# CHAPTER 6. Inventories ASSIGNMENT CLASSIFICATION TABLE. B Problems. A Problems. Brief Exercises Do It! Exercises

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1 CHAPTER 6 Inventories ASSIGNMENT CLASSIFICATION TABLE Study Objectives Questions Brief Exercises Do It! Exercises A Problems B Problems 1. Describe the steps in determining inventory quantities. 1, 2, 3, 4, 5, , 2 1A 1B 2. Explain the accounting for inventories and apply the inventory cost flow methods. 7, 8, 9, 10, 19 2, 3, 4 2 3, 4, 5, 6, 7, 8 2A, 3A, 4A, 5A, 6A, 7A 2B, 3B, 4B, 5B, 6B, 7B 3. Explain the financial effects of the inventory cost flow assumptions. 4. Explain the lower-ofcost-or-market basis of accounting for inventories. 5. Indicate the effects of inventory errors on the financial statements. 6. Compute and interpret the inventory turnover ratio. 11, 12 5, 6 5 3, 6, 7, 8 2A, 3A, 4A, 5A, 6A, 7A 13, 14, , , 12 17, , 14 2B, 3B, 4B, 5B, 6B, 7B *7. Apply the inventory cost flow methods to perpetual inventory records. 20, , 16, 17 8A, 9A 8B, 9B *8. Describe the two methods of estimating inventories. 22, 23, 24, 25 11, 12 18, 19, 20 10A, 11A 10B, 11B *Note: All asterisked Questions, Exercises, and Problems relate to material contained in the appendices to the chapter. Copyright 2009 John Wiley & Sons, Inc. Weygandt, Accounting Principles, 9/e, Solutions Manual (For Instructor Use Only) 6-1

2 ASSIGNMENT CHARACTERISTICS TABLE Problem Number Description Difficulty Level Time Allotted (min.) 1A Determine items and amounts to be recorded in inventory. Moderate A 3A 4A 5A 6A 7A Determine cost of goods sold and ending inventory using FIFO, LIFO, and average-cost with analysis. Determine cost of goods sold and ending inventory using FIFO, LIFO, and average-cost with analysis. Compute ending inventory, prepare income statements, and answer questions using FIFO and LIFO. Calculate ending inventory, cost of goods sold, gross profit, and gross profit rate under periodic method; compare results. Compare specific identification, FIFO, and LIFO under periodic method; use cost flow assumption to influence earnings. Compute ending inventory, prepare income statements, and answer questions using FIFO and LIFO. Simple Simple Moderate Moderate Moderate Moderate *8A Calculate cost of goods sold and ending inventory for FIFO, moving-average cost, and LIFO, under the perpetual system; compare gross profit under each assumption. *9A Determine ending inventory under a perpetual inventory system. Moderate Moderate *10A Estimate inventory loss using gross profit method. Moderate *11A Compute ending inventory using retail method. Moderate B Determine items and amounts to be recorded in inventory. Moderate B 3B 4B 5B 6B Determine cost of goods sold and ending inventory using FIFO, LIFO, and average-cost with analysis. Determine cost of goods sold and ending inventory using FIFO, LIFO, and average-cost with analysis. Compute ending inventory, prepare income statements, and answer questions using FIFO and LIFO. Calculate ending inventory, cost of goods sold, gross profit, and gross profit rate under periodic method; compare results. Compare specific identification, FIFO, and LIFO under periodic method; use cost flow assumption to justify price increase. Simple Simple Moderate Moderate Moderate Copyright 2009 John Wiley & Sons, Inc. Weygandt, Accounting Principles, 9/e, Solutions Manual (For Instructor Use Only)

3 ASSIGNMENT CHARACTERISTICS TABLE (Continued) Problem Number Description Difficulty Level Time Allotted (min.) 7B Compute ending inventory, prepare income statements, and answer questions using FIFO and LIFO. Moderate *8B Calculate cost of goods sold and ending inventory under LIFO, FIFO, and moving-average cost, under the perpetual system; compare gross profit under each assumption. *9B Determine ending inventory under a perpetual inventory system. *10B Compute gross profit rate and inventory loss using gross profit method. Moderate Moderate Moderate *11B Compute ending inventory using retail method. Moderate Copyright 2009 John Wiley & Sons, Inc. Weygandt, Accounting Principles, 9/e, Solutions Manual (For Instructor Use Only) 6-3

4 WEYGANDT ACCOUNTING PRINCIPLES 9E CHAPTER 6 INVENTORIES Number SO BT Difficulty Time (min.) BE1 1 C Simple 4 6 BE2 2 K Simple 2 4 BE3 2 AP Simple 4 6 BE4 2 AP Simple 2 4 BE5 3 AP Simple 2 4 BE6 3 AP Moderate 6 8 BE7 4 AP Simple 4 6 BE8 5 AN Simple 4 6 BE9 6 AP Simple 4 6 BE10 7 AP Simple 8 10 BE11 8 AP Simple 4 6 BE12 8 AP Simple 4 6 DI1 1 AN Simple 4 6 DI2 2 AP Simple 6 8 DI3 5 AP Simple 6 8 DI4 6 AP Simple 4 6 EX1 1 AN Simple 4 6 EX2 1 AN Simple 6 8 EX3 2, 3 AN, E Moderate 6 8 EX4 2 AN, E Simple 8 10 EX5 2 AP Simple 6 8 EX6 2, 3 AP Simple 8 10 EX7 2, 3 AP Simple 8 10 EX8 2, 3 AP Simple 6 8 EX9 4 AP Simple 6 8 EX10 4 AP Simple 4 6 EX11 5 AN Simple 6 8 EX12 5 AN Simple EX13 6 AP Simple EX14 6 AP Simple 8 10 EX15 7 AP Simple 8 10 EX16 7 AP, E Moderate Copyright 2009 John Wiley & Sons, Inc. Weygandt, Accounting Principles, 9/e, Solutions Manual (For Instructor Use Only)

5 INVENTORIES (Continued) Number SO BT Difficulty Time (min.) EX17 7 AP, E Moderate EX18 8 AP Simple 8 10 EX19 8 AP Simple EX20 8 AP Moderate P1A 1 AN Moderate P2A 2, 3 AP Simple P3A 2, 3 AP Simple P4A 2, 3 AN Moderate P5A 2, 3 AP, E Moderate P6A 2, 3 AP, E Moderate P7A 2, 3 AN Moderate P8A 7 AP, E Moderate P9A 7 AP Moderate P10A 8 AP Moderate P11A 8 AP Moderate P1B 1 AN Moderate P2B 2, 3 AP Simple P3B 2, 3 AP Simple P4B 2, 3 AN Moderate P5B 2, 3 AP, E Moderate P6B 2, 3 AP, E Moderate P7B 2, 3 AN Moderate P8B 7 AP, E Moderate P9B 7 AP Moderate P10B 8 AP Moderate P11B 8 AP Moderate BYP1 2, 6 AP Simple BYP2 6 E Simple BYP3 2, 6 AN Simple BYP4 8 AP Moderate BYP5 5 AN Simple BYP6 3 E Simple BYP7 5 E Simple Copyright 2009 John Wiley & Sons, Inc. Weygandt, Accounting Principles, 9/e, Solutions Manual (For Instructor Use Only) 6-5

6 BLOOM S TAXONOMY TABLE Correlation Chart between Bloom s Taxonomy, Study Objectives and End-of-Chapter Exercises and Problems Study Objective Knowledge Comprehension Application Analysis Synthesis Evaluation 1. Describe the steps in determining inventory quantities. Q6-2 Q6-6 Q6-1 Q6-3 Q6-4 BE6-1 Q6-5 E6-1 DI6-1 E6-1 E6-2 P6-1A P6-1B 2. Explain the accounting for inventories and apply the inventory cost flow methods. Q6-8 Q6-10 Q6-19 BE6-2 BE6-5 Q6-7 Q6-9 BE6-3 BE6-4 DI6-2 E6-5 E6-6 E6-7 E6-8 P6-2A P6-2B P6-3A P6-3B P6-5A P6-5B P6-6A P6-6B E6-3 E6-4 P6-4A P6-4B P6-7A P6-7B E6-3 E6-4 P6-5A P6-5B 3. Explain the financial effects of the inventory cost flow assumptions. Q6-11 Q6-12 BE6-5 BE6-6 E6-6 E6-7 E6-8 P6-2A P6-2B P6-3A P6-3B P6-5A P6-5B P6-6A P6-6B E6-3 P6-4A P6-4B P6-7A P6-7B E6-3 P6-5A P6-5B P6-6A P6-6B 4. Explain the lower-of-cost-or-market basis of accounting for inventories. Q6-13 BE6-7 E6-9 E6-10 Q6-14 Q Indicate the effects of inventory errors on the financial statements. DI6-3 Q6-16 BE6-8 E6-11 E Compute and interpret the inventory turnover ratio. Q6-17 BE6-9 DI6-4 E6-13 E6-14 Q6-18 BE6-9 *7. Apply the inventory cost flow methods to perpetual inventory records. Q6-20 Q6-21 BE6-10 E6-15 E6-16 E6-17 P6-8A P6-8B P6-9A P6-9B E6-16 E6-17 P6-8A P6-8B *8. Describe the two methods of estimating inventories. Q6-22 Q6-23 Q6-24 Q6-25 BE6-11 BE6-12 E6-18 E6-19 E6-20 P6-10A P6-11A P6-10B P6-11B Broadening Your Perspective Financial Reporting Decision Making Across the Organization Exploring the Web Communication Comp. Analysis All About You Ethics Case 6-6 Copyright 2009 John Wiley & Sons, Inc. Weygandt, Accounting Principles, 9/e, Solutions Manual (For Instructor Use Only)

8 Questions Chapter 6 (Continued) 12. Casey Company may experience severe cash shortages if this policy continues. All of its net income is being paid out as dividends, yet some of the earnings must be reinvested in inventory to maintain inventory levels. Some earnings must be reinvested because net income is computed with cost of goods sold based on older, lower costs while the inventory must be replaced at current, higher costs. Because of this factor, net income under FIFO is sometimes referred to as phantom profits. 13. Peter should know the following: (a) A departure from the cost basis of accounting for inventories is justified when the value of the goods is lower than its cost. The writedown to market should be recognized in the period in which the price decline occurs. (b) Market means current replacement cost, not selling price. For a merchandising company, market is the cost at the present time from the usual suppliers in the usual quantities. 14. Garitson Music Center should report the CD players at \$380 each for a total of \$1,900. \$380 is the current replacement cost under the lower-of-cost-or-market basis of accounting for inventories. A decline in replacement cost usually leads to a decline in the selling price of the item. Valuation at LCM is conservative. 15. Ruthie Stores should report the toasters at \$27 each for a total of \$540. The \$27 is the lower of cost or market. It is used because it is the lower of the inventory s cost and current replacement cost. 16. (a) Mintz Company s 2009 net income will be understated \$7,000; (b) 2010 net income will be overstated \$7,000; and (c) the combined net income for the two years will be correct. 17. Willingham Company should disclose: (1) the major inventory classifications, (2) the basis of accounting (cost or lower of cost or market), and (3) the costing method (FIFO, LIFO, or average). 18. An inventory turnover that is too high may indicate that the company is losing sales opportunities because of inventory shortages. Inventory outages may also cause customer ill will and result in lost future sales. 19. PepsiCo uses the average, first-in, first-out or last-in, first-out methods for its inventories. *20. Disagree. The results under the FIFO method are the same but the results under the LIFO method are different. The reason is that the pool of inventoriable costs (cost of goods available for sale) is not the same. Under a periodic system, the pool of costs is the goods available for sale for the entire period, whereas under a perpetual system, the pool is the goods available for sale up to the date of sale. *21. In a periodic system, the average is a weighted average based on total goods available for sale for the period. In a perpetual system, the average is a moving average of goods available for sale after each purchase. *22. Inventories must be estimated when: (1) management wants monthly or quarterly financial statements but a physical inventory is only taken annually and (2) a fire or other type of casualty makes it impossible to take a physical inventory. 6-8 Copyright 2009 John Wiley & Sons, Inc. Weygandt, Accounting Principles, 9/e, Solutions Manual (For Instructor Use Only)

9 Questions Chapter 6 (Continued) *23. In the gross profit method, the average is the gross profit rate, which is gross profit divided by net sales. The rate is often based on last year s actual rate. The gross profit rate is applied to net sales in using the gross profit method. In the retail inventory method, the average is the cost-to-retail ratio, which is the goods available for sale at cost divided by the goods available for sale at retail. The ratio is based on current year data and is applied to the ending inventory at retail. *24. The estimated cost of the ending inventory is \$40,000: Net sales... \$400,000 Less: Gross profit (\$400,000 X 35%) ,000 Estimated cost of goods sold... \$260,000 Cost of goods available for sale... \$300,000 Less: Cost of goods sold ,000 Estimated cost of ending inventory... \$ 40,000 *25. The estimated cost of the ending inventory is \$28,000: Ending inventory at retail: \$40,000 = (\$120,000 \$80,000) Cost-to-retail ratio: 70% = \$84,000 \$120,000 Ending inventory at cost: \$28,000 = (\$40,000 X 70%) Copyright 2009 John Wiley & Sons, Inc. Weygandt, Accounting Principles, 9/e, Solutions Manual (For Instructor Use Only) 6-9

10 SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 6-1 (a) (b) (c) (d) Ownership of the goods belongs to Smart. Thus, these goods should be included in Smart s inventory. The goods in transit should not be included in the inventory count because ownership by Smart does not occur until the goods reach the buyer. The goods being held belong to the customer. They should not be included in Smart s inventory. Ownership of these goods rests with the other company. Thus, these goods should not be included in the physical inventory. BRIEF EXERCISE 6-2 The items that should be included in inventoriable costs are: (a) (b) (c) (d) Freight-in Purchase Returns and Allowances Purchases Purchase Discounts BRIEF EXERCISE 6-3 (a) (b) The ending inventory under FIFO consists of 200 units at \$ units at \$7 for a total allocation of \$2,720 or (\$1,600 + \$1,120). The ending inventory under LIFO consists of 300 units at \$ units at \$7 for a total allocation of \$2,220 or (\$1,800 + \$420) Copyright 2009 John Wiley & Sons, Inc. Weygandt, Accounting Principles, 9/e, Solutions Manual (For Instructor Use Only)

11 BRIEF EXERCISE 6-4 Average unit cost is \$6.89 computed as follows: 300 X \$6 = \$1, X \$7 = 2, X \$8 = 1, \$6,200 \$6, = \$6.89 (rounded). The cost of the ending inventory is \$2,480 or (360 X \$6.89). BRIEF EXERCISE 6-5 (a) (b) (c) (d) FIFO would result in the highest net income. FIFO would result in the highest ending inventory. LIFO would result in the lowest income tax expense (because it would result in the lowest net income). Average-cost would result in the most stable income over a number of years because it averages out any big changes in the cost of inventory. BRIEF EXERCISE 6-6 Cost of good sold under: LIFO FIFO Purchases \$6 X 100 \$6 X 100 \$7 X 200 \$7 X 200 \$8 X 150 \$8 X 150 Cost of goods available for sale \$ 3,200 \$ 3,200 Less: Ending inventory \$ 1,160 \$ 1,410 Cost of goods sold \$ 2,040 \$ 1,790 Since the cost of goods sold is \$250 less under FIFO (\$2,040 \$1,790) that is the amount of the phantom profit. It is referred to as phantom profit because FIFO matches current selling prices with old inventory costs. To replace the units sold, the company will have to pay the current price of \$8 per unit, rather than the \$6 per unit which some of the units were priced at under FIFO. Therefore, profit under LIFO is more representative of what the company can expect to earn in future periods. Copyright 2009 John Wiley & Sons, Inc. Weygandt, Accounting Principles, 9/e, Solutions Manual (For Instructor Use Only) 6-11

12 BRIEF EXERCISE 6-7 Inventory Categories Cost Market LCM Cameras \$12,000 \$12,100 \$12,000 Camcorders 9,500 9,700 9,500 DVD players 14,000 12,800 12,800 Total valuation \$34,300 BRIEF EXERCISE 6-8 The understatement of ending inventory caused cost of goods sold to be overstated \$10,000 and net income to be understated \$10,000. The correct net income for 2010 is \$100,000 or (\$90,000 + \$10,000). Total assets in the balance sheet will be understated by the amount that ending inventory is understated, \$10,000. BRIEF EXERCISE 6-9 Inventory turnover: \$270,000 \$60,000 + \$40,000 2 ( ) = \$270,000 \$50,000 = 5.4 Days in inventory: = 67.6 days *BRIEF EXERCISE 6-10 (1) FIFO Method Date Purchases Product E2-D2 Cost of Goods Sold Balance May 7 \$10) \$500 \$10) \$500 June 1 \$10) \$300 \$10) \$200 July 28 \$13) \$390 \$10) \$13) } \$590 Aug. 27 \$10) \$13) } \$460 \$13) \$ Copyright 2009 John Wiley & Sons, Inc. Weygandt, Accounting Principles, 9/e, Solutions Manual (For Instructor Use Only)

13 *BRIEF EXERCISE 6-10 (Continued) (2) LIFO Method Product E2-D2 Date Purchases Cost of Goods Sold Balance May 7 \$10) \$500 \$10) \$500 June 1 \$10) \$300 \$10) \$200 July 28 \$13) \$390 \$10) \$13) } \$590 Aug. 27 \$13) } \$490 \$10) \$10) \$100 (3) Average-Cost Product E2-D2 Date Purchases Cost of Goods Sold Balance May 7 \$10) \$500 \$10) \$500 June 1 \$10) \$300 \$10) \$200 July 28 \$13) \$390 \$11.80)*\$590 Aug. 27 \$11.80) \$472 \$11.80) \$118 *(\$200 + \$390) 50 *BRIEF EXERCISE 6-11 (1) Net sales... \$330,000 Less: Estimated gross profit (35% X \$330,000) ,500 Estimated cost of goods sold... \$214,500 (2) Cost of goods available for sale... \$230,000 Less: Estimated cost of goods sold ,500 Estimated cost of ending inventory... \$ 15,500 *BRIEF EXERCISE 6-12 At Cost At Retail Goods available for sale \$35,000 \$50,000 Net sales 40,000 Ending inventory at retail \$10,000 Cost-to-retail ratio = (\$35,000 \$50,000) = 70% Estimated cost of ending inventory = (\$10,000 X 70%) = \$7,000 Copyright 2009 John Wiley & Sons, Inc. Weygandt, Accounting Principles, 9/e, Solutions Manual (For Instructor Use Only) 6-13

14 SOLUTIONS FOR DO IT! REVIEW EXERCISES DO IT! 6-1 Inventory per physical count... \$300,000 Inventory out on consignment... 26,000 Inventory sold, in transit at year-end... 0 Inventory purchased, in transit at year-end... 17,000 Correct December 31 inventory... \$343,000 DO IT! 6-2 Cost of goods available for sale = (3,000 X \$5) + (8,000 X \$7) = \$71,000 Ending inventory = 3, ,000 9,200 = 1,800 units (a) FIFO: \$71,000 (1,800 X \$7) = \$58,400 (b) LIFO: \$71,000 (1,800 X \$5) = \$62,000 (c) Average-cost: \$71,000/11,000 = \$6.455 per unit 9,200 X \$6.455 = \$59,386 DO IT! 6-3 (a) The lowest value for each inventory type is: Small \$64,000, Medium \$260,000, and Large \$152,000. The total inventory value is the sum of these figures, \$476,000. (b) Ending inventory \$31,000 understated No effect Cost of goods sold \$31,000 overstated \$31,000 understated Owner s equity \$31,000 understated No effect 6-14 Copyright 2009 John Wiley & Sons, Inc. Weygandt, Accounting Principles, 9/e, Solutions Manual (For Instructor Use Only)

15 DO IT! \$1,200,000 \$1,425,000 Inventory turnover ratio (\$180,000 + \$220,000)/2 = 6 (\$220,000 + \$80,000)/2 = 9.5 Days in inventory = 60.8 days = 38.4 days The company experienced a very significant decline in its ending inventory as a result of the just-in-time inventory. This decline improved its inventory turnover ratio and its days in inventory. It is possible that this increase is the result of a more focused inventory policy. It appears that this change is a win-win situation for Aragon Company. Copyright 2009 John Wiley & Sons, Inc. Weygandt, Accounting Principles, 9/e, Solutions Manual (For Instructor Use Only) 6-15

16 SOLUTIONS TO EXERCISES EXERCISE 6-1 Ending inventory physical count... \$297, No effect title passes to purchaser upon shipment when terms are FOB shipping point No effect title does not transfer to Lima until goods are received Add to inventory: Title passed to Lima when goods were shipped... 22, Add to inventory: Title remains with Lima until purchaser receives goods... 35, The goods did not arrive prior to year-end. The goods, therefore, cannot be included in the inventory... (44,000) Correct inventory... \$310,000 EXERCISE 6-2 Ending inventory as reported... \$740, Subtract from inventory: The goods belong to Superior Corporation. Strawser is merely holding them as a consignee... (250,000) 2. No effect title does not pass to Strawser until goods are received (Jan. 3) Subtract from inventory: Office supplies should be carried in a separate account. They are not considered inventory held for resale... (17,000) 4. Add to inventory: The goods belong to Strawser until they are shipped (Jan. 1)... 30, Add to inventory: District Sales ordered goods with a cost of \$8,000. Strawser should record the corresponding sales revenue of \$10,000. Strawser s decision to ship extra unordered goods does not constitute a sale. The manager s statement that District could ship the goods back indicates that Strawser knows this over-shipment is not a legitimate sale. The manager acted unethically in an attempt to improve Strawser s reported income by over-shipping... 52, Copyright 2009 John Wiley & Sons, Inc. Weygandt, Accounting Principles, 9/e, Solutions Manual (For Instructor Use Only)

17 EXERCISE 6-2 (Continued) 6. Subtract from inventory: GAAP require that inventory be valued at the lower of cost or market. Obsolete parts should be adjusted from cost to zero if they have no other use... (40,000) Correct inventory... \$515,000 EXERCISE 6-3 (a) FIFO Cost of Goods Sold (#1012) \$100 + (#1045) \$90 = \$190 (b) (c) It could choose to sell specific units purchased at specific costs if it wished to impact earnings selectively. If it wished to minimize earnings it would choose to sell the units purchased at higher costs in which case the Cost of Goods Sold would be \$190. If it wished to maximize earnings it would choose to sell the units purchased at lower costs in which case the cost of goods sold would be \$170. I recommend they use the FIFO method because it produces a more appropriate balance sheet valuation and reduces the opportunity to manipulate earnings. (The answer may vary depending on the method the student chooses.) EXERCISE 6-4 (a) FIFO Beginning inventory (26 X \$97)... \$ 2,522 Purchases Sept. 12 (45 X \$102)... \$4,590 Sept. 19 (20 X \$104)... 2,080 Sept. 26 (50 X \$105)... 5,250 11,920 Cost of goods available for sale... 14,442 Less: Ending inventory (20 X \$105)... 2,100 Cost of goods sold... \$12,342 Copyright 2009 John Wiley & Sons, Inc. Weygandt, Accounting Principles, 9/e, Solutions Manual (For Instructor Use Only) 6-17

18 EXERCISE 6-4 (Continued) Proof Date Units Unit Cost Total Cost 9/1 26 \$ 97 \$ 2,522 9/ ,590 9/ ,080 9/ , \$12,342 LIFO Cost of goods available for sale... \$14,442 Less: Ending inventory (20 X \$97)... 1,940 Cost of goods sold... \$12,502 (b) Proof Date Units Unit Cost Total Cost 9/26 50 \$105 \$ 5,250 9/ ,080 9/ ,590 9/ \$12,502 FIFO \$2,100 (ending inventory) + \$12,342 (COGS) = \$14,442 LIFO \$1,940 (ending inventory) + \$12,502 (COGS) = \$14,442 } Cost of goods available for sale Under both methods, the sum of the ending inventory and cost of goods sold equals the same amount, \$14,442, which is the cost of goods available for sale. EXERCISE 6-5 FIFO Beginning inventory (30 X \$8)... \$240 Purchases May 15 (25 X \$11)... \$275 May 24 (35 X \$12) Cost of goods available for sale Less: Ending inventory (25 X \$12) Cost of goods sold... \$ Copyright 2009 John Wiley & Sons, Inc. Weygandt, Accounting Principles, 9/e, Solutions Manual (For Instructor Use Only)

19 EXERCISE 6-5 (Continued) Proof Date Units Unit Cost Total Cost 5/1 30 \$ 8 \$240 5/ / \$635 LIFO Cost of goods available for sale... \$935 Less: Ending inventory (25 X \$8) Cost of goods sold... \$735 Proof Date Units Unit Cost Total Cost 5/24 35 \$12 \$420 5/ / \$735 EXERCISE 6-6 (a) FIFO Beginning inventory (200 X \$5)... \$1,000 Purchases June 12 (300 X \$6)... \$1,800 June 23 (500 X \$7)... 3,500 5,300 Cost of goods available for sale... 6,300 Less: Ending inventory (120 X \$7) Cost of goods sold... \$5,460 LIFO Cost of goods available for sale... \$6,300 Less: Ending inventory (120 X \$5) Cost of goods sold... \$5,700 Copyright 2009 John Wiley & Sons, Inc. Weygandt, Accounting Principles, 9/e, Solutions Manual (For Instructor Use Only) 6-19

20 EXERCISE 6-6 (Continued) (b) (c) The FIFO method will produce the higher ending inventory because costs have been rising. Under this method, the earliest costs are assigned to cost of goods sold and the latest costs remain in ending inventory. For Yount Company, the ending inventory under FIFO is \$840 or (120 X \$7) compared to \$600 or (120 X \$5) under LIFO. The LIFO method will produce the higher cost of goods sold for Yount Company. Under LIFO the most recent costs are charged to cost of goods sold and the earliest costs are included in the ending inventory. The cost of goods sold is \$5,700 or [\$6,300 (120 X \$5)] compared to \$5,460 or (\$6,300 \$840) under FIFO. EXERCISE 6-7 (a) (1) FIFO Beginning inventory... \$10,000 Purchases... 26,000 Cost of goods available for sale... 36,000 Less: ending inventory (80 X \$130)... 10,400 Cost of goods sold... \$25,600 (2) LIFO Beginning inventory... \$10,000 Purchases... 26,000 Cost of goods available for sale... 36,000 Less: ending inventory (80 X \$100)... 8,000 Cost of goods sold... \$28,000 (3) AVERAGE Beginning inventory... \$10,000 Purchases... 26,000 Cost of goods available for sale... 36,000 Less: ending inventory (80 X \$120)... 9,600 Cost of goods sold... \$26,400 (b) (c) (d) The use of FIFO would result in the highest net income since the earlier lower costs are matched with revenues. The use of FIFO would result in inventories approximating current cost in the balance sheet, since the more recent units are assumed to be on hand. The use of LIFO would result in Jones paying the least taxes in the first year since income will be lower Copyright 2009 John Wiley & Sons, Inc. Weygandt, Accounting Principles, 9/e, Solutions Manual (For Instructor Use Only)

21 EXERCISE 6-8 (a) Cost of Goods Available for Sale \$6,300 Total Units Available for Sale 1,000 = Weighted Average Unit Cost \$6.30 Ending inventory (120 X \$6.30) \$ 756 Cost of goods sold (880 X \$6.30) 5,544 (b) (c) Ending inventory is lower than FIFO (\$840) and higher than LIFO (\$600). In contrast, cost of goods sold is higher than FIFO (\$5,460) and lower than LIFO (\$5,700). The average-cost method uses a weighted-average unit cost, not a simple average of unit costs. EXERCISE 6-9 Cost Market Lower of Cost or Market: Cameras Minolta \$ 850 \$ 780 \$ 780 Canon Total 1,750 1,692 Light meters Vivitar 1,500 1,380 1,380 Kodak 1,680 1,890 1,680 Total 3,180 3,270 Total inventory \$4,930 \$4,962 \$4,740 EXERCISE 6-10 Cost Market Lower of Cost or Market: Cameras \$ 6,500 \$ 7,100 \$ 6,500 DVD players 11,250 10,350 10,350 Ipods 10,000 9,750 9,750 Total inventory \$27,750 \$27,200 \$26,600 Copyright 2009 John Wiley & Sons, Inc. Weygandt, Accounting Principles, 9/e, Solutions Manual (For Instructor Use Only) 6-21

22 EXERCISE Beginning inventory... \$ 20,000 \$ 27,000 Cost of goods purchased , ,000 Cost of goods available for sale , ,000 Corrected ending inventory... 27,000 a 41,000 b Cost of goods sold... \$143,000 \$161,000 a \$30,000 \$3,000 = \$27,000. b \$35,000 + \$6,000 = \$41,000. EXERCISE 6-12 (a) Sales... \$210,000 \$250,000 Cost of goods sold Beginning inventory... 32,000 39,000 Cost of goods purchased , ,000 Cost of goods available for sale , ,000 Ending inventory (\$44,000 \$5,000)... 39,000 52,000 Cost of goods sold , ,000 Gross profit... \$ 44,000 \$ 61,000 (b) The cumulative effect on total gross profit for the two years is zero as shown below: Incorrect gross profits: \$49,000 + \$56,000 = \$105,000 Correct gross profits: \$44,000 + \$61,000 = 105,000 Difference \$ 0 (c) Dear Mr./Ms. President: Because your ending inventory of December 31, 2010 was overstated by \$5,000, your net income for 2010 was overstated by \$5,000. For 2011 net income was understated by \$5,000. In a periodic system, the cost of goods sold is calculated by deducting the cost of ending inventory from the total cost of goods you have available for sale in the period. Therefore, if this ending inventory figure is overstated, as it was in December 2010, then the cost of goods sold is understated and therefore net income will be overstated by that amount. Consequently, this overstated ending inventory figure goes on to become the next period s beginning inventory amount and is a part of the total cost of goods available for sale. Therefore, the mistake repeats itself in the reverse Copyright 2009 John Wiley & Sons, Inc. Weygandt, Accounting Principles, 9/e, Solutions Manual (For Instructor Use Only)

23 EXERCISE 6-12 (Continued) The error also affects the balance sheet at the end of The inventory reported in the balance sheet is overstated; therefore, total assets are overstated. The overstatement of the 2010 net income results in the capital account balance being overstated. The balance sheet at the end of 2011 is correct because the overstatement of the capital account at the end of 2010 is offset by the understatement of the 2011 net income and the inventory at the end of 2011 is correct. Thank you for allowing me to bring this to your attention. If you have any questions, please contact me at your convenience. Sincerely, EXERCISE Inventory \$900,000 \$1,120,000 \$1,300,000 turnover (\$100,000 + \$300,000) 2 (\$300,000 + \$400,000) 2 (\$400,000 + \$480,000) 2 \$900,000 \$1,120,000 \$1,300,000 = 4.5 = 3.2 \$200,000 \$350,000 \$440,000 = 2.95 Days in = 81.1 days = days inventory = days Gross \$1,200,000 \$900,000 \$1,600,000 \$1,120,000 \$1,900,000 \$1,300,000 =.25 =.30 profit rate \$1,200,000 \$1,600,000 \$1,900,000 =.32 The inventory turnover ratio decreased by approximately 34% from 2009 to 2011 while the days in inventory increased by almost 53% over the same time period. Both of these changes would be considered negative since it s better to have a higher inventory turnover with a correspondingly lower days in inventory. However, Santo s Photo gross profit rate increased by 28% from 2009 to 2011, which is a positive sign. Copyright 2009 John Wiley & Sons, Inc. Weygandt, Accounting Principles, 9/e, Solutions Manual (For Instructor Use Only) 6-23

24 EXERCISE 6-14 (a) O Brien Company Weinberg Company Inventory Turnover \$190,000 \$292,000 (\$45,000 + \$55,000)/2 (\$71,000 + \$69,000)/2 = 3.80 = 4.17 Days in Inventory 365/3.80 = 96 days 365/4.17 = 88 days (b) Weinberg Company is moving its inventory more quickly, since its inventory turnover is higher, and its days in inventory is lower. *EXERCISE 6-15 (1) FIFO Date Purchases Cost of Goods Sold Balance Jan. 1 \$600) \$1,800 8 \$600) \$1,200 \$600) \$660) \$3,960 \$600) \$660) 4, \$600) \$660) \$2,580 \$660) 1,980 (2) LIFO Date Purchases Cost of Goods Sold Balance Jan. 1 \$600) \$1,800 8 \$600) \$1,200 \$600) \$660) \$3,960 \$600) \$660) 4, \$660) \$2,640 \$600) \$660) 1, Copyright 2009 John Wiley & Sons, Inc. Weygandt, Accounting Principles, 9/e, Solutions Manual (For Instructor Use Only)

25 *EXERCISE 6-15 (Continued) (3) MOVING-AVERAGE COST Date Purchases Cost of Goods Sold Balance Jan. 1 \$600) \$1,800 8 \$600) \$1,200 \$600) \$660) \$3,960 \$651.43)* 4, \$651.43) \$2,606 \$651.43) 1,954 *Average-cost = (\$600 + \$3,960) 7 = \$ (rounded) *EXERCISE 6-16 (a) The cost of goods available for sale is: June 1 Inventory \$5 \$1,000 June 12 Purchase \$6 1,800 June 23 Purchase \$7 3,500 Total cost of goods available for sale \$6,300 FIFO Date Purchases Cost of Goods Sold Balance June 1 \$5) \$1,000 June 12 \$6) \$1,800 \$5) \$6) } \$2,800 June 15 \$5) \$1,000 \$6) 1,200 \$6) \$ 600 \$6) June 23 \$7) \$3,500 \$7) } \$4,100 June 27 \$6) 600 \$7) \$ 840 \$7) 2,660 \$5,460 Ending inventory: \$840. Cost of goods sold: \$6,300 \$840 = \$5,460. Copyright 2009 John Wiley & Sons, Inc. Weygandt, Accounting Principles, 9/e, Solutions Manual (For Instructor Use Only) 6-25

26 *EXERCISE 6-16 (Continued) LIFO Date Purchases Cost of Goods Sold Balance June 1 \$5) \$1,000 June 12 \$6) \$1,800 \$5) \$6) } \$2,800 June 15 \$6) \$1,800 \$5) \$ 500 \$5) \$ 500 \$5) June 23 \$7) \$3,500 \$7) } \$4,000 \$5) June 27 \$7) \$3,360 ( \$7) } \$ 640 \$5,660 Ending inventory: \$640. Cost of goods sold: \$6,300 \$640 = \$5,660. Moving-Average Cost Date Purchases Cost of Goods Sold Balance June 1 \$5) \$1,000 June 12 \$6) \$1,800 \$5.60) \$2,800 June 15 \$5.60) \$2,240 \$5.60) \$ 560 June 23 \$7) \$3,500 \$6.767) \$4,060 June 27 \$6.767) \$3,248 \$6.767) \$ 812 \$5,488 Ending inventory: \$812. Cost of goods sold: \$6,300 \$812 = \$5,488. (b) (c) FIFO gives the same ending inventory and cost of goods sold values under both the periodic and perpetual inventory system. LIFO and average give different ending inventory and cost of goods sold values under the periodic and perpetual inventory systems, due to the Last-in, First-out assumption being applied to a different pool of costs. The simple average would be [(\$5 + \$6 + \$7) 3)] or \$6. However, the moving-average cost method uses a weighted-average unit cost that changes each time a purchase is made rather than a simple average Copyright 2009 John Wiley & Sons, Inc. Weygandt, Accounting Principles, 9/e, Solutions Manual (For Instructor Use Only)

27 *EXERCISE 6-17 (a) FIFO Date Purchases Cost of Goods Sold Balance 9/1 \$ 97) \$2,522 9/5 \$ 97) \$1,164 \$ 97) \$1,358 9/12 \$102) \$4,590 \$ 97) \$102) \$5,948 9/16 \$ 97) \$102) \$5,030 ( \$102) \$ 918 9/19 \$104) \$2,080 ( \$102) \$104) \$2,998 9/26 \$105) \$5,250 ( \$102) \$104) \$105) \$8,248 9/29 ( \$102) \$104) \$105) \$6,148 \$105) \$2,100 LIFO Date Purchases Cost of Goods Sold Balance 9/1 \$ 97) \$2,522 9/5 \$ 97) \$1,164 \$ 97) \$1,358 9/12 \$102) \$4,590 \$ 97) \$102) \$5,948 9/16 \$102) ( \$ 97) \$5,075 ( \$ 97) \$ 873 9/19 \$104) \$2,080 ( \$ 97) \$104) \$2,953 9/26 \$105) \$5,250 ( \$ 97) \$104) \$105) \$8,203 9/29 \$105) ( \$ 97) ( \$104) \$6,186 \$104) \$2,017 Copyright 2009 John Wiley & Sons, Inc. Weygandt, Accounting Principles, 9/e, Solutions Manual (For Instructor Use Only) 6-27

28 *EXERCISE 6-17 (Continued) Moving-Average Cost Date Purchases Cost of Goods Sold Balance 9/1 \$97) \$2,522 9/5 \$97) \$1,164 \$97) \$1,358 9/12 \$102) \$4,590 \$100.81) a \$5,948 9/16 \$100.81) \$5,041* ( \$100.81) \$ 907 9/19 \$104) \$2,080 \$103.00) b \$2,987 9/26 \$105) \$5,250 \$104.27) c \$8,237 9/29 \$104.27) \$6,152* \$104.27) \$2,085 *Rounded a \$5, = \$ b \$2, = \$ c \$8, = \$ (b) (c) Periodic Perpetual Ending Inventory FIFO \$2,100 \$2,100 Ending Inventory LIFO \$1,940 \$2,017 FIFO yields the same ending inventory value under both the periodic and perpetual inventory system. LIFO yields different ending inventory values when using the periodic versus perpetual inventory system. *EXERCISE 6-18 (a) Sales... \$800,000 Cost of goods sold Inventory, November 1... \$100,000 Cost of goods purchased ,000 Cost of goods available for sale ,000 Inventory, December ,000 Cost of goods sold ,000 Gross profit... \$320,000 Gross profit rate \$320,000/\$800,000 = 40% 6-28 Copyright 2009 John Wiley & Sons, Inc. Weygandt, Accounting Principles, 9/e, Solutions Manual (For Instructor Use Only)

29 *EXERCISE 6-18 (Continued) (b) Sales... \$1,000,000 Less: Estimated gross profit (40% X \$1,000,000) ,000 Estimated cost of goods sold... \$ 600,000 Beginning inventory... \$120,000 Cost of goods purchased ,000 Cost of goods available for sale ,000 Less: Estimated cost of goods sold ,000 Estimated cost of ending inventory... \$130,000 *EXERCISE 6-19 (a) Net sales (\$51,000 \$1,000)... \$50,000 Less: Estimated gross profit (40% X \$50,000)... 20,000 Estimated cost of goods sold... \$30,000 Beginning inventory... \$20,000 Cost of goods purchased (\$31,200 \$1,400 + \$1,200)... 31,000 Cost of goods available for sale... 51,000 Less: Estimated cost of goods sold... 30,000 Estimated cost of merchandise lost... \$21,000 (b) Net sales... \$50,000 Less: Estimated gross profit (30% X \$50,000)... 15,000 Estimated cost of goods sold... \$35,000 Beginning inventory... \$30,000 Cost of goods purchased... 31,000 Cost of goods available for sale... 61,000 Less: Estimated cost of goods sold... 35,000 Estimated cost of merchandise lost... \$26,000 Copyright 2009 John Wiley & Sons, Inc. Weygandt, Accounting Principles, 9/e, Solutions Manual (For Instructor Use Only) 6-29

30 *EXERCISE 6-20 Women s Department Men s Department Cost Retail Cost Retail Beginning inventory \$ 32,000 \$ 46,000 \$ 45,000 \$ 60,000 Goods purchased 148, , , ,000 Goods available for sale \$180, ,000 \$181, ,000 Net sales 178, ,000 Ending inventory at retail \$ 47,000 \$ 60,000 Cost-to-retail ratio \$180,000 \$181,300 \$225,000 = 80% \$245,000 = 74% Estimated cost of ending inventory \$47,000 X 80% = \$37,600 \$60,000 X 74% = \$44, Copyright 2009 John Wiley & Sons, Inc. Weygandt, Accounting Principles, 9/e, Solutions Manual (For Instructor Use Only)

31 SOLUTIONS TO PROBLEMS PROBLEM 6-1A (a) (b) (c) (d) (e) (f) (g) The goods should not be included in inventory as they were shipped FOB shipping point and shipped February 26. Title to the goods transfers to the customer February 26. Heath should have recorded the transaction in the Sales and Accounts Receivable accounts. The amount should not be included in inventory as they were shipped FOB destination and not received until March 2. The seller still owns the inventory. No entry is recorded. Include \$500 in inventory. Include \$400 in inventory. \$750 should be included in inventory as the goods were shipped FOB shipping point. The sale will be recorded on March 2. The goods should be included in inventory at the end of February at their cost of \$250. The damaged goods should not be included in inventory. They should be recorded in a loss account since they are not saleable. Copyright 2009 John Wiley & Sons, Inc. Weygandt, Accounting Principles, 9/e, Solutions Manual (For Instructor Use Only) 6-31

32 PROBLEM 6-2A (a) (b) COST OF GOODS AVAILABLE FOR SALE Date Explanation Units Unit Cost Total Cost March 1 Beginning Inventory 1,500 \$ 7 \$ 10,500 5 Purchase 3, , Purchase 5, , Purchase 4, , Purchase 2, ,000 Total 16,000 \$146,000 FIFO (1) Ending Inventory (2) Cost of Goods Sold Date Units Unit Cost Total Cost Cost of goods available for sale \$146,000 March 26 2,000 \$11 \$22,000 Less: Ending 21 1, ,000 inventory 37,000 3,500* \$37,000 Cost of goods sold \$109,000 *16,000 12,500 = 3,500 Proof of Cost of Goods Sold Date Units Unit Cost Total Cost March 1 1,500 \$ 7 \$ 10, , , , , , ,000 12,500 \$109, Copyright 2009 John Wiley & Sons, Inc. Weygandt, Accounting Principles, 9/e, Solutions Manual (For Instructor Use Only)

33 PROBLEM 6-2A (Continued) LIFO (1) Ending Inventory (2) Cost of Goods Sold Date Units Unit Cost Total Cost Cost of goods available for sale \$146,000 March 1 1,500 \$7 \$10,500 Less: Ending 5 2, ,000 inventory 26,500 3,500 \$26,500 Cost of goods sold \$119,500 Proof of Cost of Goods Sold Date Units Unit Cost Total Cost March 26 2,000 \$11 \$22, , , , , , ,000 12,500 \$119,500 AVERAGE-COST (1) Ending Inventory (2) Cost of Goods Sold \$146,000 16,000 = \$9.125 Cost of goods available for sale \$146,000 Units Unit Cost Total Cost Less: Ending inventory 31,938 3,500 \$9.125 \$31,938* Cost of goods sold \$114,062 *rounded to nearest dollar (c) (1) As shown in (b) above, FIFO produces the highest inventory amount, \$37,000. (2) As shown in (b) above, LIFO produces the highest cost of goods sold, \$119,500. Copyright 2009 John Wiley & Sons, Inc. Weygandt, Accounting Principles, 9/e, Solutions Manual (For Instructor Use Only) 6-33

34 PROBLEM 6-3A (a) (b) COST OF GOODS AVAILABLE FOR SALE Date Explanation Units Unit Cost Total Cost 1/1 Beginning Inventory 400 \$ 8 \$ 3,200 2/20 Purchase ,400 5/5 Purchase ,000 8/12 Purchase ,300 12/8 Purchase ,400 Total 2,000 \$19,300 FIFO (1) Ending Inventory (2) Cost of Goods Sold Date Units Unit Cost Total Cost Cost of goods available for sale \$19,300 12/8 200 \$12 \$2,400 Less: Ending 8/ ,300 inventory 5, \$5,700 Cost of goods sold \$13,600 Proof of Cost of Goods Sold Date Units Unit Cost Total Cost 1/1 400 \$ 8 \$ 3,200 2/ ,400 5/ ,000 1,500 \$13, Copyright 2009 John Wiley & Sons, Inc. Weygandt, Accounting Principles, 9/e, Solutions Manual (For Instructor Use Only)

35 PROBLEM 6-3A (Continued) (b) LIFO (1) Ending Inventory (2) Cost of Goods Sold Date Units Unit Cost Total Cost Cost of goods available for sale \$19,300 1/1 400 \$8 \$3,200 Less: Ending 2/ inventory 4, \$4,100 Cost of goods sold \$15,200 Proof of Cost of Goods Sold Date Units Unit Cost Total Cost 12/8 200 \$12 \$ 2,400 8/ ,300 5/ ,000 2/ ,500 1,500 \$15,200 AVERAGE-COST (1) Ending Inventory (2) Cost of Goods Sold \$19,300 2,000 = \$9.65 Cost of goods available for sale \$19,300 Units Unit Total Less: Ending Cost Cost inventory 4, \$9.65 \$4,825 Cost of goods sold \$14,475 Proof of Cost of Goods Sold 1,500 units X 9.65 = \$14,475 (c) (1) LIFO results in the lowest inventory amount for the balance sheet, \$4,100. (2) FIFO results in the lowest cost of goods sold, \$13,600. Copyright 2009 John Wiley & Sons, Inc. Weygandt, Accounting Principles, 9/e, Solutions Manual (For Instructor Use Only) 6-35

36 PROBLEM 6-4A (a) MORALES CO. Condensed Income Statement For the Year Ended December 31, 2010 FIFO LIFO Sales... \$865,000 \$865,000 Cost of goods sold Beginning inventory... 32,000 32,000 Cost of goods purchased , ,000 Cost of goods available for sale , ,000 Ending inventory... 84,000 a 68,000 b Cost of goods sold , ,000 Gross profit , ,000 Operating expenses , ,000 Income before income taxes , ,000 Income taxes (34%)... 59,500 54,060 Net income... \$115,500 \$104,940 a 30,000 X \$2.80 = \$84,000. b \$32,000 + (15,000 X \$2.40) = \$68,000. (b) (1) The FIFO method produces the most meaningful inventory amount for the balance sheet because the units are costed at the most recent purchase prices. (2) The LIFO method produces the most meaningful net income because the costs of the most recent purchases are matched against sales. (3) The FIFO method is most likely to approximate actual physical flow because the oldest goods are usually sold first to minimize spoilage and obsolescence. (4) There will be \$5,440 additional cash available under LIFO because income taxes are \$54,060 under LIFO and \$59,500 under FIFO. (5) Gross profit under the average cost method will be: (a) lower than FIFO and (b) higher than LIFO Copyright 2009 John Wiley & Sons, Inc. Weygandt, Accounting Principles, 9/e, Solutions Manual (For Instructor Use Only)

37 PROBLEM 6-5A Cost of Goods Available for Sale Date Explanation Units Unit Cost Total Cost October 1 Beginning Inventory 60 \$25 \$1,500 9 Purchase , Purchase , Purchase ,240 Total 330 \$8,750 Ending Inventory in Units: Sales Revenue Units available for sale 330 Unit Sales ( ) 270 Date Units Price Total Sales Units remaining in ending inventory 60 October \$35 \$ 3, , , \$10,300 (a) (1) LIFO (i) Ending Inventory (ii) Cost of Goods Sold October 1 \$25 = \$1,500 Cost of goods available for sale \$8,750 Less: Ending inventory 1,500 Cost of goods sold \$7,250 (iii) Gross Profit (iv) Gross Profit Rate Sales revenue \$10,300 Gross profit \$ 3,050 Cost of goods sold 7,250 Net sales \$10,300 = 29.6% Gross profit \$ 3,050 Copyright 2009 John Wiley & Sons, Inc. Weygandt, Accounting Principles, 9/e, Solutions Manual (For Instructor Use Only) 6-37

38 PROBLEM 6-5A (Continued) (2) FIFO (i) Ending Inventory (ii) Cost of Goods Sold October 25 \$28 = \$1,680 Cost of goods available for sale \$ 8,750 Less: Ending inventory 1,680 Cost of goods sold \$ 7,070 (iii) Gross Profit (iv) Gross Profit Rate Sales revenue \$10,300 Gross profit \$ 3,230 Cost of goods sold 7,070 Net sales \$10,300 = 31.4% Gross profit \$ 3,230 (3) Average-Cost Weighted-average cost per unit: cost of goods available for sale units available for sale \$8, = \$ (i) Ending Inventory (ii) Cost of Goods Sold \$ = \$1,591* Cost of goods available for sale \$8,750 *rounded to nearest dollar Less: Ending inventory 1,591 Cost of goods sold \$7,159 (iii) Gross Profit (iv) Gross Profit Rate Sales revenue \$10,300 Gross profit \$ 3,141 Cost of goods sold 7,159 Net sales \$10,300 = 30.5% Gross profit \$ 3,141 (b) LIFO produces the lowest ending inventory value, gross profit, and gross profit rate because its cost of goods sold is higher than FIFO or average-cost Copyright 2009 John Wiley & Sons, Inc. Weygandt, Accounting Principles, 9/e, Solutions Manual (For Instructor Use Only)

39 PROBLEM 6-6A (a) (1) To maximize gross profit, Bernelli Diamonds should sell the diamonds with the lowest cost. Sale Date Cost of Goods Sold Sales Revenue March 5 \$300 \$ 45,000 \$600 \$108,000 \$350 10,500 \$ ,000 March 25 \$350 59,500 \$375 86, \$201, \$368,000 Gross profit \$368,000 \$201,250 = \$166,750. (2) To minimize gross profit, Bernelli Diamonds should sell the diamonds with the highest cost. Sale Date Cost of Goods Sold Sales Revenue March 5 \$350 \$ 63,000 \$600 \$108,000 March 25 \$ ,250 \$ ,000 \$350 7,000 \$300 9, \$210, \$368,000 Gross profit \$368,000 \$210,250 = \$157,750. (b) FIFO Cost of goods available for sale March 1 Beginning inventory \$300 \$ 45,000 3 Purchase \$350 70, Purchase \$ , \$246,250 Goods available for sale 700 Units sold 580 Ending inventory \$375 \$45,000 Copyright 2009 John Wiley & Sons, Inc. Weygandt, Accounting Principles, 9/e, Solutions Manual (For Instructor Use Only) 6-39

40 PROBLEM 6-6A (Continued) Goods available for sale \$246,250 Ending inventory 45,000 Cost of goods sold \$201,250 Gross profit: \$368,000 \$201,250 = \$166,750. (c) LIFO Cost of goods available for sale \$246,250 (from part b) Ending inventory \$300 36,000 Cost of goods sold \$210,250 Gross profit: \$368,000 \$210,250 = \$157,750. (d) The choice of inventory method depends on the company s objectives. Since the diamonds are marked and coded, the company could use specific identification. This could, however, result in earnings management by the company because, as shown, it could carefully choose which diamonds to sell to result in the maximum or minimum income. Employing a cost flow assumption, such as LIFO or FIFO, would reduce record-keeping costs. FIFO would result in higher income, but LIFO would reduce income taxes and provide better matching of current sales revenue with current costs Copyright 2009 John Wiley & Sons, Inc. Weygandt, Accounting Principles, 9/e, Solutions Manual (For Instructor Use Only)

41 PROBLEM 6-7A (a) UTLEY INC. Condensed Income Statement For the Year Ended December 31, 2010 FIFO LIFO Sales... \$665,000 \$665,000 Cost of goods sold Beginning inventory... 35,000 35,000 Cost of goods purchased , ,500 Cost of goods available for sale , ,500 Ending inventory ,500 a 115,000 b Cost of goods sold , ,500 Gross profit , ,500 Operating expenses , ,000 Income before income taxes , ,500 Income tax expense (28%)... 36,120 30,940 Net income... \$ 92,880 \$ 79,560 a \$4.50) + ( \$4.20) = \$133,500. b \$3.50) + \$4.00) = \$115,000. (b) Answers to questions: (1) The FIFO method produces the most meaningful inventory amount for the balance sheet because the units are costed at the most recent purchase prices. (2) The LIFO method produces the most meaningful net income because the costs of the most recent purchases are matched against sales. (3) The FIFO method is most likely to approximate actual physical flow because the oldest goods are usually sold first to minimize spoilage and obsolescence. (4) There will be \$5,180 additional cash available under LIFO because income taxes are \$30,940 under LIFO and \$36,120 under FIFO. Copyright 2009 John Wiley & Sons, Inc. Weygandt, Accounting Principles, 9/e, Solutions Manual (For Instructor Use Only) 6-41

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