CHAPTER 7 – Inventory

Exercise 1 – Understanding Inventory Relationships

Solve for the missing amounts in each independent scenario below.

Scenario
A B C D E
Beginning inventory 250 125 D? 675 430
Purchases 5,300 B? 8,675 7,425 H?
Cost of goods available for sale (COGAS) A? 3,450 9,525 F? I?
Cost of goods sold (COGS) 4,600 C? 8,755 G? 9,250
Ending inventory 950 275 E? 525 510

A)

B)

C)

D)

E)

F)

G)

H)

I)
BUS 145 –Introductory Financial Accounting – In-Class Exercises

Exercise 2 – Perpetual System using Weighted Average and FIFO costing

Crazy Mama’s Surf Shop Inc. has the following inventory transactions. They have the choice to use FIFO or Weighted
Average inventory costing systems. Calculate the effects of each costing formula, using the perpetual system.

May 1 Crazy Mama's has beginning inventory of 3 boards at $400 each

May 3 5 more are purchased on account at $450 each
May 10 6 are sold at $1,000 each (sales price) on account (COGS expense = ?)
May 12 5 more are purchased on account at $475 each
May 20 3 more are sold at $1,000 each on account (COGS expense = ?)
May 31 Ending inventory = 4 boards at $?

a) Compute the COGS expense and Ending inventory using the Weighted-Average method.

b) Record the journal entries for the above transactions under the Weighted-Average method. Complete a t-account
for Inventory.

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BUS 145 –Introductory Financial Accounting – In-Class Exercises

Exercise 2 – continued

c) Compute the COGS expense and Ending inventory using the FIFO method.

d) Record the journal entries for the above transactions under the FIFO method. Complete a t-account for Inventory.

e) Compare results across both methods by calculating COGS, Gross Margin and Ending Inventory.

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BUS 145 –Introductory Financial Accounting – In-Class Exercises

Exercise 3 – Periodic System using Weighted Average and FIFO costing

a) Using the purchase and sales information from Exercise 2, compute the COGS and Ending inventory under the
Weighted-Average method using the periodic system.

Number Cost per Total

of Units Unit Cost

Beginning inventory
Purchases:
May 3
May 12
Total cost of goods available for sale
(COGAS) **

Less: Ending inventory** (physically counted)

Cost of goods sold expense

b) Using the purchase and sales information from Exercise 2, compute the COGS and Ending inventory under the
FIFO method using the periodic system (same format as in part a).

c) Compare results across both methods by calculating COGS, Gross Margin and Ending Inventory.

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BUS 145 –Introductory Financial Accounting – In-Class Exercises

Exercise 4 – Inventory Valuation and Financial Statement Analysis

Part 1

Phoenix Music Systems Ltd. sells audio players. Its records show that it has an ending inventory balance of $23,000.
However, it realizes that due to the technology going obsolete, it will only be able to sell the inventory for $8,000.

What is the journal entry required?

Part 2
Phoenix Music Systems Ltd. now sells vinyl record players. It started 2001 with a beginning inventory balance of
$14,000. Purchases for the next two years were $65,000 each year. At the end of 2001, a physical inventory count was
done. The correct ending inventory balance was $8,000 but an error was made during the count as certain items were
omitted. The count, in error, concluded that there was only $5,000 in ending inventory. 2002 ending inventory was
counted correctly at $7,000.

Calculate the effect of this error on net income in 2001 and 2002.

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BUS 145 –Introductory Financial Accounting – In-Class Exercises

Exercise 4 – continued

Part 3
Frank's Automotive Ltd. provided the following information from the previous three years.

2019 2018 2017

Inventory 85,000 78,000 77,000
Cost of goods sold expense 610,000 600,000 590,000

Calculate the Inventory Turnover Ratio and the Days to Sell Inventory for 2019 and 2018. Comment on whether it
took more or less time to sell inventory in 2019.

2019 2018

Inventory Turnover Ratio =

Days to Sell Inventory =

Comment:

Part 4
Frank's Automotive Ltd. began this year with $75,000 in inventory. Purchases during the year were $625,000. Sales
revenue for the year was $950,000 with a gross margin of 35%. Using the gross margin estimation method, what was
the value of ending inventory?

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