

EX17

8

AP

Simple

8–10

EX18

8

AP

Simple

10–12

6-4

Copyright © 2011 John Wiley & Sons, Inc.   Weygandt, IFRS, 1/e, Solutions Manual   (For Instructor Use Only)

INVENTORIES(Continued) Number

SO

BT

Difficulty

Time(min.)

EX19

8

AP

Moderate

10–12

EX20

9

AP

Moderate

6–8

EX21

9

AP, E

Moderate

12–15

P1A

1

AN

Moderate

15–20

P2A

2, 3

AP

Simple

30–40

P3A

2, 3

AP

Simple

30–40

P4A

2, 3

AN

Moderate

30–40

P5A

2, 3

AP, E

Moderate

30–40

P6A

2, 3

AP, E

Moderate

20–30

P7A

2, 3

AN

Moderate

30–40

*P8A

7

AP, E

Moderate

30–40

*P9A

7

AP

Moderate

40–50

*P10A

8

AP

Moderate

30–40

*P11A

8

AP

Moderate

20–30

*P12A

9

AP

Moderate

15–20

P1B

1

AN

Moderate

15–20

P2B

2, 3

AP

Simple

30–40

P3B

2, 3

AP

Simple

30–40

P4B

2, 3

AN

Moderate

30–40

P5B

2, 3

AP, E

Moderate

30–40

P6B

2, 3

AP, E

Moderate

20–30

P7B

2, 3

AN

Moderate

30–40

*P8B

7

AP, E

Moderate

30–40

*P9B

7

AP

Moderate

40–50

*P10B

8

AP

Moderate

30–40

*P11B

8

AP

Moderate

20–30

*P12B

9

AP

Moderate

15–20

BYP1

2, 6

AP

Simple

10–15

BYP2

6

E

Simple

10–15

BYP3

2, 6

AN

Simple

10–15

BYP4

8

AP

Moderate

20–25

BYP5

5

AN

Simple

10–15

BYP6

3

E

Simple

10–15

Copyright © 2011 John Wiley & Sons, Inc.   Weygandt, IFRS, 1/e, Solutions Manual   (For Instructor Use Only)

6-5

StudyObjective

Knowledge

Comprehension

Application

Analysis

Copyright © 2011 John Wiley & Sons, Inc.   Weygandt, IFRS, 1/e, Solutions Manual   (For Instructor Use Only)

1.

Describethe stepsin determining inventoryquantities.

Q6-2 Q6-6

Q6-1 Q6-3

2.

Explainthe accountingfor inventoriesand applythe inventorycost flowmethods.

Q6-8 Q6-10 Q6-18 BE6-2 BE6-4

Q6-7 Q6-9

3.

Explainthe financialeffectsof the inventory cost flowassumptions.

4.

Explainthe lower-of-cost-or-net realizablevalue basisof accountingfor inventories.

5.

Indicatethe effectsof inventory errorson the financialstatements.

6.

Computeandinterpretthe inventory turnoverratio.

Q6-16

BE6-7 DI6-4

E6-12 Q6-17 E6-13

*7.

Applythe inventorycost flowmethodsto perpetualinventoryrecords.

Q6-19 Q6-20

BE6-8 E6-14 E6-15 E6-16

P6-8A P6-8B P6-9A P6-9B

*8.

Describethe twomethodsof estimatinginventories.

Q6-21 Q6-22

Q6-23 Q6-24 BE6-9 BE6-10

*9.

Applythe LIFOinventorycostingmethod.

Q6-11 Q6-25

BE6-11 E6-20 E6-21

BroadeningYourPerspective

Q6-12

Q6-4 Q6-5 BE6-1 E6-1

DI6-1 E6-1 E6-2

Synthesis

Evaluation

P6-1A P6-1B

BE6-3 DI6-2 E6-5 E6-6 E6-7

P6-2A P6-2B P6-3A P6-3B P6-5A

P6-5B E6-3 P6-6A E6-4 P6-6B P6-4A P6-4B P6-7A

P6-7B

E6-3 E6-4 P6-5A P6-5B P6-6A

P6-6B E6-6 E6-7

BE6-4 E6-6 E6-7 P6-2A

P6-2B P6-3A P6-3B P6-5A

P6-5B E6-3 P6-6A P6-4A P6-6B P6-4B P6-7A

P6-7B

E6-3 P6-5A P6-5B P6-6A

P6-6B E6-6 E6-7

Q6-13 Q6-14 BE6-5 DI6-3

E6-8 E6-9

DI6-3

Q6-15 BE6-6

E6-17 E6-18 E6-19 P6-10A

FinancialReporting DecisionMaking Acrossthe Organization

E6-10 E6-11

E6-16 E6-17 P6-8A P6-8B

P6-11A P6-10B P6-11B P6-12A P6-12B Exploringthe Web Communication

Comp.Analysis EthicsCase

BLOOM’S TAXONOMY TABLE

6-6

CorrelationChartbetweenBloom’sTaxonomy,StudyObjectivesand End-of-ChapterExercisesand Problems

ANSWERSTO QUESTIONS 1.

Agree. Effective inventory management is frequently the key to successful business operations. Management attempts to maintain sufficient quantities and types of goods to meet expected customer demand. It also seeks to avoid the cost of carrying inventories that are clearly in excess of anticipated sales.

2.

Inventory items have two common characteristics: (1) they are owned by the company and (2) they are in a form ready for sale in the ordinary course of business.

3.

Taking a physical inventory involves actually counting, weighing or measuring each kind of inventory on hand. Retailers, such as a hardware store, generally have thousands of different items to count. This is normally done when the store is closed.

4.

(a) (1) The goods will be included in Reeves Company’s inventory if the terms of sale are FOB destination. (2) They will be included in Cox Company’s inventory if the terms of sale are FOB shipping point. (b) Reeves Company should include goods shipped to another company on consignment in its inventory. Goods held by Reeves Company on consignment should not be included in inventory.

5.

Inventoriable costs are $3,020 (invoice cost $3,000 + freight charges $50 – cash discount $30). The amount paid to negotiate the purchase is a buying cost that normally is not included in the cost of inventory because of the difficulty of allocating these costs. Buying costs are expensed in the year incurred.

6.

FOB shipping point means that ownership of goods in transit passes to the buyer when the public carrier accepts the goods from the seller. FOB destination means that ownership of goods in transit remains with the seller until the goods reach the buyer.

7.

Actual physical flow may be impractical because many items are indistinguishable from one another. Actual physical flow may be inappropriate because management may be able to manipulate net income through specific identification of items sold.

8.

The major advantage of the specific identification method is that it tracks the actual physical flow of the goods available for sale. The major disadvantage is that management could manipulate net income.

9.

No. Selection of an inventory costing method is a management decision. However, once a method has been chosen, it should be used consistently from one accounting period to another.

10.

(a) FIFO. (b) Average-cost. (c) FIFO.

Copyright © 2011 John Wiley & Sons, Inc.   Weygandt, IFRS, 1/e, Solutions Manual   (For Instructor Use Only)

6-7

QuestionsChapter6 (Continued) 11. Plato Company is using the FIFO method of inventory costing, and Cecil Company is using the LIFO method. Under FIFO, the latest goods purchased remain in inventory. Thus, the inventory on the statement of financial position should be close to current costs. The reverse is true of the LIFO method. Plato Company will have the higher gross profit because cost of goods sold will include a higher proportion of goods purchased at earlier (lower) costs. 12. Peter should know the following: (a) A departure from the cost basis of accounting for inventories is justified when the value of the goods is lower than its cost. The writedown to net realizable value should be recognized in the period in which the price decline occurs. (b) Net realizable value (NRV) means the net amount that a company expects to realize from the sale, not the selling price. NRV is estimated selling price less estimated costs to complete and to make a sale. 13. Garitson Music Center should report the CD players at $180 each for a total of $900. $180 is the net realizable value under the lower-of-cost-or-net realizable value basis of accounting for inventories. A decline in net realizable value usually leads to a decline in the selling price of the item. Valuation at LCNRV is an example of the accounting concept of prudence. 14. Ruthie Stores should report the toasters at $27 each for a total of $540. The $27 is the lower of cost or net realizable value. It is used because it is the lower of the inventory’s cost and net realizable value. 15. (a) Mintz Company’s 2010 net income will be understated €7,000; (b) 2011 net income will be overstated €7,000; and (c) the combined net income for the two years will be correct. 16. Willingham Company should disclose: (1) the major inventory classifications, (2) the basis of accounting (cost or lower-of-cost-or-net realizable value), and (3) the costing method (FIFO or average cost). 17. An inventory turnover that is too high may indicate that the company is losing sales opportunities because of inventory shortages. Inventory outages may also cause customer ill will and result in lost future sales. 18. Cadbury uses the average-cost method for its inventories. *19. Disagree. The results under the FIFO method are the same but the results under the averagecost method are different. The reason is that the pool of inventoriable costs (cost of goods available for sale) is not the same. Under a periodic system, the pool of costs is the goods available for sale for the entire period, whereas under a perpetual system, the pool is the goods available for sale up to the date of sale. *20. In a periodic system, the average is a weighted average based on total goods available for sale for the period. In a perpetual system, the average is a moving average of goods available for sale after each purchase. *21. Inventories must be estimated when: (1) management wants monthly or quarterly financial statements but a physical inventory is only taken annually and (2) a fire or other type of casualty makes it impossible to take a physical inventory.

6-8

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QuestionsChapter6 (Continued) *22. In the gross profit method, the average is the gross profit rate, which is gross profit divided by net sales. The rate is often based on last year’s actual rate. The gross profit rate is applied to net sales in using the gross profit method. In the retail inventory method, the average is the cost-to-retail ratio, which is the goods available for sale at cost divided by the goods available for sale at retail. The ratio is based on current year data and is applied to the ending inventory at retail. *23. The estimated cost of the ending inventory is $40,000: Net sales.................................................................................................................... Less: Gross profit ($400,000 X 35%)........................................................................ Estimated cost of goods sold.....................................................................................

$400,000 140,000 $260,000

Cost of goods available for sale................................................................................. Less: Cost of goods sold........................................................................................... Estimated cost of ending inventory............................................................................

$300,000 260,000 $ 40,000

*24. The estimated cost of the ending inventory is £28,000: Ending inventory at retail:

£40,000 = (£120,000 – £80,000)

Cost-to-retail ratio:

 £84,000  70% =   £120,000 

Ending inventory at cost:

£28,000 = (£40,000 X 70%)

*25. During times of rising prices, using the LIFO method for costing inventories rather than FIFO or average-cost will result in lower income taxes. Since LIFO uses the most recent, higher, costs to calculate cost of goods sold, taxable income is lower, and income taxes are also lower.

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6-9

SOLUTIONSTO BRIEFEXERCISES BRIEFEXERCISE6-1 (a)

Ownership of the goods belongs to Smart. Thus, these goods should be included in Smart’sinventory.

(b) The goodsin transit shouldnot be includedin the inventorycountbecauseownership by Smart does not occur until the goods reach the buyer. (c)

The goodsbeingheld belongto the customer.Theyshouldnot be includedin Smart’s inventory.

(d) Ownershipof thesegoodsrests with the other company. Thus, these goodsshould not be includedin the physicalinventory. BRIEFEXERCISE6-2 The itemsthat shouldbe includedin inventoriablecostsare: (a) (b) (c) (e)

Freight-in PurchaseReturnsand Allowances Purchases PurchaseDiscounts

BRIEFEXERCISE6-3 (a)

The endinginventoryunderFIFOconsistsof 200 units at $8 + 160 units at $7 for a total allocationof $2,720or ($1,600+ $1,120).

(b) The ending inventory under average-cost consists of 360 units at $6.89* for a total allocationof $2,480. *Averageunit cost is $6.89computedas follows: 300 X $6 = 400 X $7 = 200 X $8 = 900

$1,800 2,800 1,600 $6,200

$6,200÷ 900 = $6.89(rounded). Thecost of the endinginventoryis $2,480or (360 X $6.89). 6-10

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BRIEFEXERCISE6-4 (a) (b) (c) (d)

FIFOwouldresult in the highestnet income. FIFOwouldresult in the highestendinginventory. Average-cost wouldresult in the lowest incometax expense(becauseit wouldresult in the lowestnet income). Average-cost wouldresult in the most stable incomeover a number of yearsbecause it averagesoutanybigchangesin thecostof inventory.

BRIEFEXERCISE6-5

InventoryCategories Cameras Camcorders DVDplayers Total valuation

Cost €12,000 9,500 14,000

Net Realizable Value €12,100 9,700 12,800

LCNRV €12,000 9,500 12,800 €34,300

BRIEFEXERCISE6-6 The understatement of ending inventory caused cost of goods sold to be overstated $10,000 and net income to be understated $10,000. The correct net income for 2011 is $100,000or ($90,000+ $10,000). Total assets in the statement of financial position will be understated by the amount that endinginventoryis understated,$10,000.

BRIEFEXERCISE6-7

Inventoryturnover:

Daysin inventory:

$270,000 $270,000 = = 5.4 ($60,000 + $40,000) ÷ 2 $50,000

365 = 67.6 days 5.4

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6-11

*BRIEFEXERCISE6-8 (1)

FIFOMethod

Date Purchases May 7 (50 @ $10) $500 June 1 July 28 (30 @ $13) $390 Aug. 27

(2)

ProductE2-D2 Cost of GoodsSold (30 @ $10)

$300

(20 @ $10) (20 @ $13)

} $460

Balance (50 @ $10) $500 (20 @ $10) $200 (20 @ $10) (30 @ $13) } $590 (10 @ $13)

$130

Balance (50 @ $10) (20 @ $10) (50 @ $11.80)* (10 @ $11.80)

$500 $200 $590 $118

Moving-AverageCost

Date May 7 June 1 July 28 Aug. 27

Purchases (50 @ $10) $500 (30 @ $13)

ProductE2-D2 Cost of GoodsSold (30 @ $10)

$300

(40 @ $11.80)

$472

$390

*($200+ $390)÷ 50

*BRIEFEXERCISE6-9 (1)

Net sales.................................................................................. Less: Estimatedgrossprofit (35%X ¥330,000)............................. Estimatedcost of goodssold......................................................

¥330,000 115,500 ¥214,500

(2)

Cost of goodsavailablefor sale.................................................. Less: Estimatedcost of goodssold............................................ Estimatedcost of endinginventory..............................................

¥230,000 214,500 ¥ 15,500

6-12

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*BRIEFEXERCISE6-10 Goodsavailablefor sale Net sales Endinginventoryat retail

At Cost $35,000

At Retail $50,000 40,000 $10,000

Cost-to-retail ratio = ($35,000÷ $50,000)= 70% Estimatedcost of endinginventory= ($10,000X 70%)= $7,000

*BRIEFEXERCISE6-11 The ending inventory under LIFO consists of 300 units at $6 + 60 units at $7 for a total allocationof $2,220or ($1,800+ $420).

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6-13

SOLUTIONSFORDO IT! REVIEWEXERCISES DOIT! 6-1 Inventoryper physicalcount.............................................................. Inventoryout on consignment............................................................ Inventorysold, in transit at year-end.................................................... Inventorypurchased,in transit at year-end........................................... CorrectDecember31 inventory...........................................................

R$300,000 26,000 –0– 17,000 R$343,000

DO IT! 6-2 Cost of goodsavailablefor sale = (3,000X $5) + (8,000X $7) = $71,000 Endinginventory= 3,000+ 8,000– 9,200= 1,800units (a) FIFO:$71,000– (1,800X $7) = $58,400 (b) Average-cost: $71,000/11,000= $6.455per unit 9,200X $6.455= $59,386

DO IT! 6-3 (a)

The lowest value for each inventory type is: Small $64,000, Medium $260,000, and Large$152,000.The total inventoryvalueis the sumof thesefigures,$476,000.

(b) Endinginventory Cost of goodssold Equity

6-14

2011 $31,000understated $31,000overstated $31,000understated

2012 No effect $31,000understated No effect

Copyright © 2011 John Wiley & Sons, Inc.   Weygandt, IFRS, 1/e, Solutions Manual   (For Instructor Use Only)

DOIT! 6-4 2010 Inventoryturnoverratio

Daysin inventory

CHF1,200,000 (CHF180,000+ CHF220,000)/2 365 ÷ 6 = 60.8 days

2011 = 6

CHF1,425,000 (CHF220,000+ CHF80,000)/2

= 9.5

365 ÷ 9.5 = 38.4 days

The company experienced a very significant decline in its ending inventory as a result of the just-in-time inventory. This declineimprovedits inventoryturnoverratio and its days in inventory.It is possiblethat this increaseis the result of a morefocusedinventorypolicy. It appearsthat this changeis a win-win situationfor AragonCompany.

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6-15

SOLUTIONSTO EXERCISES EXERCISE6-1 Endinginventory—physicalcount............................................................. 1. No effect—titlepassesto purchaseruponshipment whentermsare FOBshippingpoint............................................... 2. No effect—titledoesnot transferto Limauntil goodsare received...................................................................... 3. Addto inventory: Title passedto Limawhengoods wereshipped............................................................................... 4. Addto inventory: Title remainswith Limauntil purchaserreceivesgoods............................................................. 5. Thegoodsdid not arriveprior to year-end. Thegoods, therefore,cannotbe includedin the inventory................................. Correctinventory....................................................................................

$297,000 0 0 22,000 35,000 (44,000) $310,000

EXERCISE6-2 Endinginventory—asreported................................................................. 1. Subtractfrominventory:Thegoodsbelongto SuperiorCorporation.Strawseris merelyholding themas a consignee.................................................................... 2. No effect—titledoesnot passto Strawseruntil goodsare received(Jan. 3)........................................................... 3. Subtractfrominventory:Officesuppliesshould be carriedin a separateaccount.Theyare not consideredinventoryheld for resale.............................................. 4. Addto inventory:Thegoodsbelongto Strawser until theyare shipped(Jan. 1)....................................................... 5. Addto inventory:District Salesorderedgoods with a cost of £8,000.Strawsershouldrecordthe correspondingsalesrevenueof £10,000.Strawser’s decisionto ship extra“unordered”goodsdoesnot constitutea sale. The manager’sstatementthat District couldship the goodsbackindicatesthat Strawserknows this over-shipmentis not a legitimatesale. The manager actedunethicallyin an attemptto improveStrawser’s reportedincomeby over-shipping.................................................

6-16

£740,000

(250,000) 0

(17,000) 30,000

52,000

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EXERCISE6-2 (Continued) 6.

Subtractfrominventory:IFRSrequirethat inventory be valuedat the lowerof cost or net realizablevalue. Obsoletepartsshouldbe adjustedfromcost to zero if theyhaveno otheruse............................................................... Correctinventory.....................................................................................

(40,000) £515,000

EXERCISE6-3 (a)

FIFOCost of GoodsSold (#1012)$100+ (#1045)$90 = $190

(b)

It couldchooseto sell specificunits purchasedat specificcostsif it wishedto impact earningsselectively.If it wishedto minimizeearningsit would chooseto sell the units purchasedat highercosts—inwhichcasethe Cost of GoodsSold wouldbe $190. If it wishedto maximizeearningsit wouldchooseto sell the units purchasedat lowercosts —inwhichcasethe cost of goodssold wouldbe $170.

(c)

I recommend they use the FIFO method because it produces a more appropriate statement of financial position valuation and reduces the opportunity to manipulate earnings. (Theanswermayvarydependingon themethodthestudentchooses.)

EXERCISE6-4 (a)

FIFO Beginninginventory(26 X $97).............................................. Purchases Sept. 12 (45 X $102)....................................................... Sept. 19 (20 X $104)....................................................... Sept. 26 (50 X $105)....................................................... Cost of goodsavailablefor sale............................................. Less: Endinginventory(20 X $105)........................................ Cost of goodssold...............................................................

$ 2,522 $4,590 2,080 5,250

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11,920 14,442 2,100 $12,342

6-17

EXERCISE6-4 (Continued)

Date 9/1 9/12 9/19 9/26

Units 26 45 20 30 121

Proof Unit Cost $ 97 102 104 105

Total Cost $ 2,522 4,590 2,080 3,150 $12,342

Average-Cost Cost of goodsavailablefor sale................................................................ Less: Endinginventory(20 X $102.43*)..................................................... Cost of goodssold..................................................................................

$14,442 2,049 $12,393

*Averageunit cost is $102.43computedas follows: $14,442(Costof goodsavailablefor sale) 141 units(Total units availablefor sale)

= $102.43(rounded)

Proof 121 unitsX $102.43= $12,394($1 differencedue to rounding) (b) FIFO$2,100(endinginventory)+ $12,342(COGS)= $14,442 Average-cost $2,049(endinginventory)+ $12,393(COGS)= $14,442

}

Cost of goods available for sale

Underboth methods,the sumof the endinginventoryand cost of goodssold equalsthe same amount,$14,442,whichis thecostof goodsavailableforsale. EXERCISE6-5 FIFO Beginninginventory(30 X $8)......................................................... Purchases May15 (25 X $11)................................................................... May24 (35 X $12)................................................................... Cost of goodsavailablefor sale...................................................... Less: Endinginventory(25 X $12).................................................. Cost of goodssold........................................................................ 6-18

$240 $275 420

695 935 300 $635

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EXERCISE6-5 (Continued)

Date 5/1 5/15 5/24

Units 30 25 10

Proof Unit Cost $8 11 12

Total Cost $240 275 120 $635

AVERAGE-COST Cost of goodsavailablefor sale..................................................................... Less: Endinginventory(25 X $10.39)............................................................. Cost of goodssold.......................................................................................

$935 260 $675

*Averageunit cost is $10.39computedas follows: $935(Costof goodsavailablefor sale) 90 units (Total unitsavailablefor sale)

= $10.39(rounded)

Proof 65 units X $10.39= $675 EXERCISE6-6 (a)

FIFO Beginninginventory(200 X $5)................................... Purchases June12 (300X $6)............................................. June23 (500X $7)............................................. Cost of goodsavailablefor sale.................................. Less: Endinginventory(120 X $7).............................. Cost of goodssold....................................................

$1,000 $1,800 3,500

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5,300 6,300 840 $5,460

6-19

EXERCISE6-6 (Continued) AVERAGE-COST Cost of goodsavailablefor sale........................................ Less: Endinginventory(120 X $6.30)................................. Cost of goodssold..........................................................

$6,300 756 $5,544

Averageunit cost is: $6,300 (Costof goodsavailablefor sale) 1,000units (200 + 300 + 500)

= $6.30

(b) The FIFO method will produce the higher ending inventory because costs have been rising. Under this method, the earliest costs are assigned to cost of goods sold and the latestcostsremainin endinginventory.For YountCompany,the endinginventoryunder FIFOis $840or (120 X $7) comparedto $756or (120 X $6.30)underaverage-cost. (c) The average-cost method will produce the higher cost of goods sold for Yount Company. The cost of goods sold is $5,544 or [$6,300 –$756] compared to $5,460 or ($6,300– $840)underFIFO. EXERCISE6-7 (a)

(1)

(2)

FIFO Beginninginventory.................................................. Purchases................................................................ Cost of goodsavailablefor sale.................................. Less: endinginventory(80 X $130)............................. Cost of goodssold....................................................

$10,000 26,000 36,000 10,400 $25,600

AVERAGE-COST Beginninginventory.................................................. Purchases................................................................ Cost of goodsavailablefor sale.................................. Less: endinginventory(80 X $120*)............................ Cost of goodssold....................................................

$10,000 26,000 36,000 9,600 $26,400

*[($10,000+ $26,000)÷ (100 + 200)]

6-20

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EXERCISE6-7 (Continued) (b) The use of FIFOwouldresult in the highestnet incomesincethe earlier lowercosts are matchedwithrevenues. (c)

Theuseof FIFOwouldresult in inventoriesapproximatingcurrentcostin thestatementof financialposition,sincethemorerecentunitsareassumedto beonhand.

(d) The use of average-cost would result in Jones paying the least taxes in the first year sinceincomewill be lower. EXERCISE6-8

Net Realizable Value

Cost

Lowerof Cost or NRV

Cameras Minolta Canon Total

W 850,000 900,000 1,750,000

W 780,000 912,000 1,692,000

W 780,000 900,000

Lightmeters Vivitar Kodak Total Total inventory

1,500,000 1,680,000 3,180,000 W4,930,000

1,380,000 1,890,000 3,270,000 W4,962,000

1,380,000 1,680,000 W4,740,000

EXERCISE6-9

Cameras DVDplayers iPods Total inventory

Cost $ 6,500 11,250 10,000 $27,750

Net Realizable Value $ 7,100 10,350 9,750 $27,200

Lowerof Cost or NRV $ 6,500 10,350 9,750 $26,600

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6-21

EXERCISE6-10

Beginninginventory................................................... Cost of goodspurchased............................................ Cost of goodsavailablefor sale................................... Correctedendinginventory......................................... Cost of goodssold..................................................... a

€30,000– €3,000= €27,000.

2011 € 20,000 150,000 170,000 27,000a €143,000

2012 € 27,000 175,000 202,000 41,000b €161,000

b

€35,000+ €6,000= €41,000.

EXERCISE6-11 (a) Sales..................................................................... Cost of goodssold Beginninginventory........................................ Cost of goodspurchased................................. Cost of goodsavailablefor sale........................ Endinginventory($44,000– $5,000)................... Cost of goodssold.......................................... Grossprofit............................................................

2011 $210,000

2012 $250,000

32,000 173,000 205,000 39,000 166,000 $ 44,000

39,000 202,000 241,000 52,000 189,000 $ 61,000

(b) Thecumulativeeffect on total grossprofit for the two yearsis zero as shownbelow: Incorrectgrossprofits: Correctgrossprofits: Difference

6-22

$49,000+ $56,000= $44,000+ $61,000=

$105,000 105,000 $ 0

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EXERCISE6-11 (Continued) (c)

DearMr./Ms.President: Becauseyour ending inventory of December31, 2011 was overstated by $5,000, your net incomefor 2011wasoverstatedby $5,000.For 2012net incomewasunderstatedby $5,000. In a periodic system, the cost of goods sold is calculated by deducting the cost of endinginventoryfromthe total cost of goodsyou have availablefor sale in the period. Therefore, if this ending inventory figure is overstated, as it was in December 2011, thenthe cost of goodssold is understatedand thereforenet incomewill be overstated by that amount. Consequently, this overstated ending inventory figure goes on to becomethe next period’sbeginninginventoryamountand is a part of the total cost of goodsavailablefor sale. Therefore,the mistakerepeatsitself in the reverse. The error also affects the statement of financial position at the end of 2011. The inventoryreportedin the statementof financial position is overstated; therefore, total assets are overstated.The overstatementof the 2011 net incomeresults in the retained earnings account balance being overstated. The statement of financial position at the end of 2012 is correct because the overstatement of the retained earnings account at the end of 2011 is offset by the understatement of the 2012 net income and the inventoryat the end of 2012is correct. Thank you for allowing me to bring this to your attention. If you have any questions, pleasecontactme at yourconvenience. Sincerely,

EXERCISE6-12

Inventory turnover

2010

2011

$900,000 ($100,000+ $300,000)÷ 2

$1,120,000 ($300,000+ $400,000)÷ 2

$900,000 $200,000 Daysin inventory Gross profit rate

365 4.5

$1,120,000 $350,000

= 4.5

= 81.1 days

$1,200,000– $900,000 $1,200,000

= .25

365 3.2

2012

$1,300,000 $440,000

= 3.2

365 2.95

= 114.1days

$1,600,000– $1,120,000 $1,600,000

$1,300,000 ($400,000+ $480,000)÷ 2

= .30

= 2.95

= 123.7days

$1,900,000– $1,300,000 $1,900,000

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= .32

6-23

EXERCISE6-12 (Continued) The inventory turnover ratio decreasedby approximately 34% from 2010 to 2012 while the days in inventory increased by almost 53% over the same time period. Both of these changeswould be considered negative since it’s better to have a higher inventoryturnover with a correspondingly lower days in inventory. However, Santo’s Photo gross profit rate increasedby 28%from2010to 2012, whichis a positivesign.

EXERCISE6-13 (a) InventoryTurnover

Daysin Inventory (b)

O’BrienCompany

WeinbergCompany

€190,000 (€45,000+ €55,000)/2 = 3.80

€292,000 (€71,000+ €69,000)/2 = 4.17

365/3.80= 96 days

365/4.17= 88 days

WeinbergCompanyis movingits inventorymorequickly, sinceits inventory turnover is higher,andits daysin inventoryis lower.

*EXERCISE6-14 (1)

FIFO Cost of GoodsSold

Date Purchases Jan. 1 8 (2 @ $600) 10 (6 @ $660) $3,960 15

6-24

(1 @ $600) (3 @ $660)

$1,200

Balance (3 @ $600) $1,800 (1 @ $600) 600 (1 @ $600) (6 @ $660) 4,560

$2,580

(3 @ $660)

1,980

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*EXERCISE6-14 (Continued) (2)

MOVING-AVERAGECOST Date Purchases Cost of GoodsSold Jan. 1 8 (2 @ $600) $1,200 10 (6 @ $660) $3,960 15 (4 @ $651.43) $2,606

Balance (3 @ $600) $1,800 (1 @ $600) 600 (7 @ $651.43)* 4,560 (3 @ $651.43) 1,954

*Average-cost = ($600+ $3,960)÷ 7 = $651.43(rounded)

*EXERCISE6-15 (a) The cost of goodsavailablefor sale is: June 1 Inventory 200 @ $5 June12 Purchase 300 @ $6 June23 Purchase 500 @ $7 Total cost of goodsavailablefor sale (1) Date June 1 June12

FIFO Cost of GoodsSold

Purchases (300@ $6)

$1,800

June15 June23 June27

Balance (200 @ $5) $1,000 (200 @ $5) $2,800 (300 @ $6)

}

(200 @ $5) (200 @ $6) (500@ $7)

$1,000 1,800 3,500 $6,300

$1,000 1,200

$3,500 (100 @ $6) (380 @ $7)

600 2,660 $5,460

(100 @ $6) (100 @ $6) (500 @ $7)

$ 600

}

(120 @ $7)

$4,100 $ 840

Endinginventory:$840. Cost of goodssold: $6,300– $840= $5,460.

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6-25

*EXERCISE6-15 (Continued) (2) Date June 1 June12 June15 June23 June27

Purchases (300@ $6)

Moving-AverageCost Costof GoodsSold $1,800 (400@ $5.60)

(500@ $7)

$3,500 (480@ $6.767)

Balance (200 @ $5) (500 @ $5.60) $2,240 (100 @ $5.60) (600 @ $6.767) $3,248 (120 @ $6.767) $5,488

$1,000 $2,800 $ 560 $4,060 $ 812

Endinginventory:$812. Costof goodssold: $6,300– $812= $5,488. (b)

FIFO gives the same ending inventory and cost of goods sold values under both the periodicandperpetualinventorysystem.Moving-averagegivesdifferentendinginventory andcostof goodssoldvaluesunderthe periodicandperpetualinventorysystems,dueto theaveragecalculationbeingbasedon differentpoolsof costs.

(c)

The simpleaveragewouldbe [($5 + $6 + $7) ÷ 3)] or $6. However,the moving-average cost methodusesa weighted-averageunit cost that changeseachtimea purchaseis maderatherthana simpleaverage.

*EXERCISE6-16 (a)

Date 9/1 9/5 9/12

FIFO Cost of GoodsSold

Purchases (45 @ $102)

9/16 9/19 9/26 9/29

6-26

(20 @ $104) (50 @ $105)

(12 @ $ 97)

$1,164

(14 @ $ 97) (36 @ $102)

$5,030

$4,590

$2,080 $5,250 ( 9 @ $102) (20 @ $104) (30 @ $105)

$6,148

Balance (26 @ $ 97) $2,522 (14 @ $ 97) $1,358 (14 @ $ 97) (45 @ $102) $5,948 ( 9 @ $102) ( 9 @ $102) (20 @ $104) ( 9 @ $102) (20 @ $104) (50 @ $105)

$ 918

(20 @ $105)

$2,100

$2,998 $8,248

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*EXERCISE6-16 (Continued)

Date 9/1 9/5 9/12 9/16 9/19 9/26 9/29

Moving-AverageCost Cost of GoodsSold

Purchases

(26 @ $97) $1,164 (14 @ $97) (59 @ $100.81)a $5,041* ( 9 @ $100.81) (29 @ $103.00)b (79 @ $104.27)c $6,152* (20 @ $104.27)

(12 @ $97) (45 @ $102)

$4,590 (50 @ $100.81)

(20 @ $104) (50 @ $105)

Balance

$2,080 $5,250 (59 @ $104.27)

$2,522 $1,358 $5,948 $ 907 $2,987 $8,237 $2,085

*Rounded a $5,948÷ 59 = $100.81 b $2,987÷ 29 = $103.00 c $8,237÷ 79 = $104.27 (b) EndingInventoryFIFO EndingInventoryAverage

(c)

Periodic $2,100 $2,049

Perpetual $2,100 $2,085

FIFO yields the same ending inventory value under both the periodic and perpetual inventorysystem. Average-cost yields different ending inventory values when using the periodic versus perpetualinventorysystem.

*EXERCISE6-17 (a)

Sales ....................................................... Cost of goodssold Inventory,November1.......................... Cost of goodspurchased...................... Cost of goodsavailablefor sale............. Inventory,December31........................ Cost of goodssold....................... Grossprofit ..............................................

Rs800,000,000 Rs100,000,000 500,000,000 600,000,000 120,000,000 480,000,000 Rs320,000,000

Grossprofit rate Rs320,000,000/Rs800,000,000= 40%

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6-27

*EXERCISE6-17 (Continued) (b) Sales.................................................................................... Less: Estimatedgrossprofit (40%X Rs10,000,000)................... Estimatedcost of goodssold..................................................

Rs10,000,000 4,000,000 Rs 6,000,000

Beginninginventory.............................................................. Cost of goodspurchased....................................................... Cost of goodsavailablefor sale.............................................. Less: Estimatedcost of goodssold........................................ Estimatedcost of endinginventory..........................................

Rs 1,200,000 6,100,000 7,300,000 6,000,000 Rs 1,300,000

*EXERCISE6-18 (a)

Net sales($51,000– $1,000)............................................................ Less: Estimatedgrossprofit (40%X $50,000)................................... Estimatedcost of goodssold..........................................................

$50,000 20,000 $30,000

Beginninginventory...................................................................... Cost of goodspurchased($31,200– $1,400+ $1,200)......................... Cost of goodsavailablefor sale...................................................... Less: Estimatedcost of goodssold................................................ Estimatedcost of merchandiselost.................................................

$20,000 31,000 51,000 30,000 $21,000

(b) Net sales...................................................................................... Less: Estimatedgrossprofit (30%X $50,000)................................... Estimatedcost of goodssold..........................................................

$50,000 15,000 $35,000

Beginninginventory...................................................................... Cost of goodspurchased............................................................... Cost of goodsavailablefor sale...................................................... Less: Estimatedcost of goodssold................................................ Estimatedcost of merchandiselost.................................................

$30,000 31,000 61,000 35,000 $26,000

6-28

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*EXERCISE6-19 Women’s Department Cost Retail Beginninginventory Goodspurchased Goodsavailablefor sale Net sales Endinginventoryat retail

Cost-to-retail ratio

Estimatedcost of ending inventory

$ 32,000 148,000 $180,000

$ 46,000 179,000 225,000 178,000 $ 47,000

Men’s Department Cost Retail $ 45,000 136,300 $181,300

$ 60,000 185,000 245,000 185,000 $ 60,000

$180,000 = 80% $225,000

$181,300 = 74% $245,000

$47,000X 80%= $37,600

$60,000X 74%= $44,400

*EXERCISE6-20 Beginninginventory(200 X $5)........................................... Purchases June12 (300X $6)....................................................... June23 (500X $7)....................................................... Cost of goodsavailablefor sale.......................................... Less:Endinginventory(120 X $5)....................................... Cost of goodssold............................................................

$1,000 $1,800 3,500

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5,300 6,300 600 $5,700

6-29

*EXERCISE6-21 (a)

1.

2.

FIFO Beginninginventory.................................................. Purchases................................................................ Cost of goodsavailablefor sale.................................. Less: endinginventory(80 X $130)............................. Cost of goodssold....................................................

$10,000 26,000 36,000 10,400 $25,600

AVERAGE-COST Beginninginventory.................................................. Purchases................................................................ Cost of goodsavailablefor sale.................................. Less: endinginventory(80 X $120*)............................ Cost of goodssold....................................................

$10,000 26,000 36,000 9,600 $26,400

*[($10,000+ $26,000)÷ (100 + 200)] 3.

LIFO Beginninginventory.................................................. Purchases................................................................ Cost of goodsavailablefor sale.................................. Less: endinginventory(80 X $100)............................. Cost of goodssold....................................................

$10,000 26,000 36,000 8,000 $28,000

(b) The use of FIFOwouldresult in the highestnet incomesincethe earlier lowercostsare matchedwithrevenues. (c)

Theuseof FIFOwouldresultin inventoriesapproximatingcurrentcostin thestatementof financialposition,sincethemorerecentunitsareassumedto beonhand.

(d) Theuseof LIFOwouldresultin Jonespayingthe leasttaxesin the first yearsinceincome will be lower.

6-30

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SOLUTIONSTO PROBLEMS PROBLEM6-1A

(a)

The goods should not be included in inventory as they were shipped FOB shipping point and shippedFebruary26. Title to the goodstransfersto the customerFebruary 26. Heath should have recorded the transaction in the Sales and Accounts Receivableaccounts.

(b)

The amount should not be included in inventory as they were shipped FOB destination and not received until March 2. The seller still owns the inventory. No entryis recorded.

(c)

IncludeTL500in inventory.

(d)

IncludeTL400in inventory.

(e)

TL750 should be included in inventory as the goods were shipped FOB shipping point.

(f)

The sale will be recordedon March 2. The goods should be includedin inventory at the end of Februaryat their cost of TL250.

(g)

The damagedgoodsshouldnot be includedin inventory.Theyshouldbe recordedin a loss accountsincetheyare not saleable.

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6-31

PROBLEM6-2A

(a) Date March 1 5 13 21 26

COSTOF GOODSAVAILABLEFORSALE Explanation Units Unit Cost BeginningInventory 1,500 $7 Purchase 3,000 8 Purchase 5,500 9 Purchase 4,000 10 Purchase 2,000 11 Total 16,000

(b)

Total Cost $ 10,500 24,000 49,500 40,000 22,000 $146,000

FIFO (1)

EndingInventory Unit Date Units Cost March 26 2,000 $11 21 1,500 10 3,500*

(2) Cost of GoodsSold Total Cost Cost of goodsavailable for sale $146,000 $22,000 Less: Ending 15,000 inventory 37,000 $37,000 Cost of goodssold $109,000

*16,000– 12,500= 3,500 Proofof Costof GoodsSold Unit Total Cost Date Units Cost March 1 1,500 $7 $ 10,500 5 3,000 8 24,000 13 5,500 9 49,500 21 2,500 10 25,000 12,500 $109,000

6-32

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PROBLEM6-2A (Continued) AVERAGE-COST (1) EndingInventory (2) Cost of GoodsSold $146,000÷ 16,000= $9.125 Cost of goodsavailable for sale $146,000 Unit Less: Ending Units Cost Total Cost inventory 31,938 3,500 $9.125 $31,938* Cost of goodssold $114,062 *roundedto nearestdollar Proofof Costof GoodsSold 12,500units X $9.125= $114,062

(c) 1. 2.

Asshownin (b) above,FIFOproducesthehighestinventoryamount, $37,000. As shown in (b) above, average-cost produces the highest cost of goods sold, $114,062.

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6-33

PROBLEM6-3A

(a) Date 1/1 2/20 5/5 8/12 12/8

COSTOF GOODSAVAILABLEFORSALE Explanation Units Unit Cost BeginningInventory 400 £8 Purchase 600 9 Purchase 500 10 Purchase 300 11 Purchase 200 12 Total 2,000

(b)

FIFO (1) Date 12/8 8/12

Date 1/1 2/20 5/5

6-34

Total Cost £ 3,200 5,400 5,000 3,300 2,400 £19,300

EndingInventory Unit Units Cost 200 £12 300 11 500

Total Cost £2,400 3,300 £5,700

(2) Cost of GoodsSold Cost of goods availablefor sale £19,300 Less: Ending inventory 5,700 Cost of goodssold £13,600

Proofof Costof GoodsSold Unit Total Units Cost Cost 400 £8 £ 3,200 600 9 5,400 500 10 5,000 1,500 £13,600

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PROBLEM6-3A (Continued)

(1)

Units 500

AVERAGE-COST EndingInventory (2) Cost of GoodsSold £19,300÷ 2,000= £9.65 Cost of goods availablefor sale £19,300 Unit Cost Less: Ending Total inventory 4,825 Cost £9.65 £4,825 Cost of goodssold £14,475

Proofof Cost of GoodsSold 1,500units X £9.65= £14,475 (c) 1.

2.

Average-cost results in the lowest inventory amount for the statement of financial position,£4,825. FIFOresultsin the lowestcost of goodssold, £13,600.

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6-35

PROBLEM6-4A

(a)

MORALESCO. CondensedIncomeStatement For the Year EndedDecember31, 2011 Sales............................................................... Cost of goodssold Beginninginventory.................................. Cost of goodspurchased........................... Cost of goodsavailablefor sale.................. Endinginventory...................................... Cost of goodssold.................................... Grossprofit..................................................... Operatingexpenses.......................................... Incomebeforeincometaxes.............................. Incometaxes(34%)........................................... Net income...................................................... a

30,000X $2.80= $84,000.

FIFO $865,000

Average-Cost $865,000

32,000 595,000 627,000 84,000a 543,000 322,000 147,000 175,000 59,500 $115,500

32,000 595,000 627,000 76,770b 550,230 314,770 147,000 167,770 57,042 $110,728

b

$627,000÷ 245,000units = $2.559/unit 30,000X $2.559= $76,770.

(b) 1.

The FIFO method produces the most meaningful inventory amount for the statement of financial position because the units are costed at the most recent purchaseprices.

2.

The FIFO method is most likely to approximate actual physical flow because the oldestgoodsareusuallysoldfirst to minimizespoilageand obsolescence.

3.

There will be $2,458 additional cash available under averagecost because income taxes are $57,042 under average-cost and $59,500 under FIFO.

6-36

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PROBLEM6-5A

Cost of GoodsAvailablefor Sale Date Explanation October 1 BeginningInventory 9 Purchase 17 Purchase 25 Purchase Total EndingInventoryin Units: Units availablefor sale Sales(100+ 60 + 110) Units remainingin endinginventory

Units 60 120 70 80 330 330 270 60

Date October11 22 29

Unit Cost €25 26 27 28 SalesRevenue Unit Units Price 100 €35 60 40 110 40 270

Total Cost €1,500 3,120 1,890 2,240 €8,750

Total Sales € 3,500 2,400 4,400 €10,300

(a) (1) FIFO (i)

EndingInventory

October25

60 @ €28 = €1,680

(iii) GrossProfit Salesrevenue Cost of goodssold Grossprofit

€10,300 7,070 € 3,230

(ii) Cost of GoodsSold Cost of goodsavailable for sale Less: Endinginventory Cost of goodssold

€ 8,750 1,680 € 7,070

(iv) GrossProfit Rate Grossprofit € 3,230 = 31.4% Net sales €10,300

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6-37

PROBLEM6-5A (Continued) (2)

Average-Cost Weighted-averagecost per unit:

Cost of goodsavailablefor sale Unitsavailablefor sale €8,750 = €26.515 330

(i)

EndingInventory

(ii) Cost of GoodsSold Cost of goodsavailable for sale Less: Endinginventory Cost of goodssold

60 @ €26.515= €1,591* *roundedto nearesteuro

(iii) GrossProfit Salesrevenue Cost of goodssold Grossprofit (b)

6-38

€10,300 7,159 € 3,141

(iv) GrossProfit Rate Grossprofit € 3,141 Net sales €10,300

€8,750 1,591 €7,159

= 30.5%

Average-cost producesa lower ending inventory value, gross profit, and gross profit rate becauseits cost of goodssold is higherthanFIFO.

Copyright © 2011 John Wiley & Sons, Inc.   Weygandt, IFRS, 1/e, Solutions Manual   (For Instructor Use Only)

PROBLEM6-6A

(a) (1) Tomaximizegrossprofit,BernelliDiamondsshouldsell thediamondswith the lowest cost. SaleDate March 5 March25

Cost of GoodsSold 150 @ $300 $ 45,000 30 @ $350 10,500 170 @ $350 59,500 230 @ $375 86,250 580 $201,250

SalesRevenue 180 @ $600 $108,000 400 @ $650 260,000

580

$368,000

Grossprofit $368,000– $201,250= $166,750. (2) Tominimizegrossprofit, Bernelli Diamondsshouldsell thediamondswith the highest cost. SaleDate March 5 March25

Cost of GoodsSold 180 @ $350 $ 63,000 350 @ $375 131,250 20 @ $350 7,000 30 @ $300 9,000 580 $210,250

SalesRevenue 180 @ $600 $108,000 400 @ $650 260,000

580

$368,000

Grossprofit $368,000– $210,250= $157,750.

(b) FIFO Cost of goodsavailablefor sale March1 Beginninginventory 3 Purchase 10 Purchase

Goodsavailablefor sale Unitssold Endinginventory

150 @ $300 200 @ $350 350 @ $375 700

$ 45,000 70,000 131,250 $246,250

700 580 120 @ $375

$ 45,000

Copyright © 2011 John Wiley & Sons, Inc.   Weygandt, IFRS, 1/e, Solutions Manual   (For Instructor Use Only)

6-39

PROBLEM6-6A (Continued) Goodsavailablefor sale – Endinginventory Cost of goodssold

$246,250 45,000 $201,250

Grossprofit: $368,000– $201,250= $166,750.

(c) Average-Cost Cost of goodsavailablefor sale (frompart b) – Endinginventory 120 @ $351.786* Cost of goodssold

$246,250 42,214 $204,036

Grossprofit: $368,000– $204,036= $163,964. *$246,250÷ 700 units = $351.786/unit

(d) The choice of inventory method depends on the company’s objectives. Since the diamondsaremarkedandcoded,thecompanycouldusespecificidentification.This could, however, result in “earnings management” by the companybecause, as shown,it could carefully choosewhichdiamondsto sell to result in the maximumor minimumincome. Employing a cost flow assumption, such as average-cost or FIFO, would reduce record-keeping costs. FIFO would result in higher income, but average-cost would reduceincometaxes.

6-40

Copyright © 2011 John Wiley & Sons, Inc.   Weygandt, IFRS, 1/e, Solutions Manual   (For Instructor Use Only)

PROBLEM6-7A

(a)

UTLEYLTD. CondensedIncomeStatement For the Year EndedDecember31, 2011 FIFO Sales.............................................................. Cost of goodssold Beginninginventory.................................. Cost of goodspurchased........................... Cost of goodsavailablefor sale.................. Endinginventory....................................... Cost of goodssold.................................... Grossprofit..................................................... Operatingexpenses......................................... Incomebeforeincometaxes.............................. Incometax expense(28%)................................. Net income......................................................

AverageCost

£665,000

£665,000

35,000 504,500 539,500 133,500a 406,000 259,000 130,000 129,000 36,120 £ 92,880

35,000 504,500 539,500 124,500b 415,000 250,000 130,000 120,000 33,600 £ 86,400

a

(25,000@ £4.50)+ (5,000@ £4.20)= £133,500. £539,500÷ 130,000units = £4.15per unit; 30,000@ £4.15= £124,500.

b

(b) Answersto questions: 1.

The FIFO method produces the most meaningful inventory amount for the statement of financial position because the units are costed at the most recent purchaseprices.

2.

The FIFO methodis most likely to approximateactual physical flow becausethe oldestgoodsare usuallysold first to minimizespoilageand obsolescence.

3.

There will be £2,520 additional cash available under average-cost because incometaxesare£33,600underaverage-costand£36,120 underFIFO.

Copyright © 2011 John Wiley & Sons, Inc.   Weygandt, IFRS, 1/e, Solutions Manual   (For Instructor Use Only)

6-41

PROBLEM6-7A (Continued) Answerin businessletter form: DearUtleyLtd. After preparing the comparative condensed income statements for 2011 under FIFOand average-cost methods,we havefoundthe following: The FIFO method produces the most meaningful inventory amount for the statement of financial position because the units are costed at the most recent purchaseprices. This methodis most likely to approximateactual physical flow because the oldest goods are usually sold first to minimize spoilage and obsolescence. There will be £2,520 additional cash available under average-cost because incometaxesare£33,600underaverage-costand£36,120underFIFO.

Sincerely,

6-42

Copyright © 2011 John Wiley & Sons, Inc.   Weygandt, IFRS, 1/e, Solutions Manual   (For Instructor Use Only)

*PROBLEM6-8A (a) Sales: Date January 6 January 9 (return) January10 January30 Total sales (1) FIFO Date

150 units @ $40 (10 units @ $40) 50 units @ $45 110 units @ $50

Purchases

$ 6,000 (400) 2,250 5,500 $13,350

Costof GoodsSold

January 1 January January January January

2 6 9 9

(100 @ $21)

(150 @ $17) (–10 @ $17) ( 75 @ $24)

January10 January10

(–15 @ $24)

January23

(100 @ $28)

January30

$2,100 $2,550 ($ 170)

$1,800

($ 360) ( 10 @ $17) ( 40 @ $21)

}

$1,010

$2,800

( 60 @ $21) ( 50 @ $24)

}

$2,460

Balance (150 @ $17) (150 @ $17) (100 @ $21) (100 @ $21) ( 10 @ $17) (100 @ $21) ( 75 @ $24) ( 10 @ $17) (100 @ $21) ( 60 @ $24) ( 60 @ $21) ( 60 @ $24) ( 60 @ $21) ( 60 @ $24) (100 @ $28) ( 10 @ $24) (100 @ $28)

$2,550

}

$4,650 $2,100

} }

$4,070

$3,710

}

$2,700

}

$5,500

}

$3,040

$5,850

(i) Costof goodssold= $5,850.(ii) Endinginventory= $3,040.(iii) Grossprofit = $13,350– $5,850= $7,500.

Copyright © 2011 John Wiley & Sons, Inc.   Weygandt, IFRS, 1/e, Solutions Manual   (For Instructor Use Only)

6-43

*PROBLEM6-8A (Continued) (2) Moving-Average Date

Purchases

January 1 January 2 January 6 January 9 January 9 January10 January10 January23 January30

(100 @ $21)

( 75 @ $24) (–15 @ $24) (100 @ $28)

$4,650÷ 250 = $18.60 $3,846÷ 185 = $20.789

Cost of goodssold

$2,100 (150 @ $18.60) (–10 @ $18.60)

$2,790 ($ 186)

( 50 @ $20.506)

$1,025

(110 @ $23.914)

$2,631 $6,260

$1,800 ($ 360) $2,800

Balance (150 @ $17) (250 @ $18.60)a (100 @ $18.60) (110 @ $18.60) (185 @ $20.789)b (170 @ $20.506)c (120 @ $20.506) (220 @ $23.914)d (110 @ $23.914)

$2,550 $4,650 $1,860 $2,046 $3,846 $3,486 $2,461 $5,261 $2,630

$3,486÷ 170 = $20.506 $5,261÷ 220 = $23.914

a

c

b

d

(i) Cost of goodssold = $6,260.(ii) Endinginventory= $2,630.(iii) Grossprofit = $13,350– $6,260= $7,090. (b) Grossprofit: Sales Cost of goodssold Grossprofit Endinginventory

FIFO $13,350 5,850 $ 7,500 $ 3,040

Moving-Average $13,350 6,260 $ 7,090 $ 2,630

In a period of rising costs, the moving-average cost flow assumption results in the highest cost of goods sold and lowest gross profit. FIFO gives the lowest cost of goodssold andhighestgrossprofit. On the statement of financial position, FIFO gives the highest ending inventory (representing the most current costs); and average-cost gives the lowest ending inventory.

6-44

Copyright © 2011 John Wiley & Sons, Inc.   Weygandt, IFRS, 1/e, Solutions Manual   (For Instructor Use Only)

*PROBLEM6-9A (a) (1)

FIFO Date May 1 4 8

Costof GoodsSold

Purchases (7 @ $150)

$1,050 (4 @ $150)

(8 @ $170)

$600

$1,360 (3 @ $150) (2 @ $170)

12 15

Balance

(6 @ $185)

}

$790

$1,110

20

(3 @ $170)

25

(3 @ $170) (1 @ $185)

(2)

$510

}

$695

(7 @ $150) (3 @ $150) (3 @ $150) (8 @ $170) (6 @ $170) (6 @ $170) (6 @ $185) (3 @ $170) (6 @ $185)

$1,050 $ 450

}

$1,810 $1,020

} }

(5 @ $185)

$2,130 $1,620 $ 925

MOVING-AVERAGECOST Date May1 4 8 12 15 20 25

Cost of GoodsSold

Purchases (7 @ $150) (8 @ $170) (6 @ $185)

Balance

$1,050 (4 @ $150)

$600

(5 @ $164.55)

$823

(3 @ $174.75) (4 @ $174.75)

$524 $699

$1,360 $1,110

( 7 @ $150) ( 3 @ $150) (11 @ $164.55)* ( 6 @ $164.55) (12 @ $174.75)** ( 9 @ $174.75) ( 5 @ $174.75)

$1,050 $ 450 $1,810 $ 987 $2,097 $1,573 $ 874

*Average-cost = $1,810÷ 11 (rounded) **$2,097÷ 12

(b) 1. 2.

Thehighestendinginventoryis $925underthe FIFOmethod. Thelowestendinginventoryis $874underthe moving-average method.

Copyright © 2011 John Wiley & Sons, Inc.   Weygandt, IFRS, 1/e, Solutions Manual   (For Instructor Use Only)

6-45

*PROBLEM6-10A

(a) Net sales........................................... Cost of goodssold Beginninginventory.................. Net purchases........................... Add: Freight-in......................... Cost of goodspurchased........... Costof goodsavailable for sale.................................. Endinginventory....................... Cost of goodssold............. Grossprofit....................................... Grossprofit rate

=

February €300,000 € 4,500 €197,800 2,900 200,700 205,200 13,200 192,000 €108,000

€108,000 = 36% €300,000

(b) Net sales............................................................ Less: Estimatedgrossprofit (36%X €250,000)..................................... Estimatedcost of goodssold...............................

€250,000

Beginninginventory............................................ Net purchases..................................................... Add: Freight-in................................................... Cost of goodspurchased..................................... Cost of goodsavailablefor sale............................ Less: Estimatedcost of goodssold...................... Estimatedtotal cost of ending inventory........................................................ Less: Inventorynot lost (30%X €48,200)....................................... Estimatedinventorylost in fire (70%X €48,200)...............................................

€ 13,200

6-46

90,000 €160,000 €191,000 4,000 195,000 208,200 160,000 48,200 14,460 € 33,740

Copyright © 2011 John Wiley & Sons, Inc.   Weygandt, IFRS, 1/e, Solutions Manual   (For Instructor Use Only)

*PROBLEM6-11A

(a)

Sporting Goods Cost

Beginninginventory Purchases Purchasereturns Purchasediscounts Freight-in Goodsavailablefor sale Net sales Endinginventoryat retail

$ 47,360 675,000 (26,000) (12,360) 9,000 $693,000

Retail $ 74,000 1,066,000 (40,000)

1,100,000 (1,000,000) $ 100,000

Jewelry and Cosmetics Cost $ 39,440 741,000 (12,000) (2,440) 14,000 $780,000

Retail $ 62,000 1,158,000 (20,000)

1,200,000 (1,160,000) $ 40,000

Cost-to-retail ratio: SportingGoods—$693,000÷ $1,100,000= 63%. Jewelryand Cosmetics—$780,000÷ $1,200,000= 65%. Estimatedendinginventoryat cost: $100,000X 63%= $63,000—SportingGoods. $ 40,000X 65%= $26,000—Jewelryand Cosmetics. (b) SportingGoods—$95,000X 60%= $57,000. Jewelryand Cosmetics—$44,000X 64%= $28,160.

Copyright © 2011 John Wiley & Sons, Inc.   Weygandt, IFRS, 1/e, Solutions Manual   (For Instructor Use Only)

6-47

*PROBLEM6-12A

Cost of GoodsAvailablefor Sale Date Explanation October 1 BeginningInventory 9 Purchase 17 Purchase 25 Purchase Total EndingInventoryin Units: Units availablefor sale Sales(100+ 60 + 110) Units remainingin endinginventory

Units 60 120 70 80 330

Unit Cost €25 26 27 28

Total Cost €1,500 3,120 1,890 2,240 €8,750

330 270 60

EndingInventory October1 60 @ €25 = €1,500

6-48

Copyright © 2011 John Wiley & Sons, Inc.   Weygandt, IFRS, 1/e, Solutions Manual   (For Instructor Use Only)

PROBLEM6-1B

(a)

The sale will be recordedon February 26. The goods (cost, $800) should be excluded fromElms’February28 inventory.

(b)

Elms owns the goods once they are shipped on February 26. Include inventory of $480.

(c)

Include$650in inventory.

(d)

Excludethe itemsfromElm’sinventory.Title remainswith the consignor.

(e)

Title of the goodsdoes not transfer to Elm’s until March2. Excludethis amountfrom the February28 inventory.

(f)

Title to the goodsdoesnot transferto the customeruntil March2. The$200cost should be includedin endinginventory.

Copyright © 2011 John Wiley & Sons, Inc.   Weygandt, IFRS, 1/e, Solutions Manual   (For Instructor Use Only)

6-49

PROBLEM6-2B

(a) Date Oct. 1 3 9 19 25

COSTOF GOODSAVAILABLEFORSALE Explanation Units Unit Cost BeginningInventory 2,000 £7 Purchase 3,000 8 Purchase 3,500 9 Purchase 3,000 10 Purchase 3,500 11 Total 15,000

(b)

Total Cost £ 14,000 24,000 31,500 30,000 38,500 £138,000

FIFO (1) Date Oct. 25 19

EndingInventory Unit Units Cost 3,500 £11 100 10 3,600*

Total Cost £38,500 1,000 £39,500

(2) Cost of GoodsSold Cost of goods availablefor sale £138,000 Less: Ending inventory 39,500 Cost of goodssold £ 98,500

*15,000– 11,400= 3,600

Date Oct.

6-50

1 3 9 19

Proofof Cost of GoodsSold Units Unit Cost Total Cost 2,000 £7 £14,000 3,000 8 24,000 3,500 9 31,500 2,900 10 29,000 11,400 £98,500

Copyright © 2011 John Wiley & Sons, Inc.   Weygandt, IFRS, 1/e, Solutions Manual   (For Instructor Use Only)

PROBLEM6-2B (Continued) AVERAGECOST (1) EndingInventory (2) Cost of GoodsSold Cost of goodsavailable £138,000÷ 15,000= £9.20 for sale £138,000 Units Unit Cost 33,120 Total Cost Less: Endinginventory 3,600 £9.20 £33,120 Cost of goodssold £104,880 Proofof Costof GoodsSold 11,400units X £9.20= £104,880

(c) 1.

2.

FIFO results in the highest inventory amount for the statement of financial position,£39,500. Average-cost resultsin the highestcost of goodssold, £104,880.

Copyright © 2011 John Wiley & Sons, Inc.   Weygandt, IFRS, 1/e, Solutions Manual   (For Instructor Use Only)

6-51

PROBLEM6-3B

(a) Date 1/1 3/15 7/20 9/4 12/2

COSTOF GOODSAVAILABLEFORSALE Explanation Units Unit Cost BeginningInventory 150 $20 Purchase 400 23 Purchase 250 24 Purchase 350 26 Purchase 100 29 Total 1,250

(b)

FIFO (1) Date 12/2 9/4

Date 1/1 3/15 7/20 9/4

6-52

Total Cost $ 3,000 9,200 6,000 9,100 2,900 $30,200

EndingInventory Unit Units Cost 100 $29 150 26 250

Total Cost $2,900 3,900 $6,800

(2) Cost of GoodsSold Cost of goods availablefor sale $30,200 Less: Ending inventory 6,800 Cost of goodssold $23,400

Proofof Costof GoodsSold Unit Total Units Cost Cost 150 $20 $ 3,000 400 23 9,200 250 24 6,000 200 26 5,200 1,000 $23,400

Copyright © 2011 John Wiley & Sons, Inc.   Weygandt, IFRS, 1/e, Solutions Manual   (For Instructor Use Only)

PROBLEM6-3B (Continued) AVERAGECOST (1) EndingInventory (2) Cost of GoodsSold Cost of goodsavailable $30,200÷ 1,250= $24.16 for sale $30,200 Units Unit Cost 6,040 Total Cost Less: Endinginventory 250 $24.16 $6,040 Cost of goodssold $24,160 Proofof Costof GoodsSold 1,000units X $24.16= $24,160

(c) 1. 2.

FIFOresultsin the highestinventoryamount,$6,800,as shownin (b) above. Average-cost produces the highest cost of goods sold, $24,160 as shown in (b) above.

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6-53

PROBLEM6-4B (a)

MONERINC. CondensedIncomeStatements For the Year EndedDecember31, 2011 FIFO Sales............................................................ Cost of goodssold Beginninginventory................................ Cost of goodspurchased......................... Cost of goodsavailablefor sale................ Endinginventory..................................... Cost of goodssold.................................. Grossprofit................................................... Operatingexpenses....................................... Incomebeforeincometaxes............................ Incometaxes(40%)........................................ Net income....................................................

AverageCost

€747,000

€747,000

16,000 468,000 484,000 48,600a 435,400 311,600 130,000 181,600 72,640 €108,960

16,000 468,000 484,000 43,992b 440,008 306,992 130,000 176,992 70,797 €106,195

a

18,000X €2.70 = €48,600. €484,000÷ 198,000units= €2.444/unit 18,000X €2.444= €43,992

b

(b) 1.

The FIFO method produces the most meaningful inventory amount for the statement of financial position because the units are costed at the most recent purchaseprices.

2.

The FIFO methodis most likely to approximateactual physical flow becausethe oldestgoodsare usuallysold first to minimizespoilageand obsolescence.

3.

There will be €1,843 additional cash available under average-cost because incometaxesare €70,797underaverageand €72,640underFIFO.

6-54

Copyright © 2011 John Wiley & Sons, Inc.   Weygandt, IFRS, 1/e, Solutions Manual   (For Instructor Use Only)

PROBLEM6-5B

(a) Cost of GoodsAvailablefor Sale Date Explanation June 1 BeginningInventory June 4 Purchase June18 Purchase June18 Purchasereturn June28 Purchase Total EndingInventoryin Units: Unitsavailablefor sale Sales(110 – 15 + 65) Unitsremainingin endinginventory

Units 40 135 55 (10) 30 250 250 160 90

Date June10 11 25

Unit Cost $40 44 46 46 50

SalesRevenue Unit Units Price 110 $70 (15) 70 65 75 160

Total Cost $ 1,600 5,940 2,530 (460) 1,500 $11,110

Total Sales $ 7,700 (1,050) 4,875 $11,525

(1) FIFO (i) EndingInventory June28 30 @ $50 18 45 @ $46 4 15 @ $44 90

(iii) GrossProfit Salesrevenue Cost of goodssold Grossprofit

$1,500 2,070 660 $4,230

$11,525 6,880 $ 4,645

(ii) Cost of GoodsSold Cost of goodsavailablefor sale Less: Endinginventory Cost of goodssold

$11,110 4,230 $ 6,880

(iv) GrossProfit Rate Grossprofit $ 4,645 = 40.3% Net sales $11,525

Copyright © 2011 John Wiley & Sons, Inc.   Weygandt, IFRS, 1/e, Solutions Manual   (For Instructor Use Only)

6-55

PROBLEM6-5B (Continued) (2) Average-Cost Cost of goodsavailablefor sale Unitsavailablefor sale

Weighted-averagecost per unit:

$11,110 = $44.44 250 (i)

EndingInventory 90 units @$44.44

(iii) GrossProfit Salesrevenue Cost of goodssold Grossprofit

$4,000

$11,525 7,110 $ 4,415

(ii) Cost of GoodsSold Cost of goodsavailable for sale Less: Endinginventory Cost of goodssold (iv) GrossProfit Rate Grossprofit $ 4,415 Net sales $11,525

$11,110 4,000 $ 7,110

= 38.3%

(b) In this period of rising prices, average-cost gives the highest cost of goods sold and the lowest gross profit. FIFO gives the lowest cost of goods sold and the highest grossprofit.

6-56

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PROBLEM6-6B (a)

MONDELLOINC. IncomeStatement(partial) For the MonthEndedMarch31, 2011 (1) Salesrevenuea Beginninginventory Purchasesb Cost of goodsavailablefor sale Endinginventoryc Cost of goodssold Grossprofit

(2)

(3) AverageCost $8,560 1,200 6,505

SpecificIdentification $8,560 1,200 6,505

FIFO $8,560 1,200 6,505

7,705 2,735 4,970 $3,590

7,705 2,936 4,769 $3,791

7,705 2,660 5,045 $3,515

450 @ $.60 850 @ $.65 1,100@ $.72 1,400@ $.80 3,800liters

$ 270.00 552.50 792.00 1,120.00 $2,734.50

(a)

(2,200@ $1.05)+ (5,000@ $1.25) (2,500@ $ .65) + (4,000@ $.72) + (2,500@ $.80) (c) Specificidentificationendinginventoryconsistsof: (b)

Beginninginventory(2,000liters – 1,100– 450) March3 purchase (2,500liters – 1,100– 550) March10 purchase (4,000liters – 2,900) March20 purchase (2,500liters – 1,100) FIFOendinginventoryconsistsof: March20 purchase March10 purchase

2,500@ $.80 1,300@ $.72 3,800liters

$2,000 936 $2,936

Average-cost endinginventoryconsistsof: 3,800liters @ $.700= 2,660 Weighted-averagecost per unit: $7,705 (2,000+ 2,500+ 4,000+ 2,500)

Cost of goodsavailablefor sale Units availablefor sale = $.700/liter

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6-57

PROBLEM6-6B (Continued) (b) Companiescan choosea cost flow methodthat producesthe highest possiblecost of goodssold and lowest grossprofit to justify price increases.In this example,averagecost producesthe lowestgrossprofit and best supportto increasesellingprices.

6-58

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PROBLEM6-7B (a)

WINTERTHURCO. CondensedIncomeStatement For the Year EndedDecember31, 2011 Average-Cost Sales.......................................................... Cost of goodssold Beginninginventory............................. Cost of goodspurchased...................... Cost of goodsavailablefor sale............. Endinginventory.................................. Cost of goodssold............................... Grossprofit................................................ Operatingexpenses..................................... Incomebeforeincometaxes......................... Incometax expense(30%)............................ Net income.................................................

FIFO CHF700,000

CHF700,000

45,000 532,000 577,000 168,000a 409,000 291,000 140,000 151,000 45,300 CHF105,700

45,000 532,000 577,000 157,350b 419,650 280,350 140,000 140,350 42,105 CHF 98,245

a

(30,000@ CHF5.60)= CHF168,000. CHF577,000÷ 110,000units = CHF5.245per unit; 30,000@ CHF5.245= CHF157,350.

b

(b) Answersto questions: 1.

The FIFO method produces the most meaningful inventory amount for the statement of financial position because the units are costed at the most recent purchaseprices.

2.

The FIFO method is most likely to approximate actual physical flow becausethe oldestgoodsareusuallysoldfirstto minimizespoilageandobsolescence.

3.

There will be CHF3,195 additional cash available under average-cost because incometaxesare CHF42,105underaverageandCHF45,300underFIFO.

Copyright © 2011 John Wiley & Sons, Inc.   Weygandt, IFRS, 1/e, Solutions Manual   (For Instructor Use Only)

6-59

*PROBLEM6-8B (a) Sales: January 8 January10 (return) January20

(1) FIFO Date

110 units @ $28 (10 units @ $28) 80 units @ $32 180 units

Purchases

$3,080 (280) 2,560 $5,360

Costof GoodsSold

January 1 January 5

(150 @ $18)

(100 @ $15) ( 10@$18) (–10 @ $18)

January10 January15

( 55 @ $20)

$1,100

January16

( –5 @ $20)

($ 100)

January20 January25

(100 @ $15) (100 @ $15) (150 @ $18)

$2,700

January 8

(80 @ $18) ( 30 @ $22)

Balance

}

$1,500

}

$4,200

$1,680

(140 @ $18)

$2,520

($ 180)

(150 @ $18) (150 @ $18) ( 55 @ $20) (150 @ $18) ( 50 @ $20) ( 70 @ $18) ( 50 @ $20) ( 70 @ $18) ( 50 @ $20) ( 30 @ $22)

$2,700

$1,440

$ 660

} } }

}

$3,800 $3,700 $2,260 $2,920

$2,940

(i) Cost of goodssold = $2,940. (ii) Ending inventory = $2,920. (iii) Gross profit = $5,360 – $2,940= $2,420.

6-60

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*PROBLEM6-8B (Continued) (2) Moving-AverageCost Date January 1 January 5 January 8 January10 January15 January16 January20 January25

Purchases (150 @ $18)

( 55 @ $20) ( –5 @ $20) ( 30 @ $22)

Cost of GoodsSold

$2,700 (110 @ $16.80) (–10 @ $16.80)

$1,848 ($ 168)

( 80 @ $17.60)

$1,408

$1,100 ($ 100) $ 660

Balance (100 @ $15) (250 @ $16.80)a (140 @ $16.80) (150 @ $16.80) (205 @ $17.658)b (200 @ $17.60)c (120 @ $17.60) (150 @ $18.48)d

$1,500 $4,200 $2,352 $2,520 $3,620 $3,520 $2,112 $2,772

$3,088 *rounded a $4,200÷ 250 = $16.80 b $3,620÷ 205 = $17.659

$3,520÷ 200 = $17.60 $2,772÷ 150 = $18.48

c

d

(i) Cost of goodssold = $3,088. (ii) Endinginventory= $2,772. (iii) Gross profit = $5,360 – $3,088= $2,272.

(b) Grossprofit: Sales Cost of goodssold Grossprofit Endinginventory

FIFO $5,360 2,940 $2,420 $2,920

Moving-Average-Cost $5,360 3,088 $2,272 $2,772

In a period of rising costs, the moving-average cost flow assumption results in the highestcost of goodssold and lowestgrossprofit. FIFOgivesthe lowestcost of goods sold andhighestgrossprofit. On the statement of financial position, FIFO gives the highest ending inventory (representing the most current costs); and moving-average cost results in the lowest endinginventory.

Copyright © 2011 John Wiley & Sons, Inc.   Weygandt, IFRS, 1/e, Solutions Manual   (For Instructor Use Only)

6-61

*PROBLEM6-9B (a) (1)

FIFO Date

Purchases

July

1 6 11

Costof GoodsSold

(5 @ HK$120)

HK$ 600

(7 @ HK$136)

HK$ 952

(4 @ HK$120)

(1 @ HK$120) (2 @ HK$136)

14 21

(8 @ HK$147)

HK$480

}

HK$392

HK$1,176

27

(5 @ HK$136) (1 @ HK$147)

(2)

}

HK$827

Balance (5 @ HK$120) (1 @ HK$120) (1 @ HK$120) (7 @ HK$136) (5 @ HK$136) (5 @ HK$136) (8 @ HK$147)

HK$ 600 HK$ 120

}

HK$1,072 HK$ 680

}

(7 @ HK$147)

HK$1,856 HK$1,029

MOVING-AVERAGECOST Date July

1 6 11 14 21 27

Purchases (5 @ HK$120) (7 @ HK$136) (8 @ HK$147)

Cost of GoodsSold HK$ 600 (4 @ HK$120)

HK$480

(3 @ HK$134)

HK$402

(6 @ HK$142)

HK$852

HK$ 952 HK$1,176

Balance ( 5 @ HK$120) ( 1 @ HK$120) ( 8 @ HK$134)* ( 5 @ HK$134) (13 @ HK$142)** ( 7 @ HK$142)

HK$ 600 HK$ 120 HK$1,072 HK$ 670 HK$1,846 HK$ 994

*HK$1,072÷ 8 = HK$134 **HK$1,846÷ 13 = HK$142

(b) Thehighestendinginventoryis HK$1,029underthe FIFOmethod.

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Copyright © 2011 John Wiley & Sons, Inc.   Weygandt, IFRS, 1/e, Solutions Manual   (For Instructor Use Only)

*PROBLEM6-10B

(a) Net sales ........................................................ Cost of goodssold Beginninginventory................................... Purchases................................................. Less: Purchasereturnsand allowances..................................... Purchasediscounts........................ Add: Freight-in......................................... Cost of goodspurchased............................ Cost of goodsavailablefor sale................... Endinginventory........................................ Cost of goodssold............................. Grossprofit....................................................... Grossprofit rate

(b)

=

$240,000 $600,000

November $600,000 $ 32,000 $377,000 13,300 8,500 8,800 364,000 396,000 36,000 360,000 $240,000

= 40%

Net sales..................................................... Less: Estimatedgrossprofit (40%X $700,000).............................. Estimatedcost of goodssold.........................

$700,000

Beginninginventory..................................... Purchases................................................... Less: Purchasereturnsand allowances....................................... Purchasediscounts.......................... Net purchases.............................................. Freight-in.................................................... Cost of goodspurchased.............................. Cost of goodsavailablefor sale..................... Less: Estimatedcost of goods sold................................................ Estimatedinventorylost in fire.......................

$ 36,000

280,000 $420,000

$424,000 $14,900 9,500

24,400 399,600 9,900 409,500 445,500 420,000 $ 25,500

Copyright © 2011 John Wiley & Sons, Inc.   Weygandt, IFRS, 1/e, Solutions Manual   (For Instructor Use Only)

6-63

*PROBLEM6-11B

(a)

Hardcovers Cost Beginninginventory Purchases Freight-in Purchasediscounts Goodsavailablefor sale Net sales Endinginventoryat retail

€ 420,000 2,135,000 24,000 (44,000) €2,535,000

Retail € 700,000 3,200,000

3,900,000 3,100,000 € 800,000

Paperbacks Cost € 280,000 1,155,000 12,000 (22,000) €1,425,000

Retail € 360,000 1,540,000

1,900,000 1,570,000 € 330,000

Cost-to-retail ratio: Hardcovers—€2,535,000÷ €3,900,000= 65%. Paperbacks—€1,425,000÷ €1,900,000= 75%. Estimatedendinginventoryat cost: €800,000X 65%= €520,000—Hardcovers. €330,000X 75%= €247,500—Paperbacks. (b) Hardcovers—€790,000X 65%= €513,500. Paperbacks—€335,000X 75%= €251,250.

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Copyright © 2011 John Wiley & Sons, Inc.   Weygandt, IFRS, 1/e, Solutions Manual   (For Instructor Use Only)

*PROBLEM6-12B

(a) Cost of GoodsAvailablefor Sale Date Explanation June 1 BeginningInventory June 4 Purchase June18 Purchase June18 Purchasereturn June28 Purchase Total

Units 40 135 55 (10) 30 250

EndingInventoryin Units: Unitsavailablefor sale Sales(110 – 15 + 65) Unitsremainingin endinginventory

250 160 90

EndingInventory June1 40 @ $40 4 50 @ 44 90

Unit Cost $40 44 46 46 50

Total Cost $ 1,600 5,940 2,530 (460) 1,500 $11,110

$1,600 2,200 $3,800

Copyright © 2011 John Wiley & Sons, Inc.   Weygandt, IFRS, 1/e, Solutions Manual   (For Instructor Use Only)

6-65

BYP6-1

(a)

FINANCIALREPORTINGPROBLEM

InventoryAmounts December31, 2008 December31, 2007 £767million £821million

(b) Dollar amountof inventorychange– £54 milliondecrease (£821million– £767million) Percentchangein inventoriesfrom2007to 2008 6.58%

(£821million– £767million) £821million

Inventoryas a percentof currentassets December31, 2008– 29.11%(£767million÷ £2,635million) (c)

In Cadbury’s Note 1 “Nature of operationsand accountingpolicies Cadburyindicates that it values its inventory at the lower of average cost or estimated realizable value. As a result, it usesthe average-cost methodas its cost flowassumption.

(d) In Cadbury’s Note 3 “Trading costs”, it indicates that cost of sales is £2,870 million. Revenueis £5,384 and therefore the ratio of cost to sales is 53.31%(£2,870 million ÷ £5,384).

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Copyright © 2011 John Wiley & Sons, Inc.   Weygandt, IFRS, 1/e, Solutions Manual   (For Instructor Use Only)

BYP6-2

(a)

COMPARATIVEANALYSISPROBLEM

1.

InventoryTurnover Cadbury

3.6 times

Nestlé

5.1 times

2.

Daysin Inventory Cadbury Nestlé

101 days 72 days

Computation £2,870million (£821million+ £767) 2 CHF47,339million (CHF9,272million+ CHF9,342 2 Computation 365 days 3.6 times 365 days 5.1 times

(b) Nestlé has a faster inventory turnover and as a result a lower number of days in inventory. As a result, it appears that Nestle is managing its inventory more effectively than Cadbury. It should be noted that Cadbury may be attempting to increase its inventoryturnoveras it decreasedits inventorymorethan6% from2007to 2008.

Copyright © 2011 John Wiley & Sons, Inc.   Weygandt, IFRS, 1/e, Solutions Manual   (For Instructor Use Only)

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BYP6-3

EXPLORINGTHEWEB

The followingresponsesare basedon the 2008annualreport: (a)

$1,235,000,000,as of July 26, 2008.

(b) $1,235,000,000– $1,322,000,000= $87,000,000decrease. (c)

67.4 percent($833÷ $1,235).

(d) Lowerof costor marketusingstandardcost, whichapproximatesFIFO.

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Copyright © 2011 John Wiley & Sons, Inc.   Weygandt, IFRS, 1/e, Solutions Manual   (For Instructor Use Only)

BYP6-4

(a)

DECISIONMAKINGACROSSTHEORGANIZATION

1.

SalesJanuary1–March31............................. Cashsales4/1–4/10($18,500X 40%)............... Acknowledgedcredit sales4/1–4/10............... Salesmadebut unacknowledged................... Salesas of April 10.......................................

$180,000 7,400 37,000 5,600 $230,000

2.

PurchasesJanuary1–March31...................... Cashpurchases4/1–4/10............................... Credit purchases4/1–4/10............................. Less: Itemsin transit................................... Purchasesas of April 10...............................

$ 94,000 4,200

*(b) Net sales............................................................ Cost of goodssold Inventory,January1..................................... Cost of goodspurchased.............................. Cost of goodsavailablefor sale..................... Inventory,December31................................ Cost of goodssold....................................... Grossprofit......................................................... Grossprofit rate.................................................. Averagegrossprofit rate..............................

$12,400 1,600

10,800 $109,000

2010 $600,000

2009 $480,000

60,000 404,000 464,000 80,000 384,000 $216,000

40,000 356,000 396,000 60,000 336,000 $144,000

36%

30% 33%

*(c) Sales......................................................................................... Less: Grossprofit ($230,000X 33%).............................................. Cost of goodssold......................................................................

$230,000 75,900 $154,100

Inventory,January1.................................................................... Purchases.................................................................................. Cost of goodsavailablefor sale.................................................... Cost of goodssold...................................................................... Estimatedinventoryat timeof fire................................................. Less: Inventorysalvaged............................................................ Estimatedinventoryloss..............................................................

$ 80,000 109,000 189,000 154,100 34,900 17,000 $ 17,900

Copyright © 2011 John Wiley & Sons, Inc.   Weygandt, IFRS, 1/e, Solutions Manual   (For Instructor Use Only)

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BYP6-5

COMMUNICATIONACTIVITY

MEMO To: From:

JaniceLemay,President Student

Re:

2010endinginventoryerror

As you know, 2010 ending inventory was overstated by $1 million. Of course, this error will cause2010 net incometo be incorrectbecausethe endinginventoryis usedto compute2010 costof goodssold.Sincetheendinginventoryis subtractedin thecomputationof costof goods sold, an overstatement of ending inventory results in an understatement of cost of goods sold andthereforean overstatementof net income. Unfortunately, unless corrected, this error will also affect 2011 net income. The 2010 ending inventory is also the 2011 beginning inventory. Therefore, 2011 beginning inventory is also overstated,whichcausesan overstatementof cost of goodssold and an understatementof 2011net income.

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Copyright © 2011 John Wiley & Sons, Inc.   Weygandt, IFRS, 1/e, Solutions Manual   (For Instructor Use Only)

BYP6-6

(a)

ETHICSCASE

The higher cost of the items ordered, received, and on hand at year-end will be included in cost of goods sold, thereby lowering current year’s income and income taxes. If the purchaseat year-end had beenmadein the next year, the next year’s cost of goods sold would have absorbed the higher cost. Next year’s income will be increased if unit purchases (next year) are less than unit sales (next year). This is because the lower costs carried from the earlier year as inventory will be charged to next year’scost of goodssold. Therefore,next year’sincometaxeswill increase.

(b) No. Thepresidentwouldnot havegiventhe samedirectivebecausethe purchaseunder FIFOwouldhavehad no effect on net incomeof the currentyear. (c)

Theaccountanthas no groundsfor not orderingthe goodsif the presidentinsists. The purchaseis legal and ethical.

Copyright © 2011 John Wiley & Sons, Inc.   Weygandt, IFRS, 1/e, Solutions Manual   (For Instructor Use Only)

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