Reporting and Analyzing Inventory: Learning Objectives

Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley Financial Accounting, Seventh Canadian Edition
CHAPTER 6
REPORTING AND ANALYZING INVENTORY
LEARNING OBJECTIVES
1. Describe the steps in determining inventory quantities.
2. Apply the cost formulas using specific identification, FIFO, and average cost under
a perpetual inventory system.
3. Explain the effects on the financial statements of choosing each of the inventory
cost formulas.
4. Identify the effects of inventory errors on the financial statements.
5. Demonstrate the presentation and analysis of inventory.
6.* Apply the FIFO and average cost inventory cost formulas under a periodic inventory
system (Appendix 6A).
Solutions Manual 6-1 Chapter 6

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SUMMARY OF QUESTIONS BY LEARNING OBJECTIVES

AND BLOOM’S TAXONOMY
Item LO BT Item LO BT Item LO BT Item LO BT Item LO BT
Questions
1. 1 C 6. 2 C 11. 2 C 16. 5 C 21. 2,6 C
2. 1 C 7. 2 K 12. 4 C 17. 5 K 22. 2,6 C
3. 1 K 8. 2 C 13. 4 C 18. 5 C
4. 1 C 9. 3 C 14. 4 C 19. 2,6 C
5. 2 C 10. 3 C 15. 5 C 20. 6 C
Brief Exercises
1. 1 K 4. 2 AN 7. 3 C 10. 5 AP 13. 6 AP
2. 1 AP 5. 2 AN 8. 4 C 11. 5 AP 14. 2,6 AN
3. 2 AP 6. 2 AP 9. 4 AN 12. 5 AN 15. 2,6 AP
Exercises
1. 1 C 5. 2 AN 9. 4 AN 13. 3,6 AP
2. 1 AN 6. 2,3 AN 10. 5 AP 14. 6 AN
3. 2,3 AN 7. 2,3 AN 11. 5 AN 15. 2,6 AP
4. 2,3 AN 8. 4 AN 12. 3,5 AN 16. 2,6 AP
Problems: Set A and B
1. 1 AP 5. 2,3 AN 9. 5 AN 13. 6 AP
2. 2 AP 6. 2,5 AP 10. 5 AP 14. 5,6 AP
3. 2,3 AP 7. 4,5 AN 11. 5 AP 15. 2,6 AN
4. 2,4 AN 8. 4,5 AN 12. 5 AN 16. 2,6 AN
Accounting Cycle Review
1. 2 AN
Cases
1. 3 AN 3. 1,2,3,6 E 5. 2,3 AN 7. 2,3 AN
2. 5 AN 4. 4,5 E 6. 1,2 E

Legend: The following abbreviations will appear throughout the solutions manual
file.
LO Learning objective
BT Bloom's Taxonomy
K Knowledge
C Comprehension
AP Application
AN Analysis
S Synthesis
E Evaluation
Difficulty: Level of difficulty
S Simple
M Moderate
C Complex
Time: Estimated time to prepare in minutes
AACSB Association to Advance Collegiate Schools of Business

Communication Communication
Ethics Ethics
Analytic Analytic
Tech. Technology
Diversity Diversity
Reflec. Thinking Reflective Thinking
CPA CM CPA Canada Competency
cpa-e001 Ethics Professional and Ethical Behaviour
cpa-e002 PS and DM Problem-Solving and Decision-Making
cpa-e003 Comm. Communication
cpa-e004 Self-Mgt. Self-Management
cpa-e005 Team & Lead Teamwork and Leadership
cpa-t001 Reporting Financial Reporting
cpa-t002 Stat. & Gov. Strategy and Governance
cpa-t003 Mgt. Accounting Management Accounting
cpa-t004 Audit Audit and Assurance
cpa-t005 Finance Finance
cpa-t006 Tax Taxation

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.
LO 1 BT: C Difficulty: M Time: 20 min. AACSB: None CPA: cpa-t001 CM: Reporting
2. In a consignment agreement, the consignor is the business that owns the

goods, and the consignee is the business that will sell the goods, without
having to purchase and own the goods before they are sold. The consignee
will sell the goods for the consignor for a fee or a percentage of the sales
price. Only the owner of goods, the consignor, includes the goods in its
inventory even though the goods are physically located on the consignee’s
premises.
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.
LO 1 BT: K Difficulty: S Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

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

consignor.
(b) Include: the inventory items belong to Kingsway while in transit

because the terms are FOB shipping point.
(c) Exclude: the customer has purchased the inventory item and legal
ownership has passed to the customer.
5. (a) The unit cost of an inventory item is needed for the entry to record the
cost of goods sold and remove the cost of the items sold from
inventory. Because units of the same inventory item are typically
purchased at different prices, it is necessary to determine which unit
costs to use in the calculation of the cost of the goods sold.
(b) When using the perpetual system, an entry to record the cost of goods
sold and remove the cost of the items sold from inventory is recorded
at the same time as the sales transaction. The information from the
perpetual system is updated, using the cost formula adopted by the
business. The cost formula is also used in the detailed perpetual
records for every increase in inventory caused by purchases, freight-
in, etc. transactions. On the other hand, since a record is not kept of
the individual inventory item transactions under the periodic system,
the entry to record the cost of goods sold and remove the cost of the
items sold from inventory can only be made at the end of a reporting
period, when ending inventory is determined by a physical count.

6. (a) The specific identification formula tracks the physical flow of individual
inventory items, matching the cost of the actual item sold against the
revenue from that item. The FIFO inventory cost formula assumes the
first inventory purchased is the first inventory sold. The most recent
purchases are assumed to remain in ending inventory. The average
cost formula assumes that all goods available for sale are
indistinguishable or homogeneous.
(b) 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 vehicle
identification numbers.
Inventory such as groceries could be accounted for using the FIFO
cost formula as older items are normally sold first.
Inventory such as hardware could be accounted for using an average
cost formula.
7. (a) Average cost or FIFO can be used if the goods available for sale are
identical. Specific identification cannot be used if the goods are not
specifically identifiable.
(b) FIFO assumes that the first goods purchased are the first to be sold.
(c) Specific identification matches the actual physical flow of

merchandise.
8. 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.

9. A company should consider:
• Whether the goods are interchangeable or not, or whether they

are produced or segregated for specific projects;
• Whether the formula corresponds most closely to the physical flow

of goods;
• Whether the formula reports inventory on the statement of financial

position that is close to the inventory’s most recent cost; and
• Whether the formula is used for other inventories with a similar nature
and usage.
10. Average cost 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.

11. (a) No effect – cash is not affected by the choice of inventory cost
formulas.
(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 cost 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 formula.
(d) Because of the effect on the cost of goods sold as outlined in (c), net
income will be lower under FIFO and higher under average cost.
(e) The impact on retained earnings will be the same as the impact on
net income and ending inventory—lower in a period of declining prices
using FIFO and higher using average cost.
LO 2 BT: C Difficulty: C Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting
12. 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.

13. (a) Mila Ltd.’s 2018 income before tax will be understated by $43,000.
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 income before tax will be understated.
(b) 2018 retained earnings will be understated by $43,000 because net
income is understated (see (1) above).
(c) 2018 total shareholders’ equity will be understated by $43,000
because the retained earnings balance is understated (see (b)
above).
(d) 2019 net income will be overstated $43,000. This is because
beginning inventory is understated by $43,000, which will result in an
understatement of cost of goods sold (recognizing that 2018 ending
inventory is 2019 beginning inventory). If cost of goods sold is
understated, then income before tax will be overstated.
(e) 2019 retained earnings will be correct because the understatement in
net income in 2018 and overstatement in 2019 will cancel each other.
(f) 2019 total shareholders’ equity will be correct because the retained
earnings balance is correct.
LO 4 BT: C Difficulty: C Time: 15 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

14. (a) At the end of the fiscal year, before the inventory is adjusted to the
inventory count, Shediac’s assets (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 net

income 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).
15. (a) Cost refers to the original cost of inventory as determined by using
specific identification, FIFO, or average cost formulas. Net realizable
value is the selling price less any costs required to make the goods
ready for sale.
(b) The lower of cost and net realizable value rule should be applied at
the end of the accounting period, before financial statements are
prepared.

16. (a) Cost of Goods Sold is debited when recording a decline in inventory
value under the lower of cost and net realizable value rule and the
asset account Inventory is credited.
(b) 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. Since the inventory has specifically been
purchased for resale, the net realizable value becomes the most
relevant measure of the asset on the statement of financial position.
17. An increase in the days in inventory ratio from one year to the next would
be seen as a 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.
LO 5 BT: K Difficulty: S Time: 5 min. AACSB: None CPA: cpa-t001 cpa-t005 CM: Reporting
18. (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.
LO 5 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 and cpa-t005. CM: Reporting and
Finance

*19. 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 an
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.
LO 2,6 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
*20. Ending inventory is known from the physical inventory count. 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.
*21. In both systems, the first (oldest) costs are the costs assigned to the goods
sold. No matter what system is used, the cost of goods sold will always
consist of the oldest units and these units are assumed to be on hand when
using either formula.
*22. In a perpetual system, the average cost per item is recalculated every time
a purchase transaction takes place. In a periodic system, the average cost
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 Helgeson because ownership does not
transfer until the customer receives the goods. They should be included in
Helgeson’s inventory.
(d) 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.
(e) 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.
(f) 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.
(Legal title determines if an item should be included in inventory)

BRIEF EXERCISE 6-2

$95,000 Count
(7,500)Held on consignment
(1,000)Sold
5,000August 28 shipment plus freight, FOB shipping point
($4,750 + $250)
$91,500 Correct inventory cost
LO 1 BT: AP Difficulty: M Time: 5 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
BRIEF EXERCISE 6-3
(a) 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 2 pianos @ $600 = $1,200 $2,750 – $1,675 = $1,075

Identification 1 piano @ $475 = 475
$1,675 (Proof: 1 piano @ $600 +
1 piano @ $475 = $1,075)
(b) If management wished higher net income, it could have sold two pianos
from the last shipment, that had a lower cost. If it wished lower net income,
it could have sold two of the first 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
LO 2 BT: AN Difficulty: C Time: 15 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 6-5
[1] $200 ($6,000  30)

[2] 45 (15 + 30)
[3] $8,700 ($2,700 + $6,000)
[4] $193.3333 ($8,700 (from [3]) ÷ 45 (from [2]))
[5] $193.33 (from [4])
[6] 25 x $193.3333 = $4,833.33
[7] 45 (from [2]) – 25 sold = 20
[8] $8,700.00 (from [3]) – $4,833.33 (from [6]) = $3,866.67
[9] $3,866.67 (from [8])  20 (from [7]) = $193.3333 rounded to equal [4].
Notice how the average cost does not change after a sale.
[10] $2,460  $205 = 12
[11] 20 (from [7]) + 12 (from [10]) = 32
[12] $3,866.67 (from [8]) + $2,460.00 = $6,326.67
[13] $6,326.67 (from [12])  32 (from [11]) = $197.708 rounded to $197.71

BRIEF EXERCISE 6-6

(a) FIFO cost formula
Date Description Purchases Cost of Goods Sold Ending Inventory
Purchase 250 $ 70 $ 17,500 250 $ 70 $ 17,500

Aug. 2
250 70 17,500
Purchase 500 100 50,000 500 100 50,000
3
250 $70
10 Sale 50 100 $22,500 450 100 45,000
450 100 45,500
Purchase 900 120 108,000 900 120 108,000
15
125 100 12,500
25 Sale 325 100 32,500 900 120 108,000
1,650 $175,500 625 $55,000 1,025 $120,500
Check: $55,000 + $120,500 = $175,500
(b) Average cost formula

Aug. 2 Purchase 250 $ 70.00 $17,500.00 250 $ 70.00 $ 17,500.00
3 Purchase 500 100.00 50,000.00 750 90.00 67,500.00
10 Sale 300 $90.00 $27,000.00 450 90.00 040,500.00
15 Purchase 900 120.00 108,000.00 1,350 110.00 5148,500.00
25 Sale 325 110.00 35,750.00 1,025 110.00 112,750.00

1,650 $175,500.00 625 $62,750.00 1,025 $112,750.00
Check: $62,750 + $112,750 = $175,500

BRIEF EXERCISE 6-7

(a) Average cost. The ending inventory is valued at the average of the cost of
the product, including earlier costs. Since this cost formula yields a higher
ending inventory than FIFO when prices are falling, the result will not be
closer to replacement cost. This result is achieved with the FIFO cost
formula.
(b) FIFO. The cost of goods is valued using the earlier, higher costs. Since
the revenue reflects current lower prices, the FIFO cost formula does not
match current costs against revenue when prices are falling. This result is
better achieved by the average cost formula.
(c) One of the guidelines that management should consider is choosing an

inventory cost formula that corresponds as closely to the physical flow of
goods as possible. A cost formula 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 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 Inventory. The offsetting debit would be to Cost of Goods Sold, thereby
overstating this account and reducing net income.
In the following year, assuming these goods are sold, their cost is zero so cost of
goods sold would be understated and net income overstated. Assuming there are
no errors when counting inventory at the end of next year, this net income
overstatement when combined with the previous year’s net income
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
LO 4 BT: AN Difficulty: M Time: 15 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 6-10

(a)
Inventory Categories Cost NRV LCNRV
Desktops $347,000 $326,000 $326,000
Tablets and readers 168,700 224,000 168,700
Laptops 221,020 285,000 221,020
Accessories and parts 97,400 94,300 94,300
Total valuation $834,120 $929,300 $810,020
The lower of cost and net realizable value is $810,020.
(b)
Cost of Goods Sold ........................................................... 24,100
Inventory ................................................................ 24,100
$834,120 – $810,020 = $24,100
BRIEF EXERCISE 6-11
(a) Cost of Goods Sold ........................................................ 2,200

Inventory .................................................................. 2,200
$54,700 – $52,500 = $2,200
(b) $54,700

BRIEF EXERCISE 6-12
(a)
$7,747.1
Inventory Turnover = 4.6 times
($1,764.5 + $1,623.8) ÷ 2
(2015)
365
Days in Inventory (2015) = 79 days
4.6
$8,033.2
Inventory Turnover = 5.2 times
($1,623.8 + $1,481.0) ÷ 2
(2014)
365
Days in Inventory (2014) 5.2 = 70 days
(b) The inventory management deteriorated in 2015 as evidenced by the

increase in number of days in inventory from 70 days in 2014 to 79 days in
2015. This was corroborated by the declining inventory turnover. This
deterioration signifies that it took longer to sell the inventory in 2015.
LO 5 BT: AN Difficulty: M Time: 10 min. AACSB: Analytic CPA: cpa-t001 cpa-t005 CM: Reporting and
Finance

*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 cost

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 = $ 6,587.17

$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: (1,300 × $45.00) + (200 × $50.00) = $68,500

$216,000 – $68,500 = $147,500
Proof: Cost of goods sold = (1,500 × $45.00) + (1,600 × $50.00) = $147,500
(b) No, the answer under a perpetual system would be the same, since the
first goods purchased are assumed to be the first goods sold.
LO 2,6 BT: AN Difficulty: M Time: 15 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting


(a) FIFO Perpetual
Jan. 3 Accounts Receivable ............................................ 8,400

Sales (700 × $12)......................................... 8,400
3 Cost of Goods Sold (700 × $5) ............................. 3,500

Inventory ...................................................... 3,500
9 Inventory (1,000 × $6) .......................................... 6,000

Accounts Payable ........................................ 6,000
15 Cash ..................................................................... 8,800

Sales (800 x $11) ......................................... 8,800
15 Cost of Goods Sold [(200 × $5) + (600 × $6)] ...... 4,600

Inventory ...................................................... 4,600
(b) FIFO Periodic
Jan. 3 Accounts Receivable ............................................. 8,400

Sales ............................................................ 8,400
9 Purchases ............................................................. 6,000

Accounts Payable ......................................... 6,000
15 Cash ...................................................................... 8,800

Sales ............................................................. 8,800
LO 2,6 BT: AP Difficulty: M Time: 15 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

SOLUTIONS TO EXERCISES
EXERCISE 6-1
1. Do not include – Shippers Ltd. does not own items held on consignment.
These goods will be recorded in the owner’s inventory.
2. Include in inventory – Shipping terms FOB destination means that Shippers

Ltd. owns the items until they reach the customer.
3. Include in inventory – Shippers Ltd. still owns the items as they were only
shipped on consignment.
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 destination point
so ownership has not transferred to the buyer. Shippers Ltd. should not
record anything until the goods arrive.
6. 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.
7. Do not include in inventory. The shipping terms are FOB shipping point, so
Shippers Ltd. no longer owns the goods. They will be part of cost of sales
on the income statement.
(Legal title determines if an item should be included in inventory.)

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
deciding 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 net income selectively. If it wished to minimize net income it
would choose to sell the units purchased at higher costs–in which case the
cost of goods sold would be $4,300 ($2,400 + $1,900) and gross profit
would be $900 [($2,600 x 2) – $4,300]. If it wished to maximize net income
it would choose to sell the units purchased at lower costs; in which case
the cost of goods sold would be $3,580 ($1,900 + $1,680) and gross profit
would be $1,620 [($2,600 x 2) – $3,580].
(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 would not be able to use specific
identification and would have to use either the FIFO or average cost flow
formulas.

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%

EXERCISE 6-4 (CONTINUED)
(c) The gross profit is higher than if the average cost formula 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
formula. 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
June 1 Beginning 500 $125.00 $ 62,500.00
Purchase
6 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
Purchase
14 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
Balance
30 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 formula
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 1,500 @ $5 = $ 7,500
12 2,300 @ $6 = $13,800 1,500 @ $5
2,300 @ $6 = 21,300
15 1,500 @ $5
1,000 @ $6 = $13,500 1,300 @ $6 = 7,800
16 4,500 @ $7 = 31,500 1,300 @ $6
4,500 @ $7 = 39,300
23 1,500 @ $8 = 12,000 1,300 @ $6
4,500 @ $7
1,500 @ $8 = 51,300
27 1,300 @ $6 100 @ $7
4,400 @ $7 = 38,600 1,500 @ $8 = 12,700
Total $57,300 $52,100 $12,700
Check: $52,100 + $12,700 = $64,800 ($7,500 + $57,300)
(a) (2) Average cost
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 1,500 @ $5.00 = $ 7,500.00
12 2,300 @ $6 = $13,800.00 3,800 @ $5.61 = 21,300.00
15 2,500 @ $5.61 = $14,013.16 1,300 @ $5.61 = 7,286.84
16 4,500 @ $7 = 31,500.00 5,800 @ $6.69 = 38,786.84
23 1,500 @ $8 = 12,000.00 7,300 @ $6.96 = 50,786.84
27 5,700 @ $6.96 = 39,655.48 1,600 @ $6.96 = 11,131.36
Total $57,300.00 $53,668.64 $11,131.36
Check: $53,668.64 + $11,131.36 = $64,800 ($7,500 + $57,300)
(b) The average cost formula results in a higher cost of goods sold because
the cost of inventory is rising.


(c) The FIFO cost formula results in a higher net income because it produces
the lower cost of goods sold when prices are rising, as the lower costs from
earlier units are assigned to cost of goods sold, while the higher costs are
assigned to ending inventory.
(d) The FIFO cost formula results in a higher ending inventory because the cost
of inventory is rising and these higher unit prices are used to determine
ending inventory.
(e) Both cost formulas result in the same pre-tax cash flow. The cost formulas
do not change the pre-tax cash flows of a company.

EXERCISE 6-7
(a) FIFO cost formula
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 formula
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)
Average
FIFO Cost
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
Income before income tax 35,000 33,500
Income tax expense (30%) 10,500 10,050
Net income $ 24,500 $ 23,450

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

EXERCISE 6-8
(a) Corrected inventory

2017 = $30,000 + $4,000 = $34,000
2018 = $37,000 – $2,000 = $35,000
Corrected cost of goods sold

2017 = $154,000 – $4,000 = $150,000
2018 = $168,000 + $2,000 + $4,000 = $174,000
(b) (1) and (2) Cost of goods sold and income before income tax: The
inventory error for 2017 will cause the cost of goods sold to be
overstated by $4,000, which will cause net income and retained
earnings to be understated by the same amount. Assuming the error
was not corrected, when it reverses in 2018, cost of goods sold will
be understated and net income 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 2018 (with respect to this
particular error, taken alone).
The $2,000 overstatement of inventory in 2018 will cause the cost of
goods sold to be understated and the net income and retained
earnings to be overstated by $2,000.
When the two errors are taken together, in 2018 cost of goods sold
will be understated by $6,000 ($4,000 for 2017 error and $2,000 for
2018 error). Net income will be overstated by $6,000 in 2018.
(3) The inventory error for 2017 will cause the inventory—an asset
account—to be understated by $4,000.
The inventory error for 2018 will cause the inventory (asset) account
to be overstated by $2,000.

(b) (continued)
(4) The errors will not affect liabilities.
(5) As explained above in (1) and (2), retained earnings is understated

by $4,000 in 2017. In 2018, 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 2018.
A = L + SE
2017 U$4,000 = NE + U$4,000
2018 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 net
income.

EXERCISE 6-9
(a)
2018 2017
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 2018 2017
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
Sekonic 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

Inventory .................................................................... 110
(c) Dec. 31 Cost of Goods Sold (2  $150) ........................................... 300

Inventory .................................................................... 300

EXERCISE 6-11
(a)
Inventory Turnover (2016): $2,229,130
= 2.7 times
($851,033 + $779,407)÷2
Days in Inventory (2016): 365

= 135 days
2.7
Gross Profit Margin (2016): ($2,959,238 - $2,229,130)

= 24.7%
$2,959,238
Inventory Turnover (2015): $1,701,311

= 2.5 times
(779,407 + $595,794)÷2
Days in Inventory (2015): 365

= 146 days
2.5
Gross Profit Margin (2015): ($2,359,994 - $1,701,311)

= 27.9%
$2,359,994
(b) In 2016, Gildan Activewear experienced an improvement in liquidity but a

deterioration in profitability. The liquidity has been improved due to the
decrease in time required to turn over its inventory, from 146 days to 135
days. The company has experienced deteriorated profitability due to a
significant drop in its gross profit margin from 27.9% to 24.7%.
LO 5 BT: AN Difficulty: M Time: 15 min. AACSB: Analytic CPA: cpa-t001 cpa-t005 CM: Reporting and
Finance

EXERCISE 6-12
(a) $750,000
Inventory turnover (FIFO) = 3.4 times
$222,500
$735,000
Inventory turnover (Average Cost) = 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 Cost) = 1.9 times
$350,000
(c) The FIFO cost formula appears to show a slightly better turnover ratio
because it has a lower ending inventory. The current ratios are the same.
The two cost formulas 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 formula will be the same since the formulas involve allocating the
same costs. In reality, there is no economic difference between the two
formulas and any differences in ratios are artificial ones caused solely by
the different cost formulas. Consequently, there is no real difference in
liquidity.
LO 3,5 BT: AN Difficulty: M Time: 15 min. AACSB: Analytic CPA: cpa-t001 and cpa-t005. CM: Reporting
and Finance

*EXERCISE 6-13
(a),(b)(1)
FIFO
Beginning inventory ($2,000 ×$20) ........................................ $ 40,000

Purchases
Oct. 9 (5,000 × $21) ..................................................... $105,000
Oct. 12 (4,000 × $20.50) .............................................. 82,000
Oct. 25 (4,000 × $20.80) .............................................. 83,200 270,200
Cost of goods available for sale (15,000 units) ....................... 310,200
Less: Ending inventory (4,000 × $20.80) ............................... 83,200
Cost of goods sold (11,000 units) ........................................... $ 227,000
(a),(b)(2)
Average cost
Beginning inventory ($2,000 ×$20) ........................................ $ 40,000

Purchases
Oct. 9 (5,000 × $21) ..................................................... $105,000
Oct. 12 (4,000 × $20.50) .............................................. 82,000
Oct. 25 (4,000 × $20.80) .............................................. 83,200 270,200
Cost of goods available for sale (15,000 units) ....................... 310,200
Less: Ending inventory (4,000 × $20.68*) .............................. 82,720
Cost of goods sold (11,000 units) ........................................... $ 227,480
*$310,200 ÷ 15,000 units = $20.68/unit
(c) FIFO would result in a slightly higher gross profit, since its cost of goods
sold is lower.

*EXERCISE 6-14
(a)
(1) FIFO
Beginning inventory (1,500 × $5) ..................................................... $ 7,500

Purchases
June 12 (2,300 × $6) .................................................................... $13,800
June 16 (4,500 × $7) .................................................................... 31,500
June 23 (1,500 × $8) .................................................................... 12,000 57,300
Cost of goods available for sale (9,800 units) .................................. 64,800
Less: Ending inventory [(1,500 × $8) + (100 × $7)] .......................... 12,700
Cost of goods sold (8,200 units) ...................................................... $52,100
(2) Average cost
Note: Unrounded numbers have been used in the average cost calculation,
Cost of Goods Total Units Weighted Average

Available for Sale  Available for Sale = Unit Cost
$64,800 9,800 $6.612245
Ending inventory = 1,600 × $6.612245 = $10,579.59

Cost of goods sold = $64,800.00 – $10,579.59 = $54,220.41
Proof: (9,800 – 1,600) × ($64,800 ÷ 9,800) = $54.220.41
(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 cost – 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)

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
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 Cost

Dr. Cr. Dr. Cr.
Nov. 5 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
Inventory 12,450 12,485.45
19 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
Inventory 15,185 15,155.23
25 Inventory 9,300 9,300.00
(b)
(1) FIFO (2) Average Cost

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. The sale will be recorded on February 19. The goods (cost, $980)
should be excluded from Kananaskis’ inventory at the end of
February.
3. The inventory has been sold to the customer so the customer has
ownership. Exclude.
4. Exclude the items from Kananaskis’ inventory. Craft Producers Ltd.

still owns the inventory.
5. Kananaskis owns the goods once they are shipped on February 26.
Include inventory of $1,445 ($1,350 + $95).
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. The freight charge is a
delivery expense.
8. Include $1,950 in inventory.

PROBLEM 6-1A (CONTINUED)

(b) The revised ending inventory is:
Unadjusted inventory $218,000

Adjustments
1. February 1 $ 900
5. February 25 1,445
8. February 28 1,950 6,195
Adjusted inventory $224,195

PROBLEM 6-2A
(a)
Cost of Goods Sold Ending Inventory

Sales
Cost/ price/ Cost/
Unit Unit Unit
Model VIN # $ $ Model VIN # $
Apr. 8 Focus C81362 24,000 26,000 Apr. 1 F-150 F1883 25,000

Mustang G62313 29,000 32,000 12 Mustang G71811 30,000
18 Mustang G71891 28,000 33,000 Flex X4214 31,000
F-150 F1921 29,000 32,500 Flex X4212 30,000
Flex X3892 31,000 34,000 23 Focus C81528 27,000
Escape E21202 29,000 32,000 Escape E28268 30,000
170,000 189,500 173,000
(b) Gross profit = $189,500 – $170,000

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

PROBLEM 6-3A
(a) (1) FIFO
Purchase 120 $100 $12,000 120 $100 $12,000

May 1
3 Sale 80 $100 $ 8,000 040 100 4,000

40 100
8 Purchase 100 110 11,000 100 110 15,000
40 100
13 Sale 40 110 8,400 60 110 6,600
60 110
15 Purchase 60 115 6,900 60 115 13,500
20 Sale 60 110 6,600 60 115 6,900
27 Sale 40 115 4,600 20 115 2,300
31 Balance 280 $29,900 260 $27,600 20 $ 2,300
Check: $27,600 + $2,300 = $29,900


Note: Unrounded numbers have been used in the average cost calculations,
May 1 Purchase 120 $100.00 $12,000.00 120 $100.00 $12,000.00
3 Sale 80 $100.00 $8,000.00 40 100.00 4,000.00
8 Purchase 100 110.00 11,000.00 140 107.14 15,000.00
13 Sale 80 107.14 8,571.43 60 107.14 6,428.57
15 Purchase 60 115.00 6,900.00 120 111.07 13,328.57
20 Sale 60 111.07 6,664.29 60 111.07 6,664.29
27 Sale 40 111.07 4,442.86 20 111.07 2,221.43
31 Balance 280 $29,900.00 260 $27,678.57 20 $2,221.43
Check: $27,678.57 + $2,221.43 = $29,900.00
(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 formula produces a slightly higher gross profit and net
income as results in cost of goods sold being 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 formula is used.

PROBLEM 6-4A
(a)
Beg. 30 $50 $1,500

Apr. 1
inventoInventory
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 formula 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 formula would be lower.

PROBLEM 6-5A
Beg. 30 $50.00 $1,500.00

Apr. 1
inventoInventory
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
30 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
Inventory (1 × $36.56) .................................. 36.56

(c) Three accounts would be affected—Inventory, Cost of Goods Sold, and

Retained Earnings. The 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 net income being overstated by
$36.56. The Retained Earnings account would also be overstated by
$36.56.

PROBLEM 6-6A
(a)
April 1 No entry
6 Inventory (110 × $90) ............................................ 9,900.00

Cash ............................................................. 9,990.00
8 Cash (130 × $120)................................................. 15,600.00

Sales ............................................................. 15,600.00
Cost of Goods Sold (130 × $86.88*)...................... 11,293.75

Inventory ....................................................... 11,293.75
15 Inventory (120 × $70) ........................................... 8,400.00

Cash ............................................................. 8,400.00
20 Cash (120 × $100)................................................. 12,000.00

Sales ............................................................. 12,000.00
Cost of Goods Sold (120 × $73.38*)...................... 8,805.00

Inventory ....................................................... 8,805.00
27 Inventory (20 × $60) .............................................. 1,200.00

Cash ............................................................. 1,200.00
* 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
Apr. 1 Beginning 50 $80.00 $ 4,000.00
6 Purchase 110 $90 $ 9,900 160 86.88 13,900.00
8 Sale 130 $86.88 $11,293.75 30 86.88 2,606.25
15 Purchase 120 70 8,400 150 73.38 11,006.25
20 Sale 120 73.38 8,805.00 30 73.38 2,201.25
27 Purchase 20 60 1,200 50 68.03 3,401.25
Balance 250 $19,500 250 $20,098.75 50 $ 3,401.25

30
Check: $20,098.75 + $3,401.25 = $23,500 ($4,000 + $19,500)
(c) Ending inventory should be valued at $2,500 (50 x $50) which is the
lower of cost and net realizable value.
Cost = $3,401.25 (50 units @ 68.025)

NRV = $2,500.00 (50 units @ $50)

PROBLEM 6-7A
2018 2017
(a) Cash No effect No effect
(b) Cost of goods sold Overstated Understated
(c) Net income 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 2018, 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 2018.
LO 4,5 BT: AN Difficulty: C Time: 20 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 6-8A
(a) (INCORRECT)
KMETA INC.
Income Statement
Year Ended July 31
2018 2017 2016
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
Income before income tax $ 39,000 $ 36,000 $ 27,000
Statement of financial position:

Inventory $40,000 $40,000 $24,000
(CORRECT)
KMETA INC.
Income Statement
Year Ended July 31
2018 2017 2016
Sales $340,000 $320,000 $300,000
Gross profit 107,000 91,000 100,000

Inventory $40,000 $55,0004 $33,0003
$209,000 – $9,000 = $200,000

1
2
$220,000 + $9,000 (2016 error) + $0* (2017 error) = $229,000
3 $24,000 + $9,000 = $33,000
4 $40,000 + $15,000 = $55,000
* - Purchases understated by $15,000 and inventory understated by $15,000, so

nil effect on cost of goods sold.

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

Retained earnings after correction = $36,000 + $27,000 + $39,000 = $102,000
The retained earnings balance at the end of 2018 is unaffected and remains at
$102,000 because by that time, all errors have been corrected.
(c) Inventory turnover
(INCORRECT)
$233,000
= 5.8 times
Inventory turnover (2018) ($40,000 + $40,000) ÷ 2
$220,000
= 6.9 times
(CORRECT)
$233,000
= 4.9 times
$229,000
= 5.2 times
LO 4,5 BT: AN Difficulty: C Time: 10 min. AACSB: Analytic CPA: cpa-t001, cpa-t005
CM: Reporting and Finance

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

Inventory ..................................................... 650
(c) Tascon’s operations involve the sale of coffee beans. The users of the
financial information are aware of the volatility of the cost of the beans due
to weather conditions in the countries where the beans are grown. Users
expect and appreciate that the lower of cost and net realizable value
(LCNRV) requirement in accounting because they know that inventory and
income are not overstated. Adjustments Tascon would need to make by
applying the item-by-item approach of the LCNRV would not be minor in
amount. The item-by-item is always the more conservative method (that is,
lower inventory amount reported) because net realizable values above cost
are never included in the calculations. Under these circumstances, Tascon
should apply the LCNRV rule on an item-by-item basis for coffee beans.
One argument in support of both types of coffee beans being considered

as part of one inventory grouping is that the accounting values that are
reported under LCNRV on an item-by-item basis are not neutral and
unbiased measures of income and inventory. Recognizing net realizable
values only when they are lower than cost, is an inconsistent treatment that
can lead to distortions in reported net income. Another argument can be
made on the basis of the cost versus benefit constraint of accounting.
Although not appropriate in this case, due to the type of inventory, the costs
incurred in arriving at the net realizable value on an item-by-item basis may
far outweigh the benefit derived by applying LCNRV on an item-by-item
basis.

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

(1) June 30 $12,640,0001 $13,600,0004 $12,640,000
(2) July 31 14,195,0002 13,610,5005 13,610,500
(3) August 31 12,632,5003 12,245,0006 12,245,000
116,000 x $790 = $12,640,000

216,700 x $850 = $14,195,000
315,500 x $815 = $12,632,500
416,000 x $850 = $13,600,000
516,700 x $815 = $13,610,500
615,500 x $790 = $12,245,000
(b) (1) June 30 No entry
(2) July 31 Cost of Goods Sold .......................................... 584,500

Inventory ........................................... 584,500
($14,195,000 – $13,610,500 = $584,500)
(3) Aug. 31 Cost of Goods Sold ........................................ 387,500

Inventory ............................................ 387,500
($12,632,500– $12,245,000 = $387,500)

PROBLEM 6-11A
(a) (in USD millions)
Inventory Turnover Days In Inventory Current Ratio
$17,482 365 $33,395

2015 = 5.8 times = 63 days = 1.2 : 1
($2,902 + $3,100)÷2 5.8 times $26,930
$17,889 365 $32,986

2014 = 5.6 times = 65 days = 1.0 : 1
($3,100 + $3,277)÷2 5.6 times $32,374
Coca-Cola’s current ratio improved in 2015 and is slightly below the

industry average of 1.3:1. 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 improved but 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.
LO 5 BT: AP Difficulty: M Time: 20 min. AACSB: Analytic CPA: cpa-t001, cpa-t005

PROBLEM 6-12A
(a) Both companies have current ratios that exceed the industry average and
therefore enjoy greater liquidity. Wendy’s has a lower current ratio and
higher inventory turnover ratio than McDonald’s, so it may be more liquid
than McDonald’s. McDonald’s has a 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 ratio may not translate
into higher liquidity.
(b) Both companies’ gross profit margin exceeds the industry average, with
McDonald’s having the better ratio of the two companies. Where the
differences in ratios is more noticeable is in the profit margin. In the case
of Wendy’s, its profit margin is well below the industry average. For
McDonald’s, the profit margin is double that of Wendy’s and well above the
industry average. This indicates that McDonald’s has succeeded in
translating a higher gross profit margin into a higher profit margin by
controlling its expenses.

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

Jan. 1 Beginning inventory 250 $160 $ 40,000
Mar. 15 Purchase 700 150 105,000
July 20 Purchase 500 145 72,500
Sept. 4 Purchase 450 135 60,750
Dec. 2 Purchase 100 125 12,500
Total 2,000 $290,750
(b) (1) FIFO
Step 1: Ending Inventory

Date Units Unit Cost Total Cost
Sept. 4 100 $135 $13,500
Dec. 2 100 125 12,500
200 $26,000
Step 2: Cost of Goods Sold

Cost of goods available for sale $290,750
Less: Ending inventory 26,000
Cost of goods sold $264,750
Proof: Cost of Goods Sold

Unit Total
Units Cost Cost
250 $160 $ 40,000
700 150 105,000
500 145 72,500
350 135 47,250
1,800 $264,750

*PROBLEM 6-13A (CONTINUED)
(b) (2) Average Cost

Weighted Average Total
Units Unit Cost Cost
200 $145.38* = $29,075.00
*$290,750  2,000 = $145.38 (rounded)

Less: Ending inventory (200 x $145.38 rounding) 29,075
Proof: Cost of goods sold

1,800 × ($290,750 ÷ 2,000) = $261,675

*PROBLEM 6-14A
(a)
KANE LTD.
Partial Income Statements
Average
FIFO Cost
Sales (1,800 × $200) ....................................... $360,000 $360,000

Cost of goods sold
Beginning inventory ................................. 40,000 40,000
Cost of goods purchased ........................ 250,750 250,750
Cost of goods available for sale .............. 290,750 290,750
Ending inventory ..................................... 26,000 29,075
Cost of goods sold .................................. 264,750 261,675
Gross profit ...................................................... 95,250 98,325
(b)
KANE LTD.
Partial Statement of Financial Position
Average
FIFO Cost
Assets
Current assets
Inventory .................................................... $26,000 $29,075
(c) FIFO uses the most recent inventory prices to value the ending inventory.
Since prices are declining, FIFO results in the lower cost for ending
inventory. FIFO results in the higher cost of goods sold, lower gross profit,
and lower net income because FIFO values the cost of goods sold at the
older, higher prices.

*PROBLEM 6-15A
(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

*PROBLEM 6-15A (Continued)
(a) (2) Perpetual Inventory System
Aug 1 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
31 Balance 290 $26,940 260 $23,880 80 , $ 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

Nov. 1 Beginning
inventory 100 $40.00 $ 4,000.00
4 Purchase 500 $42 $21,000 600 41.67 25,000.00
11 Sale 450 $41.67 $18,750.00 150 41.67 6,250.00
16 Purchase 750 44 33,000 900 43.61 39,250.00
20 Sale 800 43.61 34,888.89 100 43.61 4,361.11
27 Purchase 600 46 27,600 700 45.66 31,961.11
30 Balance 1,850 $81,600 1,250 $53,638.89 700 $31,961.11
Check: $53,638.89 + $31,961.11 = $85,600 ($4,000 + $81,600)

*PROBLEM 6-16A (CONTINUED)
(a) (2) Periodic Inventory System
COST OF GOODS AVAILABLE FOR SALE

Nov 1 Beginning inventory 100 $40 $ 4,000
4 Purchase 500 42 21,000
16 Purchase 750 44 33,000
27 Purchase 600 46 27,600
Total 1,950 $85,600
Average cost per unit = $85,600  1,950 = $43.90

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

700 units @ $43.90 = $30,728.21

Cost of goods available for sale $85,600.00
Less: Ending inventory 30,728.21
Cost of goods sold $54,871.79

1,250 × ($85,600 ÷ 1,950) = $54,871.79

(b)
Average Cost
Periodic Perpetual
Cost of goods sold $54,871.79 $53,638.89
Ending inventory 30,728.21 31,961.11
Cost of goods available for sale $85,600.00 $85,600.00
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. $2,650 ($2,500 + $150) should be included in inventory as the goods

were shipped FOB shipping point on February 21st.
3. 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. Freight charges are paid by the customer.
4. Include $1,100 ($2,200 ÷ 2) in inventory as Banff has title to this

inventory.
5. The amount should not be included in inventory as the goods were

shipped FOB destination and not received until March 2. The seller
still owns the inventory. No entry is recorded. The seller is responsible
for the freight costs.
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 $1,800. The freight
is a selling expense.
7. Include $2,100 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.

PROBLEM 6-1B (CONTINUED)

(b) The revised ending inventory is:
Unadjusted inventory $161,000

Adjustments
2. February 19 $ 2,650
8. February 28 (800) 6,850
Adjusted inventory $167,850

PROBLEM 6-2B
(a)
Cost/ Sales price/ Cost/

Unit Unit Unit
Supplier Serial # $ $ Supplier Serial # $
Aug. 10 Suzuki SZ5828 1,900 3,000 Aug. 1 Kawai KG1520 900
Kawai KG1268 1,800 2,100 Suzuki SZ5716 1,400
18 Yamaha YH4418 1,600 2,400 Steinway ST0944 2,500
Steinway ST8411 2,900 4,000 22 Suzuki SZ6148 1,900
26 Suzuki SZ6132 2,100 3,200 6,700
Yamaha YH6318 1,800 2,800
Yamaha YH5632 1,900 2,900
14,000 20,400
(b) Gross profit = $20,400 – $14,000 = $6,400
(c) The specific identification formula is likely the most appropriate formula for
the Piano Studio Ltd. because the pianos are large dollar value items that
are specifically identifiable by serial number.

PROBLEM 6-3B
(a) (1) FIFO
May 1 Purchase 110 $190 $20,900 110 $190 $20,900

110 190
6 Purchase 140 220 30,800 140 220 51,700
110 $190
11 Sale 90 220 $40,700 50 220 11,000
50 220
14 Purchase 80 230 18,400 80 230 29,400
50 220
21 Sale 50 230 22,500 30 230 6,900
30 230
27 Purchase 50 250 12,500 50 250 19,400
31 Balance 380 $82,600 300 $63,200 80 $19,400
Check: $63,200 + $19,400 = $82,600


(2) Average Cost
May 1 Purchase 110 $190 $20,900 110 $190.00 $20,900.00
6 Purchase 140 220 30,800 250 206.80 51,700.00
11 Sale 200 $206.80 $41,360.00 50 206.80 10,340.00
14 Purchase 80 230 18,400 130 221.08 28,740.00
21 Sale 100 221.08 22,107.69 30 221.08 6,632.31
27 Purchase 50 250 12,500 80 239.15 19,132.31
31 Balance 380 $82,600 300 $63,467.69 80 $19,132.31

Check: $63,467.69 + $19,132.31 = $82,600
(b) Family Appliance Mart should select the formula that:

• corresponds most closely to the physical flow of goods
• 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 net
income.
(d) Because the ending inventory is determined using the most recent prices,
the FIFO cost formula produces the higher ending inventory.
(e) Pre-tax cash flow will be the same under both cost formulas.

PROBLEM 6-4B
(a) FIFO

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) When prices are rising, I would expect that, under the average cost
formula, the ending inventory would be lower. Under FIFO, the ending
inventory consists of the units purchased recently. Under average cost,
ending inventory includes some lower cost from goods purchased earlier.
I would expect cost of goods sold to be higher under average cost since
the average cost would include the cost of more recently purchased goods.
Notice that average cost will give higher cost of goods sold while having
ending inventory that is lower than under FIFO.

PROBLEM 6-5B
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

Inventory .................................... 246.13
(c) Three accounts would be affected—Inventory, Cost of Goods Sold, and

Retained Earnings. The 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 net income being
overstated by $246.13. The Retained Earnings account would also be
overstated by $246.13.

PROBLEM 6-6B
(a)
Oct. 1 No entry required
5 Inventory (100 × $130) .......................................... 13,000

8 Accounts Receivable ............................................. 24,000

Sales (120 × $200)........................................ 24,000
Cost of Goods Sold ............................................... 16,200

Inventory [(60 × $140) + (60 × $130)] ........... 16,200
15 Inventory (35 × $120) ............................................ 4,200

Accounts Payable ......................................... 4,200
20 Accounts Receivable ............................................. 9,600

Sales (60 × $160).......................................... 9,600
Cost of Goods Sold ............................................... 7,600

Inventory [(40 × $130) + (20 × $120)] ........... 7,600
26 Inventory (15 × $110) ............................................ 1,650


(b) Ending Inventory

Unit Total
Date Units Cost Cost
Oct. 31 15 @ $110 $1,650
15 @ $120 1,800
30* $3,450
*60 + 100 – 120 + 35 – 60 + 15 = 30
(c) The inventory should be valued at $3,240. This is the lower of cost and net
realizable value.
Cost = $3,450.00 (see (b))

NRV = $3,240.00 (30 @ $108)

PROBLEM 6-7B
2018 2017
(a) Cash No effect No effect
(b) Cost of goods sold Understated Overstated
(c) Net income 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 2018, 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 2018.
LO 4,5 BT: AN Difficulty: C Time: 20 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 6-8B
(a) (INCORRECT)
PELLETIER INC.
Income Statement
Year Ended July 31
2018 2017 2016
Sales $320,000 $312,000 $300,000
Gross profit 133,000 109,000 130,000

Inventory $37,000 $24,000 $37,000
(CORRECT)
PELLETIER INC.
Income Statement
Year Ended July 31
2018 2017 2016
Sales $320,000 $312,000 $300,000
Gross profit 133,000 119,000 120,000

Inventory $37,000 $29,0004 $27,000
3
1 $170,000+ $10,000 = $180,000
2 $203,000– $10,000 (2016 error) + $0* (2017 error) = $193,000
3 $37,000 – $10,000 = $27,000
4 $24,000 + $5,000 = $29,000
* Purchases understated by $5,000 and inventory understated by $5,000, so nil

effect on cost of goods sold.

(b) Before correction = $81,000 + $57,000 + $80,000 = $218,000

After correction = $81,000 + $67,000 + $70,000 = $218,000
(c) Inventory turnover
(INCORRECT)
$187,000
= 6.1 times
Inventory turnover (2018) ($37,000 + $24,000)÷2
$203,000
= 6.7 times
(CORRECT)
$187,000
= 5.7 times
$193,000
= 6.9 times
LO 4,5 BT: AN Difficulty: C Time: 10 min. AACSB: Analytic CPA: cpa-t001, cpa-t005

PROBLEM 6-9B
(a)
Lower
Net of Cost
Unit Total Realizable Total and
Product Quantity Cost Cost Value 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

Inventory ...................................................... 60
($1,015 - $955 = $60)

PROBLEM 6-10B
(a)
Tonnes Total Cost Total NRV LCNRV
(1) March 30,000 $21,750,0001 $22,200,0004 $21,750,000
31
(2) April 30 25,000 17,875,0002 17,750,0005 17,750,000
(3) May 31 28,000 20,300,0003 20,300,0006 20,300,000
130,000 x $725 = $21,750,000

225,000 x $715 = $17,875,000
328,000 x $725 = $20,300,000
430,000x $740 = $22,200,000
525,000 x $710 = $17,750,000
628,000 x $725 = $20,300,000
(b)
(1) March 31 No entry
(2) April 30 Cost of Goods Sold ...................................... 125,000

Inventory ................................................. 125,000
($17,875,000 – $17,750,000 = $125,000)
(3) May 31 No entry


PROBLEM 6-11B
(a) (in USD millions)
Inventory Turnover Days In Inventory Current Ratio
$28,384 365 $23,031

2015 = 9.7 times = 38 days = 1.3 : 1
($2,720 + $3,143)÷2 9.7 times $17,578
$30,884 365 $20,663

2014 = 9.4 times = 39 days = 1.1 : 1
($3,143 + $3,409)÷2 9.4 times $18,092
PepsiCo’s current ratio improved in 2015 and is equal to the industry

average of 1.3:1. This ratio indicates that the company has the same
proportion of current assets to cover its current liabilities as does the
average company in this industry. The increase in the current ratio 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 improved, and is above the industry
average. This trend is opposite to the industry trend which declined from
2014 to 2015.
(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 formula an appropriate choice.
Other components of inventory, including raw materials such as sugar, may
be accounted for on an average cost basis.
LO 5 BT: AP Difficulty: M Time: 20 min. AACSB: Analytic CPA: cpa-t001, cpa-t005


PROBLEM 6-12B
(a) Magna’s inventory turnover outpaces its industry counterparts by a large

margin while Dana is below the industry standard in this respect. On the
other hand, Dana has a much stronger current ratio compared to its
industry counterparts while Magna is slightly under industry average for
this measure of liquidity.
(b) While the gross profit margins are similar between Magna and Dana, their
gross profit margins fall well short of the industry average. This could be
due in part to the product mix for each company compared to its industry
peers. As for profit margin, Magna does a better job than Dana controlling
costs as its gross profit is 1.9% less than Dana’s, but its profit margin is
only 0.1% less. Both Magna and Dana are below the industry average for
profit margin.
(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 than Magna. 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 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) (2) Average Cost
Step1: Ending Inventory
Weighted Average Total

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

Cost of goods available for sale $88,200.00
Less: Ending inventory 8,018.18
Proof: 4,000 × ($88,200 ÷ 4,400) = $80,181.82

*PROBLEM 6-14B
(a)
STEWARD INC.
Partial Income Statements
Average
FIFO Cost
Sales (4,000 × $40) ......................................... $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
Average
FIFO Cost
Assets
Current assets
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 net income because FIFO values the cost of goods sold at the
earliest and lowest prices.
LO 5,6 BT: AP Difficulty: M Time: 25 min. AACSB: Analytic CPAL cpa-t001 CM: Reporting

*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)
(2) Periodic

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


(a) (continued)

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) FIFO
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 formula because the
most recently purchased goods remain in inventory.

*PROBLEM 6-16B
(1) Average Cost – Perpetual
Oct. 1 Beg. inventory 50 $240.00 $12,000.00
9 Purchase 125 $260 $32,500 175 254.29 44,500.00
15 Sale 150 $254.29 $38,142.86 25 254.29 6,357.14
20 Purchase 70 270 18,900 95 265.86 25,257.14
29 Sale 55 265.86 14,622.56 40 265.86 10,634.59
30 Balance 195 $51,400 205 $52,765.41 40 $10,634.59
Check: $52,765.41 + $10,634.59 = $63,400 ($12,000 + $51,400)

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

Oct. 1 Beginning inventory 50 $240 $12,000
9 Purchase 125 260 32,500
20 Purchase 70 270 18,900
Total 245 $63,400
Ending Inventory Cost of Goods Sold

Unit Total Cost of goods
Date Units Cost Cost available for sale $63,400.00
Oct. 31 40 $258.78* $10,351.02 Less: Ending inventory 10,351.02
*$63,400  245 = $258.78
Proof: Cost of Goods Sold 205 × ($63,400  245) = $53,048.98
(b)
Average Cost
Perpetual Periodic
Cost of goods sold $52,765.41 $53,048.98
Ending inventory 10,634.59 10,351.02
Cost of goods available for sale $63,400.00 $63,400.00
The results for the average cost formula 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.

ACR6-1 ACCOUNTING CYCLE REVIEW

(a) Dec. 1 Cash ................................................................. 315,000
Accounts Receivable................................. 315,000
Rent Expense.................................................... 14,000
Cash.......................................................... 14,000
4 Accounts Payable ............................................. 375,000

Cash.......................................................... 375,000
6 Accounts Receivable......................................... 2,121,000

Sales ......................................................... 2,121,000
Cost of Goods Sold (4,200 x $278)*.................. 1,167,600
Inventory ................................................... 1,167,600
*Dec. 1 balance ÷ Dec. 1 units =
$2,780,000 ÷ 10,000 = $278
15 Inventory (6,000 x $290) ................................... 1,740,000
Accounts Payable ..................................... 1,740,000
18 Salaries Expense .............................................. 125,000
Cash.......................................................... 125,000
21 Accounts Receivable ........................................ 4,092,000
Sales ......................................................... 4,092,000
Cost of Goods Sold ........................................... 2,250,400
Inventory (5,800* x $278) + (2,200** x $290) 2,250,400
* remaining units (10,000 – 4,200 Dec. 6)
** additional (8,000 – 5,800 = 2,200)
24 Advertising Expense ......................................... 32,000
Cash.......................................................... 32,000
27 Inventory (5,000 x $300) ................................... 1,500,000
Accounts Payable ..................................... 1,500,000
(b) Part (b) is combined with part (d).

ACR6-1 (CONTINUED)
(c)
RETRO PRODUCTIONS LIMITED
Unadjusted Trial Balance
December 31, 2018
Debit Credit
Cash $ 190,100
Accounts receivable 7,288,000
Inventory 2,602,000
Supplies 39,000
Prepaid rent 14,000
Equipment 1,350,000
Accumulated depreciation—equipment $ 35,625
Accounts payable 4,095,000
Unearned revenue 96,000
Bank loan payable—non-current 1,240,000
Common shares 600,000
Retained earnings 1,239,275
Dividends declared 120,000
Sales 22,893,000
Sales returns and allowances 56,000
Sales discounts 166,800
Cost of goods sold 12,592,000
Advertising expense 437,000
Freight out 980,000
Office expense 78,000
Rent expense 168,000
Salaries expense 3,561,000
Travel expense 46,000
Utilities expense 61,000
Interest expense 70,000
Income tax expense 380,000
$30,198,900 $30,198,900

ACR6-1 (CONTINUED)
(d) Adjusting journal entries (AJE)
Dec. 31 Utilities Expense................................................ 6,000

Accounts Payable ..................................... 6,000
31 Salaries Expense .............................................. 140,000

Salaries Payable ....................................... 140,000
31 Interest Expense ............................................... 6,200
Interest Payable ........................................ 6,200
31 Depreciation Expense ....................................... 168,750

Accumulated Depreciation—Equipment.... 168,750
($1,350,000 ÷ 8 = $168,750)
31 Cost of Goods Sold ........................................... 8,000

Inventory ($2,602,000* - $2,594,000)........ 8,000
* Refer to Inventory T account below part (b) and (d)
31 Income Tax Expense ........................................ 112,000

Income Tax Payable ................................. 112,000

ACR6-1 (CONTINUED)
Dec. 31 Bal. 204,375
(b) and (d)
AJE = Adjusting Journal Entry Accounts Payable
Cash Dec. 4 375,000 Nov. 30 Bal. 1,230,000
Nov. 30 Bal. 421,100 Dec. 1 14,000 Dec. 15 1,740,000
Dec. 1 315,000 Dec. 4 375,000 Dec. 27 1,500,000
Dec. 18 125,000 Unadj. Bal. 4,095,000
Dec. 24 32,000 Dec. 31 AJE 6,000
Dec. 31 Bal. 190,100 Dec. 31 Bal. 4,101,000
Accounts Receivable Income Tax Payable

Nov. 30 Bal. 1,390,000 Dec. 1 315,000 Nov. 30 Bal. 0
Dec. 6 2,121,000 Unadj. Bal. 0
Dec. 21 4,092,000 Dec. 31 AJE 112,000
Dec. 31 Bal. 7,288,000 Dec. 31 Bal. 112,000
Inventory Interest Payable

Nov. 30 Bal. 2,780,000 Dec. 6 1,167,600 Nov. 30 Bal. 0
Dec. 15 1,740,000 Dec. 21 2,250,400
Unadj. Bal. 0
Dec. 27 1,500,000
Dec. 31 AJE 6,200
Unadj. Bal. 2,602,000
Dec. 31 Bal. 6,200
Dec. 31 AJE 8,000
Dec. 31 Bal. 2,594,000 Salaries Payable
Nov. 30 Bal. 0
Supplies
Unadj. Bal. 0
Nov. 30 Bal. 39,000 Dec. 31 AJE 140,000
Dec. 31 Bal. 39,000 Dec. 31 Bal. 140,000
Prepaid Rent
Nov. 30 Bal. 14,000
Dec. 31 Bal. 14,000
Equipment
Nov. 30 Bal. 1,350,000
Dec. 31 Bal. 1,350,000
Accumulated Depreciation-Equipment
Nov. 30 Bal. 35,625
Unadj. Bal. 35,625
Dec. 31 AJE 168,750

ACR6-1 (CONTINUED)
(b) and (d) (continued)
Cost of Goods Sold
Unearned Revenue Nov. 30 Bal. 9,174,000
Nov. 30 Bal. 96,000 Dec. 6 1,167,600
Dec. 31 Bal. 96,000 Dec. 21 2,250,400
Unadj. Bal. 12,592,000
Bank Loan Payable Dec. 31AJE 8,000
Nov. 30 Bal. 1,240,000 Dec. 31 Bal. 12,600,000
Dec. 31 Bal. 1,240,000
Advertising Expense
Common Shares Nov. 30 Bal. 405,000
Nov. 30 Bal. 600,000 Dec. 24 32,000
Dec. 31 Bal. 600,000 Dec. 31 Bal. 437,000
Retained Earnings
Nov. 30 Bal. 1,239,275 Depreciation Expense
Dec. 31 Bal. 1,239,275 Nov. 30 Bal. 0
Unadj. Bal. 0
Dividends Declared Dec. 31AJE 168,750
Nov. 30 Bal. 120,000 Dec. 31 Bal. 168,750
Dec. 31 Bal. 120,000
Freight Out
Sales Nov. 30 Bal. 980,000
Nov. 30 Bal. 16,680,000 Dec. 31 Bal. 980,000
Dec. 6 2,121,000
Dec. 21 4,092,000 Office Expense
Dec. 31 Bal. 22,893,000 Nov. 30 Bal. 78,000
Dec. 31 Bal. 78,000
Sales Returns and Allowances
Nov. 30 Bal. 56,000
Rent Expense
Dec. 31 Bal. 56,000
Nov. 30 Bal. 154,000
Dec. 1 14,000
Sales Discounts
Dec. 31 Bal. 168,000
Nov. 30 Bal. 166,800
Dec. 31 Bal. 166,800

ACR6-1 (CONTINUED)
(b) and (d) (continued)
Salaries Expense Interest Expense

Nov. 30 Bal. 3,436,000 Nov. 30 Bal. 70,000
Dec. 18 125,000 Unadj. Bal. 70,000
Unadj. Bal. 3,561,000 Dec. 31AJE 6,200
Dec. 31AJE 140,000 Dec. 31 Bal. 76,200
Dec. 31 Bal. 3,701,000
Income Tax Expense
Travel Expense Nov. 30 Bal. 380,000
Nov. 30 Bal. 46,000 Unadj. Bal. 380,000
Dec. 31 Bal. 46,000 Dec. 31AJE 112,000
Dec. 31 Bal. 492,000
Utilities Expense
Nov. 30 Bal. 61,000
Unadj. Bal. 61,000
Dec. 31AJE 6,000
Dec. 31 Bal. 67,000

ACR6-1 (CONTINUED)
(e)
Adjusted Trial Balance
December 31, 2018
Debit Credit
Cash $ 190,100
Inventory 2,594,000
Supplies 39,000
Prepaid rent 14,000
Equipment 1,350,000
Income tax payable 112,000
Interest payable 6,200
Salaries payable 140,000
Dividends declared 120,000
Sales 22,893,000
Sales returns and allowances 56,000
Sales discounts 166,800
Depreciation expense 168,750
Freight out 980,000
Salaries expense 3,701,000
$30,631,850 $30,631,850

ACR6-1 (CONTINUED)
(f) (1)
Income Statement
Year Ended December 31, 2018
Sales $22,893,000
Less: Sales returns and allowances $ 56,000
Sales discounts 166,800 222,800
Net sales 22,670,200
Gross profit 10,070,200
Operating expenses
Salaries expense $3,701,000
Freight out 980,000
Depreciation expense 168,750
Total operating expenses 5,645,750
Income from operations 4,424,450
Other expenses
Income before income tax 4,348,250
Net income $3,856,250

ACR6-1 (CONTINUED)
(f) (2)
Statement of Changes in Equity
Year Ended December 31, 2018
Common Retained Total
Shares Earnings Equity
Balance, January 1 $600,000 $1,239,275 $1,839,275
Net income 0000 000 3,856,250 3,856,250
Dividends declared 0000 000 (120,000) (120,000)
Balance, December 31 $600,000 $4,975,525 $5,575,525

ACR6-1 (CONTINUED)
(f) (3)
Statement of Financial Position
December 31, 2018
Assets
Current assets
Cash $ 190,100
Inventory 2,594,000
Supplies 39,000
Prepaid rent 14,000
Total current assets 10,125,100
Property, plant and equipment
Equipment $1,350,000
Less: Accumulated depreciation 204,375 1,145,625
Total assets $11,270,725
Liabilities and Shareholders’ Equity
Current Liabilities
Accounts payable $ 4,101,000
Interest payable
6,200
Total current liabilities 4,455,200
Bank loan payable 1,240,000
Total Liabilities 5,695,200
Shareholders’ equity
Common shares $ 600,000

Total shareholders’ equity 5,575,525
Total liabilities and shareholders’ equity $11,270,725

ACR6-1 (CONTINUED)
(g) Closing entries (CE)
Dec. 31 Sales ................................................................. 22,893,000

Sales Discounts ........................................ 166,800
Sales Returns and Allowances.................. 56,000
Income Summary ...................................... 22,670,200
31 Income Summary .............................................. 18,813,950

Cost of Goods Sold ................................... 12,600,000
Advertising Expense ................................. 437,000
Depreciation Expense ............................... 168,750
Freight Out ................................................ 980,000
Office Expense .......................................... 78,000
Rent Expense............................................ 168,000
Salaries Expense ...................................... 3,701,000
Travel Expense ......................................... 46,000
Utilities Expense........................................ 67,000
Interest Expense ....................................... 76,200
Income Tax Expense ................................ 492,000
31 Income Summary .............................................. 3,856,250

Retained Earnings..................................... 3,856,250
31 Retained Earnings............................................. 120,000

Dividends Declared ................................... 120,000

ACR6-1 (CONTINUED)
CE = Closing Entry
Retained Earnings
Nov. 30 Bal. 1,239,275 Cost of Goods Sold
Dec. 31 Bal. 1,239,275 Nov. 30 Bal. 9,174,000
Dec. 31 CE 120,000 Dec. 31 CE 3,856,250 Dec. 6 1,167,600
Dec. 31 Bal. 4,975,525 Dec. 21 2,250,400
Unadj. Bal. 12,592,000
Dividends Declared Dec. 31AJE 8,000
Nov. 30 Bal. 120,000 Dec. 31 CE 120,000 Dec. 31 Bal. 12,600,000 Dec. 31 CE 12,600,000
Dec. 31 Bal. -
Advertising Expense
Income Summary Nov. 30 Bal. 405,000
Dec. 31 CE 18,813,950 Dec. 31 CE 22,670,200 Dec. 24 32,000
Dec. 31 CE 3,856,250 Dec. 31 Bal. 3,856,250 Dec. 31 Bal. 437,000 Dec. 31 CE 437,000
Dec. 31 -
Depreciation Expense
Sales Nov. 30 Bal. -
Nov. 30 Bal. 16,680,000 Unadj. Bal. -
Dec. 6 2,121,000 Dec. 31AJE 168,750
Dec. 21 4,092,000 Dec. 31 Bal. 168,750 Dec. 31 CE 168,750
Dec. 31 CE 22,893,000 Dec. 31 Bal. 22,893,000
Dec. 31 - Freight Out
Nov. 30 Bal. 980,000
Sales Returns and Allowances
Dec. 31 Bal. 980,000 Dec. 31 CE 980,000
Nov. 30 Bal. 56,000
Dec. 31 Bal. 56,000 Dec. 31 CE 56,000 Office Expense
Dec. 31 Bal -
Nov. 30 Bal. 78,000
Sales Discounts Dec. 31 Bal. 78,000 Dec. 31 CE 78,000
Nov. 30 Bal. 166,800
Rent Expense
Dec. 31 Bal. 166,800 Dec. 31 CE 166,800
Nov. 30 Bal. 154,000
Dec. 31 Bal -
Dec. 1 14,000
Dec. 31 Bal. 168,000 Dec. 31 CE 168,000

ACR6-1 (CONTINUED)
Salaries Expense
Nov. 30 Bal. 3,436,000
Dec. 18 125,000
Unadj. Bal. 3,561,000
Dec. 31 AJE 140,000
Dec. 31 Bal. 3,701,000 Dec. 31 CE 3,701,000
Interest Expense
Nov. 30 Bal. 70,000
Travel Expense
Unadj. Bal. 70,000
Nov. 30 Bal. 46,000
Dec. 31AJE 6,200
Dec. 31 Bal. 46,000 Dec. 31 CE 46,000
Dec. 31 Bal. 76,200 Dec. 31 CE 76,200
Utilities Expense
Income Tax Expense
Nov. 30 Bal. 61,000
Nov. 30 Bal. 380,000
Unadj. Bal. 61,000
Unadj. Bal. 380,000
Dec. 31AJE 6,000
Dec. 31AJE 112,000
Dec. 31 Bal. 67,000 Dec. 31 CE 67,000
Dec. 31 Bal. 492,000 Dec. 31 CE 492,000

ACR6-1 (CONTINUED)
(h)
Post-Closing Trial Balance
December 31, 2018
Debit Credit
Cash $ 190,100
Inventory 2,594,000
Supplies 39,000
Prepaid rent 14,000
Equipment 1,350,000
Interest payable 6,200
Retained earnings __________ 4,975,525
$11,475,100 $11,475,100

CT6-1 FINANCIAL REPORTING CASE

(Note: All amounts are in thousands)
(a) Inventories were $211,736 in 2016 and $204,812 in 2015.
(b)
As a
2016 2015 Increase Percentage
Inventory $211,736 $204,812 $6,924 3.4%
Current assets 335,581 315,840
Inventory as a %
of current assets 63.1% 64.8%
Inventory has increased at a modest pace from the end of 2015 to the end
of 2016. There was, on the other hand, a decrease in inventory as a
percentage of current assets.
(c) When choosing the average cost formula for inventory in the warehouse
and FIFO cost formula for food, North West, whose product is
interchangeable, considered the flowing guidelines:
1. Choose a formula 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 formula for all inventories having a similar nature and
usage in the company.

CT6-1 (CONTINUED)
(c) (continued)
Due to the nature of the product sold, particularly the food items, which
often have best before dates, North West would normally want to sell the
oldest items in inventory first, so using FIFO cost formula for food makes
sense. In terms of the other items it sells which include appliances and
household items, the average cost formula is the best choice in terms of
meeting the above guidelines.
(d) North West wrote down its inventory to net realizable value in both fiscal
years ending January 31, 2016 and 2015. The journal entry for 2016 in
thousands of dollars was as follows:
Cost of Goods Sold ..................................................... 1,392

Inventory ........................................................ 1,392
The amount of the write down in 2015 of $4,223 thousand was significantly
higher than in 2016.
LO 5 BT: AN Difficulty: M Time: 20 min. AACSB: Analytic CPA: cpa-t001 and cpa-t005 CM: Reporting
and Finance

CT6-2 FINANCIAL REPORTING CASE

(a)
North West Sobeys
(in thousands) (in millions)
Current ratio $335,581 $2,581.4

= 2.2 : 1 = 1.0 : 1
$155,501 $2,707.4
(b)
North West Sobeys
(in thousands) (in millions)
Inventory $1,273,421 $18,661.2

turnover ($211,736 + $204,812) ÷ 2 ($1,287.3 + $1,260.3) ÷ 2
= 6.1 times = 14.7 times
Days in 365 365

inventory = 60 days = 25 days
6.1 times 14.7 times
(c) North West has the better current ratio of the two companies as it’s ratio is
double that of Sobeys and well ahead of the industry average. On the other
hand, because Sobey’s inventory is mostly food, it has an inventory
turnover twice that of North West, which also sells merchandise other than
food, which moves more slowly. North West also sells much of its food in
sites in the far North, so inventory would be in transit longer than would be
the case for Sobeys. The Industry average falls between these two
companies.
LO 5 BT: AN Difficulty: M Time: 20 min. AACSB: Analytic CPA: cpa-t001, cpa-t005


CT6-3 FINANCIAL ANALYSIS CASE

(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 formula, used by Global Lumber, will not result in
any financial differences between a periodic and perpetual inventory
system. The use of the average cost formula, 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.

CT6-3 (CONTINUED)
(c) Yes, the use of the different cost formulas 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 formula and therefore its inventory is valued at the most current price.
Gibson uses the average cost formula and therefore its inventory is valued
at the average cost of all inventory purchased or produced 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.
LO 1,2,3,6 BT: E Difficulty: C Time: 40 min. AACSB: Reflec. Thinking CPA: cpa-t001 CM: Reporting

CT6-4 PROFESSIONAL JUDGEMENT 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 Inventory
account will have to be adjusted along with a corresponding adjustment to
Cost of Goods Sold. The error can be calculated as follows:
Inventory balance per Kevin 900 × $310 $279,000

Inventory correct balance (see above) 222,400
Difference $ 56,600
As this will directly affect operating income for the month of December,
Kevin’s bonus should be reduced by $5,660 (10% of $56,600).

CT6-4 (CONTINUED)
(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 loan balance that the bank will now allow. 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.
(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 formula 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 of $278 each would be higher. 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).
LO 4,5 BT: E Difficulty: M Time: 45 min. AACSB: Ethics and Communication

CPA: cpa-t001, cpa-e001, cpa-e003 CM: Reporting, Ethics, and Comm.

CT6-5 ETHICS CASE
(a) Specific Identification

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

Cost of goods sold ............................................ 366,1002 366,8003
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 handbags 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
$366,100 2

CT6-5 (CONTINUED)
Specific Identification–Minimize gross profit (maximize cost of sales by
selling the handbags 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
$366,800 3
(b) The stakeholders are the shareholders, customers, and staff of Swag
Bags. There is not really anything unethical in selecting which handbag to
sell, unless it is done solely on a desire to manipulate profits.
(c) Average Cost

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

CT6-5 (CONTINUED)
(d) Swag Bags should select the average cost method, given that the inventory
is homogeneous and not individually distinguishable. The specific
identification formula is not a permissible choice for the company, given
the type and physical flow of inventory it carried. The average cost formula
also has the advantage of not being subject to manipulation.
LO 2,3 BT: AN Difficulty: M Time: 45 min. AACSB: Ethics and Communication

CPA: cpa-t001, cpa-e001, cpa-e003 CM: Reporting, Ethics, and Comm.

CT6-6 PROFESSIONAL JUDGEMENT CASE

(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 small merchandise in locked display cases that can be
accessed only by staff. For larger items such as laptops, use locking
devises so that they cannot be stolen
(b) The inventory should be counted more frequently than once a year,
particularly for high-end products. 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 the Inventory account on the statement of financial position.
The opposite would be true if there proved to be an overage established
by the inventory count. The adjusting entry would affect net income and
Retained Earnings.

CT6-6 (CONTINUED)
(c) The tablets and laptops are unique and identifiable through their
serial number. Specific identification formula of costing inventory is
recommended for this type of inventory. Using this formula will better track
the items on an individual basis, helping narrow down errors in recording
or pinpointing the pilferage of specific inventory items. This formula 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 the cases and bags, FIFO or average
cost would be a better choice, as there is no need to have as stringent
control over these less expensive items.
LO 1,2 BT: E Difficulty: C Time: 35 min. AACSB: Communication CPA: cpa-t001, cpa-e003
CM: Reporting and Comm.

CT6-7 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)
Time Management Software Inventory - FIFO

2017 Purchases Cost of Goods Sold Balance
July 4 10 $550.00 $5,500.00 10 $550.00 $5,500.00
14 6 550.00 3,300.00 4 550.00 2,200.00
Aug. 1 10 550.00 5,500.00 14 550.00 7,700.00
28 9 550.00 4,950.00 5 550.00 2,750.00
Sept. 4 10 539.00 5,390.00 5 550.00
10 539.00 8,140.00
27 5 550.00
3 539.00 4,367.00 7 539.00 3,773.00
Oct. 3 10 539.00 5,390.00 7 539.00
10 528.22 5,282.20 10 539.00
10 528.22 14,445.20
27 7 539.00 3,773.00 10 539.00
10 528.22 10,672.20
Total 50 $27,062.20 30 $16,390.00 20 $10,672.20

CT6-7 (CONTINUED)
(b)
July 4 Inventory (10 × $550) ............................................ 5,500.00

Accounts Payable ......................................... 5,500.00
14 Cash (6 × $995) .................................................... 5,970.00
Sales ............................................................. 5,970.00
14 Cost of Goods Sold (6 × $550) .............................. 3,300.00

Inventory ....................................................... 3,300.00
25 Accounts Payable .................................................. 5,500.00
Cash ............................................................. 5,500.00
Aug. 1 Inventory (10 × $550) ........................................... 5,500.00
28 Cash (9 × $995) .................................................... 8,955.00
Sales ............................................................. 8,955.00
Cost of Goods Sold (9 × $550) .............................. 4,950.00
Inventory ....................................................... 4,950.00
Cash ............................................................ 5,500.00
Sept. 4 Inventory (10 × $539) ........................................... 5,390.00
27 Accounts Receivable (8 × $995)............................ 7,960.00
Sales ............................................................. 7,960.00
Cost of Goods Sold [(5 × $550) + (3 × $539)] ....... 4,367.00
Inventory ....................................................... 4,367.00
Cash ............................................................. 5,390.00

CT6-7 (CONTINUED)
(b) (continued)
Oct. 3 Inventory [(10 × $539) + (10 × $528.22)] .............. 10,672.20
27 Cash (7 × $995) .................................................... 6,965.00
Sales ............................................................. 6,965.00
Inventory ....................................................... 3,773.00
(c)
Time Management Software Inventory – Average Cost

2017 Purchases Cost of Goods Sold Balance
July 4 10 $550.00 $5,500.00 10 $550.00 $5,500.00
14 6 550.00 3,300.00 4 550.00 2,200.00
Aug. 1 10 550.00 5,500.00 14 550.00 7,700.00
28 9 550.00 4,950.00 5 550.00 2,750.00
Sept. 4 10 539.00 5,390.00 15 542.67 8,140.00
27 8 542.67 4,341.33 7 542.67 3,798.67
Oct. 3 10 539.00 5,390.00 17 540.51 9,188.67
10 528.22 5,282.20 27 535.96 14,470.87
27 7 535.96 3,751.71 20 535.96 10,719.16
Total 50 $27,062.20 30 $16,343.04 20 $10,719.16

CT6-7 (CONTINUED)
(d)
July 4 Inventory (10 × $550) ............................................ 5,550.00

14 Cash ($995 x 6) ..................................................... 5,970.00

Sales ............................................................. 5,970.00

Inventory ....................................................... 3,300.00

Cash ............................................................. 5,500.00
Aug. 1 Inventory (10 × $550) ........................................... 5,500.00

28 Cash (9 × $995) .................................................... 8,955.00

Sales ............................................................. 8,955.00

Inventory ....................................................... 4,950.00

Cash ............................................................. 5,500.00
Sept. 4 Inventory (10 × $539) ........................................... 5,390.00

27 Accounts Receivable (8 × $995)............................ 7,960.00

Sales ............................................................. 7,960.00
Cost of Goods Sold (8 × $542.67) ......................... 4,341.33

Inventory ....................................................... 4,341.33

CT6-7 (CONTINUED)
(d) (continued)
Aug. 29 Accounts Payable .................................................. 5,390.00

Cash ............................................................. 5,390.00
Oct. 3 Inventory [(10 × $539) + (10 × $528.22)] .............. 10,672.20

25 Cash (7 × $995) ................................................... 6,965.00

Sales ............................................................. 6,965.00
Cost of Goods Sold (7 × $535.96) ......................... 3,751.71

Inventory ....................................................... 3,751.71
(e)
Average
FIFO Cost
Sales $29,850 (1) $29,850
Cost of goods sold 16,390 16,343
Gross profit 13,460 13,507
Gross profit margin 45.1% 45.2%

(1) Sales = $5,970 + $8,955 + $7,960 + $6,965 = $29,850

CT6-7 (CONTINUED)
(f) Emily should consider:
• Whether the goods are interchangeable or not, or whether they are
produced or segregated for specific projects;
• Whether the formula corresponds most closely to the physical flow of
goods;
• Whether the formula reports inventory on the statement of financial
position at an amount close to the inventory’s most recent cost; and
• Whether the formula is used for other inventories with a similar nature
and usage.
For Emily, the inventory of time management software consists of goods

that are interchangeable. As such, ABC cannot use specific identification.
The nature of the items is not subject to a particular flow of goods or
deterioration over time. Under the FIFO cost formula, the cost of the ending
inventory is determined using the most recent costs and is closer to
replacement cost. However, since the software is identical and there is no
issue of obsolescence, the average cost formula may better suit this type
of inventory. In addition, it is the same method used for ABC’s other
inventories,
LO 2,3 BT: Difficulty: M Time: 60 min. AACSB: Analytic CPA CM: Reporting

Legal Notice
Copyright © 2017 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.
(MMXVII vi F2)


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Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley Financial Accounting, Seventh Canadian Edition

Solutions Manual 6-1 Chapter 6

SUMMARY OF QUESTIONS BY LEARNING OBJECTIVES

Solutions Manual 6-2 Chapter 6

AACSB Association to Advance Collegiate Schools of Business

Solutions Manual 6-3 Chapter 6

Ideally, strong internal control should be exerted over the physical

2. In a consignment agreement, the consignor is the business that owns the

(b) The goods will be included in Fastrak Corporation’s (the buyer’s)

Solutions Manual 6-4 Chapter 6

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

(b) Include: the inventory items belong to Kingsway while in transit

Solutions Manual 6-5 Chapter 6

(c) Specific identification matches the actual physical flow of

Solutions Manual 6-6 Chapter 6

9. A company should consider:

• Whether the goods are interchangeable or not, or whether they

• Whether the formula corresponds most closely to the physical flow

• Whether the formula reports inventory on the statement of financial

Solutions Manual 6-7 Chapter 6

(b) In a period of declining prices, FIFO will produce a lower ending

Solutions Manual 6-8 Chapter 6

Solutions Manual 6-9 Chapter 6

Because Cost of Goods Sold is overstated, gross profit and net

Solutions Manual 6-10 Chapter 6

Solutions Manual 6-11 Chapter 6

Solutions Manual 6-12 Chapter 6

SOLUTIONS TO BRIEF EXERCISES

BRIEF EXERCISE 6-1

(Legal title determines if an item should be included in inventory)

Solutions Manual 6-13 Chapter 6

BRIEF EXERCISE 6-2

BRIEF EXERCISE 6-3

(a) Cost of Goods Available for Sale

Ending Inventory Cost of Goods Sold

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

Solutions Manual 6-14 Chapter 6

BRIEF EXERCISE 6-4

[1] $450  30 = $15

Solutions Manual 6-15 Chapter 6

BRIEF EXERCISE 6-5

[1] $200 ($6,000  30)

Solutions Manual 6-16 Chapter 6

BRIEF EXERCISE 6-6

Date Description Purchases Cost of Goods Sold Ending Inventory

Purchase 250 $ 70 $ 17,500 250 $ 70 $ 17,500

Check: $55,000 + $120,500 = $175,500

(b) Average cost formula

Date Description Purchases Cost of Goods Sold Ending Inventory

3 Purchase 500 100.00 50,000.00 750 90.00 67,500.00

10 Sale 300 $90.00 $27,000.00 450 90.00 040,500.00

15 Purchase 900 120.00 108,000.00 1,350 110.00 5148,500.00

25 Sale 325 110.00 35,750.00 1,025 110.00 112,750.00

Solutions Manual 6-17 Chapter 6

BRIEF EXERCISE 6-7

(c) One of the guidelines that management should consider is choosing an

BRIEF EXERCISE 6-8

Solutions Manual 6-18 Chapter 6