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The McGraw-Hill Companies,Inc., 2013
Solutions Manual, Vol.1, Chapter 8 81
AACSB assurance of learning standards in accounting and business education require
documentation of outcomes assessment. Although schools, departments, and faculty may approachassessment and its documentation differently, one approach is to provide specific questions onexams that become the basis for assessment. To aid faculty in this endeavor, we have labeled eachquestion, exercise, and problem inIntermediate Accounting, 7e, with the following AACSB learningskills:
Questions AACSB Tags Exercises (cont.) AACSB Tags81 Reflective thinking 85 Analytic82 Reflective thinking 86 Analytic83 Reflective thinking 87 Analytic84 Reflective thinking 88 Analytic
85 Reflective thinking 89 Analytic
86 Reflective thinking 810 Analytic87 Reflective thinking 811 Analytic88 Reflective thinking 812 Communications89 Reflective thinking 813 Analytic
810 Reflective thinking 814 Analytic811 Reflective thinking 815 Analytic812 Reflective thinking 816 Analytic813 Reflective thinking 817 Analytic
814 Reflective thinking 818 Analytic815 Reflective thinking 819 Analytic816 Reflective thinking 820 Communications
Brief Exercises 821 Analytic
81 Analytic 822 Analytic
82 Analytic 823 Analytic83 Analytic 824 Reflective thinking84 Analytic CPA/CMA85 Analytic 1 Analytic86 Analytic 2 Analytic87 Analytic 3 Analytic88 Analytic 4 Analytic
89 Analytic 5 Analytic810 Analytic 6 Analytic811 Analytic 7 Analytic812 Analytic 8 Reflective thinking
813 Analytic 1 Analytic
Exercises 2 Analytic81 Analytic 3 Analytic82 Analytic Problems83 Analytic 81 Analytic84 Analytic 82 Analytic
Chapter 8 Inventories: Measurement
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The McGraw-Hill Companies,Inc., 2013
82 Intermediate Accounting, 7/e
Problems cont. AACSB Tags83 Analytic84 Analytic85 Analytic
86 Analytic87 Analytic
88 Analytic89 Analytic810 Analytic811 Analytic812 Analytic
813 Analytic814 Analytic
815 Analytic
816 Analytic
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The McGraw-Hill Companies,Inc., 2013
Solutions Manual, Vol.1, Chapter 8 83
Question 81
Question 82
Question 83Perpetual System Periodic System
(1) Purchase of merchandise debit inventory debitpurchases
(2) Sale of merchandise debit cost of goods sold;
credit inventory no entry
(3) Return of merchandise credit inventory creditpurchase returns
Question 84
QUESTIONS FOR REVIEW OF KEY TOPICS
Inventory for a manufacturing company consists of (1) raw materials, (2) work in process, and(3) finished goods. Raw materialsrepresent the cost, primarily purchase price plus freight chargesof goods purchased from other manufacturers, that will become part of the finished product. Work-in-processinventory represents the products that are not yet complete. The cost of work in processincludes the cost of raw materials used in production, the cost of labor that can be directly traced tothe goods in process, and an allocated portion of other manufacturing costs, called manufacturingoverhead. When the manufacturing process is completed, these costs that have been accumulated inwork in process are transferred tofinished goods.
Beginning inventory plus net purchases for the period equals cost of goods available for sale
The main difference between a perpetual and a periodic system is that the periodic system allocatescost of goods available for sale to ending inventory and cost of goods sold only at the end of theperiod. The perpetual system accomplishes this allocation by decreasing inventory and increasingcost of goods sold each time goods are sold.
(4) Payment of freight debit inventory debitfreight-in
Inventory shipped f.o.b. shipping point is included in the inventory of the purchaser when themerchandise reaches the common carrier. Laetner Corporation records the purchase in 2013 andincludes the shipment in its ending inventory. Bockner Company records the sale in 2013Inventory shipped f.o.b. destination is included in the inventory of the seller until it reaches the
purchasers location. Bockner would include the merchandise in its 2013 ending inventory and thesale/purchase would be recorded in 2014.
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The McGraw-Hill Companies,Inc., 2013
84 Intermediate Accounting, 7/e
Answers to Questions (continued)
Question 85
Question 86
Question 87
Question 88
Question 89
A consignment is an arrangement under which goods are physically transferred to another
company (the consignee), but the transferor (consignor) retains legal title. If the consignee cantfind a buyer, the goods are returned to the consignor. Goods held on consignmentare included inthe inventory of the consignor until sold by the consignee.
By the gross method, purchase discounts not taken are viewed as part of inventory cost. By thenet method, purchase discounts not taken are considered interest expense because they are viewed ascompensation to the seller for providing financing to the buyer.
1. Beginning inventory increase
2. Purchases increase3. Ending inventory decrease4. Purchase returns decrease5. Freight-in increase
Four methods of assigning cost to ending inventory and cost of goods sold are (1) specificidentification, (2) first-in, first-out (FIFO), (3) last-in, first-out (LIFO), and (4) average cost. Thespecific identification method requires each unit sold during the period or each unit on hand at theend of the period to be traced through the system and matched with its actual cost. First-in, first-out(FIFO) assumes that units sold are the first units acquired. The last-in, first-out (LIFO) method
assumes that the units sold are the most recent units purchased. The average cost method assumesthat cost of goods sold and ending inventory consist of a mixture of all the goods available for sale.The average unit cost applied to goods sold or ending inventory is an average unit cost weighted bythe number of units acquired at the various unit prices.
When costs are declining, LIFO will result in a lowercost of goods sold and higher incomethan FIFO. This is because LIFO will include in cost of goods sold the most recently purchasedlower-cost merchandise. LIFO also will provide a higherending inventory in the balance sheet.
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The McGraw-Hill Companies,Inc., 2013
Solutions Manual, Vol.1, Chapter 8 85
Answers to Questions (continued)
Question 810
Question 811
Question 812
Question 813
Question 814
Proponents of LIFO argue that it provides a better match of revenues and expenses because
cost of goods sold includes the costs of the most recent purchases. These are matched with sales thareflect a current selling price. On the other hand, inventory costs in the balance sheet generally areout of date because they are derived from old purchase transactions. It is conceivable that acompanys LIFO inventory balance could be based on unit costs actually incurred several yearsearlier. When inventory quantity declinesduring a period, then these out-of-date inventory layerswill be liquidated and cost of goods sold will match noncurrent costs with current selling prices.
Many companies choose the LIFO inventory method to reduce income taxes in periods whenprices are rising. In periods of rising prices, LIFO results in a higher cost of goods sold andtherefore a lower net income than the other methods. The companies income tax returns will repor
lower taxable incomes using LIFO and lower taxes will be paid currently. If a company uses LIFOto measure its taxable income, IRS regulations require that LIFO also be used to measure incomereported to investors and creditors.
The gross profit, inventory turnover, and average days in inventory ratios are designed tomonitor inventories. The gross profit ratio is calculated by dividing gross profit (net sales minuscost of goods sold) by net sales. Inventory turnover is calculated by dividing cost of goods sold byaverage inventory, and we compute average days in inventory by dividing the number of days in theperiod by the inventory turnover ratio.
A LIFO inventory pool groups inventory units into pools based on physical similarities of theindividual units. The average cost for all of a pools beginning inventory and for all of a poolspurchases during the period is used instead of individual unit costs. If the quantity of endinginventory for the pool increases, then ending inventory will consist of the beginning inventory plus alayer added during the period at the average acquisition cost for the pool.
The dollar-value LIFO method has important advantages. First, it simplifies the recordkeepingprocedures compared to unit LIFO because no information is needed about unit flows. Second, itminimizes the probability of the liquidation of LIFO inventory layers, even more so than the use o
pools alone, through the aggregation of many types of inventory into larger pools. In addition, firmsthat do not replace units sold with new units of the same kind can use the method.
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The McGraw-Hill Companies,Inc., 2013
86 Intermediate Accounting, 7/e
Answers to Questions (concluded)
Question 815
Question 816
After determining ending inventory at year-end cost, the following steps remain:
1. Convert ending inventory valued at year-end cost to base year cost.2. Identify the layers in ending inventory with the years they were created.3. Convert each layers base year cost measurement to layer year cost measurement using the
layer years cost index and then sum the layers.
The primary difference between U.S. GAAP and IFRS in the methods allowed to valueinventory is that IFRS does not allow the use of the LIFO method.
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The McGraw-Hill Companies,Inc., 2013
Solutions Manual, Vol.1, Chapter 8 87
Brief Exercise 81
Beginning inventory $186,000Plus: Purchases 945,000Less: Cost of goods sold (982,000)
Ending inventory $149,000
Brief Exercise 82
To record the purchase of inventory on account.
Inventory ......................................................................... 845,000Accounts payable ........................................................ 845,000
To record sales on account and cost of goods sold.
Accounts receivable ........................................................ 1,420,000Sales revenue .............................................................. 1,420,000
Cost of goods sold .......................................................... 902,000Inventory ..................................................................... 902,000
BRIEFEXERCISES
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88 Intermediate Accounting, 7/e
Brief Exercise 83
Both shipments should be included in inventory. The goods shipped to acustomer f.o.b. destination did not arrive at the customers location until after the
fiscal year-end. They belong to Kelly until they arrive at the customers location.Title to the goods shipped from a supplier to Kelly on December 30, f.o.b. shipping
point, changed hands on December 30.
Brief Exercise 84
Purchase price = 10 units x $25,000 = $250,000
December 28, 2013Inventory ......................................................................... 250,000
Accounts payable ........................................................ 250,000
January 6, 2014Accounts payable ............................................................ 250,000Cash (99% x $250,000)................................................... 247,500Inventory (1% x $250,000)............................................. 2,500
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The McGraw-Hill Companies,Inc., 2013
Solutions Manual, Vol.1, Chapter 8 89
Brief Exercise 85
December 28, 2013Inventory (99% x $250,000)............................................... 247,500Accounts payable ....................................................... 247,500
January 6, 2014Accounts payable ............................................................ 247,500
Cash ............................................................................ 247,500
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810 Intermediate Accounting, 7/e
Brief Exercise 86Cost of goods available for sale:Beginning inventory (200 x $25) $5,000Purchases:
100 x $28 $2,800200 x $30 6,000 8,800
Cost of goods available (500 units) $13,800
First-in, first-out (FIFO)
Cost of goods available for sale (500 units) $13,800Less: Ending inventory (determined below) (8,100)
Cost of goods sold $5,700
Cost of ending inventory:
Date of
purchase Units Unit cost Total cost
January 8 75 $28 $2,100January 19 200 30 6,000
Total $8,100
Average cost
Cost of goods available for sale (500 units) $13,800Less: Ending inventory(determined below) (7,590)
Cost of goods sold $6,210 *
Cost of ending inventory:
$13,800Weighted-average unit cost = = $27.60
500 units
275 units x $27.60 = $7,590
*Alternatively, could be determined by multiplying the units sold by the averagecost: 225 units x $27.60 = $6,210
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The McGraw-Hill Companies,Inc., 2013
Solutions Manual, Vol.1, Chapter 8 811
Brief Exercise 87
First-in, first-out (FIFO)
Cost of goods sold:
Date of Cost of
Sale Units Sold Units Sold Total Cost
January 10 125(from Beg. Inv.) $25 $3,125January 25 75 (from Beg. Inv.) 25 1,875
25(from 1/8 purchase) 28 700Total 225 $5,700
Ending inventory:
Date of
Purchase Units Unit Cost Total Cost
January 8 75 $28 $2,100January 19 200 30 6,000
Total $8,100
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The McGraw-Hill Companies,Inc., 2013
812 Intermediate Accounting, 7/e
Brief Exercise 87 (concluded)
Average cost
Date Purchased Sold Balance
Beginninginventory
200 @ $25 = $5,000 200 @ $25 $5,000
January 8
Available
100 @ $28 = $2,800
$7,800
= $26/unit300 units
January 10 125 @ $26 = $3,250 175 @ $26 $4,550
January 19
Available
200 @ $30 = $6,000
$10,550= $28.133/unit
375 units
January 25 100 @ $28.133 = $2,813
275 @ $28.133 $7,737Ending
inventory
Total cost of goods sold = $6,063
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The McGraw-Hill Companies,Inc., 2013
Solutions Manual, Vol.1, Chapter 8 813
Brief Exercise 88
Cost of goods available for sale:Beginning inventory (20,000 x $25) $ 500,000Purchases:
80,000 x $30 2,400,000Cost of goods available (100,000 units) 2,900,000Less: Ending inventory (15,000 units) 375,000*
Cost of goods sold $2,525,000
*15,000 units x $25 each = $375,000
Brief Exercise 8964,000 units were sold.
Cost of goods sold without year-end purchase:
Units purchased during the year: 60,000 x $18 $1,080,000Plus units from beginning inventory: 4,000 x $15 60,000
Cost of goods sold 1,140,000
Cost of goods sold with year-end purchase:64,000 units x $18 1,152,000
Difference $ 12,000
Cost of goods sold would be $12,000 higher and income before income taxes
$12,000 lower if the year-end purchase is made.
If FIFO were used instead of LIFO, the year-end purchase would have no effecton income before income taxes. FIFO cost of goods sold with or without the purchasewould consist of the 10,000 units from beginning inventory and 54,000 units
purchased during the year at $18:
10,000 units x $15 $ 150,000Plus: 54,000 units x $18 972,000
Cost of goods sold $1,122,000
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Brief Exercise 810
Units liquidated 5,000Difference in cost ($30 25) x $5Before-tax LIFO liquidation profit $25,000
Tax effect ($25,000 x 40%) (10,000)
LIFO liquidation profit $15,000
Brief Exercise 811
Cost of goods sold for the fiscal year ended February 26, 2011, would have been
$18 million lower had SuperValue used FIFO for its LIFO inventory. Whilebeginning inventory would have been $264 million higher, ending inventory alsowould have been higher by $282 million. An increase in beginning inventory causes
an increase in cost of goods sold, but an increase in ending inventory causes adecrease in cost of goods sold. Purchases for the year are the same regardless of theinventory valuation method used.
Cost of goods sold as reported $29,124 millionDecrease if FIFO (18) million
Cost of goods sold, FIFO instead of LIFO $29,106 million
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The McGraw-Hill Companies,Inc., 2013
Solutions Manual, Vol.1, Chapter 8 815
Brief Exercise 812
Average inventory = ($60,000 + 48,000)
2 = $54,000
Cost of goods sold Average inventory = Inventory turnover
Cost of goods sold $54,000 = 5Cost of goods sold = $54,000 x 5Cost of goods sold = $270,000
Gross profit ratio = 40%, therefore cost percentage = 60%
Sales x .60 = $270,000
Sales = $270,000 .60 = $450,000
Brief Exercise 813
Ending Inventory Inventory Layers Inventory Layers Inventory
Date at Base Year Cost at Base Year Cost Converted to Cost DVL Cost
1/1/13 $1,400,000= $1,400,000 $1,400,000 (base) $1,400,000 x 1.00 =$1,400,000 $1,400,000
1.00
12/31/13 $1,664,000
= $1,600,000 $1,400,000 (base) $1,400,000 x 1.00 = $1,400,000
1.04 200,000 (2013) 200,000 x 1.04 = 208,000 $1,608,000
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816 Intermediate Accounting, 7/e
Exercise 811. To record the purchase of inventory on account and the payment of freight
charges.
Inventory ......................................................................... 5,000Accounts payable ........................................................ 5,000
Inventory ......................................................................... 300Cash ............................................................................. 300
2. To record purchase returns.
Accounts payable ............................................................ 600Inventory ..................................................................... 600
3. To record cash sales and cost of goods sold.
Cash ................................................................................. 5,200Sales revenue ............................................................... 5,200
Cost of goods sold ........................................................... 2,800Inventory ..................................................................... 2,800
EXERCISES
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The McGraw-Hill Companies,Inc., 2013
Solutions Manual, Vol.1, Chapter 8 817
Exercise 821. To record the purchase of inventory on account and the payment of freight
charges.
Purchases ........................................................................ 5,000Accounts payable ........................................................ 5,000
Freight-in ........................................................................ 300Cash ............................................................................ 300
2. To record purchase returns.
Accounts payable ............................................................ 600Purchase returns .......................................................... 600
3. To record cash sales.
Cash ................................................................................ 5,200
Sales revenue .............................................................. 5,200
NO ENTRY IS MADE FOR THE COST OF GOODS SOLD.
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The McGraw-Hill Companies,Inc., 2013
818 Intermediate Accounting, 7/e
Exercise 83
Requirement 1
Beginning inventory $ 32,000
Plus net purchases:Purchases $240,000Less: Purchase discounts (6,000)Less: Purchases returns (10,000)Plus: Freight-in 17,000 241,000
Cost of goods available for sale 273,000Less: Ending inventory (40,000)Cost of goods sold $233,000
Requirement 2
Cost of goods sold (above)............................................... 233,000Inventory (ending)............................................................ 40,000Purchase discounts .......................................................... 6,000Purchase returns .............................................................. 10,000
Inventory (beginning)................................................... 32,000Purchases ..................................................................... 240,000Freight-in ..................................................................... 17,000
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The McGraw-Hill Companies,Inc., 2013
Solutions Manual, Vol.1, Chapter 8 819
Exercise 84
PERPETUAL SYSTEM PERIODIC SYSTEM($ in 000s)
PurchasesInventory 155 Purchases 155
Accounts payable 155 Accounts payable 155
Freight
Inventory 10 Freight-in 10Cash 10 Cash 10
Returns
Accounts payable 12 Accounts payable 12Inventory 12 Purchase returns 12
Sales
Accounts receivable 250 Accounts receivable 250Sales revenue 250 Sales revenue 250
Cost of goods sold 148 No entryInventory 148
End of period
No entry Cost of goods sold (below) 148Inventory (ending) 30
Purchase returns 12Inventory (beginning) 25Purchases 155Freight-in 10
Cost of goods sold:Beginning inventory $25Purchases $155Less: Returns (12)Plus: Freight-in 10Net purchases 153
Cost of goods available 178Less: Ending inventory (30)Cost of goods sold $148
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820 Intermediate Accounting, 7/e
Exercise 852013 2014 2015
Beginning inventory 275 (1) 249 (3) 225
Cost of goods sold 627 621 584 (6)Ending inventory 249 (2) 225 216
Cost of goods available for sale 876 846 (4) 800
Purchases (gross) 630 610 (5) 585
Purchase discounts 18 15 12 (7)Purchase returns 24 30 14Freight-in 13 32 16
Net purchases = Purchases (gross) Purchase returns Purchase discounts + Freight-inBeginning inventory + Net purchases = Cost of goods available for sale
Cost of goods available for sale Ending inventory = Cost of goods sold
2013:
(1)Cost of goods available for sale Net purchases = Beginning inventory
876 (630 18 24 + 13) = 275 = Beginning inventory
(2)Cost of goods available for sale Cost of goods sold = Ending inventory
876 627 = 249 = Ending inventory
2014:
(3)2014 beginning inventory = 2013 ending inventory = 249
(4)Cost of goods sold + Ending inventory = Cost of goods available for sale
621 + 225 = 846 = Cost of goods available for sale
(5)Cost of goods available for sale Beginning inventory = Net purchases846 249 = 597 = Net purchases
Net purchases + Purchases discounts + Purchase returns Freight-in = Purchases(gross)
597 + 15 + 30 32 = 610 = Purchases (gross)
2015:(6)Cost of goods available for sale Ending inventory = Cost of goods sold
800 216 = 584 = Cost of goods sold
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The McGraw-Hill Companies,Inc., 2013
Solutions Manual, Vol.1, Chapter 8 821
Exercise 85 (concluded)
(7)Cost of goods available for sale Beginning inventory = Net purchases800 225 = 575 = Net purchases
Purchases (gross) Purchase returns + Freight-in Net purchases = Purchase discounts585 14 + 16 575 = 12 = Purchase discounts
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The McGraw-Hill Companies,Inc., 2013
822 Intermediate Accounting, 7/e
Exercise 86Inventory balance before additional transactions $165,000Add:
Goods shipped to Kwok f.o.b. shipping point on Dec. 28 17,000Goods shipped to customer f.o.b. destination on December 27 22,000Correct inventory balance $204,000
Exercise 87Inventory balance before additional transactions $210,000Add:Merchandise on consignment with Joclyn Corp. 15,000
Deduct:
Merchandise shipped to Raymond f.o.b. destination on December 26 (30,000)Merchandise held on consignment from the Harrison Company (14,000)
Correct inventory balance $181,000
Exercise 881. Excluded2. Included3. Included
4.
Excluded5. Included6. Excluded7. Included
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The McGraw-Hill Companies,Inc., 2013
Solutions Manual, Vol.1, Chapter 8 823
Exercise 89
Requirement 1
Purchase price = 1,000 units x $50 = $50,000
July 15, 2013Purchases ........................................................................ 50,000
Accounts payable ........................................................ 50,000
July 23, 2013
Accounts payable ............................................................ 50,000Cash (98% x $50,000).................................................... 49,000Purchase discounts (2% x $50,000)............................... 1,000
Requirement 2
August 15, 2013Accounts payable ............................................................ 50,000Cash ............................................................................ 50,000
Requirement 3
The July 15 entry would include a debit to the inventory account instead of topurchases, and the July 23 entry would include a credit to the inventory accountinstead of topurchase discounts.
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Solutions Manual, Vol.1, Chapter 8 825
Exercise 811
Requirement 1
Purchases: $500 x 70% = $350 per unit.
100 units x $350 = $35,000
November 17, 2013Purchases ........................................................................ 35,000
Accounts payable ........................................................ 35,000
November 26, 2013Accounts payable ........................................................... 35,000
Purchase discounts (2% x $35,000)............................... 700Cash (98% x $35,000).................................................... 34,300
Requirement 2
December 15, 2013Accounts payable ............................................................ 35,000
Cash ............................................................................ 35,000
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The McGraw-Hill Companies,Inc., 2013
826 Intermediate Accounting, 7/e
Exercise 811 (concluded)
Requirement 3
Requirement 1:
November 17, 2013Purchases (98% x $35,000)................................................ 34,300
Accounts payable ........................................................ 34,300
November 26, 2013Accounts payable ............................................................ 34,300
Cash ............................................................................. 34,300
Requirement 2:
December 15, 2013Accounts payable ............................................................ 34,300
Interest expense (2% x $35,000)........................................ 700Cash ............................................................................. 35,000
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The McGraw-Hill Companies,Inc., 2013
Solutions Manual, Vol.1, Chapter 8 827
Exercise 812
TheFASB Accounting Standards Codification represents the single source of
authoritative U.S. generally accepted accounting principles. The specific
citation for each of the following items is:
1. Define the meaning of cost as it applies to the initial measurement of
inventory.
FASB ASC 33010301: InventoryOverallInitial Measurement.
The primary basis of accounting for inventories is cost, which has beendefined generally as the price paid or consideration given to acquire anasset. As applied to inventories, cost means in principle the sum of the
applicable expenditures and charges directly or indirectly incurred inbringing an article to its existing condition and location. It is understoodto mean acquisition and production cost, and its determination involvesmany considerations.
2. Indicate the circumstances when it is appropriate to initially measure
agricultural inventory at fair value.
FASB ASC 905330301: AgricultureInventoryInitial
Measurement.Exceptional cases exist in which it is not practicable to determine anappropriate cost basis for products. A market basis is acceptable if the
products meet all of the following criteria:
a. They have immediate marketability at quoted market prices thatcannot be influenced by the producer.
b. They have characteristics of unit interchangeability.
c. They have relatively insignificant costs of disposal.
The accounting basis of those kinds of inventories shall be theirrealizable value, calculated on the basis of quoted market prices lessestimated direct costs of disposal. An example is freshly dressed meats
produced in meat packing operations.
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The McGraw-Hill Companies,Inc., 2013
828 Intermediate Accounting, 7/e
Exercise 812 (concluded)
3. What is a major objective of accounting for inventory?
FASB ASC 33010101: InventoryOverallObjectives.
A major objective of accounting for inventories is the properdetermination of income through the process of matching appropriatecosts against revenues.
4. Are abnormal freight charges included in the cost of inventory?
FASB ASC 33010307: InventoryOverallInitial Measurement.
Unallocated overheads shall be recognized as an expense in the period inwhich they are incurred. Other items such as abnormal freight, handlingcosts, and amounts of wasted materials (spoilage) require treatment ascurrent period charges rather than as a portion of the inventory cost.
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The McGraw-Hill Companies,Inc., 2013
Solutions Manual, Vol.1, Chapter 8 829
Exercise 813Cost of goods available for sale:Beginning inventory (2,000 x $6.10) $12,200
Purchases:10,000 x $5.50 $55,0006,000 x $5.00 30,000 85,000
Cost of goods available (18,000 units) $97,200
First-in, first-out (FIFO)
Cost of goods available for sale (18,000 units) $97,200Less: Ending inventory (determined below) (15,000)
Cost of goods sold $82,200
Cost of ending inventory:
Date of
purchase Units Unit cost Total cost
August 18 3,000 $5.00 $15,000
Last-in, first-out (LIFO)
Cost of goods available for sale (18,000 units) $97,200Less: Ending inventory(determined below) (17,700)
Cost of goods sold $79,500
Cost of ending inventory:
Date of
purchase Units Unit cost Total cost
Beg. Inv. 2,000 $6.10 $12,200
August 8 1,000 5.50 5,500Total $17,700
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The McGraw-Hill Companies,Inc., 2013
830 Intermediate Accounting, 7/e
Exercise 813 (concluded)
Average cost
Cost of goods available for sale (18,000 units) $97,200Less: Ending inventory(determined below) (16,200)
Cost of goods sold $81,000 *
Cost of ending inventory:
$97,200Weighted-average unit cost = = $5.40
18,000 units
3,000 units x $5.40 = $16,200
*Alternatively, could be determined by multiplying the units sold by the averagecost: 15,000 units x $5.40 = $81,000
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The McGraw-Hill Companies,Inc., 2013
Solutions Manual, Vol.1, Chapter 8 831
Exercise 814First-in, first-out (FIFO)
Cost of goods sold:
Date of Cost of
Sale Units Sold Units Sold Total Cost
Aug. 14 2,000(from Beg. Inv.) $6.10 $12,2006,000 (from 8/8 purchase) 5.50 33,000
Aug. 25 4,000 (from 8/8 purchase) 5.50 22,0003,000(from 8/18 purchase) 5.00 15,000
Total 15,000 $82,200
Ending inventory = 3,000 units x $5.00 = $15,000
Last-in, first-out (LIFO)Date Purchased Sold Balance
Beginninginventory
2,000 @ $6.10 = $12,200 2,000 @ $6.10 $12,200
August 8 10,000 @ $5.50 = $55,000 2,000 @ $6.1010,000 @ $5.50 $67,200
August 14 8,000 @ $ 5.50 = $44,000 2,000 @ $6.102,000 @ $5.50 $23,200
August 18 6,000 @ $5.00 = $30,000 2,000 @ $6.102,000 @ $5.50 $53,2006,000 @ $5.00
August 25 6,000 @ $5.00 = $30,000
1,000 @ $5.50 = $5,500
2,000 @ $6.10
1,000 @ $5.50 $17,700Endinginventory
Total cost of goods sold = $79,500
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The McGraw-Hill Companies,Inc., 2013
832 Intermediate Accounting, 7/e
Exercise 814 (concluded)
(Note: the perpetual inventory LIFO results in this exercise are the same asperiodic LIFO results, due to the timing of sales and purchases. The same LIFO
layers are on hand at the end of the period under each method. This is unusual. LIFOperpetual and LIFO periodic normally produce different results for ending inventoryand cost of goods sold.)
Average costDate Purchased Sold Balance
Beginninginventory
2,000 @ $6.10 = $12,200 2,000 @ $6.10 $12,200
August 8
Available
10,000 @ $5.50 = $55,000
$67,200= $5.60/unit
12,000 units
August 14 8,000 @ $5.60 = $44,800 4,000 @ $5.60 $22,400
August 18
Available
6,000 @ $5.00 = $30,000
$52,400 = $5.24/unit10,000 units
August 25 7,000 @ $5.24 = $36,680
3,000 @ $5.24 $15,720Ending
inventory
Total cost of goods sold = $81,480
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The McGraw-Hill Companies,Inc., 2013
Solutions Manual, Vol.1, Chapter 8 833
Exercise 815
Requirement 1
LIFO will result in the highest cost of goods sold figure because both the cost ofmerchandise and the quantity of merchandise rose during the period. FIFO will result
in the highest ending inventory balance for the same reasons.
Requirement 2
Cost of goods available for sale:Beginning inventory (600 x $80) $ 48,000Purchases:
1,000 x $ 95 $95,000800 x $100 80,000 175,000
Cost of goods available(2,400 units) $223,000
First-in, first-out (FIFO)
Cost of goods available for sale (2,400 units) $223,000Less: Ending inventory(below) (80,000)
Cost of goods sold $143,000
Cost of ending inventory:
Date of
purchase Units Unit cost Total cost
January 21 800 $100 $80,000
Last-in, first-out (LIFO)
Cost of goods available for sale (2,400 units) $223,000Less: Ending inventory(below) (67,000)
Cost of goods sold $156,000
Cost of ending inventory:
Date ofpurchase Units Unit cost Total cost
Beg. Inv. 600 $80 $48,000January 15 200 95 19,000
Total $67,000
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The McGraw-Hill Companies,Inc., 2013
Solutions Manual, Vol.1, Chapter 8 835
Exercise 816 (concluded)
Requirement 2
Date Purchased Sold Balance
Beginninginventory
5,000 @ $10.00 = $50,000 5,000 @ $10.00 $50,000
September 7
Available
3,000 @ $10.40 = $31,200
$81,200= $10.15/unit
8,000 units
September 10 4,000 @ $10.15 = $40,600 4,000 @ $10.15 $40,600
September 25
Available
8,000 @ $10.75 = $86,000
$126,600= $10.55/unit
12,000 units
September 29 5,000 @ $10.55 = $52,750
7,000 @ $10.55 $73,850Ending
inventory Total cost of goods sold = $93,350
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The McGraw-Hill Companies,Inc., 2013
836 Intermediate Accounting, 7/e
Exercise 817
Requirement 1
FIFO cost of goods sold:
10,000 units @ $5.00 = $50,000+ 10,000 units @ $6.00 (determined below) = 60,000
$110,000
Requirement 2
LIFO cost of goods sold:
20,000 units @ $6.00 (determined below) = $120,000
Calculations to determine cost per unit of year 2013 purchases:
Cost of goods sold= Weighted-average cost per unit
Number of units sold
$115,000= $5.75 per unit
20,000 units
$5.75 x 40,000 units = $230,000 = Cost of goods available for sale
$230,000 50,000 (beginning inventory)= $180,000 = Cost of purchases
$180,000= $6 = Cost per unit of year 2013 purchases
30,000 units purchased
Cost of goods available for sale:
Beginning inventory (10,000 x $5.00) $ 50,000Purchases (30,000 x $6.00) 180,000Cost of goods available(40,000 units) $230,000
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The McGraw-Hill Companies,Inc., 2013
Solutions Manual, Vol.1, Chapter 8 837
Exercise 818
Requirement 1
February 25, 2011 ($ in millions)
LIFO reserve ($21.3 20.9).............................................. .4Cost of goods sold ...................................................... .4
Requirement 2
$1,693.8 + .4 = $1,694.2 million cost of goods sold under FIFO.
Requirement 3
$20.9 x 35% = $7.315 millionin tax savings.
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The McGraw-Hill Companies,Inc., 2013
838 Intermediate Accounting, 7/e
Exercise 819
Requirement 1
Cost of goods sold:
50,000 units x $8.50 = $425,0004,000 units x $7.00 = 28,000
$453,000
Requirement 2
When inventory quantity declines during a reporting period, liquidation of LIFOinventory layers carried at different costs prevailing in prior years results innoncurrent costs being matched with current selling prices. If the resulting effect onincome is material, it must be disclosed. In this case, the effect of the LIFO layer
liquidation is to increase income (ignoring taxes) by $6,000 [4,000 units liquidated x$1.50 ($8.50 current year cost per unit $7 LIFO layer cost per unit)].
Exercise 820
Requirement 2
The specific citation thatdescribes the disclosure requirements that must be madeby publicly traded companies for a LIFO liquidation is FASB ASC 33010S993:
InventoryOverallSEC MaterialsLIFO Liquidations.
Requirement 3
When a company using LIFO liquidates a substantial portion of its LIFOinventory and as a result includes a material amount of income in its income statementthat otherwise would not have been recorded, it must disclose the amount of incomerealized as a result of the inventory liquidation.
Such disclosure would be required in order to make the financial statements notmisleading. Disclosure may be made either in a footnote or parenthetically on the faceof the income statement.
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The McGraw-Hill Companies,Inc., 2013
Solutions Manual, Vol.1, Chapter 8 839
Exercise 821
($ in millions)
HOME DEPOT LOWES
Gross profit ratio = 23,304 =34.3% 17,152 = 35.1%67,997 48,815
Inventory turnover = 44,693 =4.29 times 31,663 =3.82 times10,406.5 8,285
Average days = 365 =85 days 365 = 96 daysin inventory 4.29 3.82
The gross profit ratios for the two companies are similar and both exceed theindustry average of 27%. On average, Lowes turns over its inventory eleven daysslower than does Home Depot and both companies turn over their inventories muchfaster than the industry average.
Exercise 822Ending
Ending Inventory Inventory Layers Inventory Layers Inventory
Date at Base Year Cost at Base Year Cost Converted to Cost DVL Cost
1/1/13 $660,000
= $660,000 $660,000 (base) $660,000 x 1.00 = $660,000 $660,0001.00
12/31/13 $690,000= $663,462 $660,000 (base) $660,000 x 1.00 = $660,000
1.04 3,462 (2013) 3,462 x 1.04 = 3,600 663,600
12/31/14 $760,000
= $703,704 $660,000 (base) $660,000 x 1.00 = $660,0001.08 3,462 (2013) 3,462 x 1.04 = 3,600
40,242 (2014) 40,242 x 1.08 = 43,461 707,061
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The McGraw-Hill Companies,Inc., 2013
840 Intermediate Accounting, 7/e
Exercise 823Ending
Ending Inventory Inventory Layers Inventory Layers Inventory
Date at Base Year Cost at Base Year Cost Converted to Cost DVL Cost
12/31/13 $200,000
= $200,000 $200,000 (base) $200,000 x 1.00 = $200,000 $200,0001.00
12/31/14 $231,000= $220,000 Index = 1.05
Index$200,000 (base) $200,000 x 1.00 = $200,000
20,000 (2014) 20,000 x 1.05 = 21,000 221,000
12/31/15 $299,000= $260,000 Index = 1.15
Index$200,000 (base) $200,000 x 1.00 = $200,000
20,000 (2014) 20,000 x 1.05 = 21,000
40,000 (2015) 40,000 x 1.15 = 46,000 267,000
12/31/16 $300,000= $250,000 Index = 1.20
Index$200,000 (base) $200,000 x 1.00 = $200,000
20,000 (2014) 20,000 x 1.05 = 21,000
30,000 (2015) 30,000 x 1.15 = 34,500 255,500
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The McGraw-Hill Companies,Inc., 2013
Solutions Manual, Vol.1, Chapter 8 841
Exercise 824
List A List B
i 1. Perpetual inventory a. Legal title passes when goods aresystem delivered to common carrier.
l 2. Periodic inventory system b. Goods are transferred to another companybut title remains with transferor.
a 3. F.o.b. shipping point c. Purchase discounts not taken are includedin inventory cost.
c 4. Gross method d. If LIFO is used for taxes, it must be usedfor financial reporting.
g 5. Net method e. Items sold are those acquired first.
h 6. Cost index f. Items sold are those acquired last.k 7. F.o.b. destination g. Purchase discounts not taken areconsidered interest expense.
e 8. FIFO h. Used to convert ending inventory at year-end cost to base year cost.
f 9. LIFO i. Continuously records changes ininventory.
b 10. Consignment j. Items sold come from a mixture of goodsacquired during the period.
j 11. Average cost k. Legal title passes when goods arrive atlocation.
d 12. IRS conformity rule l. Adjusts inventory at the end of the period.
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The McGraw-Hill Companies,Inc., 2013
842 Intermediate Accounting, 7/e
CPA / CMA REVIEW QUESTIONS
CPA Exam Questions
1. d.
2. c. Under the net method, purchases are recorded net of the discount:$3,600 x 98% = $3,528
3. b. Average Cost = $4,950 / 140 units = $35.36 per unit
Ending Inventory = $35.36 x 5 = $176.79
4. a. 5 units x $30 = $150
5. c. 5 units x $50 = $250
6. b. If the inventory balance was lower using FIFO than LIFO, then prices duringthe period were moving downward. By using FIFO during such a period, thehigher priced items are sold first with lower-priced goods remaining in theending inventory.
7. b.
Inventory Layer Layerat Base at Base Cost at Current Ending
Date Year Cost Year Cost Index Year Cost Inventory1/1/13 $100,000 1.00 $100,00012/31/13 120,000 $20,000 1.05 $21,000 121,000
12/31/14 128,000 8,000 1.10 8,800 129,800
8. a. IAS No. 2does not permit the use ofLIFO.
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The McGraw-Hill Companies,Inc., 2013
Solutions Manual, Vol.1, Chapter 8 845
Problem 81 (continued)
d. To record sales on account.
October 2013Accounts receivable ........................................................ 28,000
Sales revenue .............................................................. 28,000No entry is made for the cost of goods sold.
Cost of goods sold:
Beginning inventory $15,000Plus net purchases:
Purchases $21,560Less: Purchases returns (3,000)Plus: Freight-in 500 19,060Cost of goods available for sale 34,060
Less: Ending inventory (16,060)Cost of goods sold $18,000
Adjusting entry:
October 31, 2013Cost of goods sold (above)............................................... 18,000Inventory (ending)............................................................ 16,060Purchase returns .............................................................. 3,000
Inventory (beginning).................................................... 15,000Purchases .................................................................... 21,560Freight-in .................................................................... 500
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The McGraw-Hill Companies,Inc., 2013
846 Intermediate Accounting, 7/e
Problem 81 (concluded)
Requirement 2
a. To record the purchase of inventory on account and the payment of freightcharges.
October 12, 2013Inventory (98% x $22,000)................................................. 21,560
Accounts payable ....................................................... 21,560
Inventory ......................................................................... 500Cash ............................................................................. 500
b. To record purchase returns.
October 18, 2013Accounts payable ............................................................ 3,000
Inventory ..................................................................... 3,000
c. To record payment of accounts payable.
October 31, 2013
Accounts payable ............................................................ 21,560Interest expense ............................................................... 440
Cash ............................................................................. 22,000
d. To record sales on account.
October 2013Accounts receivable ........................................................ 28,000
Sales revenue ............................................................... 28,000
Cost of goods sold ........................................................... 18,000Inventory ..................................................................... 18,000
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The McGraw-Hill Companies,Inc., 2013
Solutions Manual, Vol.1, Chapter 8 847
Problem 821. The transaction is not correctly accounted for. Inventory held on consignment by
another company should be included in the inventory of the consignor. Rasul
should include this merchandise in its 2013 ending inventory.2. The transaction is not correctly accounted for. Legal title to merchandise shippedf.o.b. shipping point changes hands when the goods are shipped. Rasul shouldrecord the purchase and corresponding account payable in 2013 and include themerchandise in its 2013 ending inventory.
3. The transaction is not correctly accounted for. Since the merchandise was shippedf.o.b. destination and did not arrive at the customer's location until 2014, it should
be included in Rasuls 2013 ending inventory. The sale should be recorded in2014.
4. The transaction iscorrectly accounted for. Merchandise held on consignment from
another company belongs to the consignor and should be excluded from theinventory of the consignee.
5. The transaction is correctly accounted for. Since the merchandise was shippedf.o.b. destination and did not arrive at Rasuls location until 2014, it should not beincluded in Rasuls 2013 ending inventory. The purchase is correctly recorded in2014.
Problem 83Accounts
Inventory Payable SalesInitial amounts $1,250,000 $1,000,000 $9,000,000Adjustments - increase (decrease):1. (155,000) (155,000) NONE2. (22,000) NONE NONE3. NONE NONE 40,0004. 210,000 NONE NONE5. 25,000 25,000 NONE6. 2,000 2,000 NONE7. (5,300) (5,300) NONE
Total adjustments 54,700 (133,300) 40,000Adjusted amounts $1,304,700 $ 866,700 $9,040,000
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The McGraw-Hill Companies,Inc., 2013
848 Intermediate Accounting, 7/e
Problem 84
Requirement 1
Beginning inventory (10,000 x $8.00) $ 80,000
Net purchases:Purchases (50,000*units x $10.00) $500,000Less: Returns (1,000 units x $10.50) (10,500)Less: Purchase discounts
($490,000 x 2%) (9,800)Plus: Freight-in (50,000 units x $.50) 25,000 504,700
Cost of goods available (59,000 units) 584,700Less: Ending inventory(below) (121,200)Cost of goods sold $463,500
* The 5,000 units purchased on December 28 are not included. Themerchandise was shipped f.o.b. destination and did not arrive at Johnsonswarehouse until 2014.
Cost of ending inventory:
Date of
purchase Units Unit cost Total cost
Beg. Inv. 10,000 $ 8.00 $ 80,000
2013 4,000 10.30** 41,200Total 14,000 $121,200
**$10 x 98% = $9.80 + .50 in freight charges = $10.30
Requirement 2
Sales (45,000 units x $18.00) $810,000Less:Cost of goods sold (above) $463,500
Other operating expenses 150,000 (613,500)Income before income taxes $196,500
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The McGraw-Hill Companies,Inc., 2013
Solutions Manual, Vol.1, Chapter 8 849
Problem 85Cost of goods available for sale for periodic system:
Beginning inventory (6,000 x $8.00) $ 48,000Purchases:
5,000 x $ 9.00 $45,0006,000 x $10.00 60,000 105,000
Cost of goods available (17,000 units) $153,000
1. FIFO, periodic system
Cost of goods available for sale (17,000 units) $153,000Less: Ending inventory(determined below) (78,000)
Cost of goods sold $ 75,000
Cost of ending inventory:
Date of
purchase Units Unit cost Total cost
Jan. 10 2,000 $ 9.00 $18,000Jan. 18 6,000 10.00 60,000
Totals 8,000 $78,000
Alternatively, cost of goods sold can be determined by adding the cost of the 6,000units in beginning inventory ($48,000) and the 3,000 units from the January 10
purchase ($27,000) = $75,000.
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The McGraw-Hill Companies,Inc., 2013
850 Intermediate Accounting, 7/e
Problem 85 (continued)
2. LIFO, periodic system
Cost of goods available for sale (17,000 units) $153,000Less: Ending inventory(determined below) (66,000)
Cost of goods sold $ 87,000
Cost of ending inventory:
Date of
purchase Units Unit cost Total cost
Beg. Inv. 6,000 $8.00 $48,000Jan. 10 2,000 9.00 18,000
Totals 8,000 $66,000
Alternatively, cost of goods sold can be determined by adding the cost of the 6,000units from the January 18 purchase ($60,000) and the 3,000 units from the January10 purchase ($27,000) = $87,000.
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The McGraw-Hill Companies,Inc., 2013
Solutions Manual, Vol.1, Chapter 8 851
Problem 85 (continued)
3. LIFO, perpetual systemDate Purchased Sold Balance
Beginninginventory
6,000 @ $8.00 = $48,000 6,000 @ $8.00 $48,000
January 5 3,000 @ $8.00 = $24,000 3,000 @ $8.00 $24,000
January 10 5,000 @ $9.00 = $45,000 3,000 @ $8.005,000 @ $9.00 $69,000
January 12 2,000 @ $9.00 = $18,000 3,000 @ $8.003,000 @ $9.00 $51,000
January 18 6,000 @ $10.00 = $60,000 3,000 @ $8.003,000 @ $9.00 $111,0006,000 @ $10.00
January 20 4,000 @ $10.00 = $40,000
3,000 @ $8.003,000 @ $9.00
2,000 @ $10.00 $71,000
Ending
inventory
Total cost of goods sold = $82,000
4. Average cost, periodic system
Cost of goods available for sale (17,000 units) $153,000Less: Ending inventory(below) (72,000)
Cost of goods sold $ 81,000
Cost of ending inventory:
$153,000Weighted-average unit cost = = $9.00
17,000 units
8,000 units x $9.00 = $72,000
Alternatively, cost of goods sold could be determined by multiplying the unitssold by the average cost: 9,000 units x $9.00 = $81,000.
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The McGraw-Hill Companies,Inc., 2013
852 Intermediate Accounting, 7/e
Problem 85 (concluded)
5. Average cost, perpetual systemDate Purchased Sold Balance
Beginninginventory
6,000 @ $8.00 = $48,000 6,000 @ $8.00 $48,000
January 5 3,000 @ $8.00 = $24,000 3,000 @ $8.00 $24,000
January 10
Available
5,000 @ $9.00 = $45,000
$69,000
= $8.625/unit8,000 units
January 12 2,000 @ $8.625 = $17,250 6,000 @ $8.625 $51,750
January 18
Available
6,000 @ $10.00 = $60,000
$111,750
= $9.3125/unit12,000 units
January 20 4,000 @ $9.3125 = $37,250 8,000 @ $9.3125 $74,500Ending
inventory
Total cost of goods sold = $78,500
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The McGraw-Hill Companies,Inc., 2013
Solutions Manual, Vol.1, Chapter 8 853
Problem 86
Requirement 1
Cost of goods available for sale for periodic system:
Purchases:5,000 x $4.00 $20,00012,000 x $4.50 54,00017,000 x $5.00 85,000
Cost of goods available (34,000 units) $159,000
a. FIFO
Cost of goods available for sale (34,000 units) $159,000Less: Ending inventory(determined below) (70,000)
Cost of goods sold $ 89,000
Cost of ending inventory:
Date of
purchase Units Unit cost Total cost
March 22 14,000 5.00 70,000
b. LIFO
Cost of goods available for sale (34,000 units) $159,000Less: Ending inventory(determined below) (60,500)
Cost of goods sold $ 98,500
Cost of ending inventory:
Date of
purchase Units Unit cost Total costJan. 7 5,000 $4.00 $20,000Feb. 16 9,000 4.50 40,500
Totals 14,000 $60,500
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The McGraw-Hill Companies,Inc., 2013
854 Intermediate Accounting, 7/e
Problem 86 (concluded)
c. Average cost
Cost of goods available for sale (34,000 units) $159,000Less: Ending inventory(below) (65,471)
Cost of goods sold $ 93,529*
Cost of ending inventory:
$159,000Weighted-average unit cost = = $4.6765
34,000 units
14,000 units x $4.6765 = $65,471*Alternatively, could be determined by multiplying the units sold by the averagecost: 20,000 units x $4.6765 = $93,530 (rounding)
Gross Profit ratio:
FIFO: $51,000* $140,000**= 36%
LIFO: $41,500* $140,000**= 30%
Average: $46,471* $140,000**= 33%
*Sales less cost of goods sold**20,000 units x $7 sales price = sales
Requirement 2
In situations when costs are rising, LIFO results in a higher cost of goods soldand, therefore, a lower gross profit ratio than FIFO.
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The McGraw-Hill Companies,Inc., 2013
Solutions Manual, Vol.1, Chapter 8 855
Problem 87
Requirement 1
Beginning inventory ($60,000 + 60,000 + 63,000) $183,000
Purchases:211 $63,000212 63,000213 64,500214 66,000215 69,000216 70,500217 72,000218 72,300
219 75,000 615,300Cost of goods available 798,300
Ending inventory:213 $64,500216 70,500219 75,000 (210,000)
Cost of goods sold $588,300
Requirement 2
Cost of goods available for sale $798,300Less: Ending inventory(below) (219,300)
Cost of goods sold $579,000
Cost of ending inventory (3 autos):
Car ID Cost
219 $ 75,000218 72,300217 72,000
Total $219,300
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The McGraw-Hill Companies,Inc., 2013
856 Intermediate Accounting, 7/e
Problem 87 (concluded)
Requirement 3
Cost of goods available for sale $798,300Less: Ending inventory(below) (183,000)
Cost of goods sold $615,300
Cost of ending inventory (3 autos):
Car ID Cost203 $ 60,000207 60,000210 63,000
Total $183,000
Requirement 4
Cost of goods available for sale (12 units) $798,300
Less: Ending inventory(below) (199,575)Cost of goods sold $598,725*
Cost of ending inventory:
$798,300Weighted-average unit cost = = $66,525
12 units
3 units x $66,525 = $199,575
*Alternatively, could be determined by multiplying the units sold by the averagecost: 9 units x $66,525 = $598,725
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The McGraw-Hill Companies,Inc., 2013
Solutions Manual, Vol.1, Chapter 8 857
Problem 88
Requirement 1
The note indicates that if the company had used FIFO, inventory would have
been higher by $2,575 million and $3,022 million at the end of 2010 and 2009respectively. Therefore, 2010 cost of goods sold would have been higher (and income
before tax lower) by $447 million ($3,022 2,575).The information provided also states that net income for 2010 would have been
lower by $331 million if FIFO had been used. This means that the tax effect of thedifference between LIFO and FIFO was $116 million ($447 331). The effective tax
rate is therefore approximately 26%($116 $447).
Requirement 2
The information might be useful to a financial analyst interested in comparingCaterpillars performance with another company using the FIFO inventory methodexclusively.
Requirement 3
Retained earnings would have been higher by approximately $1,906 million[$2,575 million x (1 .26)]. This analysis assumes a constant 26% income tax ratethroughout Caterpillars corporate life.
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The McGraw-Hill Companies,Inc., 2013
858 Intermediate Accounting, 7/e
Problem 89
Requirement 1
Beginning inventory $ 450,000
Purchases:30,000 units @ $25 750,000
Cost of goods available for sale 1,200,000Less: Ending inventory (below) (250,000)Cost of goods sold $ 950,000
Cost of ending inventory:
Date of
purchase Units Unit cost Total costBeg. Inv. 10,000 $15 $150,000Beg. Inv. 5,000 20 100,000
Totals 15,000 $250,000
Requirement 2
Cost of goods sold assuming all units purchased at the year 2013 price:40,000 units x $25.00 = $1,000,000Less: LIFO cost of goods sold (950,000)
LIFO liquidation profit before tax 50,000
Multiplied by 1 .40 x .60LIFO liquidation profit $ 30,000
Requirement 3
$50,000 x 40% = $20,000
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Problem 810
Requirement 1
Cost of goods sold:
2013: 1,000 x $16 = $ 16,00010,000 x $18 = 180,000
11,000 $196,000
2014: 1,500 x $16 = $ 24,00013,000 x $18 = 234,000
14,500 $258,000
2015: 1,000 x $12 = $ 12,00012,000 x $18 = 216,000
13,000 $228,000
Requirement 2
LIFO liquidation before-tax profit or loss:
2013: 1,000 units x $2 ($18 16) = $2,000 profit2014: 1,500 units x $2 ($18 16) = $3,000 profit2015: 1,000 units x $6 ($18 12) = $6,000 profit
Requirement 3
Disclosure note:
During fiscal 2015, 2014, and 2013, inventory quantities in certain LIFO layers werereduced. These reductions resulted in a liquidation of LIFO inventory quantities
carried at lower costs prevailing in prior years as compared with the cost of fiscal2015, 2014, and 2013 purchases. As a result, cost of goods sold decreased by $6,000,$3,000, and $2,000 in fiscal 2015, 2014, and 2013, respectively, and net incomeincreased by approximately $3,600, $1,800, and $1,200, respectively.
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Problem 811
Requirement 1
Sales (27,000 units x $2,000) $54,000,000
Less: Cost of goods sold (27,000 units x $1,000) (27,000,000)Gross profit $27,000,000
Gross profit ratio = $27,000,000 $54,000,000 = 50%
Requirement 2
Sales (27,000 units x $2,000) $54,000,000Less: Cost of goods sold* (25,000,000)
Gross profit $29,000,000
Gross profit ratio = $29,000,000 $54,000,000 = 53.7%
*Cost of goods sold:15,000 units x $1,000 = $15,000,000
6,000 units x $ 900 = 5,400,0004,000 units x $ 800 = 3,200,000
2,000 units x $ 700 = 1,400,00027,000 units $25,000,000
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Problem 811 (concluded)
Requirement 3
The gross profit and gross profit ratio are higher applying the requirement 2assumption of 15,000 units purchased because of the LIFO liquidation profit that
results. When inventory quantity declines during a reporting period, LIFO inventorylayers carried at costs prevailing in prior years are liquidated or assumed sold in thecost of goods sold calculation. This results in noncurrent costs being matched withcurrent selling prices. If the company had purchased at least 27,000 units during2014, there would be no LIFO liquidation.
The profit difference ($2,000,000 in this case), if material, must be disclosed in anote. The difference can be arrived at by comparing the current replacement cost of$1,000 with each inventory layer from prior years that was included in this years costof goods sold, as follows:
6,000 units x $100 ($1,000 900) $ 600,0004,000 units x $200 ($1,000 800) 800,0002,000 units x $300 ($1,000 700) 600,000Total LIFO liquidation profit $2,000,000
Requirement 4
Sales (27,000 units x $2,000) $54,000,000Cost of goods sold:
5,000 units x $700 $ 3,500,0004,000 units x $800 3,200,000
6,000 units x $900 5,400,00012,000 units x $1,000 12,000,000 24,100,00027,000 units
Gross profit = $29,900,000
Gross profit ratio = $29,900,000 $54,000,000 = 55.4%
If only 15,000 units are purchased, cost of goods sold, gross profit, and the grossprofit ratio would be exactly the same as when 28,000 units are purchased.
Requirement 5
The number of units purchased has no effect on FIFO cost of goods sold. Whenapplying the first-in, first-out approach, beginning inventory costs are included in costof goods sold first, regardless of the quantities of inventory purchased in the newreporting period.
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Problem 812
Requirement 1
Allowance for uncollectible accounts
Balance, beginning of year $7Add: Bad debt expense for 2013 8Less: End-of-year balance (10)
Accounts receivable written off $ 5
Requirement 2
Accounts receivable analysis:
Balance, beginning of year ($583 + 7) $ 590
Add: Credit sales 6,255Less: write-offs (from Requirement 1) (5)Less: Balance end of year ($703 + 10) (713)
Cash collections $6,127
Requirement 3
Cost of goods sold for 2013 would have been $130 million lowerhad Invernessused the average cost method for its entire inventory. While beginning inventorywould have been $350 million higher, ending inventory also would have been higher
by $480 million. An increase in beginning inventory causes an increase in cost ofgoods sold, but an increase in ending inventory causes a decrease in cost of goodssold. Purchases for the year are the same regardless of the inventory valuation method
used. Therefore, cost of goods sold would have been $5,060($5,190 130).
Requirement 4
a. Receivables turnover ratio = $6,255 = 9.73 times($703 + 583)/2
b. Inventory turnover ratio = $5,190 = 6.15 times($880 + 808)/2
c. Gross profit ratio = ($6,255 5,190) = 17%$6,255
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Problem 812 (concluded)
Requirement 5
If inventory costs are increasing, when inventory quantity declines during aperiod, liquidation of LIFO inventory layers carried at lower costs prevailing in prior
years results in noncurrent costs being matched with current selling prices. Theincome generated by this liquidation is known as LIFO liquidation profit.
The liquidation caused 2013 cost of goods sold to be lower by $9.23 million [$6
million (1 .35)]
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Problem 813Ending
Ending Inventory Inventory Layers Inventory Layers Inventory
Date at Base Year Cost at Base Year Cost Converted to Cost DVL Cost
1/1/13 $400,000
= $400,000 $400,000 (base) $400,000 x 1.00 = $400,000 $400,0001.00
12/31/13 $441,000= $420,000 $400,000 (base) $400,000 x 1.00 = $400,000
1.05 20,000 (2013) 20,000 x 1.05 = 21,000 421,000
12/31/14 $487,200= $435,000 $400,000 (base) $400,000 x 1.00 = $400,000
1.12 20,000 (2013) 20,000 x 1.05 = 21,000
15,000 (2014) 15,000 x 1.12 = 16,800 437,800
12/31/15 $510,000= $425,000 $400,000 (base) $400,000 x 1.00 = $400,000
1.20 20,000 (2013) 20,000 x 1.05 = 21,000
5,000 (2014) 5,000 x 1.12 = 5,600 426,600
Problem 814Ending
Ending Inventory Inventory Layers Inventory Layers Inventory
Date at Base Year Cost at Base Year Cost Converted to Cost DVL Cost
1/1/13 $150,000
= $150,000 $150,000 (base) $150,000 x 1.00 = $150,000 $150,0001.00
12/31/13 $200,000= $185,185 $150,000 (base) $150,000 x 1.00 = $150,000
1.08 35,185 (2013) 35,185 x 1.08 = 38,000 188,000
12/31/14 $245,700
= $210,000 $150,000 (base) $150,000 x 1.00 = $150,0001.17 35,185 (2013) 35,185 x 1.08 = 38,000
24,815 (2014) 24,815 x 1.17 = 29,034 217,034
12/31/15 $235,980
= $207,000 $150,000 (base) $150,000 x 1.00 = $150,0001.14 35,185 (2013) 35,185 x 1.08 = 38,000
21,815 (2014) 21,815 x 1.17 = 25,524 213,524
12/31/16 $228,800= $208,000 $150,000 (base) $150,000 x 1.00 = $150,000
1.10 35,185 (2013) 35,185 x 1.08 = 38,00021,815 (2014) 21,815 x 1.17 = 25,524
1,000 (2016) 1,000 x 1.10 = 1,100 214,624
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Problem 815Ending
Ending Inventory Inventory Layers Inventory Layers Inventory
Date at Base Year Cost at Base Year Cost Converted to Cost DVL Cost
1/1/13 $260,000
= $260,000 $260,000 (base) $260,000 x 1.00 = $260,000 $260,0001.00
12/31/13 $340,000= $333,333 $260,000 (base) $260,000 x 1.00 = $260,000
1.02 73,333 (2013) 73,333 x 1.02 = 74,800 334,800
12/31/14 $350,000= $330,189 $260,000 (base) $260,000 x 1.00 = $260,000
1.06 70,189 (2013) 70,189 x 1.02 = 71,593 331,593
12/31/15 $400,000
= $373,832 $260,000 (base) $260,000 x 1.00 = $260,0001.07 70,189 (2013) 70,189 x 1.02 = 71,593
43,643 (2015) 43,643 x 1.07 = 46,698 378,291
12/31/16 $430,000
= $390,909 $260,000 (base) $260,000 x 1.00 = $260,0001.10 70,189 (2013) 70,189 x 1.02 = 71,593
43,643 (2015) 43,643 x 1.07 = 46,698
17,077 (2016) 17,077 x 1.10 = 18,785 397,076
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Problem 816Ending
Ending Inventory Inventory Layers Inventory Layers Inventory
Date at Base Year Cost at Base Year Cost Converted to Cost DVL Cost
1/1/13 $84,000= $84,000 $84,000 (base) $84,000 x 1.00 = $84,000 $84,000
1.00
12/31/13 $100,800= $96,000 $84,000 (base) $84,000 x 1.00 = $84,000
1.05 12,000 (2013) 12,000 x 1.05 = 12,600 96,600
12/31/14 $136,800
= $120,000 $84,000 (base) $84,000 x 1.00 = 84,000
1.14 12,000 (2013) 12,000 x 1.05 = 12,600
24,000 (2014) 24,000 x 1.14 = 27,360 123,960
12/31/15 $150,000= $125,000 $84,000 (base) $84,000 x 1.00 = $84,000
1.20(1) 12,000 (2013) 12,000 x 1.05 = 12,60024,000 (2014) 24,000 x 1.14 = 27,360
5,000 (2015) 5,000 x 1.20 = 6,000 129,960
12/31/16 $160,000(5)
= $128,000(4) $84,000 (base) $84,000 x 1.00 = 84,000
1.25 12,000 (2013) 12,000 x 1.05 = 12,60024,000 (2014) 24,000 x 1.14 = 27,360
5,000 (2015) 5,000 x 1.20 = 6,000
3,000 (2016) 3,000(3) x 1.25 = 3,750(2) 133,710
(1)$150,000 $125,000 = 1.20 (2015 cost index)
(2)$133,710 129,960 = $3,750
(3)$3,750 1.25 = $3,000
(4)$125,000 + 3,000 = $128,000 (2016 inventory at base-year cost)
(5)$128,000 x 1.25 = $160,000 (2016 inventory at year-end costs)
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Judgment Case 81
Advance warning of the company's impending bankruptcy existed at the date ofthe financial statements. As a rule, inventories should rise in tandem with sales. Ifinventories rise faster, it may be because the goods simply aren't selling. This is
particularly true of companies in faddish or seasonal businessesMerry-Go-Round'sworld.
The company's report showed that inventories on January 30 were $82.2 million,up 37 percent from $60 million a year earlier. That's well above the 15 percent salesgrowth in the same period, to $877.5 million from $761.2 million. This alone shouldhave been a major cause for concern. It indicated the company's goods simply weren't
selling as rapidly as it expected, causing its inventories to bulge. The increase inreceivables from $6,195 to over $6 million should also have been cause for concern.
CASES
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Real World Case 82
Requirement 1
Identifying items that should be included in inventory is difficult due to goods in
transit, goods on consignment, and sales returns.Goods in transit. Inventory shipped f.o.b. shipping point is included in the
purchasers inventory as soon as the merchandise is shipped. On the other hand,inventory shipped f.o.b. destination is included in the purchasers inventory only afterit reaches the purchasers location.
Goods on consignment. Goods held on consignment are included in theinventory of the consignor until sold by the consignee.
Sales returns. When the right of return exists, a seller must be able to estimatethose returns. As a result, a company includes in inventory the cost of merchandise it
anticipates will be returned.
Requirement 2
In addition to the direct acquisition costs such as the price paid and transportationcosts to obtain inventory, the costs of unloading, unpacking, and preparing inventoryfor sale or raw materials for use, if material in amount, also should be included in thecost of inventory.
Requirement 3
Sport Chalet considers cost to include the direct cost of merchandise and inbound
freight, plus internal costs associated with merchandise procurement, storage, andhandling.
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Judgment Case 831. a. The specific identification method requires each unit to be clearly
distinguished from similar units either by description, identification number, location
or other characteristic. Costs are accumulated for specific units and expensed as theunits are sold. Thus, the specific identification method results in recognized cosflows being identical to actual physical flows. Ideally, each unit is relativelyexpensive and the number of units relatively few so that recording costs is not
burdensome. Under the specific identification method, if similar items have differentcosts, cost of goods sold is influenced by the specific units sold.
b. It is appropriate for Happlia to use the specific identification methodbecause each appliance is expensive, and easily identified by number and descriptionThe specific identification method is feasible because Happlia already maintainsrecords of its units held by individual retailers. Managements ability to manipulate
cost of goods sold is minimized because once the inventory is in the retailers hands,Happlias management cannot influence the units selected for sale.
2. a.Happlia should include in inventory carrying amounts all necessary andreasonable costs to get an appliance into a useful condition and place for saleCommon (or joint) costs should be allocated to individual units. Such costs excludethe excess costs incurred in transporting refrigerators to Minneapolis and theirreshipment to Kansas City. These unit costs should only include normal freight costsfrom Des Moines to Kansas City. In addition, costs incurred to provide time utility tothe goods, that is, ensuring that they are available when required, will also be included
in inventory carrying amounts.b.Examples of inventoriable costs include the unit invoice price, plus an
allocated proportion of the port handling fees, import duties, freight costs to DesMoines and to retailers, insurance costs, repackaging, and warehousing costs.
3. The 2013 income statement should report in cost of goods sold allinventory costs related to units sold in 2013, regardless of when cash is received fromretailers. Excess freight costs incurred for shipping the refrigerators from Minneapolisto Kansas City should be included in determining operating income.
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Communication Case 84Suggested Grading Concepts and Grading Scheme:
Content (70%)_______ 20 Describes the differential effect on ending inventory
and cost of goods sold of using FIFO versus LIFOwhen_____ Prices are increasing._____ Prices are decreasing.
_______ 25 Discusses the various motivating factors thatmight influence the choice of inventory method.
______ The actual physical flow of product.______ The better match of expenses with revenues
provided by LIFO.
______ The effect on the balance sheet.______ The effect on reported income and income
taxes.______ The cost of implementation of LIFO._______ 10 Discusses briefly the methods available to
simplify LIFO._______ 15 Discusses the IRS conformity rule with respect to
LIFO and the relaxation of the rule that allows aa company using LIFO to present supplementalnon-LIFO disclosures.
_____________ 70 points
Writing (30%)_______ 6 Terminology and tone appropriate to the audience ofa company president.
_______ 12 Organization permits ease of understanding._____ Introduction that states purpose._____ Paragraphs that separate main points.
_______ 12 English_____ Sentences grammatically clear and well organized,
concise._____ Word selection.
_____ Spelling._____ Grammar and punctuation.
_____________ 30 points
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Communication Case 85LIFO produces a higher cost of goods sold, lower taxable income, and therefore
lower income taxes currently payable than FIFO only in periods when the costs of thecompanys products are rising. When costs are decreasing, LIFO results in lower cost
of goods sold, higher taxable income, and a higher current tax liability than FIFO. Inthe case of the electronics client, you would explain this to the intern concluding thatthe costs of the client's products must be decreasing, as frequently occurs in thisindustry.
Judgment Case 86At the end of a reporting period it is important to ensure that a proper inventory
cutoff is made. A proper cutoff involves the determination of the ownership of goodsthat are in transit between the company and its customers as well as the company andits suppliers. If the shipment is made f.o.b. shipping point, then ownership istransferred to the buyer when the goods reach the common carrier. If the shipment ismade f.o.b. destination, then ownership is transferred to the buyer when the goodsarrive at the buyers location.
In this case, John is incorrect if the goods were shipped f.o.b. destination. If soeven though the company is not in physical possession of the goods, they should beincluded in ending inventory because the shipment had not reached the buyer'slocation by the end of the reporting period.
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Ethics Case 87
Requirement 1
Without purchase of the additional units:
Sales (35,000 @ $60) $2,100,000Cost of goods sold (35,000 x $30) (1,050,000)Gross profit $1,050,000
Due Jim Lester($1,050,000 x 20%) = $210,000
With purchase of the additional units:Sales $2,100,000Cost of goods sold:20,000 x $40 $800,000
15,000 x $30 450,000 (1,250,000)Gross profit $ 850,000
Due Jim Lester($850,000 x 20%) = $170,000
Requirement 2
Discussion should include these elements.
Facts:
If Moncrief purchases the additional units at the end of the year under a periodic
LIFO inventory system, the transaction results in a reduced payment to Jim Lester,reduced profits to shareholders, and reduced income tax payments to governmententities. By purchasing the additional units of Zelenex, Moncrief reduces Jim Lester's
payment by $40,000 ($210,000 170,000) and decreases gross profit by $200,000($1,050,000 850,000). The net effect on before-tax income is a decrease of$160,000 ($200,000 40,000). Since Moncrief does not intend to sell the units until2014, the only logical reason for purchasing more costly inventory at year-end is
profit manipulation.
Ethical Dilemma:Should Moncrief exercise its right to purchase inventory at will, resulting in areduction in net income, or recognize the rights of Jim Lester to receive profit for thesale of his product, shareholders' rights to have their investment appreciate through
positive earnings, and government entities' rights to collect tax on economic netincome?
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Real World Case 88
Requirement 1
The LIFO conformity rule permits LIFO users to present designated
supplemental disclosures. These disclosures allow a company using LIFO to reportin a note, the difference between inventories valued using LIFO and inventory valuedas if another method had been used. Kroger's note provides this supplementainformation.
Requirement 2
1/29/11
Ending Beginning
Inventory Inventory
($ in millions)Inventory as stated $4,966 $4,935Add: Increase in LIFO inventory 827 770FIFO inventory balances $5,793 $5,705
Requirement 3
Cost of goods sold for the fiscal year ended January 29, 2011, would have been
$57 million lower had Kroger used FIFO for its entire inventory. While beginninginventory would have been $770 million higher, ending inventory also would have
been higher by $827 million. An increase in beginning inventory causes an increasein cost of goods sold, but an increase in ending inventory causes a decrease in cost ofgoods sold. Purchases for the year are the same regardless of the inventory valuationmethod used.
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Real World Case 89
Requirement 3
The following is based on Whole Foods 2010 financial statements. Answers
will vary depending on the financial statement dates chosen.
a. Whole Foods uses the last-in, first-out (LIFO) method for approximately 93.9%of its inventories at the end of 2010 and 93.6% of its inventories at the end of2009 and FIFO for the remainder.
b. Assuming that current cost approximates FIFO cost, the inventory disclosurenote indicates that, if FIFO had been used to value LIFO inventories,inventories would have been higher than reported by $19.4 million at the end of2010 and $27.1 million at the end of 2009. Cost of goods sold for 2010 would
have been $7.7 million higher ($27.1 19.4) had Whole Foods used FIFO.
Beginning inventory would have been $27.1 million higher and endinginventory also would have been higher by $19.4 million. An increase in
beginning inventory causes an increase in cost of goods sold, while an increasein ending inventory causes a decrease in cost of goods sold. Purchases for 2010are the same regardless of the inventory valuation method used.
c. Inventory turnover = cost of goods sold divided by average inventory
($ rounded to millions)Inventory turnover = $5,870 = 18.52 times
$317 *
*($323 + 311) 2
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Communication Case 810The dollar-value LIFO inventory estimation technique begins with the
determination of the current years ending inventory valued in terms of year-end costs
It is not necessary for a company using DVL to track the cost of purchases during theyear. All that is needed is to take the physical quantities of goods on hand at the endof the year and apply year-end costs.
The next step is to convert the ending inventory from year-end costs to base yearcosts. This usually is accomplished by dividing the ending inventory at year-end costs
by the years cost index. The cost index reflects the change in cost from a base year tothe current year. The ending inventory has been deflated for cost changes from the
base year to the end of the current year.The next step in the procedure is to identify the layers in ending inventory with
the years they were created by comparing ending inventory at base year cost to the
beginning inventory at base year cost. Applying the LIFO concept, if inventory hasincreased, ending inventory at base year cost consists of the beginning inventory layer
plus a current year layer.The final step converts the layers identified to cost by multiplying the layers at
base year cost by the layers cost index. The costs are totaled to obtain endinginventory at DVL cost.
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Research Case 811
Requirement 1
The FASBs codification citation that provides guidance for determining whether
an arrangement involving the sale of inventory is in substance a financingarrangement is FASB ASC 47040052: DebtProduct Financing ArrangementsOverview and Background.
Requirement 2
The FASBs codification citation that addresses the recognition of a productfinancing arrangement is FASB ASC 47040251: DebtProduct FinancingArrangementsRecognition.
Requirement 3
The appropriate accounting treatment for this type of arrangement is for thesponsor to record a liability at the time the proceeds are received from the other entity.The sponsor does not record the transaction as a sale and does not remove the productfrom its inventory. The cost of the repurchase amount in excess of the originallyrecorded liability represents financing and holding costs. These costs are accountedfor in accordance with the sponsors accounting policies applicable to other financingand holding costs. Notice that this is an example of substance (a loan) over form (asale).
Requirement 4
Journal entry to record the sale (cash receipt):
Cash ................................................................................. 160,000Liabilityproduct financing arrangement ................. 160,000
Journal entry to record the repurchase:
Liabilityproduct financing arrangement .................... 160,000Holding and financing costs* ......................................... 4,000
Cash ............................................................................. 164,000
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Research Case 811 (concluded)
*The treatment of these costs depends on the accounting policies of the sponsor. Forexample, if these costs normally are expensed as period costs, then the debit in this
case would be to an expense account (or accounts).
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Analysis Case 812
Requirement 1
($ in millions)
SAKS DILLARDS
Gross profit ratio = 1,098 =39% 2,145 = 35%2,786 6,121
Inventory turnover = 1,688 =2.56 times 3,976 = 3.07 times660 1,295.5
Average days = 365 =143 days 365 = 119daysin inventory 2.56 3.07
The gross profit ratios for the two companies are similar, and both are higher thanthe industry average. The inventory turnover ratios for the two companies reveal that,on average, it takes Saks 24 more days to sell its inventory than Dillards. This could
be a reflection of more higher-end merchandise sold at Saks, which would alsoexplain the slightly higher gross profit ratio of 39% compared to 35% for Dillards.
Saks turns its inventory over 14 days slower than the industry average, Dillards 10d