Solution manual financial accounting 8th by harrison CH06

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Chapter 6
Inventory & Cost of Goods Sold
Short Exercises
(10 min.)
Inventory…………………………
Cash…………………………...

424

Billions
3.8
3.8

Accounts Receivable………….
Sales Revenue……………….

19.7

Cost of Goods Sold……………
Inventory……………………...

4.5

Cash………………………………
Accounts Receivable……….

18.8

Financial Accounting 8/e Solutions Manual

19.7

4.5

18.8

S 6-1


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(10-15 min.)

S 6-2

1. (Journal entries)
Inventory…………………………………..
Accounts Payable…………………….

120,000

Amounts Receivable……………………
Sales Revenue………………………...

150,000

Cost of Goods Sold……………………..
Inventory ($120,000 × .75)…………..

90,000

Cash ($150,000 × .30)…………………...
Accounts Receivable………………...

45,000

120,000

150,000

90,000

45,000

2. (Financial statements)
BALANCE SHEET
Current assets:
Inventory ($120,000 − $90,000)………………. $ 30,000
INCOME STATEMENT
Sales revenue………………………………………
Cost of goods sold………………………………..
Gross profit…………………………………………

Chapter 6

$150,000
90,000
$60,000

Inventory & Cost of Goods Sold

425


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(15-20 min.)
a
Average Cost
Cost of goods sold:
Average (26 ×
$154.71)
FIFO $1,260 + (17
× $160)
LIFO $4,000 + (1 ×
$140)
Ending inventory:
Average (8 ×
$154.71)
FIFO (8 × $160)
LIFO (8 × $140)

b
FIFO

S 6-3

c
LIFO

$4,022.46
$3,980
$4,140

$ 1,237.68
$1,280
$1,120

Computations:
Units sold = 26 (9 + 25 − 8)
Units in ending inventory = 8
Average cost per unit = $154.71 ($1,260 + $4,000) ÷ (9 + 25)
Cost per unit:
First purchase
= $140 ($1,260 ÷ 9 = $140)
Second purchase = $160 ($4,000 ÷ 25 = $160)

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(10-15 min.)

S 6-4

Jefferson’s Copy Center

Income Statement
Year Ended December 31, 2010
Average
FIFO
LIFO
Sales revenue (580 × $20.25)
$11,745 $11,745
$11,745
Cost of goods sold (580 × $9.70*)
5,626
(92 × $8.90) + (488 × $9.80)
5,601
(580 × $9.80)
5,684
Gross profit
6,119
6,144
6,061
Operating expenses
3,750
3,750
3,750
Net income
$ 2,369
$2,394
$ 2,311
_____
*
Average cost per unit:
Beginning inventory (92 @ $9.00)……………..

$ 828
Purchases (680 @ $9.80)…………………………
6,664
Goods available…………………….………………
$7,492
Average cost per unit $7,492 / 772 units……
$ 9.70

Chapter 6

Inventory & Cost of Goods Sold

427


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(10-15 min.)

S 6-5

Jefferson Copy Center
Income Statement
Year Ended December 31, 2010
Average
FIFO
Sales revenue (580 × $20.25)
$11,745 $11,745
Cost of goods sold (580 × $9.70*)
5,626

(92 × $8.90) + (488 × $9.80)
5,601
(580 × $9.80)
______ ______
Gross profit
6,119
6,144
Operating expenses
3,750
3,750
Income before income tax
$2,369 $ 2,394
Income tax expense (30%)
$ 711
$ 718
*From S 6-4

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Method to
maximize
reported
income
(before
tax).

LIFO
$11,745

5,684
6,061
3,750
$ 2,311
$ 693
Method to
minimize
income tax
expense.


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(5 min.)

S 6-6

Microdata managers can purchase lots of inventory before year
end. Under LIFO, these high inventory costs go directly to cost
of goods sold in the current year. As a result, the current year’s
net income drops and that saves on income tax. Saving on
taxes is one reason companies want to decrease their income.

Student responses may vary.

(5-10 min.)

S 6-7

BALANCE SHEET
Current assets:
Inventories, at market (which is lower than cost)……. $ 42,000
INCOME STATEMENT
Cost of goods sold [$440,000 + ($57,000 − $42,000)]…… $455,000

Chapter 6

Inventory & Cost of Goods Sold

429


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(15-20 min.)
DATE:

_____________

TO:

Joe Smith, President of Saxophone Company

FROM:

Student Name

S 6-8

SUBJECT: Proposal for Increasing Net Income
We can increase net income by not buying our normal
quantities of inventory as we make sales. Inventory costs are
rising, and the company uses the LIFO inventory method.
Under LIFO, the high cost of our inventory purchases goes
straight into cost of goods sold. By slowing our purchases of
inventory, we can keep those high costs out of cost of goods
sold this year. That will keep net income from going lower and
will help net income be as high as possible. Also, our inventory
quantities are above normal, so we don’t need to buy a lot of
inventory before year end.

Student responses will vary.

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(10-15 min.)

S 6-9

LIFO

1. Generally associated with saving income taxes.

FIFO

2. Results in a cost of ending inventory that is close
to the current cost of replacing the inventory.

Specific
unit cost

Average

3. Used to account for automobiles, jewelry, and art
objects.
4. Provides a middle-ground measure of ending
inventory and cost of goods sold.

FIFO

5. Maximizes reported income.

LIFO

6. Matches the most current cost of goods sold
against sales revenue.

LIFO

7. Results in an old measure of the cost of ending
inventory.

LCM

8. Writes inventory down when replacement cost
drops below historical cost.

LIFO

9. Enables a company to buy high-cost inventory at
year end and thereby to decrease reported
income and income tax.

FIFO

10. Enables a company to keep reported income
from dropping lower by liquidating older layers of
inventory.

Chapter 6

Inventory & Cost of Goods Sold

431


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(5-10 min.)

Gross profit percentage

=

Inventory turnover

=

Dollars in Millions
$35,482 − $15,333
$35,482

= 0.568

$15,333
= 8.6 times
($1,641 + $1,945) / 2

(5-10 min.)

+
=
−

=

432

S 6-10

S 6-11

Beginning inventory……………………………... $ 244,000
Purchases……………………………………….…

1,540,000
Goods available…………………………………...
1,784,000
Cost of goods sold:
Sales revenue………………………. $4,000,000
Less estimated gross profit (60%) (2,400,000)
Estimated cost of goods sold………………. (1,600,000)
Estimated cost of ending inventory…………... $ 184,000

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(5 min.)

S 6-12

Correct
Amount
(Millions)
a.
b.
c.
d.

Net sales (unchanged)……………………………….
Inventory ($450 − $14)………………………………..
Cost of goods sold ($1,130 + $14)…………………
Gross profit ($1,900 − $1,144)………………………

$1,900
$ 436
$1,144
$ 756

(5 min.)

S 6-13

1. Last year’s reported gross profit was understated.
Correct gross profit last year was $5.5 million ($3.8 + $1.7).
2. This year’s gross profit is overstated.
Correct gross profit for this year is $3.8 million ($5.5 − $1.7).

Chapter 6

Inventory & Cost of Goods Sold

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(5-10 min.)

S 6-14

1. Unethical. The company falsified its ending inventory in
order to cheat the government (and the people) out of taxes.

2. Ethical. There is nothing wrong with buying inventory
whenever a company wishes.
3. Ethical. Same idea as 2.
4. Unethical. The company falsified its ending inventory and net
income.
5. Unethical. The company falsified its purchases, cost of
goods sold, and net income in order to cheat the government
(and the people) out of income tax.

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Exercises
Group A
(15-20 min.)

E 6-15A

Req. 1
Perpetual System
1. Purchases:
Inventory…………………….……….…
Accounts Payable………………….

47,000

2. Sales:
Cash ($79,000 × .21)…….…………
Accounts Receivable ($79,000 × .79).
Sales Revenue…………….……….

16,590
62,410

Cost of Goods Sold…………………..
Inventory………………….………....

47,000

79,000
41,000
41,000

Req. 2

BALANCE SHEET
Current assets:
Inventory……………………………….

$ 14,000

INCOME STATEMENT
Sales revenue…………………………….
Cost of goods sold………………………
Gross profit……………………………….

$79,000
41,000
$38,000

Chapter 6

Inventory & Cost of Goods Sold

435


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(15-25 min.)

E 6-16A

Journal
DATE

ACCOUNT TITLES AND EXPLANATION

1 Inventory ($600 + $1,920)……………..
Accounts Payable…………………...

2,520

2 Accounts Receivable (12 @ $550)…..
Sales Revenue……………………….

6,600

Cost of Goods Sold…………………….
Inventory………………………………

1,830*

3 Sales revenue…………………………...
Cost of goods sold……………………..
Gross profit……………………………...

$6,600
1,830
$4,770

Ending inventory
($750 + $600 + $1,920 − $1,830)…...
_____
*(9 @ $150) + (3 @ $160) = $1,830
**Or, (9 @ $160) = $1,440

436

DEBIT

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CREDIT

2,520

6,600

1,830

$1,440**


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(10-15 min.)

E 6-17A

1.
Begin. Bal.
Purchases
Dec. 15
26
Ending bal.

Inventory
( 5 units @ $150) 750
( 4 units @ $150)
600 Cost of goods sold
(12 units @ $160) 1,920
(12 units @ $?)
( 9 units @ $?)
?

Cost of Goods Sold

Ending Inventory

(a) Specific
unit cost (6 @ $150) + (6 @ $160) = $1,860
(b) Average
cost

12 × $156*

?

(3 @ $150) + (6 @ $160) = $1,410

= $1,872

9 × $156*

= $1,404

_____
*Average cost per unit

=

($750 + $600 + $1,920)
(5 + 4 + 12)

=

$156

(c) FIFO (9 @ $150) + (3 @ $160)

=

$1,830

(9@ $160)

= $1,440

(d) LIFO (12 @ $160)

=

$1,920

(9 @ $150)

= $1,350

2. LIFO produces the highest cost of goods sold, $1,920.
FIFO produces the lowest cost of goods sold, $1,830.
The increase in inventory cost from $150 to $160 per unit
causes the difference in cost of goods sold.

Chapter 6

Inventory & Cost of Goods Sold

437


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(10 min.)
Cost of goods sold:
LIFO ($1,920) − FIFO ($1,830)……………………
× Income tax rate……………………………………
LIFO advantage in tax savings………………………

E 6-18A
$90
.35
$ 31.50

(15 min.)

E 6-19A

1.
a. FIFO
Cost of goods sold:
(12 @ $32)… ……………................
Ending inventory:
(4 @ $32) + (5@ $63)………………
b. LIFO
Cost of goods sold:

(5 @ $63) + (7@ $32)…..................
Ending inventory:
(9 @ $32)……………......................

$384
$ 443

$539
$ 288

2.
MusicPlace
Income Statement
Month Ended April 30, 2010
Sales revenue (12 @ $112) …………………………..
Cost of goods sold…………………………………….
Gross profit……………………………………………..
Operating expenses…………………………………...
Income before income tax……………………………
Income tax expense (35%)……………………………
Net income………………………………………………

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$1,344
384
960
260

700
245
$ 455


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(15 min.) E 6-20A
Millions
1. Gross profit:
Sales revenue……………………………
Cost of goods sold
FIFO: 800,000 × $5…………………..
LIFO: (500,000 × $3) + (200,000 × $4) +
(100,000 ×5)………………………….
Gross profit………………………………

2.

FIFO
$4.8

LIFO
$4.8

4.0

$0.8

2.8

$2.0

Gross profit under FIFO and LIFO differ because inventory
costs decreased during the period.

3. Valuing the ending inventory at $5.00 per unit will, result in
an ending inventory valued at $4,000,000 (800,000 @ $5)
while the FIFO inventory was valued at $2,800,000 (500,000 @
$3) + (200,000 @ $4) + (100,000 @ $5). This would amount to
changing the method of accounting for inventories from FIFO
to LIFO. The difference of $1,200,000 between the ending
inventories would reduce cost of goods sold by $1,200,000
and increase net income by the same amount.

While

accounting changes like this are permissible under GAAP,
they must be for a business purpose, and not merely to
increase the manager’s bonus. The company’s auditors will
likely view the change unfavorably.

In addition, such a

change will likely increase the company’s tax bill, so it is
unlikely that the owners of the company will go along with it
either.
Chapter 6

Inventory & Cost of Goods Sold

439


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(5-10 min.)

E 6-21A

Thames Garden Supply
Income Statement (partial)
Year Ended July 31, 2010
Sales revenue ………………………………………………
Cost of goods sold [$67,000 + ($15,000 − $10,800)]…
Gross profit…………………………………………………

$116,000
71,200
$ 44,800

Note: Cost is used for beginning inventory because cost is
lower than market. Market (replacement cost) is used for
ending inventory because market is lower than cost at
year end.

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(15-20 min.)

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

E 6-22A

(Amounts in millions or billions)
$ 66
$19 + $65 − $18 = $66
$ 39
$105 − $66 = $39
Must first solve for d
$ 93
$138 − $45= $93
$ 94
$27 + c − $93 = $28; c = $94
$ 92
$60 + $32 = $92
$ 25
f + $56 − $21 = $60; f = $25

$ 5
$11 + $30 − g = $36; g = $5
$ 48
$84 − $36 = $48

Crane Company
Income Statement
Year Ended December 31, 2010
(Millions)
Net sales
$ 105
Cost of goods sold
Beginning inventory
$ 19
Net purchases
65
Goods available
84
Ending inventory
(18)
Cost of goods sold
66
Gross profit
39
Operating and other expenses
41
Net income (Net loss)
$(2)

Chapter 6

Inventory & Cost of Goods Sold

441


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(20-30 min.)

Company

Gross Profit
Percentage

E 6-23A

Inventory Turnover

Crane

$39
$105

= 0.371

$66
= 3.6 times
($19 + $18) / 2

Foster

$45
$138

= 0.326

$93
= 3.4 times
($27 + $28) / 2

Allen

$32
$92

= 0.348

$60
= 2.6 times
($25 + $21) / 2

Matthews

$48
$84

= 0.571

$36

= 4.5 times
($11 + $5) / 2

Matthews has the highest gross profit percentage, 57.1%.
Matthews has the highest rate of inventory turnover, 4.5 times.
Based on these data, Matthews looks the most profitable
because Matthews gross profit percentage is approximately
1½ times the other companies’ gross profit percentage. And
Matthew’s inventory turnover is about 25% higher than Crane’s
turnover.

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(15 min.)

E 6-24A

Req. 1 and 2

Gross profit percentage =

1
FIFO
$144,000 − $85,200
$144,000

= 0.408

Inventory turnover

=

2
LIFO
$144,000 − $92,800
$144,000
= 0.356

$85,200
($21,000 + $23,000) / 2

$92,800
($8,000 + $17,000) / 2

= 3.9 times

= 7.4 times

Req. 3
FIFO makes the company look better on the gross profit
percentage.

Req. 4
LIFO makes the company look better on the rate of inventory
turnover.

Chapter 6

Inventory & Cost of Goods Sold

443


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(10-15 min.)

E 6-25A

Year ended January 31, 2010

Millions

Budgeted cost of goods sold ($6,500 × 1.10)………..

$7,150

Budgeted ending inventory……………………………..

2,400

Budgeted goods available………….……………………

9,550

Actual beginning inventory……………………………..

(2,100)

Budgeted purchases……………………………………..

$7,450

(10-15 min.)

Beginning inventory………………………
Net purchases………………………………
Goods available……….…………………...
Estimated cost of goods sold:
Net sales revenue………………………
Less estimated gross profit of 35%…
Estimated cost of goods sold………...
Estimated cost of inventory destroyed..

E 6-26A

$ 47,500
30,900
78,400
$ 62,100
(21,735)
40,365
$ 38,035

Another reason managers use the gross profit method to
estimate ending inventory is to test the reasonableness of

ending inventory.
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10-15 min.)

E 6-27A

Big Blue Sea Marine Supply
Income Statement (Corrected)
Years Ended September 30, 2010 and 2009
2010
2009
Sales revenue
$143,000
$120,000
Cost of goods sold:
Beginning inventory $21,000
$ 9,000
Net purchases
74,000
67,000
Goods available
95,000
76,000
Ending inventory

(19,000)
(21,000)*
Cost of goods sold
76,000
55,000
Gross profit
67,000
65,000
Operating expenses
28,000
24,000
Net income
$ 39,000
$ 41,000

*$14,500 + $6,500 = $21,000

Big Blue Sea actually performed poorly in 2010, compared to
2009, with net income down from $41,000 to $39,000.

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Exercises

Group B
(15-20 min.)

E 6-28B

Req. 1
Perpetual System
1. Purchases:
Inventory…………………….……….…
Accounts Payable………………….
2. Sales:
Cash ($74,000 × .24)…….…………
Accounts Receivable ($74,000 × .76).
Sales Revenue…………….……….
Cost of Goods Sold…………………..
Inventory………………….………....

49,000
4,900

17,760
56,240
74,000
40,000
40,000

Req. 2

446

BALANCE SHEET
Current assets:
Inventory……………………………….

$ 17,000

INCOME STATEMENT
Sales revenue…………………………….
Cost of goods sold………………………
Gross profit……………………………….

$ 74,000
40,000
$ 34,000

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(15-25 min.)

E 6-29B

Journal
DATE

ACCOUNT TITLES AND EXPLANATION

DEBIT

1 Inventory ($960 + $1,870)……………..
Accounts Payable…………………...

2,830

2 Accounts Receivable (14 @ $625)…..
Sales Revenue……………………….

8,750

Cost of Goods Sold…………………….
Inventory………………………………

2,250*

3 Sales revenue…………………………...
Cost of goods sold……………………..
Gross profit……………………………...

$8,750
2,250
$6,500

Ending inventory
($1,120 + $960 + $1870 − $2,250)….

CREDIT

2,830

8,750

2,250

$1,700**

_____
*(13 @ $160) + (1 @ $170) = $2,250
**Or, (10 @ $170) = $1,700

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(10-15 min.)

E 6-30B

1.
Begin. Bal.
Purchases
May 15
26
Ending bal.

Inventory
( 7 units @ $160 1,120
( 6 units @ $160)
960
(11 units @ $170) 1,870
( 10 units @ $?)
?

Cost of Goods Sold
(a) Specific
unit cost
(b) Average
cost

?

Ending Inventory

(8 @ $160) + (6 @ $170) = $2,300

14 × $165*

Cost of goods sold
(14 units @ $?)

(5 @ $160) + (5 @ $170) = $1,650

= $2,310

10 × $165*

= $1,650

_____
*Average cost per unit

=

($1,120 + $960 + $1,870)
(7 + 6 + 11)

=

$165

(c) FIFO (13 @ $160) + (1 @ $170) =

$2,250

(10 @ $170)

= $1,700

(d) LIFO (11 @ $170) + (3 @ $160) =

$2,350

(10 @ $160)

= $1,600

2. LIFO produces the highest cost of goods sold, $2,350.
FIFO produces the lowest cost of goods sold, $2,250.
The increase in inventory cost from $160 to $170 per unit
causes the difference in cost of goods sold.

448

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