1、Chapter 07 - Reporting and Interpreting Cost of Goods Sold and Inventory Financial Accounting, 8/e 7-1 2014 by McGraw-Hill Global Education Holdings, LLC. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not b
2、e copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or par t. Chapter 7 Reporting and Interpreting Cost of Goods Sold and Inventory ANSWERS TO QUESTIONS 1. Inventory often is one of the largest amounts listed under assets on the balance sheet which means that it r
3、epresents a significant amount of the resources available to the business. The inventory may be excessive in amount, which is a needless waste of resources; alternatively it may be too low, which may result in lost sales. Therefore, for internal users inventory control is very important. On the inco
4、me statement, inventory exerts a direct impact on the amount of income. Therefore, statement users are interested particularly in the amount of this effect and the way in which inventory is measured. Because of its impact on both the balance sheet and the income statement, it is of particular intere
5、st to all statement users. 2. Fundamentally, inventory should include those items, and only those items, legally owned by the business. That is, inventory should include all goods that the company owns, regardless of their particular location at the time. 3. The cost principle governs the measuremen
6、t of the ending inventory amount. The ending inventory is determined in units and the cost of each unit is applied to that number. Under the cost principle, the unit cost is the sum of all costs incurred in obtaining one unit of the inventory item in its present state. 4. Goods available for sale is
7、 the sum of the beginning inventory and the amount of goods purchased during the period. Cost of goods sold is the amount of goods available for sale less the ending inventory. 5. Beginning inventory is the stock of goods on hand (in inventory) at the start of the accounting period. Ending inventory
8、 is the stock of goods on hand (in inventory) at the end of the accounting period. The ending inventory of one period automatically becomes the beginning inventory of the next period. 6. (a) Average costThis inventory costing method in a periodic inventory system is based on a weighted-average cost
9、for the entire period. At the end of the accounting period the average cost is computed by dividing the goods available for sale in units into the cost of goods available for sale in dollars. The computed unit cost then is used to determine the cost of goods sold for the period by multiplying the un
10、its sold by this average unit Chapter 07 - Reporting and Interpreting Cost of Goods Sold and Inventory 7-2 Solutions Manual 2014 by McGraw-Hill Global Education Holdings, LLC. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. Th
11、is document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. cost. Similarly, the ending inventory for the period is determined by multiplying this average unit cost by the number of units on hand. (b) FIFOThis inventory costing method views t
12、he first units purchased as the first units sold. Under this method cost of goods sold is costed at the oldest unit costs, and the ending inventory is costed at the newest unit costs. (c) LIFOThis inventory costing method assumes that the last units purchased are the first units sold. Under this met
13、hod cost of goods sold is costed at the newest unit costs and the ending inventory is costed at the oldest unit costs. (d) Specific identificationThis inventory costing method requires that each item in the beginning inventory and each item purchased during the period be identified specifically so t
14、hat its unit cost can be determined by identifying the specific item sold. This method usually requires that each item be marked, often with a code that indicates its cost. When it is sold, that unit cost is the cost of goods sold amount. It often is characterized as a pick-and-choose method. When t
15、he ending inventory is taken, the specific items on hand, valued at the cost indicated on each of them, is the ending inventory amount. 7. The specific identification method of inventory costing is subject to manipulation. Manipulation is possible because one can, at the time of each sale, select (p
16、ick and choose) from the shelf the item that has the highest or the lowest (or some other) unit cost with no particular rationale for the choice. The rationale may be that it is desired to influence, by arbitrary choice, both the amount of income and the amount of ending inventory to be reported on
17、the financial statements. To illustrate, assume item A is stocked and three are on the shelf. One cost $100; the second one cost $115; and the third cost $125. Now assume that one unit is sold for $200. If it is assumed arbitrarily that the first unit is sold, the gross profit will be $100; if the s
18、econd unit is selected, the gross profit will be $85; or alternatively, if the third unit is selected, the gross profit will be $75. Thus, the amount of gross profit (and income) will vary significantly depending upon which one of the three is selected arbitrarily from the shelf for this particular
19、sale. This assumes that all three items are identical in every respect except for their unit costs. Of course, the selection of a different unit cost, in this case, also will influence the ending inventory for the two remaining items. 8. LIFO and FIFO have opposite effects on the inventory amount re
20、ported under assets on the balance sheet. The ending inventory is based upon either the oldest unit cost or the newest unit cost, depending upon which method is used. Under FIFO, the ending inventory is costed at the newest unit costs, and under LIFO, the ending inventory is costed at the oldest uni
21、t costs. Therefore, when prices are rising, the ending inventory reported on the balance sheet will be higher under FIFO than under LIFO. Conversely, when prices are falling the Chapter 07 - Reporting and Interpreting Cost of Goods Sold and Inventory Financial Accounting, 8/e 7-3 2014 by McGraw-Hill
22、 Global Education Holdings, LLC. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or par t. ending inventory on the
23、balance sheet will be higher under LIFO than under FIFO. 9. LIFO versus FIFO will affect the income statement in two ways: (1) the amount of cost of goods sold and (2) income. When the prices are rising, FIFO will give a lower cost of goods sold amount and hence a higher income amount than will LIFO
24、. In contrast, when prices are falling, FIFO will give a higher cost of goods sold amount and, as a result, a lower income amount. 10. When prices are rising, LIFO causes a lower taxable income than does FIFO. Therefore, when prices are rising, income tax is less under LIFO than FIFO. A lower tax bi
25、ll saves cash (reduces cash outflow for income tax). The total amount of cash saved is the difference between LIFO and FIFO inventory amounts multiplied by the income tax rate. 11. LCM is applied when market (defined as current replacement cost) is lower than the cost of units on hand. The ending in
26、ventory is valued at market (lower), which (a) reduces net income and (b) reduces the inventory amount reported on the balance sheet. The effect of applying LCM is to include the holding loss on the income statement (as a part of CGS) in the period in which the replacement cost drops below cost rath
27、er than in the period of actual sale. 12. When a perpetual inventory system is used, the unit cost must be known for each item sold at the date of each sale because at that time two things happen: (a) the units sold and their costs are removed from the perpetual inventory record and the new inventor
28、y balance is determined; (b) the cost of goods sold is determined from the perpetual inventory record and an entry in the accounts is made as a debit to Cost of Goods Sold and a credit to Inventory. In contrast, when a periodic inventory system is used the unit cost need not be known at the date of
29、each sale. In fact, the periodic system is designed so that cost of goods sold for each sale is not known at the time of sale. At the end of the period, under the periodic inventory system, cost of goods sold is determined by adding the beginning inventory to the total goods purchased for the period
30、 and subtracting from that total the ending inventory amount. The ending inventory amount is determined by means of a physical inventory count of the goods remaining on hand and with the units valued on a unit cost basis in accordance with the cost principle (by applying an appropriate inventory cos
31、ting method). ANSWERS TO MULTIPLE CHOICE 1. c) 2. d) 3. a) 4. a) 5. c) 6. c) 7. a) 8. c) 9. c) 10. a) Chapter 07 - Reporting and Interpreting Cost of Goods Sold and Inventory 7-4 Solutions Manual 2014 by McGraw-Hill Global Education Holdings, LLC. This is proprietary material solely for authorized i
32、nstructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. Authors Recommended Solution Time (Time in minutes) Mini-exercises Exercises Problems Alternate Problems Cases
33、 and Projects No. Time No. Time No. Time No. Time No. Time 1 5 1 15 1 30 1 30 1 20 2 5 2 20 2 30 2 40 2 20 3 5 3 20 3 40 3 35 3 20 4 10 4 10 4 40 4 40 4 20 5 5 5 15 5 45 5 40 6 5 6 15 6 50 6 20 7 5 7 30 7 40 7 30 8 5 8 30 8 40 8 * 9 10 9 30 9 35 10 30 10 20 11 15 12 20 Continuing Case 13 15 1 30 14
34、20 15 20 16 20 17 20 18 20 19 15 20 20 21 25 22 25 * Due to the nature of these cases and projects, it is very difficult to estimate the amount of time students will need to complete the assignment. As with any open-ended project, it is possible for students to devote a large amount of time to these
35、 assig nments. While students often benefit from the extra effort, we find that some become frustrated by the perceived difficulty of the task. You can reduce student frustration and anxiety by making your expectations clear. For example, when our goal is to sharpen research skills, we devote class
36、time to discussing research strategies. When we want the students to focus on a real accounting issue, we offer suggestions about possible companies or industries. Chapter 07 - Reporting and Interpreting Cost of Goods Sold and Inventory Financial Accounting, 8/e 7-5 2014 by McGraw-Hill Global Educat
37、ion Holdings, LLC. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or par t. MINI-EXERCISES M71. Type of Business T
38、ype of Inventory Merchandising Manufacturing Work in process X Finished goods X Merchandise X Raw materials X M72. To record the purchase of 90 new shirts in accordance with the cost principle (perpetual inventory system): Inventory (+A). 2,150 Cash (A). 2,150 Cost: $1,800 + $185 + $165 = $2,150. Th
39、e $108 interest expense is not a proper cost of the merchandise; it is recorded as prepaid interest expense and later as interest expense. M73. (1) Part of inventory (2) Expenseas incurred a. Wages of factory workers X b. Costs of raw materials purchased X c. Sales salaries X d. Heat, light, and pow
40、er for the factory building X e. Heat, light, and power for the headquarters office building X Chapter 07 - Reporting and Interpreting Cost of Goods Sold and Inventory 7-6 Solutions Manual 2014 by McGraw-Hill Global Education Holdings, LLC. This is proprietary material solely for authorized instruct
41、or use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. M74. Computation: Simply rearrange the basic inventory model (BI + P EI = CGS): Cost of goods sold . $11,042 million
42、+ Ending inventory . 2,916 million Beginning inventory . (3,213) million Purchases . $10,745 million M75. (a) Declining costs Highest net income LIFO Highest inventory LIFO (b) Rising costs Highest net income FIFO Highest inventory FIFO M76. LIFO is often selected when costs are rising because it re
43、duces the companys tax liability whichincreases cash and benefits shareholders. However, it also reduces reported net income. M77. Quantity Cost per Item Replacement Cost per Item Lower of Cost or Market Reported on Balance Sheet Item A 70 $ 110 $100 $100 70 x $100 = $7,000 Item B 30 60 85 60 30 x $
44、60 = $1,800 Total $8,800 M78. + (a) Parts inventory delivered daily by suppliers instead of weekly. NE (b) Extend payments for inventory purchases from 15 days to 30 days. + (c) Shorten production process from 10 days to 8 days. Chapter 07 - Reporting and Interpreting Cost of Goods Sold and Inventor
45、y Financial Accounting, 8/e 7-7 2014 by McGraw-Hill Global Education Holdings, LLC. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a w
46、ebsite, in whole or par t. M79. Understatement of the 2014 ending inventory by $50,000 caused 2014 pretax income to be understated and 2015 pretax income to be overstated by the same amount. Overstatement of the 2014 ending inventory would have the opposite effect; that is, 2014 pretax income would
47、be overstated by $50,000 and 2015 pretax income understated by $50,000. Total pretax income for the two years combined would be correct. Chapter 07 - Reporting and Interpreting Cost of Goods Sold and Inventory 7-8 Solutions Manual 2014 by McGraw-Hill Global Education Holdings, LLC. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This
