Chapter 06 - Inventories and Cost of Sales

Chapter 6
Inventories and Cost of Sales
EXERCISES
Exercise 6-1 (10 minutes)

1. The title will pass at “destination” which is Harlow Company’s

receiving dock. Harris should show the $12,500 in its inventory at year-
end as Harris retains title until the goods reach Harlow Company.

2. The consignor is Harris Company. The consignee is Harlow Company.

The consignor, Harris Company, should include any unsold and
consigned goods in its inventory.

Exercise 6-2 (10 minutes)

Cost of inventory (estate’s contents)

Price $75,000
Transportation-in 2,400
Insurance on shipment 300
Cleaning and refurbishing 980
Total cost of inventory $78,680

Exercise 6-3 (45 minutes)

a. Specific identification
Ending inventory—180 units from January 30, 5 units from January 20, and 15
units from beginning inventory
Ending Cost of
Specific Identification Inventory Goods Sold

(180 x $4.50) + (5 x $5.00) + (15 x $6.00)......... $ 925

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Chapter 06 - Inventories and Cost of Sales

$1,950 [Total Goods Available] - $925 [Ending Inventory]....... $1,025

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Chapter 06 - Inventories and Cost of Sales

Exercise 6-3 (continued)

b. Weighted Average—Perpetual

Date Goods Purchased Cost of Goods Sold Inventory Balance

1/1 140 @ $6.00 = $ 840.00
1/10 100 @ $6.00 = $ 600.00 40 @ $6.00 = $ 240.00
1/20 60 @ $5.00 40 @ $6.00
= $ 540.00
60 @ $5.00
(avg. cost is $5.40)
1/25 80 @ $5.40 = $ 432.00 20 @ $5.40 = $ 108.00
1/30 180 @ $4.50 20 @ $5.40
= $ 918.00
$1,032.00 180 @ $4.50
(avg. cost is $4.59)

c. FIFO—Perpetual

Date Goods Purchased Cost of Goods Sold Inventory Balance

1/1 140 @ $6.00 = $ 840.00
1/10 100 @ $6.00 = $ 600.00 40 @ $6.00 = $ 240.00
1/20 60 @ $5.00 40 @ $6.00
= $ 540.00
60 @ $5.00
1/25 40 @ $6.00 = $ 440.00
40 @ $5.00 20 @ $5.00 = $ 100.00
1/30 180 @ $4.50 20 @ $5.00
$1,040.00 180 @ $4.50 = $ 910.00

d. LIFO—Perpetual
Date Goods Purchased Cost of Goods Sold Inventory Balance
1/1 140 @ $6.00 = $ 840.00
1/10 100 @ $6.00 = $ 600.00 40 @ $6.00 = $ 240.00
1/20 60 @ $5.00 40 @ $6.00
= $ 540.00
60 @ $5.00
1/25 60 @ $5.00 = $ 420.00
20 @ $6.00 20 @ $6.00 = $ 120.00
1/30 180 @ $4.50 20 @ $6.00
$1,020.00 180 @ $4.50 = $ 930.00

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Chapter 06 - Inventories and Cost of Sales

Exercise 6-3 (Concluded)

Alternate Solution Format for FIFO and LIFO Perpetual
Ending Cost of
Computations Inventory Goods Sold
c. FIFO
(180 x $4.50) + (20 x $5.00)............................................... $ 910.00

(100 x $6.00) + (40 x $6.00) + (40 x $5.00)....................... $1,040.00

d. LIFO
(20 x $6.00) + (180 x $4.50)............................................... $ 930.00

(100 x $6.00) + [(60 x $5.00) + (20 x $6.00)]..................... $1,020.00

Exercise 6-4 (20 minutes)

LAKER COMPANY
Income Statements
For Month Ended January 31
Specific Weighted
Identification Average FIFO LIFO
Sales $2,700.00 $2,700.00 $2,700.00 $2,700.00
(180 units x $15 price)
Cost of goods sold 1,025.00 1,032.00 1,040.00 1,020.00
Gross profit 1,675.00 1,668.00 1,660.00 1,680.00
Expenses 1,250.00 1,250.00 1,250.00 1,250.00
Income before taxes 425.00 418.00 410.00 430.00
Income tax expense (40%) 170.00 167.20 164.00 172.00
Net income $ 255.00 $ 250.80 $ 246.00 $ 258.00

1. LIFO method results in the highest net income of $258.00.

2. Weighted average net income of $250.80 falls between the FIFO net
income of $246.00 and the LIFO net income of $258.00.

3. If costs were rising instead of falling, then the FIFO method would yield
the highest net income.

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Chapter 06 - Inventories and Cost of Sales

Exercise 6-5A (35 minutes)

Ending Cost of
Periodic Inventory Computations Inventory Goods Sold

a. Specific Identification—Periodic
(180 x $4.50) + (5 x $5.00) + (15 x $6)...................$ 925.00
$1,950 [Total Goods Available] - $925 [Ending Inventory]............ $1,025.00

b. Weighted Average—Periodic
($1,950 / 380 units = $5.13* average cost per unit)
200 x $5.13..............................................................$1,026.00
180 x $5.13.............................................................. $ 923.40

c. FIFO—Periodic
(180 x $4.50) + (20 x $5.00)....................................$ 910.00

(140 x $6.00) + (40 x $5.00).................................... $1,040.00

d. LIFO—Periodic
(140 x $6.00) + (60 x $5.00)....................................$1,140.00
(180 x $4.50)........................................................... $ 810.00

*rounded to dollars and cents

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Chapter 06 - Inventories and Cost of Sales

Exercise 6-6 (20 minutes)

LAKER COMPANY
Income Statements
For Month Ended January 31
Specific Weighted
Identification Average FIFO LIFO
Sales $2,700.00 $2,700.00 $2,700.00 $2,700.00
(180 units x $15 price)
Cost of goods sold 1,025.00 923.40 1,040.00 810.00
Gross profit 1,675.00 1,776.60 1,660.00 1,890.00
Expenses 1,250.00 1,250.00 1,250.00 1,250.00
Income before taxes 425.00 526.60 410.00 640.00
Income tax expense (40%) 170.00 210.64 164.00 256.00
Net income $ 255.00 $ 315.96 $ 246.00 $ 384.00

1. LIFO method results in the highest net income of $384.00.

2. Weighted average net income of $315.96 falls between the FIFO net
income of $246.00 and the LIFO net income of $384.00.

3. If costs were rising instead of falling, then the FIFO method would yield
the highest net income.

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Chapter 06 - Inventories and Cost of Sales

Exercise 6-7 (20 minutes)

a. FIFO—Perpetual

Date Goods Purchased Cost of Goods Sold Inventory Balance

1/1 200 @ $10 = $ 2,000

1/10 150 @ $10 = $ 1,500 50 @ $10 =$ 500

3/14 350 @ $15 = $5,250 50 @ $10

350 @ $15 = $ 5,750

3/15 50 @ $10 100 @ $15 = $ 1,500

250 @ $15 = $ 4,250

7/30 450 @ $20 = $9,000 100 @ $15

450 @ $20 = $10,500

10/5 100 @ $15

330 @ $20 = $ 8,100 120 @ $20 = $ 2,400

10/26 100 @ $25 = $2,500 120 @ $20

______ 100 @ $25 = $ 4,900
$13,850

b. LIFO—Perpetual
Date Goods Purchased Cost of Goods Sold Inventory Balance
1/1 200 @ $10 = $ 2,000
1/10 150 @ $10 = $ 1,500 50 @ $10 = $ 500
3/14 350 @ $15 = $ 5,250 50 @ $10
350 @ $15 = $ 5,750

3/15 50 @ $10
300 @ $15 = $ 4,500 50 @ $15 = $ 1,250

7/30 450 @ $20 = $ 9,000 50 @ $10

50 @ $15 = $ 10,250
450 @ $20

10/5 50 @ $10
430 @ $20 = $8,600 50 @ $15 = $ 1,650
20 @ $20

10/26 100 @ $25 = $ 2,500 50 @ $10

50 @ $15
20 @ $20 = $ 4,150
_______ 100 @ $25
$14,600

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Chapter 06 - Inventories and Cost of Sales

Exercise 6-7 (Concluded)

Alternate Solution Format

Ending Cost of
Inventory Goods Sold
a. FIFO
(100 x $25) + (120 x $20)........................................................ $4,900
(150 x $10) + (50 x $10) + (250 x $15) +
(100 x $15)+ (330 x $20)...................................................... $13,850
b. LIFO
(50 x $10) + (50 x $15) + (20 x $20) + (100 x $25)................. $4,150
(150 x $10) + (300 x $15) + (430 x $20)............................ $14,600

FIFO Gross Margin

Sales revenue (880 units sold x $40 selling price) $35,200
Less: FIFO cost of goods sold 13,850
Gross profit $21,350

LIFO Gross Margin

Sales revenue (880 units sold x $40 selling price) $35,200
Less: LIFO cost of goods sold 14,600
Gross profit $20,600

Exercise 6-8 (15 minutes)

a. Specific Identification method—Cost of goods sold

Cost of goods available for sale $18,750
Ending inventory under specific identification
3/14 purchase ( 45 @ $15) $ 675
7/30 purchase ( 75 @ $20) 1,500
10/26 purchase (100 @ $25) 2,500
Total ending inventory under specific identification 4,675
Cost of goods sold under specific identification $14,075

b. Specific Identification method—Gross margin

Sales revenue (880 units sold x $40 selling price) $35,200

Less: Specific identification cost of goods sold 14,075
Gross profit $21,125

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Chapter 06 - Inventories and Cost of Sales

Exercise 6-10 (15 minutes)

Per Unit Total Total LCM Applied

Inventory Items Unit Cost Market Cost Market to Items
s
Helmets 24 $50 $54 $1,200 $1,296 $1,200
Bats 17 78 72 1,326 1,224 1,224
Shoes 38 95 91 3,610 3,458 3,458
Uniforms 42 36 36 1,512 1,512 1,512
$7,648 $7,490 $7,394

Lower of cost or market of inventory by product = $7,394

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Chapter 06 - Inventories and Cost of Sales

PROBLEM SET A
Problem 6-1A (40 minutes)

1. Compute cost of goods available for sale and units available for sale

Beginning inventory 100 units @ $50.00 $ 5,000

March 5 400 units @ $55.00 22,000
March 18 120 units @ $60.00 7,200
March 25 200 units @ $62.00 12,400
Units available 820 units
Cost of goods available for sale $46,600

2. Units in ending inventory

Units available (from part 1) 820 units

Less: Units sold (420 + 160) 580 units
Ending Inventory (units) 240 units

3a. FIFO perpetual

Date Goods Purchased Cost of Goods Sold Inventory Balance

Mar. 1 100 @ $50.00 = $5,000

Mar. 5 400 @ $55.00 = $22,000 100 @ $50.00

400 @ $55.00 = $27,000
Mar. 9 100 @ $50.00 = $ 5,000 80 @ $55.00 = $ 4,400
320 @ $55.00 = $17,600

Mar. 18 120 @ $60.00 = $ 7,200 80 @ $55.00

120 @ $60.00 = $11,600
Mar. 25 200 @ $62.00 = $ 12,400 80 @ $55.00
120 @ $60.00
200 @ $62.00 = $24,000
Mar. 29 80 @ $55.00 = $ 4,400 40 @ $60.00
80 @ $60.00 = $ 4,800 200 @ $62.00 = $14,800
$31,800

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Chapter 06 - Inventories and Cost of Sales

Problem 6-1A (Continued)

3b. LIFO perpetual

Date Goods Purchased Cost of Goods Sold Inventory Balance

Mar. 1 100 @ $50.00 = $ 5,000

Mar. 5 400@ $55.00= $22,000 100 @ $50.00

400 @ $55.00 = $27,000
Mar. 9 400 @ $55.00 = $22,000 80 @ $50.00 = $ 4,000
20 @ $50.00 = $ 1,000
Mar. 18 120@ $60.00= $ 7,200 80 @ $50.00
120 @ $60.00 = $11,200
Mar. 25 200@ $62.00= $12,400 80 @ $50.00
120 @ $60.00
200 @ $62.00 = $23,600
80 @ $50.00
Mar. 29 160 @ $62.00 = $ 9,920 120 @ $60.00
40 @ $62.00 = $13,680
$32,920

3c. Weighted Average perpetual

Date Goods Purchased Cost of Goods Sold Inventory Balance

Mar. 1 100 @ $50.00 = $ 5,000

Mar. 5 400@ $55.00= $22,000 100 @ $50.00

400 @ $55.00 = $27,000
(avg. = $54.00)

Mar. 9 420 @ $54.00 = $22,680 80 @ $54.00 = $ 4,320

(avg. = $54.00)
80 @ $54.00
Mar. 18 120@ $60.00= $ 7,200
120 @ $60.00 = $11,520
(avg. = $57.60)

Mar. 25 200@ $62.00= $12,400 80 @ $54.00

120 @ $60.00
200 @ $62.00 = $23,920
(avg. = $59.80)

Mar. 29 160 @ $59.80 = $ 9,568 240 @ $59.80 = $14,352

(avg. = $59.80)
$32,248
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Chapter 06 - Inventories and Cost of Sales

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Chapter 06 - Inventories and Cost of Sales

Problem 6-1A (Concluded)

3d. Specific Identification

Date Goods Purchased Cost of Goods Sold Inventory Balance

Mar. 1 100 @ $50.00 = $ 5,000
Mar. 5 400 @ $55.00 = $22,000 100 @ $50.00
400 @ $55.00 = $27,000
Mar. 9 80 @ $50.00 = $ 4,000 20 @ $50.00
340 @ $55.00 = $18,700 60 @ $55.00 = $ 4,300

Mar. 18 120 @ $60.00 = $ 7,200 20 @ $50.00

60 @ $55.00
120 @ $60.00 = $11,500
Mar. 25 200 @ $62.00 = $12,400 20 @ $50.00
60 @ $55.00
120 @ $60.00
200 @ $62.00 = $23,900
20 @ $50.00
40 @ $60.00 = $ 2,400
Mar. 29 60 @ $55.00
120 @ $62.00 = $ 7,440
80 @ $60.00
80 @ $62.00 = $14,060
$32,540

Specific identification—Alternative Computation

Cost of goods sold—80 units from beginning inventory, 340 units from March 5
purchase, 40 units from March 18 purchase, and 120 units from March 25 purchase
Ending Cost of
Specific Identification Inventory Goods Sold

(80x$50) + (340x$55) + (40x$60) + (120x$62)........ $32,540

$46,600 [Total Goods Available] - $32,540 [Cost of Goods Sold].... $14,060

4.
Specific
Weighted Identifi-
FIFO LIFO Average cation
Sales* $50,900 $50,900 $50,900 $50,900
Less: Cost of goods sold 31,800 32,920 32,248 32,540

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Chapter 06 - Inventories and Cost of Sales

Gross profit $ 19,100 $17,980 $ 18,652 $ 18,360

*Sales = (420 units x $85.00) + (160 units x $95.00) = $50,900

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Chapter 06 - Inventories and Cost of Sales

Problem 6-2A (40 minutes)

1. Compute cost of goods available for sale and units available for sale

Beginning inventory 100 units @ $50.00 $ 5,000

March 5 400 units @ $55.00 22,000
March 18 120 units @ $60.00 7,200
March 25 200 units @ $62.00 12,400
Units available 820 units
Cost of goods available for sale $46,600

2. Units in ending inventory

Units available (from part 1) 820 units

Less: Units sold (420 + 160) 580 units
Ending Inventory (units) 240 units

3.
Ending Cost of
Periodic Inventory Inventory Goods Sold
a. FIFO
(200 x $62.00) + (40 x $60.00) $14,800.00
(100 x $50.00) + (400 x $55.00) + (80 x $60.00) $31,800.00

b. LIFO
(100 x $50.00) + (140 x $55.00) $12,700.00
(200 x $62.00) + (120 x $60.00) + (260 x $55.00) $33,900.00

c. Weighted average ($46,600/820 = $56.83)

(240 x $56.83) $13,639.20
$46,600 [Goods Available] - $13,639.20 [Ending Inventory] $32,960.80

d. Specific identification
(20x$50)+(60x$55)+(80x$60)+(80x$62) $14,060.00
$46,600 [Goods Available] - $14,060.00 [Ending Inventory] $32,540.00

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Chapter 06 - Inventories and Cost of Sales

Problem 6-2A (Concluded)

4.
Specific
Weighted Identifi-
FIFO LIFO Average cation

Sales* $50,900.00 $50,900.00 $50,900.00 $50,900.00

Less: Cost of goods sold 31,800.00 33,900.00 32,960.80 32,540.00

Gross profit $19,100.00 $17,000.00 $17,939.20 $18,360.00

*Sales = (420 units x $85.00) + (160 units x $95.00) = $50,900

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Chapter 06 - Inventories and Cost of Sales

Problem 6-3A (40 minutes)

1. Calculate cost of goods available for sale and units available for sale

Beginning inventory 600 units @ $45.00 $27,000

Feb. 10 400 units @ $42.00 16,800
Mar. 13 200 units @ $27.00 5,400
Aug. 21 100 units @ $50.00 5,000
Sept. 5 500 units @ $46.00 23,000
Units available 1,800 units
Cost of goods available for sale $77,200

2. Units in ending inventory

Units available (from part 1) 1,800

Less: Units sold (800+600) 1,400
Ending Inventory (units) 400

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Chapter 06 - Inventories and Cost of Sales

Problem 6-3A (Continued)

3a. FIFO perpetual

Date Goods Purchasd Cost of Goods Sold Inventory Balance

1/1 600 @ $45.00 = $27,000

2/10 400 @ $42.00= $16,800 600 @ $45.00

400 @ $42.00 = $43,800
3/13 200 @ $27.00= $ 5,400 600 @ $45.00
400 @ $42.00 = $49,200
200 @ $27.00
3/15 600 @ $45.00 200 @ $42.00
200 @ $42.00 = $35,400 200 @ $27.00 = $13,800

8/21 100 @ $50.00= $ 5,000 200 @ $42.00

200 @ $27.00 = $18,800
100 @ $50.00
9/5 500 @ $46.00= $23,000 200 @ $42.00
200 @ $27.00
100 @ $50.00
500 @ $46.00 = $41,800
9/10 200 @ $42.00
200 @ $27.00
100 @ $50.00
100 @ $46.00 = $23,400 400 @ $46.00 = $18,400
$58,800

FIFO Alternate Solution Format

Cost of goods available for sale $77,200
Less: Cost of sales 600 @ $45.00 $27,000
400 @ $42.00 16,800
200 @ $27.00 5,400
100 @ $50.00 5,000
100 @ $46.00 4,600
Total cost of goods sold 58,800
Ending Inventory $18,400

Proof of Ending Inventory

400 @ $46.00 $18,400

Ending Inventory 400 units $18,400

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Chapter 06 - Inventories and Cost of Sales

Problem 6-3A (Continued)

3b. LIFO perpetual

Date Goods Purchased Cost of Goods Sold Inventory Balance

1/1 600 @ $45.00 = $27,000

2/10 400 @ $42.00= $16,800 600 @ $45.00

400 @ $42.00 = $43,800
3/13 200 @ $27.00= $ 5,400 600 @ $45.00
400 @ $42.00 = $49,200
200 @ $27.00
3/15 200 @ $27.00
400 @ $42.00 400 @ $45.00 = $18,000
200 @ $45.00 = $31,200

8/21 100 @ $50.00= $ 5,000 400 @ $45.00

100 @ $50.00 = $23,000
9/5 500 @ $46.00= $23,000 400 @ $45.00
100 @ $50.00
500 @ $46.00 = $46,000
9/10 500 @ $46.00
100 @ $50.00 = $28,000 400 @ $45.00 = $18,000
$59,200

LIFO alternate solution format

Cost of goods available for sale $77,200
Less: Cost of sales 500 @ $46 $23,000
100 @ 50 5,000
200 @ 27 5,400
400 @ 42 16,800
200 @ 45 9,000
Cost of Goods Sold 59,200
Ending Inventory $18,000

Proof of Ending Inventory

400 @ 45 18,000
Ending Inventory… 400 units $18,000

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Chapter 06 - Inventories and Cost of Sales

Problem 6-3A (Continued)

3c. Weighted Average

Date Goods Purchased Cost of Goods Sold Inventory Balance

1/1 600 @ $45.00 = $27,000

2/10 400 @ $42.00= $16,800 600 @ $45.00

400 @ $42.00 = $43,800
(avg. cost is $43.80)

3/13 200 @ $27.00= $ 5,400 600 @ $45.00

400 @ $42.00 = $49,200
200 @ $27.00
(avg. cost is $41.00)

3/15 800 @ $41.00 = $32,800 400 @ $41.00 = $16,400

8/21 100 @ $50.00= $ 5,000 400 @ $41.00

100 @ $50.00 = $21,400
(avg. cost is $42.80)

9/5 500 @ $46.00= $23,000 400 @ $41.00

100 @ $50.00
500 @ $46.00 = $44,400
(avg. cost is $44.40)

9/10 600 @ $44.40 = $26,640 400 @ $44.40 = $17,760

$59,440

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Chapter 06 - Inventories and Cost of Sales

Problem 6-3A (Continued)

3d. Specific Identification

Cost of goods available for sale $77,200

Less: Cost of Goods Sold
600 @ $45.00 $27,000
300 @ $42.00 12,600
200 @ $27.00 5,400
50 @ $50.00 2,500
250 @ $46.00 11,500
Total cost of goods sold 59,000
Ending Inventory $18,200

Proof of Ending Inventory

100 @ $42 $ 4,200
50 @ $50 $ 2,500
250 @ $46 11,500
Ending Inventory…. 400 units $18,200

4.
Specific
Identifi- Weighted
FIFO LIFO cation Average
Sales (1,400 x $75) $105,000 $105,000 $105,000 $105,000
Less: Cost of goods sold 58,800 59,200 59,000 59,440
Gross profit $ 46,200 $ 45,800 $ 46,000 $ 45,560

5. Montoure’s manager would likely prefer the FIFO method since this
methods’ gross profit is the largest at $46,200. This would give the
manager the highest bonus based on gross profit.

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