financial accounting tools for business decision making solutions 7e chapter 06

Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley

Financial Accounting, Seventh Canadian Edition

CHAPTER 6
REPORTING AND ANALYZING INVENTORY
LEARNING OBJECTIVES
1.
2.

Describe the steps in determining inventory quantities.
Apply the cost formulas using specific identification, FIFO, and average cost under
a perpetual inventory system.
3. Explain the effects on the financial statements of choosing each of the inventory
cost formulas.
4. Identify the effects of inventory errors on the financial statements.
5. Demonstrate the presentation and analysis of inventory.
6.* Apply the FIFO and average cost inventory cost formulas under a periodic inventory
system (Appendix 6A).

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Financial Accounting, Seventh Canadian Edition

SUMMARY OF QUESTIONS BY LEARNING OBJECTIVES

AND BLOOM’S TAXONOMY
Item LO

BT Item LO

BT Item LO BT
Questions

Item LO

BT

Item LO

BT

1.

1

C

6.

2

C

11.

2

C

16.

5

C

21.

2,6

C

2.

1

C

7.

2

K

12.

4

C

17.

5

K

22.

2,6

C

2

C

13.

4

C

18.

5

C

3

C

14.

4

C

19.

2,6

C

C

15.

C

20.

6

C

C

10.

5

AP

13.

6

AP

3.

1

K

8.

4.

1

C

9.

5.

2

C

10.

3

5

Brief Exercises
1.

1

K

4.

2

AN

7.

3

2.

1

AP

5.

2

AN

8.

4

C

11.

5

AP

14.

2,6

AN

3.

2

AP

6.

2

AP

9.

4

AN

12.

5

AN

15.

2,6

AP

AN

13.

3,6

AP

Exercises
1

C

5.

2

AN

9.

4

2.

1

AN

6.

2,3

AN

10.

5

AP

14.

6

AN

3.

2,3

AN

7.

2,3

AN

11.

5

AN

15.

2,6

AP

4.

2,3

AN

8.

4

AN

12.

3,5

AN

16.

2,6

AP

1.

1

AP

5.

2,3

AN

9.

5

AN

13.

6

AP

2.

2

AP

6.

2,5

AP

10.

5

AP

14.

5,6

AP

3.

2,3

AP

7.

4,5

AN

11.

5

AP

15.

2,6

AN

4.

2,4

AN

8.

4,5

AN

12.

5

AN

16.

2,6

AN

2,3

AN

1.

Problems: Set A and B

Accounting Cycle Review
1.

2

AN

1.

3

AN

3.

1,2,3,6

E

5.

2,3

AN

2.

5

AN

4.

4,5

E

6.

1,2

E

Cases
7.

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Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley

Financial Accounting, Seventh Canadian Edition

Legend: The following abbreviations will appear throughout the solutions manual
file.
LO

Learning objective

BT

Bloom's Taxonomy
K
Knowledge
C
Comprehension
AP Application
AN Analysis
S

Synthesis
E
Evaluation
Level of difficulty
S
Simple
M
Moderate
C
Complex
Estimated time to prepare in minutes

Difficulty:

Time:
AACSB

CPA CM
cpa-e001
cpa-e002
cpa-e003
cpa-e004
cpa-e005
cpa-t001
cpa-t002
cpa-t003
cpa-t004
cpa-t005
cpa-t006

Association to Advance Collegiate Schools of Business
Communication
Communication
Ethics
Ethics
Analytic
Analytic
Technology
Tech.
Diversity
Diversity
Reflective Thinking
Reflec. Thinking
CPA Canada Competency
Ethics
Professional and Ethical Behaviour
PS and DM
Problem-Solving and Decision-Making
Comm.
Communication
Self-Mgt.
Self-Management
Team & Lead
Teamwork and Leadership
Reporting
Financial Reporting
Stat. & Gov.
Strategy and Governance
Mgt. Accounting
Management Accounting

Audit
Audit and Assurance
Finance
Finance
Tax
Taxation

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Financial Accounting, Seventh Canadian Edition

ANSWERS TO QUESTIONS
1.

Taking a physical inventory involves actually counting, weighing or
measuring each kind of inventory on hand. Retailers, such as hardware
stores, generally have thousands of different items to count. This is
normally done when the store is closed to minimize errors due to the
movement of merchandise. Tom will probably count items and mark the
quantity, description, and inventory number on pre-numbered inventory
tags (unless the company has more advanced technology that can read
bar codes on inventory products – we will assume that they do not). He
should only include items in the inventory that are in saleable condition.
Ideally, strong internal control should be exerted over the physical

inventory count. For example, Tom should not have responsibility for the
custody or record-keeping for the inventory. He should also count in teams
of two, or there should be a second counter checking the accuracy of the
count.
Adjustments may also have to be made to the physical inventory count for
any goods in transit. For example, inventory purchased FOB shipping point
that is still in transit will have to be included in inventory. Inventory that has
been shipped by Kikujiro to customers FOB destination and not received
by the customer before year-end will also have to be included in the count.
Finally, any of Kikujiro’s inventory held by other retailers on consignment
will have to be included in the count as well.

LO 1 BT: C Difficulty: M Time: 20 min. AACSB: None CPA: cpa-t001 CM: Reporting

2.

In a consignment agreement, the consignor is the business that owns the
goods, and the consignee is the business that will sell the goods, without
having to purchase and own the goods before they are sold. The consignee
will sell the goods for the consignor for a fee or a percentage of the sales
price. Only the owner of goods, the consignor, includes the goods in its
inventory even though the goods are physically located on the consignee’s
premises.

LO 1 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

3.

(a)

The goods will be included in Janine Ltd.’s (the seller’s) inventory if
the terms of sale are FOB destination.

(b)

The goods will be included in Fastrak Corporation’s (the buyer’s)
inventory if the terms of sale are FOB shipping point.

LO 1 BT: K Difficulty: S Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

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4.

Financial Accounting, Seventh Canadian Edition

(a)

Include: the inventory items belong to Kingsway as Kingsway is the
consignor.

(b)

Include: the inventory items belong to Kingsway while in transit

because the terms are FOB shipping point.

(c)

Exclude: the customer has purchased the inventory item and legal
ownership has passed to the customer.

LO 1 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

5.

(a)

The unit cost of an inventory item is needed for the entry to record the
cost of goods sold and remove the cost of the items sold from
inventory. Because units of the same inventory item are typically
purchased at different prices, it is necessary to determine which unit
costs to use in the calculation of the cost of the goods sold.

(b)

When using the perpetual system, an entry to record the cost of goods
sold and remove the cost of the items sold from inventory is recorded
at the same time as the sales transaction. The information from the
perpetual system is updated, using the cost formula adopted by the
business. The cost formula is also used in the detailed perpetual
records for every increase in inventory caused by purchases, freightin, etc. transactions. On the other hand, since a record is not kept of
the individual inventory item transactions under the periodic system,
the entry to record the cost of goods sold and remove the cost of the
items sold from inventory can only be made at the end of a reporting

period, when ending inventory is determined by a physical count.

LO 2 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

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6.

(a)

(b)

Financial Accounting, Seventh Canadian Edition

The specific identification formula tracks the physical flow of individual
inventory items, matching the cost of the actual item sold against the
revenue from that item. The FIFO inventory cost formula assumes the
first inventory purchased is the first inventory sold. The most recent
purchases are assumed to remain in ending inventory. The average
cost formula assumes that all goods available for sale are
indistinguishable or homogeneous.
An example of inventory where the specific identification would be
appropriate would be for goods that are not ordinarily
interchangeable, such as automobiles with unique vehicle

identification numbers.
Inventory such as groceries could be accounted for using the FIFO
cost formula as older items are normally sold first.
Inventory such as hardware could be accounted for using an average
cost formula.

LO 2 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

7.

(a) Average cost or FIFO can be used if the goods available for sale are
identical. Specific identification cannot be used if the goods are not
specifically identifiable.
(b) FIFO assumes that the first goods purchased are the first to be sold.
(c) Specific identification
merchandise.

matches

the

actual

physical

flow

of

LO 2 BT: K Difficulty: S Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

8.

A new weighted average unit cost must be calculated after each purchase
because a new cost amount is added to the “cost pool”. This changes the
total dollars in the cost pool and the quantity of units on hand in the cost
pool. A sale withdraws units and total dollars from the cost pool at the
weighted average cost. This does not affect the weighted average cost of
the remaining units. That is, the weighted average cost of the remaining
units is unchanged after a sale.

LO 2 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

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9.

Financial Accounting, Seventh Canadian Edition

A company should consider:
•

Whether the goods are interchangeable or not, or whether they
are produced or segregated for specific projects;

•

Whether the formula corresponds most closely to the physical flow
of goods;

•

Whether the formula reports inventory on the statement of financial
position that is close to the inventory’s most recent cost; and

•

Whether the formula is used for other inventories with a similar nature
and usage.

LO 3 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

10.

Average cost produces the better income statement valuation because the
cost of goods sold is determined using more recent inventory prices. This
better matches current costs with current revenues.
FIFO produces the better valuation on the statement of financial position
because the ending inventory is determined using the most recent prices.
Since the normal intent is to replace the inventory after it is sold, the most
recent prices are more relevant for decision-making.

LO 3 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

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11.

Financial Accounting, Seventh Canadian Edition

(a)

No effect – cash is not affected by the choice of inventory cost
formulas.

(b)

In a period of declining prices, FIFO will produce a lower ending
inventory as inventory is determined using the most recent (lower)
prices. Average cost will produce a higher ending inventory as ending
inventory incorporates the higher older prices.

(c)

The cost of goods sold effect is opposite to that of ending inventory.
Hence, cost of goods sold will be higher under FIFO and lower under
the average cost formula.

(d)

Because of the effect on the cost of goods sold as outlined in (c), net
income will be lower under FIFO and higher under average cost.

(e)

The impact on retained earnings will be the same as the impact on
net income and ending inventory—lower in a period of declining prices
using FIFO and higher using average cost.

LO 2 BT: C Difficulty: C Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

12.

The error should be corrected if it will change the figures presented on the
financial statements. While retained earnings may not change, other
financial statement items and comparative figures may change. This
information may impact a user’s decision.

LO 4 BT: C Difficulty: C Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

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13.

(a)

(b)
(c)

(d)

(e)
(f)

Financial Accounting, Seventh Canadian Edition

Mila Ltd.’s 2018 income before tax will be understated by $43,000.
This is because an understatement of ending inventory will result in
an overstatement of cost of goods sold. If cost of goods sold is
overstated, then income before tax will be understated.
2018 retained earnings will be understated by $43,000 because net
income is understated (see (1) above).
2018 total shareholders’ equity will be understated by $43,000
because the retained earnings balance is understated (see (b)
above).
2019 net income will be overstated $43,000. This is because
beginning inventory is understated by $43,000, which will result in an
understatement of cost of goods sold (recognizing that 2018 ending
inventory is 2019 beginning inventory). If cost of goods sold is
understated, then income before tax will be overstated.
2019 retained earnings will be correct because the understatement in
net income in 2018 and overstatement in 2019 will cancel each other.

2019 total shareholders’ equity will be correct because the retained
earnings balance is correct.

LO 4 BT: C Difficulty: C Time: 15 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

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14.

Financial Accounting, Seventh Canadian Edition

(a)

At the end of the fiscal year, before the inventory is adjusted to the
inventory count, Shediac’s assets (Inventory) would be overstated
and its liabilities would be overstated (Accounts Payable). There
would be no effect on shareholders’ equity.

(b)

Since the merchandise is not on hand at the time of the inventory
count, the shipment from Bathurst would not be counted. This in turn
would cause the inventory count to be lower than the perpetual
inventory record. Normally when such a discrepancy arises, the

Inventory account will be adjusted downward with a credit to reflect
the amount of merchandise actually on hand. The corresponding
debit in this adjusting entry would be to Cost of Goods Sold. The
summary effect of the initial error and the count adjustment would be
an overstatement in Cost of Goods Sold and Accounts Payable.
Because Cost of Goods Sold is overstated, gross profit and net
income are understated as well as Retained Earnings. At the end of
Shediac’s current year, after the adjustment is made for the results of
the inventory count, the overall impact on the accounting equation is
no effect on assets, an overstatement of liabilities (Accounts
Payable), and an understatement of shareholders’ equity (Retained
Earnings).

LO 4 BT: C Difficulty: C Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting

15.

(a)

Cost refers to the original cost of inventory as determined by using
specific identification, FIFO, or average cost formulas. Net realizable
value is the selling price less any costs required to make the goods
ready for sale.

(b)

The lower of cost and net realizable value rule should be applied at
the end of the accounting period, before financial statements are
prepared.

LO 5 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

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16.

Financial Accounting, Seventh Canadian Edition

(a)

Cost of Goods Sold is debited when recording a decline in inventory
value under the lower of cost and net realizable value rule and the
asset account Inventory is credited.

(b)

These declines are usually considered part of the risk associated with
carrying inventory and part of the costs of carrying a variety and
quantity of goods on hand. Since the inventory has specifically been
purchased for resale, the net realizable value becomes the most
relevant measure of the asset on the statement of financial position.

LO 5 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

17.

An increase in the days in inventory ratio from one year to the next would
be seen as a deterioration in the company’s efficiency in managing
inventory. It means that the inventory is being held for a longer period of
time, which increases the risk of spoilage and obsolescence.

LO 5 BT: K Difficulty: S Time: 5 min. AACSB: None CPA: cpa-t001 cpa-t005 CM: Reporting

18.

(a)

An inventory turnover ratio that is too high may indicate that the
company is losing sales opportunities because of inventory
shortages. Inventory shortages may also cause customer ill will and
result in lost future sales.

(b)

If the inventory turnover is too low, it may indicate that the company
is having difficulty selling its inventory, and the inventory may become
obsolete.

LO 5 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 and cpa-t005. CM: Reporting and
Finance

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*19.

Financial Accounting, Seventh Canadian Edition

Periodic and perpetual inventory systems differ in the accounting treatment
for inventories. Under a perpetual inventory system, inventory records are
updated for every purchase and sale transaction. The cost of goods sold
is recorded each time a sale is made. Under a periodic system, the
inventory is only updated at the end of the period when a physical inventory
count is performed. Inventory purchases throughout the year are debited
to a Purchases account in a periodic inventory system rather than an
Inventory account. When a sale is recorded in a periodic inventory system,
no entry is made to record the cost of the sale. Cost of goods sold is
calculated separately, after the physical inventory count is performed.

LO 2,6 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

*20.

Ending inventory is known from the physical inventory count. The total
amount of inventory available for sale needs to be determined first in order
to determine what inventory has been sold (goods available for sale –
ending inventory = cost of goods sold). Goods sold are not tracked
separately in a periodic inventory system.

LO 6 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

*21.

In both systems, the first (oldest) costs are the costs assigned to the goods
sold. No matter what system is used, the cost of goods sold will always
consist of the oldest units and these units are assumed to be on hand when
using either formula.

LO 2,6 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

*22.

In a perpetual system, the average cost per item is recalculated every time
a purchase transaction takes place. In a periodic system, the average cost
is determined based on the total goods available for sale during the period.
If there are cost changes during the period, the average cost per item will
differ in a perpetual and periodic inventory system.

LO 2,6 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

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Financial Accounting, Seventh Canadian Edition

SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 6-1
(a)

Ownership of the goods belongs to the consignor (Helgeson). Thus, these
goods should be included in Helgeson’s inventory.

(b)

Goods held on consignment belong to the other company and should not
be included in Helgeson’s inventory.

(c)

The goods in transit belong to Helgeson because ownership does not
transfer until the customer receives the goods. They should be included in
Helgeson’s inventory.

(d)

The goods purchased belong to the buyer, Helgeson as the terms of
shipment are FOB shipping point. Title transferred to Helgeson as soon as
the goods were shipped, so even though they have not been received, they
should be included in Helgeson’s inventory.

(e)

The goods in transit belong to the customer as the terms of shipment are
FOB shipping point. They should not be included in Helgeson’s inventory

because title transferred to the customer as soon as the goods were
shipped.

(f)

The goods in transit should not be included in the inventory count because
ownership by Helgeson does not occur until the goods reach the buyer.

(Legal title determines if an item should be included in inventory)
LO 1 BT: K Difficulty: S Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting

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Financial Accounting, Seventh Canadian Edition

BRIEF EXERCISE 6-2
$95,000
(7,500)
(1,000)
5,000

Count
Held on consignment
Sold

August 28 shipment plus freight, FOB shipping point
($4,750 + $250)
$91,500 Correct inventory cost
LO 1 BT: AP Difficulty: M Time: 5 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 6-3
(a)

Cost of Goods Available for Sale
3 electric pianos @ $600 = $1,800
2 electric pianos @ $475 =
950
$2,750
Ending Inventory
(a) Specific
Identification

(b)

2 pianos @ $600 =
1 piano @ $475 =

$1,200
475
$1,675

Cost of Goods Sold
$2,750 – $1,675 = $1,075
(Proof: 1 piano @ $600 +
1 piano @ $475 = $1,075)

If management wished higher net income, it could have sold two pianos
from the last shipment, that had a lower cost. If it wished lower net income,
it could have sold two of the first pianos purchased.

LO 2 BT: AP Difficulty: M Time: 10 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

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Financial Accounting, Seventh Canadian Edition

BRIEF EXERCISE 6-4
[1]
[2]
[3]
[4]
[5]
[6]
[7]
[8]
[9]
[10]
[11]
[12]

[13]
[14]
[15]
[16]
[17]
[18]

$450  30 = $15
15 (from April 1)
$18 (from April 1)
30 (from April 6)
$15 (from April 6)
(15 @ $18) + (30 @ $15) = $720
$18 (from April 1)
$15 (from April 6)
(15 @ $18) + (10 @ $15) = $420
15 + 30 – 15 – 10 = 20
$15
20 @ $15 = $300
$144 ÷ 12 = $12
20
$15
12
$12
(20 @ $15) + (12 @ $12) = $444

LO 2 BT: AN Difficulty: C Time: 15 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

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Financial Accounting, Seventh Canadian Edition

BRIEF EXERCISE 6-5
[1]
[2]
[3]
[4]
[5]
[6]
[7]
[8]
[9]
[10]
[11]
[12]
[13]

$200 ($6,000  30)
45 (15 + 30)
$8,700 ($2,700 + $6,000)
$193.3333 ($8,700 (from [3]) ÷ 45 (from [2]))
$193.33 (from [4])
25 x $193.3333 = $4,833.33
45 (from [2]) – 25 sold = 20

$8,700.00 (from [3]) – $4,833.33 (from [6]) = $3,866.67
$3,866.67 (from [8])  20 (from [7]) = $193.3333 rounded to equal [4].
Notice how the average cost does not change after a sale.
$2,460  $205 = 12
20 (from [7]) + 12 (from [10]) = 32
$3,866.67 (from [8]) + $2,460.00 = $6,326.67
$6,326.67 (from [12])  32 (from [11]) = $197.708 rounded to $197.71

LO 2 BT: AN Difficulty: C Time: 15 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

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Financial Accounting, Seventh Canadian Edition

BRIEF EXERCISE 6-6
(a)

FIFO cost formula

Date Description

Purchases

Purchase

250 $ 70

Purchase

500

Cost of Goods Sold

Ending Inventory

$ 17,500

250

$ 70

$ 17,500

50,000

250
500

70
100

17,500
50,000

450
450
900

100
100
120

45,000
45,500
108,000

100
120

12,500
108,000

Aug. 2
3

100

10 Sale
15

Purchase

900

120

$70
100

$22,500

325

100

32,500

125
900

$55,000

1,025

108,000

25 Sale
1,650

250
50

$175,500

625

$120,500

Check: $55,000 + $120,500 = $175,500
(b)
Date

Average cost formula

Description

Aug. 2 Purchase
3 Purchase

Purchases
250 $ 70.00 $17,500.00
500 100.00

300 $90.00 $27,000.00
900 120.00 108,000.00

25 Sale

Ending Inventory
250

50,000.00

10 Sale

15 Purchase

Cost of Goods Sold

750

90.00

67,500.00

450

90.00

040,500.00

1,350
325 110.00 35,750.00 1,025

1,650

$175,500.00 625

$ 70.00 $ 17,500.00

$62,750.00 1,025

110.00 5148,500.00
110.00

112,750.00
$112,750.00

Check: $62,750 + $112,750 = $175,500
LO 2 BT: AP Difficulty: M Time: 20 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

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Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley

Financial Accounting, Seventh Canadian Edition

BRIEF EXERCISE 6-7
(a)

Average cost. The ending inventory is valued at the average of the cost of
the product, including earlier costs. Since this cost formula yields a higher
ending inventory than FIFO when prices are falling, the result will not be
closer to replacement cost. This result is achieved with the FIFO cost
formula.

(b)

FIFO. The cost of goods is valued using the earlier, higher costs. Since
the revenue reflects current lower prices, the FIFO cost formula does not
match current costs against revenue when prices are falling. This result is

better achieved by the average cost formula.

(c)

One of the guidelines that management should consider is choosing an
inventory cost formula that corresponds as closely to the physical flow of
goods as possible. A cost formula that provides an ending inventory cost
close to the inventory’s recent cost is also preferable.

LO 3 BT: C Difficulty: M Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 6-8
Total assets in the statement of financial position will be overstated by the amount
that ending inventory is overstated, $25,000. When the purchase of inventory was
recorded, an account payable would have been created, so total liabilities will also
be overstated by $25,000 (assuming the “supplier” was not paid). Shareholders’
equity will not be affected.
LO 4 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

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Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley

Financial Accounting, Seventh Canadian Edition

BRIEF EXERCISE 6-9

When items are not counted, an adjustment would be made to lower the balance
in the Inventory account to reflect the difference between the amount counted
(which is lower) and the amount recorded in the account. This would be done by
crediting Inventory. The offsetting debit would be to Cost of Goods Sold, thereby
overstating this account and reducing net income.
In the following year, assuming these goods are sold, their cost is zero so cost of
goods sold would be understated and net income overstated. Assuming there are
no errors when counting inventory at the end of next year, this net income
overstatement when combined with the previous year’s net income
understatement, would cancel each other out and make retained earnings
correctly stated at the end of next year.
These effects are summarized below.

Assets
Liabilities
Shareholders’ equity

Current Year
Understated $7,000
No impact
Understated $7,000

Next Year
No impact
No impact
No impact

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Financial Accounting, Seventh Canadian Edition

BRIEF EXERCISE 6-10
(a)
Inventory Categories
Desktops
Tablets and readers
Laptops
Accessories and parts
Total valuation

Cost
$347,000
168,700
221,020
97,400
$834,120

NRV
$326,000
224,000
285,000
94,300

$929,300

LCNRV
$326,000
168,700
221,020
94,300
$810,020

The lower of cost and net realizable value is $810,020.
(b)
Cost of Goods Sold ........................................................... 24,100
Inventory ................................................................
$834,120 – $810,020 = $24,100

24,100

LO 5 BT: AP Difficulty: M Time: 10 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 6-11
(a) Cost of Goods Sold ........................................................ 2,200
Inventory ..................................................................
$54,700 – $52,500 = $2,200

2,200

(b) $54,700
LO 5 BT: AP Difficulty: M Time: 5 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

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Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley

Financial Accounting, Seventh Canadian Edition

BRIEF EXERCISE 6-12
(a)
Inventory Turnover
(2015)
Days in Inventory (2015)

Inventory Turnover
(2014)

$7,747.1
= 4.6 times
($1,764.5 + $1,623.8) ÷ 2
365
= 79 days
4.6

$8,033.2
= 5.2 times
($1,623.8 + $1,481.0) ÷ 2

365

Days in Inventory (2014) 5.2 = 70 days
(b)

The inventory management deteriorated in 2015 as evidenced by the
increase in number of days in inventory from 70 days in 2014 to 79 days in
2015. This was corroborated by the declining inventory turnover. This
deterioration signifies that it took longer to sell the inventory in 2015.

LO 5 BT: AN Difficulty: M Time: 10 min. AACSB: Analytic CPA: cpa-t001 cpa-t005 CM: Reporting and
Finance

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Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley

Financial Accounting, Seventh Canadian Edition

*BRIEF EXERCISE 6-13
Beginning inventory
Purchases
(370 @ $9) + (700 @ $12) + (800 @ $11)
Goods available for sale
Ending inventory
Goods sold
(a)

Units
0

Dollars
$
0

1,870
1,870
(600)
1,270

20,530
$20,530

FIFO
Ending inventory: (600 units @ $11) = $6,600
Cost of goods sold = Goods available for sale – ending inventory
$20,530 – $6,600 = $ 13,930
Proof: Cost of goods sold = (370 × $9) + (700 × $12) + (200 x $11) = $ 13,930

(b)

Average cost
Note: Unrounded numbers have been used in the average cost
calculations, although the numbers have been rounded to the nearest cent
for presentation purposes. Because of this, some amounts may not appear
to multiply exactly because of the rounding in the presentation.
Weighted average cost = $20,530 ữ 1,870 = $10.98
Ending inventory: 600 ì $10.98 = $ 6,587.17

Cost of goods sold = Goods available for sale – ending inventory
$20,530 – $ 6,587.17 = $ 13,942.83
Proof: Cost of goods sold = 1,270 ì ($20,530 ữ 1,870) = $ 13,942.83

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Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley

Financial Accounting, Seventh Canadian Edition

*BRIEF EXERCISE 6-14
(a)

Ending Inventory: (1,300 × $45.00) + (200 × $50.00) = $68,500
Cost of goods sold = Goods available for sale – ending inventory
$216,000 – $68,500 = $147,500
Proof: Cost of goods sold = (1,500 × $45.00) + (1,600 × $50.00) = $147,500

(b)

No, the answer under a perpetual system would be the same, since the
first goods purchased are assumed to be the first goods sold.

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Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley

Financial Accounting, Seventh Canadian Edition

*BRIEF EXERCISE 6-15
(a)
Jan.

FIFO Perpetual
3

3

9

15

15

Accounts Receivable ............................................
Sales (700 × $12).........................................

8,400

Cost of Goods Sold (700 × $5) .............................
Inventory ......................................................

3,500

Inventory (1,000 × $6) ..........................................
Accounts Payable ........................................

6,000

Cash .....................................................................
Sales (800 x $11) .........................................

8,800

Cost of Goods Sold [(200 × $5) + (600 × $6)] ......
Inventory ......................................................

4,600

8,400

3,500

6,000

8,800

4,600

(b) FIFO Periodic
Jan.

3

9

15

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

8,400

Purchases .............................................................
Accounts Payable .........................................

6,000

Cash ......................................................................
Sales .............................................................

8,800

8,400

6,000

8,800

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Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley

Financial Accounting, Seventh Canadian Edition

SOLUTIONS TO EXERCISES
EXERCISE 6-1
1.

Do not include – Shippers Ltd. does not own items held on consignment.
These goods will be recorded in the owner’s inventory.

2.

Include in inventory – Shipping terms FOB destination means that Shippers
Ltd. owns the items until they reach the customer.

3.

Include in inventory – Shippers Ltd. still owns the items as they were only
shipped on consignment.

4.

Do not include in inventory. Freight costs on goods shipped to customers
are included in Freight Out or Delivery Expense.

5.

Do not include in inventory – The shipping terms are FOB destination point
so ownership has not transferred to the buyer. Shippers Ltd. should not
record anything until the goods arrive.

6.

Include in inventory – Shipping terms FOB shipping point means that
ownership transferred at the time of shipping and therefore, Shippers Ltd.
owns the goods in transit.

7.

Do not include in inventory. The shipping terms are FOB shipping point, so
Shippers Ltd. no longer owns the goods. They will be part of cost of sales
on the income statement.

(Legal title determines if an item should be included in inventory.)
LO 1 BT: C Difficulty: M Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting

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