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Chapter 6 Inventory & Cost of Goods Sold Short Exercises (10 min.) S 6-1 Billions 4.5 4.5

a.

Inventory.................................................. Cash....................................................

b.

Accounts Receivable.............................. Sales Revenue...................................

18.9

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

3.9

Cash......................................................... Accounts Receivable........................

18.7

c.

d.

Chapter 6

18.9

3.9

18.7

Inventory and Cost of Goods Sold

6-1

(10-15 min.) S 6-2 1. (Journal entries) Inventory………………………………….. Accounts Payable…………………….

125,000

Accounts Receivable…………………… Sales Revenue………………………...

190,000

Cost of Goods Sold…………………….. Inventory ($125,000 × .80)…………..

100,000

Cash ($190,000 × .25)…………………... Accounts Receivable………………...

47,500

125,000

190,000

100,000

47,500

2. (Financial statements)

6-2

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

$ 25,000

INCOME STATEMENT Sales revenue……………………………………….... Cost of goods sold…………………………………... Gross profit……………………………………………

$190,000 100,000 $ 90,000

Financial Accounting 9/e Solutions Manual

(15-20 min.) S 6-3 a Average Cost Cost of goods sold: Average (28 × $157.50) FIFO [$1,350 + (19 × $160)] LIFO [$4,320 + (1 × $150)] Ending inventory: Average (8 × $157.50) FIFO (8 × $160) LIFO (8 × $150)

b

c

FIFO

LIFO

$4,410 $4,390 $4,470

$ 1,260 $1,280 $1,200

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

Chapter 6

Inventory and Cost of Goods Sold

6-3

(10-15 min.) S 6-4 Jonah’s Copy Center Income Statement Year Ended December 31 Average Sales revenue (600 × $20.50) $12,300 Cost of goods sold (600 × $9.85*) 5,910 (100 × $8.40) + (500 × $9.90) (600 × $9.90) Gross profit 6,390 Operating expenses 3,900 Net income _____

$ 2,490

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

6-4

Financial Accounting 9/e Solutions Manual

FIFO $12,300

LIFO $12,300

5,790 6,510 3,900

5,940 6,360 3,900

$ 2,610

$ 2,460

$ 950 6,930 $7,880 $ 9.85

(10-15 min.) S 6-5 Jonah’s Copy Center Income Statement Year Ended December 31 Average Sales revenue (600 × $20.50) $12,300 Cost of goods sold (600 × $9.85*) 5,910 (100 × $8.40) + (500 × $9.90) (600 × $9.90) ______ Gross profit 6,390 Operating expenses 3,900 Income before income tax $ 2,490 Income tax expense (40%) $ 996 *From S 6-4

FIFO $12,300

LIFO $12,300

5,790 ______ 6,510 3,900 $ 2,610 $ 1,044

5,940 6,360 3,900 $ 2,460 $ 984

Method to maximize reported income (before tax).

Chapter 6

Method to minimize income tax expense.

Inventory and Cost of Goods Sold

6-5

(5 min.) S 6-6 Macrovision.com managers can purchase a large amount of inventory before year end. Under LIFO, these high inventory costs go directly to cost of goods sold in the current year. Higher cost of goods sold creates lower net income, and lower net income results in lower income taxes. Saving on taxes is one reason companies want to decrease their income.

Student responses may vary.

(5-10 min.) S 6-7

6-6

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

$ 49,000

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

$436,000

Financial Accounting 9/e Solutions Manual

(15-20 min.) S 6-8 DATE:

_____________

TO:

Jim Tolbert, President of Tolbert Trumpet Company

FROM:

Student Name

SUBJECT:

Proposal for Increasing Net Income

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

Student responses will vary.

(10-15 min.) S 6-9 LIFO

1.

Generally associated with saving income taxes Chapter 6

Inventory and Cost of Goods Sold

6-7

Specific unit cost

2.

Used to account for automobiles, jewelry, and art objects

FIFO

3.

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

FIFO

4.

Maximizes reported income

LIFO

5.

Enables a company to buy high-cost inventory at year end and thereby to decrease reported income and income tax

LIFO

6.

Results in an old measure of the cost of ending inventory

Average

7.

Provides a middle-ground measure of ending inventory and cost of goods sold

LIFO

8.

Enables a company to keep reported income from dropping lower by liquidating older layers of inventory

All

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

LIFO

6-8

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

Financial Accounting 9/e Solutions Manual

(5-10 min.) S 6-10 Dollars in Millions Gross profit percentage

=

$35,376 − $15,437 $35,376

=

56.4%

Inventory turnover

=

$15,437 ($1,672 + $1,908) / 2

=

8.6 times

(5-10 min.) S 6-11

+ = −

=

Beginning inventory……………………………... Purchases……………………………………….… Goods available…………………………………... Cost of goods sold: Sales revenue…………………………. Less estimated gross profit (60%)… Estimated cost of goods sold………………. Estimated cost of ending inventory…………...

Chapter 6

$ 315,000 1,820,000 2,135,000 $3,920,000 (2,352,000) (1,568,000) $ 567,000

Inventory and Cost of Goods Sold

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(5 min.) S 6-12 Correct Amount (Millions) a. b. c. d.

Net sales (unchanged)………………………………. Inventory ($480 − $13)……………………………….. Cost of goods sold ($1,160 + $13)………………… Gross profit ($2,500 − $1,173)………………………

$2,500 $ 467 $1,173 $1,327

(5 min.) S 6-13 1. Last year’s reported gross profit was understated. Correct gross profit last year was $5.1 million ($3.7 + $1.4). 2. This year’s gross profit is overstated. Correct gross profit for this year is $3.2 million ($4.6 − $1.4).

6-10

Financial Accounting 9/e Solutions Manual

(5-10 min.) S 6-14 1. Unethical. The company falsified its ending inventory in order to cheat the government (and the people) out of taxes. 2. Ethical. There is nothing wrong with buying inventory whenever a company wishes. 3. Ethical. Same idea as 2. 4. Unethical. The company falsified its ending inventory and net income. 5. Unethical. The company falsified its purchases, cost of goods sold, and net income in order to evade taxes.

Chapter 6

Inventory and Cost of Goods Sold

6-11