西方财务会计课后习题答案.docx

Chapter 6

Merchandise Inventory and Cost of
Goods Sold

Check Points

(10 min.) CP 6-1

Nissan North America
Balance Sheet
December 31, 20X6
Current assets:

Inventory (300 @ $80)…………………..
$24,000

Nissan North America
Income Statement
Year Ended December 31, 20X6
Sales revenue [700 ´ ($80 + $40)]……….
$84,000
Cost of goods sold (700 @ $80)…………
56,000
Gross profit………………………………….
$28,000

(10-15 min.) CP 6-2

1. (Journal entries)

Inventory…………………………………..
100,000

Accounts Payable…………………….

100,000

Cash ($140,000 ´ .20)……………………
28,000

Amounts Receivable ($140,000 ´ .80)..
112,000

Sales Revenue………………………...

140,000

Cost of Goods Sold……………………..
60,000

Inventory ($100,000 ´ .60)…………..

60,000

2. (Financial statements)

BALANCE SHEET

Current assets:

Inventory ($100,000 – $60,000)……………….
$40,000

INCOME STATEMENT

Sales revenue………………………………………
$140,000
Cost of goods sold………………………………..
60,000
Gross profit…………………………………………
$ 80,000

(10 min.) CP 6-3

Billions

Inventory…………………………
6.4

Cash…………………………...

6.4

Accounts Receivable………….
28.5

Sales Revenue……………….

28.5

Cost of Goods Sold……………
6.2

Inventory……………………...

6.2

Cash………………………………
26.3

Accounts Receivable……….

26.3

(10 min.) CP 6-4

1. Inventory costs are increasing from $10 to $14 to $18 per unit.

2. FIFO results in the highest cost of ending inventory ($360) because under FIFO the ending inventory is costed at the last costs incurred during the period. When costs are increasing, the last costs are the highest costs.

FIFO results in the lowest cost of goods sold. This occurs because the oldest costs are assigned to cost of goods sold. When costs are increasing, the oldest costs are the lowest.

FIFO results in the highest gross profit because cost of goods sold, the expense, is the lowest. (Sales revenue is unaffected by the inventory costing method.)

3. LIFO results in the lowest cost of ending inventory ($240) because under LIFO, the ending inventory is costed at the oldest costs. When costs are increasing, the oldest costs are the lowest costs.

LIFO results in the highest cost of goods sold. This occurs because the last costs of the period are assigned to cost of goods sold. When costs are increasing, the last costs are the highest.

LIFO results in the lowest gross profit because cost of goods sold, the expense, is the highest. (Sales revenue is unaffected by the inventory costing method.)

(10 min.) CP 6-5

a
b
c

Average
Cost
FIFO
LIFO

Cost of goods sold:

Average (50 @ $15*)
$750

FIFO (10 @ $10) + (25 @ $14) + (15 @ $18)
$720

LIFO (25 @ $18) + (25 @ $14)

$800

Ending inventory:

Average (10 @ $15*)
$150

FIFO (10 @ $18)

$180

LIFO (10 @ $10)

$100
_____
*Average cost

=
($100 + $350 + $450)
=
$15
per unit
(10 + 25 + 25)

(10-15 min.) CP 6-6

Kinko’s
Income Statement
Year Ended December 31, 20XX

Average
FIFO
LIFO
Sales revenue (600 ´ $20)
$12,000
$12,000
$12,000
Cost of goods sold (600 ´ $9.90*)
5,940

(100 ´ $9) + (500 ´ 10)

5,900

(600 ´ $10)

6,000
Gross profit
6,060
6,100
6,000
Operating expenses
4,000
4,000
4,000
Net income
$ 2,060
$ 2,100
$ 2,000
_____
*
Beginning inventory (100 @ $9.20)…………..
$ 920
Purchases (700 @ $10)…………………………
7000
Goods available…………………….……………
$7,920
Average cost per unit $7,920 / 800 units…
$ 9.90

(10 min.) CP 6-7

Kinko’s
Income Statement
Year Ended December 31, 20XX

Average
FIFO
LIFO
Sales revenue (600 ´ $20)
$12,000
$12,000
$12,000
Cost of goods sold (600 ´ $9.90*)
5,940

(100 ´ $9) + (500 ´ $10)

5,900

(600 ´ $10)
______
______
6,000
Gross profit
6,060
6,100
6,000
Operating expenses
4,000
4,000
4,000
Income before income tax
$ 2,060
$ 2,100
$ 2,000
Income tax expense (40%)
$ 824
$ 840
$ 800

Method to minimize income tax expense.
Method to maximize reported income (before tax).
*From CP 6-6

(5 min.) CP 6-8

Lands’ End managers can delay purchases of inventory until the next year. Under LIFO, high inventory costs that would have been paid for inventory do not become expense as cost of goods sold in the current year. As a result, the current year’s income statement reports a higher net income than Lands’ End would have reported if the company had replaced inventory before year end.

(5-10 min.) CP 6-9

Millions
BALANCE SHEET

Current assets:

Inventories, at market (which is lower than cost)..
$ 330

INCOME STATEMENT

Cost of goods sold [$1,001 + ($333 – $330)]…………
$1,004

(10 min.) CP 6-10

1. FIFO

2. LIFO

Gross profit percentage:

Gross profit
=
$460*
=
46%

$340**
=
34%

Net sales revenue
$1,000

$1,000

_____

* $1,000 – $540 = $460

** $1,000 – $660 = $340

Inventory turnover:

Cost of goods sold
=
$540

$660

Average inventory
($100 + $360) / 2

($100 + $240) / 2

=
2.3 times

=
3.9 times

3.
Gross profit percentage — FIFO looks better.

4.
Inventory turnover — LIFO looks better.

(10-15 min.) CP 6-11

1.

Beginning inventory……………………………...

$ 300,000

+
Purchases……………………………………….…
1,600,000

=
Goods available…………………………………...
1,900,000

–
Cost of goods sold……………………………….
(1,800,000)

=
Ending inventory……………………………….…
$ 100,000

2.

Beginning inventory……………………………..
$ 300,000

+
Purchases……………………………………….…
s
ame
1,600,000

=
Goods available…………………………………...
1,900,000

–
Cost of goods sold:

Sales revenue……………………….
$3,000,000

Less estimated gross profit (40%)
(1,200,000)

Estimated cost of goods sold……………….
(1,800,000)

=
Estimated cost of ending inventory…………...
$ 100,000

(5-10 min.) CP 6-12

Correct
Amount (Millions)

a.
Inventory ($333 + $3)…………………………………
$ 336
b.
Net sales (unchanged)……………………………….
$1,755
c.
Cost of goods sold ($1,001 – $3)…………………...
$ 998
d.
Gross profit ($754 + $3)……………………….……..
$ 757

(10 min.) CP 6-13

1. Last year’s reported gross profit was understated.
Correct gross profit last year was $5.6 million ($4.0 + $1.6).

2. This year’s gross profit is overstated.
Correct gross profit for this year is $3.2 million ($4.8 – $1.6).

3. Lang’s perspective is better because correcting the error changes the trend of correct gross profit from up (good) to down (bad), as follows:

Millions

Last Year
This Year
Trend

Reported gross profit……..
$4.0
$4.8
Up (Good)
Correct gross profit……….
$5.6
$3.2
Down (Bad)

(5-10 min.) CP 6-14

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

2. Ethical. Same idea as 1.

3. Unethical. The company falsified its reported amounts of inventory and net income.

4. Unethical. The company falsified its reported inventory purchases, cost of goods sold, and net income in order to cheat the government (and the people) out of income tax.

5. Unethical. The company falsified its reported amount of inventory in order to cheat the government (and the people) out of taxes.
Exercises

(15-20 min.) E 6-1

Req. 1 (journal entried)

Perpetual System
1.
Purchases:
Thousands

Inventory…………………….……….…
2,200

Accounts Payable………………….

2,200

2.
Sales:

Cash ($3,500 ´ .20)…….……………..
700

Accounts Receivable ($3,500 ´ .80).
2,800

Sales Revenue…………….……….

3,500

Cost of Goods Sold…………………..
2,100

Inventory………………….………....

2,100

Req. 2 (financial statement amounts)

BALANCE SHEET
Thousands
Current assets:

Inventory ($370 + $2,200 – $2,100)...
$ 470

INCOME STATEMENT

Sales revenue…………………………….
$3,500
Cost of goods sold………………………
2,100
Gross profit……………………………….
$1,400

(15-25 min.) E 6-2

Journal
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT

1
Inventory ($640 + $1,870 + $900)……….
3,410

Accounts Payable………………………

3,410

2
Accounts Receivable (17 @ $500)……...
8,500

Sales Revenue…………………………..

8,500

Cost of Goods Sold……………………….
2,800*

Inventory…………………………………

2,800

3
Sales revenue………………………………
$8,500

Cost of goods sold………………………..
2,800

Gross profit…………………………………
$5,700

Ending inventory ($800 + $3,410 – $2,800)…….
$1,410
_____
*(9 @ $160) + (8 @ $170) = $2,800
(10-15 min.) E 6-3

1.
Inventory
Begin. Bal.
( 5 units @ $160) 800

Purchases

Oct. 8
( 4 units @ $160) 640

15
(11 units @ $170) 1,870
Cost of goods sold

26
( 5 units @ $180) 900
(17 units @ $?)
?
Ending bal.
( 8 units @ $?) ?

Cost of Goods Sold

Ending Inventory

(a) Specific

unit cost
(6 @ $160) + (11 @ $170)
=
$2,830

(3 @ $160) + (5 @ $180)
=
$1,380

(b) Average

cost
17 ´ $168.40*
=
$2,863

8 ´ $168.40*
=
$1,347

_____
*Average cost per unit
=
($800 + $640 + $1,870 + $900)
=
$168.40
(5 + 4 + 11 + 5)

(c) FIFO
(9 @ $160) + (8 @ $170)
=
$2,800

(5 @ $180) + (3 @ $170)
=
$1,410

(d) LIFO
(5 @ $180) + (11 @ $170) + (1 @ $160)
=
$2,930

(8 @ $160)
=
$1,280

2. LIFO produces the highest cost of goods sold.
FIFO produces the lowest cost of goods sold.
The increase in inventory cost from $160 to $170 to $180 per unit causes the difference in cost of goods sold.
(15-20 min.) E 6-4

Cost of goods sold:

LIFO ($2,930) – FIFO ($2,800)…………………………
$130
´ Income tax rate………………………………………..
.35
LIFO advantage in tax savings…………………………..
$ 46

(15 min.) E 6-5

1.
a.
FIFO

Cost of goods sold:

(5 @ $90) + (5 @ $95)……………...
$925

Ending inventory:

7 @ $95………………………………
$665

b.
LIFO

Cost of goods sold:

10 @ $95……………………………..
$950

Ending inventory:

(5 @ $90) + (2 @ $95)……………...
$640

2.
VPA, Inc.
Income Statement
Month Ended May 31, 20XX

Sales revenue (3 @ $150) + (7 @ $155)…………….
$1,535
Cost of goods sold……………………………………
925
Gross profit……………………………………………..
610
Operating expenses…………………………………...
310
Income before income tax……………………………
300
Income tax expense (40%)……………………………
120
Net income………………………………………………
$ 180

(15 min.) E 6-6

Millions
1.
Gross profit:
FIFO
LIFO

Sales revenue……………………………………
$4.9
$4.9

Cost of goods sold

FIFO: 600,000 ´ $7……………………………
4.2

LIFO: (400,000 ´ $5) + (100,000 ´ $6)

+ (100,000 ´ $7)………………………

3.3

Gross profit………………………………………
$ .7
$1.6

2. Gross profit under FIFO and LIFO differ because inventory costs decreased during the period.

If you base your prediction on the decrease in inventory unit cost, then, yes, you would predict that LIFO gross profit would be higher.

But if you assume that FIFO produces higher gross profit, then, no, the actual result does not follow your prediction.
(15-20 min.) E 6-7

DATE: _____________

TO: Rick Tabor

FROM: Student Name

SUBJECT: Proposal for Saving Income Tax

We can save income tax by buying above-normal quantities of inventory before the end of the year. Inventory costs are rising, and the company uses the LIFO inventory method. Under LIFO, the higher cost of year-end purchases of inventory goes straight into cost of goods sold. This increases cost of goods sold and decreases net income and income taxes. Because our inventory levels are lower than normal, we need the inventory anyway. In effect, we can use our cash to buy inventory or to pay income taxes. I think it would be wiser to buy inventory.
(10-15 min.) E 6-8

Specific
unit cost 1. Used to account for automobiles, jewelry, and art objects.

Average 2. Provides a middle-ground measure of ending inventory and cost of goods sold

FIFO 3. Maximizes reported income.

LIFO 4. Matches the most current cost of goods sold against sales revenue.

LIFO 5. Results in an old measure of the cost of ending inventory.

LIFO 6. Generally associated with saving income taxes.

FIFO 7 Results in a cost of ending inventory that is close to the current cost of replacing the inventory.

LIFO 8. Enables a company to buy high-cost inventory at year end and thereby to decrease reported income.

LIFO 9. Enables a company to keep reported income from dropping lower by liquidating older layers of inventory.

LCM    10. Writes inventory down when replacement cost drops below historical cost.
(5-10 min.) E 6-9

Jeffrey Corporation
Income Statement (partial)
Year Ended December 31, 20X4
Sales revenue ………………………………………………
$225,000
Cost of goods sold [$110,000 + ($18,000 – $17,000)]..
111,000
Gross profit…………………………………………………
$114,000

Note: Cost was used for beginning inventory because cost was lower than market. Market (replacement cost) was used for ending inventory because market was lower than cost.
(20-25 min.) E 6-10

A
B

C
D
E
1
WHITEWATER CANOE SALES
2
ESTIMATED INCOME UNDER FIFO AND LIFO
3
JANUARY 20XX
4

5

FIFO
LIFO
FIFO
LIFO
6

7
Sales
$260,000
$260,000
$260,000
$260,000
8

9
Cost of goods sold

10
Beginning inventory
63,000
63,000
63,000
63,000
11
Net purchases
159,000
159,000
182,000
182,000
12

13
Goods available
222,000
222,000
245,000
245,000
14
Ending inventory
(85,000)
(78,000)
(85,000)
(78,000)
15

16
Cost of goods sold
137,000
144,000
160,000
167,000
17

18
Gross profit
123,000
116,000
100,000
93,000
19
Operating expenses
83,000
83,000
83,000
83,000
20

21
Income from operations

40,000

33,000