SM Chapter 06

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Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition
CHAPTER 6
Reporting and Analyzing Inventory
ASSIGNMENT CLASSIFICATION TABLE
Brief A B
Study Objectives Questions Exercises Exercises Problems Problems BYP
1. Describe the steps in 1, 2, 3, 4 1, 2 1, 2 1A 1B 3, 6

determining inventory
quantities.
2. Apply the methods of 5, 6, 7, 3, 4, 5, 6, 3, 4, 5, 6, 2A, 3A, 2B, 3B, 3, 5,

cost determination using *18, *20, *14, *15 7, *15, *16 4A, 5A, 4B, 5B, 6, 7
specific identification, *21 6A, *15A, 6B, *15B,
FIFO, and average *16A *16B
under a perpetual
inventory system.
3. Explain the effects on 8, 9, 10 7 3, 6, 7, 12 3A, 5A 3B, 5B 1, 3,

financial statement of 5, 7
choosing each of the
inventory cost
determination methods.
4. Identify the effects of 11, 12, 13 8, 9 8, 9 4A, 7A, 8A 4B, 7B, 8B 4

inventory errors on the
financial statements
5. Demonstrate the 14, 15, 16, 10, 11, 12 10, 11, 12 6A, 7A, 6B, 7B, 1, 2, 4
presentation and 17 8A, 9A, 8B, 9B,
analysis of inventory. 10A, 11A, 10B, 11B,
12A, *14A 12B, *14B
*6. Apply the FIFO and *18, *19, *13, *14, *13, *14, *13A, *13B,
average cost inventory *20, *21 *15 *15, *16 *14A, *14B,
cost determination *15A, *16A *15B, *16B
methods under a
periodic inventory
system (Appendix 6A).
*Note: All asterisked Questions, Exercises, and Problems relate to material contained in the
appendices to each chapter.
Solutions Manual 6-1 Chapter 6

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ASSIGNMENT CHARACTERISTICS TABLE
Problem Difficulty Time

Number Description Level Allotted (min.)
1A Identify items in inventory. Simple 30-40
2A Apply specific identification. Moderate 30-40
3A Apply perpetual FIFO and answer questions about Moderate 30-40

effects.
4A Apply perpetual average cost and discuss errors. Moderate 30-40
5A Apply perpetual FIFO and average cost; compare Moderate 35-45

effects.
6A Record transactions using perpetual average cost; Moderate 30-40

apply LCNRV.
7A Determine effects of inventory error for two years. Moderate 20-25
8A Determine effects of inventory errors for multiple Moderate 25-30

years.
9A Determine and record LCNRV. Moderate 15-25
10A Record and present LCNRV valuation for multiple Moderate 15-25
periods.
11A Calculate ratios and comment on liquidity. Moderate 25-30
12A Compare ratios; comment on liquidity and profitability. Moderate 25-30
*13A Apply periodic FIFO and average cost. Moderate 25-35
*14A Prepare partial financial statements and assess Moderate 20-30

effects.
*15A Apply perpetual and periodic FIFO. Moderate 25-35
*16A Apply perpetual and periodic average cost. Moderate 25-35
1B Identify items in inventory. Simple 30-40

ASSIGNMENT CHARACTERISTICS TABLE (Continued)
Problem Difficulty Time

Number Description Level Allotted (min.)
2B Apply specific identification. Moderate 25-35
3B Apply perpetual FIFO and answer questions about Moderate 30-40

effects.
4B Apply perpetual average cost and discuss errors. Moderate 30-40
5B Apply perpetual FIFO and average cost; compare Moderate 30-40

effects.
6B Record transactions using perpetual FIFO; apply Moderate 30-40

LCNRV.
7B Determine effects of inventory error for two years. Moderate 25-35
8B Determine effects of inventory errors for multiple Moderate 25-35

years.
9B Determine and record LCNRV. Moderate 15-25
10B Record and present LCNRV valuation for multiple Moderate 15-25
periods.
11B Calculate ratios and comment on liquidity. Moderate 25-30
12B Compare ratios; comment on liquidity and profitability. Moderate 25-30
*13B Apply periodic FIFO and average cost. Moderate 25-35
*14B Prepare partial financial statements and assess Moderate 20-30

effects.
*15B Apply perpetual and periodic FIFO. Moderate 25-35
*16B Apply perpetual and periodic average cost. Moderate 25-35

ANSWERS TO QUESTIONS
1. Taking a physical inventory involves actually counting, weighing or measuring each kind
of inventory on hand. Retailers, such as hardware stores, generally have thousands of
different items to count. This is normally done when the store is closed to minimize errors
due to the movement of merchandise. Tom will probably count items and mark the
quantity, description, and inventory number on pre-numbered inventory tags (unless the
company has more advanced technology that can read bar codes on inventory products
– we will assume that they do not). He should only include items in the inventory that are
in saleable condition.
Ideally, strong internal control should be exerted over the physical inventory count. For
example, Tom should not have responsibility for the custody or record-keeping for the
inventory. He should also count in teams of two, or there should be a second counter
checking the accuracy of the count.
Adjustments may also have to be made to the physical inventory count for any goods in
transit. For example, inventory purchased FOB shipping point that is still in transit will
have to be included in inventory. Inventory that has been shipped by Kikujiro to
customers FOB destination and not received by the customer before year-end will also
have to be included in the count. Finally, any of Kikujiro’s inventory held by other retailers
on consignment will have to be included in the count as well.
2. Internal control consists of all the related methods and measures adopted within an
organization to help it achieve reliable financial reporting, effective and efficient
operations, and compliance with relevant laws and regulations. The use of internal
control procedures will result in a more accurate and reliable inventory count.
For example, the counting should be done by employees who do not have responsibility
for the custody or record-keeping for the inventory. Each counter should verify the
validity of each inventory item by checking that the items actually exist, how many there
are and what condition they are in. To ensure accuracy, counting should be completed in
teams of two and all inventory counts should be rechecked. Finally pre-numbered
inventory tags should be used to ensure that all inventory is counted and none is
counted twice. The pre-numbering of the tags will assist in the retracing of the count
back to the physical inventory on hand and will also assist in establishing to the
completeness of the count, when the inventory is compiled from the tags.
3. (a) The goods will be included in Janine Ltd.’s (the seller’s) inventory if the terms of sale
are FOB destination.
(b) The goods will be included in Fastrak Corporation’s (the buyer’s) inventory if the
terms of sale are FOB shipping point.

Answers to Questions (Continued)
4. (a) Include: the inventory items belong to Kingsway.
(b) Include: the inventory items belong to Kingsway.
(c) Exclude: the customer has purchased the inventory item and legal ownership has
passed to the customer.
5. The specific identification method tracks the physical flow of individual inventory items,
matching the cost of the actual item sold against the revenue from that item. An example
of inventory where the specific identification would be appropriate would be for goods
that are not ordinarily interchangeable, such as automobiles with unique serial numbers.
The FIFO inventory cost method assumes the first inventory purchased is the first
inventory sold. The most recent purchases are assumed to remain in ending inventory.
Inventory such as groceries could be accounted for using the FIFO cost method since
older items should be sold first. The average cost method assumes that all goods
available for sale are indistinguishable or homogeneous. Inventory such as hardware
could be accounted for using an average cost method.
6. Average assumes that the goods available for sale are identical. FIFO assumes that the
first goods purchased are the first to be sold. Specific identification matches the actual
physical flow of merchandise.
7. A new weighted average unit cost must be calculated after each purchase because a
new cost amount is added to the “cost pool”. This changes the total dollars in the cost
pool and the quantity of units on hand in the cost pool. A sale withdraws units and total
dollars from the cost pool at the weighted average cost. This does not affect the
weighted average cost of the remaining units. That is, the weighted average cost of the
remaining units is unchanged after a sale.
8. A company should consider:

• Whether the goods are interchangeable or not, or whether they are produced or
segregated for specific projects;
• Whether the method corresponds most closely to the physical flow of goods;
• Whether the method reports inventory on the statement of financial position that is
close to the inventory’s most recent cost; and
• Whether the method is used for other inventories with a similar nature and usage.
9. Average produces the better income statement valuation because the cost of goods sold
is determined using more recent inventory prices. This better matches current costs with
current revenues.
FIFO produces the better valuation on the statement of financial position because the
ending inventory is determined using the most recent prices. Since the normal intent is to
replace the inventory after it is sold, the most recent prices are more relevant for
decision-making.


10. (a) No effect – cash is not affected by the choice of inventory cost methods.
(b) In a period of declining prices, FIFO will produce a lower ending inventory as
inventory is determined using the most recent (lower) prices. Average will produce a
higher ending inventory as ending inventory incorporates the higher older prices.
(c) The cost of goods sold effect is opposite to that of ending inventory. Hence, cost of
goods sold will be higher under FIFO and lower under the average cost method.
(d) Because of the effect on the cost of goods sold as outlined in (c), profit will be lower
under FIFO and higher under average.
(e) The impact on retained earnings will be the same as the impact on profit and ending
inventory—lower in a period of declining prices using FIFO and higher using average
cost.
11. The error should be corrected if it will change the figures presented on the financial
statements. While retained earnings may not change, other financial statement items and
comparative figures may change. This information may impact a user’s decision.
12. (a) Mila Ltd.’s 2014 profit will be understated by $5,000. This is because an
understatement of ending inventory will result in an overstatement of cost of goods
sold. If cost of goods sold is overstated, then profit will be understated.
(b) 2014 retained earnings will be understated by $5,000 because profit is understated
(see (a) above).
(c) 2014 total shareholders’ equity will be understated by $5,000 because the retained
earnings balance is understated (see (b) above).
(d) 2015 profit will be overstated $5,000. This is because beginning inventory is
understated by $5,000, which will result in an understatement of cost of goods sold
(recognizing that 2014 ending inventory is 2015 beginning inventory). If cost of
goods sold is understated, then profit will be overstated.
(e) 2015 retained earnings will be correct because the understatement in profit in 2014
and overstatement in 2015 will cancel each other.
(f) 2015 total shareholders’ equity will be correct because the retained earnings
balance is correct.

13. (a) At the end of the fiscal year, before the inventory is adjusted to the inventory count,
Shediac’s assets (Merchandise Inventory) would be overstated and its liabilities
would be overstated (Accounts Payable). There would be no effect on shareholders’
equity.
(b) Since the merchandise is not on hand at the time of the inventory count, the
shipment from Bathurst would not be counted. This in turn would cause the inventory
count to be lower than the perpetual inventory record. Normally when such a
discrepancy arises, the Inventory account will be adjusted downward with a credit to
reflect the amount of merchandise actually on hand. The corresponding debit in this
adjusting entry would be to Cost of Goods Sold. The summary effect of the initial
error and the count adjustment would be an overstatement in Cost of Goods Sold
and Accounts Payable.
Because Cost of Goods Sold is overstated, gross profit and profit are understated as
well as Retained Earnings. At the end of Shediac’s current year, after the adjustment
is made for the results of the inventory count, the overall impact on the accounting
equation is no effect on assets, an overstatement of liabilities (Accounts Payable),
and an understatement of shareholders’ equity (Retained Earnings).
14. (a) Cost refers to the original cost of inventory as determined by using specific
identification, or the FIFO or average cost methods.
(b) Net realizable value is the selling price less any costs required to make the goods
ready for sale.
(c) The lower of cost and net realizable value rule should be applied at the end of the
accounting period, before financial statements are prepared.
15. Cost of Goods Sold is debited when recording a decline in inventory value under the
lower of cost and net realizable value rule because a decline in the value of inventory is
considered to be a cost of buying and selling merchandise. These declines are usually
considered part of the risk associated with carrying inventory and part of the costs of
carrying a variety and quantity of goods on hand.
16. An increase in the days in inventory ratio from one year to the next would be seen as
deterioration in the company’s efficiency in managing inventory. It means that the
inventory is being held for a longer period of time, which increases the risk of spoilage
and obsolescence.


17. (a) An inventory turnover ratio that is too high may indicate that the company is losing
sales opportunities because of inventory shortages. Inventory shortages may also
cause customer ill will and result in lost future sales.
(b) If the inventory turnover is too low, it may indicate that the company is having
difficulty selling its inventory and the inventory may become obsolete.
*18. Periodic and perpetual inventory systems differ in the accounting treatment for
inventories. Under a perpetual inventory system inventory records are updated for every
purchase and sale transaction. The cost of goods sold is recorded each time a sale is
made. Under a periodic system, the inventory is only updated at the end of the period
when a physical inventory count is performed. Inventory purchases throughout the year
are debited to a Purchases account in a periodic inventory system rather than a
Merchandise Inventory account. When a sale is recorded in a periodic inventory system,
no entry is made to record the cost of the sale. Cost of goods sold is calculated
separately after the physical inventory count is performed.
*19. Ending inventory is known as a result of the physical inventory count. To determine cost
of goods sold, the total amount of inventory available for sale needs to be determined
first in order to determine what inventory has been sold (goods available for sale –
ending inventory = cost of goods sold). Goods sold are not tracked separately in a
periodic inventory system.
*20. In both systems, the first costs in are the costs assigned to the goods sold so no matter
what system is used, the cost of goods sold will always consist of the oldest units and
these would are assumed to be on hand when using either method.
*21. In a perpetual system, the average cost per item is recalculated every time a purchase
transaction takes place. In a periodic system, the average is determined based on the
total goods available for sale during the period. If there are cost changes during the
period, the average cost per item will differ in a perpetual and periodic inventory system.

SOLUTIONS TO BRIEF EXERCISES

BRIEF EXERCISE 6-1
(a) Ownership of the goods belongs to the consignor (Helgeson). Thus, these goods should
be included in Helgeson’s inventory.
(b) Goods held on consignment belong to the other company and should not be included in
Helgeson’s inventory.
(c) The goods in transit belong to the customer as the terms of shipment are FOB shipping
point. They should not be included in Helgeson’s inventory because title transferred to
the customer as soon as the goods were shipped.
(d) The goods in transit should not be included in the inventory count because ownership by
Helgeson does not occur until the goods reach the buyer.
(e) The goods in transit belong to Helgeson because ownership does not transfer until the
customer receives the goods. They should be included in Helgeson’s inventory.
(f) The goods purchased belong to the buyer, Helgeson as the terms of shipment are FOB
shipping point. Title transferred to Helgeson as soon as the goods were shipped so even
though they have not been received they should be included in Helgeson’s inventory.
BRIEF EXERCISE 6-2

$66,000 Count
(6,000) Held on consignment
(1,000) Sold
4,000 August 28 shipment plus freight, FOB shipping point ($3,750 + $250)
$63,000 Correct inventory cost

BRIEF EXERCISE 6-3

Cost of Goods Available for Sale
3 electric pianos @ $600 = $1,800

2 electric pianos @ $475 = 950
$2,750
Ending Inventory Cost of Goods Sold
(a) Specific Identification 2 pianos @ $600 = $1,200 $2,750 – $1,675 = $1,075

1 piano @ $475 = 475
$1,675 (Proof: 1 piano @ $600 + 1
piano @ $475 = $1,075)
(b) If management wished higher profit, it could have sold two pianos from the last shipment
that had a lower cost. If it wished lower profit, it could have sold the first two pianos
purchased.
BRIEF EXERCISE 6-4
[1] $450 ÷ 30 = $15

[2] 15 (from April 1)
[3] $18 (from April 1)
[4] 30 (from April 6)
[6] (15 @ $18) + (30 @ $15) = $720
[9] (15 @ $18) + (10 @ $15) = $420
[10] 15 + 30 – 15 – 10 = 20
[11] $15
[12] 20 @ $15 = $300
[13] $144 ÷ 12 = $12
[14] 20
[15] $15
[16] 12
[17] $12
[18] (20 @ $15) + (12 @ $12) = $444

BRIEF EXERCISE 6-5
[1] $15 ($450 ÷ 30)

[2] 45 (15 + 30)
[3] $720 ($270 + $450)
[4] $16 ($720 (from [3]) ÷ 45 (from [2]))
[5] $16 (from [4])
[6] 25 x $16 = $400
[7] 45 (from [2]) – 25 sold = 20
[8] $720 (from [3]) – $400 (from [6]) = $320
[9] $320 (from [8]) ÷ 20 (from [7]) = $16. Notice how the average does not change after a
sale.
[10] $144 ÷ $12 = 12
[11] 20 (from [7]) + 12 (from [10]) = 32
[12] $320 (from [8]) + $144 = $464
[13] $464 (from [12]) ÷ 32 (from [11]) = $14.50

BRIEF EXERCISE 6-6

(a) FIFO cost method
Date Description Purchases Cost of Goods Sold Ending Inventory
Aug. 2 Purchase 250 $7 $ 1,750 250 $7 $ 1,750

250 7 1,750
3 Purchase 500 10 5,000 500 10 5,000
250 $7
10 Sale 50 10 $2,250 450 10 4,500
450 10 4,500
15 Purchase 900 12 10,800 900 12 10,800
125 10 1,250
25 Sale 325 10 3,250 900 12 10,800
1,650 $17,550 625 $5,500 1,025 $12,050
Check: $5,500 + $12,050 = $17,550
(b) Average cost method
Aug. 2 Purchase 250 $ 7.00 $ 1,750.00 250 $ 7.00 $ 1,750.00
3 Purchase 500 10.00 5,000.00 750 9.00 6,750.00
10 Sale 300 $9.00 $2,700.00 450 9.00 04,050.00
15 Purchase 900 12.00 10,800.00 1,350 11.00 514,850.00
25 Sale 325 11.00 3,575.00 1,025 11.00 11,275.00

1,650 $17,550.00 625 $6,275.00 375 $11,275.00
Check: $6,275 + $11,275 = $17,550

BRIEF EXERCISE 6-7

(a) Average. The ending inventory is valued at the average of the cost of the product,
including earlier costs. Since this method yields a higher ending inventory than average
cost when prices are falling, the result will not be closer to replacement cost. This result
is achieved with the FIFO cost method.
(b) FIFO. The cost of goods is valued using the earlier, higher costs. Since the revenue
reflects current lower prices, the FIFO cost method does not match current costs
against revenue when prices are falling. This result is better achieved by the average
cost method.
(c) One of the guidelines that management should consider is choosing an inventory cost
method that corresponds as closely to the physical flow of goods as possible. A cost
method that provides an ending inventory cost close to the inventory’s recent cost is
also preferable.
BRIEF EXERCISE 6-8

Total assets in the statement of financial position will be overstated by the amount that
ending inventory is overstated, $25,000. When the purchase of inventory was recorded, an
account payable would have been created, so total liabilities will also be overstated by
$25,000 (assuming the “supplier” was not paid). Shareholders’ equity will not be affected.
BRIEF EXERCISE 6-9

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

Assets Understated $7,000 No impact
Liabilities No impact No impact
Shareholders’ equity Understated $7,000 No impact

BRIEF EXERCISE 6-10

(a)
Inventory Categories Cost NRV LCNRV

Camcorders $11,000 $10,200 $10,200
Cameras 9,000 9,500 9,000
DVD players 14,000 12,800 12,800
Total valuation $34,000 $32,500 $32,000
The lower of cost and net realizable value is $32,000.
(b)
Cost of Goods Sold ......................................................................... 2,000

Merchandise Inventory......................................................... 2,000
$34,000 – $32,000 = $2,000

BRIEF EXERCISE 6-11
(a) Cost of Goods Sold ................................................................... 2,200

Merchandise Inventory......................................................... 2,200
$54,700 – $52,500 = $2,200
(b) $54,700
BRIEF EXERCISE 6-12

(a)
$7,929
Inventory Turnover (2012) = 5.4 times
($1,503 + $1,449) ÷ 2
365
Days in Inventory (2012) = 68 days
5.4
$7,326
Inventory Turnover (2011) = 6.2 times
($1,449 + $933) ÷ 2
365
Days in Inventory (2011) = 59 days
6.2
(b) The inventory management deteriorated in 2012 as evidenced by the increase in

number of days in inventory from 59 days in 2011 to 68 days in 2012. This was
corroborated by the declining inventory turnover. This deterioration signifies that the
inventory was sold more slowly.

*BRIEF EXERCISE 6-13

Units Dollars
Beginning inventory 0 $ 0
Purchases
(370 @ $9) + (700 @ $12) + (800 @ $11) 1,870 20,530
Goods available for sale 1,870 $20,530
Ending inventory (600)
Goods sold 1,270
(a) FIFO
Ending inventory: (600 units @ $11) = $6,600
Cost of goods sold = Goods available for sale – ending inventory

$20,530 – $6,600 = $ 13,930
Proof: Cost of goods sold = (370 × $9) + ( 700 × $12) + (200 x $11) = $ 13,930
(b) Average
Note: Unrounded numbers have been used in the average cost calculations, although the
numbers have been rounded to the nearest cent for presentation purposes. Because of
this, some amounts may not appear to multiply exactly because of the rounding in the
presentation.
Weighted average cost = $20,530 ÷ 1,870 = $10.98
Ending inventory: 600 × $10.98 = $ 6,578.17

$20,530 – $ 6,587.17 = $ 13,942.83
Proof: Cost of goods sold = 1,270 × ($20,530 ÷ 1,870) = $ 13,942.83


(a) Ending Inventory: (13 × $4.50) + (2 × $5.00) = $68.50

$216.00 – $68.50 = $147.50
Proof: Cost of goods sold = (15 × $4.50) + (16 × $5.00) = $147.50
(b) No, the answer under a perpetual system would be the same as the first goods
purchased are assumed to be the first goods sold.
(c)
Cost of Goods Sold .................................................................... 25
Merchandise Inventory......................................................... 25
5 × $5.00 = $25


(a) FIFO Perpetual
Jan. 3 Accounts Receivable ............................................ 3,000

Sales (500 × $6) .......................................... 3,000
3 Cost of Goods Sold (500 × $4) ............................. 2,000

Merchandise Inventory ................................. 2,000
9 Merchandise Inventory (1,000 × $4) ..................... 4,000

Accounts Payable ........................................ 4,000
15 Cash ..................................................................... 6,400

Sales (800 x $8) ........................................... 6,400
15 Cost of Goods Sold [(200 × $4) + (600 × $4)] ...... 3,200

Merchandise Inventory ................................. 3,200
(b) FIFO Periodic
Jan. 3 Accounts Receivable ............................................. 3,000

Sales ............................................................ 3,000
9 Purchases ............................................................. 4,000

Accounts Payable ......................................... 4,000
15 Cash ...................................................................... 6,400

Sales ............................................................. 6,400

SOLUTIONS TO EXERCISES
EXERCISE 6-1
1. Do not include – Shippers Ltd. does not own items held on consignment.
2. Include in inventory – Shippers Ltd. still owns the items as they were only shipped on
consignment.
3. Include in inventory – Shipping terms FOB destination means that Shippers Ltd. owns
the items until they reach the customer.
4. Do not include in inventory. Freight costs on goods shipped to customers are included in
Freight Out or Delivery Expense.
5. Do not include in inventory – The shipping terms are FOB shipping point so ownership
has transferred to the customer. Shippers Ltd. should record this as a sale on the income
statement.
6. Do not include in inventory. The shipping terms are FOB destination so Shippers Ltd.
does not own the goods until they arrive at Shippers Ltd.’s premises.
7. Include in inventory – Shipping terms FOB shipping point means that ownership
transferred at the time of shipping and therefore, Shippers Ltd. owns the goods in transit.

EXERCISE 6-2
(a) Ending inventoryphysical count ............................................................ $285,000

1. Add to inventory. Title remains with Novotna until purchaser
receives goods ..................................................................................... 35,000
2. Add to inventory. Title passed to Novotna when goods were shipped . 95,000
3. Add to inventory. Title passed to Novotna when goods were shipped . 28,000
4. No effect. Title passes to purchaser upon shipment when terms are
FOB shipping point .............................................................................. 0
5. Add to inventory. Novotna owns the goods out on consignment ......... 30,500
6. Deduct from inventory. Obsolete inventory should be written off to
cost of goods sold. ............................................................................... (15,000)
Correct inventory ...................................................................................... $458,500
(b) Since inventory is usually the largest current asset on a company’s statement of financial
position, errors can have a significant impact. In making a decision to grant a short-term
bank loan, the bank will be looking at Novotna’s liquidity by calculating the current ratio
as well as the inventory turnover and days sales in inventory. Any error in the inventory
count will affect these ratios. In addition, the errors will also affect Novotna’s profitability
by impacting the cost of goods sold on the income statement.

EXERCISE 6-3
(a) The company would identify, by serial number, the items remaining in inventory. The
sum of the cost of the items remaining in inventory would become the ending inventory
balance. Then, the company would identify the cost of the items sold, again by using
serial numbers to determine the cost of each item sold. The total cost of items sold would
become the cost of goods sold.
(b) It could choose to sell specific units purchased at specific costs if it wished to impact
profit selectively. If it wished to minimize profit it would choose to sell the units purchased
at higher costs–in which case the cost of goods sold would be $1,540 ($800 + $740) and
gross profit would be $1,060 ($2,600 – $1,540). If it wished to maximize profit it would
choose to sell the units purchased at lower costs; in which case the cost of goods sold
would be $1,420 ($740 + $680) and gross profit would be $1,180 ($2,600 – $1,420).
(c) Discount Electronics should consider the nature of the inventory items. The specific
identification system is best suited to inventory items are clearly identified from each
other and that are not ordinarily interchangeable, or to products that are produced and
segregated for specific projects. The specific identification system produces the most
accurate measure of ending inventory and matching of cost of goods sold to sales. It is
however more time-consuming and expensive to apply. If the inventory items are
interchangeable, Discount Electronics should consider the use of either the FIFO or
average cost flow methods.

EXERCISE 6-4
(a)
Apr. 1 Beg. inventory 50 $210

100 225 $33,000
50 $210
3 Sale 25 225 $ 16,125 75 225 16,875
75 225
10 Purchase 200 $275 $ 55,000 200 275 71,875
75 225
17 Sale 175 275 65,000 25 275 6,875
25 275
24 Purchase 300 290 87,000 300 290 93,875
25 275
30 Sale 175 290 57,625 125 290 36,250
30 Balance 500 $142,000 525 $138,750 125 290 $36,250
Check: $138,750 + $36,250 = $175,000 ($33,000 + $142,000)
(b)
Sales Units Sales Price/Unit Total
Apr. 3 75 $400 $ 30,000
17 250 400 100,000
30 200 400 80,000
$210,000
Gross profit = $210,000 – $138,750 = $71,250
Gross profit margin = $71,250 ÷ $210,000 = 33.9%
(c) The gross profit is higher than if the average cost method had been used in a perpetual
inventory system because cost of goods sold is lower under FIFO in a period of rising
prices than it would be using the average cost method. Under FIFO, ending inventory is
higher, cost of goods sold is lower and gross profit is higher.

EXERCISE 6-5
(a) Note: Unrounded numbers have been used in the average cost calculations, although the
presentation.
June 1 Beginning 500 $125.00 $ 62,500.00
6 Purchase 1,200 $127.00 $152,400.00 1,700 126.41 214,900.00
10 Sale 1,000 $126.41 $126,411.76 700 126.41 88,488.24
14 Purchase 1,800 128.00 ‘230,400.00 2,500 127.56 318,888.24
16 Sale 1,600 127.56 204,088.47 900 127.56 114,799.77
26 Purchase 1,000 129.00 129,000.00 1,900 128.31 243,799.77
30 Balance 4,000 $511,800.00 2,600 $330,500.23 1,900 $243,799.77
Check: $330,500.23 + $243,799.77 = $574,300 ($62,500 + $511,800)
(b)
Sales = (1,000 @ $200) + (1,600 @ $205) = $528,000
Gross profit = $528,000 – $330,500 = $197,500
Gross profit margin = $197,500 ÷ $528,000 = 37.4%
(c) The gross profit is lower than it would be using the FIFO cost method because the cost of
the product being purchased is rising.

EXERCISE 6-6
(a) (1) FIFO
Date Purchases Cost of Goods Sold Balance

June 1 Beginning inventory 150 @ $5 = $ 750
12 230 @ $6 = $1,380 150 @ $5
230 @ $6 = 2,130
15 150 @ $5
100 @ $6 = $1,350 130 @ $6 = 780
16 450 @ $7 = 3,150 130 @ $6
450 @ $7 = 3,930
23 150 @ $8 = 1,200 130 @ $6
450 @ $7
150 @ $8 = 5,130
27 130 @ $6 10 @ $7
440 @ $7 = 3,860 150 @ $8 = 1,270
Total $5,730 $5,210 $1,270
Check: $5,210 + $1,270 = $6,480 ($750 + $5,730)
(a) (2) Average
Note: Unrounded numbers have been used in the average cost calculations, although the
numbers have been rounded to the nearest cent for presentation purposes. Because of this,
some amounts may not appear to multiply exactly because of the rounding in the
presentation.
Date Purchases Cost of Goods Sold Balance

June 1 Beginning inventory 150 @ $5.00 = $ 750.00
12 230 @ $6 = $1,380.00 380 @ $5.61 = 2,130.00
15 250 @ $5.61 = $1,401.32 130 @ $5.61 = 728.68
16 450 @ $7 = 3,150.00 580 @ $6.69 = 3,878.68
23 150 @ $8 = 1,200.00 730 @ $6.96 = 5,078.68
27 570 @ $6.96 = 3,965.54 160 @ $6.96 = 1,113.14
Total $5,730.00 $5,366.86 $1,113.14
Check: $5,366.86 + $1,113.14 = $6,480 ($750 + $5,730)
(b) The average cost method results in a higher cost of goods sold because the cost of
inventory is rising.
(c) The FIFO cost method results in a higher profit because it produces the lower cost of
goods sold when prices are rising.

EXERCISE 6-6 (Continued)

(d) The FIFO cost method results in a higher ending inventory because the cost of inventory
is rising.
(e) Both cost methods result in the same pre-tax cash flow. The cost methods do not change
the pre-tax cash flows of a company.
EXERCISE 6-7
(a) FIFO cost method
Purchases Cost of Goods Sold Balance

Date Units Cost Total Units Cost Total Units Cost Total
Oct. 2 9,000 $12 $108,000 9,000 $12 $108,000
15 15,000 14 210,000 9,000 12
15,000 14 318,000
29 9,000 $12
13,000 14 $290,000 2,000 14 28,000
(b) Average cost method
Purchases Cost of Goods Sold Balance

Oct. 2 9,000 $12 $108,000 9,000 $12.00 $108,000
15 15,000 14 210,000 24,000 13.25 318,000
29 22,000 $13.25 $291,500 2,000 13.25 26,500
(c)
FIFO Average
Sales $525,000 $525,000
Cost of goods sold (from above) 290,000 291,500
Gross profit 235,000 233,500
Operating expenses 200,000 200,000
Profit before income tax 35,000 33,500
Income tax expense (30%) 10,500 10,050
Profit $ 24,500 $ 23,450

EXERCISE 6-7 (Continued)

(d) (1) Currently, as shown in (a) above, FIFO results in a higher profit than the average
cost method. This is anticipated when costs are rising, as is the case above.
If instead costs fall, the use of the FIFO cost method will result in a lower profit
compared to the average cost method. The cost of goods sold will then be
composed of higher costs than the average cost method and this will generate
lower profits.
(2) If costs remain stable, the two cost methods will produce the same profits.

EXERCISE 6-8
(a) Corrected merchandise inventory
2014 = $30,000 + $4,000 = $34,000

2015 = $37,000 – $2,000 = $35,000
Corrected cost of goods sold
2014 = $154,000 – $4,000 = $150,000

2015 = $168,000 + $2,000 + $4,000 = $174,000
(b) (1) and (2) Cost of goods sold and profit before income tax: The inventory error for 2014
will cause the cost of goods sold to be overstated by $4,000, which will cause profit and
retained earnings to be understated by the same amount. Assuming that the error was
not corrected, when it reverses in 2015, cost of goods sold will be understated and profit
will be overstated by $4,000. Over the two years the error will reverse and therefore the
retained earnings balance will be correct at the end of 2015 (with respect to this
particular error taken alone).
The $2,000 overstatement of inventory in 2015 will cause the cost of goods sold to be
understated and the profit and retained earnings to be overstated by $2,000.
When the two errors are taken together, in 2015 cost of goods sold will be understated
by $6,000 ($4,000 for 2014 error and $2,000 for 2015 error). Profit will be overstated by
$6,000 in 2015.
(3) The inventory error for 2014 will cause the merchandise inventory—an asset
account—to be understated by $4,000.
The inventory error for 2015 will cause the merchandise inventory (asset) account to
be overstated by $2,000.
(4) The errors will not affect liabilities.
(5) As explained above in (1) and (2), retained earnings is understated by $4,000 in
2014. In 2015, retained earnings is overstated by $2,000. Because of this,
shareholders’ equity will be understated by $4,000 in 2014 and overstated by $2,000
in 2015.
A = L + SE
2014 U$4,000 = NE + U$4,000
2015 O$2,000 = NE + O$2,000
(c) Errors should be corrected as soon as they are discovered so that users have a more
accurate account of inventory on hand, gross profit and profit.

EXERCISE 6-9
(a)
2015 2014
Sales ........................................................................................... $265,000 $250,000
Cost of goods sold (see 1 and 2) ................................................ 213,000 186,000
Gross profit ................................................................................. $ 52,000 $ 64,000
(1) $194,000 – $8,000 = $186,000

(2) $205,000 + $8,000 = $213,000
(b) The cumulative effect on total gross profit for the two years is zero as shown below:
Incorrect gross profits: $56,000 + $60,000 = $116,000

Correct gross profits: $64,000 + $52,000 = 116,000
Difference $ 0
(c) Gross profit margin 2015 2014
Before correction $60,000 ÷ $265,000 $56,000 ÷ $250,000

= 22.6% = 22.4%
After correction $52,000 ÷ $265,000 $64,000 ÷ $250,000

= 19.6% = 25.6%

EXERCISE 6-10
(a)
Units Cost/Unit Total Cost NRV/Unit Total NRV LCNRV
Cameras:
Sony 4 $175 $ 700 $160 $ 640 $ 640
Canon 8 150 1,200 152 1,216 1,200
Light Meters:
Gossen 12 135 1,620 139 1,668 1,620
Seconic 10 115 1,150 110 1,100 1,100
Total $4,670 $4,624 $4,560
(b) Dec. 31 Cost of Goods Sold ($4,670 – $4,560) ............................... 110

Merchandise Inventory ............................................... 110
(c) Dec. 31 Cost of Goods Sold (2 × 150) ............................................. 300

Merchandise Inventory ............................................... 300

EXERCISE 6-11
(a)
$1,552,128
Inventory Turnover (2012): = 2.8 times
($553,068 + $568,311)÷2
365
Days in Inventory (2012): = 130 days
2.8
($1,948,253 - $1,552,128)
Gross Profit Margin (2012): = 20.3%
$1,948,253
$1,288,106
Inventory Turnover (2011): = 2.9 times
($568,311 + $332,542)÷2
365
Days in Inventory (2011): = 126 days
2.9
($1,725,712 - $1,288,106)
Gross Profit Margin (2011): = 25.4%
$1,725,712
(b) In 2012, Gildan Activewear experienced a deterioration in liquidity and profitability. The
liquidity has been deteriorated due to the increase in time required to turn over its
inventory, from 126 days to 130 days. The company has experienced deteriorated
profitability due to a significant drop in its gross profit margin from 25.4% to 20.3%.

EXERCISE 6-12
(a) $750,000
Inventory turnover (FIFO) = 3.4 times
$222,500
$735,000
Inventory turnover (Average) = 3.2 times
$227,500
(b) ($450,000 + $222,500)

Current ratio (FIFO) = 1.9 times
$350,000
($450,000 + $227,500)
Current ratio (Average) = 1.9 times
$350,000
(c) The FIFO cost method appears to show a slightly better turnover ratio because it has a
lower ending inventory. The current ratios are the same. The two cost methods will
generally yield the same overall assessment of liquidity when combining the inventory
turnover ratio and the current ratio. The trend analysis for the inventory turnover and the
current ratio produced by either method will be the same since the methods involve
allocating the same costs. In reality, there is no economic difference between the two
methods and any differences in ratios are artificial ones caused solely by the different
cost methods. Consequently, there is no real difference in liquidity.

*EXERCISE 6-13
(a)
FIFO
Beginning inventory (30 × $10) ............................................... $ 300

Purchases
May 12 (50 × $12)........................................................ $600
May 14 (20 × $15)........................................................ 300 900
Cost of goods available for sale (100 units) ............................ 1,200
Less: Ending inventory (15 × $15) ......................................... 225
Cost of goods sold (85 units) .................................................. $ 975
(b)
Average
Beginning inventory (30 × $10) ............................................... $ 300

Purchases
May 12 (50 × $12)........................................................ $600
May 14 (20 × $15)........................................................ 300 900
Cost of goods available for sale (100 units) ............................ 1,200
Less: Ending inventory (15 × $12*)......................................... 180
Cost of goods sold (85 units) .................................................. $1,020
*$1,200 ÷ 100 units = $12/unit

*EXERCISE 6-14
(a)
(1) FIFO
Beginning inventory (150 × $5) ........................................................ $ 750

Purchases
June 12 (230 × $6)....................................................................... $1,380
June 16 (450 × $7)....................................................................... 3,150
June 23 (150 × $8)....................................................................... 1,200 5,730
Cost of goods available for sale (980 units) ..................................... 6,480
Less: Ending inventory [(150 × $8) + (75 × $7)] ............................... 1,725
Cost of goods sold ........................................................................... $4,755
(2) Average
Note: Unrounded numbers have been used in the average cost calculation, although the
presentation.
Cost of Goods Total Units Weighted Average

Available for Sale ÷ Available for Sale = Unit Cost
$6,480 980 $6.61
Ending inventory = 225 × $6.61 = $1,487.76

Cost of goods sold = $6,480.00 – $1,487.76 = $4,992.24
Proof: 755 × ($6,480 ÷ 980) = $4,992.24
(b) The average unit cost is not $6.50 because the average unit cost is not a simple straight
average but is a weighted average based on the number of units purchased at each
price.
(c) (1) FIFO – The perpetual system will give the same ending inventory and cost of goods
sold as the periodic system.
(2) Average – The perpetual system will have a different ending inventory and cost of
goods sold because the cost of goods sold is calculated based on the weighted
average at the time of each sale under the perpetual system.

*EXERCISE 6-15
(a) (1) FIFO
Date Purchases Sales Balance
Nov. 1 Beginning inventory (30 @ $295) = $8,850
5 25 @ $300 = $7,500 (30 @ $295) +

(25 @ $300) = $16,350
12 (30 @ $295) +
(12 @ $300) = $12,450 (13 @ $300) = $3,900
19 40 @ $305 = $12,200 (13 @ $300) +

(40 @ $305) = $16,100
22 (13 @ $300) +
(37 @ $305) = $15,185 (3 @ $305) = $915
25 30 @ $310 = $9,300 (3 @ $305) +

(30 @ $310) = $10,215
Cost of Goods Sold: $12,450 + $15,185 = $27,635

Ending Inventory: $10,215
Check: $27,635 + $10,215 = $37,850 ($8,850 + $7,500 + $12,200 + $9,300)

*EXERCISE 6-15 (Continued)
(a) (2) Average
Note: Unrounded numbers have been used in the average cost calculations, although
the numbers have been rounded to the nearest cent for presentation purposes.
Because of this, some amounts may not appear to multiply exactly because of the
rounding in the presentation.
Date Purchases Sales Balance
Nov. 1 Beginning inventory 30 @ $295 = $8,850.00
5 25 @ $300 = $7,500 55 @ $297.27 = $16,350.00
12 42 @ $297.27 = $12,485.45 13 @ $297.27 = $3,864.55
19 40 @ $305 = $12,200 53 @ $303.10 = $16,064.55
22 50 @ $303.10 = $15,155.23 3 @ $303.10 = $909.31
25 30 @ $310 = $9,300 33 @ $309.37 = $10,209.31
Cost of Goods Sold: $12,485.45 + $15,155.24 = $27,640.69

Ending Inventory: $10,209.31
Check: $27,640.69 + $10,209.31 = $37,850 ($8,850 + $7,500 + $12,200 + $9,300)
(b)
FIFO
Beginning inventory (30 × $295) ........................................................ $ 8,850
Purchases
Nov. 5 (25 × $300) ......................................................................... $ 7,500
Nov. 19 (40 × $305) ....................................................................... 12,200
Nov. 25 (30 × $310) ....................................................................... 9,300 29,000
Cost of goods available for sale (125 units) ....................................... 37,850
Less: Ending inventory (3 × $305) + (30 × $310) .............................. 10,215
Cost of goods sold ............................................................................. $27,635
AVERAGE
Cost of goods available for sale (125 units) ....................................... $37,850.00
Less: Ending inventory (33 × $302.801)............................................. 9,992.40
Cost of goods sold ............................................................................. $27,857.60
1
$37,850 ÷ 125 = $302.80

*EXERCISE 6-16
(a)
(1) FIFO (2) Average
Dr. Cr. Dr. Cr.
Nov. 5 Merchandise Inventory 7,500 7,500.00
Accounts Payable 7,500 7,500.00
12 Cash 19,320 19,320.00
Sales 19,320 19,320.00
12 Cost of Goods Sold 12,450 12,485.45
Merchandise Inventory 12,450 12,485.45
19 Merchandise Inventory 12,200 12,200.00
22 Cash 23,500 23,500.00
Sales 23,500 23,500.00
22 Cost of Goods Sold 15,185 15,155.23
Merchandise Inventory 15,185 15,155.23
25 Merchandise Inventory 9,300 9,300.00
(b)
(1) FIFO (2) Average
Dr. Cr. Dr. Cr.
Nov. 5 Purchases 7,500 7,500
Accounts Payable 7,500 7,500
12 Cash 19,320 19,320
Sales 19,320 19,320
19 Purchases 12,200 12,200
22 Cash 23,500 23,500
Sales 23,500 23,500
25 Purchases 9,300 9,300

SOLUTIONS TO PROBLEMS
PROBLEM 6-1A
(a) 1. The unsold consignment inventory should be included in Kananaskis’ inventory.

Include $900 ($1,800 – $900) in inventory.
2. Exclude the items from Kananaskis’ inventory. Craft Producers Ltd. still owns the
inventory.
3. The inventory has been sold to the customer so the customer has ownership.
Exclude.
4. The sale will be recorded on February 23. The goods (cost, $560) should be
excluded from Kananaskis’ inventory at the end of February.
5. Kananaskis owns the goods once they are shipped on February 26. Include
inventory of $830 ($750 + $80).
6. Title of the goods does not transfer to Kananaskis until March 4. Exclude this
amount from the February 28 inventory.
7. Title to the goods does not transfer to the customer until March 7. Include the
$1,900 in ending inventory.
8. Include $1,260 in inventory.
(b) The revised ending inventory is:

Unadjusted inventory $150,000
Adjustments
1. February 1 $ 900
5. February 24 830
7. February 27 1,900
8. March 5 1,260 4,890
Adjusted inventory $154,890

PROBLEM 6-2A
(a)
Cost of Goods Sold Ending Inventory
Sales
Cost/ price/ Cost/
Unit Unit Unit
Model Serial # $ $ Model Serial # $
Apr. 8 Focus C81362 22,000 24,000 Apr. 1 F-150 F1883 23,000

Mustang G62313 27,000 30,000 12 Mustang G71811 28,000
18 Mustang G71891 26,000 31,000 Flex X4212 28,000
Flex X3892 29,000 32,000 Flex X4214 29,000
F-150 F1921 27,000 30,500 23 Focus C81528 25,000
Escape E21202 27,000 30,000 Escape E28268 28,000
158,000 177,500 161,000
(b) Gross profit = $177,500 – $158,000

= $19,500
(c) The specific identification method is likely the most appropriate method for Dean’s
Sales Ltd. because the vehicles are large dollar value items that are specifically
identifiable by serial number.

PROBLEM 6-3A
(a)
Apr. 1 Beg. inventory 30 $50 $1,500

30 50
6 Purchase 15 $45 $ 675 15 45 2,175
30 50
9 Sale 5 45 $1,725 10 45 450
10 45
14 Purchase 20 40 800 20 40 1,250
10 45
20 Sale 15 40 1,050 5 40 200
5 40
28 Purchase 20 35 700 20 35 900
30 Total 55 $2,175 60 $2,775 25 , $ 900
Check: $2,775 + $900 = $3,675 ($1,500 + $2,175)
(b) It needs to consider whether the change will result in more relevant and reliable
presentation in the financial statements. This may only occur if the physical flow, or
nature and use, of the inventory changes.
(c) I would expect the ending inventory under the average cost method to be higher when
prices are falling as the inventory will be valued at an average cost. Under FIFO,
ending inventory would be lower when prices are falling as the inventory will be valued
at the last (and lowest) price. Cost of goods sold under the average cost method
would be lower.

PROBLEM 6-4A
(a) Note: Unrounded numbers have been used in the average cost calculations, although
Apr. 1 Beg. inventory 30 $50.00 $1,500.00
6 Purchase 15 $45 $ 675.00 45 48.33 2,175.00
9 Sale 35 $48.33 $1,691.67 10 48.33 483.33
14 Purchase 20 40 800.00 30 42.78 1,283.33
20 Sale 25 42.78 1,069.44 5 42.78 213.89
28 Purchase 20 35 700.00 25 36.56 913.89
31 Balance 55 $2,175.00 60 $2,761.11 25 $ 913.89
Check: $2,761.11 + $913.89 = $3,675.00 ($1,500.00 + $2,175.00)
(b)
Cost of Goods Sold .......................................................... 36.56
Merchandise Inventory (1 × $36.56)...................... 36.56
(c) Three accounts would be affected—Merchandise Inventory, Cost of Goods Sold, and
Retained Earnings. The Merchandise Inventory account would be overstated by
$36.56. This would result in the statement of financial position sub-totals of current
assets and total assets also being overstated. The Cost of Goods Sold account would
be understated by $36.56. This would lead to the income statement sub-totals of
gross profit and profit being overstated by $36.56. The Retained Earnings account
would also be overstated by $36.56.

PROBLEM 6-5A
(a) (1) FIFO
May 1 Purchase 12 $100 $1,200 12 $100 $1,200
3 Sale 8 $100 $ 800 04 100 400

4 100
8 Purchase 10 110 1,100 10 110 1,500
4 100
13 Sale 4 110 840 6 110 660
6 110
15 Purchase 6 115 690 6 115 1,350
20 Sale 6 110 660 6 115 690
27 Sale 4 115 460 2 115 230
31 Balance 28 $2,990 26 $2,760 2 $ 230
Check: $2,760 + $230 = $2,990

PROBLEM 6-5A (Continued)
(a) (Continued)
(2) Average
July 1 Purchase 12 $100.00 $1,200.00 12 $100.00 $1,200.00
3 Sale 8 $100.00 $ 800.00 4 100.00 400.00
8 Purchase 10 110.00 1,100.00 14 107.14 1,500.00
13 Sale 8 107.14 857.14 6 107.14 642.86
15 Purchase 6 115.00 690.00 12 111.07 1,332.86
20 Sale 6 111.07 666.43 6 111.07 666.43
27 Sale 4 111.07 444.28 2 111.07 222.15
31 Balance 28 $2,990.00 26 $2,767.85 2 $ 222.15
Check: $2,767.85 + $222.15 = $2,990.00
(b) Save-Mart should consider the physical flow of its goods, the amount to be reported
on the statement of financial position, and the nature and use of its goods.
(c) The FIFO cost method produces a higher gross profit and profit as its cost of goods
sold are lower during periods of rising prices.
(d) FIFO produces a higher ending inventory during periods of rising prices.
(e) The pre-tax cash flows are the same no matter which cost method is used.

PROBLEM 6-6A
(a)
April 1 No entry
6 Merchandise Inventory (110 × $9) ......................... 990.00

Cash ............................................................. 990.00
8 Cash (140 × $12)................................................... 1,680.00

Sales ............................................................. 1,680.00
Cost of Goods Sold (140 × $8.69*)........................ 1,216.25

Merchandise Inventory .................................. 1,216.25
15 Merchandise Inventory (120 × $7) ........................ 840.00

Cash ............................................................. 840.00
20 Cash (110 × $10)................................................... 1,100.00

Sales ............................................................. 1,100.00
Cost of Goods Sold (110 × $7.24*)........................ 796.52

Merchandise Inventory .................................. 796.52
27 Merchandise Inventory (20 × $6) ........................... 120.00

Cash ............................................................. 120.00
* These numbers have been rounded to the nearest cent for presentation purposes,
but not for calculation purposes. See detailed calculations in part (b).

(b) Note: Unrounded numbers have been used in the average cost calculations, although
May 1 Beginning 50 $8.00 $ 400.00
6 Purchase 110 $9 $ 990 160 8.69 1,390.00
8 Sale 140 $8.69 $1,216.25 20 8.69 173.75
15 Purchase 120 7 840 140 7.24 1,013.75
20 Sale 110 7.24 796.52 30 7.24 217.23
27 Purchase 20 6 120 50 6.74 337.23
31 Balance 250 $1,950 250 $2,012.77 50 $ 337.23
Check: $2,012.77 + $337.23 = $2,350 ($400 + $1,950)
(c) Ending inventory should be valued at $250 (50 x $5) which is the lower of cost and net
realizable value.
Cost = $337.23
NRV = $250.00 (50 units @ $5)

PROBLEM 6-7A
2015 2014
(a) Cash No effect No effect
(b) Cost of goods sold Overstated Understated
(c) Profit Understated Overstated
(d) Retained earnings No effect Overstated
(e) Ending inventory No effect Overstated
(f) Gross profit margin ratio Understated Overstated
(g) Inventory turnover ratio Understated* Understated
*Although the cost of goods sold is overstated in 2015, this is not as significant (in
percentage terms) as the overstatement in average inventory, which is the denominator in
the inventory turnover ratio so this ratio remains understated in 2015.

PROBLEM 6-8A
(a) (INCORRECT)
KMETA INC.
Income Statement
Year Ended July 31
2015 2014 2013

Sales $340,000 $320,000 $300,000
Cost of goods sold 233,000 220,000 209,000
Gross profit 107,000 100,000 91,000
Operating expenses 68,000 64,000 64,000
Profit before income tax $ 39,000 $ 36,000 $ 27,000
Statement of financial position:

Merchandise inventory $40,000 $40,000 $24,000
(CORRECT)
KMETA INC.
Income Statement
Year Ended July 31
2015 2014 2013

Sales $340,000 $320,000 $300,000
Gross profit 122,000 76,000 100,000

1
$209,000 – $9,000 = $200,000
2
$220,000 + $9,000 + $15,000 = $244,000
3
$233,000 – $15,000 = $218,000
4
$24,000 + $9,000 = $33,000
5
$40,000 – $15,000 = $25,000

(b) Retained earnings before correction = $27,000 + $36,000 + $39,000 = $102,000

Retained earnings after correction = $36,000 + $12,000 + $54,000 = $102,000
The retained earnings balance at the end of 2015 is unaffected and remains at
$102,000 because by that time all errors have been corrected.
(c) Inventory turnover
(INCORRECT)
$233,000
Inventory turnover (2015) = 5.8 times
($40,000 + $40,000) ÷ 2
$220,000
($40,000 + $24,000) ÷ 2
(CORRECT)
$218,000
($40,000 + $25,000) ÷ 2
$244,000
($25,000 + $33,000) ÷ 2

PROBLEM 6-9A
(a)
Unit
Type of Bean Quantity Cost Total Cost NRV Total NRV LCNRV
Coffea arabica 13,000 bags $5.60 $72,800 $5.55 $72,150 $72,150
Coffea robusta 5,000 bags 3.40 17,000 3.50 17,500 17,000

$89,800 $89,650 $89,150
(b) Dec. 31 Cost of Goods Sold ($89,800 – $89,150)........... 650

Merchandise Inventory ............................... 650
(c) If the same inventory has recovered its decline in value, the write down should be
reversed. A reversal is justified when the economic circumstances that previously
caused the inventory to be written down below cost no longer exist or there is clear
evidence that net realizable value now exceeds cost. The inventory would be restated
at its unit cost. The inventory cannot be valued at an amount greater than its original
cost.

PROBLEM 6-10A
(a)
Total Cost Total NRV LCNRV

(1) June 30 $4,740,000 $5,100,000 $4,740,000
(2) July 31 5,695,000 5,460,500 5,460,500
(3) August 31 4,482,500 4,345,000 4,345,000
(b) (1) June 30 No entry
(2) July 31 Cost of Goods Sold .......................................... 234,500

Merchandise Inventory ...................... 234,500
($5,695,000 – $ 5,460,000 = $234,500)
(3) Aug. 31 Cost of Goods Sold ........................................ 137,500

Merchandise Inventory ...................... 137,500
($4,482,500 – $4,345,000 = $137,500)
(c) There are no significant differences in recording LCNRV under ASPE rather than
IFRS.

PROBLEM 6-11A
(a) (in USD millions)
Inventory Turnover Days In Inventory Current Ratio
$19,053 365 $30,328

2012 = 6.0 times = 61 days = 1.1 : 1
($3,264 + $3,092)÷2 6.0 times $27,821
$18,216 365 $25,497

2011 = 6.3 times = 58 days = 1.1 : 1
($3,092 + $2,650)÷2 6.3 times $24,282
Coca-Cola’s current ratio remained constant in 2012 and is slightly below the industry
average of 1.2:1. This ratio indicates that the company has fewer current assets to
cover its current liabilities compared to other companies in the industry. Coca-Cola’s
inventory turnover has deteriorated and continues to be significantly worse than the
rest of the industry.
(b) Coca-Cola has different types of inventory that likely have different physical flows of
inventory For example, beverages likely flow on a FIFO basis (especially for
beverages with “best before” dates). Other components of inventory including raw
materials such as sugar may be accounted for on an average basis.

PROBLEM 6-12A
(a) Both companies have current ratios that exceed the industry average and therefore
enjoy greater liquidity. Tim Hortons has a higher current ratio and higher inventory
turnover ratio and therefore greater liquidity than Starbucks. Both companies have
significantly lower inventory turnover than the industry. Since inventory is a large
component of current assets, an inventory turnover ratio lower than the industry
means that more inventory is kept on hand and therefore increases current assets and
the current ratio. As a result, the higher than average current ratios may not translate
into higher liquidity.
(b) Starbucks’ gross profit margin significantly exceeds the industry average, likely
because of its high sales price strategy, but its profit margin only matches the industry
average. Tim Hortons’ gross profit margin is below industry average but its profit
margin is much larger than both Starbucks and its industry counterparts. This
indicates that Tim Hortons likely has lower operating expenses relative to sales, since
it has leveraged a lower gross profit margin into a higher profit margin.

*PROBLEM 6-13A
(a) Cost Of Goods Available For Sale
Date Explanation Units Unit Cost Total Cost

Jan. 1 Beginning inventory 25 $160 $ 4,000
Mar. 15 Purchase 70 150 10,500
July 20 Purchase 50 145 7,250
Sept. 4 Purchase 45 135 6,075
Dec. 2 Purchase 10 125 1,250
Total 200 $29,075
(b) FIFO
Step 1: Ending Inventory

Date Units Unit Cost Total Cost
Sept. 4 10 $135 $1,350
Dec. 2 10 125 1,250
20 $2,600
Step 2: Cost of Goods Sold

Cost of goods available for sale $29,075
Less: Ending inventory 2,600
Cost of goods sold $26,475
Proof: Cost of Goods Sold

Unit Total
Units Cost Cost
25 $160 $ 4,000
70 150 10,500
50 145 7,250
35 135 4,725
180 $26,475

*PROBLEM 6-13A (Continued)
(b) (Continued)
Average

Weighted Average Total
Units Unit Cost Cost
20 $145.38* = $2,907.50
*$29,075 ÷ 200 = $145.38 (rounded)

Cost of goods available for sale $29,075.00
Less: Ending inventory 2,907.50
Cost of goods sold $26,167.50
Proof: Cost of goods sold

180 × ($29,075 ÷ 200) = $26,167.50

*PROBLEM 6-14A
(a)
KANE LTD.
Partial Income Statements
FIFO Average
Sales (180 × $200) .......................................... $36,000 $36,000

Cost of goods sold
Beginning inventory ................................. 4,000 4,000
Cost of goods purchased ........................ 25,075 25,075
Cost of goods available for sale .............. 29,075 29,075
Ending inventory ..................................... 2,600 2,908
Cost of goods sold .................................. 26,475 26,167
Gross profit ...................................................... 9,525 9,833
(b)
KANE LTD.
Partial Statement of Financial Position
FIFO Average
Assets
Current assets
Merchandise inventory ............................... $2,600 $2,908
(c) FIFO uses the most recent inventory prices to value the ending inventory. Since prices
are declining, FIFO results in the lowest cost for ending inventory. FIFO results in the
higher cost of goods sold and lower profit because FIFO values the cost of goods sold at
the oldest higher prices.

*PROBLEM
PROBLEM6-15A
6-5A
(a)
(1) Periodic Inventory System
COST OF GOODS AVAILABLE FOR SALE

Aug. 1 Beginning inventory 50 $90 $ 4,500
4 Purchase 180 92 16,560
18 Purchase 70 94 6,580
28 Purchase 40 95 3,800
Total 340 $31,440
Units Sold = 160 + 100 = 260

Units in Ending inventory = 340 – 260 = 80

Unit Total
Units Cost Cost
40 $95 $3,800
40 94 3,760
80 $7,560

Unit Total
Units Cost Cost
50 $90 $ 4,500
180 92 16,560
30 94 2,820
260 $23,880

(a) (Continued)
(2) Perpetual Inventory System
June1 Beginning
inventory 50 $90 $ 4,500
50 90
4 Purchase 180 $92 $16,560 180 92 21,060
50 $90
10 Sale 110 92 $14,620 70 92 6,440
70 92
18 Purchase 70 94 6,580 70 94 13,020
70 92
25 Sale 30 94 9,260 40 94 3,760
40 94
28 Purchase 40 95 3,800 40 95 7,560
30 Balance 290 $26,940 125 $23,880 40 , $ 7,560
Check: $23,880 + $7,560 = $31,440 ($4,500 + $26,940)
(b)
Perpetual Periodic
Cost of goods sold $23,880 $23,880
Ending inventory 7,560 7,560
Cost of goods available for sale $31,440 $31,440
The results under FIFO in a perpetual system are the same as in a periodic system. Under
both inventory systems, the first costs in inventory are the ones assigned to the cost of goods
sold.

*PROBLEM 6-16A
(a) (1) Perpetual Inventory System
the numbers have been rounded to the nearest cent for presentation purposes. Because
of this, some amounts may not appear to multiply exactly because of the rounding in the
presentation.
Nov. 1 Beginning
inventory 100 $20.00 $ 2,000.00
4 Purchase 500 $21 $10,500 600 20.83 12,500.00
11 Sale 450 $20.83 $ 9,375.00 150 20.83 3,125.00
16 Purchase 750 22 16,500 900 21.81 19,625.00
20 Sale 800 21.81 17,444.44 100 21.81 2,180.56
27 Purchase 600 23 13,800 700 22.83 15,980.56
30 Balance 1,850 $40,800 1,250 $26,819.44 700 $15,980.56
Check: $26,819.44 + $15,980.56 = $42,800 ($2,000 + $40,800)

(a) (Continued)
(2) Periodic Inventory System
COST OF GOODS AVAILABLE FOR SALE

Nov 1 Beginning inventory 100 $20 $ 2,000
4 Purchase 500 21 10,500
16 Purchase 750 22 16,500
27 Purchase 600 23 13,800
Total 1,950 $42,800
Average cost per unit = $42,800 ÷ 1,950 = $21.95

Units Sold = 450 + 800 = 1,250
Units in Ending inventory = 1,950 – 1,250 = 700

700 units @ $21.95 = $15,364.10


1,250 × ($42,800 ÷ 1,950) = $27,435.90

(b)
Average
Periodic Perpetual
Cost of goods sold $27,435.90 $26,819.44
Ending inventory 15,364.10 15,980.56
Cost of goods available for sale $42,800.00 $42,800.00
The results are different because the perpetual system recalculates (changes) the average
unit cost after each purchase where the average cost is calculated only once at the end of
the period in the periodic system.

PROBLEM 6-1B
(a) 1. The goods on consignment belong to Kananaskis and should not be included in
Banff’s ending inventory.
2. Include $600 ($1,200 ÷ 2) in inventory as Banff has title to this inventory.
3. $1,650 ($1,500 + $150) should be included in inventory as the goods were shipped
FOB shipping point on February 25th.
4. The goods should not be included in inventory as they were shipped FOB shipping
point and shipped before February 28. Title to the goods transfers to the customer
at shipping. Banff should have recorded the transaction in the Sales and Accounts
Receivable accounts.
5. The amount should not be included in inventory as they were shipped FOB
destination and not received until March 2. The seller still owns the inventory. No
entry is recorded.
6. The sale will be recorded on March 3. The goods should be included in inventory
at the end of February at their cost of $800. The freight is a selling expense.
7. Include $1,300 in inventory as it has not been sold.
8. Inventory should be decreased by $800 to record these goods at lower of cost and
net realizable value, which is zero.
(b) The revised ending inventory is:
Unadjusted inventory $112,000

Adjustments
2. February 5 $ 600
6. February 25 800
8. February 28 (800) 3,550
Adjusted inventory $115,550

PROBLEM 6-2B
(a)
Sales
Cost/ price/ Cost/
Unit Unit Unit
Supplier Serial # $ $ Supplier Serial # $
Aug. 10 Suzuki SZ5828 1,600 2,700 Aug. 1 Suzuki SZ5716 1,100

Kawai KG1520 600 1,000 Kawai KG1268 1,500
18 Yamaha YH4418 1,300 2,100 Steinway ST8411 2,600
Steinway ST0944 2,200 3,700 22 Suzuki SZ6148 1,600
26 Suzuki SZ6132 1,800 2,900 6,800
Yamaha YH6318 1,500 2,500
Yamaha YH5632 1,600 2,600
10,600 17,500
(b) Gross profit = $17,500 – $10,600 = $6,900
(c) The specific identification method is likely the most appropriate method for the Piano
Studio Ltd. because the pianos are large dollar value items that are specifically
identifiable by serial number.

PROBLEM 6-3B
(a)

April 1 Beg. inventory 50 $230 $11,500
50 230
6 Purchase 35 $240 $ 8,400 35 240 19,900
50 $230
9 Sale 5 240 $12,700 30 240 7,200
30 240
14 Purchase 40 245 9,800 40 245 17,000
30 240
20 Sale 20 245 12,100 20 245 4,900
20 245
28 Purchase 30 250 7,500 30 250 12,400
30 Balance 105 $25,700 105 $24,800 50 $12,400
Check: $24,800 + $12,400 = $37,200 ($11,500 + $25,700)
(b) It needs to consider whether the change will result in more relevant and reliable
presentation in the financial statements. This may only occur if the physical flow, or
nature and use of the inventory changes.
(c) I would expect that under the average method the ending inventory would be lower,
because under FIFO, when prices are rising, the inventory with the highest cost would
have been purchased last and would remain in inventory. Under average, ending
inventory includes some lower cost goods purchased earlier. I would expect cost of
goods sold to be higher under average since the average would include the cost of more
recently purchased goods. Notice that average will give higher cost of goods sold while
having ending inventory that is lower than under FIFO.

PROBLEM 6-4B
April 1 Beg. inventory 50 $230.00 $11,500.00
6 Purchase 35 $240 $ 8,400 85 234.12 19,900.00
9 Sale 55 $234.12 $12,876.47 30 234.12 7,023.53
14 Purchase 40 245 9,800 70 240.34 16,823.53
20 Sale 50 240.34 12,016.81 20 240.34 4,806.72
28 Purchase 30 250 7,500 50 246.13 12,306.72
30 105 $25,700 105 $24,893.28 50 $12,306.72
Check: $24,893.28 + $12,306.72 = $37,200 ($11,500 + $25,700)
(b) It should write-off the rod:
April 30 Cost of Goods Sold ......................................... 246.13

Merchandise Inventory ......................... 246.13
(c) Three accounts would be affected—Merchandise Inventory, Cost of Goods Sold, and
Retained Earnings. The Merchandise Inventory account would be overstated by
$246.13. This would result in the statement of financial position sub-totals of current
assets and total assets also being overstated. The Cost of Goods Sold account would
be understated by $246.13. This would lead to the income statement sub-totals of
gross profit and profit being overstated by $246.13. The Retained Earnings account
would also be overstated by $246.13.

PROBLEM 6-5B
(a) (1) FIFO
May 1 Purchase 110 $19 $2,090 110 $19 $2,090

110 19
6 Purchase 140 22 3,080 140 22 5,170
110 $19
11 Sale 90 22 $4,070 50 22 1,100
50 22
14 Purchase 80 23 1,840 80 23 2,940
50 22
21 Sale 50 23 2,250 30 23 690
30 23
27 Purchase 50 25 1,250 50 25 1,940
31 Balance 380 $8,260 300 $6,320 80 $1,940
Check: $6,320 + $1,940 = $8,260

PROBLEM 6-5B (Continued)

(a) (Continued)
(2) Average
May 1 Purchase 110 $19 $2,090 110 $19.00 $2,090.00
6 Purchase 140 22 3,080 250 20.68 5,170.00
11 Sale 200 $20.68 $4,136.00 50 20.68 1,034.00
14 Purchase 80 23 1,840 130 22.11 2,874.00
21 Sale 100 22.11 2,210.77 30 22.11 663.23
27 Purchase 50 25 1,250 80 23.92 1,913.23
31 Balance 380 $8,260 300 $6,346.77 80 $1,913.23
Check: $6,346.77 + $1,913.23 = $8,260
(b) Family Appliance Mart should consider whether the goods are ordinarily
interchangeable. If so, it should consider
• The method that corresponds most closely to the physical flow of goods
• The method that results in a cost on the statement of financial position that is close
to the inventory’s most recent cost
(c) Because prices are rising, FIFO produces the higher gross profit and profit.
(d) Because the ending inventory is determined using the most recent prices, the FIFO cost
method produces the higher ending inventory.
(e) Pre-tax cash flow will be the same under both cost methods.

PROBLEM 6-6B
(a)
Oct. 1 No entry required
5 Merchandise Inventory (100 × $13) ....................... 1,300

Accounts Payable ........................................ 1,300
8 Accounts Receivable ............................................. 2,600

Sales (130 × $20).......................................... 2,600
Cost of Goods Sold ............................................... 1,750

Merchandise Inventory
[(60 × $14) + (70 × $13)] ............................... 1,750
15 Merchandise Inventory (35 × $12) ......................... 420

Accounts Payable ......................................... 420
20 Accounts Receivable ............................................. 800

Sales (50 × $16) ........................................... 800
Cost of Goods Sold ............................................... 630

Merchandise Inventory [(30 × $13) + (20 × $12)] 630
26 Merchandise Inventory (15 × $11) ......................... 165

Accounts Payable ........................................ 165
(b) Ending Inventory

Unit Total
Date Units Cost Cost
Oct. 31 30* 15 @ $12
15 @ $11 $345
*60 + 100 – 130 + 35 – 50 + 15 = 30
(c) The inventory should be valued at $300. This is the lower of cost and net realizable
value.
Cost = $345
NRV = $300 (30 @ $10)

PROBLEM 6-7B
2015 2014
(a) Cash No effect No effect
(b) Cost of goods sold Understated Overstated
(c) Profit Overstated Understated
(d) Retained earnings No effect Understated
(e) Ending inventory No effect Understated
(f) Gross profit margin ratio Overstated Understated
(g) Inventory turnover ratio Overstated* Overstated
* Although the cost of goods sold is understated in 2015, this is not as significant (in
percentage terms) as the understatement in average inventory, which is the denominator in
the inventory turnover ratio so this ratio remains overstated in 2015.

PROBLEM 6-8B
(a) (INCORRECT)
PELLETIER INC.
Income Statement
Year Ended July 31
2015 2014 2013

Sales $320,000 $312,000 $300,000
Gross profit 133,000 109,000 130,000

(CORRECT)
PELLETIER INC.
Income Statement
Year Ended July 31
2015 2014 2013

Sales $320,000 $312,000 $300,000
Cost of goods sold 182,000 3 198,0002 180,0001
Gross profit 138,000 114,000 120,000

1
$170,000 + $10,000 = $180,000
2
$203,000 – $10,000 + $5,000 = $198,000
3
$187,000 – $5,000 = $182,000
4
$37,000 – $10,000 = $27,000
5
$24,000 – $5,000 = $19,000

PROBLEM 6-8B (Continued)
(b) Before correction = $80,000 + $57,000 + $81,000 = $218,000

After correction = $86,000 + $62,000 + $70,000 = $218,000
(c) Inventory turnover
(INCORRECT)
$187,000
($37,000 + $24,000)÷2
$203,000
($24,000 + $37,000)÷2
(CORRECT)
$182,000
($37,000 + $19,000)÷2
$198,000
($19,000 + $27,000)÷2

PROBLEM 6-9B
(a)
Net Lower of
Realizable Cost and
Product Quantity Unit Cost Total Cost Value Total NRV NRV
A 25 $7 $ 175 $7 $ 175 $175
B 30 6 180 8 240 180
C 60 11 660 10 600 600
$1,015 $1,015 $955
(b) March 31 Cost of Goods Sold ................................................... 60

Merchandise Inventory ................................ 60
(c) Product C has recovered its decline in value, so the write down should be reversed. A
reversal is justified when the economic circumstances that previously caused the
inventory to be written down below cost no longer exist or there is clear evidence that
net realizable value now exceeds cost. The inventory would be restated at its unit cost
of $11. The inventory cannot be valued at an amount greater than its original cost.

PROBLEM 6-10B
(a)
Tonnes Total Cost Total NRV LCNRV
(1) March 31 3,000 $2,175,000 $2,220,000 $2,175,000
(2) April 30 2,500 1,787,500 1,775,000 1,775,000
(3) May 31 2,800 2,030,000 2,030,000 2,030,000
(b)
(1) March 31 No entry
(2) April 30 Cost of Goods Sold ...................................... 12,500

Merchandise Inventory ........................... 12,500
($1,787,500 – $1,775,000 = $12,500)
(3) May 31 No entry
(c) There are no significant differences in recording LCNRV under ASPE rather than
IFRS.

PROBLEM 6-11B
(a) (in USD millions)
Inventory Turnover Days In Inventory Current Ratio
$31,291 365 $18,720

2012 = 8.4 times = 43 days = 1.1 : 1
($3,581 + $3,827)÷2 8.4 times $17,089
$31,593 365 $17,441

2011 = 8.8 times = 42 days = 1.0 : 1
($3,827 + $3,372)÷2 8.8 times $18,154
PepsiCo’s current ratio improved slightly in 2012 but is below the industry average of
1.2:1. This ratio indicates that the company less current assets to cover its current
liabilities than the average company in this industry. The increase in the current ratio
however follows the trend experienced by the industry and may be due to the same
economic factors as experienced by other companies in the same industry. PepsiCo’s
inventory turnover has deteriorated slightly but remains above the industry average.
This ratio has also experienced the same trend as the industry.
(b) PepsiCo has different types of inventory that likely have different physical flows. For
example, drinks with “best before dates” likely flow first-in, first-out, which make the
FIFO inventory cost method an appropriate choice. Other components of inventory,
including raw materials such as sugar may be accounted for on an average basis.

PROBLEM 6-12B
(a) Magna’s inventory turnover outpaces its industry counterparts by a large margin while
Dana falls short in this respect. On the other hand Dana has a much stronger current
ratio compared to its industry counterparts while Magna falls short for this measure of
liquidity.
(b) Both Magna and Dana have gross profit margins and profit margins that are
substantially lower than industry average. This could be due in part to the product mix
for each company compared to its industry peers.
(c) Since inventory is a large component of current assets, a higher inventory turnover as
is the case for Magna would normally decrease its current ratio, which appears to be
case. Dana experienced the opposite trend as it has a lower inventory turnover. Dana
should have a higher current ratio, which also appears to be the case. One can
therefore conclude: other factors remaining equal the more inventory is kept on hand,
the greater the current assets and the current ratio.

*PROBLEM 6-13B
(a) Cost Of Goods Available For Sale

Jan. 1 Beginning inventory 400 $18 $ 7,200
Feb. 20 Purchase 1,200 19 22,800
May 5 Purchase 1,000 21 21,000
Aug. 12 Purchase 1,200 20 24,000
Dec. 8 Purchase 600 22 13,200
Total 4,400 $88,200
(b) (1) FIFO

Dec. 8 400 22 $ 8,800

Unit Total
Units Cost Cost
400 $18 $ 7,200
1,200 19 22,800
1,000 21 21,000
1,200 20 24,000
200 22 4,400
4,000 $79,400

*PROBLEM 6-13B (Continued)
(b) (Continued)
(2) Average
Step1: Ending Inventory
Weighted Average Total

Units Unit Cost Cost
400 $20.05* = $8,018.18
*$88,200 ÷ 4,400 = $20.05

Proof: 4,000 × ($88,200 ÷ 4,400) = $80,181.82

*PROBLEM 6-14B
(a)
STEWARD INC.
Partial Income Statements
FIFO Average
Sales (1,900 × $20) ......................................... $160,000 $160,000

Cost of goods sold
Beginning inventory ................................. 7,200 7,200
Cost of goods purchased ........................ 81,000 81,000
Cost of goods available for sale .............. 88,200 88,200
Ending inventory ..................................... 8,800 8,018
Cost of goods sold .................................. 79,400 80,182
Gross profit ...................................................... 80,600 79,818
(b)
STEWARD INC.
Partial Statement of Financial Position
FIFO Average
Assets
Current assets
Merchandise inventory ............................ $8,800 $8,018
(c) FIFO uses the latest inventory prices to determine the cost of the ending inventory and,
therefore, results in the higher amount for ending inventory in periods of rising prices.
FIFO results in the lowest cost of goods sold and higher profit because FIFO values the
cost of goods sold at the earliest and lowest prices.

*PROBLEM 6-15B
(a) (1) Perpetual
May 1 Beg. inventory 15,000 $2.30 $ 34,500

15,000 2.30
6 Purchase 40,000 $2.35 $ 94,000 40,000 2.35 128,500
15,000 $2.30
11 Sale 15,000 2.35 $ 69,750 25,000 2.35 58,750
25,000 2.35
14 Purchase 50,000 2.40 120,000 50,000 2.40 178,750
25,000 2.35
21 Sale 40,000 2.40 154,750 10,000 2.40 24,000
10,000 2.40
27 Purchase 40,000 2.45 98,000 40,000 2.45 122,000
31 Balance 130,000 $312,000 95,000‘ $224,500 50,000 $122,000
Check: $224,500 + $122,000 = $346,500 ($34,500 + $312,000)


(a) (Continued)
(2) Periodic

May 14 10,000 $2.40 $ 24,000
May 27 40,000 2.45 98,000
50,000 $122,000


Unit Total
Units Cost Cost
15,000 $2.30 $ 34,500
40,000 2.35 94,000
40,000 2.40 96,000
95,000 $224,500
(b)
Perpetual Periodic
Cost of goods sold $224,500 $224,500
Ending inventory 122,000 122,000
Cost of goods available for sale $346,500 $346,500
Both the periodic and perpetual systems result in the same ending inventory and cost of
goods sold under the FIFO cost method because the most recently purchased goods
remain in inventory.

*PROBLEM 6-16B
(1) Average – Perpetual
Oct. 1 Beg. inventory 50 $24.00 $1,200.00
9 Purchase 125 $26 $3,250 175 25.43 4,450.00
15 Sale 150 $25.43 $3,814.29 25 25.43 635.71
20 Purchase 70 27 1,890 95 26.59 2,525.71
29 Sale 55 26.59 1,462.25 40 26.59 1,063.46
30 Balance 195 $5,140 205 $5,276.54 40 $1,063.46
Check: $5,276.54 + $1,063.46 = $6,340 ($1,200 + $5,140)

(a) (Continued)
(2) Average – Periodic
Cost of Goods Available for Sale

Oct. 1 Beginning inventory 50 $24 $1,200
9 Purchase 125 26 3,250
22 Purchase 70 27 1,890
Total 245 $6,340
Ending Inventory Cost of Goods Sold

Unit Total Cost of goods
Date Units Cost Cost available for sale $6,340.00
Oct. 31 40 $25.88* $1,035.10 Less: Ending inventory 1,035.10
$6,340 ÷ 245 = $25.88

*
Proof: Cost of Goods Sold 205 × ($6,340 ÷ 245) = $5,304.90
(b)
Average
Perpetual Periodic
Cost of goods sold $5,276.54 $5,304.90
Ending inventory 1,063.46 1,035.10
Cost of goods available for sale $6,340.00 $6,340.00
The results for the average cost method differ depending on whether a perpetual or periodic
system is used. This is because using a perpetual system, the average cost is recalculated
(changes) after each purchase. In a periodic system, it is calculated only once at the end of
the period.

BYP 6-1 FINANCIAL REPORTING
(Note: All amounts are in thousands)
(a) Inventories were $2,148,484 in 2012 and $2,042,302 in 2011.
(b)
As a
2012 2011 Increase Percentage
Inventory $2,148,484 $2,042,302 $106,182 5.2%
Current assets 2,764,997 2,695,647
Inventory as a %
of current assets 77.7% 75.8%
Inventory has increased at a modest pace from 2011 to 2012. There was also a modest
increase in inventory as a percentage of current assets.
(c) When choosing the cost method of FIFO, Shoppers, whose product is interchangeable,
considered the flowing guidelines:
1. Choose a method that corresponds as closely as possible to the physical flow of
goods.
2. Report an inventory cost on the statement of financial position that is close to the
inventory’s recent cost.
3. Use the same method for all inventories having a similar nature and usage in the
company.
Due to the nature of the product sold, particularly the food items, which have a high
turnover, Shoppers has attempted to fulfill the guidelines above and has chosen FIFO.
(d) Shoppers wrote down its inventory to net realizable value in both the 2011 and 2012
fiscal years. The journal entry for 2012 in thousands of dollars was as follows:
Cost of Goods Sold ................................................................. 44,334

Merchandise Inventory ................................................. 44,334
The amount of the write down in 2011 of $39,943 thousand was slightly lower than in
2012.

BYP 6-2 COMPARATIVE ANALYSIS
(a)
Shoppers Jean Coutu
(in thousands) (in millions)
$2,764,997 $421.9
Current ratio = 1.2 : 1 = 1.6 : 1
2,334,917 $265.3
(b)
Shoppers Jean Coutu
(in millions) (in millions)
Inventory $6,609.2 $2,169.0

turnover ($2,148.5 + $2,042.3) ÷ 2 ($190.1 + $166.2) ÷ 2
= 3.2 times = 12.2 times
Days in 365 365

inventory = 114 days = 30 days
3.2 times 12.2 times
(c) Jean Coutu has the better ratios of the two companies and its ratios are better than that
of the industry, while Shoppers is worse than the industry. While the ratios might be
affected by the product mix of the inventory of both companies, Shoppers’ liquidity is
poor as demonstrated by its current ratio and the movement of inventory is more three
times slower than that of Jean Coutu.

BYP 6-3 COMPARING IFRS AND ASPE
(a) There are no significant differences in the accounting standards relating to the
management of inventory for ASPE and IFRS.
Although not discussed in this introductory course, analysts should be aware that
there are differences in the standards when accounting for specific types of inventory.
Examples of types of inventory which do have differences are construction in progress
and biological assets at the point of harvest.
(b) Yes, the use of the two different inventory systems could affect the comparison of the
financial statements of each company. For example, when the perpetual inventory
system is used, any costs related to inventory shrinkage are identified. The company
can then record the shrinkage in cost of goods sold as is normally done but if the
amount is significant. a company could record the shrinkage in a separate account.
With the periodic system, these costs are not separately identified and would
ultimately be buried in cost of goods sold when the inventory count is performed.
The use of the FIFO cost method, used by Global Lumber, will not result in any
financial differences between a periodic and perpetual inventory system. The use of
the average cost method, used by Gibson Lumber, will normally result in different
financial results between a periodic and perpetual inventory system because the
average unit cost is determined only at the end of a period in the periodic system
compared to continually adjusting it in a perpetual inventory system. That said, these
differences are likely minor if costs are changing by small amounts.
(c) Yes, the use of the different cost methods would affect the comparison of the financial
statements. This effect is greater in periods where inventory costs are changing.
Global Lumber measures its inventory using the FIFO cost method and therefore its
inventory is valued at the most current price. Gibson uses the average cost method
and therefore its inventory is valued at the average cost of all inventory purchased
during the period. Therefore, in a period of rising (or declining) prices Global Lumber's
would be recorded at a higher (or lower) per unit value than that of Gibson.

BYP 6-4 CRITICAL THINKING CASE
(a) The cost of goods available for sale in December can be calculated as follows (notice that
the goods in transit are not included as title has not yet passed because terms were FOB
destination):
Doors Cost Total
December 1 – purchase from

DDI 2,600 310 $ 806,000
Second purchase 800 240 192,000
Third purchase 600 190 114,000
4,000 $1,112,000
(b) The cost of ending inventory at the end at December 31 can be calculated as follows:
The average cost, or carrying amount, of a door is $1,112,000 ÷ 4,000 = $278 per door.
The number of units in ending inventory is the 800 doors counted. The 100 doors in
transit should not be included in inventory because title did not pass while in transit. Title
passes at destination and the doors have not yet reached their destination. Consequently,
ending inventory is 800 × $278 = $222,400.
(c) Because there is an error in the ending inventory balance the Merchandise Inventory
account will have to be adjusted along with a corresponding adjustment to Cost of Goods
Sold. The error can be calculated as follows:
Merchandise Inventory balance per Kevin 900 × $310 $279,000

Merchandise Inventory correct balance (see above) 222,400
Difference $ 56,600
As this will directly affect operating profit for the month of December, Kevin’s bonus
should be reduced by $5,660 (10% of $56,600).
(d) The error in ending inventory has an impact on the bank loan. The loan limit is 80% of the
carrying amount of inventory. Since the correct inventory balance is $222,400 and 80% of
this amount is $177,920 that is the maximum amount that the bank will now allow the loan
balance to be. Since the loan outstanding is currently at $200,000, the bank will want
ABS to pay down the loan by $22,080 ($200,000 − $177,920). Had Kevin’s amounts for
ending inventory been used, there would have been enough security for the loan.

BYP 6-4 (Continued)

(e) Kevin’s actions may be considered unethical for two major reasons. First of all, he
apparently increased the number of doors in ending inventory by the 100 doors that were
in transit even though title had not passed. Secondly, he did not apply the average cost
method appropriately. It is also interesting to note that the motivation for doing this was
probably to maximize his bonus but it could also have been done to maintain the level of
current funding from the bank. One can also wonder why ABS purchased the inventory
when it acquired DDI at an average cost per door of $310 when the cost of doors
appeared to be falling dramatically.
(f) If the selling price, which is the net realizable value of a door, fell to $240 each, then the
carrying amount as calculated in (b) above would be above this amount at $278 each.
Since inventory is valued at the lower of cost or net realizable value, the amount per door
should be reduced from $278 to $240 each, representing a write-down of $800 × ($278 −
$240) = $30,400. Cost of goods sold will be increased by $30,400 and this will decrease
gross profit by the same amount. This would further reduce Kevin’s bonus by $3,040 and
would mean that the bank loan balance would also have to be reduced by $24,320 (80%
× $30,400).

BYP 6-5 ETHICS CASE
(a) Specific Identification

(1) (2)
Maximize Minimize
Gross Profit Gross Profit
Sales ........................................................... $561,0001 “$561,0001

2 3
Cost of goods sold ...................................... 366,100 366,800
Gross profit ................................................. $194,900 “$194,200
1
Sales = ( 170 × $800) + (500 × $850) = $561,000
Goods Available for Sale

Date Units Cost Total
Mar. 1 140 “$500 $ 70,000
3 200 540 108,000
10 340 570 193,800
$371,800
Specific Identification–Maximize gross profit (minimize cost of sales by deciding to sell the
diamonds purchased at the lowest cost)

Date Units Cost Total Date Units Cost Total
Mar. 5 140 0$500 $ 70,000 Mar. 25 10 $570 $5,700
30 ,,,,540 16,200
25 170 …540 91,800
330 570 188,100
2
$366,100
Specific Identification–Minimize gross profit (maximize cost of sales by selling the diamonds
purchased at the highest cost)

Date Units Cost Total Date Units Cost Total
Mar. 5 170 ,,$540 $ 91,800 Mar. 1 10 $500 $5,000
25 340 570 193,800
30 540 16,200
130 500 65,000
3
$366,800

BYP 6-5 (Continued)

(b) The stakeholders are the shareholders, customers, and staff of Swag Diamonds. There
is not really anything unethical in selecting which diamonds to sell, unless it is done
solely on a desire to manipulate profits.
(c) Average
Sales ................................................................... $561,000

Cost of goods sold .............................................. 366,255 4
Gross profit.......................................................... $194,745
March 1 Beginning inventory 140 $500.00 $ 70,000

3 Purchase 200 540.00 108,000
340 523.53 178,000
5 Sale (170) 523.53 (89,000)
170 523.53 89,000
10 Purchase 340 570.00 193,800
510 554.51 282,800
25 Sale (500) 554.51 (277,255)
31 Balance 10 $ 5,545
4
Cost of Goods Sold = (170 × $523.53) + (500 × $554.51) = $366,255
(d) Swag Diamonds should select the average cost method given that the inventory is
homogeneous and not individually distinguishable. The specific identification method is
not a permissible choice for the company given the type and physical flow of inventory it
carried. The average cost method also has the advantage of not being subject to
manipulation.

BYP 6-6 “ALL ABOUT YOU” ACTIVITY
(a) Internal control measures should be in place to help ensure:

• All goods received are placed into inventory and the perpetual record is updated
promptly to ensure that items are not taken by the receiving clerk
• Put control tags on each inventory item so that customers do not leave the store
without paying for them
• Have staff watch for suspicious conduct by customers or other staff members
• Establish clear policies concerning the handling on inventory and monitor the
adherence to these policies by staff members.
• Have merchandise in locked display cases that can be accessed only by staff.
(b) The inventory should be counted more frequently than once a year, particularly for high-
end product. Through visual inspection and counting of items on hand when compared
to the perpetual record, one can quickly establish if there are issues concerning the
accuracy of the perpetual record or if theft and pilferage is occurring. If there is high
activity (purchase and/or sale) of a particular product, a sample count of that product
can be done as frequently as deemed reasonable and prudent to establish proper
internal control over the inventory.
Assuming the physical count is less than the count on the books, the loss would
increase the Cost of Goods Sold account on the income statement and decrease both
the Merchandise Inventory and Retained Earnings accounts on the statement of
financial position. The opposite would be true if there proved to be an overage
established by the inventory count.
(c) If the cameras and photographic equipment are unique and identifiable, I would
recommend the specific identification method of costing inventory. Using this method
will better track the items on an individual basis, helping narrow down errors in
recording or pinpointing the pilferage of specific inventory items. This method will also
allow for better management of the selling price of items and the tracking of gross profit
on the sale of specific items. For items that are of lesser value and interchangeable,
such as picture frames, FIFO or average would be a better choice as there are no need
to have as stringent control over these items, due to their minimal value.

BYP 6-7 SERIAL CASE
Note to instructors: All of the material supplementing this group activity, including a
suggested solution, can be found in the Collaborative Learning section of the Instructor
Resource site accompanying this textbook as well as in the Prepare and Present section of
WileyPLUS.
(a)
Mixer Inventory - FIFO

2014 Purchases Cost of Goods Sold Balance
July 4 3 $550 $1,650 3 $550 $1,650
14 1 $550 $ 550 2 550 1,100
Aug. 1 1 568 568 2 550
1 568 1,668
27 2 550 1,100 1 568 568
Sept. 4 3 564 1,692 1 568
3 564 2,260
12 1 568
2 564 1,696 1 564 564
Oct. 3 3 574 1,722 1 564
3 574 2,286
27 1 564 564 3 574 1,722
Total 10 $5,632 7 $3,910 3 $1,722
(b)
July 4 Merchandise Inventory (3 × $550) ......................... 1,650

14 Cash ...................................................................... 995

Sales ............................................................. 995

Merchandise Inventory .................................. 550
25 Accounts Payable .................................................. 1,650

Cash ............................................................. 1,650

BYP 6-7 (Continued)

(b) (Continued)
Aug. 1 Merchandise Inventory ......................................... 568

27 Cash ...................................................................... 1,990

Sales ............................................................. 1,990
Cost of Goods Sold (2 × $550) .............................. 1,100

Merchandise Inventory .................................. 1,100
29 Accounts Payable .................................................. 568

Cash ............................................................ 568
Sept. 4 Merchandise Inventory (3 × $564) ........................ 1,692


Sales ............................................................. 2,985
Cost of Goods Sold [(1 × $568) + (2 × $564)] ....... 1,696

Merchandise Inventory .................................. 1, 696

Cash ............................................................. 1,692
Oct. 3 Merchandise Inventory ......................................... 1,722

27 Cash ...................................................................... 995

Sales ............................................................. 995
Cost of Goods Sold (1 × $564) .............................. 564


BYP 6-7 (Continued)

(c)
Mixer Inventory - Average

2011 Purchases Cost of Goods Sold Balance
July 4 3 $550 $1,650 3 $550 $1,650
14 1 $550 $ 550 2 550 1,100
Aug. 1 1 568 568 3 556 1,668
27 2 556 1,112 1 556 556
Sept. 4 3 564 1,692 4 562 2,248
12 3 562 1,686 1 562 562
Oct. 3 3 574 1,722 4 571 2,284
27 1 571 571 3 571 1,713
Total 10 $5,632 7 $3,919 3 $1,713
(d)
July 4 Merchandise Inventory (3 × $550) ......................... 1,650

14 Cash ...................................................................... 995

Sales ............................................................. 995


Cash ............................................................. 1,650
Aug. 1 Merchandise Inventory ......................................... 568

27 Cash ...................................................................... 1,990

Sales ............................................................. 1,990

Merchandise Inventory .................................. 1,112
29 Accounts Payable .................................................. 568

Cash ............................................................. 568

BYP 6-7 (Continued)

(d) (Continued)
Sept. 4 Merchandise Inventory (3 × $564) ........................ 1,692


Sales ............................................................. 2,985

Merchandise Inventory .................................. 1, 686

Cash ............................................................. 1,692
Oct. 3 Merchandise Inventory ......................................... 1,722

25 Cash ...................................................................... 995

Sales ............................................................. 995

(e)
FIFO Average
(1)
Sales $6,965 $6,965
Cost of goods sold 3,910 3,919
Gross profit 3,055 3,046
Gross profit margin 43.9% 43.7%

(1)
Sales = $995 + $1,990 + $2,985 + $995 = $6,965

BYP 6-7 (Continued)

(f) Natalie should consider:
• Whether the goods are interchangeable or not, or whether they are produced or
segregated for specific projects;
• Whether the method corresponds most closely to the physical flow of goods;
• Whether the method reports inventory on the statement of financial position that is
close to the inventory’s most recent cost; and
• Whether the method is used for other inventories with a similar nature and usage.
For Natalie, the inventory of mixers consists of goods that are interchangeable. The
nature of the items is not subject to a particular flow of goods so older mixers do not need
to be sold first. Under the FIFO cost method, the cost of the ending inventory is
determined using the most recent costs and is closer to replacement cost. This may not
necessarily be the case for the mixers because they are subject to currency fluctuations.
The ending inventory cost may not match the replacement cost. Because of the currency
fluctuations, it is also not possible to know if the cost will increase or decrease over time
and what the impact of using FIFO will be on cost of goods sold. Under the average cost
method, the cost of the mixers will be averaged out and will smooth out the impact of the
currency fluctuations. Since the mixers are identical and there is no issue of
obsolescence, the average cost method may better suit the type of inventory.

Legal Notice
Copyright
Copyright © 2014 by John Wiley & Sons Canada, Ltd. or related companies. All rights
reserved.
The data contained in these files are protected by copyright. This manual is furnished under
licence and may be used only in accordance with the terms of such licence.
The material provided herein may not be downloaded, reproduced, stored in a retrieval
system, modified, made available on a network, used to create derivative works, or
transmitted in any form or by any means, electronic, mechanical, photocopying, recording,
scanning, or otherwise without the prior written permission of John Wiley & Sons Canada,
Ltd.
(MMXV vii F3)


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1. Describe the steps in 1, 2, 3, 4 1, 2 1, 2 1A 1B 3, 6

2. Apply the methods of 5, 6, 7, 3, 4, 5, 6, 3, 4, 5, 6, 2A, 3A, 2B, 3B, 3, 5,

3. Explain the effects on 8, 9, 10 7 3, 6, 7, 12 3A, 5A 3B, 5B 1, 3,

4. Identify the effects of 11, 12, 13 8, 9 8, 9 4A, 7A, 8A 4B, 7B, 8B 4

Solutions Manual 6-1 Chapter 6

ASSIGNMENT CHARACTERISTICS TABLE

Problem Difficulty Time

1A Identify items in inventory. Simple 30-40

2A Apply specific identification. Moderate 30-40

3A Apply perpetual FIFO and answer questions about Moderate 30-40

4A Apply perpetual average cost and discuss errors. Moderate 30-40

5A Apply perpetual FIFO and average cost; compare Moderate 35-45

6A Record transactions using perpetual average cost; Moderate 30-40

7A Determine effects of inventory error for two years. Moderate 20-25

8A Determine effects of inventory errors for multiple Moderate 25-30

9A Determine and record LCNRV. Moderate 15-25

11A Calculate ratios and comment on liquidity. Moderate 25-30

12A Compare ratios; comment on liquidity and profitability. Moderate 25-30

*13A Apply periodic FIFO and average cost. Moderate 25-35

*14A Prepare partial financial statements and assess Moderate 20-30

*15A Apply perpetual and periodic FIFO. Moderate 25-35

*16A Apply perpetual and periodic average cost. Moderate 25-35

1B Identify items in inventory. Simple 30-40

Solutions Manual 6-2 Chapter 6

ASSIGNMENT CHARACTERISTICS TABLE (Continued)

Problem Difficulty Time

3B Apply perpetual FIFO and answer questions about Moderate 30-40

4B Apply perpetual average cost and discuss errors. Moderate 30-40

5B Apply perpetual FIFO and average cost; compare Moderate 30-40

6B Record transactions using perpetual FIFO; apply Moderate 30-40

7B Determine effects of inventory error for two years. Moderate 25-35

8B Determine effects of inventory errors for multiple Moderate 25-35

9B Determine and record LCNRV. Moderate 15-25

11B Calculate ratios and comment on liquidity. Moderate 25-30

12B Compare ratios; comment on liquidity and profitability. Moderate 25-30

*13B Apply periodic FIFO and average cost. Moderate 25-35

*14B Prepare partial financial statements and assess Moderate 20-30

*15B Apply perpetual and periodic FIFO. Moderate 25-35

*16B Apply perpetual and periodic average cost. Moderate 25-35

Solutions Manual 6-3 Chapter 6

Solutions Manual 6-4 Chapter 6

Answers to Questions (Continued)

4. (a) Include: the inventory items belong to Kingsway.

(b) Include: the inventory items belong to Kingsway.

8. A company should consider:

Solutions Manual 6-5 Chapter 6

Answers to Questions (Continued)

Solutions Manual 6-6 Chapter 6

Answers to Questions (Continued)

Solutions Manual 6-7 Chapter 6

Answers to Questions (Continued)

Solutions Manual 6-8 Chapter 6

SOLUTIONS TO BRIEF EXERCISES

BRIEF EXERCISE 6-2

Solutions Manual 6-9 Chapter 6

BRIEF EXERCISE 6-3

3 electric pianos @ $600 = $1,800

Ending Inventory Cost of Goods Sold

(a) Specific Identification 2 pianos @ $600 = $1,200 $2,750 – $1,675 = $1,075

BRIEF EXERCISE 6-4

[1] $450 ÷ 30 = $15

Solutions Manual 6-10 Chapter 6

BRIEF EXERCISE 6-5