Chapter 06 -Inventory and Cost of Goods Sold

Chapter 6 Inventory and Cost of Goods Sold

Calculate cost of goods sold(LO6-2)

E6-1Russell Retail Group begins the year with inventory of $63,800 and ends the year with inventory of $41,500. During the year, the company has four purchases for the following amounts:

Purchase of February 17 / $292,100
Purchase of May 6 / 148,200
Purchase of September 8 / 392,800
Purchase of December 4 / 92,400

Required:

Calculate cost of goods sold for the year.

Prepare a multiple-step income statement(LO6-2)

E6-2Wayman Corporation reports the following amounts in its December 31, 2015, income statement.

Net sales / $250,100 / Income tax expense / $21,500
Interest expense / 6,500 / Cost of goods sold / 93,200
Salaries expense / 22,400 / Advertising expense / 11,800
Utilities expense / 45,700

Required:

Prepare a multiple-step income statement.

Prepare a multiple-step income statement and analyze profitability(LO6-2)

E6-3Tisdale Incorporated reports the following amount in its December 31, 2015, income statement.

Net sales / $320,500 / Income tax expense / $ 24,200
Gain on land sale* / 120,000 / Cost of goods sold / 223,700
Selling expenses / 36,400 / Administrative expenses / 42,800
General expenses / 45,100

*On July 12, 2015, the company sold land for $410,000 that it had previously purchased for $290,000, resulting in a $120,000 gain. This is the only land owned by the company.

Required:

1. Prepare a multiple-step income statement.

2. Explain how analyzing the multiple levels of profitability can help in understanding the future profit-generating potential of Tisdale Incorporated.

Calculate inventory amounts when costs are rising(LO6-3)

E6-4During 2015, TRC Corporation has the following inventory transactions.

Date / Transaction / Number of Units / Unit Cost / Total Cost
Jan.1 / Beginning inventory / $ 55 / $31 / $ 1,705
Apr. 7 / Purchase / 147 / 35 / 5,145
Jul. 16 / Purchase / 230 / 49 / 11,270
Oct. 6 / Purchase / 120 / 56 / 6,720
552 / $24,840

For the entire year, the company sells 501 units of inventory for $58 each

Required:

1. Using FIFO, calculate (a) ending inventory, (b) cost of goods sold, (c) sales revenue, and (d) gross profit.

2. Using LIFO, calculate (a) ending inventory, (b) cost of goods sold, (c) sales revenue, and (d) gross profit.

3. Using weighted-average cost, calculate (a) ending inventory, (b) cost of goods sold, (c) sales revenue, and (d) gross profit.

4. Determine which method will result in higher profitability when inventory costs are rising.

Calculate inventory amounts when costs are declining(LO6-3)

E6-5During 2015, Trombley Incorporated has the following inventory transactions.

Date / Transaction / Number of Units / Unit Cost / Total Cost
Jan.1 / Beginning inventory / $11 / $21 / $231
Mar. 4 / Purchase / 41 / 14 / 574
Jun.9 / Purchase / 18 / 10 / 180
Nov. 11 / Purchase / 15 / 8 / 120
85 / $1,105

For the entire year, the company sells 65 units of inventory for $25 each.

Required:

1. Using FIFO, calculate (a) ending inventory, (b) cost of goods sold, (c) sales revenue, and (d) gross profit.

2. Using LIFO, calculate (a) ending inventory, (b) cost of goods sold, (c) sales revenue, and (d) gross profit.

3. Using weighted-average cost, calculate (a) ending inventory, (b) cost of goods sold, (c) sales revenue, and (d) gross profit.

4. Determine which method will result in higher profitability when inventory costs are declining.

Record transactions for a perpetual system(LO6-5)

E6-6Bingerton Industries uses a perpetual inventory system. The company began the year with inventory of$80,000. Purchases of inventory on account during the year totaled $320,000. Merchandise costing $340,000 was sold on account for $450,000.

Required:

Record transactions for the purchase and sale of inventory.

Record transactions for a perpetual system(LO6-5)

E6-7On June 5, Staley Electronics purchases 120 units of inventory on account for $15 each. After closer examination, Staley determines 30 units are defective and returns them to its supplier for full credit on June 9. All remaining inventory is sold on June 16 for $25 each.

Required:

Record transactions for the purchase, return, and sale of inventory.

Record transactions for a perpetual system(LO6-5)

E6-8On June 5, Staley Electronics purchases 120 units of inventory on account for $15 each, with terms 4/10, n/30. Staley pays for the inventory on June 12.

Required:

1. Record transactions for the purchase of inventory and payment on account.

2. Now assume payment is made on June 22. Record the payment on account.

Record transactions for a perpetual system(LO6-5)

E6-9Littleton Books has the following transactions during May.

May2Purchases books on account from Readers Wholesale for $2,500, terms 5/10, n/30.

May3Pays freight costs of $120 on books purchased from Readers.

May5Returns books with a cost of $480 to Readers because part of the order is incorrect.

May 10Pays the full amount due to Readers.

May 30Sells all books purchased on May 2 (less those returned on May 5) for $3,650 on account.

Required:

1. Record the transactions of Littleton Books, assuming the company uses a perpetual inventory system.

2. Assume that payment to Readers is made on May 24 instead of May 10. Record this payment.

Record transactions for a perpetual system(LO6-5)

E6-10Sundance Systems has the following transactions during July.

July5Purchases 42 laptop computers on account from Red River Supplies for $1,600 each, terms 2/10, n/30.

July8Returns to Red Riverfour laptops that had defective hard drives.

July 13Pays the full amount due to Red River.

July 28Sells 38 laptops from July 5 for $2,100 each on account.

Required:

Record the transactions of Sundance Systems, assuming the company uses a perpetual inventory system.

Record transactions for a perpetual system(LO6-5)

E6-11DS Unlimited has the following transactions during August.

August 6 Purchases 85 hand-held game devices on account from GameGirl, Inc. for $80 each, terms 5/10, n/60.

August 7 Pays $200 to Sure Shipping for freight charges associated with the August 6 purchase.

August 10Returns to GameGirl five game devices that were defective.

August 14Pays the full amount due to GameGirl.

August 23 Sells 60 game devices purchased on August 6 for $115 each to customers on account. The total cost of the 60 game devises sold is $4,710.

Required:

Record the transactions of DS Unlimited, assuming the company uses a perpetual inventory system.

Record transactions for a perpetual system(LO6-5)

E6-12Refer to the transactions in E6–11.

Required:

Prepare the transactions for GameGirl, Inc. assuming the company uses a perpetual inventory system. Assume the 85game devices sold on August 6to DS Unlimited had a cost to Red River of $60 each. The items returned on August 10 were considered worthless to GameGirl and were discarded.

Calculate inventory using lower-of-cost-or-market(LO6-6)

E6-13Home Furnishings reports inventory using the lower-of-cost-or-market method. Below is information related to its year-end inventory.

Inventory / Quantity / Cost / Market
Furniture / $80 / $240 / $290
Electronics / 52 / 135 / 110

Required:

1. Calculate ending inventory under lower-of-cost-or-market.

2. Record any necessary adjustment to inventory.

3. Explain the impact of the adjustment in the financial statements.

Calculate inventory using lower-of-cost-or market (LO6-6)

E6-14A company like Golf USAthat sells golf-related merchandise typically will have inventory items such as golf clothing and golf equipment. As technology advances the design and performance of the next generation of drivers, the older models become less marketable and therefore decline in value. Suppose that in 2015, Ping (a manufacturer of golf clubs) introduces the MegaDriver II, the new and improved version of the MegaDriver. Below are amounts related to Golf USA’s inventory at the end of 2015.

Inventory / Quantity / Cost / Market
Shirts / $52 / $ 75 / $ 92
MegaDriver / 12 / 250 / 180
MegaDriver II / 40 / 320 / 360

Required:

1. Calculate ending inventory under lower-of-cost-or-market.

2. Record any necessary adjustment to inventory.

3. Explain the impact of the adjustment in the financial statements.

Calculate cost of goods sold, the inventory turnover ratio, and average days in inventory(LO6-2, 6-7)

E6-15Lewis Incorporated and Clark Enterprises report the following amounts for 2015.

Lewis / Clark
Inventory (beginning) / $ 13,000 / $ 16,000
Inventory (ending) / 9,000 / 32,000
Purchases / 132,000 / 140,000
Purchase returns / 4,000 / 28,000

Required:

1. Calculate cost of goods sold for each company.

2. Calculate the inventory turnover ratio for each company.

3. Calculate the average days in inventory for each company.

4. Explain which company appears to be managing its inventory more efficiently.

Calculate levels of profitability for a multiple-step income statement and the gross profit ratio(LO6-6, 6-7)

E6-16Below are amounts found in the income statements of three companies.

Company / Net Sales / Cost of Goods
Sold / Operating
Expenses / Nonoperating
Expenses / Income Tax
Expense
Henry / $17,000 / $ 3,400 / $5,100 / $900 / $1,300
Grace / 21,000 / 12,600 / 9,800 / 2,400 / 0
James / 24,000 / 19,200 / 1,700 / 0 / 1,600

Required:

1. For each company, calculate (a) gross profit, (b) operating income, (c) income before income taxes, and (d) net income.

2. For each company, calculate the gross profit ratio and indicate which company has the most favorable ratio.

Record transactions using a periodic system (LO6-8)

E6-17Refer to the transactions in E6–9.

Required:

1. Record the transactions of Littleton Books, assuming the company uses a periodic inventory system.

2. Record the period-end adjustment to cost of goods sold on May 31, assuming the company has no beginning or ending inventory.

Record transactions using a periodic system (LO6-8)

E6-18Refer to the transactions in E6–10.

Required:

1. Record the transactions of Sundance Systems, assuming the company uses a periodic inventory system.

2. Record the period-end adjustment to cost of goods sold on July 31, assuming the company has no beginning inventory.

Record transactions using a periodic system (LO6-8)

E6-19Refer to the transactions in E6–11.

Required:

1. Record the transactions of DS Unlimited, assuming the company uses a periodic inventory system.

2. Record the period-end adjustment to cost of goods sold on August 31, assuming the company has no beginning inventory and ending inventory has a cost of $1,570.

Find financial statement effects of understatement in ending inventory(LO6-9)

E6-20 Mulligan Corporation purchases inventory on account with terms FOB destination. The goods are shipped on December 30, 2015, but do not reach Mulligan until January 5, 2016. Mulligan correctly does not record accounts payable associated with the purchase but does include this inventory in its 2015 ending inventory count.

Required:

1. If an error has been made, explain why.

2. If an error has been made, indicate whether there is an understatement (U), overstatement (O), or no effect (N) on the reported amount of each financial statement element in the current year and following year. Ignore any tax effects.

Balance Sheet / Income Statement
Year / Assets / Liabilities / Stockholders’ Equity / Revenues / Cost of Goods Sold / Gross Profit
Current
Following

Chapter 6 6-1