Chapter 6

Inventory & Cost of Goods Sold

Short Exercises

(10 min.) S 6-1

Billions
a. Inventory ................................................ 4.5
Cash .................................................. 4.5

b. Accounts Receivable ............................ 18.9

Sales Revenue .................................. 18.9

c. Cost of Goods Sold ............................... 3.9

Inventory ........................................... 3.9

d. Cash ........................................................ 18.7

Accounts Receivable ....................... 18.7

Chapter 6 Inventory and Cost of Goods Sold 6-1

 (10-15 min.) S 6-2

1. (Journal entries)

Inventory………………………………….. 125,000
Accounts Payable……………………. 125,000

Accounts Receivable…………………… 190,000

Sales Revenue………………………... 190,000

Cost of Goods Sold…………………….. 100,000

Inventory ($125,000 × .80)………….. 100,000

Cash ($190,000 × .25)…………………... 47,500

Accounts Receivable………………... 47,500

2. (Financial statements)

BALANCE SHEET
Current assets:
Inventory ($125,000 − $100,000)………………. $ 25,000

INCOME STATEMENT
Sales revenue……………………………………….... $190,000
Cost of goods sold…………………………………... 100,000
Gross profit…………………………………………… $ 90,000

6-2 Financial Accounting 9/e Solutions Manual

 (15-20 min.) S 6-3

a b c
Average
Cost FIFO LIFO
Cost of goods sold:
Average (28 × $157.50) $4,410
FIFO [$1,350 + (19 × $160)] $4,390
LIFO [$4,320 + (1 × $150)] $4,470

Ending inventory:
Average (8 × $157.50) $ 1,260
FIFO (8 × $160) $1,280
LIFO (8 × $150) $1,200

Computations:
Units sold = 28 (9 + 27 − 8)
Average cost per unit = $157.50 ($1,350 + $4,320) ÷ (9 + 27)
Cost per unit:
Beginning inventory = $150 ($1,350 ÷ 9 = $150)
March purchase = $160 ($4,320 ÷ 27 = $160)

Chapter 6 Inventory and Cost of Goods Sold 6-3

 (10-15 min.) S 6-4

Jonah’s Copy Center

Income Statement
Year Ended December 31
Average FIFO LIFO
Sales revenue (600 × $20.50) $12,300 $12,300 $12,300
Cost of goods sold (600 × $9.85*) 5,910
(100 × $8.40) + (500 × $9.90) 5,790
(600 × $9.90) 5,940
Gross profit 6,390 6,510 6,360
Operating expenses 3,900 3,900 3,900

Net income $ 2,490 $ 2,610 $ 2,460

_____
*Average cost per unit:
Beginning inventory (100 @ $9.50)…………….. $ 950
Purchases (700 @ $9.90)………………………… 6,930
Goods available…………………….……………… $7,880
Average cost per unit $7,880 / 800 units…… $ 9.85

6-4 Financial Accounting 9/e Solutions Manual

 (10-15 min.) S 6-5

Jonah’s Copy Center

Income Statement
Year Ended December 31
Average FIFO LIFO
Sales revenue (600 × $20.50) $12,300 $12,300 $12,300
Cost of goods sold (600 × $9.85*) 5,910
(100 × $8.40) + (500 × $9.90) 5,790
(600 × $9.90) ______ ______ 5,940
Gross profit 6,390 6,510 6,360
Operating expenses 3,900 3,900 3,900
Income before income tax $ 2,490 $ 2,610 $ 2,460
Income tax expense (40%) $ 996 $ 1,044 $ 984

*From S 6-4 Method to Method to

maximize minimize
reported income tax
income expense.
(before
tax).

Chapter 6 Inventory and Cost of Goods Sold 6-5

 (5 min.) S 6-6

Macrovision.com managers can purchase a large amount of inventory before year

end. Under LIFO, these high inventory costs go directly to cost of goods sold in the
current year. Higher cost of goods sold creates lower net income, and lower net
income results in lower income taxes. Saving on taxes is one reason companies
want to decrease their income.

Student responses may vary.

(5-10 min.) S 6-7

BALANCE SHEET
Current assets:
Inventories, at market (which is lower than cost)……. $ 49,000

INCOME STATEMENT
Cost of goods sold [$420,000 + ($65,000 − $49,000)]……. $436,000

6-6 Financial Accounting 9/e Solutions Manual

 (15-20 min.) S 6-8

DATE: _____________

TO: Jim Tolbert, President of Tolbert Trumpet Company

FROM: Student Name

SUBJECT: Proposal for Increasing Net Income

We can increase net income by not buying below-normal quantities of inventory as

we make sales. Inventory costs are rising, and the company uses the LIFO inventory
method. Under LIFO, the high cost of our inventory purchases goes straight into
cost of goods sold. By decreasing our purchases of inventory, we can keep those
high costs out of cost of goods sold this year. That will keep net income from going
lower and will help net income be as high as possible. Also, our inventory quantities
are above normal, so we don’t need to buy a lot of inventory before year end.

Student responses will vary.

(10-15 min.) S 6-9

LIFO 1. Generally associated with saving income taxes

Specific
unit cost 2. Used to account for automobiles, jewelry, and art objects

FIFO 3. Results in a cost of ending inventory that is close to the current cost
of replacing the inventory

Chapter 6 Inventory and Cost of Goods Sold 6-7

 FIFO 4. Maximizes reported income

LIFO 5. Enables a company to buy high-cost inventory at year end and

thereby to decrease reported income and income tax

LIFO 6. Results in an old measure of the cost of ending inventory

Average 7. Provides a middle-ground measure of ending inventory and cost

of goods sold

LIFO 8. Enables a company to keep reported income from dropping lower

by liquidating older layers of inventory

All 9. Writes inventory down when replacement cost drops below historical
cost

LIFO 10. Matches the most current cost of goods sold against sales revenue

6-8 Financial Accounting 9/e Solutions Manual

 (5-10 min.) S 6-10

Dollars in Millions
$35,376 − $15,437
Gross profit percentage = = 56.4%
$35,376

$15,437
Inventory turnover = = 8.6 times
($1,672 + $1,908) / 2

(5-10 min.) S 6-11

Beginning inventory……………………………... $ 315,000

+ Purchases……………………………………….… 1,820,000
= Goods available…………………………………... 2,135,000
− Cost of goods sold:
Sales revenue…………………………. $3,920,000
Less estimated gross profit (60%)… (2,352,000)
Estimated cost of goods sold………………. (1,568,000)
= Estimated cost of ending inventory…………... $ 567,000

Chapter 6 Inventory and Cost of Goods Sold 6-9

 (5 min.) S 6-12

Correct
Amount
(Millions)

a. Net sales (unchanged)………………………………. $2,500

b. Inventory ($480 − $13)……………………………….. $ 467
c. Cost of goods sold ($1,160 + $13)………………… $1,173
d. Gross profit ($2,500 − $1,173)……………………… $1,327

(5 min.) S 6-13

1. Last year’s reported gross profit was understated.

Correct gross profit last year was $5.1 million ($3.7 + $1.4).

2. This year’s gross profit is overstated.

Correct gross profit for this year is $3.2 million ($4.6 − $1.4).

6-10 Financial Accounting 9/e Solutions Manual

 (5-10 min.) S 6-14

1. Unethical. The company falsified its ending inventory in order to cheat the
government (and the people) out of taxes.

2. Ethical. There is nothing wrong with buying inventory whenever a company

wishes.

3. Ethical. Same idea as 2.

4. Unethical. The company falsified its ending inventory and net income.

5. Unethical. The company falsified its purchases, cost of goods sold, and net
income in order to evade taxes.

Chapter 6 Inventory and Cost of Goods Sold 6-11