Chapter 6

Inventory & Cost of Goods Sold

Short Exercises
(10 min.) S 6-1
Billions
4.5
4.5

a.

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

b.

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

18.9

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

Inventory.............................................

3.9

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

18.7

c.

d.

Chapter 6

18.9

3.9

18.7

Inventory and Cost of Goods Sold

6-1

(10-15 min.) S 6-2

1. (Journal entries)
Inventory..
Accounts Payable.

125,000

Accounts Receivable
Sales Revenue...

190,000

Cost of Goods Sold..

Inventory ($125,000 .80)..

100,000

Cash ($190,000 .25)...

Accounts Receivable...

47,500

125,000

190,000

100,000

47,500

2. (Financial statements)

6-2

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

$ 25,000

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

$190,000
100,000
$ 90,000

Financial Accounting 9/e Solutions Manual

(15-20 min.) S 6-3

a
Average
Cost
Cost of goods sold:
Average (28 $157.50)
FIFO [$1,350 + (19 $160)]
LIFO [$4,320 + (1 $150)]
Ending inventory:
Average (8 $157.50)
FIFO (8 $160)
LIFO (8 $150)

FIFO

LIFO

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

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

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

Chapter 6

Inventory and Cost of Goods Sold

6-3

(10-15 min.) S 6-4

Jonahs Copy Center
Income Statement
Year Ended December 31
Average
Sales revenue (600 $20.50)
$12,300
Cost of goods sold (600 $9.85*)
5,910
(100 $8.40) + (500 $9.90)
(600 $9.90)
Gross profit
6,390
Operating expenses
3,900
Net income
_____

$ 2,490

*Average cost per unit:

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

6-4

Financial Accounting 9/e Solutions Manual

FIFO
$12,300

LIFO
$12,300

5,790
6,510
3,900

5,940
6,360
3,900

$ 2,610

$ 2,460

$ 950
6,930
$7,880
$ 9.85

(10-15 min.) S 6-5

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

FIFO
$12,300

LIFO
$12,300

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

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

Method to
maximize
reported
income
(before
tax).

Chapter 6

Method to
minimize
income tax
expense.

Inventory and Cost of Goods Sold

6-5

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

Student responses may vary.

(5-10 min.) S 6-7

6-6

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

$ 49,000

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

$436,000

Financial Accounting 9/e Solutions Manual

(15-20 min.) S 6-8

DATE:

_____________

TO:

Jim Tolbert, President of Tolbert Trumpet Company

FROM:

Student Name

SUBJECT:

Proposal for Increasing Net Income

We can increase net income by not buying below-normal quantities of inventory as

we make sales. Inventory costs are rising, and the company uses the LIFO inventory
method. Under LIFO, the high cost of our inventory purchases goes straight into
cost of goods sold. By decreasing our purchases of inventory, we can keep those
high costs out of cost of goods sold this year. That will keep net income from going
lower and will help net income be as high as possible. Also, our inventory quantities
are above normal, so we dont need to buy a lot of inventory before year end.

Student responses will vary.

(10-15 min.) S 6-9

LIFO

1.

Generally associated with saving income taxes

Chapter 6

Inventory and Cost of Goods Sold

6-7

Specific
unit cost

2.

Used to account for automobiles, jewelry, and art objects

FIFO

3.

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

of replacing the inventory

FIFO

4.

Maximizes reported income

LIFO

5.

Enables a company to buy high-cost inventory at year end and

thereby to decrease reported income and income tax

LIFO

6.

Results in an old measure of the cost of ending inventory

Average

7.

Provides a middle-ground measure of ending inventory and cost

of goods sold

LIFO

8.

Enables a company to keep reported income from dropping lower

by liquidating older layers of inventory

All

9.Writes inventory down when replacement cost drops below historical

cost

LIFO

6-8

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

Financial Accounting 9/e Solutions Manual

(5-10 min.) S 6-10

Dollars in Millions
Gross profit percentage

$35,376 $15,437
$35,376

56.4%

Inventory turnover

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

8.6 times

(5-10 min.) S 6-11

+
=

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

Chapter 6

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

Inventory and Cost of Goods Sold

6-9

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

Net sales (unchanged).

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

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

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

6-10

Financial Accounting 9/e Solutions Manual

(5-10 min.) S 6-14

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

Chapter 6

Inventory and Cost of Goods Sold

6-11