CH6 Inventories and Cost of Sales

Q1 Use the following information from Marval Company for the month of July to
answer questions
July 1 Beginning inventory 75 units @$25 each
3 Purchase 348 units @$27 each
8 Sale 300 units
15 Purchase 257 units @$28 each
23 Sale 275 units
(1) Using the perpetual FIFO inventory system. What is the dollar value of its
ending inventory?
(2) Using the perpetual LIFO inventory system. What is the dollar value of its
ending inventory?
(3) Using the specific identification inventory system. Its ending inventory consists
of 20 units from beginning inventory, 40 units from the July 3 purchase, and 45
units from the July 15 purchase. What is the dollar value of its ending inventory?
(4) Using the periodic FIFO inventory system. What is the dollar value of its ending
inventory?
Ans :
(1) $2,940 75+348-300+257-275 = 105
105*28 = 2,940
(2) 2,685 75*$25 + 30*27 = 2,685
(3) 2,840 20*$25 + 40*27 + 45*28 = 2,840
(4) 2,940 (Hint: FIFO periodic inventory computation is identical to the FIFO
perpetual inventory computation.)

Q2. A company reports the following beginning inventory and purchases, and it ends
the period with 30 units in inventory.
Beginning inventory 100 units @$10 each
Purchase 1 40 units @$12 each
Purchase 2 20 units @$14 each
(1) Compute ending inventory using the FIFO periodic system?
(2) Compute cost of goods sold using the LIFO periodic system?
Ans:
(1) $400 (20*$14 + 10*$12) = 400
(2) $1,460 (20*$14 + 40*$12 + 70*$10) = 1,460

Q3. A company has cost of goods sold of $85,000 and ending inventory of $18,000.
Its days’ sales in inventory equals 77.29 days.
Ans: ($18,000 / 85,000)*365 = 77.29

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Q4. Park Company reported the following March purchases and sales data for its only
product.

Park uses a perpetual inventory system. Determine the cost assigned to ending
inventory and to cost of goods sold using (1) specific identification, (2) weighted
average cost, and (3) FIFO (Round per unit costs to three decimals, but inventory
balances to the dollar.) For specific identification, ending inventory consists of 225
units, where 90 are from the March 30 purchase, 80 are from the March 20 purchase,
and 55 are from beginning inventory.
Ans:
(1) Specific identification
Ending inventory—90 units from March 30, 80 units from March 20, and 55
units from beginning inventory
Ending Cost of
Computations Inventory Goods Sold
(90 x $5.00) + (80 x $6.00) + (55 x $7.00) .......... $1,315
$2,820 - $1,315 .................................................... $1,505

(2) Weighted average cost perpetual

Date Goods Purchased Cost of Goods Sold Inventory Balance
3/ 1 150 @ $7.000 = $1,050
3/10 90 @ $ 7.00 = $630 60 @ $7.000 = $ 420
3/20 220 @ $6.00 60 @ $7.000
= $1,740
220 @ $6.000
(avg. cost is $6.214*)
3/25 145 @ $6.214 = $901* 135 @ $6.214 = $ 839*
3/30 90 @ $5.00 135 @ $6.214
= $1,289
_____ 90 @ $5.000
$1,531 (avg. cost is $5.729*)
*rounded

(3) FIFO Perpetual

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 Date Goods Purchased Cost of Goods Sold Inventory Balance
3/ 1 150 @ $7.00 = $1,050
3/10 90 @ $7.00 = $ 630 60 @ $7.00 =$ 420
3/20 220 @ $6.00 60 @ $7.00
= $1,740
220 @ $6.00
3/25 60 @ $7.00
85 @ $6.00 =$ 930 135 @ $6.00 =$ 810
3/30 90 @ $5.00 _____ 135 @ $6.00
= $1,260
$1,560 90 @ $5.00

Q5. Use the data above to prepare comparative income statements for the month of
March for the three inventory methods. Assume expenses are $1,600, and that the
applicable income tax rate is 30%. And which method yields the highest net profit?
Ans:
PARK COMPANY
Income Statements
For Month Ended March 31
Specific Weighted
Identification Average Cost FIFO
Sales .................................... $3,525 $3,525 $3,525
(235 units x $15 price)
Cost of goods sold .............. 1,505* 1,531** 1,560***
Gross profit ......................... 2,020 1,994 1,965
Expenses ............................. 1,600 1,600 1,600
Profit before tax .................. 420 394 365
Income tax expense (30%) ....... 126 118 110
Net profit ............................. $ 294 $ 276 $ 255
Rounded to nearest dollar.
* 95 X $7 + 140 X $6 = $665 + $840 = $1,505
** 90 X $7 + 145 X ((60 X $7 + 220 X $6)/ (60 + 220))
= $630 + 145 X ($1,740/280) = $1,531
*** 150 X $7 + 85 X $6 = $1,050 + $510 = $1,560
Specific identification results in the highest net profit of $294.

Q6. Use the data above and assume the periodic inventory system is used.
Determine the costs assigned to ending inventory and to cost of goods sold using
(1) specific identification, (2) weighted average cost, (3) FIFO, and (4) LIFO.
(Round per unit costs to three decimals, but inventory balances to the dollar.)
Ans:
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 Ending Cost of
Inventory Goods Sold
(1) Specific Identification
(90 x $5.00) + (80 x $6.00) + (55 x $7)................................... $1,315
$2,820 - $1,315 ........................................................................ $1,505

(2) Weighted Average Cost

($2,820 / 460 units = $6.130* average cost per unit)
225 x $6.130 ............................................................................ $1,379*
235 x $6.130 ............................................................................ $1,441*

(3) FIFO
(90 x $5.00) + (135 x $6.00).................................................... $1,260
(150 x $7.00) + (85 x $6.00)................................................. $1,560

(4) LIFO
(150 x $7.00) + (75 x $6.00).................................................... $1,500
(90 x $5.00) + (145 x $6.00).................................................... $1,320

*rounded

Q7. Harold Co. reported the following current-year purchases and sales data for its
only product. It uses a perpetual inventory system. Determine the costs assigned to
ending inventory and to cost of goods sold using (1)FIFO and (2)LIFO. Compute
the gross margin for each period.

Ans:
(1) FIFO Perpetual
Date Goods Purchased Cost of Goods Sold Inventory Balance
1/1 100 @ $10 = $ 1,000
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 1/10 90 @ $10 = $ 900 10 @ $10 =$ 100
3/14 250 @ $15 = $ 3,750 10 @ $10
=$ 3,850
250 @ $15
3/15 10 @ $10 120 @ $15 = $ 1,800
130 @ $15 = $2,050
7/30 400 @ $20 = $ 8,000 120 @ $15
= $ 9,800
400 @ $20
10/5 120 @ $15
180 @ $20 = $5,400 220 @ $20 = $ 4,400
10/26 600 @ $25 = $ 15,000 220 @ $20
_____ 600 @ $25 = $19,400
$8,350

(2) LIFO Perpetual

Date Goods Purchased Cost of Goods Sold Inventory Balance
1/1 100 @ $10 =$ 1,000
1/10 90 @ $10 = $ 900 10 @ $10 =$ 100
3/14 250 @ $15 = $ 3,750 10 @ $10
=$ 3,850
250 @ $15
3/15 10 @ $10
=$ 1,750
140 @ $15 = $ 2,100 110 @ $15
7/30 400 @ $20 = $ 8,000 10 @ $10
110 @ $15 = $ 9,750
400 @ $20
10/5 10 @ $10
300 @ $20 = $ 6,000 110 @ $15 = $ 3,750
100 @ $20
10/26 600 @ $25 = $15,000 10 @ $10
110 @ $15
100 @ $20 = $ 18,750
_____ 600 @ $25
$9,000

FIFO Gross Margin

Sales Revenue (530 units sold x $40 selling price) ............................... $21,200
Less: FIFO cost of goods sold ............................................................ 8,350
Gross margin .......................................................................................... $12,850

LIFO Gross Margin

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 Sales Revenue (530 units sold x $40 selling price) ............................... $21,200
Less: LIFO cost of goods sold ............................................................ 9,000
Gross margin .......................................................................................... $12,200

Q8. Use the data above. Assume that ending inventory is made up of 100 units from
the March 14 purchase, 120 units from July 30 purchase, and all 600 units from the
October 26 purchase. Using the specific identification method, calculate (1) the
cost of goods sold and (2) the gross profit.
Ans:
(1) Specific identification method—Cost of goods sold
Cost of goods available for sale ................................................... $27,750
Ending inventory under specific identification
3/14 purchase (100 @ $15) ............................................... $ 1,500
7/30 purchase (120 @ $20) ................................................. 2,400
10/26 purchase (600 @ $25) ................................................. 15,000
Total ending inventory under specific identification ............... 18,900
Cost of goods sold under specific identification ...................... $ 8,850

(2) Specific identification method—Gross margin

Sales Revenue (530 units sold x $40 selling price) ..................... $21,200
Less: Specific identification cost of goods sold........................ 8,850
Gross margin ................................................................................ $12,350

Q9. During the year, W Company had net sales (at retail) of $130,000. The following
additional information is available from its records at the end of the year. Use the
retail inventory method to estimate W’s ending inventory at cost.
At Cost At Retail
Beginning inventory $31,900 $64,200
Cost of goods purchased 57,810 98,400
Ans:
At Cost At Retail
Goods available for sale
Beginning inventory ............................................... $ 31,900 $ 64,200
Cost of goods purchased ............................................... 57,810 98,400
Goods available for sale................................................ 89,710 162,600
Deduct net sales at retail ..................................................... 130,000
Ending inventory at retail ................................................... $ 32,600
Cost ratio: ($89,710/$162,600) = 0.55 ...................................
Ending inventory at cost ($32,600 x 55%) ......................... $ 17,930

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Q10. On March 1, KB Shop had $450,000 of inventory at cost. In the first quarter of
the year, it purchased $1,590,000 of merchandise, returned $23,100, and paid
freight charges of $37,600 on purchased merchandise, terms FOB hipping point.
The company’s gross profit averages 30%, and the store had $2,000,000 of net sales
(at retail) in the first quarter of the year. Use the gross profit method to estimate its
cost of inventory at the end of the first quarter.
Ans:

Goods available for sale

Inventory, January 1 ....................................................... $ 450,000
Net cost of goods purchased* ......................................... 1,604,500
Goods available for sale ................................................. 2,054,500
Less estimated cost of goods sold
Net sales.......................................................................... $2,000,000
Estimated cost of goods sold
[$2,000,000 x (1 – 30%)] ..................................... (1,400,000)
Estimated March 31 inventory ............................................. $ 654,500
*
$1,590,000 - $23,100 + $37,600 = $1,604,500