BRIEF EXERCISES
BE6–1 Match each of the following types of companies with its definition.
Types of Companies Definitions
1. Service company
2. Merchandising company 3. Manufacturing company
a. Purchases goods that are primarily in finished form for resale to customers. b. Earns revenues by providing services
to customers.
c. Produces the goods they sell to customers.
BE6–2 Match each of the following inventory classifications with its definition.
Inventory Classifications Definitions
1. Raw materials 2. Work-in-process 3. Finished goods
a. Cost of items not yet complete by the end of the period.
b. Inventory that has been substantially completed.
c. Basic components used to build a product.
BE6–3 At the beginning of 2012, Bryers Incorporated reports inventory of $7,000. During 2012, the company purchases additional inventory for $22,000. At the end of 2012, the cost of inventory remaining is $9,000. Calculate cost of goods sold for 2012. BE6–4 During 2012, Wright Company sells 320 remote control airplanes for $100 each. The company has the following inventory purchase transactions for 2012.
Date Transaction Number of Units Unit Cost Total Cost
Jan. 1 Beginning inventory 50 $72 $ 3,600
May. 5 Purchase 200 75 15,000
Nov. 3 Purchase 100 80 8,000
350 $26,600
Calculate ending inventory and cost of goods sold for 2012 assuming the company uses FIFO.
BE6–5 Refer to the information in BE6–4. Calculate ending inventory and cost of goods sold for 2012, assuming the company uses LIFO.
BE6–6 Refer to the information in BE6–4. Calculate ending inventory and cost of goods sold for 2012, assuming the company uses weighted-average cost.
BE6–7 Refer to the information in BE6–4. Calculate ending inventory and cost of goods sold for 2012, assuming the company uses specific identification. Actual sales by the company include its entire beginning inventory, 180 units of inventory from the May 5 purchase, and 90 units from the November 3 purchase.
BE6–8 For each item below, indicate whether FIFO or LIFO will generally result in a higher reported amount when inventory costs are rising versus falling. The first answer is provided as an example. Inventory Costs Higher Total Assets Higher Cost of Goods Sold Higher Net Income Rising FIFO Declining Understand terms related to types of companies (LO1)
Understand terms related to inventory (LO1)
Calculate cost of goods sold (LO2)
Calculate ending inventory and cost of goods sold using FIFO (LO3)
Calculate ending inventory and cost of goods sold using LIFO (LO3)
Calculate ending inventory and cost of goods sold using weighted-average cost (LO3)
Calculate ending inventory and cost of goods sold using specific identification (LO3) Identify financial
statement effects of FIFO and LIFO (LO4)
BE6–9 Shankar Company uses a perpetual system to record inventory transactions. The company purchases inventory on account on February 2, 2012, for $30,000 and then sells this inventory on account on March 17, 2012, for $50,000. Record transactions for the purchase and sale of inventory.
BE6–10 Shankar Company uses a perpetual system to record inventory transactions. The company purchases inventory on account on February 2, 2012, for $30,000. In addition to the cost of inventory, the company also pays $500 for freight charges associated with the purchase on the same day. Record the purchase of inventory on February 2, including the freight charges.
BE6–11 Shankar Company uses a perpetual system to record inventory transactions. The company purchases 1,000 units of inventory on account on February 2, 2012, for $30,000 ($30 per unit) but then returns 50 defective units on February 5, 2012. Record the inventory purchase on February 2 and the inventory return on February 5.
BE6–12 Shankar Company uses a perpetual system to record inventory transactions. The company purchases inventory on account on February 2, 2012, for $30,000, with terms 2/10, n/30. On February 10, the company pays on account for the inventory. Record the inventory purchase on February 2 and the payment on February 10. BE6–13 For each company, calculate the missing amount.
Company
Sales Revenue
Cost of
Goods Sold Gross Profit
Operating
Expenses Net Income
Lennon $16,000 (a) $7,000 $3,000 $4,000
Harrison 17,000 $10,000 (b) 5,000 2,000
McCartney 11,000 8,000 3,000 (c) 1,000
Starr 14,000 5,000 9,000 6,000 (d)
BE6–14 Powder Ski Shop reports inventory using lower-of-cost-or-market. Below is information related to its year-end inventory. Calculate the amount to be reported for ending inventory.
Inventory Quantity Cost Market
Ski jackets 15 $120 $100
Skis 20 350 400
BE6–15 Creative Technology reports inventory using lower-of-cost-or-market. Below is information related to its year-end inventory. Calculate the amount to be reported for ending inventory.
Inventory Quantity Cost Market
Optima cameras 100 $50 $80
Inspire speakers 40 60 50
BE6–16 Using the amounts below, calculate the inventory turnover ratio, average days in inventory, and gross profit ratio.
Net sales $200,000
Cost of goods sold 140,000
Beginning inventory 45,000
Ending inventory 35,000
BE6–17 Refer to the information in BE6–9, but now assume that Shankar uses a periodic system to record inventory transactions. Record transactions for the purchase and sale of inventory.
Record inventory purchases and sales using a perpetual system (LO5)
Record freight charges for inventory using a perpetual system (LO5)
Record purchase returns of inventory using a perpetual system (LO5)
Record purchase discounts of inventory using a perpetual system (LO5)
Calculate amounts related to the multiple-step income statement (LO6)
Calculate ending inventory using lower-of-cost-or-market (LO7)
Calculate ending inventory using lower-of-cost-or-market (LO7)
Calculate inventory ratios (LO8)
Record inventory purchases and sales using a periodic system (LO9)
BE6–18 Refer to the information in BE6–10, but now assume that Shankar uses a periodic system to record inventory transactions. Record the purchase of inventory on February 2, including the freight charges.
BE6–19 Refer to the information in BE6–11, but now assume that Shankar uses a periodic system to record inventory transactions. Record the inventory purchase on February 2 and the inventory return on February 5.
BE6–20 Refer to the information in BE6–12, but now assume that Shankar uses a periodic system to record inventory transactions. Record the inventory purchase on February 2 and the payment on February 10.
BE6–21 Ebbers Corporation overstated its ending inventory balance by $10,000 in 2012. What impact will this error have on cost of goods sold and gross profit in 2012 and 2013?
BE6–22 Refer to the information in BE6–21. What impact will this error have on ending inventory and retained earnings in 2012 and 2013? Ignore any tax effects.
Record freight charges for inventory using a periodic system (LO9)
Record purchase returns of inventory using a periodic system (LO9)
Record purchase discounts of inventory using a periodic system (LO9) Find income statement effects of overstatement in ending inventory (LO10)
Find balance sheet effects of overstatement in ending inventory (LO10)
EXERCISES
E6–1 Russell Retail Group begins the year with inventory of $45,000 and ends the year with inventory of $35,000. During the year, the company has four purchases for the following amounts. Purchase on February 17 $200,000 Purchase on May 6 120,000 Purchase on September 8 150,000 Purchase on December 4 400,000 Required:
Calculate cost of goods sold for the year.
E6–2 During 2012, TRC Corporation has the following inventory transactions.
Date Transaction Number of Units Unit Cost Total Cost
Jan. 1 Beginning inventory 40 $32 $ 1,280
Apr. 7 Purchase 120 34 4,080
Jul. 16 Purchase 190 37 7,030
Oct. 6 Purchase 100 38 3,800
450 $16,190
For the entire year, the company sells 400 units of inventory for $50 each.
Required:
1. Using FIFO, calculate (a) ending inventory, (b) cost of goods sold, (c) sales revenue, and (d) gross profit.
2. Using LIFO, calculate (a) ending inventory, (b) cost of goods sold, (c) sales revenue, and (d) gross profit.
3. Using weighted-average cost, calculate (a) ending inventory, (b) cost of goods sold, (c) sales revenue, and (d) gross profit.
4. Determine which method will result in higher profitability when inventory costs are rising.
Calculate cost of goods sold (LO2)
Calculate inventory amounts when costs are rising (LO3)
E6–3 During 2012, Trombley Incorporated has the following inventory transactions.
Date Transaction Number of Units Unit Cost Total Cost
Jan. 1 Beginning inventory 10 $12 $120
Mar. 4 Purchase 15 11 165
Jun. 9 Purchase 20 10 200
Nov. 11 Purchase 20 8 160
65 $645
For the entire year, the company sells 50 units of inventory for $20 each.
Required:
1. Using FIFO, calculate (a) ending inventory, (b) cost of goods sold, (c) sales revenue, and (d) gross profit.
2. Using LIFO, calculate (a) ending inventory, (b) cost of goods sold, (c) sales revenue, and (d) gross profit.
3. Using weighted-average cost, calculate (a) ending inventory, (b) cost of goods sold, (c) sales revenue, and (d) gross profit.
4. Determine which method will result in higher profitability when inventory costs are declining.
E6–4 Bingerton Industries uses a perpetual inventory system. The company began the year with inventory of $75,000. Purchases of inventory on account during the year totaled $300,000. Inventory costing $325,000 was sold on account for $500,000.
Required:
Record transactions for the purchase and sale of inventory.
E6–5 On June 5, Staley Electronics purchases 100 units of inventory on account for $10 each. After closer examination, Staley determines 20 units are defective and returns them to its supplier for full credit on June 9. All remaining inventory is sold on account on June 16 for $15 each.
Required:
Record transactions for the purchase, return, and sale of inventory.
E6–6 On June 5, Staley Electronics purchases 100 units of inventory on account for $10 each, with terms 2/10, n/30. Staley pays for the inventory on June 12.
Required:
1. Record transactions for the purchase of inventory and payment on account. 2. Now assume payment is made on June 22. Record the payment on account. E6–7 Littleton Books has the following transactions during May.
May 2 Purchases books on account from Readers Wholesale for $2,300, terms 2/10, n/30.
May 3 Pays freight costs of $100 on books purchased from Readers.
May 5 Returns books with a cost of $300 to Readers because part of the order is incorrect.
May 10 Pays the full amount due to Readers.
May 30 Sells all books purchased on May 2 (less those returned on May 5) for $3,000 on account.
Required:
1. Record the transactions of Littleton Books, assuming the company uses a perpetual inventory system.
2. Assume that payment to Readers is made on May 24 instead of May 10. Record this payment.
Calculate inventory amounts when costs are declining (LO3)
Record inventory transactions using a perpetual system (LO5)
Record inventory purchase and purchase return using a perpetual system (LO5)
Record inventory purchase and purchase discount using a perpetual system (LO5)
Record transactions using a perpetual system (LO5)
E6–8 Sundance Systems has the following transactions during July.
July 5 Purchases 20 laptop computers on account from Red River Supplies for $1,500 each, terms 3/10, n/30.
July 8 Returns to Red River two laptops that had defective hard drives. July 13 Pays the full amount due to Red River.
July 28 Sells remaining 18 laptops purchased on July 5 for $2,000 each on account.
Required:
Record the transactions of Sundance Systems, assuming the company uses a perpetual inventory system.
E6–9 DS Unlimited has the following transactions during August.
August 6 Purchases 50 handheld game devices on account from GameGirl, Inc., for $100 each, terms 1/10, n/60.
August 7 Pays $300 to Sure Shipping for freight charges associated with the August 6 purchase.
August 10 Returns to GameGirl five game devices that were defective. August 14 Pays the full amount due to GameGirl.
August 23 Sells 30 game devices purchased on August 6 for $120 each to customers on account. The total cost of the 30 game devices sold is $3,170.
Required:
Record the transactions of DS Unlimited, assuming the company uses a perpetual inventory system.
E6–10 Refer to the transactions in E6–9.
Required:
Prepare the transactions for GameGirl, Inc., assuming the company uses a perpetual inventory system. Assume the 50 game devices sold on August 6 to DS Unlimited had a cost to GameGirl of $80 each. The items returned on August 10 were considered worthless to GameGirl and were discarded.
E6–11 Wayman Corporation reports the following amounts in its December 31, 2012, income statement.
Sales revenue $320,000 Income tax expense $ 40,000 Interest expense 10,000 Cost of goods sold 120,000 Salaries expense 30,000 Advertising expense 20,000 Utilities expense 40,000
Required:
Prepare a multiple-step income statement.
E6–12 Tisdale Incorporated reports the following amount in its December 31, 2012, income statement.
Sales revenue $250,000 Income tax expense $ 20,000
Gain on land sale* 100,000 Cost of goods sold 180,000 Selling expenses 50,000 Administrative expenses 30,000 General expenses 40,000
*On July 12, 2012, the company sold land for $400,000 that it had previously purchased for $300,000, resulting in a $100,000 gain. This is the only land owned by the company.
Required:
1. Prepare a multiple-step income statement.
2. Explain how analyzing the multiple levels of profitability can help in understanding the future profit-generating potential of Tisdale Incorporated.
Record transactions using a perpetual system (LO5)
Record transactions using a perpetual system (LO5) Flip Side of E6–10
Record transactions using a perpetual system (LO5)
Flip Side of E6–9
Prepare a multiple-step income statement (LO6)
Prepare a multiple-step income statement and analyze profitability (LO6)
E6–13 Home Furnishings reports inventory using the lower-of-cost-or-market method. Below is information related to its year-end inventory.
Inventory Quantity Cost Market
Furniture 100 $ 75 $ 90
Electronics 40 300 250
Required:
1. Calculate ending inventory under lower-of-cost-or-market. 2. Record any necessary adjustment to inventory.
3. Explain the impact of the adjustment in the financial statements.
E6–14 A company like Golf USA that sells golf-related inventory typically will have inventory items such as golf clothing and golf equipment. As technology advances the design and performance of the next generation of drivers, the older models become less marketable and therefore decline in value. Suppose that in 2012, Ping (a manufacturer of golf clubs) introduces the MegaDriver II, the new and improved version of the MegaDriver. Below are amounts related to Golf USA’s inventory at the end of 2012.
Inventory Quantity Cost Market
Shirts 25 $ 50 $ 60
MegaDriver 5 260 200
MegaDriver II 20 300 320
Required:
1. Calculate ending inventory under lower-of-cost-or-market. 2. Record any necessary adjustment to inventory.
3. Explain the impact of the adjustment in the financial statements.
E6–15 Lewis Incorporated and Clark Enterprises report the following amounts for 2012. Lewis Clark Inventory (beginning) $ 14,000 $ 40,000 Inventory (ending) 8,000 50,000 Purchases 120,000 150,000 Purchase returns 5,000 50,000 Required:
1. Calculate cost of goods sold for each company.
2. Calculate the inventory turnover ratio for each company. 3. Calculate the average days in inventory for each company.
4. Explain which company appears to be managing its inventory more efficiently. E6–16 Below are amounts found in the income statements of three companies.
Company Sales Revenue Cost of Goods Sold Operating Expenses Nonoperating Expenses Income Tax Expense Henry $12,000 $ 3,000 $4,000 $1,000 $1,000 Grace 15,000 10,000 6,000 3,000 0 James 20,000 12,000 2,000 0 2,000 Required:
1. For each company, calculate (a) gross profit, (b) operating income, (c) income before income taxes, and (d) net income.
2. For each company, calculate the gross profit ratio and indicate which company has the most favorable ratio.
Calculate inventory using lower-of-cost-or-market (LO7) Calculate inventory using lower-of-cost-or market (LO7)
Calculate cost of goods sold, the inventory turnover ratio, and average days in inventory (LO2, 8)
Calculate levels of profitability for a multiple-step income statement and the gross profit ratio (LO6, 8)
E6–17 Refer to the transactions in E6–7.
Required:
1. Record the transactions of Littleton Books, assuming the company uses a periodic inventory system.
2. Record the period-end adjustment to cost of goods sold on May 31, assuming the company has no beginning or ending inventory.
E6–18 Refer to the transactions in E6–8.
Required:
1. Record the transactions of Sundance Systems, assuming the company uses a periodic inventory system.
2. Record the period-end adjustment to cost of goods sold on July 31, assuming the company has no beginning inventory.
E6–19 Refer to the transactions in E6–9.
Required:
1. Record the transactions of DS Unlimited, assuming the company uses a periodic inventory system.
2. Record the period-end adjustment to cost of goods sold on August 31, assuming the company has no beginning inventory and ending inventory has a cost of $1,585. E6–20 Mulligan Corporation purchases inventory on account with terms FOB shipping point. The goods are shipped on December 30, 2012, but do not reach the company until January 5, 2013. Mulligan correctly records accounts payable associated with the purchase but does not include this inventory in its 2012 ending inventory count.
Required:
1. If an error has been made, explain why.
2. If an error has been made, indicate whether there is an understatement (U), overstatement (O), or no effect (N) on the reported amount of each financial statement element in the current year and following year. Ignore any tax effects.
Balance Sheet Income Statement
Year Assets Liabilities
Stockholders’ Equity Revenues Cost of Goods Sold Gross Profit Current Following
Record transactions using a periodic system (LO9)
Record transactions using a periodic system (LO9)
Record transactions using a periodic system (LO9)
Find financial statement effects of understatement in ending inventory (LO10)
PROBLEMS: SET A
P6–1A Sandra’s Purse Boutique has the following transactions related to its top-selling Gucci purse for the month of October 2012.
Date Transactions Units Cost per Unit Total Cost
October 1 Beginning inventory 6 $800 $ 4,800
October 4 Sale 4 October 10 Purchase 5 810 4,050 October 13 Sale 3 October 20 Purchase 4 820 3,280 October 28 Sale 7 October 30 Purchase 6 830 4,980 $17,110 Calculate ending inventory and cost of goods sold for four inventory methods (LO3)
Required:
1. Calculate ending inventory and cost of goods sold at October 31, 2012, using the specific identification method. The October 4 sale consists of purses from beginning inventory, the October 13 sale consists of one purse from beginning inventory and two purses from the October 10 purchase, and the October 28 sale consists of three purses from the October 10 purchase and four purses from the October 20 purchase.
2. Using FIFO, calculate ending inventory and cost of goods sold at October 31, 2012. 3. Using LIFO, calculate ending inventory and cost of goods sold at October 31, 2012. 4. Using weighted-average cost, calculate ending inventory and cost of goods sold at
October 31, 2012.
P6–2A Greg’s Bicycle Shop has the following transactions related to its top-selling Mongoose mountain bike for the month of March 2012:
Date Transactions Units Cost per Unit Total Cost
March 1 Beginning inventory 20 $200 $ 4,000
March 5 Sale ($300 each) 15
March 9 Purchase 10 220 2,200
March 17 Sale ($350 each) 8
March 22 Purchase 10 230 2,300
March 27 Sale ($375 each) 12
March 30 Purchase 8 250 2,000
$10,500
Required:
1. Calculate ending inventory and cost of goods sold at March 31, 2012, using the specific identification method. The March 5 sale consists of bikes from beginning inventory, the March 17 sale consists of bikes from the March 9 purchase, and the March 27 sale consists of four bikes from beginning inventory and eight bikes from the March 22 purchase.
2. Using FIFO, calculate ending inventory and cost of goods sold at March 31, 2012. 3. Using LIFO, calculate ending inventory and cost of goods sold at March 31, 2012. 4. Using weighted-average cost, calculate ending inventory and cost of goods sold at
March 31, 2012.
5. Calculate sales revenue and gross profit under each of the four methods.
6. Comparing FIFO and LIFO, which one provides the more meaningful measure of ending inventory? Explain.
7. If Greg’s Bicycle Shop chooses to report inventory using LIFO instead of FIFO, record the LIFO adjustment.
P6–3A At the beginning of July, CD City has a balance in inventory of $2,900. The following transactions occur during the month of July.
July 3 Purchase CDs on account from Wholesale Music for $1,800, terms 2/10, n/30. July 4 Pay freight charges related to the July 3 purchase from Wholesale Music, $100. July 9 Return incorrectly ordered CDs to Wholesale Music and receive credit, $300. July 11 Pay Wholesale Music in full.
July 12 Sell CDs to customers on account, $4,800, that had a cost of $2,500. July 15 Receive full payment from customers related to the sale on July 12. July 18 Purchase CDs on account from Music Supply for $2,600, terms 1/10, n/30. July 22 Sell CDs to customers for cash, $3,700, that had a cost of $2,000.
July 28 Return CDs to Music Supply and receive credit of $200. July 30 Pay Music Supply in full.
Required:
1. Assuming that CD City uses a perpetual inventory system, record the transactions. 2. Prepare the top section of the multiple-step income statement through gross profit
for the month of July. Calculate ending
inventory, cost of goods sold, sales revenue, and gross profit for four inventory methods (LO3, 4, 5)
Record transactions and prepare a partial income statement using a perpetual inventory system (LO5, 6)
P6–4A A local Chevrolet dealership carries the following types of vehicles:
Inventory Items Quantity Cost per Unit
Market (replacement cost) per Unit Lower-of- Cost-or-Market Vans 3 $22,000 $20,000 Trucks 6 17,000 16,000 2-door sedans 2 12,000 14,000 4-door sedans 7 16,000 19,000 Sports cars 3 32,000 35,000 SUVs 5 28,000 23,000 Because of recent increases in gasoline prices, the car dealership has noticed a reduced demand for its SUVs, vans, and trucks.
Required:
1. Compute the total cost of the entire inventory.
2. Determine whether each inventory item would be reported at cost or market. Multiply the quantity of each inventory item by the appropriate cost or market amount and place the total in the “Lower-of-Cost-or-Market” column. Then determine the total for that column.
3. Compare your answers in Requirement 1 and Requirement 2 and then record any necessary adjustment to write down inventory from cost to market value. 4. Discuss the financial statement effects of using lower-of-cost-or-market to report
inventory.
P6–5A For 2012, Parker Games has the following inventory transactions related to its traditional board games.
Date Transaction Units Cost Total Cost
Jan. 1 Beginning inventory 100 $20 $2,000
Mar. 12 Purchase 80 15 1,200
Sep. 17 Purchase 50 8 400
230 $3,600
Jan. 1–Dec. 31 Sales 160
Because of the increasing popularity of electronic video games, Parker Games
continues to see a decline in the demand for board games. Sales prices have decreased by over 50% during 2012. At the end of the year, Parker estimates the total cost to replace the 70 units of unsold inventory is only $400.
Required:
1. Using FIFO, calculate ending inventory and cost of goods sold. 2. Using LIFO, calculate ending inventory and cost of goods sold.
3. Determine the amount of ending inventory to report using lower-of-cost-or-market. Record any necessary adjustment under (a) FIFO and (b) LIFO.
P6–6A At the beginning of October, Bowser Co.’s inventory consists of 60 units with a cost per unit of $40. The following transactions occur during the month of October. October 4 Purchase 120 units of inventory on account from Waluigi Co. for $50 per
unit, terms 2/10, n/30.
October 5 Pay freight charges related to the October 4 purchase, $600.
October 9 Return 20 defective units from the October 4 purchase and receive credit. October 12 Pay Waluigi Co. in full.
October 15 Sell 150 units of inventory to customers on account, $12,000. [ Hint: The cost of units sold from the October 4 purchase includes $50 unit cost plus $6 per unit for freight less $1 per unit for the purchase discount, or $55 per unit.] October 19 Receive full payment from customers related to the sale on October 15.
Report inventory using lower-of-cost-or-market (LO7)
Calculate ending inventory and cost of goods sold using FIFO and LIFO and adjust inventory using the lower-of-cost-or-market method (LO3, 7)
Record transactions using a perpetual system, prepare a partial income statement, and adjust for the lower-of-cost-or-market method (LO2, 3, 4, 5, 6, 7)
October 20 Purchase 100 units of inventory from Waluigi Co. for $60 per unit, terms 1/10, n/30.
October 22 Sell 90 units of inventory to customers for cash, $7,200.
Required:
1. Assuming that Bowser Co. uses a FIFO perpetual inventory system to maintain its inventory records, record the transactions.
2. Assuming for preparing financial statements that Bowser Co. reports inventory using LIFO, record the LIFO adjustment.
3. Suppose by the end of October that the remaining inventory is estimated to have a market value per unit of $35, record any necessary adjustment for the lower-of-cost-or-market method after the LIFO adjustment.
4. Prepare the top section of the multiple-step income statement through gross profit for the month of October after the lower-of-cost-or-market adjustment.
P6–7A Baskin-Robbins is one of the world’s largest specialty ice cream shops. The company offers dozens of different flavors, from Very Berry Strawberry to lowfat Espresso ’n Cream. Assume that a local Baskin-Robbins in Raleigh, North Carolina, has the following amounts for the month of July 2012.
Salaries expense $12,700 Sales revenue $64,800
Inventory (July 1, 2012) 1,800 Interest income 2,300
Sales returns 1,200 Cost of goods sold 28,200
Utilities expense 3,100 Rent expense 5,700
Income tax expense 5,000 Interest expense 500
Inventory (July 31, 2012) 1,200
Required:
1. Prepare a multiple-step income statement for the month ended July 31, 2012. 2. Calculate the inventory turnover ratio for the month of July. Would you expect this
ratio to be higher or lower in December 2012? Explain. 3. Calculate the gross profit ratio for the month of July.
P6–8A Wawa Food Markets is a convenience store chain located primarily in the Northeast. The company sells gas, candy bars, drinks, and other grocery-related items. St. Jude Medical Incorporated sells medical devices related to cardiovascular needs. Suppose a local Wawa Food Market and St. Jude sales office report the following amounts in the same year (company names are disguised):
Company 1 Company 2
Net sales $300,000 $300,000
Cost of goods sold 90,000 240,000
Gross profit $210,000 $ 60,000
Average inventory $ 30,000 $ 20,000
Required:
1. For Company 1 and Company 2, calculate the inventory turnover ratio. 2. For Company 1 and Company 2, calculate the gross profit ratio.
3. After comparing the inventory turnover ratios and gross profit ratios, which company do you think is Wawa and which is St. Jude? Explain.
P6–9A Refer to the transactions of CD City in P6–3A.
Required:
1. Assuming that CD City uses a periodic inventory system, record the transactions. 2. Record the month-end adjustment to inventory, assuming that a final count reveals
ending inventory with a cost of $2,370. Prepare a multiple-step
income statement and calculate the inventory turnover ratio and gross profit ratio (LO6, 8)
Use the inventory turnover ratio and gross profit ratio to analyze companies (LO8)
Record transactions and prepare a partial income statement using a periodic inventory system (LO9)
3. Prepare the top section of the multiple-step income statement through gross profit for the month of July.
P6–10A Over a four-year period, Jackie Corporation reported the following series of gross profits.
2009 2010 2011 2012
Net sales $50,000 $56,000 $64,000 $80,000
Cost of goods sold 25,000 39,000 21,000 41,000
Gross profit $25,000 $17,000 $43,000 $39,000
In 2012, the company performed a comprehensive review of its inventory accounting procedures. Based on this review, company records reveal that ending inventory was understated by $10,000 in 2010. Inventory in all other years is correct.
Required:
1. Calculate the gross profit ratio for each of the four years based on amounts originally reported.
2. Calculate the gross profit ratio for each of the four years based on corrected
amounts. Describe the trend in the gross profit ratios based on the original amounts versus the corrected amounts.
3. Total gross profit over the four-year period based on the amounts originally reported equals $124,000 ( = $25,000 + $17,000 + $43,000 + $39,000). Compare this amount to total gross profit over the four-year period based on the corrected amounts.
Correct inventory understatement and calculate gross profit ratio (LO8, 10)
P6–1B Jimmie’s Fishing Hole has the following transactions related to its top-selling Shimano fishing reel for the month of June 2012:
Date Transactions Units Cost per Unit Total Cost
June 1 Beginning inventory 16 $250 $ 4,000
June 7 Sale 11 June 12 Purchase 10 240 2,400 June 15 Sale 12 June 24 Purchase 10 230 2,300 June 27 Sale 8 June 29 Purchase 10 220 2,200 $10,900 Required:
1. Calculate ending inventory and cost of goods sold at June 30, 2012, using the specific identification method. The June 7 sale consists of fishing reels from beginning inventory, the June 15 sale consists of three fishing reels from beginning inventory and nine fishing reels from the June 12 purchase, and the June 27 sale consists of one fishing reel from beginning inventory and seven fishing reels from the June 24 purchase.
2. Using FIFO, calculate ending inventory and cost of goods sold at June 30, 2012. 3. Using LIFO, calculate ending inventory and cost of goods sold at June 30, 2012. 4. Using weighted-average cost, calculate ending inventory and cost of goods sold
at June 30, 2012.
P6–2B Pete’s Tennis Shop has the following transactions related to its top-selling Wilson tennis racket for the month of August 2012:
Calculate ending inventory and cost of goods sold for four inventory methods (LO3)
Calculate ending inventory, cost of goods sold, sales revenue, and gross profit for four inventory methods (LO3, 4, 5)
PROBLEMS: SET B
Date Transactions Units Cost per Unit Total Cost
August 1 Beginning inventory 8 $150 $1,200
August 4 Sale ($175 each) 5
August 11 Purchase 10 140 1,400
August 13 Sale ($190 each) 8
August 20 Purchase 10 130 1,300
August 26 Sale ($200 each) 11
August 29 Purchase 12 120 1,440
$5,340
Required:
1. Calculate ending inventory and cost of goods sold at August 31, 2012, using the specific identification method. The August 4 sale consists of rackets from beginning inventory, the August 13 sale consists of rackets from the August 11 purchase, and the August 26 sale consists of one racket from beginning inventory and 10 rackets from the August 20 purchase.
2. Using FIFO, calculate ending inventory and cost of goods sold at August 31, 2012. 3. Using LIFO, calculate ending inventory and cost of goods sold at August 31, 2012. 4. Using weighted-average cost, calculate ending inventory and cost of goods sold at
August 31, 2012.
5. Calculate sales revenue and gross profit under each of the four methods.
6. Comparing FIFO and LIFO, which one provides the more meaningful measure of ending inventory? Explain.
7. If Pete’s chooses to report inventory using LIFO, record the LIFO adjustment. P6–3B At the beginning of June, Circuit Country has a balance in inventory of $2,500. The following transactions occur during the month of June.
June 2 Purchase radios on account from Radio World for $2,200, terms 2/15, n/45. June 4 Pay freight charges related to the June 2 purchase from Radio World, $300. June 8 Return defective radios to Radio World and receive credit, $200.
June 10 Pay Radio World in full.
June 11 Sell radios to customers on account, $4,000, that had a cost of $2,700. June 18 Receive payment on account from customers, $3,000.
June 20 Purchase radios on account from Sound Unlimited for $3,300, terms 3/10, n/30. June 23 Sell radios to customers for cash, $4,800, that had a cost of $3,100.
June 26 Return damaged radios to Sound Unlimited and receive credit of $400. June 28 Pay Sound Unlimited in full.
Required:
1. Assuming that Circuit Country uses a perpetual inventory system, record transactions using the following account titles: Cash, Accounts Receivable, Inventory, Accounts Payable, Sales, and Cost of Goods Sold.
2. Prepare the top section of the multiple-step income statement through gross profit for the month of June.
P6–4B A home improvement store, like Lowe’s , carries the following items:
Inventory Items Quantity Cost per Unit
Market (replacement cost) per Unit Lower-of- Cost-or-Market Hammers 100 $ 7.00 $ 7.50 Saws 50 10.00 9.00 Screwdrivers 130 2.00 2.60 Drills 40 25.00 22.00
1-gallon paint cans 160 5.50 5.00
Paintbrushes 180 6.00 6.50
Record transactions and prepare a partial income statement using a perpetual inventory system (LO5, 6)
Report inventory using lower-of-cost-or-market (LO7)
Required:
1. Compute the total cost of inventory.
2. Determine whether each inventory item would be reported at cost or market. Multiply the quantity of each inventory item by the appropriate cost or market amount and place the total in the “Lower-of-Cost-or-Market” column. Then determine the total of that column.
3. Compare your answers in Requirement 1 and Requirement 2 and then record any necessary adjustment to write down inventory from cost to market value. 4. Discuss the financial statement effects of using lower-of-cost-or-market to report
inventory.
P6–5B Trends by Tiffany sells high-end leather purses. During 2012, the company has the following inventory transactions.
Date Transaction Units Cost Total Cost
Jan. 1 Beginning inventory 10 $400 $ 4,000
Apr. 9 Purchase 20 420 8,400
Oct. 4 Purchase 16 450 7,200
46 $19,600
Jan. 1–Dec. 31 Sales 42
Because trends in purses change frequently, Trends by Tiffany estimates that the remaining four purses have a current replacement cost at December 31 of only $250 each.
Required:
1. Using FIFO, calculate ending inventory and cost of goods sold. 2. Using LIFO, calculate ending inventory and cost of goods sold.
3. Determine the amount of ending inventory to report using lower-of-cost-or-market. Record any necessary adjustment under (a) FIFO and (b) LIFO.
P6–6B At the beginning of November, Yoshi Inc.’s inventory consists of 50 units with a cost per unit of $95. The following transactions occur during the month of November. November 2 Purchase 80 units of inventory on account from Toad Inc.
for $100 per unit, terms 2/10, n/30.
November 3 Pay freight charges related to the November 2 purchase, $210. November 9 Return 10 defective units from the November 2 purchase and receive
credit.
November 11 Pay Toad Inc. in full.
November 16 Sell 100 units of inventory to customers on account, $13,000. [ Hint: The cost of units sold from the November 2 purchase includes $100 unit cost plus $3 per unit for freight less $2 per unit for the purchase discount, or $101 per unit.]
November 20 Receive full payment from customers related to the sale on November 16. November 21 Purchase 60 units of inventory from Toad Inc. for $105 per unit, terms
1/10, n/30.
November 24 Sell 70 units of inventory to customers for cash, $8,100.
Required:
1. Assuming that Yoshi Inc. uses a FIFO perpetual inventory system to maintain its internal inventory records, record the transactions.
2. Assuming for preparing financial statements that Yoshi Inc. reports inventory using LIFO, record the LIFO adjustment.
3. Suppose by the end of November that the remaining inventory is estimated to have a market value per unit of $80, record any necessary adjustment for the lower-of-cost-or-market method after the LIFO adjustment.
4. Prepare the top section of the multiple-step income statement through gross profit for the month of November after the lower-of-cost-or-market adjustment.
Calculate ending inventory and cost of goods sold using FIFO and LIFO and adjust inventory using lower-of-cost-or-market (LO3, 7)
Record transactions using a perpetual system, prepare a partial income statement, and adjust for the lower-of-cost-or-market method (LO2, 3, 4, 5, 6, 7)
P6–7B Toys “R” Us sells a variety of children’s toys, games, books, and accessories. Assume that a local store has the following amounts for the month of March 2012.
Sales revenue $72,300 Cost of goods sold $35,300
Purchase discounts 2,200 Inventory (Mar. 31, 2012) 1,100
Advertising expense 5,400 Insurance expense 1,800
Rent expense 3,300 Sales discounts 2,500
Gain on sale of building 6,500 Salaries expense 8,400
Inventory (Mar. 1, 2012) 2,300 Income tax expense 3,200
Required:
1. Prepare a multiple-step income statement for the month ended March 31, 2012. 2. Calculate the inventory turnover ratio for the month of March. Would you expect
this ratio to be higher or lower in December 2012? Explain. 3. Calculate the gross profit ratio for the month of March.
P6–8B Payless ShoeSource and Dillard’s both offer men’s formal footwear. Payless offers lower- to middle-priced footwear, whereas Dillard’s offers more specialized, higher-end footwear. The average price for a pair of shoes in Payless may be about $50, whereas the average price in Dillard’s may be about $175. The types of shoes offered by Dillard’s are not sold by many other stores. Suppose a Payless store and a Dillard’s store report the following amounts for men’s shoes in the same year (company names are disguised):
Company 1 Company 2
Net sales $100,000 $100,000
Cost of goods sold 40,000 75,000
Gross profit $ 60,000 $ 25,000
Average inventory $ 25,000 $ 10,000
Required:
1. For Company 1 and Company 2, calculate the inventory turnover ratio. 2. For Company 1 and Company 2, calculate the gross profit ratio.
3. After comparing the inventory turnover ratios and gross profit ratios, which company do you think is Payless and which is Dillard’s? Explain.
P6–9B Refer to the transactions of Circuit Country in P6–3B.
Required:
1. Assuming that Circuit Country uses a periodic inventory system, record the transactions.
2. Record the month-end adjustment to inventory, assuming that a final count reveals ending inventory with a cost of $1,860.
3. Prepare the top section of the multiple-step income statement through gross profit for the month of June.
P6–10B Sylvester has a bird shop that sells canaries. Sylvester maintains accurate records on the number of birds purchased from its suppliers and the number sold to customers. The records show the following purchases and sales during 2012.
Date Transactions Units Cost per Unit Total Cost
January 1 Beginning inventory 25 $30 $ 750
April 14 Purchase 70 32 2,240
August 22 Purchase 120 34 4,080
October 29 Purchase 85 36 3,060
300 $10,130
Jan. 1–Dec. 31 Sales ($50 each) 270
Prepare a multiple-step income statement and calculate the inventory turnover ratio and gross profit ratio (LO6, 8)
Use the inventory turnover ratio and gross profit ratio to analyze companies (LO8)
Record transactions and prepare a partial income statement using a periodic inventory system (LO9)
Determine the effects of inventory errors using FIFO (LO3, 10)
Sylvester uses a periodic inventory system and believes there are 30 birds remaining in ending inventory. However, Sylvester neglects to make a final inventory count at the end of the year. An employee accidentally left one of the cages open one night and 10 birds flew away, leaving only 20 birds in ending inventory. Sylvester is not aware of the lost canaries.
Required:
1. What amount will Sylvester calculate for ending inventory and cost of goods sold using FIFO, assuming he erroneously believes 30 canaries remain in ending inventory?
2. What amount would Sylvester calculate for ending inventory and cost of goods sold using FIFO if he knew that only 20 canaries remain in ending inventory?
3. What effect will the inventory error have on reported amounts for (a) ending inventory, (b) retained earnings, (c) cost of goods sold, and (d) net income (ignoring tax effects) in 2012?
4. Assuming that ending inventory is correctly counted at the end of 2013, what effect will the inventory error in 2012 have on reported amounts for (a) ending inventory, (b) retained earnings, (c) cost of goods sold, and (d) net income (ignoring tax effects) in 2013?