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CHAPTER 6
Inventories
ASSIGNMENT CLASSIFICATION TABLE
Brief
Exercises

Do It!

Exercises

A
Problems

B
Problems

1, 2, 3,
4, 5, 6

1

1

1, 2

1A

1B

Explain the accounting
for inventories and
apply the inventory
cost flow methods
...


Explain the financial
effects of the inventory
cost flow assumptions
...


Explain the lower-ofcost-or-market basis of
accounting for
inventories
...


Indicate the effects of
inventory errors on the
financial statements
...


Compute and interpret
the inventory turnover
ratio
...


Apply the inventory
cost flow methods to
perpetual inventory
records
...


Describe the two
methods of estimating
inventories
...


Describe the steps in
determining inventory
quantities
...


*Note: All asterisked Questions, Exercises, and Problems relate to material contained in the appendices to the
chapter
...


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6-1

ASSIGNMENT CHARACTERISTICS TABLE
Problem
Number

Description

Difficulty
Level

Time Allotted
(min
...


Moderate

15–20

2A

Determine cost of goods sold and ending inventory using
FIFO, LIFO, and average-cost with analysis
...


Simple

30–40

4A

Compute ending inventory, prepare income statements,
and answer questions using FIFO and LIFO
...


Moderate

30–40

6A

Compare specific identification, FIFO, and LIFO under
periodic method; use cost flow assumption to influence
earnings
...


Moderate

30–40

*8A

Calculate cost of goods sold and ending inventory for
FIFO, moving-average cost, and LIFO, under the perpetual
system; compare gross profit under each assumption
...


Moderate

40–50

*10A

Estimate inventory loss using gross profit method
...


Moderate

20–30

1B

Determine items and amounts to be recorded in inventory
...


Simple

30–40

3B

Determine cost of goods sold and ending inventory using
FIFO, LIFO, and average-cost with analysis
...


Moderate

30–40

5B

Calculate ending inventory, cost of goods sold, gross profit,
and gross profit rate under periodic method; compare
results
...


Moderate

20–30

6-2

Copyright © 2009 John Wiley & Sons, Inc
...
)

Compute ending inventory, prepare income statements,
and answer questions using FIFO and LIFO
...


Moderate

30–40

*9B

Determine ending inventory under a perpetual inventory
system
...


Moderate

30–40

*11B

Compute ending inventory using retail method
...


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6-3

WEYGANDT ACCOUNTING PRINCIPLES 9E
CHAPTER 6
INVENTORIES
Number

SO

BT

Difficulty

Time (min
...


Weygandt, Accounting Principles, 9/e, Solutions Manual

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INVENTORIES (Continued)
Number

SO

BT

Difficulty

Time (min
...


Weygandt, Accounting Principles, 9/e, Solutions Manual

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6-5

6-6

Copyright © 2009 John Wiley & Sons, Inc
...


3
...


Explain the accounting for
inventories and apply the
inventory cost flow methods
...


Compute and interpret the inventory
turnover ratio
...


Describe the two methods of
estimating inventories
...


6
...


*8
...


4
...


1
...
Analysis
All About You
Ethics Case

E6-16
E6-17
P6-8A
P6-8B

E6-3
P6-5A
P6-5B
P6-6A
P6-6B

E6-3
E6-4
P6-5A
P6-5B

Evaluation

Correlation Chart between Bloom’s Taxonomy, Study Objectives and End-of-Chapter Exercises and Problems

BLOOM’S TAXONOMY TABLE

Weygandt, Accounting Principles, 9/e, Solutions Manual

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ANSWERS TO QUESTIONS
1
...
Effective inventory management is frequently the key to successful business operations
...
It also seeks to avoid the cost of carrying inventories that are clearly in excess
of anticipated sales
...


Inventory items have two common characteristics: (1) they are owned by the company and (2) they
are in a form ready for sale in the ordinary course of business
...


Taking a physical inventory involves actually counting, weighing or measuring each kind of
inventory on hand
...
This is normally done when the store is closed
...


(a) (1)

(b)

The goods will be included in Reeves Company’s inventory if the terms of sale are FOB
destination
...

Reeves Company should include goods shipped to another company on consignment in its
inventory
...


5
...

The amount paid to negotiate the purchase is a buying cost that normally is not included in the
cost of inventory because of the difficulty of allocating these costs
...


6
...
FOB destination means that ownership of goods in
transit remains with the seller until the goods reach the buyer
...


Actual physical flow may be impractical because many items are indistinguishable from one
another
...


8
...
The major disadvantage is that management could manipulate
net income
...


No
...
However, once a method
has been chosen, it should be used consistently from one accounting period to another
...


(a) FIFO
...

(c) LIFO
...


Plato Company is using the FIFO method of inventory costing, and Cecil Company is using the
LIFO method
...
Thus, the inventory
on the balance sheet should be close to current costs
...

Plato Company will have the higher gross profit because cost of goods sold will include a higher
proportion of goods purchased at earlier (lower) costs
...


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6-7

Questions Chapter 6 (Continued)
12
...
All of its net
income is being paid out as dividends, yet some of the earnings must be reinvested in inventory
to maintain inventory levels
...
Because of this factor, net income under FIFO is sometimes referred to as
“phantom profits
...
Peter should know the following:
(a) A departure from the cost basis of accounting for inventories is justified when the value of
the goods is lower than its cost
...

(b) Market means current replacement cost, not selling price
...

14
...
$380
is the current replacement cost under the lower-of-cost-or-market basis of accounting for inventories
...
Valuation
at LCM is conservative
...
Ruthie Stores should report the toasters at $27 each for a total of $540
...
It is used because it is the lower of the inventory’s cost and current replacement cost
...
(a) Mintz Company’s 2009 net income will be understated $7,000; (b) 2010 net income will be
overstated $7,000; and (c) the combined net income for the two years will be correct
...
Willingham Company should disclose: (1) the major inventory classifications, (2) the basis of
accounting (cost or lower of cost or market), and (3) the costing method (FIFO, LIFO, or average)
...
An inventory turnover that is too high may indicate that the company is losing sales opportunities
because of inventory shortages
...

19
...

*20
...
The results under the FIFO method are the same but the results under the LIFO
method are different
...
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
...
In a periodic system, the average is a weighted average based on total goods available for sale for the
period
...

*22
...


6-8

Copyright © 2009 John Wiley & Sons, Inc
...
In the gross profit method, the average is the gross profit rate, which is gross profit divided by net
sales
...
The gross profit rate is applied to net sales
in using the gross profit method
...
The ratio is based on current year
data and is applied to the ending inventory at retail
...
The estimated cost of the ending inventory is $40,000:
Net sales
...

Estimated cost of goods sold
...

Less: Cost of goods sold
...


$300,000
260,000
$ 40,000

*25
...


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6-9

SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 6-1
(a) Ownership of the goods belongs to Smart
...

(b) The goods in transit should not be included in the inventory count
because ownership by Smart does not occur until the goods reach
the buyer
...
They should not be
included in Smart’s inventory
...
Thus, these
goods should not be included in the physical inventory
...

(b) The ending inventory under LIFO consists of 300 units at $6 + 60 units
at $7 for a total allocation of $2,220 or ($1,800 + $420)
...


Weygandt, Accounting Principles, 9/e, Solutions Manual

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BRIEF EXERCISE 6-4
Average unit cost is $6
...
89 (rounded)
...
89)
...

FIFO would result in the highest ending inventory
...

Average-cost would result in the most stable income over a number of
years because it averages out any big changes in the cost of inventory
...
It is referred to as “phantom profit”
because FIFO matches current selling prices with old inventory costs
...
Therefore, profit under LIFO is more representative of what
the company can expect to earn in future periods
...


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6-11

BRIEF EXERCISE 6-7
Inventory Categories
Cameras
Camcorders
DVD players
Total valuation

Cost
$12,000
9,500
14,000

Market
$12,100
9,700
12,800

LCM
$12,000
9,500
12,800
$34,300

BRIEF EXERCISE 6-8
The understatement of ending inventory caused cost of goods sold to be
overstated $10,000 and net income to be understated $10,000
...

Total assets in the balance sheet will be understated by the amount that
ending inventory is understated, $10,000
...
4
( $60,000 + $40,000 ) ÷ 2 $50,000

365
= 67
...
4

*BRIEF EXERCISE 6-10
(1) FIFO Method

Date
May 7
June 1
July 28

Purchases
(50 @ $10) $500

(30 @ $10)
(30 @ $13)

$300

(20 @ $10)
(20 @ $13)

} $460

$390

Aug
...


Balance
(50 @ $10)
$500
(20 @ $10)
$200
(20 @ $10)
} $590
(30 @ $13)
(10 @ $13)

Weygandt, Accounting Principles, 9/e, Solutions Manual

$130

(For Instructor Use Only)

*BRIEF EXERCISE 6-10 (Continued)
(2) LIFO Method

Date
May 7
June 1
July 28

Purchases
(50 @ $10) $500

Product E2-D2
Cost of
Goods Sold
(30 @ $10)
(30 @ $13)
(10 @ $10)

(30 @ $13)

$300

} $490

$390

Aug
...
27

Purchases
(50 @ $10) $500

Product E2-D2
Cost of
Goods Sold
(30 @ $10)

(30 @ $13)

$300

$390
(40 @ $11
...
80)* $590
(10 @ $11
...

Less: Estimated gross profit (35% X $330,000)
...


$330,000
115,500
$214,500

(2) Cost of goods available for sale
...

Estimated cost of ending inventory
...


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6-13

SOLUTIONS FOR DO IT! REVIEW EXERCISES
DO IT! 6-1
Inventory per physical count
...

Inventory sold, in transit at year-end
...

Correct December 31 inventory
...
455 per unit
9,200 X $6
...
The total inventory value is the sum of
these figures, $476,000
...


2011
No effect
$31,000 understated
No effect

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DO IT! 6-4
2009
Inventory turnover ratio
Days in inventory

$1,200,000
= 6
($180,000 + $220,000)/2
365 ÷ 6 = 60
...
5

365 ÷ 9
...
4 days

The company experienced a very significant decline in its ending inventory
as a result of the just-in-time inventory
...
It is possible that this increase is
the result of a more focused inventory policy
...


Copyright © 2009 John Wiley & Sons, Inc
...

1
...

2
...

3
...

4
...

5
...
The goods,
therefore, cannot be included in the inventory
...


$297,000
0
0
22,000
35,000
(44,000)
$310,000

EXERCISE 6-2
Ending inventory—as reported
...
Subtract from inventory: The goods belong to
Superior Corporation
...

2
...
3)
...
Subtract from inventory: Office supplies should
be carried in a separate account
...

4
...
1)
...
Add to inventory: District Sales ordered goods
with a cost of $8,000
...
Strawser’s
decision to ship extra “unordered” goods does not
constitute a sale
...
The manager
acted unethically in an attempt to improve Strawser’s
reported income by over-shipping
...


Weygandt, Accounting Principles, 9/e, Solutions Manual

$740,000
(250,000)
0
(17,000)
30,000

52,000

(For Instructor Use Only)

EXERCISE 6-2 (Continued)
6
...
Obsolete parts
should be adjusted from cost to zero if they have no
other use
...


(40,000)
$515,000

EXERCISE 6-3
(a)

FIFO Cost of Goods Sold
(#1012) $100 + (#1045) $90 = $190

(b)

It could choose to sell specific units purchased at specific costs if it
wished to impact earnings selectively
...
If it wished to maximize
earnings it would choose to sell the units purchased at lower costs—in
which case the cost of goods sold would be $170
...

(The answer may vary depending on the method the student chooses
...

$ 2,522
Purchases
Sept
...
$4,590
Sept
...
2,080
Sept
...
5,250 11,920
Cost of goods available for sale
...

2,100
Cost of goods sold
...


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6-17

EXERCISE 6-4 (Continued)

Date
9/1
9/12
9/19
9/26

Units
26
45
20
30
121

Proof
Unit Cost
$ 97
102
104
105

Total Cost
$ 2,522
4,590
2,080
3,150
$12,342

LIFO
Cost of goods available for sale
...

1,940
Cost of goods sold
...

EXERCISE 6-5
FIFO
Beginning inventory (30 X $8)
...

May 24 (35 X $12)
...

Less: Ending inventory (25 X $12)
...

6-18

Copyright © 2009 John Wiley & Sons, Inc
...

Less: Ending inventory (25 X $8)
...


Date
5/24
5/15
5/1

Units
35
25
5

Proof
Unit Cost
$12
11
8

$935
200
$735

Total Cost
$420
275
40
$735

EXERCISE 6-6
(a)

FIFO
Beginning inventory (200 X $5)
...

June 23 (500 X $7)
...

Less: Ending inventory (120 X $7)
...

LIFO
Cost of goods available for sale
...

Cost of goods sold
...


Weygandt, Accounting Principles, 9/e, Solutions Manual

$1,000
$1,800
3,500

5,300
6,300
840
$5,460
$6,300
600
$5,700

(For Instructor Use Only)

6-19

EXERCISE 6-6 (Continued)
(b) The FIFO method will produce the higher ending inventory because
costs have been rising
...
For Yount Company, the ending inventory under FIFO is
$840 or (120 X $7) compared to $600 or (120 X $5) under LIFO
...
Under LIFO the most recent costs are charged to cost of
goods sold and the earliest costs are included in the ending inventory
...

EXERCISE 6-7
(a)

(1)

(2)

(3)

FIFO
Beginning inventory
...

Cost of goods available for sale
...

Cost of goods sold
...

Purchases
...

Less: ending inventory (80 X $100)
...


$10,000
26,000
36,000
8,000
$28,000

AVERAGE
Beginning inventory
...

Cost of goods available for sale
...

Cost of goods sold
...

(c) The use of FIFO would result in inventories approximating current cost in
the balance sheet, since the more recent units are assumed to be on hand
...


6-20

Copyright © 2009 John Wiley & Sons, Inc
...
30)
Cost of goods sold (880 X $6
...
30

$ 756
5,544

(b) Ending inventory is lower than FIFO ($840) and higher than LIFO ($600)
...

(c) The average-cost method uses a weighted-average unit cost, not a simple
average of unit costs
...


Weygandt, Accounting Principles, 9/e, Solutions Manual

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6-21

EXERCISE 6-11

Beginning inventory
...

Cost of goods available for sale
...

Cost of goods sold
...


b

2010
$ 20,000
150,000
170,000
a
27,000
$143,000

2011
$ 27,000
175,000
202,000
b
41,000
$161,000

$35,000 + $6,000 = $41,000
...

Cost of goods sold
Beginning inventory
...

Cost of goods available for sale
...

Cost of goods sold
...


2010
$210,000

2011
$250,000

32,000
173,000
205,000
39,000
166,000
$ 44,000

39,000
202,000
241,000
52,000
189,000
$ 61,000

(b) The cumulative effect on total gross profit for the two years is zero as
shown below:
Incorrect gross profits:
Correct gross profits:
Difference

$49,000 + $56,000 = $105,000
$44,000 + $61,000 = 105,000
$
0

(c) Dear Mr
...
President:
Because your ending inventory of December 31, 2010 was overstated
by $5,000, your net income for 2010 was overstated by $5,000
...

In a periodic system, the cost of goods sold is calculated by deducting
the cost of ending inventory from the total cost of goods you have
available for sale in the period
...
Consequently, 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
...

6-22

Copyright © 2009 John Wiley & Sons, Inc
...
The inventory reported in the balance sheet is overstated; therefore, total assets
are overstated
...
The balance sheet at the end
of 2011 is correct because the overstatement of the capital account at
the end of 2010 is offset by the understatement of the 2011 net income
and the inventory at the end of 2011 is correct
...
If you have
any questions, please contact me at your convenience
...
5

$1,120,000
$350,000

= 4
...
1 days

$1,200,000 – $900,000
=
...
2

2011
$1,300,000
($400,000 + $480,000) ÷ 2
$1,300,000
$440,000

= 3
...
95

= 114
...
30
$1,600,000

= 2
...
7 days

$1,900,000 – $1,300,000
=
...
Both of these changes would be considered negative since it’s
better to have a higher inventory turnover with a correspondingly lower days
in inventory
...


Copyright © 2009 John Wiley & Sons, Inc
...
80

$292,000
($71,000 + $69,000)/2
= 4
...
80 = 96 days

365/4
...


*EXERCISE 6-15
(1)
Date
Purchases
Jan
...
1
8
10 (6 @ $660) $3,960
15

6-24

(2 @ $600) $1,200
(1 @ $600)
(3 @ $660) $2,580

(2)
Date

FIFO
Cost of Goods Sold

Copyright © 2009 John Wiley & Sons, Inc
...
1
8
(2 @ $600)
$1,200
10 (6 @ $660) $3,960
15
(4 @ $651
...
43)* 4,560
(3 @ $651
...
43 (rounded)
*EXERCISE 6-16
(a)

The cost of goods available for sale is:
June 1 Inventory
200 @ $5
June 12 Purchase
300 @ $6
June 23 Purchase
500 @ $7
Total cost of goods available for sale

Date
June 1
June 12

FIFO
Cost of Goods Sold

Purchases
(300 @ $6) $1,800

June 15
June 23

Balance
(200 @ $5)
$1,000
(200 @ $5)
$2,800
(300 @ $6)

}

(200 @ $5)
(200 @ $6)

$1,000
1,200

(500 @ $7) $3,500

June 27

$1,000
1,800
3,500
$6,300

(100 @ $6)
(380 @ $7)

600
2,660
$5,460

(100 @ $6)
(100 @ $6)
(500 @ $7)
(120 @ $7)

$ 600

}

$4,100
$ 840

Ending inventory: $840
...


Copyright © 2009 John Wiley & Sons, Inc
...
Cost of goods sold: $6,300 – $640 = $5,660
...
60)

(500 @ $7)

$3,500
(480 @ $6
...
60)
$2,240 (100 @ $5
...
767)
$3,248 (120 @ $6
...
Cost of goods sold: $6,300 – $812 = $5,488
...
LIFO and
average give different ending inventory and cost of goods sold values
under the periodic and perpetual inventory systems, due to the Last-in,
First-out assumption being applied to a different pool of costs
...
However, the
moving-average cost method uses a weighted-average unit cost that
changes each time a purchase is made rather than a simple average
...


Weygandt, Accounting Principles, 9/e, Solutions Manual

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*EXERCISE 6-17
(a)

Date
9/1
9/5
9/12

FIFO
Cost of
Goods Sold

Purchases

(12 @ $ 97) $1,164
(45 @ $102)

$4,590

9/16

(14 @ $ 97)
(36 @ $102) $5,030

9/19

(20 @ $104)

$2,080

9/26

(50 @ $105)

$5,250

9/29

Date
9/1
9/5
9/12

( 9 @ $102)
(20 @ $104)
(30 @ $105) $6,148
LIFO
Cost of
Goods Sold

Purchases

(12 @ $ 97) $1,164
(45 @ $102)

$4,590

9/16
9/19
9/26

(45 @ $102)
( 5 @ $ 97) $5,075
(20 @ $104)
(50 @ $105)

9/29

Copyright © 2009 John Wiley & Sons, Inc
...
81)

$5,041*

(59 @ $104
...
81)a
( 9 @ $100
...
00)b
(79 @ $104
...
27)

$2,522
$1,358
$5,948
$ 907
$2,987
$8,237
$2,085

*Rounded
a
$5,948 ÷ 59 = $100
...
00
c
$8,237 ÷ 79 = $104
...

LIFO yields different ending inventory values when using the periodic
versus perpetual inventory system
...

Cost of goods sold
Inventory, November 1
...

Cost of goods available for sale
...

Cost of goods sold
...


$800,000
$100,000
500,000
600,000
120,000
480,000
$320,000

Gross profit rate $320,000/$800,000 = 40%

6-28

Copyright © 2009 John Wiley & Sons, Inc
...
$1,000,000
Less: Estimated gross profit (40% X $1,000,000)
...
$ 600,000
Beginning inventory
...

Cost of goods available for sale
...

Estimated cost of ending inventory
...

Less: Estimated gross profit (40% X $50,000)
...


$50,000
20,000
$30,000

Beginning inventory
...

Cost of goods available for sale
...

Estimated cost of merchandise lost
...

Less: Estimated gross profit (30% X $50,000)
...


$50,000
15,000
$35,000

Beginning inventory
...

Cost of goods available for sale
...

Estimated cost of merchandise lost
...


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6-29

*EXERCISE 6-20
Women’s
Department
Cost
$ 32,000
148,000
$180,000

Beginning inventory
Goods purchased
Goods available for sale
Net sales
Ending inventory at retail

Cost-to-retail ratio
Estimated cost of ending
inventory

6-30

Retail
$ 46,000
179,000
225,000
178,000
$ 47,000

$180,000
= 80%
$225,000

$47,000 X 80% = $37,600

Copyright © 2009 John Wiley & Sons, Inc
...
Title to the goods
transfers to the customer February 26
...


(b)

The amount should not be included in inventory as they were shipped
FOB destination and not received until March 2
...
No entry is recorded
...


(d)

Include $400 in inventory
...


(f)

The sale will be recorded on March 2
...


(g)

The damaged goods should not be included in inventory
...


Copyright © 2009 John Wiley & Sons, Inc
...


Weygandt, Accounting Principles, 9/e, Solutions Manual

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PROBLEM 6-2A (Continued)
LIFO
(1)

Ending Inventory
Unit
Date
Units
Cost
March 1 1,500
$7
5 2,000
8
3,500

Total
Cost
$10,500
16,000
$26,500

(2)
Cost of Goods Sold
Cost of goods
available for sale
$146,000
Less: Ending
inventory
26,500
Cost of goods sold
$119,500

Proof of Cost of Goods Sold
Unit
Total
Date
Units
Cost
Cost
March 26
2,000
$11
$22,000
21
4,000
10
40,000
13
5,500
9
49,500
8
8,000
5
1,000
12,500
$119,500
AVERAGE-COST
(1)
Ending Inventory
(2)
Cost of Goods Sold
$146,000 ÷ 16,000 = $9
...
125
$31,938*
Cost of goods sold $114,062
*rounded to nearest dollar
(c) (1) As shown in (b) above, FIFO produces the highest inventory amount,
$37,000
...


Copyright © 2009 John Wiley & Sons, Inc
...


Weygandt, Accounting Principles, 9/e, Solutions Manual

(For Instructor Use Only)

PROBLEM 6-3A (Continued)
(b)

LIFO
(1)
Date
1/1
2/20

Ending Inventory
Unit
Units
Cost
400
$8
100
9
500

Total
Cost
$3,200
900
$4,100

(2)
Cost of Goods Sold
Cost of goods
available for sale
$19,300
Less: Ending
inventory
4,100
Cost of goods sold $15,200

Proof of Cost of Goods Sold
Unit
Total
Date
Units
Cost
Cost
12/8
200
$12
$ 2,400
8/12
300
11
3,300
5/5
500
10
5,000
2/20
500
9
4,500
1,500
$15,200
AVERAGE-COST
(1)
Ending Inventory
(2)
Cost of Goods Sold
$19,300 ÷ 2,000 = $9
...
65
$4,825
Cost of goods sold $14,475
Proof of Cost of Goods Sold
1,500 units X 9
...

(2) FIFO results in the lowest cost of goods sold, $13,600
...


Weygandt, Accounting Principles, 9/e, Solutions Manual

(For Instructor Use Only)

6-35

PROBLEM 6-4A

(a)

MORALES CO
...

Cost of goods sold
Beginning inventory
...

Cost of goods available for sale
...

Cost of goods sold
...

Operating expenses
...

Income taxes (34%)
...

a

30,000 X $2
...


b

FIFO
$865,000

LIFO
$865,000

32,000
595,000
627,000
a
84,000
543,000
322,000
147,000
175,000
59,500
$115,500

32,000
595,000
627,000
b
68,000
559,000
306,000
147,000
159,000
54,060
$104,940

$32,000 + (15,000 X $2
...


(b) (1) The FIFO method produces the most meaningful inventory amount
for the balance sheet because the units are costed at the most
recent purchase prices
...

(3) The FIFO method is most likely to approximate actual physical flow
because the oldest goods are usually sold first to minimize spoilage
and obsolescence
...

(5) Gross profit under the average cost method will be: (a) lower than
FIFO and (b) higher than LIFO
...


Weygandt, Accounting Principles, 9/e, Solutions Manual

(For Instructor Use Only)

PROBLEM 6-5A

Cost of Goods Available for Sale
Date
Explanation
October 1 Beginning Inventory
9 Purchase
17 Purchase
25 Purchase
Total
Ending Inventory in Units:
Units available for sale
Sales (100 + 60 + 110)
Units remaining in ending inventory

Units
60
120
70
80
330
330
270
60

Unit Cost
$25
26
27
28

Total Cost
$1,500
3,120
1,890
2,240
$8,750

Sales Revenue
Unit
Date
Units Price Total Sales
October 11
100
$35
$ 3,500
22
60
40
2,400
29
110
40
4,400
270
$10,300

(a)
(1) LIFO
(i) Ending Inventory
October 1 60 @ $25 = $1,500

(iii) Gross Profit
Sales revenue
Cost of goods sold
Gross profit

Copyright © 2009 John Wiley & Sons, Inc
...
6%
Net sales
$10,300

Weygandt, Accounting Principles, 9/e, Solutions Manual

(For Instructor Use Only)

6-37

PROBLEM 6-5A (Continued)
(2) FIFO
(i) Ending Inventory
October 25 60 @ $28 = $1,680

(iii) Gross Profit
Sales revenue
Cost of goods sold
Gross profit

(ii) Cost of Goods Sold
Cost of goods available
for sale
Less: Ending inventory
Cost of goods sold

$10,300
7,070
$ 3,230

$ 8,750
1,680
$ 7,070

(iv) Gross Profit Rate
Gross profit
$ 3,230
= 31
...
515 = $1,591*

(ii) Cost of Goods Sold
Cost of goods available
for sale
Less: Ending inventory
Cost of goods sold

*rounded to nearest dollar
(iii) Gross Profit
Sales revenue
Cost of goods sold
Gross profit

= $26
...
5%
Net sales
$10,300

(b) LIFO produces the lowest ending inventory value, gross profit, and
gross profit rate because its cost of goods sold is higher than FIFO or
average-cost
...


Weygandt, Accounting Principles, 9/e, Solutions Manual

(For Instructor Use Only)

PROBLEM 6-6A

(a) (1) To maximize gross profit, Bernelli Diamonds should sell the diamonds
with the lowest cost
...

(2) To minimize gross profit, Bernelli Diamonds should sell the diamonds
with the highest cost
...

(b) FIFO
Cost of goods available for sale
March 1 Beginning inventory
3 Purchase
10 Purchase
Goods available for sale
Units sold
Ending inventory

Copyright © 2009 John Wiley & Sons, Inc
...

(c) LIFO
Cost of goods available for sale
(from part b)
– Ending inventory
120 @ $300
Cost of goods sold

$246,250
36,000
$210,250

Gross profit: $368,000 – $210,250 = $157,750
...

Since the diamonds are marked and coded, the company could use specific
identification
...
Employing a cost
flow assumption, such as LIFO or FIFO, would reduce record-keeping
costs
...


6-40

Copyright © 2009 John Wiley & Sons, Inc
...

Condensed Income Statement
For the Year Ended December 31, 2010
FIFO
Sales
...

Cost of goods purchased
...

Ending inventory
...

Gross profit
...

Income before income taxes
...

Net income
...
50) + ( 5,000 @ $4
...

(10,000 @ $3
...
00) = $115,000
...

(2) The LIFO method produces the most meaningful net income because
the costs of the most recent purchases are matched against sales
...

(4) There will be $5,180 additional cash available under LIFO because
income taxes are $30,940 under LIFO and $36,120 under FIFO
...


Weygandt, Accounting Principles, 9/e, Solutions Manual

(For Instructor Use Only)

6-41

PROBLEM 6-7A (Continued)
(5) The illusionary gross profit is $18,500 or ($259,000 – $240,500)
...
has recovered the current replacement cost of the
units ($424,500), whereas under FIFO, it has only recovered the
earlier costs ($406,000)
...

Answer in business letter form:
Dear Utley Inc
...
This method is most likely to approximate
actual physical flow because the oldest goods are usually sold
first to minimize spoilage and obsolescence
...

There will be $5,180 additional cash available under LIFO because
income taxes are $30,940 under LIFO and $36,120 under FIFO
...
Under LIFO, you have recovered the current replacement
cost of the units ($424,500) whereas under FIFO you have only
recovered the earlier costs ($406,000)
...

Sincerely,

6-42

Copyright © 2009 John Wiley & Sons, Inc
...
(ii) Ending inventory = $1,870
...


Weygandt, Accounting Principles, 9/e, Solutions Manual

(For Instructor Use Only)

6-43

*PROBLEM 6-8A (Continued)
(2) FIFO
Date

Purchases

Cost of Goods Sold

January 1
January
January
January
January

2
6
9
9

(100 @ $21) $2,100
(150 @ $17)
(–10 @ $17)

$2,550
($ 170)

( 75 @ $24) $1,800

January 10
January 10

(–15 @ $24) ($ 360)

January 23

(100 @ $28) $2,800

( 10 @ $17)
( 40 @ $21)

January 30

( 60 @ $21)
( 50 @ $24)

} $1,010
} $2,460

Balance
(150 @ $17)
(150 @ $17)
(100 @ $21)
(100 @ $21)
( 10 @ $17)
(100 @ $21)
( 75 @ $24)
( 10 @ $17)
(100 @ $21)
( 60 @ $24)
( 60 @ $21)
( 60 @ $24)
( 60 @ $21)
( 60 @ $24)
(100 @ $28)
( 10 @ $24)
(100 @ $28)

$2,550

}

$4,650
$2,100

}
}

$4,070

$3,710

}

$2,700

}

$5,500

}

$3,040

$5,850

(i) Cost of goods sold = $5,850
...
(iii) Gross
profit = $13,350 – $5,850 = $7,500
...
60)a
(150 @ $18
...
60)
(–10 @ $18
...
60)
(185 @ $20
...
506) c
( 50 @ $20
...
506)
(220 @ $23
...
914) $2,631 (110 @ $23
...
60
$3,846 ÷ 185 = $20
...
506
$5,261 ÷ 220 = $23
...
(ii) Ending inventory = $2,630
...

6-44

Copyright © 2009 John Wiley & Sons, Inc
...
FIFO gives the
lowest cost of goods sold and highest gross profit
...

On the balance sheet, FIFO gives the highest ending inventory (representing the most current costs); LIFO gives the lowest ending inventory
(representing the oldest costs); and average-cost results in an ending
inventory falling between the other two
...


Weygandt, Accounting Principles, 9/e, Solutions Manual

(For Instructor Use Only)

6-45

*PROBLEM 6-9A
(a) (1)

FIFO
Date
May 1
4
8

Cost of
Goods Sold

Purchases
(7 @ $150)

$1,050
(4 @ $150)

(8 @ $170)

(3 @ $150)
(2 @ $170)
(6 @ $185)

$600

$1,360

12
15

Balance

}

$790

$1,110

20

(3 @ $170)

$510

25

(3 @ $170)
(1 @ $185)

} $695

(2)

(7 @ $150)
(3 @ $150)
(3 @ $150)
(8 @ $170)

$1,050
$ 450

} $1,810

(6 @ $170)
(6 @ $170)
(6 @ $185)
(3 @ $170)
(6 @ $185)

$1,020

} $2,130
} $1,620

(5 @ $185)

$ 925

MOVING-AVERAGE COST
Date
May 1
4
8
12
15
20
25

Purchases
(7 @ $150)

Cost of
Goods Sold

Balance

$1,050
(4 @ $150)
(5 @ $164
...
75)
(4 @ $174
...
55)*
( 6 @ $164
...
75)**
( 9 @ $174
...
75)

$1,050
$ 450
$1,810
$ 987
$2,097
$1,573
$ 874

*Average-cost = $1,810 ÷ 11 (rounded)
**$2,097 ÷ 12

6-46

Copyright © 2009 John Wiley & Sons, Inc
...

(2) The lowest ending inventory is $790 under the LIFO method
...


Weygandt, Accounting Principles, 9/e, Solutions Manual

(For Instructor Use Only)

6-47

*PROBLEM 6-10A

(a)

February
$300,000

Net sales
...

$ 4,500
Net purchases
...

2,900
Cost of goods purchased
...

205,200
Ending inventory
...

192,000
Gross profit
...

Less: Estimated gross profit
(36% X $250,000)
...


$250,000

Beginning inventory
...

Add: Freight-in
...

Cost of goods available for sale
...

Estimated total cost of ending
inventory
...

Estimated inventory lost in fire
(70% X $48,200)
...


90,000
$160,000
$191,000
4,000

Weygandt, Accounting Principles, 9/e, Solutions Manual

195,000
208,200
160,000
48,200
14,460
$ 33,740

(For Instructor Use Only)

*PROBLEM 6-11A

(a)

Sporting
Goods
Cost

Beginning inventory
Purchases
Purchase returns
Purchase discounts
Freight-in
Goods available for sale
Net sales
Ending inventory at retail

Jewelry
and Cosmetics

Retail

$ 47,360 $ 74,000
675,000
1,066,000
(26,000)
(40,000)
(12,360)
9,000
$693,000
1,100,000
(1,000,000)
$ 100,000

Cost

Retail

$ 39,440 $ 62,000
741,000
1,158,000
(12,000)
(20,000)
(2,440)
14,000
$780,000
1,200,000
(1,160,000)
$ 40,000

Cost-to-retail ratio:
Sporting Goods—$693,000 ÷ $1,100,000 = 63%
...

Estimated ending inventory at cost:
$100,000 X 63% = $63,000—Sporting Goods
...

(b) Sporting Goods—$95,000 X 60% = $57,000
...


Copyright © 2009 John Wiley & Sons, Inc
...
The goods (cost, $800) should
be excluded from Elms’ February 28 inventory
...
Include
inventory of $480
...


(d)

Exclude the items from Elm’s inventory
...


(e)

Title of the goods does not transfer to Elm’s until March 2
...


(f)

Title to the goods does not transfer to the customer until March 2
...


6-50

Copyright © 2009 John Wiley & Sons, Inc
...
1
3
9
19
25

COST OF GOODS AVAILABLE FOR SALE
Explanation
Units
Unit Cost
Beginning Inventory
2,000
$7
Purchase
3,000
8
Purchase
3,500
9
Purchase
3,000
10
Purchase
3,500
11
Total
15,000

(b)

Total Cost
$ 14,000
24,000
31,500
30,000
38,500
$138,000

FIFO
(1)

Ending Inventory
Unit
Date
Units
Cost
Oct
...
1
3
9
19

Proof of Cost of Goods Sold
Units
Unit Cost
Total Cost
2,000
$7
$14,000
3,500
8
24,000
3,500
9
31,500
10
29,000
2,900
11,400
$98,500
LIFO

(1)

Ending Inventory
Unit
Date
Units
Cost
Oct
...


Total
Cost
$14,000
12,800
$26,800

(2)
Cost of Goods Sold
Cost of goods
available for sale
$138,000
Less: Ending
inventory
26,800
Cost of goods sold $111,200

Weygandt, Accounting Principles, 9/e, Solutions Manual

(For Instructor Use Only)

6-51

PROBLEM 6-2B (Continued)
Proof of Cost of Goods Sold
Unit
Total
Date
Units
Cost
Cost
Oct
...
20
for sale
$138,000
Units
Unit Cost Total Cost Less: Ending inventory
33,120
3,600
$9
...

(2) LIFO results in the highest cost of goods sold, $111,200
...


Weygandt, Accounting Principles, 9/e, Solutions Manual

(For Instructor Use Only)

PROBLEM 6-3B

(a)
Date
1/1
3/15
7/20
9/4
12/2

COST OF GOODS AVAILABLE FOR SALE
Explanation
Units
Unit Cost
Beginning Inventory
150
$20
Purchase
400
23
Purchase
250
24
Purchase
350
26
Purchase
100
29
Total
1,250

(b)

Total Cost
$ 3,000
9,200
6,000
9,100
2,900
$30,200

FIFO
(1)
Date
12/2
9/4

Ending Inventory
Unit
Units
Cost
100
$29
150
26
250

Total
Cost
$2,900
3,900
$6,800

(2)
Cost of Goods Sold
Cost of goods
available for sale
$30,200
Less: Ending
inventory
6,800
Cost of goods sold $23,400

Proof of Cost of Goods Sold
Unit
Total
Date
Units
Cost
Cost
1/1
150
$20
$ 3,000
3/15
400
23
9,200
7/20
250
24
6,000
9/4
200
26
5,200
1,000
$23,400
LIFO
(1)
Date
1/1
3/15

Ending Inventory
Unit
Units
Cost
150
$20
100
23
250

Copyright © 2009 John Wiley & Sons, Inc
...
16
Cost of goods available
for sale
$30,200
Units
Unit Cost
6,040
Total Cost Less: Ending inventory
250
$24
...
16 = $24,160
(c) (1) FIFO results in the highest inventory amount, $6,800, as shown in
(b) above
...


6-54

Copyright © 2009 John Wiley & Sons, Inc
...

Condensed Income Statements
For the Year Ended December 31, 2010
FIFO
Sales
...

Cost of goods purchased
...

Ending inventory
...

Gross profit
...

Income before income taxes
...

Net income
...
70 = $48,600
...
20) = $38,000
...

(2) The LIFO method produces the most meaningful net income because
the cost of the most recent purchases are matched against sales
...

(4) There will be $4,240 additional cash available under LIFO because
income taxes are $68,400 under LIFO and $72,640 under FIFO
...


Copyright © 2009 John Wiley & Sons, Inc
...


(ii)
Cost of Goods Sold
Cost of goods available
for sale
Less: Ending inventory
Cost of goods sold

$11,110
3,800
$ 7,310

(iv) Gross Profit Rate
Gross profit
$ 4,215
= 36
...
3%
Net sales
$11,525

(3) Average-Cost
Weighted-average cost per unit:

Cost of goods available for sale
Units available for sale
$11,110
= $44
...
44

(iii) Gross Profit
Sales revenue
Cost of goods sold
Gross profit

3,999
...
00
7,110
...
60

(ii) Cost of Goods Sold
Cost of goods available
for sale
Less: Ending inventory
Cost of goods sold

$11,110
...
60
$ 7,110
...
60
= 38
...
00

(b) In this period of rising prices, LIFO gives the highest cost of goods
sold and the lowest gross profit
...


Copyright © 2009 John Wiley & Sons, Inc
...

Income Statement (partial)
For the Year Ended December 31, 2010
a

Sales revenue
Beginning inventory
Purchasesb
Cost of goods available
for sale
Ending inventoryc
Cost of goods sold
Gross profit

Specific Identification
$8,560
1,200
6,505
7,705
2,735
4,970
$3,590

FIFO
$8,560
1,200
6,505

LIFO
$8,560
1,200
6,505

7,705
2,936
4,769
$3,791

7,705
2,370
5,335
$3,225

(a)

(2,200 @ $1
...
25)
(2,500 @ $
...
72) + (2,500 @ $
...
60
850 @ $
...
72
1,400 @ $
...
00
552
...
00
1,120
...
50

2,500 @ $
...
72
3,800 liters

$2,000
936
$2,936

2,000 @ $
...
65
3,800 liters

$1,200
1,170
$2,370

FIFO ending inventory consists of:
March 20 purchase
March 10 purchase

LIFO ending inventory consists of:
Beginning inventory
March 3 purchase

(b) Companies can choose a cost flow method that produces the highest
possible cost of goods sold and lowest gross profit to justify price
increases
...

6-58

Copyright © 2009 John Wiley & Sons, Inc
...

Condensed Income Statement
For the Year Ended December 31, 2010
Sales
...

Cost of goods purchased
...

Ending inventory
...

Gross profit
...

Income before income taxes
...

Net income
...
60) = $168,000
...
50) + (20,000 @ $5
...


b

(b) Answers to questions:
(1) The FIFO method produces the most meaningful inventory amount
for the balance sheet because the units are costed at the most
recent purchase prices
...

(3) The FIFO method is most likely to approximate actual physical flow
because the oldest goods are usually sold first to minimize spoilage
and obsolescence
...

(5) The illusionary gross profit is $21,000 or ($291,000 – $270,000)
...
has recovered the current replacement cost
of the units ($430,000), whereas under FIFO, it has only recovered
the earlier costs ($409,000)
...

Copyright © 2009 John Wiley & Sons, Inc
...
(ii) Ending inventory = $2,520
...


6-60

Copyright © 2009 John Wiley & Sons, Inc
...
(ii) Ending inventory = $2,920
...

(3) Moving-Average Cost
Date
January 1
January 5
January 8
January 10
January 15
January 16
January 20
January 25

Purchases
(150 @ $18)

Cost of Goods Sold

$2,700
(110 @ $16
...
80)

$1,848
($ 168)

( 80 @ $17
...
80)a
(140 @ $16
...
80)
(205 @ $17
...
60)c
(120 @ $17
...
48)d

$1,500
$4,200
$2,352
$2,520
$3,620
$3,520
$2,112
$2,772

$3,088
*rounded
a
$4,200 ÷ 250 = $16
...
659

c

$3,520 ÷ 200 = $17
...
48

d

(i) Cost of goods sold = $3,088
...
(iii) Gross
profit = $5,360 – $3,088 = $2,272
...


Weygandt, Accounting Principles, 9/e, Solutions Manual

(For Instructor Use Only)

6-61

*PROBLEM 6-8B (Continued)
(b)
Gross profit:
Sales
Cost of goods sold
Gross profit
Ending inventory

LIFO
$5,360
3,340
$2,020
$2,520

FIFO
$5,360
2,940
$2,420
$2,920

Moving-Average Cost
$5,360
3,088
$2,272
$2,772

In a period of rising costs, the LIFO cost flow assumption results in the
highest cost of goods sold and lowest gross profit
...
The moving-average cost flow
assumption results in amounts between the other two
...


6-62

Copyright © 2009 John Wiley & Sons, Inc
...

Copyright © 2009 John Wiley & Sons, Inc
...

Cost of goods sold
Beginning inventory
...
$377,000
Less: Purchase returns and
allowances
...

(8,500)
Add: Freight-in
...

Cost of goods available for sale
...

Cost of goods sold
...

Gross profit rate =

$240,000
$600,000

November
$600,000
$ 32,000

364,000
396,000
36,000
360,000
$240,000

= 40%

(b) Net sales
...

Estimated cost of goods sold
...

Purchases
...
$14,900
Purchase discounts
...

Freight-in
...

Cost of goods available for sale
...

Estimated inventory lost in fire
...


$700,000
280,000
$420,000
$ 36,000
$424,000
24,400
399,600
9,900

Weygandt, Accounting Principles, 9/e, Solutions Manual

409,500
445,500
420,000
$ 25,500

(For Instructor Use Only)

*PROBLEM 6-11B
(a)

Hardcovers
Cost
Beginning inventory
Purchases
Freight-in
Purchase discounts
Goods available for sale
Net sales
Ending inventory at retail

$ 420,000
2,135,000
24,000
(44,000)
$2,535,000

Retail

Paperbacks
Cost

Retail

$ 700,000 $ 280,000 $ 360,000
3,200,000 1,155,000
1,540,000
12,000
(22,000)
3,900,000 $1,425,000
1,900,000
3,100,000
1,570,000
$ 800,000
$ 330,000

Cost-to-retail ratio:
Hardcovers—$2,535,000 ÷ $3,900,000 = 65%
...

Estimated ending inventory at cost:
$800,000 X 65% = $520,000—Hardcovers
...

(b) Hardcovers—$790,000 X 65% = $513,500
...


Copyright © 2009 John Wiley & Sons, Inc
...
9% increase
2007 inventory as a percent of current assets:
$2,290 ÷ $10,151 = 22
...
Cost is determined
using the average, first-in, first-out (FIFO) or last-in, first-out (LIFO)
methods
...

(d)

PepsiCo (in millions)
Cost of Goods Sold

2007
$18,038

2006
$15,762

2005
$14,176

2007 cost of goods sold as a percent of sales:
$18,038 ÷ $39,474 = 45
...


Weygandt, Accounting Principles, 9/e, Solutions Manual

(For Instructor Use Only)

BYP 6-2

COMPARATIVE ANALYSIS PROBLEM

(a) (1) Inventory turnover:
PepsiCo:

$18,038 ÷

$1,926 + 2,290
= 8
...
39 times
2

(2) Days in inventory:
PepsiCo:
Coca-Cola:

365 ÷ 8
...
6 days
365 ÷ 5
...
7 days

(b) PepsiCo’s turnover of 8
...
39 times, resulting in days in inventory of 42
...
7
...


Copyright © 2009 John Wiley & Sons, Inc
...

(b) $1,322,000,000 – $1,371,000,000 = $49,000,000 decrease
...
9 percent ($858 ÷ $1,322)
...


6-68

Copyright © 2009 John Wiley & Sons, Inc
...

Cash sales 4/1–4/10 ($18,500 X 40%)
...

Sales made but unacknowledged
...


$180,000
7,400
37,000
5,600
$230,000

(2) Purchases January 1–March 31
...

Credit purchases 4/1–4/10
...

Purchases as of April 10
...

Cost of goods sold
Inventory, January 1
...

Cost of goods available for sale
...

Cost of goods sold
...


2008

$600,000

$480,000

60,000
404,000
464,000
80,000
384,000
$216,000

40,000
356,000
396,000
60,000
336,000
$144,000

36%

30%

Gross profit rate
...


33%

*(c) Sales
...

Cost of goods sold
...

Purchases
...

Cost of goods sold
...

Less: Inventory salvaged
...


$ 80,000
109,000
189,000
154,100
34,900
17,000
$ 17,900

Copyright © 2009 John Wiley & Sons, Inc
...
Of course,
this error will cause 2009 net income to be incorrect because the ending
inventory is used to compute 2009 cost of goods sold
...

Unfortunately, unless corrected, this error will also affect 2010 net income
...
Therefore, 2010
beginning inventory is also overstated, which causes an overstatement of
cost of goods sold and an understatement of 2010 net income
...


Weygandt, Accounting Principles, 9/e, Solutions Manual

(For Instructor Use Only)

BYP 6-6

ETHICS CASE

(a) The higher cost of the items ordered, received, and on hand at yearend will be charged to cost of goods sold, thereby lowering current
year’s income and income taxes
...
Next year’s income will be increased if unit
purchases (next year) are less than unit sales (next year)
...
Therefore, next year’s
income taxes will increase
...
The president would not have given the same directive because the
purchase under FIFO would have had no effect on net income of the
current year
...
The purchase is legal and ethical
...


Weygandt, Accounting Principles, 9/e, Solutions Manual

(For Instructor Use Only)

6-71

BYP 6-7

ALL ABOUT YOU ACTIVITY

Students responses to this question will vary depending on the inventory
fraud they choose to investigate
...

The fraud at Leslie Fay involved a number of illegal actions, all of which
increased net income
...
It also understated
or completely omitted discounts and allowances that it gave to retailers
...
It also reported sales in incorrect periods
...
It back-dated many transactions to increase
current period results
...

Many of the transactions that it reported as sales, and which resulted in
reductions in inventory, were actually not sales because they had negotiated
side agreements which allowed the buyer to return the merchandise
...


Weygandt, Accounting Principles, 9/e, Solutions Manual

(For Instructor Use Only)



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