ch05 SM Carlon 5e

Solutions Manual
to accompany
Financial
Accounting:
Recording, Analysis
and Decision Making
Fifth Edition
Prepared by
Lorena Mitrione
John Wiley & Sons Australia, Ltd 2016

Chapter 5: Reporting and analysing inventory
CHAPTER 5 – REPORTING AND ANALYSING INVENTORY
ASSIGNMENT CLASSIFICATION TABLE
Brief
Learning Objectives Exercises Exercises Problems
1. Record purchases and sales of inventory 1 1 1A, 7A, 1B,
under a periodic inventory system. 7B
2. Determine cost of sales under a periodic 2 2, 3 1A, 2A, 7A,

inventory system. 8A, 1B,2B,
7B, 8B
3. Describe the steps in determining 4

inventory quantities
4. Identify the unique features of the 5 1A, 2A, 7A,

statement of profit or loss for a 8A, 1B, 2B,
merchandising business under a periodic 7B, 8B
inventory system.
5. Explain the basis of accounting for 1, 3 6, 7 3A, 4A, 9A,

inventories and apply the inventory cost 3B, 4B, 9B
flow methods under a periodic inventory
system.
6. Explain the financial statement effects of 3A, 4A, 9A,

each of the inventory cost flow methods 3B, 4B, 9B
7. Explain the lower of cost and net 4 8

realizable value basis of accounting for
inventories
8. Calculate and interpret inventory 5 9 5A, 10A, 5B,

turnover. 10B
9. Apply the inventory cost flow methods to 6 10 6A, 12A, 6B,

perpetual inventory records. 12B
10. Indicate the effect of inventory errors on 7 11

the financial statements
11. Record the closing entries for 12, 13 11A, 11B

merchandising entities
© John Wiley and Sons Australia Ltd, 2016 5.1

Solutions manual to accompany Financial Accounting: Reporting, Analysis and decision Making 5e
CHAPTER 5 – REPORTING AND ANALYSIS INVENTORY
ANSWERS TO QUESTIONS
1.
July 24 Accounts Payable ($1,600 - $100) 1,500
Discount Received ($1,500 x 2%) 30
Cash ($1,500 – $30) 1,470
2. (a) x = Purchase returns and allowances.

(b) x = Cost of goods purchased.
(c) x = Ending inventory.
3. (a) (1) The goods will be included in Shields Ltd’s inventory if the terms of sale
are FOB destination.
(2) They will be included in Francine Ltd’s inventory if the terms of sale are
FOB shipping point.
(b) Shields Ltd should include goods shipped to a consignee in its inventory.
Goods held by Shields Ltd on consignment should not be included in inventory.
4. The primary basis of accounting for inventories is cost in accordance with the cost
principle. The major objective for inventories is the proper determination of profit in
accordance with the matching principle.
5. No. Selection of an inventory costing method is a management decision. However,

once a method has been chosen, it should be consistently applied.
6. (a) FIFO
(b) Average cost
(c) LIFO.
7. Lee Ltd is using the FIFO method of inventory costing and Lam Ltd is using the LIFO
method. Under FIFO, the latest goods purchased remain in inventory. Thus, the
inventory on the statement of financial position should be close to current costs. The
reverse is true of the LIFO method. Lee Ltd will have the lower gross profit because
cost of goods will include a higher proportion of goods purchased at earlier (higher)
costs.

8. Nancy should know the following:
(a) A departure from the cost basis of accounting for inventories is justified when
the value of the goods is no longer as great as its cost. The write-down to
market value should be recognised in the period in which the price decline
occurs.
(b) IAS 2 defines net realisable value as the estimated selling price in the
ordinary course of business less the estimated costs of completion and the
estimated costs necessary to make the sale (i.e. marketing, selling and
distributing to customers).
9. Disagree. The results under the FIFO method are the same but the results under the
LIFO method are different. The reason is that the pool of inventoriable costs (costs of
goods available for sale) is not the same. Under a periodic system, the pool of costs
is the goods available for sale for the entire period, whereas under a perpetual
system, the pool is the goods available for sale up to the date of sale.
10. (a) Peta Ltd’s 2016 profit will be understated $5,000;

(b) 2017 profit will be overstated $5,000; and
(c) the combined profit for the two years will be correct.

SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 5.1
a) Perpetual system, specific identification

b) Perpetual system, average cost
c) Periodic system, specific identification
d) Perpetual system, FIFO
e) Periodic system, specific identification
BRIEF EXERCISE 5.2

Jess Ltd
OPERATING REVENUE
Sales revenue:
Gross sales revenue 472, 500
Less: Sales returns and allowances -
Net sales revenue 472,500
Cost of sales:
Beginning inventory 45,000
Purchases 300,000
Less: Purchase returns and allowances (14,
250)
Net purchases 285,750
Add: Freight-in 12,000
Cost of goods purchased 297,750
Cost of goods available for sale 342,750
Less: Ending inventory (67,500)
Cost of sales 272,250
GROSS PROFIT 197,250
BRIEF EXERCISE 5.3

Cushion Ltd
(a) The ending inventory under FIFO consists of 400 units at $18 for a total
allocation of $7,200.
(b) The ending inventory under LIFO consists of 300 units at $12 + 100 units at
$14 for a total allocation of $5,000 ($3,600 + $1,400).

BRIEF EXERCISE 5.4
Olynda Garden Centre

Inventory Categories Cost NRV LCNRV
Native trees $16,800 $14,280 $14,280

Potting mix 12,600 13,300 12,600
Garden statues 19,600 17,920 17,920
Total valuation $49,000 $45,500 $44,800
The lower of cost and net realisable value (LCNRV) is $44,800
BRIEF EXERCISE 5.5
Che Eyewear Ltd
Inventory turnover ratio: $129,201 $129,201

  2.79
$39,300  $53,322  2 $46,311
Days in inventory: 365

 130.8 days
2.79

BRIEF EXERCISE 5.6

Harrots Department Store
1. FIFO
Cost of Sales
June 1 sale: 30 units @ $12 = $360
Aug. 27 sale: 20 units @ $12 = $240
13 units @ $18 = 234 474
$834
2. LIFO
Cost of Sales
June 1 sale: 30 units @ $12 = $360
Aug. 27 sale: 30 units @ $18 = $540
3 units @ $12 = 36 576
$936
3. AVERAGE COST
Cost of Sales
June 1 sale: 30 units @ $12 = $360
Aug. 27 sale: 33units @ $15.60* 515**
=
$875
[(50  30)  $12]  (30  $18)
*
50 units
** rounded.
BRIEF EXERCISE 5.7
The understatement of ending inventory caused cost of sales to be overstated by $14,000

and gross profit to be understated by $14,000. The correct profit for 2015 is $194,000
($180,000 + $14,000).
Total assets in the statement of financial position will be understated by the amount that
ending inventory is understated, $14,000.

SOLUTIONS TO EXERCISES
EXERCISE 5.1
(a)
Peters Ltd
(1) 5 April Purchases 9,000

Accounts Payable 9,000
(2) 6 April Freight-in 450

Cash 450
(3) 7 April Equipment 13,000

(4) 8 April Accounts Payable 1,500

Purchase Returns and Allowances 1,500
(5) 9 April Accounts Payable ($9,000 - $1,500) 7,500

Discount Received [($9,000 - $1,500) x 2%] 150
Cash ($7,500 - $150) 7,350
(b) 4 May Accounts Payable ($9,000 - $1,500) 7,500

Cash 7,500
EXERCISE 5.2
Francine Pty Ltd
Statement of Profit or Loss (partial)
for the year ended 30 June 2016
Beginning inventory 1 July 2015 $56,760

Purchases $469, 920
Less: Purchase returns and allowances 6,600
Ending inventory 30 June 2016 85,800
Cost of sales $434,280

EXERCISE 5.3
(a)
(a) $1,460 ($1,500 - $40)

(b) $1,570 ($1,460 + $110)
(c) $1,510 ($1,820 - $310)
(d) $50 ($1,080 - $1,030)
(e) $200 ($1,230 - $1,030)
(f) $120 ($1,350 - $1,230)
(g) $7,500 ($290 + $7,210)
(h) $730 ($7,940 - $7,210)
(i) $8,940 ($1,000 + $7,940)
(j) $5,200 ($49,530 - $44,330 from (l))
(k) $1,500 ($43,590 - $42,090)
(l) $44,330 ($42,090 + $2,240)
(b) The purpose of this exercise is to develop the skill to determine the relationship
between each component in the calculation of cost of sales.

EXERCISE 5.4
Hooton Ltd
(a)
Ending inventory – physical count $147,500

1. No effect – title passes to purchaser upon shipment when terms are
FOB shipping point -
2. No effect – title does not transfer to Hooton Ltd until goods are received
-
3. Add to inventory: Title passed to Hooton Ltd when goods were shipped
12,500
4. Add to inventory: Title remains with Hooton Ltd until purchaser

received goods 20,000
5 The goods did not arrive prior to year-end. The goods, therefore, (22,000)
cannot be included in the inventory
6. The goods should have been written-off under IAS 2 by application of

the LCNRV rule. (25,000)
Correct inventory $133,000
(b) It is important for the Bank of Epping to determine the correct amount for inventory
before granting a loan to Hooton Ltd because this will help the Bank determine the
accuracy of the financial statements. The Bank’s main interest in the financial
statements is trying to determine whether Hooton Ltd has the ability to repay the
loan. The year-end inventory balance of $147,500 is overstated by $14,500.
Therefore assets in the statement of financial position are overstated. Cost of sales in
the statement of profit or loss would be understated so the profit would also be
overstated.

EXERCISE 5.5
Djuric Ltd
Statement of Profit or Loss
for the month ended 31 January 2016
INCOME
Sales revenue:
Gross sales revenue $446,160
Less: Sales returns and allowances 18,590
Net sales revenue $427,570
Cost of sales:
Beginning inventory 1 January 60,060
Purchases $286,000
Less: Purchase returns and allowances 12,870
Less: Ending Inventory 31 January 90,090
OPERATING EXPENSES
Selling expenses:
Freight-out 10,010
Rent expense – store space 14,300
Sales salaries expense 30,030 54,340
Administrative expenses:
Insurance expense 17,160
Office salaries expense 57,200
Rent expense – office space 14,300 88,660
Financial expenses:
Discount allowed 11 440 11,440
Total operating expenses 154,440
PROFIT $15,730

EXERCISE 5.6
SurfsUp Ltd
(a)
FIFO
Beginning inventory (26 x $97) $2,522

Purchases:
12 May (45 x $102) $4,590
19 May (28 x $104) 2,912
22 May (40 x $105) 4,200 11,702
Less: Ending inventory (*15 x $105) 1,575
* 15 = 139 – 124
PROOF
Date Units Unit Cost Total Cost
1/5 26 $97 $2,522

12/5 45 102 4,590
19/5 28 104 2,912
22/5 25 105 2,625
124 $12,649
LIFO
Cost of goods available for sale $14,224

Less: Ending inventory (15 x $97) 1,455
PROOF
26/5 40 $105 $4,200

19/5 28 104 2,912
12/5 45 102 4,590
1/5 11 97 1,067
124 $12,769

(b) FIFO $1,575 (ending inventory) + $12,649 (Cost of sales) = $14,224 = Cost of goods
available for sale.
LIFO $1,455 (ending inventory) + $12,769 (Cost of sales) = $14,224 = Cost of goods
available for sale.
Under both methods, the sum of the ending inventory and Cost of sales equals the
same amount, $14,224, which is the cost of goods available for sale.

EXERCISE 5.7
Fenning Pty Ltd
(a)
1. FIFO
Beginning inventory (200 x $10) $2,000

Purchases:
12 June (300 x $12) $3,600
23 June (500 x $14) 7,000 10,600
2. LIFO

3. AVERAGE COST
Cost of Goods Total Units Weighted Average

Available for Sale ÷ Available for Sale = Unit Cost
$12,600 1,000 $12.60
Ending inventory (180 x $12.60) $2,268

Cost of sales (820 x $12.60) $10,332
or $12,600 - $2,268 = $10,332
(b) The FIFO method will produce the highest ending inventory because costs have
been rising. Under this method, the earliest costs are assigned to Cost of Sales, and
the latest costs remain in ending inventory. The LIFO method will produce the
highest Cost of Sales for Fenning Pty Ltd. Under LIFO the most recent costs are
charged to Cost of Sales and the earliest costs are included in the ending inventory.
(c) The average cost ending inventory ($2,268) is higher then LIFO ($1,800) but lower
than FIFO ($2,520). For Cost of Sales, average cost ($10,332) is higher than FIFO
($10,080) but lower than LIFO ($10,800).
(d) The simple average would be ($10 + $12 + $14)/3 = $12. However, the average cost
method uses a weighted average unit cost, not a simple average of unit costs.

EXERCISE 5.8
(a)
Fashionista Hair Accessories Pty Ltd
Inventory Categories Cost NRV LCNRV
Silk ribbons $25,200 $21,420 $21,420

Gold-plated hair clips 18,900 19,950 18,900
Crystal hair jewels 29,400 26,880 26,880
Total valuation $73,500 $68,250 $67,200
The lower of cost and net realisable value is. $67,200
(b) It is important to account for inventory using the LCNRV basis as this is required by
IAS 2. No asset should be valued at an amount greater than the economic benefits
expected to be received from that asset.
EXERCISE 5.9
(a)
BJ Electronics Ltd
2015 2016 2017
Inventory $8,452 $8,525 $9,330

turnover
($1,051  $853)  2 ($853  $732)  2 ($732  $1,016)  2
ratio
=8.88 =10.76 10.68
Days in 365 365 365

inventory  41 days  33.8 days  34.1 days
8.9 10.8 10.7
Gross $20,337  $8,452 $20,917  $8,525 $22,348  $9,330

profit ratio  0.58  0.59  0.58
$20,337 $20,917 $22,348
(b) The inventory turnover ratio increased by approximately 20% from 2015 to 2017,
while the days in inventory decreased by almost 17% over the same time period.
Both of these changes would be considered positive in nature. BJ Electronics’s gross
profit ratio remained relatively unchanged from 2015 to 2017.

EXERCISE 5.10
SurfsUp Ltd
(a) FIFO
Date Purchases Sales Balance
1/5 (26 @ $97) $2,522

5/5 (12 @ $97) $1,164 (14 @ $97) $1,358
12/5 (45 @ $102) $4,590 (14 @ $97)
(45 @ $102) $5,948
16/5 (14 @ $97)
(36 @ $102) $5,030 (9 @ $102) $918
19/5 (28 @ $104) $2,912 (9 @ $102)
(28 @ $104) $3,830
26/5 (40 @ $105) $4,200 (9 @ $102)
(28 @ $104)
(40 @ $105) $8,030
29/5 (9 @ $102)
(28 @ $104)
(25 @ $105) $6,455 (15 @ $105) $1,575
LIFO
1/5 (26 @ $97) $2,522

5/5 (12 @ $97) $1,164 (14 @ $97) $1,358
12/5 (45 @ $102) $4,590 (14 @ $97)
(45 @ $102) $5,948
16/5 (5 @ $97)
(45 @ $102) $5,075 (9 @ $97) $873
19/5 (28 @ $104) $2,912 (9 @ $97)
(28 @ $104) $3,785
26/5 (40 @ $105) $4,200 (9 @ $97)
(28 @ $104)
(40 @ $105) $7,985
29/5 (22 @ $104)
(40 @ $105) $6,488 (9 @ $97)
(6 @ $104) $1,497

AVERAGE COST
1/5 (26 @ $97) $2,522

5/5 (12 @ $97) $1,164 (14 @ $97) $1,358
12/5 (45 @ $102) $4,590 (59 @ $100.81)a $5,948
16/5 (50 @ $100.81) $5,041* (9 @ $100.81) $907
19/5 (28 @ $104) $2,912 (37 @ $103.22)b $3,819
22/5 (40 @ $105) $4,200 (77 @ $104.14)c $8,019
29/5 (62 @ $104.14) $6,457* (15 @ $104.14) $1,562
* Rounded
a
5948 ÷ 59 = 100.81
b
3819 ÷ 37 = 103.22
c
8019 ÷ 77 = 104.14
(b)
Periodic Perpetual
Ending Inventory FIFO $1,575 $1,575
Ending Inventory LIFO $1,455 $1,497
(c) FIFO yields the same ending inventory value under both periodic and perpetual
inventory systems
LIFO yields different ending inventory values when using either a periodic or
perpetual inventory system.

EXERCISE 5.11
Goddard Pty Ltd
(a)
2015 2016
Sales $420,000 $500,000

Cost of sales:
Beginning inventory 64,000 68,000
Cost of goods purchased 346,000 404,000
Cost of goods available for sale 410,000 472,000
Ending inventory ($80,000 - $12,000) 68,000 104,000
Cost of sales 342,000 368,000
Gross profit $78,000 $132,000
(b) The cumulative effect on total gross profit for the two years is nil as shown below:
Incorrect gross profits: $90,000 + $120,000 = $210,000

Correct gross profits: $78,000 + $132,000 = 210,000
Difference: $ -
(c) Dear Sir/Madam
Because your ending inventory of 30 June 2015 was overstated by $12,000, your
gross profit and profit for 2015 was overstated by $12,000 and your gross profit and
profit for 2016 was understated by $12,000.
In a periodic system, the Cost of Sales is calculated by deducting the cost of ending
inventory from the total cost of goods you have available for sale in the period.
Therefore, if ending inventory is overstated as it was in June 2015, the Cost of Sales
is understated and therefore profit will be overstated by that amount. This overstated
ending inventory figure goes on to become the next period’s beginning inventory
amount and is a part of the total cost of goods available for sale. Therefore, the
mistake repeats itself in the reverse. Because the errors over the two year period
cancel each other out, at the end of the second year (2016) inventory and retained
earnings are correct.
Thank you for allowing me to bring this to your attention. If you have any question,
please contact me at your convenience.
Sincerely,

EXERCISE 5.12
Closing debit and credit accounts to profit or loss summary.
Goddard Pty Ltd

General Journal
Date Accounts Debit Credit

30-6-16 Sales 500,000
Ending Inventory 104,000
Profit or loss summary 604,000
(Closing credit accounts to profit or loss
summary)

Beginning Inventory 80,000
Purchases 404,000
(Closing debit accounts to profit or loss
summary)
EXERCISE 5.13
Goddard Pty Ltd
30 June 2015
Adjusted Trial Balance Closing Entries

DR CR DR CR
Inventory 64,000 80,000 64,000
Sales 420,000 420,000
Purchases 346,000 346,000

SOLUTIONS TO PROBLEM
SET A
PROBLEM SET A 5.1

(a)
EAGLE RIDGE GOLF PTY LTD
Date Particulars Debit Credit
Oct. 5 Purchases 5,460

7 Freight-in 168
Cash 168
9 Accounts Payable 210

Purchase Returns and Allowances 210
10 Accounts Receivable 2,520

Sales 2,520
12 Purchases 1,386
12 Accounts Payable ($5,460 - $210) 5,250

Cash ($5,250 - $105) 5,145


Discount Received 13
Cash ($1,260 - $13) 1,247

Sales 1,890
27 Sales Returns and Allowances 63

Accounts Receivable 63
30 Cash 1,260
Sales 1,260
30 Cash 2,310
Accounts Receivable 2,310

(b)
Cash
1/10 Opening Balance 5,250 7/10 Freight in 168
30/10 Sales 1,260 12/10 Accounts payable 5,145
30/10 Accounts receivable 2,310 21/10 Accounts payable 1,247
31/10 Closing Balance 2,260
8,820 8,820
1/11 Opening Balance 2,260
Accounts Receivable
10/10 Sales 2,520 27/10 Sales returns 63
20/10 Sales 1,890 30/10 Cash 2,310
4,410 4,410
Inventory
Accounts Payable
9/10 Purchase returns 210 5/10 Purchases 5,460
12/10 Discounts and cash 5,250 12/10 Purchases 1,386
17/10 Purchase returns 126
18/10 Discounts and cash 1,260
6,846 6,846
1/11 Opening Balance $-
Share Capital
Sales
10/10 Accounts 2,520
Receivable
Receivable
30/10 Cash 1,260
5,670

Sales Returns and Allowances

27/10 Accounts receivable 63
Purchases
5/10 Accounts payable 5,460
6,846
Purchase Returns and Allowances

9/10 Accounts payable 210
336
Discount Received
118
Freight-in
7/10 Cash 168
(c)
Eagle Ridge Golf Pty Ltd
Trial Balance
as at 31 October 2015
Debit Credit
Cash $2,260
Inventory 7,350
Accounts Payable -
Share Capital 12,600
Sales 5,670
Sales Returns and Allowances 63
Purchases 6,846
Freight-in 168
$18,724 $18,724

(d)
Oct 31 Profit or loss summary 14,427
Sales returns and 63
allowances
Purchases 6,846
Freight inwards 168
(To close various debits amounts to the Profit or Loss Summary)
Oct 31 Ending inventory 8,820

Sales 5,670
Purchases returns and allowances 336
Discount received 118
(To close various credit accounts to profit or loss summary)
(e) Eagle Ridge Golf Pty Ltd

Statement of Profit or Loss (partial)
for the month ended 31 October 2015
Sales revenues:
Sales $5,670
Less: Sales returns and allowances (63)
Cost of sales:
Beginning inventory 1 October 7,350
Purchases $6,846
Less: Purchase returns and allowances (336)
Net purchases 6,510
Add: Freight-in 168
Ending inventory 31 October (8,820)
Cost of sales (5,208)
Gross profit $399

PROBLEM SET A 5.2

Pumpkin Patchwork Ltd
for the year ended 30 November 2016
OPERATING REVENUE
Sales revenue:
Gross sales revenue 1,056,000
Net sales revenue 1,045,000
Cost of sales:
Beginning inventory 1 December 2015 39,820
Purchases 693,000
Less: Purchase returns and allowances (3,300)
Net Purchases 689,700
Less: Ending inventory 30 November 2016 (37,796)
Other operating revenue:

Discount received 7,700 7,700
355,410
OPERATING EXPENSES
Selling expenses:
Depreciation expense – store equipment 10,450
Freight-out 9,020
Sales commissions expense 13,200 32,670
Depreciation expense – office equipment 4,400
Rates and taxes expense 3,850
Rent expense – office space 20,900
Electricity expense 22,660 215,710
Financial expenses:
Bank charges 1,100 1,100
PROFIT BEFORE INCOME TAX 105,930
Less: Income tax expense (31,779)
PROFIT AFTER INCOME TAX $74,151

PROBLEM SET A 5.3

Modelmania Ltd
(a) Cost of Goods available for Sale
Date Explanation Units Unit Cost Total Cost
March 1 Beginning inventory 90 $35 $3,150

5 Purchase 210 40 8,400
13 Purchase 330 45 14,850
21 Purchase 240 50 12,000
26 Purchase 90 55 4,950
Total 960 $43,350
(b) FIFO
(1) Ending Inventory
March 26 90 $55 $4,950

21 60 50 3,000
*150 $7,950
*960 – 810
(2) Cost of sales

Proof of Cost of sales
March 1 90 $35 $3,150

5 210 40 8,400
13 330 45 14,850
21 180 50 9,000
810 35,400

LIFO
March 1 90 $35 $3,150

5 60 40 2,400
150 $5,550
(2) Cost of sales


March 26 90 $55 $4,950

21 240 50 12,000
13 330 45 14,850
5 150 40 6,000
810 37,800
AVERAGE COST
$43,350 ÷ 960 = $45.15
Units Unit Cost Total Cost
150 $45.15 $6,773
(2) Cost of sales

(c) (1) As shown in (b) above, FIFO produces the highest inventory amount, $7,950.
(2) As shown in (b) above, LIFO produces the highest Cost of sales, $37,800.

PROBLEM SET A 5.4

(a) CANTERBURY LTD
Comparative Statements of Profit or Loss
for the Year Ended 31 December 2016
FIFO LIFO
Sales $997,500 $997,500
Cost of sales
Ending inventory 229,500a 202,500b
Cost of sales 576,000 603,000
Gross profit 421,500 394,500
Operating expenses 180,000 180,000
Profit before income tax 241,500 214,500
Income tax expense (30%) 72,450 64,350
Profit $169,050 $150,150
a
20,000 x $6.75 + 15,000 x $6.3 = $229,500.
b
$52,500 + (25,000 x $6) = $202,500.
(b) (1) The FIFO method produces the most meaningful inventory amount for the
statement of financial position because the units are costed at the most recent
purchases. It can also be argued that FIFO best represents the physical flow of
goods for most companies, resulting in an ending inventory figure that is a more
faithful representation of reality.
(2) It is argued that LIFO produces the most meaningful profit because the Cost of
Sales is measured with the most recent purchases. Some argue that because
LIFO does not approximate physical flow for most companies, Cost of Sales is
not a faithful representation of reality, and that this “unreliable” figure cannot be
meaningful.
(3) The FIFO method is most likely to approximate actual physical flow because the
oldest goods are usually sold first to minimise spoilage and obsolescence.
(4) There will be $8,100 additional cash available under LIFO because income taxes
are $64,350 under LIFO and $72,450 under FIFO.
(5) Gross profit under the average cost method will be (a) lower than FIFO and (b)
higher than LIFO.

PROBLEM SET A 5.5

(a)
World Building Products Ltd
2015
Inventory turnover ratio $306,729.8 0
($31,465.2 0$31,738.20 )2
 9 .7
Days in inventory 365

 37.6 days
9.7
Current ratio $115,343.8 0

0.93 : 1
$124,295.6 0
(b) The inventory turnover ratio indicates the number of times on average that inventory
is sold during the period. The average days in inventory indicates the average
number of days it takes to sell the inventory.
(c) Generally it is considered to be better to have a higher inventory turnover or lower

number of days in inventory as this means that inventory is selling faster. This is
beneficial to the entity as it will have less cash tied up in inventory and there is less
chance that the inventory will become obsolete. If the inventory turnover ratio is too
high, it may be an indication that the entity may not have enough inventory and may
lose customers. Businesses which sell perishable items will generally have higher
inventory turnover ratios than businesses which sell non-perishable items.

PROBLEM SET A 5.6

Fontana Ltd
(a) (1) FIFO

1/7 (5 @ $95) $475 (5 @ $95) $475
6/7 (3 @ $95) $285 (2 @ $95) $190
11/7 (4 @ $106) $424 (2 @ $95)
(4 @ $106) $614
14/7 (2 @ $95)}
(1 @ $106)} $296 (3 @ $106) $318
21/7 (3 @ $112) $336 (3 @ $106)}
(3 @ $112)} $654
27/7 (3 @ $106)}
(1 @ $112) $430 ($2 @ $112) $224
Ending inventory=$224
(2) AVERAGE COST

1/7 (5 @ $95) $475 (5 @ $95) $475
6/7 (3 @ $95) $285 (2 @ $95) $190
11/7 (4 @ $106) $424 (6 @ $102)* $614
14/7 (3 @ $102.3) $308 (3 @ $102) $306
21/7 (3 @ $112) $336 (6 @ $107)** $642
27/7 (4 @ $107) $428 (2 @ $107) $214
*$614 ÷ 6 = $102.3
**$642 ÷ 6 = $107
Ending inventory = $214
(3) LIFO
1/7 (5 @ $95) $475 (5 @ $95) $475
6/7 (3 @ $95) $285 (2 @ $95) $190
11/7 (4 @ $106) $424 (2 @ $95)}
(4 @ $106)} $614
14/7 (3 @ $106) $318 (2 @ $95)}
(1 @ $106)} $296
21/7 (3 @ $112) $336 (2 @ $95)}
(1 @ $106)}
(3 @ $112)} $632
27/7 (3 @ $112)}
(1 @ $106)} $442 (2 @ $95) $190
(b) The highest ending inventory is $224 under the FIFO method.

PROBLEM SET A 5.7

Kids Sportstore Ltd
General Journal
(a)

6 Freight-in 84
Cash 84

Sales 1,890
11 Purchases 1,260
Cash 1,260

Cash ($1,890 - $57) 1,833
14 Purchases 1,050
15 Cash 105
17 Freight-in 63
Cash 63

Sales 1,680
20 Cash 1,050
20 Accounts Payable 1,050

Cash 1,029



Sales 1,890
30 Cash 1,050
(b)
Cash
1/10 Opening Balance 5,250 6/10 Freight-in 84
20/10 Accounts receivable 1,050 11/10 Accounts payable 1,833
30/10 Accounts receivable 1,050 17/10 Freight-in 63
7,455 7,455
Accounts Receivable
8/10 Sales 1,890 20/10 Cash 1,050
18/10 Sales 1,680 27/10 Sales returns 63
30/10 Sales 1,890 30/10 Cash 1,050
5,460 5,460
Inventory
Accounts Payable
10/10 Returns and 84 4/10 Purchases 1,974
allowances
11/10 Discounts and cash 1,890 14/10 Purchases 1,050
3,024 3,024

Share Capital
Sales
8/10 Accounts receivable 1,890
5,460

27/10 Accounts Receivable 63
Purchases
4/10 Account Payables 1,974
11/10 Cash 1,260
14/10 Accounts Payable 1,050
4,284

10/10 Accounts Payable 84
15/10 Cash 105
189
Discount Received
78
Freight-in
6/10 Cash 84
17/10 Cash 63
147

(c)
Kids Sportstore Pty Ltd
Trial Balance
Debit Credit
Cash $3,186
Inventory 3,570
Accounts Payable $-
Share Capital 8,820
Sales 5,460
Purchases 4,284
Freight-in 147
$14,547 $14,547
(d) Closing entries:
Profit or loss $8,064

summary
Beginning inventory $3,570
Sales returns and allowances 63
Purchases 4,284
Freight-in 147
(To close various debits amounts to the Profit or Loss
Summary)
Ending inventory $3,780

Sales 5,460
summary

(e)
Kids Sportstore Pty Ltd
Partial Statement of Profit or Loss
Sales revenues:
Sales $5,460
Cost of sales:
Purchases $4,284
Net purchases 4,095
Add: Freight-in 147
Ending inventory 31 October 3,780
Cost of sales 4,032
Gross profit $1,365

PROBLEM SET A 5.8

(a)
Fashionista Ltd
OPERATING REVENUE
Sales revenue:
Gross sales revenue $1,120,08
0
Net sales revenue $1,107,6
00
Cost of sales:
Purchases $689,520

384,228
OPERATING EXPENSES
Selling expenses:
Sales commissions expense 22,620
Sales salaries expense 118,560 141,180
Depreciation expense – equipment 20,748
Depreciation expense – building 16,224
Financial expenses:
Interest expense 3,120 3,120

(b) Fashionista Ltd has “purchases” and “purchases returns and allowances” accounts
in the adjusted trial balance. These accounts are used by entities that account for
inventory using the periodic inventory system. If an entity uses the perpetual
inventory system to account for inventory, there will be a “Cost of Sales” ledger
account in the trial balance and no “purchases” or “purchase returns and allowances”
accounts.

PROBLEM SET A 5.9
Movieworld Ltd
Oct 1 Beginning inventory 1,100 $10 $11,000

3 Purchase 3,850 12 46,200
9 Purchase 4,400 14 61,600
19 Purchase 3,300 16 52,800
25 Purchase 2,200 18 39,600
Total 14,850 $211,200
(b) FIFO
Oct. 25 2,200 $18 $39,600

19 550 16 8,800
*2,750 $48,400
*14,850 – 12,100
(Units available for sale less units sold)
(2) Cost of sales

Oct. 1 1,100 $10 $11,000

3 3,850 12 46,200
9 4,400 14 61,600
25 2,750 16 44,000
12,100 $162,800

LIFO
Oct. 1 1,100 $10 $11,000

3 1,650 12 19,800
2,750 $30,800
(2) Cost of sales


Oct. 25 2,200 $18 $39,600

19 3,300 16 52,800
9 4,400 14 61,600
3 2,200 12 26,400
12,100 180,400
AVERAGE COST
$211,200÷ 14,850 = $14.22
2,750 $14.22 $39,105
(2) Cost of sales

(c) (1) FIFO results in the highest inventory amount for the statement of financial
position ($48,400).
(2) LIFO results in the highest Cost of Sales for the statement of profit or loss
($180,400).

PROBLEM SET A 5.10
Sweet Cookies Ltd
2015
Inventory turnover ratio $328,942.6 0
($139,851. 60$142,257.4 0)2
 2 .3

 158.7 days
2.3
Current ratio $187,663

 2.32 : 1
$81,019.4
(b) Of the two companies, Sweet Cookies Ltd has the better current ratio: 2.32:1 versus
0.75:1; however, Sweet Cookies’s stronger current ratio is offset by its much lower
inventory turnover and days in inventory. Obviously, I would like more information as
to why one company has a much lower current ratio and the other a much lower
inventory turnover. I would also like to compare these figures to the industry
averages.

PROBLEM SET A 5.11

(a)
Michael Ltd
Perceptual Inventory Method

Sales Revenue $154,275
Profit or Loss $154,275
Summary
(To close various credit accounts to profit or loss
summary)

Summary
Sales returns and allowances 9,075
(To close various debit amounts to the Profit or Loss
Summary)

Summary
Retained Earnings $40,656
(To close Profit or Loss Summary to Retained Earnings )
OR one net entry

Sales Revenue $154,275
Profit or Loss 40,656

Summary
(To close various debit and credit amounts to the Profit or Loss
Summary)

Sonya Ltd
Periodic Inventory Method

summary
Beginning inventory $25,410
Purchases 108,900
Freight inwards 1,089
Summary)
Ending inventory $29,040

Sales 154,275
Purchases returns and allowances 1,815
summary
summary)
Profit or Loss Summary $40,656

Retained Earnings $40,656
(To close Profit or Loss Summary to Retained Earnings)
(b)
General ledgers
Perpetual method
Profit or Loss Summary
Cost of sales, etc. 113,619 Sales revenue 154,275
Retained Earnings 40,656
$154,275 $154,275
Periodic method
Beginning Inventory, etc. 144,474 Ending Inventory etc 185,130
$185,130 $185,130

PROBLEM SET A 5.12
Better Office Supplies
6 Sept. Inventory (80 x $20) 1 600

GST Paid 160
Cash 1 760
(Purchase 80 calculators @ $22)
9 Sept. Freight Inwards/Inventory 80

GST Paid 8
Cash 88
(Paid freight )
10 Sept. Accounts Receivable (2 x $22) 44

Inventory (2 x $20) 40
GST Paid 4
(Returned 2 calculators - credit given)

Sales 780
GST Collected 78
Cost of Sales (26 x $20) 520

Inventory 520
(Sold 26 calculators)
14 Sept. Sales Returns and Allowances 30

GST Collected 3
Inventory 20
Cost of Sales 20
(1 calculator was returned into stock)

Sales 900
GST Collected 90
Cost of Sales [(5 x $20) + (25 x $20)] * 600

Inventory 600
(Sold 30 calculators to Mega Ltd)
*Note: Better Office Supplies uses the FIFO inventory cost flow assumption, which means
that inventory purchased earlier will be sold first. On 1st September, Better Office Supplies
had 30 calculators on stock @ $20 each. The first 26 calculators were sold to Reader Book
Store on 12th September, so there were only 4 calculators left @ $20. But 1 Calculator was
returned from Reader Book Store on 14 September. So when Better Office Supplies sold 30
calculators to Mega Ltd on 20th September, 5 calculators from old stock @ $20 each were
sold first, and the remaining 25 calculators were taken from the new stock purchased on 6th
September also @ $20 each.

SOLUTIONS TO PROBLEM
SET B
PROBLEM SET B 5.1
Hancock’s Pro Shop Pty Ltd

(a)

7 Freight-in 160
Cash 160


Sales 2,400
12 Purchases 1,320

Cash ($5,000 - $100) 4,900


Cash ($1,200- $12 1,188

Sales 1,800

30 Cash 1,200
Sales 1,200
30 Cash 2,200

(b)
Cash
310/10 Sales 1,200 14/10 Accounts Payable 4,900
30/10 Accounts Receivable 2,200 18/10 Accounts Payable 1,188
8,400 8,400
Accounts Receivable
10/10 Sales 2,400 27/10 Sales Return 60
20/10 Sales 1,800 30/10 Sales 2,200
4,200 4,200
Inventory
Accounts Payable
12/10 Discounts and cash 5,000 12/10 Purchase 1,320
17/10 Purchase returns 120
6,520 6,520
1/11 Opening Balance $-
Share Capital
Sales
10/10 Accounts Receivable 2,400
20/10 Accounts Receivable 1,800
30/10 Cash
1,200
5,400


27/10 Accounts 60
Receivable
Purchases
6,520

320
Discount Received
112
Freight-in
7/10 Cash 160

(c)
Hancock’s Pro Shop Pty Ltd
Trial Balance
Debit Credit
Cash $2,152
Inventory 7,000
Accounts Payable
Share Capital $12,000
Sales 5,400
Purchases 6,520
Freight-in 160
$17,832 $17,832
(d) Hancock’s Pro Shop Pty Ltd

Sales revenues:
Sales $5,400
Cost of sales:
Purchases $6,520
Net purchases 6,200
Add: Freight-in 160
Cost of sales 4,960
Gross profit $380

PROBLEM SET B 5.2

Bargains Department Store
for the year ended 30 November 2016
$ $ $
OPERATING REVENUE
Sales revenue:
Gross sales revenue 1,440,00
0
Net sales revenue 1,425,000
Cost of sales:
Beginning inventory 1 December 2015 54,300
Purchases 945,000
Cost of goods available for sale 1,002,39
0
Less:
Ending inventory 30 November 2016 (51,540)

484,650
OPERATING EXPENSES
Selling expenses:
Depreciation expense – store equipment 14,250
Freight-out 12,300
Depreciation expense – office equipment 6,000
Rent expense – office space 28,500
Financial expenses:
Bank charges 1,500 1,500

PROBLEM SET B 5.3

Rye Sails
March 1 Beginning inventory 150 $35 $5,250

5 Purchase 350 40 14,000
13 Purchase 550 45 24,750
21 Purchase 400 50 20,000
26 Purchase 150 55 8,250
Total 1,600 $72,250
(b) FIFO
March 26 150 $55 $8,250

21 100 50 5,000
*250 $13,250
*1,600 – 1,350
(2) Cost of sales

March 1 150 $35 $5,250

5 350 40 14,000
13 550 45 24,750
21 300 50 15,000
1350 $59,000

LIFO
March 1 150 $35 $5,250

5 100 40 4,000
250 $9,250
(2) Cost of sales


March 26 150 $55 $8,250

21 400 50 20,000
13 550 45 24,750
5 250 40 10,000
1,350 $63,000
Average Cost
$72,250 ÷ 1,600 = $45.16
250 $45.16 $11,290
(2) Cost of sales

(c) (1) As shown in (b) above, FIFO produces the highest inventory amount,
$13,250.
(2) As shown in (b) above, LIFO produces the highest Cost of sales, $63,000.

PROBLEM SET B 5.4
(a) PEORIA LTD

Comparative Statements of Profit or Loss
for the Year Ended 31 December 2016
FIFO LIFO
Sales $865,000 $865,000
Cost of sales
Ending inventory 53,000a 45,500b
Cost of sales 559,500 567,000
Gross profit 305,500 298,000
Operating expenses 147,000 147,000
Profit before income tax 158,500 151,000
Income tax expense (32%) 50,720 48,320
Profit $107,780 $102,680
a
20,000 x $2.65 = $53,000.
b
$34,000 + ($5,000 x $2.30) = $45,500.
(b) (1) The FIFO method produces the most meaningful inventory amount for the
statement of financial position because the units are costed at the most recent
purchases. It can also be argued that FIFO best represents the physical flow of
goods for most companies, resulting in an ending inventory figure that is a more
faithful representation of reality.
(2) It is argued that LIFO produces the most meaningful profit because the Cost of
Sales is measured with the most recent purchases. Some argue that because
LIFO does not approximate physical flow for most companies, Cost of Sales is
not a faithful representation of reality, and that this “unreliable” figure cannot be
meaningful.
(3) The FIFO method is most likely to approximate actual physical flow because the
oldest goods are usually sold first to minimise spoilage and obsolescence.
(4) There will be $2,400 additional cash available under LIFO because income taxes
are $48,320 under LIFO and $50,720 under FIFO.
(5) Gross profit under the average cost method will be (a) lower than FIFO and (b)
higher than LIFO.

PROBLEM SET B 5.5
(a)
Prestige Motors Ltd
2015
Inventory turnover ratio $353,919
($36,306$36,621)2
$353,919
9.7
$36,463.50

 37.6 days
9.7

0.93 : 1
$143,418
(b) A low inventory turnover or high days in inventory is not ideal for shareholders. If
there is a low inventory turnover, it generally indicates that sales are slow. It may
indicate that too much cash is being tied up in inventory. Nevertheless, inventory
turnover needs to be compared with ratios for businesses in a similar industry or with
industry averages. Some industries have lower inventory turnover ratios than others
due to the nature of the business.

PROBLEM SET B 5.6
Watson Pty Ltd
(a) (1) FIFO

1/7 (5 @ $90) $450 (5 @ $90) $450
6/7 (3 @ $90) $270 (2 @ $90) $180
11/7 (4 @ $99) $396 (2 @ $90)
(4 @ $99) $576
14/7 (2 @ $90)}
(1 @ $99)} $279 (3 @ $99) $297
21/7 (3 @ $106) $318 (3 @ $99)}
(3 @ $106)} $615
27/7 (3 @ $99)}
(1 @ $106)} $403 $2 @ $106) $212
(2) AVERAGE COST

1/7 $5 @ $90) $450 (5 @ $90) $450
6/7 (3 @ $90) $270 (2 @ $90) $180
11/7 (4 @ $99) $396 (6 @ $96)* $576
14/7 (3 @ $96) $288 (3 @ $96) $288
21/7 (3 @ $106) $318 (6 @ $101)** $606
27/7 (4 @ $101) $404 (2 @ $101) $202
*$576 ÷ 6 = $96
**$606 ÷ 6 = $101
(3) LIFO
1/7 (5 @ $90) $450 (5 @ $90) $450
6/7 (3 @ $90) $270 (2 @ $90) $180
11/7 (4 @ $99) $396 (2 @ $90)}
(4 @ $99)} $576
14/7 (3 @ $99) $297 (2 @ $90)}
(1 @ $99)} $279
21/7 (3 @ $106) $318 (2 @ $90)}
(1 @ $99)}
(3 @ $106)} $597
27/7 (3 @ $106)}
(1 @ $99)} $417 (2 @ $90) $180
(b) The highest ending inventory is $212 under the FIFO method.

PROBLEM SET B 5.7

Mill Park Tennis Shop Pty Ltd
General Journal
(a)

(Terms 3/7, n/30)
6 Freight-in 80
Cash 80

Sales 1,800
11 Purchases 1,200
Cash 1,200

Cash ($1,800 - $54) 1,746
14 Purchases 1,000
(Terms 2/7, n/60)
15 Cash 100
17 Freight-in 60
Cash 60

Sales 1,600
20 Cash 1,000
20 Accounts Payable 1,000

Cash 980



Sales 1,800
30 Cash 1,000
(b)
Cash
20/10 Accounts 1,000 11/10 Accounts 1,746
Receivable Payable
30/10 Accounts 1,000 17/10 Freight-in 60
Receivable
20/10 Accounts 980
Payable
31/10 Closing 3,034
Balance
7,100 7,100
Accounts Receivable
8/10 Sales 1,800 20/10 Cash 1,000
18/10 Sales 1,600 27/10 Sales Returns 60
30/10 Sales 1,800 30/10 Cash 1,000
31/10 Closing 3,140
Balance
5,200 5,200
Inventory
Accounts Payable
10/10 Purchase Returns 80 4/10 Purchases 1,880
11/10 Discounts 1,800 14/10 Purchases 1,000
Received & Cash
20/10 Discounts 1,000
Received & Cash
2,880 2,880

Share Capital
1/10 Opening 8,400
Balance
Sales
8/10 Accounts 1,800
Receivable
Receivable
Receivable
5,200

27/10 Accounts 60
Receivable
Purchases
11/10 Cash 1,200
4,080

10/10 Accounts 80
Payable
15/10 Cash 100
180
Discount Received
11/10 Accounts 54
Payable
20/10 Accounts 20
Payable
74
Freight-in
6/10 Cash 80
17/10 Cash 60
140

(c)
Trial Balance
Debit Credit
Cash $3,034
Inventory 3,400
Accounts Payable $-
Share Capital 8,400
Sales 5,200
Purchases 4,080
Freight-in 140
$13,854 $13,854
(d) Closing entries:
Profit or loss 7,680

summary
Sales returns and allowances 60
Purchases 4,080
Freight inwards 140
(To close various debits amounts to the Profit or Loss
Summary)
Ending inventory 3,600

Sales 5,200
summary

(e)
Partial Statement of Profit or Loss
Sales revenues:
Sales $5,200
Cost of sales:
Purchases $4,080
Net purchases 3,900
Add: Freight-in 140
Cost of sales 3,840
Gross profit
$1,300

PROBLEM SET B 5.8
Westfields Ltd
$ $ $
OPERATING REVENUE
Sales revenue:
Gross sales revenue 789,800
Less: Sales returns and allowances (8,800)
Cost of sales:
Beginning inventory 1 July 2016 44,550
Purchases 486,200
Less: Ending inventory 30 June 2017 (82,500)

346,830
OPERATING EXPENSES
Selling expenses:
Sales salaries expense 83,600
Depreciation expense – equipment 14,630
Depreciation expense – building 11,440
Financial expenses:
Interest expense 2,200 2,200

PROBLEM SET B 5.9
Movies Abound Pty Ltd
Oct 1 Beginning inventory 1,000 $10 $10,000

3 Purchase 3,500 12 42,000
9 Purchase 4,000 14 56,000
19 Purchase 3,000 16 48,000
25 Purchase 2,000 18 36,000
Total 13,500 $192,000
(b) FIFO
Oct. 25 2,000 $18 $36,000

19 500 16 8,000
*2,500 $44,000
*13,500 – 11,000
(2) Cost of Sales

Proof of Cost of Sales
Oct. 1 1,000 $10 $10,000

3 3,500 12 42,000
9 4,000 14 56,000
25 2,500 16 40,000
11,000 $148,000

LIFO
Oct. 1 1,000 $10 $10,000

3 1,500 12 18,000
2,500 $28,000
(2) Cost of Sales

Proof of Cost of Sales
Oct. 25 2,000 $18 $36,000

19 3,000 16 48,000
9 4,000 14 56,000
3 2,000 12 24,000
11,000 $164,000
AVERAGE COST
$192,000÷ 13,500 = $14.22
2,500 $14.22 $35,550
(2) Cost of sales

(c) (1) FIFO results in the highest inventory amount for the statement of financial
performance, $44,000.
(2) LIFO results in the highest Cost of sales, $164,000.

PROBLEM SET B 5.10
(a)
Plant Food Ltd
2015
Inventory turnover ratio $234,959
($99,894  $101,751)  2
$234,959
 2 .3
$100,822 .5

 158.7 days
2.3

 2.32 : 1
$57,871
(b) Of the two companies, Plant Food has the better current ratio: 2.32:1 versus 0.8:1;
however, Plant Food’s stronger current ratio is offset by its much lower inventory
turnover and days in inventory. Obviously, I would like more information as to why
one company has a much lower current ratio and the other a much lower inventory
turnover. I would also like to compare these figures to the industry averages.

PROBLEM SET B 5.11
(a)
Mastrilli Ltd
Perceptual Inventory Method

Sales Revenue 46,750
Summary
summary)

Summary
Cost Of Sales 34,430
Sales Returns and Allowances 2,750
Summary)

Summary
(To close Profit or Loss Summary to Retained Earnings )
OR one net entry

Sales Revenue 46,750
Cost Of Sales 31,680
Sales Returns and Allowances 2,750

Summary
(To close various debit and credit amounts to the Profit or Loss
Summary)

Errica Ltd
Periodic Inventory Method

summary
Purchases 33,000
Freight inwards 330
Summary)
Ending inventory 8,800

Sales 46,750
summary
summary)
Profit or Loss Summary 12,320

(To close Profit or Loss Summary to Retained Earnings
)
(b)
General ledgers
Perpetual method
Cost of Sales, etc. 34,430 Sales revenue 46,750
46,750 46,750
Periodic method
Beginning Inventory, etc. 43,780 Ending Inventory etc 56,100
56,100 56,100

PROBLEM SET B 5.12
Petrocelli Office Supplies
6 Sept. Inventory (120 x $29*) $3 480

GST Paid (120 x $3) 360
Cash $3 840
(Purchase 120 USB @ $32)
9 Sept. Freight Inwards/Inventory 120

GST Paid 12
Cash 132
(Paid freight )

Inventory (2 x $29) 58
GST Paid 6
(Returned 2 USB - credit given)
12 Sept. Accounts Receivable (39 x $43) 1 677

Sales 1 521
GST Collected 156
Cost of Sales (39 x $30) 1 170

Inventory 1 170
(Sold 39 USB)
14 Sept. Sales Returns and Allowances 39

GST Collected 4
Inventory 30
Cost of Sales 30
(1 USB was returned into stock)
20 Sept. Accounts Receivable (45 x $43) 1 935

Sales 1 755
GST Collected 180
Cost of Sales [(7 x $30) + (38 x $29)] * 1 312

Inventory 1 312
(Sold 45 USB)
*Rounding to the nearest dollar
**Note: Petrocelli Office Supplies uses the FIFO inventory cost flow assumption, which
means that inventory purchased earlier will be sold first. On 1st September, Petrocelli Office
Supplies had 45 USB on stock @ $30 each. The first 39 USB were sold to Sunny Store on
12th September, so there were 6 USB left @ $20. But 1 USB was returned from Sunny
Store on 14th September. When Petrocelli Office Supplies sold 45 USB to Martins Ltd on
20th September, 7 USB from old stock @ $30 each were sold first, and the remaining 38
were taken from the new stock purchased on 6th September @ $29 each.

BUILDING BUSINESS SKILLS
FINANCIAL REPORTING AND ANALYSIS
BUILDING BUSINESS SKILLS 5.1 FINANCIAL REPORTING PROBLEM
Domino Pizza Enterprises Ltd
(Note: All dollar amounts are in thousands)
(a) Inventories were $6,685 as at 30 June 2013.
(b) Inventories increased $979 in 2013. Using 2012 as the base year, the increase was
approximately 17.2%. In 2013, inventories were 11.1% of current assets ($6,685 ÷
$60,383).
BUILDING BUSINESS SKILLS 5.2 COMPARATIVE ANALYSIS PROBLEM
Coca-Cola Amatil Ltd vs. PepsiCo
(a)
Coca-Cola Amatil Ltd PepsiCo

(A$ in millions) (US$ in millions)
1. Inventory turnover $2,843 $31,243

($345 $347)/ 2 ($1,533 $1,509) / 2
= 8.22 times 20.54times
2. Days in inventory 365 365

44 days 18 days
8.22 20.54
(b) PepsiCo sells its inventory within 18 days which is significantly quicker than the 44
days taken by Coca-Cola. This is approximately two and a half times the rate of
Coca-Cola Amatil. Generally companies that are able to keep their inventory at lower
levels and higher turnovers and still satisfy customer needs are the most successful.
Note: In figure 5.18 the inventory turnover ratios for Fantastic Holdings and Nick
Scali are much slower than Coca-Cola Amatil and Pepsico. Fantastic Holdings sells
its inventory within 116 days whereas Nick Scali takes 103 days to achieve the same.
Coca-Cola Amatil and Pepsico sell short shelf life items – beverages – so the
turnover would be expected to be higher. In contrast, Fantastic Holdings and Nick
Scali sell longer term floor items – furnishings which are slower to turnover.

BUILDING BUSINESS SKILLS 5.3 A GLOBAL FOCUS AND INTERPRETING

FINANCIAL STATEMENTS
Nike and Adidas
(a) Both companies have international sales: thus, they must move their goods
around the world. Styles/fashions are often cultural so what sells in one country
may not in another. Because trends/fashion in their industry change quickly, both
must manage inventory carefully. If a trend/fashion is really popular, a company
must make sure it has enough inventory before people’s interest in the product
fades. But it doesn’t want to “get stuck” with a lot of excess inventory. The best
approach is to have very efficient inventory production and distribution systems
that allow a company to respond to changes in demand very quickly.
(b) Nike’s inventories are stated at lower of cost or market and valued using an
average cost basis.
Adidas’ merchandise and finished goods are valued at the lower of cost or net
realisable value. Costs are determined using a standard valuation method which
is the average cost method.
(c) The format used by Adidas is the approach used by manufacturers. It allows the
financial statement reader to see how much inventory is in each stage of
production of inventory. This can be useful. For example, if the company is
planning to increase production, we would expect to see raw materials increase,
or if it is planning a slow-down, we would expect to see raw materials decline.
Both Nike and Adidas use other companies to do much of their production (as
evidenced by the minor amounts of raw materials and work-in-progress reported
by Nike and by the fact that Adidas reports that ‘substantially all’ of its inventory is
finished goods. Thus, in this case, it is not surprising that Adidas did not provide
this information, and it probably was not necessary that Nike did.
(d)
Nike Adidas
Inventory turnover
$14,279 $7,352
($3,222 + $3,434) / 2 ($2,486 + $2,634) / 2
= 4.29 times = 2.87 times
Days in inventory
365 365
4.29 = 85 days 2.87= 127 days
Adidas’s inventory turnover is lower and days in inventory is higher than Nike,
suggesting that Nike is more efficient in selling its inventory.

BUILDING BUSINESS SKILLS 5.4 FINANCIAL ANALYSIS ON THE WEB
JB Hi-Fi Ltd
(Note: All dollar amounts are in thousands)
The following responses are based on the 2013 Consolidated figures in the annual report.
(a) Inventories: $426,000 as at 30 June 2013. Cost of sales for the year: $2,596,194.
(b) Inventories are stated at the lower of cost and net realisable value. Net realisable
value represents the estimated selling price less all estimated costs necessary to
make the sale.
(c) Inventories to total assets ratio:
$426,000
$843,304 = 50.51%
(d) Inventory turnover ratio:
2,596,194
(426,000+428,290) / 2 = 6.08 times
Days in inventory
365
6.08 = 60 days
JB Hi-Fi’s inventory turnover is 6.08 times per annum which converts to 60 days in
inventory which is much quicker than Fantastic Holdings and Nick Scali. This
suggests that JB Hi-Fi is able to manage and sell its inventory more efficiently than
Fantastic Holdings and Nick Scali.
In figure 5.18 the inventory turnover ratios for Fantastic Holdings and Nick Scali are
much slower than JB Hi-Fi. Fantastic Holdings sells its inventory within 116 days and
Nick Scali takes 103 days to achieve the same. JB Hi-Fi sells popular high turnover
items such as CDs, DVDs, games, smart phones and computers, so the turnover
would be expected to be higher. In contrast, Fantastic Holdings and Nick Scali sell
furnishings which are generally more expensive and slower to turnover.

CRITICAL THINKING
BUILDING BUSINESS SKILLS 5.5 GROUP DECISION CASE
ChemCo International Ltd
(a) The items owned by ChemCo on 30 June would be those purchased and to whom
ownership had already passed, as well as those items sold but from which ownership
had not yet passed. These would include items described in parts 1, 5 and 7. For
item 8, it is not possible to determine ownership as the shipping date is not given in
the question and this information is critical.
(b) The transactions that involve ChemCo’s inventory account on or before 30 June
2016 would be items described in 3 and 5. The transactions that involve ChemCo’s
inventory account after 30 June 2016 would be items described in 2 and 7.
Note: Items that are inventory would be those items related to ChemCo’s final
products (chemicals, airbags and salt). The receipt of office supplies or steel for
building are therefore not inventory.
BUILDING BUSINESS SKILLS 5.6 COMMUNICATION ACTIVITY
City Jeans Ltd
To: Su Lee, Managing Director
From: Accountant
Subject: 2015 Ending Inventory Error
As you know, the 2015 ending inventory figure was overstated by $1 million. This error will
cause the 2015 profit figure to be incorrect because the ending inventory is used to calculate
the 2015 Cost of Sales. Since the ending inventory is subtracted in the calculation of Cost of
Sales, an overstatement of ending inventory results in an understatement of Cost of Sales
and therefore an overstatement of profit.
Unfortunately, unless corrected, this error will also affect 2016 profit. The 2015 ending
inventory is also the 2016 beginning inventory. Therefore, 2016 beginning inventory is also
overstated, which causes an overstatement of Cost of Sales and an understatement of 2016
profit.

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Solutions Manual

John Wiley & Sons Australia, Ltd 2016

CHAPTER 5 – REPORTING AND ANALYSING INVENTORY

ASSIGNMENT CLASSIFICATION TABLE

2. Determine cost of sales under a periodic 2 2, 3 1A, 2A, 7A,

3. Describe the steps in determining 4

4. Identify the unique features of the 5 1A, 2A, 7A,

5. Explain the basis of accounting for 1, 3 6, 7 3A, 4A, 9A,

6. Explain the financial statement effects of 3A, 4A, 9A,

7. Explain the lower of cost and net 4 8

8. Calculate and interpret inventory 5 9 5A, 10A, 5B,

9. Apply the inventory cost flow methods to 6 10 6A, 12A, 6B,

10. Indicate the effect of inventory errors on 7 11

11. Record the closing entries for 12, 13 11A, 11B

© John Wiley and Sons Australia Ltd, 2016 5.1

CHAPTER 5 – REPORTING AND ANALYSIS INVENTORY

2. (a) x = Purchase returns and allowances.

5. No. Selection of an inventory costing method is a management decision. However,

© John Wiley and Sons Australia Ltd, 2016 5.2

8. Nancy should know the following:

10. (a) Peta Ltd’s 2016 profit will be understated $5,000;

© John Wiley and Sons Australia Ltd, 2016 5.3

SOLUTIONS TO BRIEF EXERCISES

BRIEF EXERCISE 5.1

a) Perpetual system, specific identification

BRIEF EXERCISE 5.2

BRIEF EXERCISE 5.3

© John Wiley and Sons Australia Ltd, 2016 5.4

BRIEF EXERCISE 5.4

Olynda Garden Centre

Native trees $16,800 $14,280 $14,280

The lower of cost and net realisable value (LCNRV) is $44,800

BRIEF EXERCISE 5.5

Che Eyewear Ltd

Inventory turnover ratio: $129,201 $129,201

Days in inventory: 365

© John Wiley and Sons Australia Ltd, 2016 5.5

BRIEF EXERCISE 5.6

BRIEF EXERCISE 5.7

The understatement of ending inventory caused cost of sales to be overstated by $14,000

© John Wiley and Sons Australia Ltd, 2016 5.6

(1) 5 April Purchases 9,000

(2) 6 April Freight-in 450

(3) 7 April Equipment 13,000

(4) 8 April Accounts Payable 1,500

(5) 9 April Accounts Payable ($9,000 - $1,500) 7,500

(b) 4 May Accounts Payable ($9,000 - $1,500) 7,500

Beginning inventory 1 July 2015 $56,760

© John Wiley and Sons Australia Ltd, 2016 5.7

(a) $1,460 ($1,500 - $40)

© John Wiley and Sons Australia Ltd, 2016 5.8

Ending inventory – physical count $147,500

4. Add to inventory: Title remains with Hooton Ltd until purchaser

6. The goods should have been written-off under IAS 2 by application of

© John Wiley and Sons Australia Ltd, 2016 5.9

© John Wiley and Sons Australia Ltd, 2016 5.10

Beginning inventory (26 x $97) $2,522

Date Units Unit Cost Total Cost

1/5 26 $97 $2,522

Cost of goods available for sale $14,224

Date Units Unit Cost Total Cost

26/5 40 $105 $4,200

© John Wiley and Sons Australia Ltd, 2016 5.11