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Chapter 6

Inventory & Merchandizing Operations


(15-20 min.)

a.
b.
c.
d.
c.
e.
f.
g.
h.

E 6-22A

(Amounts in millions or billions)


$ 66
$19 + $65 $18 = $66
$ 39
$105 $66 = $39
Must first solve for d
$ 93
$138 $45= $93
$ 94
$27 + c $93 = $28; c = $94
$ 92
$60 + $32 = $92
$ 25
f + $56 $21 = $60; f = $25
$ 5
$11 + $30 g = $36; g = $5
$ 48
$84 $36 = $48

Crane Company
Income Statement
Year Ended December 31, 20X6
(Millions)
Net sales
$ 105
Cost of goods sold
Beginning inventory
$ 19
Net purchases
65
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Goods available
Ending inventory
Cost of goods sold
Gross profit
Operating and other expenses
Net income (Net loss)

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84
(18)

66
39
41
$(2)

(20-30 min.)

P 6-60A

Req. 1
Inventory.
Accounts Payable

8,107,000

Accounts Payable.
Cash.

7,707,000

Cash.
Accounts Receivable...
Sales Revenue..

4,900,000
9,308,000

8,107,000

7,707,000

14,208,000

Cost of Goods Sold (148,000 $55.84*).


8,264,320
Inventory.
8,264,320
_____
*($1,050,000 + $8,107,000) (21,000 + 31,000 + 51,000 + 61,000)
= $55.84

Operating Expenses.
Cash ($3,750,000 .70)...
Accrued Liabilities ($3,750,000 .30).

3,750,000

2,625,000
1,125,000

Income Tax Expense


658,104
Income Tax Payable
658,104
[($14,208,000 $8,264,320 $3,750,000) .30 = $658,104
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(continued)

P 6-60A

Req. 2
Inventory
Beg. bal.
Purchases
End. bal.

1,050,000
8,107,000 COGS
892,680

8,264,320

Req. 3
Nice Buy Store, Dallas
Income Statement
Year Ended February 28, 20X6
Sales revenue $ 14,208,000
Cost of goods sold..
8,264,320
Gross profit
5,943,680
Operating expenses.
3,750,000
Income before tax.
2,193,680
Income tax expense (30%).
658,104
Net income. $ 1,535,576

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(30-40 min.)

P 6-63A

Req. 1 (partial income statements)


Bell Aviation
Income Statement
Year Ended December 31, 20X6
AVERAGE
FIFO
Sales revenue
$132,447
$132,447
Cost of goods sold
73,888
73,359
Gross profit
$ 58,559
$ 59,088

LIFO
$132,447
74,360
$ 58,087

Computations of cost of goods sold:


Average cost
=
per unit

($6,083 + $2,496 + $68,470 + $4,876)


=
(790 + 320 + 8,350 + 530)
$8.2007

COGS at average cost = 9,010 $8.2007

= $73,888

FIFO COGS

= (790 @ $7.70) + (320 @ $7.80) + (7,900 @ $8.20)

= $73,359

LIFO COGS

= (530 @ $9.20) + (8,350 @ $8.20) + (130 @ $7.80)

= $74,360

Req. 2

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Use the LIFO method to minimize income tax because cost of


goods sold is highest (gross profit is lowest) under LIFO when
inventory costs are rising.

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(15-30 min.)

P 6-64A

ELV Trade Mart should apply the lower-of-cost-or-market rule to


account for inventories. The current replacement cost of ending
inventory is less than ELVs actual cost, so ELV must write the
inventory down to current replacement cost, with the following
journal entry:
Cost of Goods Sold
Inventory...
To write inventory down to NRV.

75,000

75,000

ELV should report the following amounts in its financial statements:


BALANCE SHEET
Inventory at market (which is lower than
cost of $220,000)...
INCOME STATEMENT
Cost of goods sold ($770,000 + $75,000)
_____
*$200,000 $75,000 = $145,000

$145,000*

$845,000

Reliability qualitative characteristic is the reason to account for


inventory at the lower of cost or NRV. Not revaluing the inventory to
the lower NRV lends biasness to the ending inventory which violates
the reliability requirement.
The Matching principle (from Chapter 3: Accrual Accounting &
Income) requires costs/losses to be recorded in the period in which
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they contributed to revenue/gains. Since the impairment in inventory


occurred during this accounting period, not recording the impairment
would mean a misstatement of both this years and the subsequent
years net income.
Student responses may vary.

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(15-20 min.)

P 6-68A

Req. 1 (corrected income statements)


R. B. Video Sales
Income Statement (adapted; amounts in millions)
Years Ended 20X6, 20X5, and 20X4
20X6
20X5
20X4
Net sales revenue..
$39
$36
$33
Cost of goods sold:
Beginning
$ 8*
$ 7*
$ 3
inventory..
Purchases
27
25
23
Goods available.
35
32
26
Ending inventory
(6)
(8)*
(7)*
Cost of goods sold
29
24
19
Gross profit.
10
12
14
Operating expenses..
6
6
Net income
$ 4
$ 6
$ 8
*Throughout the period from year end 20X4 to year beginning 20X6,
inventory was understated by $3 million.

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(continued)

P 6-68A

Req. 2
The corrections did not change total net income over the three-year
period. But the corrections drastically altered the trend of net income
from an increasing pattern to a decreasing pattern.

Req. 3
The shareholders will not be happy with a declining trend of net
income because the company is losing ground with its profits.

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