Inventory Solution Manual

Chapter 7
Merchandise Inventories and

Cost of Sales
Questions
1. Incidental costs often are ignored in pricing an inventory because the expense of
computing costs on such a precise basis usually outweighs any benefit gained from the
extra accuracy. The principle of materiality permits such practices when the effect on the
financial statements is not significant.
2. a. First items into the inventory are assumed to be the first items sold.
b. Last items into the inventory are assumed to be the first items sold.
c. The invoice price, less trade discounts, plus any additional incidental costs to put
goods into place and condition for sale.
3. LIFO will result in the lower cost of goods sold because the more recent costs are used.
4. Merchandise inventory is disclosed on the balance sheet as a current asset. It also may
appear in the income statement as part of the calculation of cost of goods sold.
5. No, changing the inventory pricing method each period would violate the accounting
principle of consistency.
6. A change from one acceptable method to another is allowed if the company justifies the
change as an improvement in financial reporting.
7. The full-disclosure principle requires that the nature of the change, justification for the
change and the effect of the change on net income be disclosed in the notes to the
companys financial statements.
8. The principle of conservatism says when faced with a choice of two or more equally
likely amounts, the least optimistic value should be selected as is the case with lower of
cost or market for inventory valuation.
9. Market can mean either net realizable value or replacement cost.
10. An inventory error that causes an understatement (or overstatement) of net income one
accounting period, if not corrected, will cause an overstatement (or understatement) the
next. Therefore, since the understatement (overstatement) of one period offsets the
overstatement (understatement) of the next, such errors are said to correct themselves.
11. Many people make important decisions based on the fluctuations in a companys net
income from period to period. Therefore, inventory errors should not be permitted to cause
such fluctuations.
12. WestJets inventory would be equivalent to 0.25% of total assets. This is not
merchandise inventory because WestJet is not a merchandiser.
13. Leons cost of goods sold figure for the year ended December 31, 2002 is $261,265,000.
Copyright 2005 by McGraw-Hill Ryerson Limited. All rights reserved.

Solutions Manual for Chapter 7
507
QUICK STUDY
Quick Study 7-1
1.
2.
The title will pass at the destination, which is Stark Companys receiving dock.
Carefree should show the $500 in its inventory at year-end as Carefree retains title
until the goods reach Stark Company.
The consignor is Carefree Company. The consignee is Stark Company. The consignor,
Carefree Company, should include the consigned goods in inventory.
Quick Study 7-2

1,500 30 + 250 + 70 = 1,790 units in ending inventory
Quick Study 7-3
Cost ....................................
Add:
Transportation-In ..............
Import duties .....................
Insurance ...........................
Inventory Cost ...................
$3,000
150
200
50
$3,400
Quick Study 7-4

$37,500 + $1,200 + $150 + $490 = $39,340
Quick Study 7-5
Beginning Inventory ........................
Add:
1st week purchase ...........................
2nd week purchase..........................
3rd week purchase...........................
4th week purchase...........................
Units Available ..................
Cost of Goods Available for Sale ...
10 units @ $50
$ 500
10 units @ $51
10 units @ $52
10 units @ $55
10 units @ $60
50 units
$ 510
520
550
600

508
$2,680
Fundamental Accounting Principles, Eleventh Canadian Edition
Quick Study 7-6

(a) FIFO perpetual
Date
Purchases
Unit
Units
Cost
Jan. 1 Beginning inventory
310 @ $3.00 =
9
75 @
25
100 @
28
Total
485
Sales (at cost)

Total
Cost
Units
Inventory Balance
Cost of
Goods
Sold
Unit
Cost
$930.00
310
310
$3.20 =
$240.00
75
310
$3.35 =
$335.00
75
100
310 @ $3.00 = $
930.00
40
35 @ 3.20 =
112.00 100
$1,505.00 345
$1,042.00 140
Cost of goods available for sale
Unit
Cost
Units
Cost of goods sold
@
@
@
@
@
@
@
@
$3.00
$3.00
3.20
$3.00
3.20
3.35
$3.20
3.35
Total
Cost
=
=
=
=
=
=
=
=
$ 930.00
$ 930.00
240.00
$ 930.00
240.00
335.00
$ 128.00
335.00
$463.00
Ending inventory
(b) LIFO perpetual

Date
Purchases
Unit
Units
Cost
310 @ $3.00 =
Sales (at cost)

Total
Cost
75 @ $3.20 =
$240.00
25
100 @ $3.35 =
$335.00
Total
485
Cost of
Goods
Sold
Units
$930.00
28
Units
Unit
Cost
Inventory Balance
310
310
75
310
75
100
100 @ $3.35 = $ 335.00

75 @ 3.20 =
240.00
170 @ 3.00 =
510.00
$1,505.00 345
$1,085.00
Cost of goods sold

Unit
Cost
Total
Cost
@ $3.00 = $ 930.00
@ $3.00 = $ 930.00
@ 3.20 =
240.00
@ $3.00 = $ 930.00
@ 3.20 =
240.00
@ 3.35 =
335.00
140 @ $3.00 = $ 420.00

140
$420.00
+
Ending inventory
509
Quick Study 7-6 (continued)

(c) Moving weighted average perpetual
Inventory Balance
Date
Purchases
Unit
Units
Cost
Beginning inventory
Jan. 1 310 @ $3.00 =
9
75 @ $3.20 =
25
100 @ $3.35 =
Sales (at cost)

Total
Cost
310
$3.00
$930.00
385
$3.04
$1,170.00
485
$3.10
$1,505.00
140
140
$3.11*
$435.50
$435.50
$335.00
$1,505.00
$3.10 =
345
=
$1,069.50
$1,069.50
Cost of goods sold
Inventory Balance
Calculations
Total
Cost
$240.00
345 @
485
(b)
(b) (a)
Total Average
Units Cost/Unit
$930.00
28
Total
Cost of
Goods
Sold
Unit
Cost
Units
(a)
310
75 @ $3.20 =
385
385
100 @ $3.35 =
485
485
345 @ $3.10 =
140
$ 930.00
240.00
$1,170.00
$1,170.00
335.00
$1,505.00
$1,505.00
1,069.50
$ 435.50
Ending inventory
* cost/unit changed due to rounding
Quick Study 7-7

Date
Purchases
Unit
Units
Cost
310 @ $3.00 =
Sales (at cost)

Total
Cost
75 @
$3.20 =
$240.00
25
100 @
$3.35 =
$335.00
Total
485
Cost of
Goods
Sold
Unit
Cost
250 @ $3.00 = $ 750.00

50 @ 3.20 =
160.00
45 @ 3.35 =
150.75
$1,505.00 345
$1,060.75
Cost of goods sold

510
Unit
Cost
Units
$930.00
28
Units
Inventory Balance
310
310
75
310
75
100
60
25
55
140
@
@
@
@
@
@
@
@
@
$3.00
$3.00
3.20
$3.00
3.20
3.35
$3.00
3.20
3.35
Total
Cost
=
=
=
=
=
=
=
=
=
$ 930.00
$ 930.00
240.00
$ 930.00
240.00
335.00
$ 180.00
80.00
184.25
$ 444.25
Ending inventory
Quick Study 7-8

a.
LIFO
b.
LIFO
c.
FIFO
d. Specific identification
Quick Study 7-9

a. and b.
Per Unit
Inventory
Items
Aprons
Bottles
Candles
Units on
Hand
Cost
9
$6.00
12
3.50
25
8.00
Market
$5.50
4.25
7.00
Total
Cost
$ 54.00
42.00
200.00
$296.00
Total
Market
$ 49.50
51.00
175.00
$275.50
LCM applied to:

a.
b.
Inventory
Each
as a Whole
Product
$ 49.50
42.00
175.00
$275.50
$266.50
c.
2005
Dec. 31
Cost of Goods Sold.............................................

Merchandise Inventory ..................................
To write inventory down to market.
20.50
20.50
Quick Study 7-10

a.
Understates cost of goods sold.
b. Overstates gross profit.

c.
Overstates 2005 net income.
d. Understates 2006 net income.

e.
The overstated net income for 2005 and the understated net income for 2006 combine
to a correct total income for the two year period.
f.
The error in 2005 will not affect years subsequent to 2006.
Quick Study 7-11

Goods available for sale:
Inventory, January 1 ..................................................
Purchases (net) ..........................................................
Goods available for sale............................................
Less: Estimated cost of goods
sold [$675,000 (1 42%)]........................................
Estimated September 10 inventory
destroyed in the fire...................................................
$180,000
342,000
$522,000
391,500
$130,500
511
Quick Study 7-12

a.
Since gross profit for prior periods has been 30%, then Cost of Goods Sold must be
70%. So, 70% x $565,000 net sales for July = $395,500 estimated cost of goods sold
for July.
Julys beginning inventory (Junes ending inventory) of........
Plus: July purchases .................................................................
Equals: Cost of goods available for sale .................................
Less: Estimated cost of goods sold for July...........................
Equals: Estimated ending inventory for July ..........................
$ 65,000
385,500
$450,500
395,500
$ 55,000
b. The estimated shrinkage is $7,000 ($55,000 - $48,000).

Quick Study 7-13
Goods available for sale..............................................................
Deduct: Net sales at retail ..........................................................
Ending inventory at retail ............................................................
At Cost
$67,600
At Retail
$104,000
82,000
$ 22,000
Cost to retail ratio: $67,600 $104,000 = 65%

Estimated ending inventory at cost: $22,000 65% =
$ 14,300
Quick Study 7-14

Beginning inventory .......................................
Cost of goods purchased ..............................
Goods available for sale ................................
Less: Net sales at retail.................................
Ending inventory at retail...............................
Cost to retail ratio ...........................................
Estimated ending inventory...........................
1. 469,950/723,000 = .65 or 65%
2. 532,440/783,000 = .68 or 68%
September
Cost
Retail
$ 74,950 $112,000
395,000 611,000
$469,950 $723,000
614,000
$109,000
x 65%1
$ 70,850

512
October
Cost
Retail
$ 70,850 $109,000
461,590 674,000
$532,440 $783,000
700,000
$ 83,000
x 68%2
$ 56,440
*Quick Study 7-15

a) FIFO periodic
Ending Inventory = 100 @ $3.35 = $335
40 @ $3.20 = $128
= $463 Cost of Ending Inventory
b) LIFO periodic
Ending Inventory = 140 @ $3.00 = $420
= $420 Cost of Ending Inventory
c) Average cost periodic

$1,505/485 units = $3.10 average cost per unit
140 units in ending inventory @ $3.10/unit = $434 Cost of Ending Inventory
*Quick Study 7-16
Both companies are improving their turnover rates for merchandise. However, Huff
Company has a higher turnover which suggests lower levels of inventory selling more
rapidly than Mesa Company. It appears that Huff Company is managing inventory more
efficiently provided they have enough merchandise to satisfy the needs of their
customers (not turning them away because of lack of adequate inventory).

513
*Quick Study 7-17

a) Days sales in inventory
2005:
$56,195
$410,225
2004:
$82,500
$344,500
365
= 50.00 days
365
= 87.41 days
The change from 2004 to 2005 is generally considered to be favourable.

b) Merchandise turnover
2005:
$410,225
($56,195 + $82,500)/2
2004:
$344,500
($82,500 + $111,500)/2
= 5.92 times
= 3.55 times
The change from 2004 to 2005 is generally considered to be favourable.

514
EXERCISES
Exercise 7-1 (45 minutes)
(a) FIFO perpetual
Date
Purchases
Sales (at cost)
Unit
Total
Unit
Units
Cost
Cost
Units
Cost
100 @ $10.00 =
$1,000
10
90 @ $10.00
Mar. 14
250 @ $15.00 =
30
Oct. 5
Total
400 @ $20.00 =
750
Cost of
Goods
Sold
Units
900
10 @ $10.00
130 @ 15.00
=
=
100
1,950
120 @ $15.00
180 @ 20.00
$12,750 530
=
=
$ 1,800
3,600
$8,350
$3,750
15
Jul.
Inventory Balance
$8,000
Cost of goods sold
100
10
10
250
Unit
Cost
@ $10.00
@ $10.00
@ $10.00
@ 15.00
Total
Cost
= $
= $
= $
=
1,000
100
100
3,750
120 @ $15.00 = $
120 @ $15.00 = $
400 @ 20.00 =
1,800
1,800
8,000
220 @ $20.00 = $ 4,400

220
$4,400
Ending inventory
Gross profit calculation under FIFO:

Sales (530 units $40) .........
Cost of goods sold ...............
Gross profit ...........................
$21,200
8,350
$12,850

515
Exercise 7-1 (continued)

(b) Moving weighted-average perpetual
Inventory Balance
Date
Jan.
Purchases
Unit
Units
Cost
Beginning inventory
1
100 @ $10 =
Sales (at cost)

Total
Cost
14
Oct.
Total
30
5
140 @ $14.81
400 @ $20 =
Total
Units
Average
Cost/Unit
Total
Cost
$10.00 $
900.00
10
$10.00 $
100.00
260
$14.81 $
3,850.00
120
$14.81 $
1,776.60
520
$18.80 $
9,776.60
$ 2,073.40
$8,000
300 @ $18.80
$ 5,640.00
750
$12,750 530
$8,613.40
Cost of goods available for sale =
Cost of goods sold
+
220
220
Inventory Balance Calculations
1,000.00
$3,750
15
July
(b)
100
90 @ $10.00
250 @ $15 =
(b) (a)
$1000
10
Mar.
Units
Cost of
Goods
Sold
Unit
Cost
(a)
$18.80 $ 4,136.60
$ 4,136.60
Ending inventory
100
90
10
10
250
260
260
140
120
120
400
520
520
300
220
$10.00 =
$15.00 =
$14.81 =
$20.00 =
$18.80 =
$ 1,000.00
900.00
$ 100.00
$ 100.00
3,750.00
$ 3,850.00
$ 3,850.00
2,073.40
$ 1,776.60
$ 1,776.60
8,000.00
$ 9,776.60
$ 9,776.60
5,640.00
$ 4,136.60
Gross profit calculation under Weighted-average:

Sales (530 units $40)........
Cost of goods sold .............
Gross profit .........................
$21,200.00
8,613.40
$12,586.60

516
Exercise 7-1 (concluded)

(c) LIFO perpetual
Date
Purchases
Sales (at cost)
Unit
Total
Unit
Units
Cost
Cost
Units
Cost
100 @ $10.00 = $ 1,000
10
90 @ $10.00
Mar. 14
250 @ $15.00 =
30
Oct. 5
Total
Cost of
Goods
Sold
=
Units
900
$ 3,750
15
Jul.
Inventory Balance
140 @ $15.00 =
$ 2,100
400 @ $20.00 = $ 8,000
750
300 @ $20.00
$12,750 530
Cost of goods sold
$ 6,000
$9,000
+
100
10
10
250
10
110
10
110
400
10
110
100
220
Unit
Cost
@ $10.00
@ $10.00
@ $10.00
@ 15.00
@ $10.00
@ 15.00
@ $10.00
@ 15.00
@ 20.00
@ $10.00
@ 15.00
@ 20.00
Total
Cost
=
=
=
=
=
=
=
=
=
=
=
=
$
$
$
1,000
100
100
3,750
$
100
1,650
$
100
1,650
8,000
$
100
1,650
2,000
$3,750
Ending inventory
Gross profit calculation under LIFO:

Sales (530 units $40) .......
Gross profit .........................
$21,200
9,000
$12,200

517

Specific identification
Date
Purchases
Sales (at cost)
Unit
Total
Unit
Units
Cost
Cost Units
Cost
100 @ $10.00 = $ 1,000
10
90 @ $10.00
Mar. 14
30
Oct. 5
Total
Units
900
10 @ $10.00
130 @ 15.00
=
=
100
1,950
60 @ $15.00
240 @ 20.00
$12,750 530
=
=
250 @ $15.00 = $
400 @ $20.00 = $
750
Cost of
Goods
Sold
=
3,750
15
Jul.
Inventory Balance
8,000
Cost of goods sold
900
4,800
$8,650
+
Unit
Cost
Total
Cost
100
10
10
250
@ $10.00
@ $10.00
@ $10.00
@ 15.00
= $
= $
= $
=
1,000
100
100
3,750
120
120
400
60
160
220
@ $15.00
@ $15.00
@ 20.00
@ $15.00
@ 20.00
= $
= $
=
= $
=
1,800
1,800
8,000
900
3,200
$4,100
Ending inventory
Gross profit calculation under Specific Identification:

Sales (530 units $40)........
Gross profit .........................
$21,200
8,650
$12,550

518

(a) Moving weighted-average perpetual
Inventory Balance
Date
Jan.
Purchases
Sales (at cost)
Unit
Total
Units
Cost
Cost
Units
Beginning inventory
1
120 @ $6.00 = $ 720.00
10
Unit
Cost
(a)
Cost of
Total
Goods Sold Units
120
70 @ $6.00 = $
7
15
125 @ $5.67 = $
Oct.
$6.00 $
$6.00 $
300.00
$5.67 $ 1,700.00
$5.66* $
991.25
675
$5.17 $ 3,491.25
1,125
$4.94 $ 5,561.25
525
525
$4.95* $ 2,597.25
$2,597.25
450 @ $4.60 = $ 2,070.00

600 @ $4.94 = $
1,320
$6,690.00
795
=
2,964.00
$4,092.75
Cost of goods sold
Inventory Balance
Calculations
720.00
500 @ $5.00 = $ 2,500.00
5
Total
Total
Cost
708.75
175
28
Average
Cost/
Unit
250 @ $5.60 = $ 1,400.00

300
July
(b)
420.00
50
Mar.
(b) (a)
120
70
50
50
250
300
300
125
175
175
500
675
675
450
1,125
1,125
600
525
@ $6.00 =
@
5.60 =
5.67 =
5.00 =
4.60 =
4.96 =
$ 720.00
420.00
$ 300.00
$ 300.00
1,400.00
$1,700.00
$1,700.00
708.75
$ 991.25
$ 991.25
2,500.00
$3,491.25
$3,491.25
2,070.00
$5,561.25
$5,561.25
2,964.00
$2,597.25
Ending inventory
*cost/unit changed due to rounding

519
Exercise 7-3 (continued)

(b) FIFO perpetual
Date
Purchases
Sales (at cost)
Inventory Balance
Cost of
Unit
Total
Unit
Goods
Unit
Units
Cost
Cost
Units
Cost
Sold
Units
Cost
Jan.
1 Beginning inventory
120 @ $6.00 =
$ 720
120 @ $6.00 =
10
70 @ $6.00 = $ 420
50 @ $6.00 =
50 @ $6.00 =
Mar. 7
250 @ $5.60 =
$ 1,400
250 @ 5.60 =
50 @ $6.00 = $ 300
15
75 @ 5.60 =
420
175 @ $5.60 =
175 @ $5.60 =
Jul. 28
500 @ $5.00 =
$ 2,500
500 @ 5.00 =
175 @ $5.60 =
500 @ 5.00 =
Oct.
3
450 @ $4.60 =
$ 2,070
450 @ 4.60 =
175 @ $5.60 = $ 980
75 @ $5.00 =
5
425 @ 5.00 =
2,125
450 @ 4.60 =
Total
1,320
$6,690 795
$4,245 525
Cost of goods sold

520
Total
Cost
$
$
$
720
300
300
1,400
$
$
980
980
2,500
$ 980
2,500
2,070
$ 375
2,070
$2,445
Ending inventory
Exercise 7-3 (concluded)

(c) LIFO perpetual
Date
Purchases
Sales (at cost)
Unit
Total
Unit
Units
Cost
Cost
Units
Cost
120 @ $6.00 =
$ 720
10
70 @ $6.00
Mar.
250 @ $5.60 =
420
125 @ $5.60
700
450 @ $4.60
150 @ 5.00
$6,690 795
=
=
$ 2,070
750
$3,940
$ 1,400
28
500 @ $5.00 =
$ 2,500
Oct.
450 @ $4.60 =
$ 2,070
1,320
Cost of goods sold

Unit
Cost
Units
Jul.
Total
Cost of
Goods
Sold
=
15
Inventory Balance
120
50
50
250
50
125
50
125
500
50
125
500
450
50
125
350
525
@
@
@
@
@
@
@
@
@
@
@
@
@
@
@
@
$6.00
$6.00
$6.00
5.60
$6.00
5.60
$6.00
5.60
5.00
$6.00
5.60
5.00
4.60
$6.00
5.60
5.00
Total
Cost
=
=
=
=
=
=
=
=
=
=
=
=
=
=
=
=
$
$
$
720
300
300
1,400
$ 300
700
$ 300
700
2,500
$ 300
700
2,500
2,070
$ 300
700
1,750
$2,750
Ending inventory
521

Specific identification perpetual
Date
Purchases
Sales (at cost)
Unit
Total
Unit
Units
Cost
Cost
Units
Cost
120 @ $6.00 = $ 720
10
70 @ $6.00
Mar.
250 @
25 @ $6.00
100 @ 5.60
=
=
$ 150
560
320 @ $5.00
280 @ 4.60
$6,690 795
=
=
$ 1,600
1,288
$4,018
$5.60 = $ 1,400
28
500 @
$5.00 = $ 2,500
Oct.
450 @
$4.60 = $ 2,070
1,320
Cost of goods sold

522
Unit
Cost
Units
$ 420
Jul.
Total
Cost of
Goods
Sold
=
15
Inventory Balance
120
50
50
250
25
150
25
150
500
25
150
500
450
25
150
180
170
525
@
@
@
@
@
@
@
@
@
@
@
@
@
@
@
@
@
$6.00
$6.00
$6.00
5.60
$6.00
5.60
$6.00
5.60
5.00
$6.00
5.60
5.00
4.60
$6.00
5.60
5.00
4.60
Total
Cost
=
=
=
=
=
=
=
=
=
=
=
=
=
=
=
=
=
$
$
$
720
300
300
1,400
$ 150
840
$ 150
840
2,500
$ 150
840
2,500
2,070
$ 150
840
900
782
$2,672
Ending inventory

TROUT COMPANY
Income Statement
For year ended December 31, 2005
Sales .....................................
(795 units $15 selling price)
Cost of goods sold ...................
Gross profit ...............................
Operating expenses..................
Net income.................................
Specific
Identification
$11,925
Moving
Weighted
Average
$11,925.00
FIFO
$11,925
LIFO
$11,925
4,018
$ 7,907
1,250
$ 6,657
4,092.75
$ 7,832.25
1,250.00
$ 6,582.25
4,245
$ 7,680
1,250
$ 6,430
3,940
$ 7,985
1,250
$ 6,735
1) The LIFO method results in the highest net income with $6,735.
2) The weighted average net income of $6,582.25 does fall between FIFO net income
($6,430) and LIFO net income ($6,735).
3) If costs were rising instead of falling then the FIFO method would probably result in
the highest net income.
a. and b.
Per Unit
Inventory
Units
Items
on Hand
BB
22
FM
15
MB
36
SL
40
c.
Cost
$50
78
95
36
NRV
$54
72
91
36
Total
Cost
$1,100
1,170
3,420
1,440
$7,130
Total
NRV
$1,188
1,080
3,276
1,440
$6,984
LCM applied to:

a.
b.
Inventory
Each
as a Whole Product
$1,100
1,080
3,276
1,440
$6,984
$6,896
2005
Dec. 31 Cost of Goods Sold ..................................................
Merchandise Inventory...................................
To write inventory down to market;
7,130 6,984 = 146.

146
146
523

1. $900,000 $500,000 = $400,000
2.
For years ended
December 31, 2005, 2006, and 2007
income statement information
should have been reported as:
$900,000
Sales
Cost of goods sold:
Beginning inventory
Add: Purchases
Less: Ending inventory
Cost of goods sold
Gross profit
$200,000
500,000
200,000
Income statement information

actually reported for
years ended December 31,
2005
2006
2007
$900,000
$900,000
$900,000
$200,000
500,000
180,000
500,000
$400,000

524
$180,000
500,000
200,000
520,000
$380,000
$200,000
500,000
200,000
480,000
$420,000
500,000
$400,000

Inventory, January 1 .......................................................
Purchases ........................................................................
Purchase returns .............................................................
Transportation-in ............................................................
Goods available for sale .................................................
Less: Estimated cost of goods sold:
Sales ................................................................................
Estimated cost of goods sold
[$2,000,000 (1 30%)] ..............................................
$1,590,000
(23,100)
37,600
$ 450,000
1,604,500
$2,054,500
$2,000,000
(1,400,000)
Estimated March 31 inventory
$ 654,500

At Cost
Beginning inventory ..........................................
Net purchases ....................................................
Goods available for sale ....................................
Deduct net sales at retail ......................................
Ending inventory at retail ......................................
Cost ratio: ($89,710/$162,600) 100 = 55.17%
Ending inventory at cost ($32,600 55.17%) ......
$31,900.00
57,810.00
$89,710.00
At Retail
$ 64,200.00
98,400.00
$162,600.00
130,000.00
$ 32,600.00
$17,985.42

a.
$27,300 55.17% = $15,061.41
b.
Estimated inventory that should have
been on hand ...............................................
Physical inventory ......................................................
Inventory shrinkage....................................................

At Cost
At Retail
$17,985.42
15,061.41
$ 2,924.01
$32,600.00
27,300.00
$ 5,300.00
525
*Exercise 7-11 (20 minutes)

Ending
Inventory
a.
Weighted-average cost ($3,300/1,320 = $2.50):

$2.50 50 ..................................................................
$3,300 $125 ............................................................
125
b. FIFO:
50 $2.20 ..................................................................
$3,300 $110 ............................................................
110
c.
LIFO:
50 $3.00 ..................................................................
$3,300 $150 ............................................................
150
Cost of
Goods Sold
3,175
3,190
3,150
FIFO provides the lowest net income because it has the highest cost of goods sold due to
decreasing unit costs.

526

Ending
Inventory
a.
FIFO:
(50 $2.86) + (100 $2.50) ......................................
(120 $2.00) + (250 $2.30) + (400 $2.50) ...........
393
b. LIFO:
(120 $2.00) + (30 $2.30) ......................................
(50 $2.86) + (500 $2.50) + (220 $2.30) ............
309
c.
Weighted-average cost ($2,208/920 = $2.40):

$2.40 150 ................................................................
$2.40 770 ................................................................
360
Cost of
Goods Sold
1,815
1,899
1,848
LIFO provides the lowest net income because it has the highest cost of goods sold due to
rising unit costs.
Ending inventory:
Units
Cost/Unit
Total Cost
80 @
$2.00 =
$160.00
22 @
2.30 =
50.60
48 @
2.50 =
120.00
150
$330.60
Beginning inventory
March 7 purchase
July 28 purchase
Cost of goods sold:

Cost of goods available for sale less Ending inventory = Cost of goods sold
$2,208.00 $330.60 = $1,877.40

527

Merchandise turnover
2006:
$ 643,825
($96,400 + $86,750)/2
2005:
$ 426,650
($86,750 + $91,500)/2
Days sales in inventory

2006:
2005:
= 7.0 times
= 4.8 times
$ 96,400 365
$643,825
= 54.7 days
$ 86,750 365
$426,650
= 74.2 days
It appears that Russo has lower levels of merchandise inventory on hand which is
generally favourable provided customers are not being turned away because of
out-of-stock items.

528
PROBLEMS
Problem 7-1A (40 minutes )
1) (a) FIFO perpetual
Date
Jan.
Purchases
Unit
Total
Units
Cost
Cost Units
500 @ $45.00 = $ 22,500
Feb. 10
Mar. 15
250 @ $42.00
Aug. 21
Sept. 10
130 @ $50.00 =
Total
Sales (at cost)
880
= $ 10,500
Unit
Cost
Inventory Balance
Cost of
Goods
Sold
330 @ $45.00 = $ 14,850
6,500
170 @ $45.00 = $ 7,650

65 @ 42.00 =
2,730
$39,500 565
$25,230
Cost of goods sold

Unit
Cost
Units
500
500
250
170
250
170
250
130
185
130
315
@
@
@
@
@
@
@
@
@
@
$45.00
$45.00
42.00
$45.00
42.00
$45.00
42.00
50.00
$42.00
50.00
Total
Cost
=
=
=
=
=
=
=
=
=
=
$ 22,500
$ 22,500
10,500
$ 7,650
10,500
$ 7,650
10,500
6,500
$ 7,770
6,500
$14,270
Ending inventory
529
Problem 7-1A (continued)

1) (b) LIFO perpetual
Date
Purchases
Sales (at cost)
Unit
Total
Units
Cost
Cost Units
500 @ $45.00 = $ 22,500
Jan.
Feb. 10
Mar. 15
250 @ $42.00 =
Aug. 21
Sept. 10
130 @ $50.00 =
Total
880
$ 10,500
Inventory Balance
Cost of
Goods
Sold
Unit
Cost
Unit
Cost
Units
250 @ $42.00 = $ 10,500

80 @ 45.00 =
3,600
$ 6,500
Total
Cost
500 @ $45.00 = $ 22,500

500 @ 45.00 =
22,500
250 @ 42.00 =
10,500
420 @ $45.00 = $ 18,900
420 @ $45.00 = $ 18,900
130 @ 50.00 =
6,500
130 @ $50.00 = $ 6,500

105 @ 45.00 =
4,725 315 @ $45.00 = $ 14,175
$39,500 565
$25,325 315
$14,175
Cost of goods sold
Ending inventory
1) (c) Moving weighted-average perpetual

Inventory Balance
Date
Jan.
Feb.
Mar.
Aug.
Sept.
Total
Purchases
Unit
Units Cost
Beginning inventory
1
500 @ $45.00 =
10
250 @ $42.00 =
Sales (at cost)

Total
Cost
10
(b) (a)
(b)
Total
Units
Average
Cost/
Unit
Total
Cost
500
$45.00
750
$44.00
$ 33,000.00
420
$44.00
$ 18,480.00
550
$45.42
$ 24,980.00
315
315
$45.42
$ 14,520.00
6,500.00
235 @ $45.42 =
$ 10,673.70
880
$39,500.00 565
$25,193.70
+
Cost of goods available for sale = Cost of goods sold

530
$ 22,500.00
$ 10,500.00
330 @ $44.00 =
130 @ $50.00 =
Cost of
Goods
Sold
$ 22,500.00
15
21
Units
Unit
Cost
(a)
$ 14,306.30
$14,306.30
Ending inventory
500
250
750
750
330
420
420
130
550
550
235
315
42.00 =
44.00 =
50.00 =
45.42 =
$22,500.00
10,500.00
$33,000.00
$33,000.00
14,520.00
$18,480.00
$18,480.00
6,500.00
$24,980.00
$24,980.00
10,673.70
$14,306.30

2) Specific Identification
Date
Jan.
Purchases
Sales (at cost)
Unit
Total
Units Cost
Cost
Units
500 @ $45.00 = $ 22,500
Feb. 10
Mar. 15
250 @ $42.00 = $ 10,500
Aug. 21
Sept. 10
130 @ $50.00 = $
Total
Unit
Cost
Cost of
Goods
Sold
170 @ $45.00 = $
160 @ 42.00 =
880
Inventory Balance
Units
500
500
250
330
90
330
90
130
165
70
80
315
7,650
6,720
6,500
165 @ $45.00 = $ 7,425

20 @ 42.00 =
840
50 @ 50.00 =
2,500
$39,500 565
$25,135
Cost of goods available for sale = Cost of goods sold

Unit
Cost
@
@
@
@
@
@
@
@
@
@
@
$45.00
$45.00
42.00
$45.00
42.00
$45.00
42.00
50.00
$45.00
42.00
50.00
Total
Cost
=
=
=
=
=
=
=
=
=
=
=
$ 22,500
$ 22,500
10,500
$ 14,850
3,780
$ 14,850
3,780
6,500
$ 7,425
2,940
4,000
$14,365
Ending inventory
531

532
Problem 7-1A (concluded)

3)
Feb.
Sept.
FIFO
LIFO
10 Merchandise Inventory............ 10,500
10,500
Accounts Payable .............
10,500
10,500
To record the purchase of
inventory on credit.
10 Accounts Receivable............... 17,625
Sales...................................
To record a credit sale;
$75/unit x 235 units =
$17,625.00.
10 Cost of Goods Sold ................. 10,380

Merchandise Inventory.....
To record the sale of
merchandise.
17,625
10,380
17,625
11,225
17,625
11,225
Moving Weighted
Specific
Average
Identification
10,500
10,500
10,500
10,500
17,625
10,673.70
17,625
10,673.70
17,625
10,765
17,625
10,765
Problem 7-2A (40 minutes)

Preparation:
Calculate cost of goods available for sale and units available for sale:
Beg.
Feb. 10
Mar. 13
Sep. 5
Units
Available
300 units
200 units
300 units
250 units
@
@
@
@
$40
42
39
32
= $12,000
=
8,400
= 11,700
=
8,000
1,050 units
$40,100 Cost of goods

available
for sale
Units in ending inventory:

Units available
Less: Units sold
Ending Inventory
1,050
850
200

Date
Jan.
Purchases
Sales (at cost)
Unit
Total
Units
Cost
Cost
Units
300 @ $40.00 = $ 12,000
Feb. 10
20
200 @ $42.00 = $
Mar. 13
300 @ $39.00 = $ 11,700
Sept. 5
Oct. 10
250 @ $32.00 = $
Total
1,050
8,400
Unit
Cost
Cost of
Goods
Sold
300 @ $40.00 = $ 12,000

50 @ 42.00 =
2,100
8,000
Inventory Balance
Unit
Cost
Units
300 @
300 @
200 @
$40.00 = $ 12,000
$40.00 = $ 12,000
42.00 =
8,400
150
150
300
150
300
250
$42.00
$42.00
39.00
$42.00
39.00
32.00
@
@
@
@
@
@
150 @ $42.00 = $ 6,300

300 @ 39.00 =
11,700
50 @ 32.00 =
1,600 200 @
$40,100 850
$33,700 200
= Cost of goods sold

+

Total
Cost
= $ 6,300
= $ 6,300
= 11,700
= $ 6,300
= 11,700
=
8,000
$32.00 = $ 6,400
$6,400
Ending inventory
533

Date
Purchases
Sales (at cost)
Unit
Total
Units
Cost
Cost Units
300 @ $40.00 = $ 12,000
Jan.
Feb. 10
20
200 @ $42.00 =
$ 8,400
Inventory Balance
Cost of
Goods
Sold
Unit
Cost
200 @ $42.00 =
150 @ 40.00 =
Units
$ 8,400
6,000
Cost of goods sold
Total
Cost
300 @ $40.00 =
300 @ $40.00 =
200 @ 42.00 =
150
150
Mar. 13
300 @ $39.00 = $ 11,700
300
150
300
Sept. 5
250 @ $32.00 = $ 8,000
250
Oct. 10
250 @ $32.00 = $ 8,000 150
250 @ 39.00 =
9,750
50
Total 1,050
$40,100 850
$32,150 200
Unit
Cost
@
@
@
@
@
@
@
@
$40.00
$40.00
39.00
$40.00
39.00
32.00
$40.00
39.00
=
=
=
=
=
=
=
=
$12,000
$12,000
8,400
$ 6,000
$ 6,000
11,700
$ 6,000
11,700
8,000
$ 6,000
1,950
$7,950
Ending inventory
(c) Moving weighted-average perpetual

Inventory Balance
Date
Purchases
Sales (at cost)
Jan.
Unit
Total
Units
Cost
Cost
Beginning inventory
1
300
@ $40.00 = $ 12,000.00
Feb.
10
200
@ $42.00 = $
13
Sept.
Oct.
250
Total
Units
Average
Cost/
Unit
Total
Cost
@ $32.00 = $
500
$40.80 $ 20,400.00
150
$40.80 $ 6,120.00
450
$39.60 $ 17,820.00
700
$36.89 $ 25,820.00
200
200
$36.88*
$7,375.00
Ending inventory
$40.80 = $ 14,280.00
8,000.00
500 @
$36.89 = $ 18,445.00
1,050
$40,100.00 850
$32,725.00
+
= Cost of goods sold
$40.00 $ 12,000.00
@ $39.00 = $ 11,700.00
10
Total
(b)
300
350 @
300
Cost of
Goods Sold
(b) (a)
8,400.00
20
Mar.
Units
Unit
Cost
(a)
300
200
500
500
350
150
150
300
450
450
250
700
700
500
200
42.00 =
40.80 =
39.00 =
32.00 =
36.89 =
$12,000.00
8,400.00
$20,400.00
$20,400.00
14,280.00
$ 6,120.00
$ 6,120.00
11,700.00
$17,820.00
$17,820.00
8,000.00
$25,820.00
$25,820.00
18,445.00
$ 7,375.00
*cost per unit changed due to rounding

534

2)
Sales (850 x $80) ............

Cost of goods sold ........
Gross profit ....................
FIFO
$68,000
33,700
$34,300
LIFO
$68,000
32,150
$35,850
Moving
Weighted
Average
$68,000
32,725
$35,275
3) If Lukich Company had been experiencing increasing prices in the acquisition of

additional inventory, gross profit would have been highest using a FIFO inventory
costing method and lowest under a LIFO inventory costing method. The gross profit
under the moving weighted average costing method would have fallen between FIFO
and LIFO.

535
Problem 7-3A (50 minutes) Part 1

GREEN JEANS COMPANY
Income Statement Comparing FIFO, LIFO and
Moving Weighted-Average Inventory Costing Methods
For Year Ended December 31, 2005
Sales (5,500 units sold x $45/unit).................................

Cost of goods sold..........................................................
Gross profit ......................................................................
Operating expenses (5,500 units sold x $6/unit).........
Net income........................................................................
FIFO
LIFO
$247,500
112,700
$134,800
33,000
$101,800
$247,500
113,900
$133,600
33,000
$100,600
Moving
Weighted
Average
Cost
$247,500
112,850
$134,650
33,000
$101,650
Supporting calculations:
Calculate units and cost of goods available for sale:
Beginning inventory............................
Purchases:
Feb. 20...............................................
May 16 ...............................................
Dec. 11...............................................
Units available for sale........................
Cost of goods available for sale........
600 @ $18 =
$ 10,800
1,500 @ $19 =
700 @ $20 =
3,300 @ $22 =
6,100
28,500
14,000
72,600

536
$125,900

Date
Purchases
Unit
Total
Units
Cost
Cost
Units
600 @ $18.00 = $ 10,800
Jan.
Feb.
700 @ $20.00 = $ 14,000
600 @ $18.00 =
1500 @ 19.00 =
400 @ 20.00 =
11 3,300 @ $22.00 = $ 72,600

22
Total
300 @ $20.00 =
2,700 @ 22.00 =
$125,900 5,500
6,100
Inventory Balance
Cost of
Goods
Sold
Unit
Cost
20 1,500 @ $19.00 = $ 28,500
May 16
Sept. 20
Dec.
Sales (at cost)
Unit
Cost
Units
600 @
600 @
1,500 @
600 @
1,500 @
700 @
$ 10,800 300 @
28,500
8,000
300 @
3,300 @
$
6,000
59,400 600 @
$112,700 600
Cost of goods sold
$18.00
$18.00
19.00
$18.00
19.00
20.00
$20.00
Total
Cost
=
=
=
=
=
=
=
$ 10,800
$ 10,800
28,500
$ 10,800
28,500
14,000
$ 6,000
$20.00 = $ 6,000
22.00 =
72,600
$22.00 = $ 13,200
$13,200
Ending inventory
(b) LIFO perpetual

Date
Purchases
Unit
Units
Cost
600 @ $18.00 =
Jan.
Sales (at cost)

Total
Cost
20
1,500 @ $19.00 =
$ 28,500
May
Sept.
16
20
700 @ $20.00 =
$ 14,000
Dec.
11
22
3,300 @ $22.00 =
$ 72,600
6,100
Cost of
Goods
Sold
Unit
Cost
700 @ $20.00 = $
1500 @ 19.00 =
300 @ 18.00 =
14,000
28,500
5,400
3,000 @ $22.00 = $
66,000
$125,900 5,500
Cost of goods sold

Unit
Cost
Units
$ 10,800
Feb.
Total
Units
Inventory Balance
$113,900
+
$18.00
$18.00
19.00
$18.00
19.00
20.00
$18.00
Total
Cost
600
600
1,500
600
1,500
700
300
@
@
@
@
@
@
@
=
=
=
=
=
=
=
$ 10,800
$ 10,800
28,500
$ 10,800
28,500
14,000
$ 5,400
300
3,300
300
300
600
@ $18.00 = $ 5,400
@ 22.00 =
72,600
@ $18.00 = $ 5,400
@ 22.00 =
6,600
$12,000
Ending inventory
537

1(c ) Moving weighted-average perpetual
Inventory Balance
Date
Purchases
Sales (at cost)
Jan.
Unit
Units
Cost
Beginning inventory
1
600 @ $18.00
10,800.00
Feb.
20 1,500
$19.00
28,500.00
May
16
$20.00
14,000.00
Sept
.
20
Dec.
11 3,300
700
Total
Cost
$22.00
= $
3,000
6,100
$19.04 = $
$125,900.00
=
$21.75 = $
5,500
Cost of goods sold
(b) (a)
(b)
Total
Units
Average
Cost/Unit
Total
Cost
600
$18.00
10,800.00
2,100
$18.71
39,300.00
2,800
$19.04
53,300.00
47,600.00
72,600.00
22
Total
Units
2,500
Cost of
Goods
Sold
Unit
Cost
(a)
65,250.00
$112,850.00
+
300
$19.00*
5,700.00
3,600
$21.75
78,300.00
600
600
$21.75
$ 13,050.00
$13,050.00
Ending inventory

600
1,500
2,100
2,100
700
2,800
2,800
2,500
@
@
18.00 =
19.00 =
20.00 =
19.04 =
300
300
3,300 @
3,600
3,600
3,000 @
600
22.00 =
21.75 =
$ 10,800
28,500
$ 39,300
$ 39,300
14,000
$ 53,300
$ 53,300
47,600
$ 5,700
$ 5,700
72,600
$ 78,300
$ 78,300
65,250
$ 13,050
Part 2
If Green Jeans Companys manager earns a bonus based on a percentage of gross profit,
she will prefer the FIFO inventory costing method since it has produced the highest gross
profit. FIFO will always produce a higher gross profit than either LIFO or Moving weighted
average when the unit costs of merchandise inventory are increasing.

538

Cost of goods sold:
2005
Reported ........................................................... $ 715,000
Adjustments: Dec. 31, 2005 error ............... 66,000
Dec. 31, 2006 error ...............
Corrected .......................................................... $ 649,000
$
+
+
$
2006
847,000
66,000
30,000
943,000
2007
$ 770,000
2006
275,000
66,000
30,000
179,000
2007
$ 231,000
+ 30,000
$ 261,000
Total current assets:

2005
Reported ........................................................... $1,155,000
Adjustments: Dec. 31, 2005 error ................ + 66,000
Dec. 31, 2006 error ...............
Corrected .......................................................... $1,221,000
2006
$1,265,000
2007
$1,100,000
30,000
$1,235,000
$1,100,000
Owners equity:
2005
Reported ........................................................... $1,287,000
Adjustments: Dec. 31, 2005 error ............... + 66,000
Dec. 31, 2006 error ...............
Corrected .......................................................... $1,353,000
2006
$1,430,000
2007
$1,232,000
30,000
$1,400,000
$1,232,000
Net income:
2005
Reported ........................................................... $ 220,000
Adjustments: Dec. 31, 2005 error ............... + 66,000
Dec. 31, 2006 error ................
Corrected .......................................................... $ 286,000
30,000
$ 740,000
Part 2
These errors are self-correcting in the year following the error. Each overstatement (or
understatement) of net income is offset by a matching understatement (or overstatement)
in the following year. Thus, aggregate net income for the three-year period is not affected
by the errors.
The understatement of inventory by $66,000 results in an overstatement of cost of goods
sold by that same amount. The $66,000 overstatement of cost of goods sold results in an
understatement of gross profit by the same amount. This understatement of gross profit
carries through to an understatement of net income. Since the understated net income is
closed to capital, the final equity figure is understated by the amount of the inventory
understatement.

539

2005
$ 345,000
+ $ 55,000
$ 400,000
$1,300,000
$ 55,000
$1,245,000
Corrected Ending Inventory

Corrected Cost of Goods Sold
2006
$ 420,000
$ 16,000
$ 404,000
$1,750,000
+ $ 55,000
+ $ 16,000
$1,821,000
2007
$392,000
(no change)
$2,100,000
$ 16,000
$2,084,000

Per Unit
Inventory
Items
Audio equipment:
Receivers
CD players
Cassette decks
Turntables
Subtotal
Units
on
Hand
335
250
316
194
Video:
Televisions
VCRs
Video cameras
Subtotal
470
281
202
Car Audio:
Cassette radios
CD radios
Subtotal
175
160
Totals
LCM applied to:
Cost Market
$ 90
111
86
52
150
93
310
70
97
$ 98
100
95
41
125
84
322
84
105
Total
Cost
Total
Market
$ 30,150
27,750
27,176
10,088
$ 95,164
$ 32,830
25,000
30,020
7,954
$ 95,804
$ 70,500
26,133
62,620
$159,253
$ 58,750
23,604
65,044
$147,398
$ 12,250
15,520
$ 27,770
$ 14,700
16,800
$ 31,500
$282,187
$274,702 $274,702 $270,332

540
a.
Whole
c.
b.
Separately
Major
to Each
Category Product
$ 30,150
25,000
27,176
7,954
$ 95,164
58,750
23,604
62,620
147,398
12,250
15,520
27,770
$263,024

2004 Gross margin ratio:
Sales ........................................................
Cost of sales...........................................
Gross margin..........................................
$3,200,225
1,760,575
$1,439,650
Gross margin ratio.................................
45%*
Estimated inventory:
Inventory, December 31, 2004..............
Net purchases, 2005 .............................
Goods available for sale .......................
Less estimated cost of goods sold:
Sales ........................................................
Estimated cost of goods sold ..............
[$350,600 (1 45%)]........................
Estimated February 10, 2005 inventory......
Less: inventory salvaged......................
Estimated inventory lost in fire....................
$294,100
182,400
$476,500
$350,600
192,830
$283,670
106,200
$177,470
*rounded to nearest whole percentage

WALKER COMPANY
Estimated Inventory
March 31, 2005
Inventory, January 1, 2005 ............................
Purchases .......................................................
Less: Purchase returns ................................
Add: Transportation-in ................................
Net cost of goods purchased .......................
Sales ................................................................
Less: Sales returns ........................................
Net sales .........................................................
[$1,181,700 (1 35%)] .............................
Estimated March 31, 2005 inventory ................

$945,200
13,050
6,900
$ 300,260
939,050
$1,239,310
$1,191,150
9,450
$1,181,700
768,105
$ 471,205
541

BASICS COMPANY
Estimated Inventory
December 31, 2005
At Cost
Beginning inventory ........................................ $ 471,350
Purchases ......................................................... 3,328,830
Purchase returns .............................................
(52,800)
Goods available for sale .................................. $3,747,380
Net sales ($5,495,700 $44,600)......................
Ending inventory at retail.................................
Cost to retail ratio ($3,747,380 $7,206,500) .
Ending inventory at cost ..................................
At Retail
$ 927,150
6,398,700
(119,350)
$7,206,500
5,451,100
$1,755,400
52%
$ 912,808
Part 2
Estimated physical inventory at cost: $1,675,800 52% = $871,416
BASICS COMPANY
Inventory Shortage
December 31, 2005
Estimated inventory, December 31 ......................
Physical inventory .................................................
Inventory shortage ................................................
At Cost
$912,808
871,416
$ 41,392
At Retail
$1,755,400
1,675,800
$ 79,600
At Cost
At Retail
$ 300,000
5,100,000
60,000
75,000
$5,415,000
$ 375,000
6,925,000
80,000

Part 1
Beginning inventory .............................................
Purchases ..............................................................
Less: Purchase returns and allowances............
Add: Transportation-in ........................................
Goods available for sale.......................................
$7,220,000
Deduct net sales at retail ($6,570,000 $72,000) ....

Ending inventory at retail ..........................................
6,498,000
$ 722,000
Cost to retail ratio ($5,415,000 $7,220,000): .........
x 75%
Estimated ending inventory at cost ($722,000 75%):

542
$ 541,500

Part 2
The estimated cost of the stolen inventory is $541,500 $234,000 = $307,500
*Problem 7-11A (25 minutes) Part 1
Cost of units available for sale:
20,000 units in beginning inventory @ $15 ...
28,000 units purchased @ $18 ........................
30,000 units purchased @ $22 ........................
20,000 units purchased @ $24 ........................
33,000 units purchased @ $27 ........................
131,000 units for sale .........................................
$ 300,000
504,000
660,000
480,000
891,000
$2,835,000
Part 2
a) FIFO basis:
Total cost of the 131,000 units for sale ..........
Less: Ending inventory on a FIFO basis:
33,000 units @ $27 ........................................
2,000 units @ $24 ........................................
Cost of units sold .............................................
$2,835,000
$891,000
48,000
939,000
$1,896,000
b) LIFO basis:
Less: Ending inventory on a LIFO basis:
20,000 beginning inventory units @ $15 .....
15,000 units @ $18 ........................................
$2,835,000
$300,000
270,000
570,000
$2,265,000
c) Weighted-average cost basis:

$2,835,000
Less: Ending inventory at weighted-average cost:
($2,835,000/131,000 = $21.64) 35,000 .......
757,400*
$2,077,600*
*These amounts may vary if the unit cost/unit was not rounded to two decimal places.

543
*Problem 7-12A (25 minutes)

a) FIFO basis:
Total cost of the 880 units for sale .................
130 units @ $50 .............................................
185 units @ $42 .............................................
$39,500
$6,500
7,770
14,270
$25,230
b) LIFO basis:
315 beginning inventory units @ $45 ........
$39,500
14,175
$25,325

$39,500.00
($39,500/880 = $44.89) 315 ........................
14,140.35*
$25,359.65*

544

a) FIFO basis:
Total cost of the 1,050 units for sale ..............
200 units @ $32 .............................................
$40,100
6,400
$33,700
b) LIFO basis:
200 @ $40 .......................................................
$40,100
8,000
$32,100

$40,100
($40,100/1,050 = $38.19) 200 .....................
7,638*
$32,462*

545

GREEN JEANS COMPANY
Income Statement Comparing FIFO, LIFO and
Weighted Average Inventory Costing Methods
Sales.............................
COGS............................
Gross Profit .................
Operating Expenses ...
Net Income...................
FIFO
$247,500
112,700
$134,800
33,000
$101,800
LIFO
$247,500
115,100
$132,400
33,000
$ 99,400
Cost of goods available for sale:
600 units in beginning inventory @ $18 ......
1,500 @ $19..........................................................
700 @ $20 .........................................................
3,300 @ $22 .........................................................
6,100 units available for sale ............................
Weighted
Average
$247,500
113,516
$133,984
33,000
$100,984
$ 10,800
28,500
14,000
72,600
$125,900
a) FIFO basis:
Total cost of the 6,100 units ......................................
600 @ $22 ...............................................................
Cost of units sold ......................................................
$125,900
13,200
$112,700
b) LIFO basis:
600 @ $18 ...............................................................
$125,900
10,800
$115,100
c) Weighted-average:
$125,900
($125,900/6,100) = $20.64 600 ..........................
12,384*
$113,516*

546
ALTERNATE PROBLEMS
Problem 7-1B (40 minutes)
Date
Purchases
Sales (at cost)
Unit
Total
Units
Cost
Cost
Units
600 @ $55.00 = $ 33,000
Jan.
Feb.
13
15
200 @ $57.00 = $
11,400
Aug.
5
10
345 @ $59.00 = $
20,355
Total
1,145
$64,755
Unit
Cost
Inventory Balance
Cost of
Goods
Sold
Units
300 @ $55.00 =
$16,500
300 @ $55.00 =
35 @ 57.00 =
635
$ 16,500
1,995
$34,995
Cost of goods sold
Unit
Cost
600
600
200
300
200
300
200
345
165
345
510
@
@
@
@
@
@
@
@
@
@
$55.00
$55.00
57.00
$55.00
57.00
$55.00
57.00
59.00
57.00
59.00
Total
Cost
=
=
=
=
=
=
=
=
=
=
$ 33,000
$ 33,000
11,400
$ 16,500
11,400
$ 16,500
11,400
20,355
9,405
20,355
$29,760
Ending inventory

Date
Purchases
Unit
Units
Cost
600 @ $55.00 =
Jan.
Sales (at cost)

Total
Cost
Units
13
15
200 @ $57.00 =
$11,400
Aug.
5
10
345 @ $59.00 =
$20,355
1,145
Cost of
Goods
Sold
Units
$33,000
Feb.
Total
Unit
Cost
Inventory Balance
$64,755
200 @ $57.00 =
100 @ 55.00 =
$11,400
5,500
335 @ $59.00 =
$19,765
635
Cost of goods sold

$36,665
+
Unit
Cost
Total
Cost
600
600
200
500
@ $55.00 =
@ $55.00 =
@ 57.00 =
@ $55.00 =
$ 33,000
$ 33,000
11,400
$ 27,500
500
345
500
10
510
@ $55.00 =
@ 59.00 =
@ $55.00 =
@ 59.00 =
$ 27,500
20,355
$ 27,500
590
$28,090
Ending inventory
547

548
Problem 7-1B (continued)

Inventory Balance
Date
Jan.
Feb.
Purchases
Sales (at cost)
Unit
Units
Cost
Beginning inventory
1
600 @ $55.00 = $
13
200 @ $57.00 = $
Total
Cost
Units
1,145
Total
Units
Average
Cost/
Unit
Total
Cost
$55.50
$56.93
$64,755.00 635
=
Cost of goods sold
800
$55.50 $ 44,400.00
500
$55.50 $ 27,750.00
845
$56.93 $ 48,105.00
510
510
$56.93 $ 29,033.45
$29,033.45
= $ 16,650.00
= $ 19,071.55
$35,721.55
+
$55.00 $ 33,000.00
20,355.00
335 @
(b)
11,400.00
10
Total
(b) (a)
600
300 @
345 @ $59.00 = $
Cost of
Goods
Sold
33,000.00
15
Aug.
Unit
Cost
(a)
Ending inventory
600
200
800
800
300
500
500
345
845
845
335
510
57.00 =
55.50 =
59.00 =
56.93 =
$33,000.00
11,400.00
$44,400.00
$44,400.00
-16,650.00
$27,750.00
$27,750.00
20,355.00
$48,105.00
$48,105.00
-19,071.55
$29,033.45

2) Specific identification
Date
Jan.
Purchases
Unit
Units
Cost
Beginning inventory
600 @ $55.00 =
Sales (at cost)

Total
Cost
Units
200 @ $57.00 =
$11,400
Aug.
345 @ $59.00 =
$20,355
Total
1,145
Cost of
Goods
Sold
$64,755
175 @ $55.00 =
125 @ 57.00 =
15 @ $55.00 =
320 @ 59.00 =
635
Cost of goods sold

$ 9,625
7,125
Unit
Cost
Units
$33,000
Feb. 13
15
5
10
Unit
Cost
Inventory Balance
825
18,880
$36,455
+
600
600
200
425
75
425
75
345
410
75
25
510
@
@
@
@
@
@
@
@
@
@
@
$55.00
$55.00
57.00
$55.00
57.00
$55.00
57.00
59.00
$55.00
57.00
59.00
Total
Cost
=
=
=
=
=
=
=
=
=
=
=
$ 33,000
$ 33,000
11,400
$ 23,375
4,275
$ 23,375
4,275
20,355
$22,550
4,275
1,475
$28,300
Ending inventory
549

550
Problem 7-1B (concluded)

3)
FIFO
Feb.
Aug.
LIFO
Moving Weighted
Average
15 Accounts Receivable................. 27,000

27,000
Sales.....................................
27,000
27,000
To record a credit sale;
$90/unit x 300 units =
$27,000.
27,000
15 Cost of Goods Sold ................... 16,500

16,900
Merchandise Inventory.......
16,500
16,900
To record the sale of
merchandise.
16,650
5 Merchandise Inventory.............. 20,355

20,355
Accounts Payable ...............
20,355
20,355
To record the purchase of
inventory on credit.
20,355
27,000
16,650
20,355
Specific
Identification
27,000
16,750
20,355
27,000
16,750
20,355

Date
Purchases
Unit
Units
Cost
Jan.
200 @ $60.00 =
Feb. 20
Total
Cost
Apr.
30
320 @ $58.00 =
$18,560
Oct.
5
10
250 @ $50.00 =
$12,500
Total
770
$12,000
Sales (at cost)

Cost of
Unit
Goods
Units
Cost
Sold
150 @ $60.00 =
Inventory Balance
$9,000
50 @ $60.00 = $ 3,000
320 @ 58.00 =
18,560
130 @ 50.00 =
6,500
$43,060 650
$37,060
Cost of goods sold
Unit
Cost
Units
200
50
50
320
50
320
250
@
@
@
@
@
@
@
$60.00
$60.00
$60.00
58.00
$60.00
58.00
50.00
120 @ 50.00
120
Total
Cost
=
=
=
=
=
=
=
$ 12,000
$3,000
$ 3,000
18,560
$ 3,000
18,560
12,500
$ 6,000
$6,000
Ending inventory
1)(b) LIFO perpetual

Date
Purchases
Sales (at cost)
Unit
Total
Unit
Units
Cost
Cost Units
Cost
Jan.
200 @ $60.00 = $ 12,000
Feb. 20
150 @ $60.00 =
Apr.
30
Oct.
5
10
Total
Inventory Balance
Cost of
Goods
Sold
Units
200
50
50
320 @ $58.00 = $ 18,560
320
50
320
250 @ $50.00 = $ 12,500
250
250 @ $50.00 = $ 12,500
50
250 @ 58.00 =
14,500
70
770
$43,060 650
$36,000 120
Cost of goods sold

Unit
Cost
$9,000
@
@
@
@
@
@
@
@
@
$60.00
$60.00
$60.00
58.00
$60.00
58.00
50.00
$60.00
58.00
Total
Cost
=
=
=
=
=
=
=
=
=
$ 12,000
$ 3,000
$ 3,000
18,560
$ 3,000
18,560
12,500
$ 3,000
4,060
$7,060
Ending inventory
551

1) c) Moving weighted-average perpetual
Inventory Balance
Date
Purchases
Unit
Units Cost
Beginning inventory
1 200 @ $60.00 =
Jan.
Feb.
Sales (at cost)

Total
Cost
Units
Unit
Cost
(a)
Cost of
Goods
Sold
Total Average
Units Cost/Unit
$ 12,000.00
20
200
150 @ $60.00 =
30 320
Oct.
5 250
@ $58.00
@ $50.00 =
3,000.00
370
$58.27 $ 21,560.00
620
$54.94
120
120
$54.92*
$ 12,500.00
500 @ $54.94 =
770
$60.00
$43,060 650
=
34,060
$ 27,470.00
$36,470.00
Cost of goods sold
$ 12,000.00
$ 18,560.00
10
Total
$60.00
Total
Cost
$ 9,000
50
Apr.
(b)
(b) (a)
$ 6,590.00
$6,590.00
200
-150
50
50
320
370
370
250
620
620
500
120
60.00 =
58.00 =
50.00 =
54.94 =
$12,000.00
9,000
$ 3,000.00
$ 3,000.00
18,560.00
$21,560.00
$21,560.00
12,500.00
$34,060.00
$34,060.00
-27,470.00
$ 6,590.00
Ending inventory
*unit cost changed due to rounding
2)
Sales (650 $80)......................
Less: Cost of goods sold .......
Gross profit ..............................
FIFO
$52,000
37,060
$14,940
LIFO
$52,000
36,000
$16,000
Moving WeightedAverage
$52,000
36,470
$15,530
3) Gross profits calculated in Part 2 would increase under FIFO and decrease under
LIFO if Moran Company had been experiencing increasing prices in the purchase of
additional inventory. The moving weighted-average costing method would fall
between FIFO and LIFO.

552
Problem 7-3B (40 minutes) Part 1

THE DENNEY COMPANY
Income Statement Comparing FIFO, LIFO,
and Moving Weighted-Average Inventory Costing Methods
Moving
Weighted
FIFO
LIFO
Average
Sales ($98 x 2,500 units) ............................ $245,000
$245,000
$245,000
Cost of goods sold..................................... 138,440
138,200
138,363
Gross profit ................................................. $106,560
$106,800
$106,637
Operating expenses ($14 x 2,500 units) ...
35,000
35,000
35,000
Net income .................................................. $ 71,560
$ 71,800
$ 71,637
Calculations:
Calculate units and cost of goods available for sale:
Beginning inventory
Purchases:
Apr. 2 ........................
Jun. 14 ........................
Aug. 29 ........................
Units available
Cost of goods available
740 @ $58 =
$ 42,920
700 @ $56 =
600 @ $54 =
500 @ $52 =
2,540
39,200
32,400
26,000

$140,520
553

Date
Jan.
Apr.
Purchases
Unit
Units
Cost
740 @ $58.00 =
2
Sales (at cost)
Total Cost Units
Cost of
Goods
Sold
$42,920
700 @ $56.00 =
$39,200
Jun. 14
600 @ $54.00 =
$32,400
Aug. 29
Oct. 25
500 @ $52.00 =
$26,000
May 20
Total
Unit
Cost
Inventory Balance
740 @ $58.00 =
460 @ 56.00 =
$42,920
25,760
240 @ $56.00 =
13,440
600 @ 54.00 =
32,400
460 @ 52.00 =
23,920
2,540
$140,520 2,500
$138,440
Cost of goods sold
+

554
Units
Unit
Cost
Total
Cost
740
740
700
240
@ $58.00 =
@ $58.00 =
@ 56.00 =
@ $56.00 =
$42,920
$42,920
39,200
$13,440
240
600
240
600
500
40
@ $56.00 =
@ 54.00 =
@ $56.00 =
@ 54.00 =
@ 52.00 =
@ 52.00 =
$13,440
32,400
$13,440
32,400
26,000
2,080
40 @ 52.00 = $2,080
Ending inventory

Date
Purchases
Sales (at cost)
Unit
Total
Units
Cost
Cost Units
740 @ $58.00 = $ 42,920
Apr. 2
700 @ $56.00 = $
39,200
Jun. 14
600 @ $54.00 = $
32,400
Aug. 29
Oct. 25
500 @ $52.00 = $
26,000
May 20
Total 2,540
Unit
Cost
Inventory Balance
Cost of
Goods
Sold
Units
700 @ $56.00 = $ 39,200

500 @ 58.00 =
29,000
500 @ $52.00 = $ 26,000

600 @ 54.00 =
32,400
200 @ 58.00 =
11,600
$140,520 2,500
$138,200
Cost of goods sold

Unit
Cost
Total
Cost
740
740
700
240
@ $58.00 = $
@ $58.00 = $
@ 56.00 =
@ $58.00 = $
240
600
240
600
500
40
@ $58.00 = $ 13,920
@ 54.00 =
32,400
@ $58.00 = $ 13,920
@ 54.00 =
32,400
@ 52.00 =
26,000
@ $58.00 = $ 2,320
40
42,920
42,920
39,200
13,920
$2,320
Ending inventory
555

556

Inventory Balance
Date
Purchases
Units Unit Cost

Beginning inventory
Jan. 1
740 @ $58.00 = $
Apr. 2
700
@ $56.00 = $
Sales (at cost)

Total
Cost
Units
42,920.00
600
@ $54.00 = $
32,400.00
Aug. 29
500
@ $52.00 = $
26,000.00
Oct. 25
1,300 @ $53.79 =
2,540
Cost of goods available for
$140,520.00 2,500
=
(b)
Total
Units
Average
Cost/
Unit
Total
Cost
1,440
1,200 @ $57.03 = $
Jun. 14
(b) (a)
740
39,200.00
May 20
Total
Cost of
Goods
Sold
Unit
Cost
(a)
Cost of goods sold
68,436.00
$ 69,927.00
$138,363.00
+
$58.00 $ 42,920.00
$57.03 $ 82,120.00
240
$57.02 $ 13,684.00
840
$54.86 $ 46,084.00
1,340
$53.79 $ 72,084.00
40
40
$53.93* $ 2,157.00
$2,157.00
Ending inventory

740
700
1,440
1,440
1,200
240
240
600
840
840
500
1,340
1,340
1,300
40
@ 56.00 =
@ 57.03 =
@ 54.00 =
@ 52.00 =
@ 53.79 =
$ 42,920.00
39,200.00
$ 82,120.00
$ 82,120.00
68,436.00
$ 13,684.00
$ 13,684.00
32,400.00
$ 46,084.00
$ 46,084.00
26,000.00
$ 72,084.00
$ 72,084.00
-69,927.00
$ 2,157.00
Problem 7-3B (concluded)

Part 2
If The Denney Company manager earns a bonus based on a percentage of gross profit,
she will prefer the LIFO inventory costing method when the unit costs of merchandise
inventory are decreasing.
Problem 7-4B (25 minutes) Part 1
Cost of goods sold
Reported ............................................................
Adjustments: Dec. 31, 2005 error ....................
Dec. 31, 2006 error ....................
Corrected ...........................................................
2005
$205,200
+ 17,000
Net income:
Reported ............................................................
Adjustments: Dec. 31, 2005 error ...................
Dec. 31, 2006 error ....................
Corrected ...........................................................
2005
$174,800
17,000
Total current assets:

Reported ............................................................
Dec. 31, 2006 error ....................
Corrected ...........................................................
2005
$266,000
17,000
Owners equity:
Reported ............................................................
Dec. 31, 2006 error ....................
Corrected ...........................................................
2005
$304,000
17,000
$222,200
$157,800
$249,000
$287,000
2006
$212,800
17,000
25,000
$170,800
2007
$196,030
+ 25,000
$221,030
2006
$211,270
+ 17,000
+ 25,000
$253,270
2007
$183,910
2006
$276,500
2007
$262,950
+ 25,000
$301,500
$262,950
2006
$316,000
2007
$336,000
+ 25,000
$341,000
$336,000
25,000
$158,910
Part 2
These errors are self-correcting in the year following the error. Each overstatement (or
understatement) of net income is offset by a matching understatement (or overstatement)
in the following year. Thus, aggregate net income for the three-year period is not affected
by the errors.

557

1)
Sales ............................
Cost of goods sold .....
Gross profit.................
Incorrect
Income Statement Information
For Years Ended December 31
2005
%
2006
%
$1,350,000 100
$1,690,000 100
810,000
60
845,000
50
$ 540,000
40
$ 845,000
50
Corrected
Income Statement Information
For Years Ended December 31
2005
%
2006
%
$1,350,000
100 $1,690,000 100
735,000*
54
937,000** 55
$ 615,000
46 $ 753,000
45
* $810,000 $75,000 = $735,000

** $845,000 + $75,000 $32,000 + $49,000 = $937,000
2) The gross profit information now reflects the increasing cost of goods sold of which
the owner was aware.
Per Unit
Inventory
Items
Units on
Hand Cost
Office furniture:
Desks
Credenzas
Chairs
Bookshelves
Subtotals
436 $261
295 227
587
49
321
93
Filing cabinets:
Two-drawer
Four-drawer
Lateral
Subtotals
214
398
175
Office Equip.:
Fax machines
Copiers
Typewriters
Subtotals
430
545
352
Totals
81
135
104
168
317
125
LCM applied to:
Market
$305
256
43
82
70
122
118
200
288
117
Total
Cost
Total
Market
$113,796
66,965
28,763
29,853
$239,377
$132,980
75,520
25,241
26,322
$260,063
$ 17,334
53,730
18,200
$ 89,264
$ 14,980
48,556
20,650
$ 84,186
$ 72,240
172,765
44,000
$289,005
$ 86,000
156,960
41,184
$284,144
$617,646
$628,393

558
a.
Whole
b.
Major
Category
c.
Separately
to Each
Product
$113,796
66,965
25,241
26,322
$239,377
14,980
48,556
18,200
84,186
72,240
156,960
41,184
284,144
$617,646
$607,707
$584,444

2004 Gross margin ratio:
Sales ................................................
Cost of sales...................................
Gross margin..................................
$4,245,100
2,674,350
$1,570,750
Gross margin ratio.........................
37.0%
Estimated inventory:
Inventory, December 31, 2004......
Net purchases, 2005 .....................
Goods available for sale ...............
Sales ................................................
[$1,475,300 (1 37%)].............
Estimated July 5, 2005 inventory lost
in the flood......................................
$262,400
829,800
$1,092,200
$1,475,300
929,439
$162,761

FOUR CORNERS EQUIPMENT CO.
Estimated Inventory
March 31, 2005
Inventory, January 1, 2005 ............................
Purchases ....................................................... $2,132,100
Less: Purchase returns .................................
38,370
Add: Transportation-in ..................................
65,900
Net cost of goods purchased .......................
Sales ................................................................ $3,710,250
Less: Sales returns ........................................
74,200
Net sales ......................................................... $3,636,050
[$3,636,050 (1 30%)] .............................
Estimated March 31, 2005, inventory ...............

$ 752,880
2,159,630
$2,912,510
2,545,235
$ 367,275
559

Part 1
THE R.E. McFADDEN CO.

Estimated Inventory
December 31, 2005
Beginning inventory ...................................
Purchases.....................................................
Purchase returns ........................................
Goods available for sale .............................
Sales .......................................................................
Sales returns ..........................................................
Net sales .................................................................
Ending inventory at retail ($866,340 $781,640)
Cost ratio: ($573,920 $866,340) ..........................
Ending inventory at cost ($84,700 66.25%) ......
At Cost
At Retail
$ 81,670.00 $
502,990.00
(10,740.00)
$573,920.00 $
114,610.00
767,060.00
(15,330.00)
866,340.00
$786,120.00
(4,480.00)
$781,640.00
$ 84,700.00
66.25%
$ 56,113.75
Part 2
Estimated physical inventory at cost: $78,550 66.25% = $52,039.38
THE R.E. McFADDEN CO.
Inventory Shortage
December 31, 2005
Estimated inventory, December 31, 2005 .....
Physical inventory ($78,550 66.25%) ..........
Inventory shortage .........................................

560
At Cost
$56,113.75
52,039.38
$ 4,074.37
At Retail
$84,700.00
78,550.00
$ 6,150.00

Beginning inventory .................................................
Purchases..................................................................
Less: Purchase returns and allowances ...............
Add: Transportation-in ............................................
Goods available for sale.......................................... .
At Cost
At Retail
$ 150,000
2,100,000
250,000
10,000
$2,010,000
$ 250,000
3,500,000
400,000
$3,350,000
Deduct net sales at retail ($2,715,000 $35,000) ........

Ending inventory at retail..............................................
2,680,000
$ 670,000
Cost to retail ratio ($2,010,000 $3,350,000): ...........
Estimated ending inventory at cost ($670,000 60%):
60%
$ 402,000
Inventory loss = $402,000 20%* = $80,400

*Because the insurance company covers 80% of the
loss, JavCos estimated loss is 20% (100% 80%).
*Problem 7-11B (25 minutes) Part 1
6,300 units in beginning inventory @ $35 .....
10,500 units purchased @ $33 .........................
13,000 units purchased @ $32 .........................
12,000 units purchased @ $29 .........................
15,500 units purchased @ $26 .........................
57,300 units for sale ..........................................
$ 220,500
346,500
416,000
348,000
403,000
$1,734,000
Part 2
a) FIFO basis:
Total cost of the 57,300 units for sale .............
15,500 units @ $26 .........................................
1,000 units @ $29 ...........................................
Cost of units sold ..............................................
b) LIFO basis:
Total cost of the 57,300 units for sale .............
6,300 beginning inventory units @ $35 . ......
10,200 units @ $33 .........................................
Cost of units sold ..............................................
$1,734,000
$403,000
29,000
432,000
$1,302,000
$1,734,000
$220,500
336,600
557,100
$1,176,900
561
*Problem 7-11B (concluded) Part 2

Total cost of the 57,300 units for sale ......................
$1,734,000
($1,734,000/57,300) = $30.26 16,500 units..........
499,290*
$1,234,710*
*Problem 7-12B (25 minutes)
a) FIFO basis:
345 units @ $59 .............................................
165 units @ $57 .............................................
$64,755
$20,355
9,405
29,760
$34,995
b) LIFO basis:
510 beginning inventory units @ $55 ........
$64,755
28,050
$36,705

$64,755.00
($64,755/1,145 = $56.55) 510 .....................
28,840.50*
$35,914.50*

562

a) FIFO basis:
120 units @ $50 .............................................
$43,060
6,000
$37,060
b) LIFO basis:
120 @ $60 .......................................................
$43,060
7,200
$35,860

$43,060.00
($43,060/770 = $55.92) 120 ........................
6,710.40*
$36,349.60*

563

The Denney Company
Income Statement Comparing FIFO, LIFO and WeightedAverage Inventory Costing Methods
FIFO
Sales (2,500 x $98/unit) ............................. $245,000.00
COGS.......................................................... 138,440.00
Gross Profit................................................ $106,560.00
Operating Expenses (2,500 x $14/unit)....
35,000.00
Net Income ................................................. $ 71,560.00
740 units in beginning inventory
700 units purchased April 2
600 units purchased June 14
500 units purchased August 29
2,540
@
@
@
@
a) FIFO periodic
Total cost of the 2,540 units for sale.........................
40 units @ 52 = ............................................
b) LIFO periodic
Total cost of the 2,540 units for sale .........................
40 units @$58 ....................................................
Cost of units sold ...........................................................
LIFO
$245,000.00
138,200.00
$106,800.00
35,000.00
$ 71,800.00
$58
$56
$54
$52
=
=
=
=
Weighted
Average
$245,000.00
138,307.20
$106,692.80
35,000.00
$ 71,692.80
$ 42,920.00
$ 39,200.00
$ 32,400.00
$ 26,000.00
$140,520.00
$140,520.00
2,080.00
$138,440.00
$140,520.00
2,320.00
$138,200.00

Total cost of the 2,540 units for sale .........................
$140,520.00
($140,520/2,540) = $55.32 40 units = .................
2,212.80*
Cost of units sold ........................................................
$138,307.20*

564
ANALYTICAL & REVIEW PROBLEMS

A&R Problem 7-1
1)
Periods
Reported net income
Adjustments:
Overstatement of ending inventory
Understatement of ending inventory
Overstatement of ending inventory
Revised (correct) net income
1
$25,000
2
$29,000
(5,000)
5,000
8,000
$20,000
$42,000
3
$33,000
4
$41,000
(8,000)
(6,000)
$19,000
6,000
$47,000
2) There is no effect on the total net income for the four periods combined because the
beginning and ending inventories for the combined four periods are correct. In other
words, the errors offset each other in these four periods, and therefore the net effect
of these errors is nil.
A&R Problem 7-2
Balance per companys books

(a)
(b)
(c)
(d)
(e)
Correct Balances
Net
Purchases
$329,000
0
0
+ 3,900
2,700
0
$330,200
Net
Income
$22,100
+ 4,500
4,100
0*
+ 2,700
1,800**
$23,400
Accounts
Payable
$29,200
0
0
+ 3,900
2,700
0
$30,400
Inventory
$20,500
+ 4,500
4,100
+ 3,900
0
+ 2,400
$27,200
*This has no effect on net income because both net purchases and ending merchandise
inventory are increased by $3,900; the net effect on net income is zero.
**The sale price of the goods was $4,200 and the cost of goods sold was $2,400 resulting
in a gross profit of $1,800 that caused net income to be overstated by the same amount.
Therefore, to correct the error, $1,800 must be subtracted from net income.

565
Ethics Challenge
1. In an environment of rising prices the use of FIFO results in a lower cost of goods
sold than LIFO. If cost of goods sold is lower, net income will be higher. A higher
net income will improve the profit margin ratio which is calculated as net
income/net sales.
With rising prices FIFO also results in the most recent, higher prices becoming part
of ending inventory. This means that the balance sheet inventory figure will be
larger than under LIFO. In the numerator of the current ratio, inventory is included
as part of the current asset total. A larger inventory, therefore, results in a bigger
numerator and therefore a larger current ratio than under LIFO.
2. It is true that managers have discretion in choosing an inventory costing method.
It appears, however, that Diversions owner does not understand that changing
methods can only be done very selectively over time. Furthermore a change in
method must be justified by management as improving the financial reporting for
the company. The consistency principle does not allow frequent changes in
inventory costing methods by management. If Diversions owner can justify the
method change as improving the financial reporting for the company her action is
not unethical. However, she must realize that changing methods can only be an
infrequent occurrence given that consistency in financial reporting is required.
Also, the full disclosure principle requires that the owner disclose to the bank that
she has implemented a change in inventory costing method from LIFO to FIFO.

566
Focus on Financial Statements

FFS 7-1
1.
Merchandise inventory, December 31, 2004
Purchases
Merchandise inventory, December 31, 2005
Cost of goods sold
FIFO
11,000
156,000
19,000
148,000
LIFO
11,000
156,000
31,000
136,000
Moving
Average
11,000
156,000
24,000
143,000
2. (a) FIFO
Fardan Stereo Sales
Income Statement
Revenues
Net sales (449,000 6,000).............................................................
$443,000
Expenses:
Cost of goods sold ......................................................................... $148,000
Operating expenses (5,000 + 92,000 + 109,000 + 8,000).............. 214,000
Interest expense..............................................................................
2,000
Total expenses ..............................................................................
364,000
Net income..........................................................................................
$ 79,000

567
Focus on Financial Statements (continued)

FFS 7-1 (continued)
2. (a) FIFO
Fardan Stereo Sales
Balance Sheet
December 31, 2005
Assets
Current assets: ........................................................
Cash.....................................................................
Accounts receivable ..........................................
Merchandise inventory ......................................
Prepaid rent ........................................................
Total current assets ...........................................
Property, plant and equipment:
Store fixtures ......................................................
Less: Accumulated amortization................
Intangible assets:
Trademark ..........................................................
Total assets...................................................................
Liabilities
Current liabilities:
Accounts payable...............................................
Unearned sales...................................................
Total current liabilities.......................................
Long-term liabilities:
Notes payable, due in 2008.................................
Total liabilities.........................................................
Owners Equity
Mikel Fardan, capital*..............................................
Total liabilities and owners equity.............................
$16,000
27,000
19,000
36,000
$117,000
82,000
$ 98,000
$35,000
3,000
$136,000
$18,000
4,000
$22,000
22,000
$44,000
92,000
$136,000
*57,000 + 79,000 44,000

568

FFS 7-1 (continued)
2. (b) LIFO
Fardan Stereo Sales
Income Statement
Revenues
Net sales .....................................................................
Expenses:
Cost of goods sold ....................................................
Operating expenses...................................................
Interest expense.........................................................
Total expenses .........................................................
Net income.....................................................................

$443,000
$136,000
214,000
2,000
352,000
$ 91,000
569

FFS 7-1 (continued)
Fardan Stereo Sales
Balance Sheet
December 31, 2005
Assets
Current assets: ........................................................
Cash.....................................................................
Prepaid rent ........................................................
Store fixtures ......................................................
Intangible assets:
Trademark ...........................................................
Total assets...................................................................
Liabilities
Accounts payable...............................................
Unearned sales...................................................
Owners Equity
$16,000
27,000
31,000
36,000
$117,000
82,000
$110,000
$35,000
3,000
$148,000
$18,000
4,000
$22,000
22,000
$44,000
104,000
$148,000
*57,000 + 91,000 44,000

570

FFS 7-1 (continued)
2. (c) Moving weighted average
Fardan Stereo Sales
Income Statement
Revenues
Net sales .....................................................................
Expenses:
Cost of goods sold ....................................................
Operating expenses...................................................
Interest expense.........................................................
Total expenses .........................................................
Net income.....................................................................

$443,000
$143,000
214,000
2,000
359,000
$ 84,000
571

FFS 7-1 (concluded)
Fardan Stereo Sales
Balance Sheet
December 31, 2005
Assets
Current assets: ........................................................
Cash.....................................................................
Prepaid rent ........................................................
Store fixtures ......................................................
Intangible assets:
Trademark ..........................................................
Total assets...................................................................
Liabilities
Accounts payable............................................... $18,000
Unearned sales...................................................
4,000
Owners Equity
$16,000
27,000
24,000
36,000
$117,000
82,000
$103,000
$35,000
3,000
$141,000
$22,000
22,000
$44,000
97,000
$141,000
*57,000 + 84,000 44,000

572

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Chapter 7

Merchandise Inventories and

Copyright 2005 by McGraw-Hill Ryerson Limited. All rights reserved.

Quick Study 7-2

Quick Study 7-4

Copyright 2005 by McGraw-Hill Ryerson Limited. All rights reserved.

Fundamental Accounting Principles, Eleventh Canadian Edition

Quick Study 7-6

Sales (at cost)

Cost of goods available for sale

Cost of goods sold

(b) LIFO perpetual

Sales (at cost)

100 @ $3.35 = $ 335.00

Cost of goods available for sale

Cost of goods sold

Copyright 2005 by McGraw-Hill Ryerson Limited. All rights reserved.

140 @ $3.00 = $ 420.00

Quick Study 7-6 (continued)

Sales (at cost)

Cost of goods available for sale

Cost of goods sold

* cost/unit changed due to rounding

Quick Study 7-7

Sales (at cost)

250 @ $3.00 = $ 750.00

Cost of goods available for sale

Cost of goods sold

Copyright 2005 by McGraw-Hill Ryerson Limited. All rights reserved.

Fundamental Accounting Principles, Eleventh Canadian Edition

Quick Study 7-8

Quick Study 7-9

LCM applied to:

Cost of Goods Sold.............................................

Quick Study 7-10

Understates cost of goods sold.

b. Overstates gross profit.

Overstates 2005 net income.

d. Understates 2006 net income.

The error in 2005 will not affect years subsequent to 2006.

Quick Study 7-11

Quick Study 7-12

b. The estimated shrinkage is $7,000 ($55,000 - $48,000).

Cost to retail ratio: $67,600 $104,000 = 65%

Quick Study 7-14

Copyright 2005 by McGraw-Hill Ryerson Limited. All rights reserved.

Fundamental Accounting Principles, Eleventh Canadian Edition

*Quick Study 7-15

= $463 Cost of Ending Inventory

= $420 Cost of Ending Inventory

c) Average cost periodic

Copyright 2005 by McGraw-Hill Ryerson Limited. All rights reserved.

*Quick Study 7-17

The change from 2004 to 2005 is generally considered to be favourable.

The change from 2004 to 2005 is generally considered to be favourable.

Copyright 2005 by McGraw-Hill Ryerson Limited. All rights reserved.

Fundamental Accounting Principles, Eleventh Canadian Edition

Sales (at cost)

Cost of goods available for sale

Cost of goods sold

220 @ $20.00 = $ 4,400

Gross profit calculation under FIFO:

Copyright 2005 by McGraw-Hill Ryerson Limited. All rights reserved.