CHAPTER The two steps are obtaining (1) a physical count and (2) a cost valuation.

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1 CHAPTER Sales transactions are accompanied by recording of the cost of goods sold (or cost of sales). This is literally true under the perpetual system and conceptually descriptive under the periodic system. 7-2 The two steps are obtaining (1) a physical count and (2) a cost valuation. 7-3 Perpetual systems provide continuous inventory and cost of goods sold records. Periodic systems rely on physical inventory taking to record cost of goods sold at the end of the period. 7-4 It is true that the periodic method requires a physical count to measure cost of goods sold and the perpetual method does not. However, for control purposes, it is important to undertake at least annual physical counts of inventory under the perpetual method, as well. 7-5 F.O.B. destination means the shipper pays the freight bill. F.O.B shipping point means the customer bears the cost of the freight bill. F.O.B. stands for "free on board." 7-6 Freight out is not shown as a direct offset to sales. Unlike sales discounts and returns, freight out is not a part of gross revenue that never gets collected. Instead, it is an expense, entailing ordinary cash disbursements. 298

2 7-7 The four methods are: 1. Specific identification charges the actual cost of the specific item sold. 2. FIFO items purchased first are assumed to be sold first. 3. LIFO items purchased most recently are assumed to be sold first. 4. Weighted average the average cost of all items available is charged for each item sold. 7-8 The specific identification method is normally used for low volume, high value items. Therefore, we would expect this to be used for a, b, d, and f. 7-9 Yes. Under FIFO the oldest costs are assigned to the cost of goods sold first, so the timing of purchases cannot affect cost flows The good news is that LIFO reduces taxes in times of rising prices. The bad news is that reported profit is lower Yes. Purchases under LIFO can affect income immediately, because the unit costs of the latest purchases are assigned to units sold No. The weighted average must take into account the number of units purchased at each price. For Gamma Company, the weighted average unit cost of inventory is: [(2 x $4.00) + (3 x $5.00)] 5 = $ Ending inventory is lower under LIFO in a period of rising prices and constant or growing inventory. FIFO produces the higher ending inventory value. Chapter 7 Inventories and Cost of Goods Sold 299

3 7-14 Falling prices reverse the normal relation, so FIFO produces higher cost of goods sold and, therefore, lower net earnings. This helps explain why computer and electronics firms typically use FIFO in order to lower their taxes Consistency requires the maintaining of constant accounting methods from period to period. Switching accounting methods hinders comparisons of current results to those of preceding periods Companies have adopted LIFO primarily because it saves income taxes during times of rising prices by reporting higher cost of goods sold and lower profits An inventory profit is fictitious because, for a going concern, it represents an amount necessary for replenishing inventory and is therefore not "available" in the form of cash for distribution as dividends. It arose from change in unit costs of the products purchased, not from the company's value added activities LIFO inventory valuations can be absurd because inventory valuation is based on older and older costs as the years pass Conservatism does result in lower immediate profits, but higher profits are then shown in later periods This convention is called conservatism. 300

4 7-21 "Market" generally means cost of replacement at the date of the physical inventory The inconsistency is the willingness of accountants to have replacement costs used as a basis for write-downs below historical costs, even though a market exchange has not occurred, but their unwillingness to have replacement costs used as a basis for write-ups above historical costs Many inventory errors do counterbalance. For example, an ending inventory that is overstated will overstate current income. But the same overstated inventory becomes the beginning inventory the next year; hence, next year's income will be understated. To show this you might use the following schematic: Year 1 Year 2 BI OK Too Large + Purchase OK OK Goods Available OK Too Large Ending Inventory Too Large OK Cost of Goods Sold Too Small Too Large This exercise stresses the fact that the ending inventory of one year becomes the beginning inventory of the subsequent year and the errors correct themselves Cost of goods sold = Beginning inventory + Purchases Ending inventory Past gross profit percentages are sometimes applied to current revenue as interim estimates of gross profit for a month or quarter. Thus, the time and cost of taking physical inventories can be saved. Chapter 7 Inventories and Cost of Goods Sold 301

5 7-26 Grocery stores have a low profit margin. If the profit margin is 2%, a savings of $100 in shrinkage would be equivalent to a $5,000 increase in sales Your boss has a point. This is a cost benefit question. If we do not give the discount, we may lose customers to competitors of ours that treat them better. But if it is not currently a custom in the industry, you may not have to do it. If offering the discount does not cause customers to buy more, it is giving money away. However, if it is not an industry custom and it attracts new customers, that may lead to a different conclusion. Compare how much your operating income would rise from newly attracted customers versus the discounts received by existing customers Phar Mor overstated its assets by overstating inventories. This means that either liabilities or stockholders equity must also be overstated (to keep the balance sheet equation in balance). Most likely Phar Mor used a periodic inventory method, so that overstating ending inventory would reduce cost of goods sold and increase pretax profit. If the company used a perpetual inventory system, management must have made inappropriate credits to cost of goods sold or some other expense account to offset the additional debits to the inventory account Under the FIFO method, the cost of sales will be based on old acquisition costs. Under the LIFO method, the cost of sales will be based on the most recent acquisition costs. Thus, under LIFO, if additional units are acquired on the last day of the year, the cost of those units will be included in cost of sales. Thus, under LIFO, additional purchases would produce higher cost of goods sold in this instance and lower evaluations for the purchasing officer. Thus, under LIFO he would be less likely to purchase additional oil on the last day of the year. 302

6 7-30 There are many advantages to a perpetual inventory system. It allows a continuous tracking of inventories, allowing better control of inventory. It provides an up-to-date measure of cost of goods sold without having to take a physical count. Its biggest disadvantage is cost; a periodic inventory system is simpler and less costly. However, with the use of optical scanning and computers the cost of a perpetual inventory system has come down quickly. If the Zen Bootist is willing to invest in a system that codes each individual product and tracks its progress through the inventories, then many advantages of a perpetual inventory system can be achieved (10-15 min.) GOODMAN S JEWELRY WHOLESALERS Schedule of Gross Profit For the Year Ended December 31, 20X8 (In Thousands) Gross sales $985 Deduct: Sales returns and allowances $40 Cash discounts on sales 5 45 Net sales 940 Cost of goods sold: Inventory, December 31, 20X7 $103 Add: Gross purchases $650 Deduct: Purchase returns and allowances $27 Cash discounts on purchases 6 33 Net purchases 617 Add Freight-in 50 Cost of merchandise acquired 667 Cost of goods available for sale 770 Deduct: Inventory, December 31, 20X8 185 Cost of goods sold 585 Gross profit $355 Chapter 7 Inventories and Cost of Goods Sold 303

7 7-32 (20 min.) Sales $71,200 Sales returns 2,300 Net sales $68,900 Cost of goods sold: Inventory, January 1* x = $39,864 Purchases $54,000 Purchase returns 2,000 Net purchases $52,000 Freight in ,500 Cost of goods available for sale $92,364 Inventory, January 15 40,000 Cost of goods sold,.76 x $68,900 52,364 Gross margin,.24 x $68,900 $16,536 * $52,364 + $40,000 52,500 = $39, 864 or: Cost of goods sold (.76 x 68,900) $52,364 Cost of goods purchased 52,500 Inventory increase $ 136 Beginning Balance = Ending Balance + Change = $40,000 - $136 $39,

8 7-33 (5 min.) Amounts are in millions of dollars. Perpetual Periodic Accounts receivable* 19 Accounts receivable 19 Sales revenue 19 Sales revenue 19 Cost of goods sold 15 No entry Merchandise inventory 15 * Could be a debit to cash if sales were for cash (10-15 min.) Cost of Goods Available = 21,400 (8, , , , ,500) LIFO Ending Inventory = 2) ) = 11,150 FIFO Ending Inventory = 2.50 = 2, = 2, = 4, = 3,150 5,500 12,350 Weighted average = 21,400/10,000 = 2.14 per unit Ending inventory 2.14 = 11,770 Cost of Goods Sold Calculation: Weighted LIFO FIFO Average Cost of goods available 21,400 21,400 21,400 Less Ending Inventory (11,150) (12,350) (11,770) Cost of Goods Sold 10,250 9,050 9,630 Chapter 7 Inventories and Cost of Goods Sold 305

9 7-35 (10-15 min.) This is straightforward. Answers are in Swiss francs. Aug. 2 Purchases 350,000 Accounts payable 350,000 Aug. 3 Freight-in 15,000 Cash 15,000 Aug. 7 Accounts payable 30,000 Purchase returns and allowances 30,000 Aug. 11 Accounts payable 320,000 Cash discounts on purchases 6,400 Cash 313,

10 7-36 (10-15 min.) 1. Invoice price $200,000 Add: Freight-in 10,000 Deduct: Purchase allowance (15,000) Deduct: Cash discount (3,700)* Total cost of steel acquired $191,300 *2% x ($200,000 $15,000) 2. Purchases (or Inventory)* 200,000 Accounts payable 200,000 *The debit is to Purchases under the periodic inventory method and to Inventory under the perpetual inventory system. Freight-in 10,000 Accounts payable (or cash) 10,000 Accounts payable 15,000 Purchase returns and allowances 15,000 Accounts payable 185,000 Cash discounts on purchases 3,700 Cash 181,300 Chapter 7 Inventories and Cost of Goods Sold 307

11 7-37 (15 min.) Amounts are in thousands of dollars. See Exhibit 7-37 for the balance sheet equation. Although not required, the balance sheet equation provides a good framework for understanding. Journal Entries Perpetual System a. Gross purchase: Inventory 960 Accounts payable 960 b. Returns and allowances: Accounts payable 80 Inventory 80 c. As goods are sold: Cost of goods sold 890 Inventory 890 d1. and d2. No entry Periodic System a. Gross purchase: Purchases 960 Accounts payable 960 b. Returns and allowances: Accounts payable 80 Purchase returns and allowances 80 c. As goods are sold: No entry d1. Transfer to cost of goods sold: Cost of goods sold 990 Purchase returns and allowances 80 Purchases 960 Inventory 110 d2. Recognize ending inventory: Inventory

12 Cost of goods sold 100 Chapter 7 Inventories and Cost of Goods Sold 309

13 EXHIBIT 7-37 Entries are in thousands of dollars. A = L + SE Accounts Retained PERPETUAL SYSTEM Inventory Payable Earnings Balance, 12/31/X = a. Gross purchases +960 = b. Returns and allowances 80 = 80 c. As goods are sold Closing the accounts at end of period: ØIncrease Cost ø Œº of Goods Soldœß d1. No entry d2. No entry Ending balances, 12/31/X =

14 EXHIBIT 7-37 (continued) A = L + SE Purchase Returns and Accounts Retained PERIODIC SYSTEM Inventory Purchases Allowances Payable Earnings Balance, 12/31/X = a. Gross purchases +960 = b. Returns and allowances 80 = 80 c. As goods are sold (no entry) Closing the accounts at end of period: d1. Transfer to cost of goods sold = 990 ØIncrease Cost ø Œº of Goods Soldœß d2. Recognize ending inventory +100 = Ending balances, 12/31/X = ØDecrease Cost ø Œº of Goods Sold œß Chapter 7 Inventories and Cost of Goods Sold 311

15

16 7-38 (10 min.) This is straightforward. 1. Purchases 880,000 Accounts payable 880, Accounts payable 50,000 Purchase returns and allowances 50, Freight-in 74,000 Cash 74, Accounts payable 830,000 Cash 812,000 Cash discounts on purchases 18, (10 min.) The entries could be compounded. Accounts receivable (or Cash) 1,250,000 Sales 1,250,000 Cost of goods sold 957,000 Purchase returns and allowances 50,000 Cash discounts on purchases 18,000 Purchases 880,000 Freight-in 74,000 Inventory 71,000 Inventory 120,000 Cost of goods sold 120,000 Chapter 7 Inventories and Cost of Goods Sold 313

17 7-40 (10-15 min.) Compound entries could be prepared. (Amounts are in millions.) Purchases 130 Accounts payable 130 Accounts receivable 239 Sales 239 Sales returns and allowances 5 Accounts receivable 5 Accounts payable 6 Purchase returns and allowances 6 Freight-in 14 Cash 14 Accounts payable 124 Cash discounts on purchases 1 Cash 123 Cash 226 Cash discounts on sales 8 Accounts receivable 234 Cost of goods sold 162 Purchase returns and allowances 6 Cash discounts on purchases 1 Inventory 25 Purchases 130 Freight-in 14 Inventory 45 Cost of goods sold 45 Other expenses

18 Cash (or other accounts) (5 min.) Amounts are in millions of dollars. Beginning inventory $ 45 Purchases 4,510 Cost of goods available 4,555 Ending inventory (56) Cost of goods sold $4,499 Chapter 7 Inventories and Cost of Goods Sold 315

19 7-42 (15-20 min.) This problem develops familiarity with the gross profit section. The answer, $51,200, is computed by filling in the gross profit section and solving for the unknown, or: $192,000 55%($256,000) = $51,200. Gross sales $280,000 Deduct: Sales returns and allowances 24,000 Net sales $256,000 Cost of goods sold: Inventory, December 31, 20X7 $38,000 Gross purchases $160,000 Deduct: Purchase returns and allowances $8,000 Cash discounts on purchases 2,000 (10,000) Net purchases 150,000 Inward transportation 4,000 Cost of goods acquired 154,000 Cost of goods available for sale 192,000 Inventory, May 3, 20X8* x = 51,200 Cost of goods sold, 55% of $256, ,800 Gross profit, 45% of $256,000 $115,200 * Calculated as the difference between cost of goods available for sale, $192,000, and cost of goods sold $140,

20 7-43 (15 min.) Sales $200,000 Cost of goods sold: Inventory, January 1 $65,000 Purchases $195,000 Purchase returns and allowance 10,000 Net purchases $185,000 Freight-in 15, ,000 Cost of goods available for sale $265,000 Inventory, March 9* x = 105,000 Cost of goods sold, 80% of $200, ,000 Gross margin, 20% of $200,000 $ 40,000 * The answer, $105,000, is obtained by filling in the schedule of cost of goods sold and solving for the unknown, or: $265,000 80%($200,000) = $265,000 $160,000 = $105, (10-15 min.) Beginning inventory $ 55,000 Purchases 200,000 Cost of goods available for sale $255,000 Less estimated cost of goods sold: 75%* of $280, ,000 Estimated ending inventory $ 45,000 *100% 25% = 75% The difference between $45,000 and the amount of inventory remaining is an estimate of the amount missing. Chapter 7 Inventories and Cost of Goods Sold 317

21 7-45 (10-15 min.) 1 & 2. To calculate the effect use the following approach: 20X5 20X6 Beginning inventory OK Too low $20,000 + Purchases OK OK Goods available OK Too low $20,000 -Ending inventory Too low $20,000 OK Cost-of-goods sold Too high $20,000 Too low $20,000 Cost-of-goods sold is too high by $20,000 in 20X5 so taxable income will be too low by $20,000. Taxes will be too low by $8,000 so net income and retained earnings will be too low by $12,000. Taxable income for 20X6 will be overstated by $20,000 and taxes will be $8,000 too high. Net income in 20X6 will be too high by $12,000 and retained earnings will be correct again at December 31, 20X6. 318

22 7-46 (10-15 min.) 1. Inventory turnover = cost of goods sold* average inventory = $1,080,000 $1,080,000 = 1.00 *Cost of goods sold = $2,400,000 $1,320,000 = $1,080, The gross profit would fall from $1,320,000 to $1,260,000, so a change in pricing strategy would be undesirable for Custom Gems. The current 20X3 data follow: Inventory turnover 1.0 Gross profit percentage: $1,320,000 $2,400,000 55% This percentage is not unusual. If prices are cut 20 percent in 20X4 without affecting inventory turnover, new sales would be.8 x $2,400,000 = $1,920,000. Cost of goods sold on those sales would still be $1,080,000. Therefore Mr. Siegl would be reducing his gross profit from $1,320,000 to $1,920,000 - $1,080,000 = $840,000 and its gross profit percentage to 44% [($1,920,000 - $1,080,000) $1,920,000]. However, an increase in inventory turnover to 1.5 would produce the following: Sales, $1,920,000 x 1.5 $2,880,000 Cost of goods sold, $1,080,000 x 1.5 1,620,000 Gross profit $1,260,000 Gross profit would be only $60,000 below the 20X3 level. Chapter 7 Inventories and Cost of Goods Sold 319

23 7-47 (15-20 min.) 1. LIFO Method: Inventory shows: 1,100 tons on hand at July 31. Costs: 1,000 $ 9.00 $ 9, $ ,000 July 31 inventory cost. $10,000 FIFO Method: Inventory shows: 1,100 tons on hand at July 31. Costs: 900 $12.00 $10, $ ,200 July 31 inventory cost. $13, Purchases: 5,000 $10 $50,000 1,000 $11 11, $12 10,800 Total purchases $71,800 Beginning inventory: 1,000 $ 9 9,000 LIFO FIFO Cost of goods available for sale $80,800 $ 80,800 $ 80,800 Less ending inventory (10,000) (13,000) Cost of goods sold $ 70,800 $ 67,800 Sales $102,000 $102,000 Cost of goods sold 70,800 67,800 Gross profit $ 31,200 $ 34,

24 7-48 (5-10 min.) The inventory would be written down from $200,000 to $185,000 on December 31, 20X1. The new $185,000 valuation is "what's left" of the original $200,000 cost. In other words, the $185,000 is the unexpired cost and may be thought of as the new cost of the inventory for future accounting purposes. Thus, because subsequent replacement values exceed the $185,000 cost, and write-ups above "cost" are not acceptable accounting practice, the valuation remains at $185,000 until it is written down to $180,000 on the following December 31, 20X (10-15 min.) Amounts are in millions of dollars. The cost of inventory acquired during the year ending August 31, 2003, can be calculated as follows. Beginning Inventory $ 3,127 Purchases X = 37,537 Cost of goods available Y = 40,664 Ending inventory (3,339) Cost of merchandise sold $37,325 Y = 37, ,339 = 40,664 X = 40,664 3,127 = 37,537 Chapter 7 Inventories and Cost of Goods Sold 321

25 7-50 (10 min.) Dollar amounts are in millions. 2003: ($11,305 - $7,799) $11,305 = 31.01% 2002: ($11,019 - $7,604) $11,019 = 30.99% 2001: ($11,332 - $7,815) $11,332 = 31.04% The gross profit percentage was very steady over these three years, with just a slight dip in 2002 followed by a small recovery. Though not in the problem, it might be interesting to note that the gross profit percentage has ranged for 27% to 31% over the past ten years (10-15 min.) 1. ISLAND BUILDING SUPPLY Statement of Gross Profit For the Year Ended December 31, 20X1 Sales $1,200,000 Cost of goods sold: Inventory, beginning $ 240,000 Add net purchases 1,035,000 Cost of goods available for sale $1,275,000 Deduct ending inventory (330,000) Cost of goods sold 945,000 Gross profit $255, Inventory turnover = Cost of goods sold Average inventory = $945,000 [1/2 x (240, ,000)] = 945, ,000 = 3.3 times 322

26 7-52 (30-40 min.) The detailed income statement is in the accompanying exhibit. Note the classification of operating expenses into a selling category and a general and administrative category. The list of accounts in the problem contained one item that belongs in a balance sheet rather than an income statement, the Allowance for Bad Debts (an offset to Accounts Receivable). The delivery expenses and the bad debts expense are shown under selling expenses. Some accountants prefer to show the bad debts expense as an offset to gross sales or as administrative expenses. Chapter 7 Inventories and Cost of Goods Sold 323

27 7-52 (continued) BACKBAY BATHROOM SUPPLY COMPANY Income Statement For the Year Ended December 31, 20X5 (In Thousands) Revenues: Gross sales $1,091 Deduct: Sales returns and allowances $ 50 Cash discounts on sales Net sales $1,025 Cost of goods sold: Inventory, December 31, 20X4 $200 Add purchases $600 Less: Purchase returns and allowances $40 Cash discounts on purchases Net purchases $545 Add Freight in 50 Cost of merchandise acquired 595 Cost of goods available for sale $795 Deduct: Inventory, December 31, 20X5 300 Cost of goods sold 495 Gross profit from sales $ 530 Operating expenses: Selling expenses: Sales salaries and commissions $160 Rent expense, selling space 90 Advertising expense 45 Depreciation expense, trucks and store fixtures 29 Bad debts expense 8 Delivery expenses 20 Total selling expenses $352 General and administrative expenses: Office salaries 46 Rent expense, office space 10 Depreciation expense, office equipment 3 Office supplies used 6 Miscellaneous expenses 13 Total general and administrative expenses 78 Total operating expenses 430 Income before income tax $ 100 Income tax expense

28 Net income $ 58 Chapter 7 Inventories and Cost of Goods Sold 325

29 7-53 (15-25 min.) Under the FIFO cost-flow assumption, the periodic and perpetual procedures give identical results. The ending inventory will be valued on the basis of the last purchases during the period. Units $ Beginning Inventory Purchases 290 2,050 Goods available 410 2,650 Units sold 255 1,465** Units in ending Inventory 155 1,185* * 155 units remain in ending inventory 100 will be valued at the $8 cost from the October 21 purchase and the remaining 55 will be valued at the $7 cost from the May 9 purchase 100 x $8 = $ x $7 = 385 $1,185 Ending inventory ** Reconciliation: Cost of Goods Sold: 255 Units: 120 x $5 = $ x $6 = x $7 = 385 $1,

30 7-54 (30-35 min.) 1. Gross profit percentage = $1,600,000 $4,000,000 = 40% Inventory turnover = $2,400,000 = 3 times $850, , Inventory turnover = $2,400,000 $600,000 = 4 times, a 1/3 increase in turnover. 3. With a lower average inventory and constant inventory turnover, cost of sales must fall. Total cost of goods sold = $600,000 x 3 = $1,800,000. To achieve a gross profit of $1,600,000, total sales must be $1,800,000 + $1,600,000, or $3,400,000. The gross profit percentage must be $1,600,000 $3,400,000 = 47.1%. Requirements 2 & 3 show that if inventory levels are reduced you must increase either inventory turnover or margins to maintain profitability. 4. Summary (computations are shown below): Succeeding Year Given Year 4a 4b Sales $4,000,000 $3,857,143 $4,125,000 Cost of goods sold 2,400,000 2,160,000 2,640,000 Gross profit $1,600,000 $1,697,143 $1,485,000 Chapter 7 Inventories and Cost of Goods Sold 327

31 7-54 (continued) a. New gross profit percentage, 40% +.10(40%) = 44% New inventory turnover, 3.10(3) = 2.7 New cost of goods sold, $800,000 x 2.7 = $2,160,000 New sales = $2,160,000 (1.44) = $2,160, = $3,857,143 Note that this is a more profitable alternative, assuming that the gross profit percentage and the inventory turnover can be achieved. In contrast, alternative 4b is less attractive than the original 40% gross profit and turnover of 3. b. New gross profit percentage, 40%.10(40%) = 36% New inventory turnover, (3) = 3.3 New cost of goods sold, $800,000 x 3.3 = $2,640,000 New sales = $2,640,000 (1 -.36) = $2,640, = $4,125, Retailers find these ratios (and variations thereof) helpful for a variety of operating decisions, too many to enumerate here. An obvious help is the quantifying of the options facing management regarding what and how much inventory to carry, and what pricing policies to follow. You may want to stress that this analysis ignores one benefit of higher inventory turnover the firm reduces its investment in inventory and reduces storage and display requirements. 328

32 7-55 (25-35 min.) The detailed income statement is in the accompanying exhibit. Some accountants prefer to show the provision for uncollectible accounts as an offset to gross sales. The data for the allowance for doubtful accounts does not affect the income statement. SEARS, ROEBUCK & COMPANY Income Statement For the Year Ended December 31, 2002 (In Millions) Revenues: Gross revenues (Plug) $44,316 Deduct: Sales returns and allowances $ 2,100 Cash discounts on sales 850 2,950 Net revenues $41,366 Cost of goods sold: Inventory, December 31, 2001 $4,912 Add purchases $26,124 Less: Purchase returns and allowances $1,200 Cash discounts on purchases 180 1,380 Net purchases $24,744 Add Freight in 1,100 Cost of merchandise acquired 25,844 Cost of goods available for sale $30,756 Deduct: Inventory, December 31, ,115 Cost of sales 25,646 Gross profit $15,720 Operating expenses: Selling and administrative $9,249 Provision for uncollectible accounts 2,261 Depreciation 875 Other operating expenses ,496 Operating income $ 3,224 Interest expense 1,143 Other income, net (372) Income before tax $ 2,453 Chapter 7 Inventories and Cost of Goods Sold 329

33 7-56 (20-30 min.) 1. CONTRACTOR SUPPLY CO. Comparison of Inventory Methods Statement of Gross Profit of Kemtone Cooktops For the Year Ended December 31, 20X8 (In Dollars) FIFO LIFO Weighted Average Sales, 260 units 26,200 26,200 26,200 Deduct cost of goods sold: Inventory, December 31, 20X7, $50 5,500 5,500 5,500 Purchases, 300 units 21,200 21,200 21,200 Cost of goods available for sale, 410 units 26,700 26,700 26,700 Deduct: Inventory, December 31, 20X8, 150 units: $80 8,000 $70 3,500 11,500 $50 5,500 $60* 2,400 7, ), $ ,768 Cost of goods sold, 260 units 15,200 18,800 16,932 Gross profit 11,000 7,400 9,268 * This is a periodic LIFO. Students are using perpetual LIFO if they answer $60 plus $80 = $2, Income taxes would be lower by.40($11,000 $7,400) = $1,440. The income tax rate is assumed to be identical at all levels of taxable income. Some students will wonder why no information is given regarding other expenses and net income. Such information is unnecessary because other expenses, whatever their amounts, will be common among all inventory methods. Thus gross profits provide sufficient information to measure the differences in income taxes among various inventory methods. 330

34 7-57 (15-20 min.) There would be no effect on gross profit, net income, or income taxes under FIFO, although the balance sheet would show ending inventory as $8,000 higher. The income statement would show purchases and ending inventory as higher by $8,000, so the net effect on cost of goods sold would be zero. LIFO would show a lower gross profit, $6,000, as compared with $7,400, a decrease of $1,400. Hence, the impact of the late purchase on income taxes would be a savings of 40% of $1,400 = $560. The tabulation below compares the results under LIFO (in dollars): Without Late Purchase With Late Purchase Sales, 260 Units 26,200 26,200 Deduct: Cost of goods sold: Inventory, December 31, 20X7, $50 5,500 5,500 Purchases, 300 units at various costs 21,200 21, $80-8,000 Cost of goods available for sale 26,700 34,700 Deduct: Inventory, December 31, 20X8: First layer (pool) $50 5,500 5,500 Second layer (pool) $60 2,400 7,900 Second layer (pool) $60 4,800 Third layer (pool) $70 4,200 14,500 Cost of goods sold, 260 units 18,800 20,200 Gross profits 7,400 6,000 Income 40% 2,960 2,400 Chapter 7 Inventories and Cost of Goods Sold 331

35 7-57 (continued) Although purchases are $8,000 higher than before, the new LIFO ending inventory is only $14,500 $7,900 = $6,600 higher. The $1,400 difference in gross profit is explained by the fact that the late purchase resulted in changes to both ending inventory and cost of goods sold. LIFO cost of goods sold is $1,400 higher ($20,200 $18,800). To see this from another angle, compare layers. Without the late purchase, the second layer had 40 $60. With the late purchase: Late purchase released as expense, $80 $8,000 Second layer is 40 units $60 = $2,400 Third layer is 60 $70 = 4,200 Amount held as ending inventory that would otherwise have been released as expense in the form of cost of goods sold 6,600 Difference in cost of goods sold $1, (15 min.) 1. LIFO: 100 $10 $1, $ $1, Replacement cost: 120 $12 = $1,440. LIFO is lower than replacement cost. Therefore, no inventory write-down takes place, and the balance sheet shows $1, FIFO: 20 $12 $ $13 1,300 $1, Replacement cost is $1,440 (see Requirement 2). Because replacement cost is lower than FIFO, the balance sheet should 332

36 include the lower amount, $1,440. Most companies would treat the $100 inventory write-down as an increase in cost of sales. Chapter 7 Inventories and Cost of Goods Sold 333

37 7-59 (10-15 min.) 1. O is used for overstated, U for understated, and N for not affected. (In Thousands) 20X1 20X2 Beginning inventory* N O $15 Ending inventory* O $15 N Cost of goods sold U 15 O 15 Gross margin O 15 U 15 Income before income taxes O 15 U 15 Income tax expense O 6 U 6 Net income O 9 U 9 *The ending inventory for 20X1 becomes the beginning inventory for 20X2. 2. Retained earnings would be overstated by $9,000 at the end of the first year. However, the error would be offset in the second year, assuming no change in the 40% income tax rate. Therefore, retained earnings would be correct at the end of the second year (20-30 min.) 1. See Exhibit 7-60 on the following page. 2. LIFO results in more cash by the difference in income tax effects. LIFO results in a lower cash outflow of.40 x ($116,000 $96,000) = $8, FIFO results in more cash when inventory prices are falling. Why? Because income tax cash outflow would be more under LIFO by.40($144,000 $124,000) = $8,

38 EXHIBIT 7-60 Unit $12 Unit $8 Requirement a Requirement b FIFO LIFO FIFO LIFO Sales, $20 $240,000 $240,000 $240,000$240,000 Deduct cost of goods sold: Inventory, December 31, 20X1, $10 100, , , ,000 Purchases: $12 and $8, respectively 156, , , ,000 Cost of goods available for sale 256, , , ,000 Deduct: Inventory, December 31, 20X2, 11,000 units: $12 = 132,000 or $10 = $100,000 $12 = 12, ,000 or $ 8 = 88,000 or $10 = $100,000 $ 8 = 8, ,000 Cost of goods sold 124, , ,000 96,000 Gross margin $116,000 $ 96,000 $124,000$144,000 Chapter 7 Inventories and Cost of Goods Sold 335

39 7-61 (20 min.) 1. Units LIFO FIFO Sales 30, , ,000 Cost of goods sold: Inventory, December 31, 20X7 14,000 84,000 84,000 Purchases 52, , ,000 Cost of goods available for sale 66, , ,000 Inventory, December 31, 20X8 36, ,000* 282,000** Cost of goods sold 30, , ,000 Gross margin or gross profit 90, ,000 * 6 = 84,000 7 = 154,000 36, ,000 ** 8 = 240,000 7 = 42,000 36, , Gross margin is higher under FIFO. However, cash will be higher under LIFO by.40( 134,000 90,000) =.40 x 44,000 = 17,600. Cash payments for inventory and cash receipts from sales are unaffected by the cost flow assumption. Only the effect on tax obligations affects cash flow. 336

40 7-62 (35 min.) 1. (Dollars In Thousands) Lastin Company (LIFO) Firstin Company (FIFO) Sales $4,500 $4,500 Deduct cost of goods sold: Beginning inventory: 10,000 $50 $ 500 $ 500 Purchases: 30,000 $60 $1,800 20,000 $70 1,400 3,200 3,200 Cost of goods available for sale $3,700 $3,700 Ending inventory: 10,000 $50 $ ,000 5,000 $ $70 1,050 Cost of goods sold 2,900 2,650 Gross profit $1,600 $1,850 Other expenses Income before income taxes $ 1,000 $1,250 Income taxes at 40% Net income $ 600 $ 750 Chapter 7 Inventories and Cost of Goods Sold 337

41 7-62 (continued) 2. Note first that the underlying events are identical, but the inventory method chosen will yield radically different results. When prices are rising, and if she had a choice, the manager would choose the method that is most harmonious with her objectives. Clearly the company is better off economically under the LIFO method, even though reported earnings are less. LIFO saved $100 thousand in income taxes: LIFO FIFO Cash receipts: Sales $4,500 $4,500 Cash disbursements: Purchases $3,200 Other expenses 600 $3,800 $3,800 Income taxes Total disbursements $4,200 $4,300 Net increase in cash $ 300 $ 200 On the other hand, reported net income is dramatically better under FIFO, $750 versus $600. In times of rising prices and stable or increasing inventory levels, the general guide is that LIFO saves income taxes and results in a better cash position; nevertheless, FIFO shows the higher reported net income. 338

42 7-63 (30 min.) 1. 20X1 20X2 20X3 20X4 20X5 Total FIFO: Sales $5,000 $5,000 $5,000 $5,000 $20,000 $40,000 Cost of goods sold 1,000 2,000 2,000 2,500 13,000 20,500 Income before taxes 4,000 3,000 3,000 2,500 7,000 19,500 Income taxes 1,600 1,200 1,200 1,000 2,800 7,800 Net income $2,400 $1,800 $1,800 $1,500 $ 4,200 $11,700 LIFO: Sales $5,000 $5,000 $5,000 $5,000 $20,000 $40,000 Cost of goods sold 2,000 2,500 3,000 4,000 9,000 20,500 Income before taxes 3,000 2,500 2,000 1,000 11,000 19,500 Income taxes 1,200 1, ,400 7,800 Net income $1,800 $1,500 $1,200$ 600 $ 6,600 $11, LIFO is most advantageous because it defers tax payments. This provides additional cash and reduces the need for borrowing. One way to think about the benefit is to think of the interest saved each year. For example, assume that if higher taxes were paid, that amount would be borrowed at an interest rate of 10%. 20X1 20X2 20X3 20X4 20X5 Total FIFO tax $1,600 $1,200 $1,200 $1,000 $2,800 $7,800 LIFO tax 1,200 1, ,400 7,800 Annual cash benefit /(loss) $ 400 $ 200 $ 400 $ 600 $(1,600)$ 0 Cumulative cash benefit $ 400 $ 600 $1,000 $1,600 Interest 10% $ 40 $ 60 $ 100 $ 160 $ 360 This analysis does not consider the time value of money in that interest savings are simply added together, but it does provide a vivid illustration of the concept. Chapter 7 Inventories and Cost of Goods Sold 339

43 7-64 (30-40 min.) 1, 2. FIFO LIFO 1(a) 2(a) 1(b) 2(b) Sales, 5,000 units $120,000 $96,000 $120,000 $96,000 Less cost of goods sold: Purchase cost, $118,000 $118,000 Less ending inventory: FIFO: $15 60,000 LIFO: $10 = $20,000 $11 = 11,000 $13 = 13,000 44,000 Cost of goods sold $ 58,000 $60,000 $ 74,000 $44,000 Other expenses 30,000 30,000 30,000 30,000 Total deductions $ 88,000 $90,000 $104,000 $74,000 Income before taxes $ 32,000 $ 6,000 $ 16,000 $22,000 Income 40% $ 12,800 $ 2,400 $ 6,400 $ 8,800 Net income $ 19,200 $ 3,600 $ 9,600 $13, FIFO LIFO 1(a) 2(a) 1(b) 2(b) Sales, 5,000 units $120,000 $96,000 $120,000 $96,000 Less cost of goods sold: Purchase cost* $ 58,000 $60,000 $ 58,000 $60,000 Other expenses 30,000 30,000 30,000 30,000 Total deductions $ 88,000 $90,000 $ 88,000 $90,000 Income before taxes $ 32,000 $ 6,000 $ 32,000 $ 6,000 Income 40% $ 12,800 $ 2,400 $ 12,800 $ 2,400 Net income $ 19,200 $ 3,600 $ 19,200 $ 3,600 The timing of purchases does not affect FIFO income but affects LIFO income. LIFO cost of goods sold declined from $74,000 to $58,000 as a result of the delay in purchase. Managers can directly influence LIFO net income by choices to replenish inventory. * In this example all purchases are sold each year and no inventories accumulate. Therefore, FIFO and LIFO give identical results. 340

44 7-65 (20-30 min.) The major point here is to demonstrate that changes in LIFO reserves can be used as a shortcut measure of the differences in cost of goods sold under FIFO and LIFO. (All amounts are in dollars.) LIFO 1. (1) (2) Reserve FIFO LIFO (1) (2) Beginning inventory, $20, $ Purchases: $24 + $28 = Cost of goods available for sale Ending inventory, $28, $ Cost of goods sold (16) 2. a. Beginning inventory Purchases (as above) Cost of goods available for sale Ending inventory $28 + $ $16 + $ Cost of goods sold (20) b. Beginning inventory Purchases Available for sale Ending inventory Cost of goods sold Chapter 7 Inventories and Cost of Goods Sold 341

45 7-65 (continued) 3. From Part 1, the beginning LIFO Reserve is 8, the difference between FIFO inventory of 40 and LIFO inventory of 32. At year end the LIFO Reserve is 24, an increase of 16. This 16 is exactly the difference between FIFO cost of goods sold of 140 and LIFO cost of goods sold of 156. If prices are rising, cost of goods sold includes more of these recent higher costs under LIFO than under FIFO. Hence, if physical quantities are held constant, the LIFO reserve will rise by the difference between the cost of goods sold. Why? Because old LIFO unit costs will still be held in ending inventory, whereas recent higher unit costs will apply to the ending FIFO inventory. If physical quantities of ending inventory rise along with rises in unit prices, the LIFO difference in higher cost of goods sold becomes larger. Compare 2a. with 1. If the older LIFO layers are liquidated, the LIFO cost of goods sold becomes less than FIFO cost of goods sold. As 2b. demonstrates, the total liquidation of inventories will result in FIFO cost of goods sold exceeding LIFO cost of goods sold by the amount of the LIFO reserve at the start of the year. 342

46 7-66 (15-20 min.) 1. O is used for overstated; U is used for understated: (In Millions) 20X3 20X2 20X1 Beginning inventory* Correct O $10 Correct Cost of goods available Correct O 10 Correct Ending inventory* U $5 Correct O $10 Cost of goods sold O 5 O 10 U 10 Gross margin U 5 U 10 O 10 Income before income taxes U 5 U 10 O 10 Income tax expense U 2 U 4 O 4 Net income U 3 U 6 O 6 * The ending inventory for a given year becomes the beginning inventory for the following year. 2. Retained earnings would be overstated by $6 million at the end of 20X1. However, the error would be offset in the second year. Therefore, retained earnings would be correct at the end of 20X2. Retained earnings is understated by $3 million at the end of 20X (30-40 min.) 1. See Exhibit 7-67 on the following page. 2. a. Income before income taxes will be lower under LIFO than under FIFO: $149,000 $124,000 = $25,000. The income tax will be lower by.40 x $25,000 = $10,000. b. Income before income taxes will be lower under LIFO than under weighted-average: $135,950 $124,000 = $11,950. The income tax will be lower by.40 x $11,950 = $4,780. Chapter 7 Inventories and Cost of Goods Sold 343

47 EXHIBIT 7-67 Weighted Specific FIFO LIFO Average Identification Net revenue from sales $900) + $1,000) $295,000 $295,000 $295,000 $295,000 Deduct cost of products sold: Inventory, February 1, 2002, $400 40,000 40,000 40,000 40,000 Purchases $500) + $600) 196, , , ,000 Cost of goods available for sale, 460 units 236, , , ,000 Deduct: Inventory, January 31, 2003, 150 units: $600 90,000 or $400 =$40,000 $500 = 25,000 65,000 or ($236, ) or $513 76,950 or $400 =$40,000 $500 = 25,000 65,000 Cost of goods sold 146, , , ,000 Gross margin $149,000 $124,000 $135,950 $124,

48 7-68 (20-30 min.) This problem explores the effects of LIFO layers. There would be no effect on gross margin, income taxes, or net income under FIFO. The balance sheet would show a higher inventory by $42,000. A detailed income statement would show both purchases and ending inventory as higher by $42,000, so the net effect on cost of goods sold would be zero. LIFO would show a lower gross margin, $112,000, as compared with $124,000, a decrease of $12,000. Hence, the impact of the late purchase would be a savings of income taxes of 40% of $12,000 = $4,800. For details, see the following tabulation. Without Late With Late Purchase Purchase Net revenues from sales as before $295,000 $295,000 Deduct cost of goods sold: Inventory, February 1, 2002, $400 $ 40,000 $ 40,000 Purchases, 360 units, as before, and 420 units 196, ,000* Cost of goods available for sale $236,000 $278,000 Ending inventory: First layer $400 plus second layer $500 65,000 First layer $400 plus second layer $500 95,000 Cost of goods sold 171, ,000 Gross margin $124,000 $112,000 *360 units, as before $196, $700 42,000 $238,000 Chapter 7 Inventories and Cost of Goods Sold 345

49 7-68 (continued) Although purchases are $42,000 higher than before, the new LIFO ending inventory is only $95,000 $65,000 = $30,000 higher. The cost of sales is $183,000 $171,000 = $12,000 higher. To see this another way, compare the ending inventories: Late purchase added to cost of goods available for sale: $700 = $42,000 Deduct 60-unit increase in ending inventory: Second layer is = 60 units $500 = 30,000 Cost of sales is higher by: ($700 - $500) = $12, (30-40 min.) See Exhibit 7-69 on the following page. 346

50 EXHIBIT TEXAS INSTRUMENTS Comparison of Inventory Methods Income Statement For the Year Ended December 31, 2002 Average FIFO LIFO Weighted Net sales, 200 units Deduct cost of sales: $2,380 $2,380 $2,380 Beginning inventory, $5 $ 400 $ 400 $ 400 Purchases, 220 units* 1,580 1,580 1,580 Available for sale, 300 units** $1,980 $1,980 $1,980 Ending inventory, 100 units: $8 $720 $7 or $5 $400 $6 120 or 520 ($1, ), or $ Cost of sales, 200 units 1,190 1,460 1,320 Gross margin $1,190 $ 920 $1,060 Other expenses Pretax income Income taxes at 40% $ $ $ Net income $ 354 $ 192 $ 276 * Always equal across all three methods. Chapter 7 Inventories and Cost of Goods Sold 347

51 ** These amounts will not be equal across the three methods usually, because the beginning inventories will generally be different. The amounts are equal here only because beginning inventories are assumed to be equal. 348

52 7-69 (continued) 2. Income taxes would be lower under LIFO by.40($590 - $320) =.40($270) = $ a b Cost of goods available for sale $1,980 $1,980 Ending inventory $8) + $7) 790 $5) + $8) 620 Cost of sales $1,190 $1,360 Sales 2,380 2,380 Gross Margin $1,190 $1,020 The specific identifications are often cumbersome, although technology has reduced the cost of using them. They obviously affect income and income taxes. This method permits the most latitude in determining income for a given period (15-20 min.) This problem explores the effects of LIFO layers. There would be no effect on gross margin, income before income taxes, or income taxes under FIFO. The balance sheet would show a higher inventory by $400. A detailed income statement would show both purchases and ending inventory as higher by $400, so the net effect on cost of goods sold would be zero. LIFO would show a lower income before income taxes, $240, as compared with $320, a decrease of $80. Hence, the impact of the late purchase would be a savings of income taxes of 40% of $80 = $32. For details, see the accompanying tabulation. Chapter 7 Inventories and Cost of Goods Sold 349

53 7-70 (continued) The tabulation given below compares the results under LIFO: Without Late Purchase With Late Purchase Net sales, 200 units $2,380 $2,380 Deduct cost of sales: Beginning inventory $5 $ 400 $ 400 Purchases, 220 units and 270 units 1,580 1,980* Available for sale $1,980 $2,380 Ending inventory: First layer (pool) $5 $400 Second layer (pool) $ First layer (pool) $5 $400 Second layer (pool) $6 300 Third layer (pool) $ Cost of sales 1,460 1,540 Gross margin Other expenses Pretax income Income taxes Net income $ 192 $ 144 *Purchases for 220 units $1,580 New purchases, 50 units 400 $1,

54 7-70 (continued) Although purchases are $400 higher than before, the new LIFO ending inventory is only $840 $520 = $320 higher. The cost of sales is $1,540 $1,460 = $80 higher. To see this from another angle, compare the ending inventories: Late purchase added to cost of goods available for sale $400 Deduct 50-unit increase in ending inventory: Second layer is = 30 units $6 = $180 Third layer is 20 0 = 20 units $7 = Cost of sales is higher by $ (20-30 min.) This is a classic problem. Knowledge of discounted cash flow is not necessary. The discounted cash flow model implies that, other things being equal, it is always desirable to take a tax deduction earlier rather than later. Moreover, if prices rise, LIFO will generate earlier tax deductions than FIFO. By switching from LIFO to FIFO, Chrysler deliberately boosted its tax bills by $53 million in exchange for real or imagined benefits in terms of its credit rating and the attractiveness of its common stock as compared with its competitors in the auto industry. Chapter 7 Inventories and Cost of Goods Sold 351

55 7-71 (continued) Was this a wise decision? Many critics thought it harmed rather than helped stockholders because the supposed benefits were illusory. For example, these critics maintain that mounting evidence about efficient stock markets shows that the investment community is not fooled by whether a company is on LIFO or FIFO -- that its stock price will be unaffected. An American Accounting Association committee (Accounting Review, Supplement to Vol. XLVIII, p. 248) commented: "If the capital markets are efficient in the semi-strong form, this change was totally unnecessary and, from the point of view of Chrysler's shareholders, constitutes a waste of resources." In sum, Chrysler gave up badly needed cash in the form of higher income taxes in exchange for a higher current ratio (FIFO inventory would be much higher than LIFO inventory) and higher reported net income. In light of Chrysler's deteriorating cash position in the late 1970s, Chrysler's tradeoff was unwise. 352

56 7-72 (40-60 min.) 1. LIFO Buy Do Not Buy (a) More Units (b) Sales: $5 $5,500,000 $5,500,000 Cost of goods sold (LIFO basis): 300,000 $3 = $ 900, ,000 $2 = 1,600,000 2,500,000 or 400,000 $4 = $1,600, ,000 $3 = 900, ,000 $2 = 800,000 3,300,000 Gross profit $3,000,000 $2,200,000 Other expenses 1,400,000 1,400,000 Income before taxes $1,600,000$ 800,000 Income taxes 800, ,000 Net income $ 800,000 $ 400,000 Earnings per share $ 8.00 $ 4.00 (a) Ending inventory, 100,000 $2, $ 200,000 (b) Ending inventory, 500,000 $2, $1,000, FIFO Buy Do Not Buy (c) More Units (d) Sales: $5 $5,500,000 $5,500,000 Cost of goods sold (FIFO basis): 900,000 $2 = $1,800, ,000 $3 = 600,000 2,400,000 2,400,000 Gross profit $3,100,000 $3,100,000 Other expenses 1,400,000 1,400,000 Income before taxes $1,700,000 $1,700,000 Income taxes 850, ,000 Net income $ 850,000 $ 850,000 Earnings per share $ 8.50 $ 8.50 (c) Ending inventory, 100,000 $3 $ 300,000 (d) Ending inventory, 400,000 $4 1,600, ,000 $3 300,000 Total $1,900,000 Chapter 7 Inventories and Cost of Goods Sold 353

57 7-72 (continued) 3. Consider this question from a strict financial management standpoint ignoring earnings per share. When prices are rising, it may be advantageous subject to prudent restraint as to maximum and minimum inventory levels to buy unusually heavy amounts of inventory at year-end, particularly if income tax rates are likely to fall. Under LIFO, the current year tax savings would be a handsome $400,000. This is at least a deferral of the tax effect. The effects on later years' taxes will depend on inventory levels, prices, and tax rates. Tax savings can be generated because LIFO permits management to influence immediate net income by its purchasing decisions. In contrast, FIFO results would be unaffected by this decision. However, if management buys the 400,000 units and uses LIFO, the first year earnings per share would be only $4.00. Note too that LIFO will show less earnings per share than FIFO ($8.00 as compared to $8.50), even if the 400,000 units are not bought. Such results may cause management to reject LIFO. Earnings per share (EPS) is a critical number, and many managements are reluctant to adopt accounting policies that hurt EPS. The shame of the matter is that the same business events can dramatically affect measures of performance, depending on whether LIFO or FIFO is adopted ($4.00 versus $8.50). Although, the smart decision would be to adopt LIFO and buy the 400,000 units, this decision produces the worst earnings record! 4a. The income statement for year two would show the same net income and earnings per share whether additional inventory is purchased or not, because prices do not change. 354

58 Chapter 7 Inventories and Cost of Goods Sold 355

59 7-72 (continued) LIFO FIFO In year 2 Do not Buy Buy Do not Buy Buy Sales $5,500,000 $5,500,000 $5,500,000 $5,500,000 Cost of goods sold 4,400,000 (a) 4,400,000 (b) 4,300,000 (c) 4,300,000 (d) Gross profit $1,100,000 $1,100,000 $1,200,000 $1,200,000 Other expenses 800, , , ,000 Income before taxes $ 300,000 $ 300,000 $ 400,000 $ 400,000 Income taxes 120, , , ,000 Net income $ 180,000 $ 180,000 $ 240,000 $ 240,000 Earnings per share $ 1.80 $ 1.80 $ 2.40 $ 2.40 Year 2 Cost of Goods Sold Calculations (a) (b) (c) (d) Beginning inventory, see parts (1) and (2) $ 200,000 $1,000,000 $ 300,000 $1,900,000 Purchases: 1,700,000 $4 6,800,000 6,800,000 1,300,000 $4 5,200,000 5,200,000 Available for sale $7,000,000 $6,200,000 $7,100,000 $7,100,000 Ending inventory: 100,000 $2 = $ 200, ,000 $4 = 2,400,000 2,600, ,000 $2 = 1,000, ,000 $4 = 800,000 1,800, ,000 $4 = 2,800,000 2,800,000 Cost of goods sold $4,400,000 $4,400,000 $4,300,000 $4,300,000 4b. FIFO shows $100,000 higher income before taxes ($60,000 after taxes) because 100,000 units of old, lower-cost inventory is in Cost of Goods Sold: LIFO FIFO 1,000,000 $4 = $4,000, ,000 $3 = 300,000 1,100,000 $4 = $4,400,000 $4,300,