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Chapter 5
Reporting and Analyzing Inventories
QUESTIONS
1.

(a) FIFO: The cost of the first (earliest) items purchased in inventory flow to cost of
goods sold first. (b) LIFO: The cost of the last (most recent) items purchased in
inventory flow to cost of goods sold first.

2.

Merchandise inventory is disclosed on the balance sheet as a current asset. It is
also sometimes reported in the income statement as part of the calculation of cost
of goods sold.

3.

Incidental costs sometimes are ignored in computing the cost of inventory because
the expense of tracking such costs on a precise basis can outweigh the benefits
gained from the increased accuracy. The principle of materiality permits such
practices when the effects on the financial statements are not significant (that is,
when such practices do not impact business decisions).

4.

LIFO will result in the lower cost of goods sold when costs are declining because it
assigns the most recent, lower cost purchases to cost of goods sold.

5.

The full-disclosure principle requires that the nature of the accounting change, the
justification for the change, and the effect of the change on net income be disclosed
in the notes or in the body of a company's financial statements.

6.

No; changing the inventory method each period would violate the accounting
principle of consistency.

7.

No; the consistency principle does not preclude changes in accounting methods
from ever being made. Instead, a change from one acceptable method to another is
allowed if the company justifies the change as an improvement in financial
reporting.

8.

Many people make important business decisions based on period-to-period
fluctuations in a company's financial numbers, including gross profit and net
income. As such, inventory errors—which can substantially impact gross profit, net
income, current assets, and cost of sales—should not be permitted to cause such
fluctuations and impair business decisions. (Note: Since such errors are ―selfcorrecting,‖ they will distort net income in only two consecutive accounting
periods—the period of the error and the next period.)

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9.

An inventory error that causes an understatement (or overstatement) for net income
in one accounting period, if not corrected, will cause an overstatement (or
understatement) in the next. Since an understatement (overstatement) of one period
offsets the overstatement (understatement) in the next, such errors are said to
correct themselves.

10. Market usually means replacement cost of inventory when applied in the LCM.
11. The principle of conservatism guides preparers of accounting reports to select the
less optimistic estimate in uncertain situations where two estimates of amounts are
about equally likely. Users of information must also be cognizant of the potential
conservatism in accounting reports when making business decisions.
12. Factors that contribute to inventory shrinkage are breakage, loss, deterioration,
decay, and theft.
13.A Accounts that are used only in a periodic inventory system include Purchases,
Purchase Discounts, Purchase Returns and Allowances, and Transportation-In.
14.B For interim reporting, companies can estimate costs of goods sold and ending
inventory by either the retail inventory method or the gross profit method.
15. Inventory as a percent of current assets on February 26, 2005 is ($ in millions):
$2,851 / $6,903 = 41.3%.
16. Cost of goods available for sale equals ending inventory plus cost of sales. As of
February 28, 2005, this is computed as ($ thousands):
Ending Inventory of $1,459,520 + Cost of Sales of $7,903,641 = $9,363,161
17. Merchandise inventory ($ millions) comprises 1.4% ($101 / $7,055) of Apple’s current
assets as of September 25, 2004, and 1.0% ($56 / $5,887) of its current assets as of

September 25, 2003.

QUICK STUDIES
Quick Study 5-1 (25 minutes)
a. FIFO
Date
1/1
1/9
1/25

Goods Purchased

Cost of Goods Sold

85 @ $3.20

}

}

110 @ $3.30

1/26

Inventory Balance
320 @ $3.00
= $ 960
320 @ $3.00
= $1,232
85 @ $3.20

320 @ $3.00
85 @ $3.20
= $1,595
110 @ $3.30
50 @ $3.20
= $ 523
110 @ $3.30

320 @ $3.00 = $ 960
35 @ $3.20 =
112
$1,072

}

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Quick Study 5-1—concluded
b. LIFO
Date
1/1
1/9

Goods Purchased


Cost of Goods Sold

85 @ $3.20

1/25

}

}

110 @ $3.30

1/26

Inventory Balance
320 @ $3.00
= $ 960
320 @ $3.00
= $1,232
85 @ $3.20
320 @ $3.00
85 @ $3.20
= $1,595
110 @ $3.30
160 @ $3.00
= $ 480

110 @ $3.30 = $ 363
85 @ $3.20 =

272
160 @ $3.00 =
480
$1,115

c. Weighted Average
Date
1/1
1/9

Goods Purchased

Cost of Goods Sold

85 @ $3.20

1/25

}

}

110 @ $3.30

1/26

Inventory Balance
320 @ $3.00
= $ 960
320 @ $3.00

85 @ $3.20
= $1,232
(avg. cost is $3.04)
320 @ $3.00
85 @ $3.20
= $1,595
110 @ $3.30
(avg. cost is $3.10)

355 @ $3.10 = $1,100.5*

160 @ $3.10

= $ 496*

*rounded

Alternate solution format
(a) FIFO:

110 @ $3.30 =
50 @ $3.20 =
160

$ 363
160
$ 523 Ending inventory cost

(b) LIFO:


160 @ $3.00 =

$ 480 Ending inventory cost

(c) Weighted average:
320 @ $3.00 =
85 @ $3.20 =
110 @ $3.30 =
515

$ 960
272
363
$1,595 Cost of goods available for sale

$1,595/515 = $3.10 (rounded) weighted average cost per unit
160 units @ $3.10 = $ 496 Ending inventory cost

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Quick Study 5-2 (10 minutes)
Beginning inventory .....................................
Plus
1st week purchase .......................................

2nd week purchase ......................................
3rd week purchase .......................................
4th week purchase .......................................
Units Available for sale ................................
Cost of Goods Available for Sale................

10 units @ $60

$ 600

10 units @ $61
10 units @ $62
10 units @ $65
10 units @ $70
50 units

610
620
650
700
$3,180

Quick Study 5-3 (25 minutes)
a. FIFO
Date

Goods Purchased

12/ 7


10 @ $ 7 = $ 70

10 @ $ 7

= $ 70

12/14

20 @ $ 8 = $160

10 @ $ 7
20 @ $ 8

= $230

15 @ $ 8

= $120

15 @ $ 8
15 @ $10

= $270

12/15
12/21

Cost of Goods Sold

10 @ $7 = $110

5 @ $8
15 @ $10 = $150
____
$110

Inventory Balance

b. LIFO
Date

Goods Purchased

Cost of Goods Sold

Inventory Balance

12/7

10 @ $ 7 = $ 70

10 @ $ 7

= $ 70

12/14

20 @ $ 8 = $160

10 @ $ 7
20 @ $ 8


= $230

10 @ $ 7
5@$8

= $110

10 @ $ 7
5@$8
15 @ $10

= $260

12/15
12/21

15 @ $8 = $120
15 @ $10 = $150
____
$120

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Quick Study 5-3 (concluded)
c. Weighted Average
Date

Goods Purchased

Cost of Goods Sold

Inventory Balance

12/7

10 @ $ 7 = $70

10 @ $ 7

12/14

20 @ $ 8 = $160

10 @ $ 7
20 @ $ 8

= $ 70

}

= $230

(avg cost is $7.67)


12/15
12/21

15 @ $7.67 =$115
15 @ $10 = $150
____
$115

15 @ $7.67
15 @ $7.67
15 @ $ 10

= $115

}

= $265

(avg cost is $8.83)

d. Specific identification
(2 units x $7) + (13 units x $8) + (15 units x $10) = $268.

Quick Study 5-4 (10 minutes)
1.
2.
3.
4.
5.


LIFO
LIFO
FIFO
LIFO
Specific Identification

Quick Study 5-5 (10 minutes)
1. Title will pass at ―destination‖ which is Kwon Company’s receiving
dock. Liu should show the $750 in its inventory at year-end as Liu
retains title until the goods reach Kwon Company.
2. The consignor is Jabar Company. The consignee is Chi Company. The
consignor, Jabar Company, should include any unsold and consigned
goods in its inventory.

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Quick Study 5-6 (10 minutes)
Units in ending inventory
Units stored in basement .................................... 1,300 units
Less damaged (unsalable) units .........................
(20)
Plus units in transit .............................................. 350
Plus units on consignment .................................

80
Total units in ending inventory ........................... 1,710 units

Quick Study 5-7 (5 minutes)
Cost ......................................................................
$14,000
Plus
Transportation-in .............................................. 250
Import duties ..................................................... 900
Insurance ........................................................... 300
Inventory Cost ..................................................
$15,450
The $150 advertising cost and the $1,250 cost for sales staff salaries are
included in operating expenses—not part of inventory costs. Those two
costs are not necessary to get the vehicle in a place and condition for sale.

Quick Study 5-8 (10 minutes)
Cost of inventory (estate’s contents)
Price .....................................................................
$38,500
Transportation-in ................................................ 2,100
Insurance on shipment ...................................... 250
Cleaning and refurbishing ................................. 800
Total cost of inventory .......................................
$41,650

Quick Study 5-9 (20 minutes)
Total
Per Unit
Inventory Items Units Cost Market

Cost
Mountain bikes
11 $600
$550 $ 6,600
Skateboards
13
350
425
4,550
Gliders
26
800
700 20,800
$31,950

Total
Market
$ 6,050
5,525
18,200
$29,775

LCM applied to
Items
Whole
$ 6,050
4,550
18,200
______
$28,800

$29,775

a. LCM for inventory as a whole ...................................................

$29,775

b. LCM applied to each product ..................................................

$28,800

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Quick Study 5-10 (15 minutes)
a.
b.
c.
d.
e.

Overstates 2008 cost of goods sold.
Understates 2008 gross profit.
Understates 2008 net income.
Overstates 2009 net income.
The understated 2008 net income and the overstated 2009 net income

combine to yield a correct total income for the two-year period.
f. The 2008 error will not affect years after 2009.

Quick Study 5-11 (10 minutes)
Inventory turnover

= Cost of goods sold/Average merchandise inventory
= $1,200,000 / [($150,000 + $180,000)/2 ] = 7.27 times

Days’ sales in inventory = Ending Inventory/Costs of goods sold x 365
= ($180,000 / $1,200,000) x 365 = 54.75 days

Quick Study 5-12A (15 minutes)
Ending
Inventory

Cost of
Goods Sold

a. FIFO
(50 x $3.20) + (110 x $3.30) ................................. $523
(320 x $3.00) + (35 x $3.20) .................................

$1,072

b. LIFO
(160 x $3.00) ......................................................... $480
(110 x $3.30) + (85 x $3.20) + (160 x $3.00) .......

$1,115


c. Weighted Average ($1,595/ 515 = $3.097* cost per unit)
(160 x $3.097) ...................................................... $495*
(355 x $3.097) ......................................................

$1,100*

*rounded

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Quick Study 5-13A (15 minutes)
Ending
Inventory

a. FIFO
(15 x $8) + (15 X $10) ..........................................
(10 x $7) + (5 x $8) ..............................................

$270

b. LIFO
(10 x $7) + (20 x $8) ............................................
(15 x $10) ............................................................


$230

c. Weighted Average ($380/ 45 = $8.44 cost per unit)*
(30 x $8.44) .........................................................
(15 x $8.44) .........................................................

$253*

Cost of
Goods Sold

$110

$150

$127*

*rounded

d. Specific Identification
(2 x $7) + (13 x $8) + (15 x $10) ..........................
(8 x $7) + (7 x $8) ................................................

$268
$112

Quick Study 5-14B (15 minutes)
Goods available for sale
Inventory, January 1 ......................................................................

$190,000
Cost of goods purchased (net) .....................................................
352,000
Goods available for sale (at cost) .................................................
542,000
Net sales at retail ..............................................................................
Estimated cost of goods sold [$685,000 x (1 - 44%)]..........................
(383,600)
Estimated September 5 inventory destroyed ................................
$158,400

$685,000

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EXERCISES
Exercise 5-1 (30 minutes)
a. Specific identification
Ending inventory—100 units from January 30, 70 units from January 20, and
20 units from beginning inventory

Ending
Inventory


Computations

Cost of
Goods Sold

(100 x $5.00) + (70 x $5.60) + (20 x $6.00)....... $1,012
$3,020 - $1,012 ..................................................

$2,008

b. Weighted average perpetual
Date

Goods Purchased

Cost of Goods Sold

1/1
1/10

100 @ $ 6.00 = $ 600

1/20

300 @ $5.60

1/25

140 @ $6.00


= $ 840

40 @ $6.00

= $ 240

40 @ $6.00
300 @ $5.60
(avg. cost is $5.65)
250 @ $5.65 = $1,412*

1/30

Inventory Balance

100 @ $5.00
$2,012

90 @ $5.65
90 @ $5.65
100 @ $5.00
(avg. cost is $5.31)

= $1,920

= $ 508*
= $1,008

*rounded


c. FIFO Perpetual
Date

Goods Purchased

Cost of Goods Sold

1/1
1/10
1/20

1/30

140 @ $6.00

= $ 840

40 @ $6.00

= $ 240

40 @ $6.00
300 @ $5.60

= $1,920

40 @ $6.00 = $1,416
210 @ $5.60

90 @ $5.60


= $ 504

$2,016

90 @ $5.60
100 @ $5.00

= $1,004

100 @ $6.00 = $ 600
300 @ $5.60

1/25

Inventory Balance

100 @ $5.00

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Exercise 5-1 (Continued)
d. LIFO Perpetual
Date


Goods Purchased

Cost of Goods Sold

Inventory Balance

1/1
1/10
1/20

100 @ $6.00
300 @ $5.60

1/25
1/30

= $ 600

250 @ $5.60

= $1,400

100 @ $5.00
$2,000

140 @ $6.00

= $ 840


40 @ $6.00

= $ 240

40 @ $6.00
300 @ $5.60

= $1,920

40 @ $6.00
50 @ $5.60

= $ 520

40 @ $6.00
50 @ $5.60
100 @ $5.00

= $1,020

Alternate Solution Format for FIFO and LIFO Perpetual
Computations
c. FIFO
(90 x $5.60) + (100 x $5.00) ...............................................

Ending
Inventory

Cost of
Goods Sold


$1,004

(100 x $6.00) + (40 x $6.00) + (210 x $5.60) .....................
d. LIFO
(40 x $6.00) + (50 x $5.60) + (100 x $5.00) .......................

$2,016

$1,020

(100 x $6.00) + (250 x $5.60) .............................................

$2,000

Exercise 5-2 (20 minutes)
LAKER COMPANY
Income Statements
For Month Ended January 31
Specific
Identification

Sales...................................... $5,250

Weighted
Average

FIFO

LIFO


$5,250

$5,250

$5,250

2,012
3,238
1,250
1,988
596*
$1,392

2,016
3,234
1,250
1,984
595*
$1,389

2,000
3,250
1,250
2,000
600
$1,400

(350 units x $15 price)


Cost of goods sold ..............
Gross profit ..........................
Expenses ..............................
Income before taxes ............

2,008
3,242
1,250
1,992
Income tax expense (30%) ........
598*
Net income ........................... $1,394
* Rounded to nearest dollar.

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Exercise 5-2 (Concluded)
1. LIFO method results in the highest net income of $1,400.
2. Weighted average net income of $1,392 falls between the FIFO net
income of $1,389 and the LIFO net income of $1,400.
3. If costs were rising instead of falling, then the FIFO method would yield
the highest net income.

Exercise 5-3 (30 minutes)

a. FIFO Perpetual
Date

Goods Purchased

Cost of Goods Sold

1/1

200 @ $10

1/10
3/14

150 @ $10 = $ 1,500
350 @ $15 = $5,250

3/15

7/30

50 @ $10
250 @ $15 = $ 4,250
450 @ $20 = $9,000

10/5

10/26

Inventory Balance


100 @ $15
330 @ $20 = $ 8,100
100 @ $25 = $2,500
______
$13,850

50 @ $10

= $ 2,000
=$

500

50 @ $10
350 @ $15

= $ 5,750

100 @ $15

= $ 1,500

100 @ $15
450 @ $20

= $10,500

120 @ $20


= $ 2,400

120 @ $20
100 @ $25

= $ 4,900

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Exercise 5-3 (Concluded)
b. LIFO Perpetual
Date

Goods Purchased

Cost of Goods Sold

1/1

200 @ $10

1/10
3/14


150 @ $10 = $ 1,500
350 @ $15 = $ 5,250

3/15
300 @ $15 = $ 4,500
7/30

450 @ $20 = $ 9,000

10/5
430 @ $20 = $8,600

10/26

Inventory Balance

100 @ $25 = $ 2,500

_______
$14,600

= $ 2,000

50 @ $10

= $

500

50 @ $10

350 @ $15

= $ 5,750

50 @ $10
50 @ $15

= $ 1,250

50 @ $10
50 @ $15
450 @ $20

= $ 10,250

50 @ $10
50 @ $15
20 @ $20

= $ 1,650

50 @ $10
50 @ $15
20 @ $20
100 @ $25

= $ 4,150

Alternate Solution Format
Ending

Inventory
a. FIFO
(100 x $25) + (120 x $20) .........................................................
(150 x $10) + (50 x $10) + (250 x $15) +
(100 x $15)+ (330 x $20) ..........................................................
b. LIFO
(50 x $10) + (50 x $15) + (20 x $20) + (100 x $25) ................
(150 x $10) + (300 x $15) + (430 x $20) ..................................

Cost of
Goods Sold

$4,900
$13,850
$4,150
$14,600

FIFO Gross Margin
Sales revenue (880 units sold x $40 selling price) .........................
Less: FIFO cost of goods sold ........................................................
Gross profit ........................................................................................

$35,200
13,850
$21,350

LIFO Gross Margin
Sales revenue (880 units sold x $40 selling price) .........................
Less: LIFO cost of goods sold ........................................................
Gross profit ........................................................................................


$35,200
14,600
$20,600

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Exercise 5-4 (15 minutes)
a. Specific identification method—Cost of goods sold
Cost of goods available for sale .............................................
Ending inventory under specific identification
3/14 purchase ( 45 @ $15) ...............................................
$ 675
7/30 purchase ( 75 @ $20) ................................................
1,500
10/26 purchase (100 @ $25) ................................................
2,500
Total ending inventory under specific identification ..........
Cost of goods sold under specific identification ................

$18,750

4,675
$14,075


b. Specific identification method—Gross margin
Sales revenue (880 units sold x $40 selling price) ................
Less: Specific identification cost of goods sold ..................
Gross profit ...............................................................................

$35,200
14,075
$21,125

Exercise 5-5 (15 minutes)
Inventory Items

Units

Per Unit
Cost Market

Total
Cost

Total
Market

LCM applied to
Products
Whole

Helmets ........... 24


$50

$54

$1,200

$1,296

$1,200

Bats ................. 17

78

72

1,326

1,224

1,224

Shoes .............. 38

95

91

3,610


3,458

3,458

Uniforms ......... 42

36

36

1,512

1,512

1,512

$7,648

$7,490

$7,394

a.

Lower of cost or market of inventory as a whole = $7,490

b.

Lower of cost or market of inventory by product = $7,394


.
$7,490

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Exercise 5-6 (25 minutes)
1. Correct gross profit = $850,000 - $500,000 = $350,000 (for each year)
2. Reported income figures
Year 2007

Year 2008

Year 2009

Sales ..................................
$850,000
$850,000
$850,000
Cost of goods sold
Beginning inventory ..... $250,000
$230,000
$250,000
Cost of purchases ......... 500,000
500,000

500,000
Good available for sale...... 750,000
730,000
750,000
Ending inventory ........... 230,000
250,000
250,000
Cost of goods sold........
520,000
480,000
500,000
Gross profit ......................
$330,000
$370,000
$350,000

Exercise 5-7 (20 minutes)
2007 Inventory turnover

2007 Days' Sales in Inventory

$426,650/[($92,500 + $87,750)/2]
= 4.7 times

$87,750/$426,650 x 365 days = 75.1 days

2008 Inventory turnover

2008 Days' Sales in Inventory


$643,825/[($87,750 + $97,400)/2]
= 7.0 times

$97,400/$643,825 x 365 days = 55.2 days

Analysis comment: It appears that during a period of increasing sales, Palmer
has been efficient in controlling its amount of inventory. Specifically,
inventory turnover increased by 2.3 times (7.0 - 4.7) from 2007 to 2008. In
addition, days' sales in inventory decreased by 19.9 days (75.1 - 55.2).

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Exercise 5-8 (20 minutes)
1. a. LIFO ratio computations
LIFO current ratio (2008) = $220/$200 = 1.1
LIFO inventory turnover (2008) = $740/ [($110+$160)/2] = 5.5
LIFO days’ sales in inventory (2008) = ($160/$740) x 365 = 78.9 days
b. FIFO ratio computations
FIFO current ratio (2008) = $300*/$200 = 1.5
FIFO inventory turnover (2008) = $660/ [($145+$240)/2] = 3.4
FIFO days’ sales in inventory (2008) = ($240/$660) x 365 = 132.7 days
*$220 + ($240 - $160)

2. The use of LIFO versus FIFO for Cruz markedly impacts the ratios

computed. Specifically, LIFO makes Cruz appear worse in comparison
to FIFO numbers on the current ratio (1.1 vs. 1.5) but better on inventory
turnover (5.5 vs. 3.4) and days’ sales in inventory (78.9 vs. 132.7). These
results can be generalized. That is, when costs are rising and quantities
are stable or rising, the FIFO inventory exceeds LIFO inventory. This
suggests that (relative to FIFO) the LIFO current ratio is understated, the
LIFO inventory turnover is overstated, and the days’ sales in inventory
is understated. Overall, users prefer the FIFO numbers for these ratios
because they are considered more representative of current
replacement costs for inventory.

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Exercise 5-9A (20 minutes)
Ending
Inventory

Cost of
Goods Sold

a. Specific Identification
(100 x $5.00) + (70 x $5.60) + (20 x $6) ..................... $1,012
$3,020 - $1,012 ..........................................................


$2,008

b. Weighted Average
($3,020 / 540 units = $5.593* average cost per unit)

190 x $5.593 ................................................................ $1,063*
350 x $5.593 ................................................................

$1,958*

c. FIFO
(100 x $5.00) + (90 x $5.60) ........................................ $1,004
(140 x $6.00) + (210 x $5.60) .....................................

$2,016

d. LIFO
(140 x $6.00) + (50 x $5.60) ........................................ $1,120
(100 x $5.00) + (250 x $5.60) ......................................

$1,900

*rounded

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Exercise 5-10A (20 minutes)
Cost of goods available for sale = $18,750 (given in Exercise 5-3)
Ending
Cost of
Inventory Goods Sold
a. FIFO
(100 x $25) + (120 x $20) ............................................

$4,900

(200 x $10) + (350 x $15) + (330 x $20) .....................

$13,850

b. LIFO
(200 x $10) + (20 x $15) ...............................................

(100 x $25) + (450 x $20) + (330 x $15) .....................

$2,300
$16,450

c.
FIFO Gross Margin
Sales revenue (880 units sold x $40 selling price) ................ $35,200
Less: FIFO cost of goods sold ............................................... 13,850
Gross margin............................................................................. $21,350
LIFO Gross Margin

Sales revenue (880 units sold x $40 selling price) ................ $35,200
Less: LIFO cost of goods sold ............................................... 16,450
Gross margin............................................................................. $18,750

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Exercise 5-11A (20 minutes)
Ending
Inventory

a. Specific identification
(50 x $2.90) + (50 x $2.80) + (50 x $2.50) .............
$3,853 - $410 ..........................................................
b. Weighted average ($3,853/1,500 = $2.57*)
$2.57 x 150 .............................................................
$3,853 - $385.5 .......................................................
c. FIFO
(150 x $2.90) ..........................................................
(100 x $2.00) + (220 x $2.25) + (540 x $2.50) +
(480 x $2.80) + (10 x 2.90) ...............................
d. LIFO
(100 x $2.00) + (50 x $2.25) ...................................
(160 x $2.90) + (480 x $2.80) + (540 x $2.50) +
(170 x $2.25) .....................................................

*Rounded

Cost of
Goods Sold

$410
$3,443
385.5**
3,467.5**
435
3,418
312.5**
3,540.5**

**Some students will round to the nearest dollar, which is fine.

Income effect: FIFO provides the lowest cost of goods sold, the
highest gross profit, and the highest net income.
Exercise 5-12A (20 minutes)
Ending
Inventory

a. Specific identification
(50 x $2.00) + (50 x $2.30) + (50 x $2.50) .............
$3,775 - $340 ..........................................................
b. Weighted average ($3,775/1,515 = $2.49*)
$2.49 x 150 .............................................................
$3,775 - $373.50 .....................................................
c. FIFO
(125 x $2.00) + (25 x $2.30) ...................................

(140 x $3.00) + (300 x $2.80) + (400 x $2.50) +
(525 x $2.30) .....................................................
d. LIFO
(140 x $3.00) + (10 x $2.80) ...................................
(125 x $2.00) + (550 x $2.30) + (400 x $2.50) +
(290 x $2.80) .....................................................
*Rounded

Cost of
Goods Sold

$340
$3,435
373.5**
3,401.5**
307.5**
3,467.5**
448
3,327

**Some students will round to the nearest dollar, which is fine.

Income effect: FIFO provides the highest cost of goods sold, the
lowest gross profit, and the lowest net income.
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Exercise 5-13B (20 minutes)
At Cost

At Retail

Goods available for sale
Beginning inventory ................................................... $ 63,800
Cost of goods purchased .......................................... 115,060
Goods available for sale ............................................ $178,860
Deduct net sales at retail ..............................................
Ending inventory at retail ..............................................

$128,400
196,800
325,200
260,000
$ 65,200

Cost ratio: ($178,860/$325,200) = 0.55 .............................
Ending inventory at cost ($65,200 x 55%) ................... $ 35,860

Exercise 5-14B (20 minutes)
Goods available for sale
Inventory, January 1 .....................................................
Net cost of goods purchased* ......................................
Goods available for sale ...............................................
Less estimated cost of goods sold
Net sales .........................................................................

Estimated cost of goods sold
[$1,000,000 x (1 – 30%)] ...........................................
Estimated March 31 inventory ........................................
*

$ 225,000
802,250
1,027,250
$1,000,000
(700,000)
$ 327,250

$795,000 - $11,550 + $18,800 = $802,250

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PROBLEM SET A
Problem 5-1A (40 minutes)
1. Compute cost of goods available for sale and units available for sale
Beginning inventory ...........................

600 units @ $45

$27,000


Feb. 10 .................................................

350 units @ $42

14,700

Mar. 13 ................................................. 200 units @ $29
Aug. 21 ................................................. 150 units @ $50
Sept. 5 ................................................. 545 units @ $46
Units available ..................................... 1,845 units

5,800
7,500
25,070

Cost of goods available for sale

$80,070

2. Units in ending inventory
Units available (from part 1) ............................
1,845
Less: Units sold (600+650) ..............................
1,250
Ending Inventory (units) ..................................
595

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Problem 5-1A (Continued)
3a. FIFO perpetual
Date

Goods Purchasd

Cost of Goods Sold

1/1
2/10

3/13

350 @ $42 = $14,700

200 @ $29 = $ 5,800

3/15

600 @ $45 = $27,000

8/21

150 @ $50 = $ 7,500


9/5

545 @ $46 = $25,070

600 @ $45

= $27,000

600 @ $45
350 @ $42

= $41,700

600 @ $45
350 @ $42
200 @ $29

= $47,500

350 @ $42
200 @ $29

= $20,500

350 @ $42
200 @ $29
150 @ $50

= $28,000


350 @ $42
200 @ $29
150 @ $50
545 @ $46
350 @ $42
200 @ $29 = $25,500
100 @ $50

9/10

Inventory Balance

50 @ $50
545 @ $46

= $53,070

= $27,570

______
$52,500

FIFO Alternate Solution Format
Cost of goods available for sale
Less: Cost of sales
600 @
350 @
200 @
100 @

Total cost of goods sold
Ending Inventory

$80,070
$45
$42
$29
$50

$27,000
14,700
5,800
5,000
52,500
$27,570

Proof of Ending Inventory

Ending Inventory .................

50 @ $50
545 @ $46
595 units

$ 2,500
25,070
$27,570

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Problem 5-1A (Continued)
3b. LIFO perpetual
Date

Goods Purchased

Cost of Goods Sold

1/1
2/10

3/13

350 @ $42 = $14,700

200 @ $29 = $ 5,800

3/15

8/21

9/5

200 @ $29

350 @ $42
50 @ $45

600 @ $45

= $27,000

600 @ $45
350 @ $42

= $41,700

600 @ $45
350 @ $42
200 @ $29

= $47,500

550 @ $45

= $24,750

550 @ $45
150 @ $50

= $32,250

= $22,750

150 @ $50 = $ 7,500


545 @ $46 = $25,070

9/10

Inventory Balance

550 @ $45
150 @ $50
545 @ $46
545 @ $46
105 @ $50

= $30,320
_______
$53,070

550 @ $45
45 @ $50

= $57,320

= $27,000

LIFO alternate solution format
Cost of goods available for sale
Less: Cost of sales
200 @ $29
350 @ 42
50 @ 45

545 @ 46
105 @ 50
Cost of Goods Sold
Ending Inventory

$80,070
$ 5,800
14,700
2,250
25,070
5,250
53,070
$27,000

Proof of Ending Inventory
Ending Inventory…

550 @ $45
45 @ 50
595 units

$24,750
2,250
$27,000

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Problem 5-1A (Continued)
3c. Specific Identification
Cost of goods available for sale .............
Less: Cost of Goods Sold
500 @ $45 .................................... $22,500
300 @ $42 .................................... 12,600
200 @ $29 .................................... 5,800
50 @ $50 .................................... 2,500
200 @ $46 .................................... 9,200
Total cost of goods sold ..........................
Ending Inventory ......................................

$80,070

52,600
$27,470

Proof of Ending Inventory

Ending Inventory….

100 @ $45
50 @ $42
100 @ $50
345 @ $46
595 units


$ 4,500
2,100
5,000
15,870
$27,470

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Problem 5-1A (Continued)
3d. Weighted Average
Date

Goods Purchased

Cost of Goods Sold

1/1
2/10

350 @ $42 = $14,700

Inventory Balance
600 @ $45.00


= $27,000

600 @ $45.00
350 @ $42.00

= $41,700

(avg. cost is $43.895*)

3/13

200 @ $29 = $ 5,800

600 @ $45.00
350 @ $42.00
200 @ $29.00

= $47,500

(avg. cost is $41.304*)

3/15
8/21

600 @ $41.304* = $24,782** 550 @ $41.304*
150 @ $50 = $ 7,500

= $22,717**

550 @ $41.304*

150 @ $50.000

= $30,217

(avg. cost is $43.167*)

9/5

545 @ $46 = $25,070

550 @ $43.167*
150 @ $50.000
545 @ $46.000

= $55,287

(avg. cost is $44.407*)

9/10

650 @ $44.407 = $28,865** 595 @ $44.407

= $26,422***

$53,647
* rounded to nearest tenth of a cent
** rounded to nearest dollar
*** Total cost of goods sold plus ending inventory = $53,647 + $26,422 = $80,069 (the $1
difference from cost of goods available for sale of $80,070 is due to rounding)


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Problem 5-1A (Concluded)
4.
LIFO

Specific
Identification

Weighted
Average

$93,750

$93,750

$93,750

52,500

53,070

52,600


53,647

Gross profit............................. $41,250

$40,680

$41,150

$40,103

FIFO

Sales (1,250 x $75) ................. $93,750
Less: Cost of goods sold ......

5. Montoure’s manager would likely prefer the FIFO method since this
methods’ gross profit is the largest at $41,250. This would give the
manager the highest bonus based on gross profit.

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