Chapter 6

Retail Inventory
Quick Check
Answers:
1. c
2. a
3. b
4. d
5. b
6. d
7. b
8. a
9. b
10. b
(20-25 min.) E6-3
Req. 1
Golf Haven

Date
Nov 1
Nov 6
Nov 8

Purchases
Unit
Total
Quantity Cost
Cost

$68

$476

10
10
4
31

68
74
74

680
740
296
$2 192

$1 480
20

$74

Nov 17
Nov 30
Totals

FIFO
Cost of sales
Unit
Total
Quantity Cost
Cost

20

$1 480

Inventory on Hand
Unit
Total
Quantity Cost
Cost
17
$68
$1 156
10
68
680
10
68
680
20
74
1 480
10
6
6

74
74

The cost of sales using the FIFO method is $2 192.

740
444
$444

Ending inventory balance using the FIFO method is $444.

Journal
DATE
ACCOUNTS AND EXPLANATIONS
Nov
6 Cash (7 x $128)
Sales revenue
6 Cost of sales (7 x $68)
Inventory

POST.
REF.

DEBIT
896

896
476
476

8 Inventory (20 x $74)

Accounts payable

1 480

17 Cash (20 x $128)

Sales revenue

2 560

17 Cost of sales
(10 x $68) + (10 x $74)
Inventory

CREDIT

1 480

2 560

1 420
1 420

30 Cash (4 x $128)
Sales revenue

512

30 Cost of sales (4 x $74)

Inventory

296

512

296
(10-15 min.) E6-6

Req. 1

Jun 30

30

Journal Entry
ACCOUNTS AND EXPLANATIONS
Purchases:
Inventory
Accounts payable
Sales:
Accounts receivable ($76 000 x .81)
Cash ($76 000 x .19)
Sales revenue

DEBIT

CREDIT

46 000
46 000

61 560
14 440
76 000

Cost of sales
Inventory

38 000
38 000

Req. 2
BALANCE SHEET:
Current assets:
Inventory ($8 000 + $46 000 $38 000)

$16 000

INCOME STATEMENT:
Sales revenue
Cost of sales
Gross profit

$76 000
38 000
$38 000
(15-20 min.) E6-9

Reqs. 1, 2 and 3
FIFO
$1 080

Sales revenue (12 $90)

Cost of sales:
FIFO (12 x $65)..
LIFO (10 x $78 + 2 x $65)
Average (12 x $70*)
Gross profit.
__________
*Total cost Total units =
16 @ $65 = $1 040
10 @ $78 =
780
$1 820

16
10
26

LIFO
$1 080

AVERAGE
$1 080

780
910
840
$ 300

$ 170

$ 240

Average cost per unit

$70

Req. 4
The FIFO method results in the largest gross profit during times of increasing
inventory prices. This method will produce the lowest cost of sales.

(5 min.) E6-10
Req. 1
Journal
DATE
ACCOUNTS AND EXPLANATIONS
Jun
30 Cost of sales ($13 000 $12 800)
Inventory

POST.
REF. DEBIT CREDIT
200
200

Req. 2
According to the lower-of-cost-and-net-realisable-value rule, Eagle Resources
should report inventory on the 30 June balance sheet at $12 800.

(5 min.) E6-11
Req. 1
Journal
DATE
ACCOUNTS AND EXPLANATIONS
Mar.
31 Cost of sales ($18 000 $17 000)
Inventory

POST.
REF. DEBIT CREDIT
1 000
1 000

Req. 2
INCOME STATEMENT:
Sales revenue
Cost of sales
$45 000 + $1 000
Gross profit

$117 000
46 000
$ 71 000

(15-20 min.) E6-13

Req. 1
Great Foods Grocery
Income Statements
Years Ended 30 June 2013 and 2012
2013
Sales revenue
Cost of sales:
Beginning inventory
Net purchases
Cost of goods available
Ending inventory
Cost of sales
Gross profit
Overhead expenses
Net profit

2012

$139 000
$8 500*
76 000
$ 84 500
(17 000)

$120 000
$12 000
70 000
$ 82 000
(8 500)*

67 500
$71 500
23 000
$ 48 500

73 500
$46 500
18 000
$ 28 500

*$13 000 $4 500 = $8 500.

Req. 2
Year

Net profit prior to correction was

2013

Understated by $4 500

2012

Overstated by $4 500
(10-15 min.) E6-14

Req. 1
Beginning inventory..
Net purchases.
Cost of goods available ..
Estimated cost of sales:
Net sales revenue.....
Less: Estimated gross profit of 45%...
Estimated cost of sales...
Estimated cost of inventory destroyed...

$220 000
800 000
$1 020 000
$1 100 000
495 000
(605 000)
$415 000

(10-15 min.) E6-16

Req. 1

Beginning inventory
Net purchases
Goods available for sale
Cost ratio
Less: Net sales
Ending inventory at retail
Ending inventory at cost

At Cost
25 000
100 000
125 000
0.41667

At Retail
50 000
250 000
300 000
-240 000
60 000

25 000

Focus on Ethics
Req. 1
Although this may or may not be viewed as an ethical issue, changing accounting
methods every year hurts a companys credibility, which makes it hard for the
company to borrow or raise money from outside investors. The question that arises
about such a company is: What does the business have to hide?
Req. 2
The comparability principle is violated. Unless the external auditor concurs with the
appropriateness of the change each year (highly unlikely), the change is a violation
of generally accepted accounting principles and the auditors opinion would be
qualified. Even if the auditor concurs with the change, the change will still be noted
in the auditors report of opinion in order to alert readers of the financial statements
to the change.
Req. 3
The companys various stakeholders could be harmed by excessive accounting
changes. It becomes difficult to tell what aspects of the companys financial results
are real and what parts are simply a result of changes in accounting methods.
Outsiders find it difficult to track the companys operating results and financial
position over time. Ultimately the company suffers because lenders will not want to
loan it money, and outsiders will be reluctant to invest in the business. This may

deprive the entity of needed funds and hurt its chances for success or survival.