1、Chapter 07 - Reporting and Interpreting Cost of Goods Sold and InventoryFinancial 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 be
2、 copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.Chapter 7Reporting and Interpreting Cost of Goods Sold and InventoryANSWERS TO QUESTIONS1. Inventory often is one of the largest amounts listed under assets on the balance sheet which means that it represe
3、nts 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 income sta
4、tement, 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 interest to
5、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 measurement of the
6、 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 the sum
7、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 is the s
8、tock 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 for the e
9、ntire 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 units sold
10、by this average unit Chapter 07 - Reporting and Interpreting Cost of Goods Sold and Inventory7-2 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. This documen
11、t 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 the first uni
12、ts 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 method cost of g
13、oods 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 that its unit c
14、ost 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 the ending inve
15、ntory 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 (pick and choose)
16、 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 the financial s
17、tatements. 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 second unit is s
18、elected, 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 sale. This assu
19、mes 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 reported under ass
20、ets 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 unit costs. Therefo
21、re, 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 InventoryFinancial Accounting, 8/e 7-3 2014 by McGraw-Hill Global Education
22、 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 part.ending inventory on the balance sheet will
23、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. In contrast, when
24、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 bill saves cash (reduce
25、s 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 inventory is valued at m
26、arket (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 rather than in the period
27、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 inventory balance is determined
28、; (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 each sale. In fact, the
29、 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 and subtracting from t
30、hat 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 costing method).ANSWERS TO
31、 MULTIPLE CHOICE1. 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 Inventory7-4 Solutions Manual 2014 by McGraw-Hill Global Education Holdings, LLC. This is proprietary material solely for authorized instructor use. Not authorize
32、d 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 ProblemsAlternate ProblemsCases and ProjectsNo. Time No. Time No
33、. Time No. Time No. Time1 5 1 15 1 30 1 30 1 202 5 2 20 2 30 2 40 2 203 5 3 20 3 40 3 35 3 204 10 4 10 4 40 4 40 4 205 5 5 15 5 45 5 406 5 6 15 6 50 6 207 5 7 30 7 40 7 308 5 8 30 8 40 8 *9 10 9 30 9 3510 30 10 2011 1512 20 Continuing Case13 15 1 3014 2015 2016 2017 2018 2019 1520 2021 2522 25* Due
34、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 assignments. While students often benefit from the extra
35、 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 time to discussing research strategies. When we want the s
36、tudents 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 InventoryFinancial Accounting, 8/e 7-5 2014 by McGraw-Hill Global Education Holdings, LLC. This is proprietary material solely for
37、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 part.MINI-EXERCISESM71.Type of BusinessType of Inventory Merchandising ManufacturingWork in process XFin
38、ished goods XMerchandise XRaw materials XM72.To record the purchase of 90 new shirts in accordance with the cost principle (perpetual inventory system):Inventory (+A) . 2,150Cash (A). 2,150Cost: $1,800 + $185 + $165 = $2,150.The $108 interest expense is not a proper cost of the merchandise; it is re
39、corded as prepaid interest expense and later as interest expense.M73. (1) Part of inventory(2) Expense as incurreda. Wages of factory workers Xb. Costs of raw materials purchased Xc. Sales salaries Xd. Heat, light, and power for the factory building Xe. Heat, light, and power for the headquarters of
40、fice buildingXChapter 07 - Reporting and Interpreting Cost of Goods Sold and Inventory7-6 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 document may n
41、ot 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+ Ending inventory . 2,916 million Beginning inventory . (3,213) millionPurchases . $1
42、0,745 millionM75.(a) Declining costs Highest net income LIFOHighest inventory LIFO(b) Rising costs Highest net income FIFOHighest inventory FIFOM76.LIFO is often selected when costs are rising because it reduces the companys tax liability which increases cash and benefits shareholders. However, it a
43、lso reduces reported net income.M77.Quantity Cost perItemReplacement Cost per ItemLower of Cost or MarketReported on Balance SheetItem A 70 $ 110 $100 $100 70 x $100 = $7,000Item B 30 60 85 60 30 x $60 = $1,800Total $8,800M78.+ (a) Parts inventory delivered daily by suppliers instead of weekly.NE (b
44、) 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 InventoryFinancial Accounting, 8/e 7-7 2014 by McGraw-Hill Global Education Holdings, LLC. This is proprietary mate
45、rial 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 part.M79.Understatement of the 2014 ending inventory by $50,000 caused 2014 pretax incom
46、e 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 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 Inventory7-8 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.
