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solutmanch061

Chapter6

MerchandiseInventoryandCostof

GoodsSold

CheckPoints

（10min.）CP6-1

NissanNorthAmerica

BalanceSheet

December31,20X6

Currentassets:

Inventory（300@$80）…………………..

$24,000

NissanNorthAmerica

IncomeStatement

YearEndedDecember31,20X6

Salesrevenue[700（$80+$40）]……….

$84,000

Costofgoodssold（700@$80）…………

56,000

Grossprofit………………………………….

$28,000

（10-15min.）CP6-2

1.（Journalentries）

Inventory…………………………………..

100,000

AccountsPayable…………………….

100,000

Cash（$140,000.20）……………………

28,000

AmountsReceivable（$140,000.80）..

112,000

SalesRevenue………………………...

140,000

CostofGoodsSold……………………..

60,000

Inventory（$100,000.60）…………..

60,000

2.（Financialstatements）

BALANCESHEET

Currentassets:

Inventory（$100,000–$60,000）……………….

$40,000

INCOMESTATEMENT

Salesrevenue………………………………………

$140,000

Costofgoodssold………………………………..

60,000

Grossprofit…………………………………………

$80,000

（10min.）CP6-3

Billions

Inventory…………………………

6.4

Cash…………………………...

6.4

AccountsReceivable………….

28.5

SalesRevenue……………….

28.5

CostofGoodsSold……………

6.2

Inventory……………………...

6.2

Cash………………………………

26.3

AccountsReceivable……….

26.3

（10min.）CP6-4

1.Inventorycostsareincreasingfrom$10to$14to$18perunit.

2.FIFOresultsinthehighestcostofendinginventory（$360）becauseunderFIFOtheendinginventoryiscostedatthelastcostsincurredduringtheperiod.Whencostsareincreasing,thelastcostsarethehighestcosts.

FIFOresultsinthelowestcostofgoodssold.Thisoccursbecausetheoldestcostsareassignedtocostofgoodssold.Whencostsareincreasing,theoldestcostsarethelowest.

FIFOresultsinthehighestgrossprofitbecausecostofgoodssold,theexpense,isthelowest.（Salesrevenueisunaffectedbytheinventorycostingmethod.）

3.LIFOresultsinthelowestcostofendinginventory（$240）becauseunderLIFO,theendinginventoryiscostedattheoldestcosts.Whencostsareincreasing,theoldestcostsarethelowestcosts.

LIFOresultsinthehighestcostofgoodssold.Thisoccursbecausethelastcostsoftheperiodareassignedtocostofgoodssold.Whencostsareincreasing,thelastcostsarethehighest.

LIFOresultsinthelowestgrossprofitbecausecostofgoodssold,theexpense,isthehighest.（Salesrevenueisunaffectedbytheinventorycostingmethod.）

（10min.）CP6-5

a

b

c

Average

Cost

FIFO

LIFO

Costofgoodssold:

Average（50@$15*）

$750

FIFO（10@$10）+（25@$14）+（15@$18）

$720

LIFO（25@$18）+（25@$14）

$800

Endinginventory:

Average（10@$15*）

$150

FIFO（10@$18）

$180

LIFO（10@$10）

$100

_____

*Averagecost

=

（$100+$350+$450）

=

$15

perunit

（10+25+25）

（10-15min.）CP6-6

Kinko’s

IncomeStatement

YearEndedDecember31,20XX

Average

FIFO

LIFO

Salesrevenue（600$20）

$12,000

$12,000

$12,000

Costofgoodssold（600$9.90*）

5,940

（100$9）+（500$10）

5,900

（600$10）

6,000

Grossprofit

6,060

6,100

6,000

Operatingexpenses

4,000

4,000

4,000

Netincome

$2,060

$2,100

$2,000

_____

*

Beginninginventory（100@$9.20）…………..

$920

Purchases（700@$10）…………………………

7,000

Goodsavailable…………………….……………

$7,920

Averagecostperunit$7,920/800units…

$9.90

（10min.）CP6-7

Kinko’s

IncomeStatement

YearEndedDecember31,20XX

Average

FIFO

LIFO

Salesrevenue（600$20）

$12,000

$12,000

$12,000

Costofgoodssold（600$9.90*）

5,940

（100$9）+（500$10）

5,900

（600$10）

______

______

6,000

Grossprofit

6,060

6,100

6,000

Operatingexpenses

4,000

4,000

4,000

Incomebeforeincometax

$2,060

$2,100

$2,000

Incometaxexpense（40%）

$824

$840

$800

Methodtominimizeincometaxexpense.

Methodtomaximizereportedincome（beforetax）.

*FromCP6-6

（5min.）CP6-8

Lands’Endmanagerscandelaypurchasesofinventoryuntilthenextyear.UnderLIFO,highinventorycoststhatwouldhavebeenpaidforinventorydonotbecomeexpenseascostofgoodssoldinthecurrentyear.Asaresult,thecurrentyear’sincomestatementreportsahighernetincomethanLands’Endwouldhavereportedifthecompanyhadreplacedinventorybeforeyearend.

（5-10min.）CP6-9

Millions

BALANCESHEET

Currentassets:

Inventories,atmarket（whichislowerthancost）..

$330

INCOMESTATEMENT

Costofgoodssold[$1,001+（$333–$330）]…………

$1,004

（10min.）CP6-10

1.FIFO

2.LIFO

Grossprofitpercentage:

Grossprofit

=

$460*

=

46%

$340**

=

34%

Netsalesrevenue

$1,000

$1,000

_____

*$1,000–$540=$460

**$1,000–$660=$340

Inventoryturnover:

Costofgoodssold

=

$540

$660

Averageinventory

（$100+$360）/2

（$100+$240）/2

=

2.3times

=

3.9times

3.

Grossprofitpercentage—FIFOlooksbetter.

4.

Inventoryturnover—LIFOlooksbetter.

（10-15min.）CP6-11

1.

Beginninginventory……………………………...

$300,000

+

Purchases……………………………………….…

1,600,000

=

Goodsavailable…………………………………...

1,900,000

–

Costofgoodssold……………………………….

（1,800,000）

=

Endinginventory……………………………….…

$100,000

2.

Beginninginventory……………………………..

$300,000

+

Purchases……………………………………….…

s

ame

1,600,000

=

Goodsavailable…………………………………...

1,900,000

–

Costofgoodssold:

Salesrevenue……………………….

$3,000,000

Lessestimatedgrossprofit（40%）

（1,200,000）

Estimatedcostofgoodssold……………….

（1,800,000）

=

Estimatedcostofendinginventory…………...

$100,000

（5-10min.）CP6-12

Correct

Amount（Millions）

a.

Inventory（$333+$3）…………………………………

$336

b.

Netsales（unchanged）……………………………….

$1,755

c.

Costofgoodssold（$1,001–$3）…………………...

$998

d.

Grossprofit（$754+$3）……………………….……..

$757

（10min.）CP6-13

1.Lastyear’sreportedgrossprofitwasunderstated.

Correctgrossprofitlastyearwas$5.6million（$4.0+$1.6）.

2.Thisyear’sgrossprofitisoverstated.

Correctgrossprofitforthisyearis$3.2million（$4.8–$1.6）.

3.Lang’sperspectiveisbetterbecausecorrectingtheerrorchangesthetrendofcorrectgrossprofitfromup（good）todown（bad）,asfollows:

Millions

LastYear

ThisYear

Trend

Reportedgrossprofit……..

$4.0

$4.8

Up（Good）

Correctgrossprofit……….

$5.6

$3.2

Down（Bad）

（5-10min.）CP6-14

1.Ethical.Thereisnothingwrongwithbuyinginventorywheneveracompanywishes.

2.Ethical.Sameideaas1.

3.Unethical.Thecompanyfalsifieditsreportedamountsofinventoryandnetincome.

4.Unethical.Thecompanyfalsifieditsreportedinventorypurchases,costofgoodssold,andnetincomeinordertocheatthegovernment（andthepeople）outofincometax.

5.Unethical.Thecompanyfalsifieditsreportedamountofinventoryinordertocheatthegovernment（andthepeople）outoftaxes.

Exercises

（15-20min.）E6-1

Req.1（journalentried）

PerpetualSystem

1.

Purchases:

Thousands

Inventory…………………….……….…

2,200

AccountsPayable………………….

2,200

2.

Sales:

Cash（$3,500.20）…….……………..

700

AccountsReceivable（$3,500.80）.

2,800

SalesRevenue…………….……….

3,500

CostofGoodsSold…………………..

2,100

Inventory………………….………....

2,100

Req.2（financialstatementamounts）

BALANCESHEET

Thousands

Currentassets:

Inventory（$370+$2,200–$2,100）...

$470

INCOMESTATEMENT

Salesrevenue…………………………….

$3,500

Costofgoodssold………………………

2,100

Grossprofit……………………………….

$1,400

（15-25min.）E6-2

Journal

DATE

ACCOUNTTITLESANDEXPLANATION

DEBIT

CREDIT

1

Inventory（$640+$1,870+$900）……….

3,410

AccountsPayable………………………

3,410

2

AccountsReceivable（17@$500）……...

8,500

SalesRevenue…………………………..

8,500

CostofGoodsSold……………………….

2,800*

Inventory…………………………………

2,800

3

Salesrevenue………………………………

$8,500

Costofgoodssold………………………..

2,800

Grossprofit…………………………………

$5,700

Endinginventory（$800+$3,410–$2,800）……...

$1,410

_____

*（9@$160）+（8@$170）=$2,800

（10-15min.）E6-3

1.

Inventory

Begin.Bal.

（5units@$160）800

Purchases

Oct.8

（4units@$160）640

15

（11units@$170）1,870

Costofgoodssold

26

（5units@$180）900

（17units@$?

）

?

Endingbal.

（8units@$?

）?

CostofGoodsSold

EndingInventory

（a）Specific

unitcost

（6@$160）+（11@$170）

=

$2,830

（3@$160）+（5@$180）

=

$1,380

（b）Average

cost

17$168.40*

=

$2,863

8$168.40*

=

$1,347

_____

*Averagecostperunit

=

（$800+$640+$1,870+$900）

=

$168.40

（5+4+11+5）

（c）FIFO

（9@$160）+（8@$170）

=

$2,800

（5@$180）+（3@$170）

=

$1,410

（d）LIFO

（5@$180）+（11@$170）+（1@$160）

=

$2,930

（8@$160）

=

$1,280

2.LIFOproducesthehighestcostofgoodssold.

FIFOproducesthelowestcostofgoodssold.