Chapter 08 Solution of Fundamental of Financial Accouting by EDMONDS (4th Edition)

ANSWERS TO QUESTIONS - CHAPTER 8
1. 1. First In, First Out - The inventory cost flow method

that assumes that the first items purchased are the
first items sold for the purpose of computing cost of
goods sold and inventory.
2. Last In, First Out - The inventory cost flow method that
assumes that the first items purchased are the last
items sold for the purpose of computing cost of goods
sold and inventory.
3. Weighted Average - The inventory cost flow method

that allocates cost between cost of goods sold and
inventory based on an average cost per unit.
4. Specific Identification - The inventory cost flow

method that assigns cost to cost of goods sold based
on the specific cost of each unit sold.
2. One advantage of the specific identification method is that

both the inventory account and cost of goods sold reflect
the actual amounts on hand and sold. This method is
usually required for high cost items such as automobiles,
boats, etc. One disadvantage of this method is that
recordkeeping can become burdensome for high-volume,
lower-priced items.
3. FIFO allocates the cost of the first units purchased to the

first units sold; consequently, in a period of rising prices,
this would produce a larger net income. This may be an
advantage for the purpose of financial reporting if
reporting a higher profit is desired. However, this is a
disadvantage for tax reporting because a higher profit
means paying more tax. FIFO also tends to best match
physical flow for most products.
4. LIFO allocates the cost of the last units purchased to the

first units sold; consequently, in a period of rising prices,
this would produce a smaller net income. This may be a
disadvantage for the purpose of financial reporting if
8-1
reporting a higher profit is desired. However, for tax
reporting, a lower profit means paying less tax.
5. In an inflationary period, i.e., a period where prices are

consistently rising, FIFO will produce the largest amount
of income. This is true because the items purchased first
(and at the lowest cost) are the items that are deemed
sold first (these are the items whose cost is charged to
expense). The highest cost items remain in the asset
account inventory. Since the lowest cost items have been
expensed, net income will be larger than it would
assuming a LIFO flow.
6. In an inflationary period, FIFO will produce the largest

amount of total assets. (Refer to the discussion for
Question 5.) The unsold items, inventory, are the highest
cost items. Consequently, assuming rising prices, FIFO
flow produces a higher inventory amount than would be
the case under a LIFO flow.
7. Flow of costs refers to the assumption that is made for the

purpose of determining the cost of inventory items that
are sold when preparing financial statements. The cost
flow assumption that a business makes may have nothing
to do with the actual flow of inventory into and out of the
business. The physical flow of goods refers to the actual
timing of when goods are sold. For example, a grocery
store may use a FIFO cost flow assumption for financial
statement purposes and this may reflect the physical flow
of some inventory items but not others. The grocer will
put the oldest detergent on the shelf for the customer to
purchase (FIFO) but may display the last produce
purchased (the freshest) for the customer to buy.
8. In a world where there is no income tax, the choice of cost

flow method would not affect the statement of cash flows
because it is simply allocating some of the cost of
inventory purchased to expense and the remainder to
assets. The statement of cash flows is affected when cash
is received for goods sold and when cash is paid for goods
purchased. However, most businesses do face income tax
consequences. In that situation, the difference in tax paid
8-2
based on each cost flow assumption would cause a
difference in the cash flow statement. In a period of rising
prices, LIFO would produce a smaller cash outflow for the
payment of tax, because a smaller amount of income tax
would be paid on a smaller amount of income.
8-3
9. Key Company (first year of operations):
Beginning inventory $ -0-
Merchandise purchased 1,000 units @ 25 25,000
Cost of Goods Sold 850 units @ 25 21,250
Ending Inventory 150 units @ 25 3,750
Cost of goods sold will be the same for all methods

because all items were purchased for the same cost.
Consequently, it will not make any difference whether the
first unit sold is assumed to be the first or last purchased.
Weighted average will also be the same.
10. The amount of cost of goods sold for Key Company will be
different using different cost flow assumptions because
the units purchased during the second year have a
different cost than those purchased the previous year.
Beginning inventory 150 units @ 25 $ 3,750

Merchandise purchased1,500 units @ 27 40,500
Total 1,650 $44,250
Units sold 1,500
FIFO: 150 units @ 25 $ 3,750

1,350 units @ 27 36,450
Cost of Goods Sold 1,500 $40,200
LIFO 1,500 units @ 27 $40,500

Cost of Goods Sold $40,500
Weighted Average: Total Cost ÷ Total Units = Cost per

unit
44,250 ÷ 1,650 = $26.82 per unit
Cost of Goods Sold: 1,500 units @ 26.82 = $40,230
11. It may be advantageous to use FIFO for financial

statement purposes because it produces the smallest cost
of goods sold and consequently, the largest gross margin
8-4
and net income. It also produces the largest amount of
assets. However, a larger net income produces a higher
income tax expense, so LIFO would be more desirable
strictly from an income tax perspective in that the cost of
goods sold would be larger, and consequently the net
income and income tax paid will be smaller. Since each
cost flow method is desirable for a specific group of users,
the cost flow assumptions chosen must be the best for the
business overall. A part of that consideration is the ease
of applying each method.
12. In an inflationary period, for a business subject to income

tax, LIFO would produce the larger amount of cash flow
because the smaller net income (larger cost of goods sold)
would result in a smaller amount of income tax being paid.
13. A deflationary period, i.e., a period of falling prices, would

produce results opposite of those for an inflationary
period. FIFO would produce the smallest amount of net
income, because the goods purchased first would cost
more than the goods purchased last. This would cause a
larger amount of cost to be expensed resulting in a lower
net income. LIFO would produce the largest net income.
14. When using a perpetual inventory system, each item

purchased is added to inventory and each item sold is
taken out of inventory. When using the periodic inventory
system, all items purchased are charged to a purchases
account. At the end of the period, a physical count is
made to determine the amount of goods in inventory.
15. "Lower of cost or market" is an accounting convention that

helps to reduce overstating inventory (assets) when the
market value of certain items has fallen below the original
cost. It is a conservative accounting measure that helps
to prevent any material misstatement of the asset
inventory.
16. For merchandise that has declined in value, the "lower of

cost or market" rule will cause a reduction in the asset
account inventory and result in an overall reduction of
8-5
total assets. This causes more cost to be shifted to cost of
goods sold, thus causing net income to be lower.
17. In certain situations it is not possible or practical to take a

complete inventory. One such situation is when the
inventory or part of it has been destroyed by some
disaster or similar event. Another situation where it is not
practical to take inventory is when monthly or quarterly
financial statements are prepared when the periodic
inventory method is used. It is not cost effective to
physically count inventory of any size on a regular basis.
In a third situation, when the periodic method is used,
inventory may be estimated on a monthly or weekly basis
to provide information for insurance coverage.
18. It is generally easier to manipulate net income when a

periodic inventory system is used. There is no accounting
for inventory at the time it is sold. There is very little
control over the inventory (as far as the accounting
records are concerned) except at the end of the year. The
only measurement available is the amount of inventory
still on hand. There is no control over the amount that
was sold, damaged, or stolen. In addition, if the inventory
is counted wrong or priced wrong, the amount of cost of
goods sold will also be determined incorrectly. For a
business owner wishing to manipulate profit, it is easy to
either overstate or understate the amount of ending
inventory.
19. Goods Available for Sale $123,000

Sales $130,000
Less: Estimated Gross
Margin ($130,000 x .25) (32,500)
Cost of Goods Sold (97,500)
Estimated Ending Inventory $
25,500
20. When using the periodic method, an overstated ending

inventory at the end of 2001 will result in an understated
cost of goods sold (expense). If cost of goods sold is
understated, then net income will be overstated. Since
the ending inventory used to compute cost of goods sold
8-6
is the same inventory that is listed as an asset on the
balance sheet, assets will also be overstated for 2001. In
addition, the ending inventory for 2001 is the beginning
inventory for 2002. If the beginning inventory is
overstated, the total cost of goods available for sale for
2002 will be overstated. Assuming the ending inventory is
correct for 2002, cost of goods sold will then be
overstated in 2002 because goods available for sale (more
specifically, beginning inventory was overstated). The
overstatement of cost of goods sold for 2002 will cause
gross margin and net income to be understated in 2002.
There is no effect on the 2002 balance sheet, assuming
the 2002 ending inventory is correct.
21. The inventory turnover tells the user how many times
average inventory has been sold during the year.
22. Discount merchandisers such as Wal-Mart and K-Mart
should have a high inventory turnover.
Specialty stores such as exclusive jewelers and antique
shops will have a low inventory turnover.
23. Operating Cycle = average number of days to sell

inventory + average number of days to collect receivables.
24. Historical cost information is used in financial statements

because it is reliable and objective, whereas market value
is often subjective and difficult to determine.
25. FASB requires market value information to be disclosed for

certain types of investment securities and inventory.
26. Market value of marketable investment securities is easy

to determine because the securities are traded daily in
established markets.
Some items of property, plant and equipment may be

difficult to value at FMV. Such items may not have a ready
market and accountants/management may not be able to
agree on an appraised value.
27. The two primary types of investment securities are debt

and equity securities.
8-7
28. A debt security is acquired by loaning assets to the
investee. Examples include bonds, notes, certificates of
deposit, and commercial paper.
29. An equity security is acquired when an investor gives

assets or services to an investee in exchange for an
ownership interest in the investee. Examples are common
and preferred stock.
30. The primary securities market is made up of transactions

directly between the investee and investors. The
secondary securities market refers to securities exchanges
between investors.
31. Marketable securities are those that are regularly traded

in established secondary markets.
32. The three categories of investment securities are:

Held-to-maturity: the investor has the intent and ability to
hold the securities until maturity.
Trading: securities that are bought and sold for the

purpose of generating profits on the short-term
appreciation of stock and/or bond prices.
Available-for-sale: all marketable securities not properly

classified as Held-to-Maturity or Trading.
33. The equity method must be used to account for

investments in equity securities when the investor
exercises significant influence (i.e., 20%-50% ownership)
over the investee.
8-8
SOLUTIONS TO EXERCISES - SERIES A - CHAPTER 8
EXERCISE 8-1A
a. FIFO
b. FIFO
c. FIFO
d. Weighted Average
e. LIFO
f. Weighted Average
g. LIFO
h. LIFO
8-9
EXERCISE 8-2A
Tyler Co.
First Purchase $3,000
Second Purchase 4,000
Total $7,000
(a) (b) (c)

FIFO LIFO W. AVG.
Cost of Goods Sold $3,000 $4,000 $3,500*
Ending Inventory 4,000 3,000 3,500*
*Average Cost per Unit: $3,000 + $4,000 = $7,000;

$7,000 ÷ 2 = $3,500
8-10
EXERCISE 8-3A
The Breckin Company
Inventory Purchases
Beginning Inventory 10 @ $40 = $
0 4,000
First Purchase 15 @ 60 = 9,000
0
Second Purchase 20 @ 68 = 13,600
0
Goods Available for 45 $26,60
Sale 0 0
a. Cost of Goods Sold:

Cost Cost of
FIFO Units per Goods
Unit Sold
From Beginning 100 @ $40 = $ 4,000
Inventory
From First Purchase 150 @ 60 = 9,000
From Second Purchase 10 @ 68 = 680
Total Units Sold 260 $13,680
Ending Inventory: 190 units @ Second Purchase Cost of $68

=
$12,920
b. Cost of Goods Sold:
Cost Cost of
LIFO Units per Goods
Unit Sold
From Second Purchase 200 @ $68 = $13,600
Ending Inventory: 190 units. 90 @ first purchase price $60

= $5,400
100 @ Beginning Inv. Cost of $40 =
$4,000
c. $9,400
8-11
Weighted Average:
Total Cost ÷ Total = Cost per Unit
Units
$26,600 ÷ 450 = $59.111
Cost of Goods Sold 260 @ $59.11 = $15,368.89

units 1
Ending Inventory: 190 @ $59.11 = $11,231.11
units 1
8-12
EXERCISE 8-4A
a. (1) Porter Company

FIFO
Sales (320 @ $30) $9,600
Cost of Goods Sold:
From Beginning 50 units @ = $ 500
Inv. $10
From Purchases 270 units @ = 4,050 (4,550)
$15
Gross Margin $5,050
a. (2)
LIFO
Sales (320 @ $30) $9,600
Cost of Goods Sold:
From Purchases 275 units @ = $4,125
$15
From Beg. Inv. 45 units @ = 450 (4,575)
$10
Gross Margin $5,025
a. (3)
Weighted Average
Sales (320 @ $30) $9,600
Cost of Goods Sold:
Average Cost per 320 @ = $4,554 (4,554)
Unit $14.23*
Gross Margin $5,046
*Total cost $4,625 ÷ Total units 325 = $14.23 Cost per unit
8-13
b. $25 ($5,050 − $5,025). The difference in net income
would be the same as the difference in gross margin,
assuming there are no income tax considerations.
8-14
EXERCISE 8-4A (cont.)
c.
FIFO LIFO W. Avg.
Cash Flows From Operating
Activities:
Cash Inflow from Customers $9,600 $9,600 $9,600
Cash Outflow for Inventory (4,625) (4,625) (4,625)
Net Cash Flow from Operating $4,975 $4,975 $4,975
Act.
Net cash flow from operating activities will be the same

for all three methods because the amount of cash from sales
and the amount of cash paid for inventory is the same
regardless of the method of cost flow assumed. If the
company were subject to income tax, the amount of cash paid
for tax expense would be different because the amount of
taxable income would be different.
8-15
EXERCISE 8-5A
McKee Sales
Summary of Purchase Transactions
1/20 Purchased 450 @ $20 = $
Units 9,000
4/21 Purchased 200 @ 24 = 4,800
Units
7/25 Purchased 100 @ 30 = 3,000
Units
9/19 Purchased 75 @ 18 = 1,350
Units
Available for 825 $18,15
Sale 0
a. (1)
Cost
FIFO Units per
Unit
Ending Inventory
From 9/19 75 @ $18 = $1,350
Purchase
From 7/25 25 @ $30 = 750
Purchase
Total Ending 100 $2,100
Inventory
a. (2)
LIFO Units Cost
per
Unit
Ending Inventory
From 1/20 100 @ $20 = $2,000
Purchase
Inventory
8-16
a. (3)
Weighted
Average
Total Cost ÷ Total Units = Cost per
Unit
$18,150 ÷ 825 = $22
Ending Inventory 100 units @ $22= $2,200
8-17
b.
FIFO
Sales (725 units @ $50) $36,250
Cost of Goods Sold
Cost of Goods Avail. for $18,150
Sale*
Less: Ending Inventory (2,100)
Gross Margin $20,200
LIFO
Sales (725 units @ $50) $36,250
Cost of Goods Sold
Sale*
Less: Ending Inventory (2,000)
*This amount is computed in the Summary of Purchase

Transactions at the beginning of the problem.
Difference in Gross Margin: $20,200 − $20,100 = $100
Note to Instructor: Cost of goods sold can be computed on a

units sold basis rather than subtracting ending inventory from
goods available for sale.
8-18
EXERCISE 8-6A
a.
Foley Company
Income Statements
FIFO
Sales (3,400 @ $68,000
$20)
Cost of Goods Sold:
From Beginning 500 units @ = $ 5,000
Inv. $10
From 4/1 2,500 units @ = 27,500
Purchase $11
From 10/1 400 units @ = 5,600
Purchase $14
Cost of Goods (38,100)
Sold
Gross Margin 29,900
Operating (17,000)
Expenses
Income Before Tax 12,900
Income Tax (30%) (3,870)
Expense
Net Income $ 9,030
LIFO
Sales (3,400 @ $68,000
$20)
Cost of Goods Sold:
From 10/1 800 units @ = $11,200
Purchase $14
From 4/1 2,500 units @ = 27,500
Purchase $11
From Beginning 100 units @ = 1,000
Inv. $10
8-19
Sold
Gross Margin 28,300
Operating (17,000)
Expenses
Income Tax (30%) (3,390)
Expense
Net Income $ 7,910
b. Income tax savings would be the difference between the

tax using FIFO and the tax using LIFO, or $3,870 − $3,390 =
$480.
c.
Foley Company
Cash Flows from Operating Activities
FIFO LIFO
Activities:
Cash Inflow from Customers $68,000 $68,000
Cash Outflow for Inventory* (38,700) (38,700)
Cash Outflow for Operating (17,000) (17,000)
Expenses
Cash Outflow for Income Tax (3,870) (3,390)
Expense
Net Cash Flow from Operating $ 8,430 $ 8,910
Activities
*Computation of cash paid for inventory:
4/1 Purchase 2,500 units @ $11 =$27,500

10/1 Purchase 800 units @ 14 = 11,200
$38,700
8-20
d. More income tax must be paid on the higher amount of net
income reported under FIFO.
8-21
EXERCISE 8-7A a.
Tiny Tots Company
Effect of Events on Financial Statements
Panel 1: FIFO Cost Flow
Even Cash + Inv. = C. Stk. + Ret. Rev. − Exp. = Net Cash Flows
t Ear. Inc.
1. 125,000 + NA = NA + 125,00 125,00 − NA = 125,00 125,000
0 0 0 OA
2. (35,000) + 35,000 = NA + NA NA − NA = NA (35,000)
OA
3. (28,500) + 28,500 = NA + NA NA − NA = NA (28,500)
OA
4. NA + (44,500 = NA + (44,500 NA − 44,50 = (44,50 NA
)1 ) 0 0)
5. (32,200) + NA = NA + (32,200 NA − 32,20 = (32,20 (32,200)
2
) 0 0) OA
Bal. 29,300 + 19,000 = NA + 48,300 125,00 − 76,70 = 48,300 29,300 NC
0 0
Panel 2: LIFO Cost Flow
Even Cash + Inv. = C. Stk + Ret. Rev. − Exp. = Net Cash Flows
t Ear. Inc.
1. 125,000 + NA = NA + 125,00 125,00 − NA = 125,00 125,000
0 0 0 OA
2. (35,000) + 35,000 = NA + NA NA − NA = NA (35,000)
OA
3. (28,500) + 28,500 = NA + NA NA − NA = NA (28,500)
OA
4. NA + (46,000 = NA + (46,000 NA − 46,00 = (46,00 NA
)3 ) 0 0)
5. (31,600) + NA = NA + (31,600 NA − 31,60 = (31,60 (31,600)
4
) 0 0) OA
8-22
Bal. 29,900 + 17,500 = NA + 47,400 125,00 − 77,60 = 47,400 29,900 NC
0 0
1
Cost of Goods Sold -- FIFO: 4/2 200 units @ $175 =$35,000
9/1 50 units @ $190 = 9,500
Total $44,500
2
Income Tax Expense: ($125,000 − $44,500) x 40% = $32,200.
3
Cost of Goods Sold -- LIFO: 9/1 150 units @ $190 = $28,500
4/2 100 units @ $175 = 17,500
Total $46,000
4
Income Tax Expense ($125,000 − $46,000) x 40% = $31,600.
8-23
b. Net Income assuming FIFO cost flow: $48,300 (see

statements model above).
c. Net Income assuming LIFO cost flow: $47,400 (see

d. LIFO produces a lower income tax of $600 ($32,200 −

$31,600). This results because a larger amount of
inventory is expensed resulting in a lower income before
tax. The last purchase was bought at a higher price than
the first purchase.
e. The difference in cash flow from operating activities is

caused by the difference in income tax paid of $600.
LIFO will produce a larger cash flow because there was
$600 less income tax paid.
8-24
EXERCISE 8-8A
a.
Nikols Company - General Journal
Date Account Titles Debit Credit
1/1/04 Merchandise Inventory (250 @ 2,500
$10)
Cash 2,500
4/1a Cash (125 @ $18) 2,250
Sales Revenue 2,250
4/1b Cost of Goods Sold (125 @ 1,375
$11)
Merchandise Inventory 1,375
8/1 Merchandise Inventory (400 @ 4,400
$11)
Cash 4,400
12/1a Cash (500 @ $19) 9,500
Sales Revenue 9,500
12/1b Cost of Goods Sold* 5,250
*Cost of Goods Sold: 50 @ $11 = $ 550
250 @ $10 = 2,500
200 @ $11 = 2,200
$5,250
b. Ending Inventory: 200 units @ $11 = $2,200.
8-25
EXERCISE 8-9A
a.
Spring Hill, Inc.
Date Purchased Sold Inventory Balance
Units Cost Total Units Cost Total Units Cost Total
1/1 Beg. 50 @ $20 = $1,000

Inv.
50 @ $20 = $1,000
3/15 Pur. 200 $24 = $4,800 200 @ $24 = $4,800
@
5/30 Sold 50 @ $20 = $1,000 -0-

120 $24 = $2,880 80 @ $24 = $1,920
@
80 @ $24 = $1,920
8/10 Pur 275 $25 = $6,875 275 @ $25 = $6,875
@
11/20 80 @ $24 = $1,920 -0-

Sold
260 @ $25 = $6,500 15 @ $25 = $375
Ending Inventory: 15 units @ $25 = $375
b. A problem arises when LIFO is applied to intermittent

sales and purchase transactions. LIFO requires that the
unit cost of the last purchase be applied to the first units
sold. However, at the time of the first sale, that cost is
not known. This problem is often overcome by recording
only quantities of units sold on a perpetual basis. At the
end of the accounting period, costs are then assigned
perpetually to the units that have been sold.
8-26
EXERCISE 8-10A
a.
Auto Parts, Co.
a. b. c. d. e. f. g. h.
Unit Ind.
Cost Mkt. Lower Total Total Item
I Quanti Per Val. Cost/Mk Cost Market Lower
tem ty Unit per t. Cost/Mk
Unit t.
(b x c) (b x d) (b x e)
P 100 $4 $3 $3 $400 $300 $300
D 50 5 4 4 250 200 200
S 20 6 7 6 120 140 120
J 15 5 4 4 75 60 60
$845 $700 $680
1. Ending inventory using the individual item method: $680

2. Ending inventory using the aggregate method: $700
b.
1. Cost of Goods Sold* 165
Merchandise Inventory 165
2. Cost of Goods Sold** 145
*$845 − $680 = $165

**$845 − $700 = $145
8-27
EXERCISE 8-11A
a.
a. b. c. d. e. f. g.
Cost Market Unit Total Total
Item Quantit Per Per Unit Lower Cost Lower
y Unit Cost/Mkt. Cost/Mkt.
(b x c) (b x e)
O 200 $10 $9 $9 $2,000 $1,800
J 250 15 14 14 3,750 3,500
R 175 5 8 5 875 875
Totals $6,625 $6,175
The inventory would be carried at $6,175, the lower of cost

or market applied to individual inventory items.
b. Under the periodic method, the amount of ending inventory

would be shown at the lower of cost or market in the
schedule of cost of goods sold. By lowering the ending
inventory, cost of goods sold is increased. The loss is
automatically included in cost of goods sold.
8-28
EXERCISE 8-12A
Rick’s Fishing Supplies
a. Gross Margin: Sales x Gross Margin %

$550,000 x 20% = $110,000
b. Cost of Goods Sold: Sales x Cost of Goods Sold %

$550,000 x 80% = $440,000
c. Computation of Ending Inventory:
Beginning Inventory $100,000

Plus: Purchases 400,000
Goods Available for Sale 500,000
Less: Cost of Goods Sold (Est.) (440,000)
Ending Inventory (Est.) $ 60,000
d. Lost Inventory: Estimated Ending Inventory $60,000

Less: Undamaged Inventory (8,000)
Inventory Lost $52,000
EXERCISE 8-13A
June 14 Inventory Account $164,000

Balance
Less: Cost of Unrecorded Sale (21,000)
Balance in the Warehouse 143,000
Less: 5% Shrinkage (7,150)
Less: Amount of Inventory in (37,500)
Showroom
Inventory Lost $ 98,350
8-29
8-30
EXERCISE 8-14A
Marshall Company
The uncounted inventory will only affect The Marshall

Company’s financial statements if the book amount of the
inventory is actually written down to the counted amount.
The perpetual system records the actual amount of goods as
they are purchased and sold. However, if an adjustment is
actually made on the books, the reduction in inventory would
cause cost of goods sold to be overstated, gross margin and
net income to be understated, and total assets and total
stockholders’ equity to be understated.
EXERCISE 8-15A
Tedall Company
Item Year Amount Affected Effect
Number
1. 2005 Beginning Inventory NA
2. 2005 Purchases NA
3. 2005 Goods Available for NA
Sale
4. 2005 Cost of Goods Sold Overstated
5. 2005 Gross Margin Understated
6. 2005 Net Income Understated
7. 2006 Beginning Inventory Understated
9. 2006 Goods Available for Understated
Sale
10. 2006 Cost of Goods Sold Understated
11. 2006 Gross Margin Overstated
12. 2006 Net Income Overstated
8-31
EXERCISE 8-16A
Asset FMV LCM HC/AC

Buildings X
Available-for-Sale X
Securities
Office Equipment X
Inventory X
Supplies X
Land X
Trading Securities X
Cash X X
Held-to-Maturity X
Securities
8-32
EXERCISE 8-17A
a.
Balance Sheet Income Statement Stmt. of
Type C + Inv. = Liab + S. R − E Net Cash
ash Sec. . Equity ev. xp. Inc. Flows
Held − + NA NA NA NA NA −IA
Trading − + NA NA NA NA NA −OA
Availabl − + NA NA NA NA NA −IA
e
b.
Martinez Brothers
Computation of Net Income
Held-to- Availabl
Classified as: Maturity Trading e-for-
Sale
Revenue $5,000 $5,000 $5,000
Expenses (1,500) (1,500) (1,500)
Unrealized Loss -0- (1,500) -0-
Net Income $3,500 $2,000 $3,500
8-33
EXERCISE 8-18A a.
Tony Electronics
Horizontal Statements Models
(1) Held-to-Maturity
Balance Sheet Income Statement Statement
Unreal. Rev./ Exp./ of
Even Cash + Inv. = Liab. + Ret. + Gain. Gain − Loss = Net Inc. Cash Flows
t Sec. Ear.
1. (150,000 + 150,00 = NA + NA + NA NA − NA = NA (150,000)
) 0 IA
2. 9,000 + NA = NA + 9,000 + NA 9,000 − -0- = 9,000 9,000
OA
3. 30,000 + (25,00 = NA + 5,000 + NA 5,000 − -0- = 5,000 30,000 IA
0)
4. NA + NA = NA + NA + NA NA − NA NA NA
Tot. (111,000 + 125,00 = -0- + 14,000 + -0- 14,000 − -0- = 14,000 (111,000)
) 0 NC
(2) Trading
Unre Rev./ Exp./
Even Cash + Inv. = Liab + Ret. + al. Gain − Loss = Net Inc. Cash Flow
t Sec. . Ear. Gain
1. (150,00 + 150,00 = NA + NA + NA NA − NA = NA (150,000)
0) 0 OA
2. 9,000 + NA = NA + 9,000 + NA 9,000 − NA = 9,000 9,000 OA
3. 30,000 + (25,00 = NA + 5,000 + NA 5,000 − NA = 5,000 30,000 OA
0)
4. NA + (25,00 = NA + (25,00 + NA NA − 25,000 = (25,000 NA
0) 0) )
Tot. (111,00 + 100,00 = -0- + (11,00 + -0- 14,00 − 25,000 = (11,000 (111,000)
0) 0 0) 0 ) NC
(3) Available-for-Sale
8-34
Unreal. Rev./ Exp.
Even Cash + Inv. = Liab + Ret. + Gain Gain − / = Net Cash Flow
t Sec. . Ear. Loss Inc.
1. (150,00 + 150,00 = NA + NA + NA NA − NA = NA (150,000) IA
0) 0
2. 9,000 + NA = NA + 9,000 + NA 9,000 − NA = 9,000 9,000 OA
3. 30,000 + (25,00 = NA + 5,000 + NA 5,000 − NA = 5,000 30,000 IA
0)
4. NA + (25,00 = NA + NA + (25,000 NA − NA = NA NA
0) )
Tot. (111,00 + 100,00 = -0- + 14,000 + (25,000 14,000 − -0- = 14,000 (111,000)
0) 0 ) NC
8-35
b. Held-to-Maturity $14,000
Trading $(11,000)
Available-for-Sale $14,000
c. The amount of change in cash from these activities is the

same for all three classifications ($111,000). Held-to-
maturity and available-for-sale securities each had net
cash inflows from operating activities of $9,000, while
trading securities had a net cash outflow of $111,000
from operating activities.
d. The amount of net income and the amount of cash flow

from operating activities is different for those securities
classified as trading from those classified as held-to-
maturity or as available-for-sale. The difference is caused
by the recognition of the unrealized loss on the income
statement for trading securities and treating investments
in trading securities as an operating activity rather than an
investing activity. The gain on the sale increased net
income by $5,000 in each case.
8-36
EXERCISE 8-19A
Transactions are recorded in the accounting equation for the

use of the instructor.
Assets = Stockholders’ Equity
Event Cash + Inv. = C. Stock + Ret. + Unreal.

Sec. Earn. Gain
Beg. Bal. 80,000 80,000 -0- -0-
1. Pur. Sec. (40,000 40,000 -0- -0- -0-
)
2. Inv. Rev. 1,200 -0- -0- 1,200 -0-
3. Sold Sec 16,000 (12,000) -0- 4,000 -0-
4. Pur. Sec. (18,000 18,000 -0- -0- -0-
)
Totals 39,200 46,000 80,000 5,200 -0-
5. Mkt. Val. if -0- -0- -0- -0- -0-
HM
5. Mkt. Val. if -0- 2,000 -0- 2,000 -0-
TR
5. Mkt. Val. if -0- 2,000 -0- -0- 2,000
AS
8-37
Poort Inc.
Financial Statements For Year Ending 2001
Classified as: Held Trading Availabl
e
Income Statements
Investment Revenue $1,200 $ 1,200 $ 1,200
Realized Gain 4,000 4,000 4,000
Unrealized Gain -0- 2,000 -0-
Net Income $5,200 $7,200 $5,200
Balance Sheets
Assets
Cash $39,200 $39,200 $39,200
Investment Securities 46,000 48,000 48,000
Total Assets $85,200 $87,200 $87,200
Stockholders’ Equity
Common Stock $80,000 $80,000 $80,000
Retained Earnings 5,200 7,200 5,200
Unrealized Gain -0- -0- 2,000
Total Stockholders’ Equity $85,200 $87,200 $87,200
Statements of Cash Flows
Act.:
Inflow from Invest. $ 1,200 $ 1,200 $
Revenue 1,200
Outflow to Purchase -0- (58,000) -0-
Securities
Inflow from Sale of -0- 16,000 -0-
Securities
Net Cash Inflow from Oper. 1,200 (40,800) 1,200
Act.
Cash Flows From Investing
Act.:
Outflow to Purchase (58,000) -0- (58,000)
Securities
Inflow from Sale of 16,000 -0- 16,000
Securities
8-38
Net Cash Flow from (42,000) -0- (42,000)
Investing Act.
Cash Flows From Financing -0- -0- -0-
Act.
Net Change in Cash (40,800) (40,800) (40,800)
Plus: Beginning Cash 80,000 80,000 80,000
Balance
Ending Cash Balance $39,200 $39,200 $39,200
8-39
EXERCISE 8-20A
Recognition
of Unrealized Cash Flow
Investme Types of Types Value Gains/Losses from Purchase
nt Securiti of Reported on Income Stmt. or Sale
Category es Revenu Balance Sheet Classified As
e
Held Debt Intere Amortized No Investing

st Cost Act.
Debt & Intere
Trading Equity st & Market Value Yes Operating
Div. Act.
Debt & Intere
Availabl Equity st & Market Value No Investing
e Div. Act.
8-40
SOLUTIONS TO PROBLEMS - SERIES A - CHAPTER 8
PROBLEM 8-21A
Sharp Photography Inc.
Inventory Purchases
Beginning Inventory 15 @ $110 = $16,50
0 0
0
0
Total 47 $46,70
0 0

Cost Cost of
FIFO Units per Goods
Unit Sold
From Beginning 150 @ $110 = $16,500
Inventory
From Second Purchase 30 @ 100 = 3,000
Ending Inventory:
Cost Ending
FIFO Units per Inventory
Unit
From Second Purchase 170 @ 100 = $17,000
Cost of Goods Sold:

Cost Cost of
LIFO Units per Goods
Unit Sold
Ending Inventory:
8-41
LIFO
From Beginning 150 @ 110 = $16,500
Inventory
Total Ending Inventory $18,200
8-42
PROBLEM 8-21A a. (cont.)
Weighted Average
Units
$46,700 ÷ 470 = $99.362
Weighted Average
Cost of Goods Sold: 300 @ $99.36 = $29,809
units 2
Ending Inventory: 170 @ $99.36 = $16,891
units 2
b.

Weighte
FIFO LIFO d
Average
Sales (300 units @ $185) $55,500 $55,500 $55,500
Cost of Goods Sold (29,700) (28,500) (29,809)
Gross Margin 25,800 27,000 25,691
Operating Expenses (12,000) (12,000) (12,000)
Income Before Tax 13,800 15,000 13,691
Income Tax (40%) (5,520) (6,000) (5,476)
Net Income $ 8,280 $ 9,000 $ 8,215
Weighte
FIFO LIFO d
Average
Income Tax Expense $5,520 $6,000 $ 5,476
Net Income 8,280 9,000 8,215
8-43
8-44
PROBLEM 8-21A (cont.)
c. The Accounting Equation is provided for the use of the

instructor.
Assets = Stockholders’
Equity
Event Cash Inventor = Com Ret.
y Stock Earn.
FIFO Cost Flow
Beginning Balance $22,000 $16,500 $14,300 $24,200
1. First Purchase (10,200) 10,200
2. Second Purchase (20,000) 20,000
3a. Sale of 55,500 55,500
Inventory
3b. Cost of Goods (29,700) (29,700)
Sold
4. Paid Oper. (12,000) (12,000)
Expenses
5. Paid Income Tax (5,520) (5,520)
Totals $29,780 $17,000 = $14,300 $32,480
LIFO Cost Flow
1. First Purchase (10,200) 10,200
3a. Sale of 55,500 55,500
Inventory
3b. Cost of Goods (28,500) (28,500)
Sold
4. Paid Oper. (12,000) (12,000)
Expenses
5. Paid Income Tax (6,000) (6,000)
Totals $29,300 $18,200 = $14,300 $33,200
Weighted Average
1. First Purchase (10,200) 10,200
3a. Sale of 55,500 55,500
8-45
Inventory
3b. Cost of Goods (29,809) (29,809)
Sold
4. Paid Oper. (12,000) (12,000)
Expenses
5. Paid Income Tax (5,476) (5,476)
Totals $29,824 $16,891 = $14,300 $32,415
8-46
PROBLEM 8-21A (cont.) c.
Financial Statements
For Year Ended December 31, 2007
FIFO LIFO Weight.
Av.
Income Statements
Sales $55,500 $55,500 $55,500
Gross Margin 25,800 27,000 25,691
Income Tax Expense (5,520) (6,000) (5,476)
Net Income $ 8,280 $ 9,000 $ 8,215
Balance Sheets
Assets
Cash $29,780 $29,300 $29,824
Merchandise Inventory 17,000 18,200 16,891
Total Assets $46,780 $47,500 $46,715
Common Stock $14,300 $14,300 $14,300
8-47
PROBLEM 8-21A c. (cont.)

For the Year Ended December 31, 2007
FIFO LIFO Weight.
Av.
Cash Flows From Operating.
Act.:
Cash Inflow from $55,500 $55,500 $55,500
Customers
Cash Outflow for (30,200) (30,200) (30,200)
Inventory
Cash Outflow for Oper. (12,000) (12,000) (12,000)
Exp.
Cash Outflow for Income (5,520) (6,000) (5,476)
Tax
Net Cash Flow from Oper. 7,780 7,300 7,824
Act.
Cash Flows From Investing -0- -0- -0-
Act.
Act.
Net Change in Cash 7,780 7,300 7,824
Balance
8-48
PROBLEM 8-22A
Provided for the use of the instructor:

Milan, Inc.
Sales and Purchase Transactions for 2006
Sales Purchases Cost of Goods Sold Inventory

Price = Cost Cost Unit Cost
Date Unit Per Total Unit Per Total Unit per Total s per Total
s Unit s Unit s Unit Unit
1/1 80 @120 = $ 9,600
80 @$120 = $ 9,600
3/5 80 @$125 = $10,00 80 @$125 = $10,000
0
4/10 60 @$245 = $14,70 60 @$12 = $ 20 @$120 = $ 2,400

0 0 7,200 80 @$125 = $10,000
6/19 70 @$245 = $17,15 20 @$12 = $

0 50 0 = 2,400 30 @$125 = $ 3,750
@$12 $
5 6,250
30 @$125 = $ 3,750
9/16 60 @$130 = $ 60 @$130 = $ 7,800
7,800
11/2 55 @$255 = $14,02 30 @$12 = $

8 5 25 5 = 3,750 35 @$130 = $ 4,550
@$13 $
0 3,250
Total Sales = $45,87 COGS = $22,85 End $ 4,550

s 5 0 Inv.
8-49
8-50
a.
Milan, Inc.
General Journal, 2006
3/5 Merchandise Inventory 10,000
Cash 10,000
4/10 Cash 14,700
Sales 14,700
4/10 Cost of Goods Sold* 7,200
6/19 Cash 17,150
Sales 17,150
9/16 Merchandise Inventory 7,800
Cash 7,800
11/28 Cash 14,025
Sales 14,025
*See schedule above for computation.
b. Sales $45,875
c. Ending Inventory: $4,550 (See computation above)
8-51
PROBLEM 8-23A
DOT Computer Repair

Individual Item
Lower of Cost or
Market
Unit Unit Total Total LCM
Item Quanti Cost Mark Cost Marke Unit per Unit Total
ty et t s
D1 60 $30 $35 $1,80 $2,10 60 @ $30 $1,800
0 0
D2 30 55 50 1,650 1,500 30 @ $50 1,500
D3 44 40 55 1,760 2,420 44 @ $40 1,760
D4 40 50 35 2,000 1,400 40 @ $35 1,400
$7,21 $7,42 $6,460
0 0
a. $6,460
b.
Debit Credit
Cost of Goods Sold (Inventory 750
Loss)*
*$7,210 − $6,460 = $750
c. $7,210
d. No entry; Cost is lower than market.
e. Under the periodic system, the amount of ending

inventory would be shown at the lower of cost or market
in the schedule of cost of goods sold. By lowering the
ending inventory, cost of goods sold is increased. Any
loss is automatically included in cost of goods sold.
8-52
PROBLEM 8-24A
a. 1. Estimated Gross Margin:
Sales x Gross Margin %: $520,000 x .25 = $130,000
2. Estimated Cost of Goods Sold:
Sales − Gross Margin: $520,000 − $130,000= $390,000

Or:
Sales x Cost of Goods Sold %: $520,000 x 75% =
$390,000
3. Estimated Inventory at September 21:
Beginning Inventory $ 68,000

Less: Cost of Goods Sold (390,000)
Ending Inventory $ 28,000
b. Loss: Total Inventory $28,000

Less: Undamaged (8,000)
Total Loss $20,000
c. Under the perpetual inventory system, if records are

maintained accurately, the balance in the inventory
account should be equal to the amount of the inventory
on hand at the time of the loss. Any differences would be
attributable to lost, stolen, or damaged goods.
8-53
PROBLEM 8-25A
Lexington Company
2004 2005 Total
Net Sales $140,000 $200,00 $340,000
0
Cost of Goods Sold (62,000) (90,000) (152,000
)
Gross Margin 78,000 110,000 188,000
Gross Margin % $188,000 ÷ $340,00 = 55%

0
Cost of Goods Sold 152,000 ÷ 340,00 = 45%
% 0
a. Computation of Gross Margin:
Sales $240,000
Less: Sales Discounts (10,000)
Net Sales 230,000
x Gross Margin % 55%
b. Computation of Ending Inventory:

Plus: Transportation-In 4,000
Goods Available for Sale224,000
Less: Cost of Goods Sold (103,500)*
Ending Inventory $120,500
*$230,000 x 45% = $103,500
8-54
PROBLEM 8-26A
Error No.1 Amount of Effect

Error
Sales, 2002 NA NA
Ending Inventory, NA NA
12/31/02
Gross Margin, 2002 $1,400 −
Beginning Inventory, NA NA
1/1/03
Cost of Goods Sold, 1,400 +
2002
Net Income, 2002 NA NA
Retained Earnings, NA NA
12/31/02
Total Assets, 12/31/02 NA NA
Error No. 2 Amount of Effect

Error
Sales, 2002 $2,400 −
Ending Inventory, 1,344 +
12/31/02
Gross Margin, 2002 1,056 −
Beginning Inventory, 1,344 +
1/1/03
Cost of Goods Sold, 1,344 −
2002
Net Income, 2002 1,056 −
Retained Earnings, 1,056 −
12/31/02
Total Assets, 12/31/02 1,056 −

Error
Sales, 2002 NA NA
8-55
Ending Inventory, $1,200 −
12/31/02
Beginning Inventory, 1,200 −
1/1/03
2002
Net Income, 2002 1,200 −
12/31/02
Total Assets, 12/31/02 1,200 −
8-56
PROBLEM 8-27A
(a). Held-to-Maturity
T-Accounts
Cash Investment Sec. Common Stock
1. 20,000 3. 20,000 3. 20,000 8. 5,000 1. 20,000
2. 60,000 4. 19,000 6. 12,000 Bal.
20,000
5. 400 6. 12,000 Bal.
27,000
8. 6,300 7. 2,000 Dividends
9. 1,000 7. 2,000
Bal. Bal.2,000
34,700
Service Revenue
2. 60,000
Bal.
60,000
Investment Income
5. 400
9. 1,000
Bal. 1,400
Gain on Sale of
Invest.
8.
1,300
Bal.
1,300
Operating
Expenses
4. 19,000
Bal.
19,000
8-57
(b). Trading
T-Accounts
1. 20,000 3. 20,000 3.20,000 8. 5,000 1. 20,000
2. 60,000 4. 19,000 6.12,000 Bal.
20,000
5. 400 6. 12,000 10.
13,000
8. 6,300 7. 2,000 Bal. Dividends
40,000
9. 1,000 7. 2,000
Bal. Bal.2,000
34,700
Service Revenue
2. 60,000
Bal.
60,000
Investment Income
5. 400
9. 1,000
Bal. 1,400
Gain on Sale of
Invest.
8. 1,300
Bal. 1,300
Operating Expenses
4. 19,000
Bal.
19,000
(Income Account)
Unrealized
Gain/Loss
10.13,000
Bal.
8-58
13,000
8-59
(c). Available-for-Sale
T-Accounts
Cash Investment Common Stock
Securities
1. 20,000 3. 20,000 3. 20,000 8. 5,000 1. 20,000
2. 60,000 4. 19,000 6. 12,000 Bal.
20,000
5. 400 6. 12,000 10.
13,000
8. 6,300 7. 2,000 Bal. Dividends
40,000
9. 1,000 7. 2,000
Bal. Bal.
34,700 2,000
(Equity Account)
Unrealized
Gain/Loss
10.
13,000
Bal.
13,000
Service Revenue
2. 60,000
Bal.
60,000
Investment
Income
5. 400
9. 1,000
Bal. 1,400
Gain on Sale of
Invest.
8. 1,300
Bal. 1,300
8-60
Operating
Expenses
4. 19,000
Bal.
19,000
8-61
Best Answering Service

Comparative Financial Statements
For the Year Ended 2007
Investment Securities Held Trading Availabl
Classified As e
Income Statements
Services Revenue $60,00 $60,000 $60,000
0
Operating Expenses (19,00 (19,000 (19,000
0) ) )
Net Operating Income 41,000 41,000 41,000
Investment Revenue 1,400 1,400 1,400

Realized Gains 1,300 1,300 1,300
Unrealized Gains -0- 13,000 -0-
Net Income $43,70 $56,700 $43,700

0
Balance Sheets
Assets
Cash $34,70 $34,700 $34,700
0
Investment Securities @ 27,000 -0- -0-
Cost
Investment Securities @ -0- 40,000 40,000
Market
Total Assets $61,70 $74,700 $74,700
0
Common Stock $20,00 $20,000 $20,000
0
8-62
0
8-63
Best Answering Service

Classified as e
Act.:
Cash Inflow from $60,00 $60,000 $60,00
Customers 0 0
Cash Inflow from Invest. 1,400 1,400 1,400
Rev.
Outflow for Expenses (19,00 (19,000 (19,000
0) ) )
Outflow to Purchase -0- (32,000 -0-
Securities )
Securities
Act.

Act.:
Outflow to Purchase (32,00 -0- (32,000
Securities 0) )
Securities
Net Cash Flow from Investing (25,70 -0- (25,700
Act. 0) )
Cash Flows From Financing
Act.:
Inflow from Stock Issue 20,000 20,000 20,000
Outflow for Dividends (2,000) (2,000) (2,000)
Net Cash Flow from 18,000 18,000 18,000
Financing Act.
Net Change in Cash $34,70 $34,700 $34,70
8-64
0 0
Plus: Beginning Cash Balance -0- -0- -0-
0
8-65
PROBLEM 8-28A
a.
Even Asset = Liab. + S. Rev. − Exp. = Net Cash
t s Equity Inc. Flow
1. + NA + NA NA NA + FA
2. + + NA NA NA NA NA
3. +− NA NA NA NA NA − OA
4. − NA − NA + − NA
5. − NA − NA NA NA NA
6. NA NA NA NA NA NA NA
7. − NA − NA + − NA
9. − NA − NA + − NA
10. − NA − NA + − NA
b. The directional effect is the same for events 9 and 10. In

both transactions, inventory was reduced and an expense
was recorded that decreased stockholders’ equity.
However, the amounts would be different during periods of
changing prices.
8-66
SOLUTIONS TO EXERCISES - SERIES B - CHAPTER 8
EXERCISE 8-1B
a. FIFO
b. LIFO
c. FIFO
d. LIFO
e. Weighted Average
8-67
EXERCISE 8-2B
Spruell Co.
First Purchase $ 750
Second Purchase 1,000
Total $1,750
(a) (b) (c)

FIFO LIFO W. AVG.
Cost of Goods Sold $ 750 $1,000 $875*
Ending Inventory 1,000 750 875*
*Average Cost per Unit: $ 750 + $1,000 = $1,750;

$1,750 ÷ 2 = $875
8-68
EXERCISE 8-3B
The Perez Company Inventory Purchases
Beginning Inventory 10 @ $40 = $
0 4,000
0
0
Goods Available for 45 $23,50
Sale 0 0
a.
Cost of Goods Sold:
FIFO Unit Unit Cost of Goods
s Cost Sold
From Beginning 100 @ $40 = $ 4,000
Inventory
From Second 10 @ 60 = 600
Purchase
Ending Inventory:
FIFO Unit Unit Ending Inventory
s Cost
From Second 190 @ $60 = $11,400
Purchase
b. Cost of Goods Sold
LIFO Unit Unit Cost of Goods
s Cost Sold
From Second 200 @ $60 = $12,000
Purchase
Ending Inventory
LIFO Unit Unit Ending Inventory
s Cost
From Beginning 100 @ $40 = $4,000
Inventory
8-69
Inventory
c.
Weighted Average:
Units
$23,500 ÷ 450 = $52.222
Cost of Goods Sold 260 @ $52.22 = $13,577.7

units 2 2
Ending Inventory: 190 @ $52.22 = $9,922.18*
units 2
*.10 difference due to rounding
8-70
EXERCISE 8-4B
a. (1) Parker Company
FIFO
Sales (210 @ $50) $10,50
0
Cost of Goods Sold:
From Beginning 40 units @ = $ 800
Inv. $20
From Purchases 170 units @ = 4,250 ( 5,050)
$25
Gross Margin $ 5,450
a. (2)
LIFO
Sales (210 @ $50) $10,50
0
Cost of Goods Sold:
From Purchases 200 units @ = $5,000
$25
From Beg. Inv. 10 units @ = 200 (5,200)
$20
a. (3)
Weighted Average
Sales (210 @ $50) $10,50
0
Cost of Goods Sold:
Average Cost per 210 @ = $5,075 ( 5,075)
Unit $24.1671 2

1
Total cost ($800 + $5,000) $5,800 ÷ Total units 240 = $24.167
Cost per unit
2
Rounded to the nearest dollar.
8-71
b. The difference between net income using FIFO and LIFO is
$150 ($5,450 − $5300). The difference between FIFO and
Weighted Average is $25 ($5,450 − $5,425). The difference
in the net incomes would be the same as the difference in
gross margins, assuming there are no income tax
considerations.
8-72
EXERCISE 8-4B (cont.)
c.
Ending Inventory
FIFO 30 @ $25 = $750
LIFO 30 @ $20 = 600
Weighted 30 @= 725
Average $24.167
8-73
EXERCISE 8-5B
King Sales
Summary of Purchase Transactions
1/20 Purchased 450 @ $5 = $2,250
Units
4/21 Purchased 200 @ 6 = 1,200
Units
7/25 Purchased 100 @ 10 = 1,000
Units
9/19 Purchased 75 @ 8 = 600
Units
Available for 825 $5,050
Sale
a. (1)
FIFO Units Unit Cost Total
Ending Inventory
From 9/19 75 @ $8 $600
Purchase
From 7/25 25 @ $10 250
Purchase
Total Ending 100 $850
Inventory
a. (2)
LIFO Units Unit Cost Total
Ending Inventory
From 1/20 100 @ $5 $500
Purchase
Total Ending 100 $500
Inventory
a. (3)
Weighted Average
Total Cost ÷ Total Units = Cost per Unit
8-74
$5,050 ÷ 825 = $6.12
Ending Inventory 100 units @ $6.12 = $612
8-75
b.
FIFO
Sales (725 units @ $20) $14,500
Cost of Goods Sold
Sale*
Less: Ending Inventory (850)
LIFO
Sales (725 units @ $20) $14,500
Cost of Goods Sold
Sale*
Less: Ending Inventory (500)
*This amount is computed in the Summary of Purchase

Transactions at the beginning of the problem.
Difference in Gross Margin: $10,300 − $9,950 = $350
Note to Instructor: Cost of goods sold can be computed on a

units sold basis rather than subtracting ending inventory from
goods available for sale.
8-76
EXERCISE 8-6B
a.
Market Company
Income Statements
FIFO
Sales (3,400 @ $136,00
$40) 0
Cost of Goods Sold:
From Beginning 500 units @ = $10,000
Inv. $20
From 4/1 2,500 units @ = 55,000
Purchase $22
From 10/1 400 units @ = 11,200
Purchase $28
Sold
Gross Margin 59,800
Operating (34,000)
Expenses
Income Tax (30%) (7,740)
Expense
Net Income $
18,060
LIFO
Sales (3,400 @ $136,00
$40) 0
Cost of Goods Sold:
From 10/1 800 units @ = $22,400
Purchase $28
From 4/1 2,500 units @ = 55,000
Purchase $22
From Beginning 100 units @ = 2,000
Inv. $20
8-77
Sold
Gross Margin 56,600
Operating (34,000)
Expenses
Income Tax (30%) (6,780)
Expense
Net Income $
15,820
b. Income tax paid using FIFO: $7,740

Income tax paid using LIFO: $6,780
c.
Market Company
Cash Flows from Operating Activities
FIFO LIFO
Activities:
Cash Inflow from Customers $136,00 $136,000
0
Cash Outflow for Inventory* (77,400) (77,400)
Cash Outflow for Operating (34,000) (34,000)
Expense
Cash Outflow for Income Tax (7,740) (6,780)
Expense
Net Cash Flow from Operating $ $
Activities 16,860 17,820
*Computation of cash paid for inventory:
4/1 Purchase 2,500 units @ $22 =$55,000

10/1 Purchase 800 units @ 28 = 22,400
8-78
$77,400
d. The difference in cash flow from operating activities

between FIFO and LIFO is caused by the difference in income
tax paid for the two methods. Taxable income is greater by
using FIFO; consequently more income tax will be paid
causing a greater cash outflow for tax expense.
8-79
EXERCISE 8-7B a
West Coast Company
Effect of Events on Financial Statements
Panel 1: FIFO Cost Flow
Even Cash + Inv. = C. + Ret. Ear. Rev. − Exp. = Net Inc. Cash Flows
t Stk.
1. 250,000 + NA = NA + 250,000 250,00 − NA = 250,000 250,000 OA
0
2. (70,000) + 70,000 = NA + NA NA − NA = NA (70,000) OA
3. (56,250) + 56,250 = NA + NA NA − NA = NA (56,250) OA
4. NA + (88,750 = NA + (88,750 NA − 88,750 = (88,750 NA
)1 ) )
5. (64,500) + NA = NA + (64,500) NA − 64,500 = (64,500 (64,500) OA
2
)
Bal. 59,250 + 37,500 = NA + 96,750 250,00 − 153,25 = 96,750 59,250 NC
0 0
Panel 2: LIFO Cost Flow
Even Cash + Inv. = C. + Ret. Rev. − Exp. = Net Inc. Cash Flows
t Stk. Earn.
1. 250,000 + NA = NA + 250,000 250,00 − NA = 250,000 250,000 OA
0
2. (70,000) + 70,000 = NA + NA NA − NA = NA (70,000) OA
3. (56,250) + 56,250 = NA + NA NA − NA = NA (56,250) OA
4. NA + (91,250 = NA + (91,250 NA − 91,250 = (91,250 NA
)3 ) )
5. (63,500) + NA = NA + (63,500 NA − 63,500 = (63,500 (63,500) OA
4
) )
Bal. 60,250 + 35,000 = NA + 95,250 250,00 − 154,75 = 95,250 60,250 NC
0 0
1
Cost of Goods Sold -- FIFO: 4/2 200 units @ $350 =$70,000
8-80
9/1 50 units @ $375 = 18,750
Total $88,750
2
Income Tax Expense: ($250,000 − $88,750) x 40% = $64,500.
3
Cost of Goods Sold -- LIFO: 9/1 150 units @ $375 = $56,250
4/2 100 units @ $350 = 35,000
Total $91,250
4
Income Tax Expense ($250,000 − $91,250) x 40% = $63,500.
8-81
b. Net Income assuming FIFO cost flow: $96,750 (see

c. Net Income assuming LIFO cost flow: $95,250 (see

d. LIFO produces an income tax that is $1,000 lower

($64,500 − $63,500) than FIFO. This results because a
larger amount of inventory is expensed using LIFO. The
last purchase was bought at a higher price than the first
purchase.
e. FIFO
8-82
EXERCISE 8-8B
a.
Polo Company - General Journal
1/1/06 Inventory (250 @ $40) 10,000
Cash 10,000
4/1a Cash (125 @ $70) 8,750
Sales Revenue 8,750
4/1b Cost of Goods Sold (125 @ 4,250
$34)
Inventory 4,250
8/1 Inventory (400 @ $44) 17,600
Cash 17,600
12/1a Cash (500 @ $76) 38,000
Sales Revenue 38,000
12/1b Cost of Goods Sold* 20,500
Inventory 20,500
*Cost of Goods Sold: 50 @ $34 = $ 1,700
250 @ $40 = 10,000
200 @ $44 = 8,800
$20,500
b. Total Cost of Goods Sold:

4/1 $ 4,250
12/1 20,500
Total $24,750
8-83
EXERCISE 8-9B
a. Big Hill, Inc.

Date Purchased Sold Inventory Balance
Units Cost Total Units Cost Total Units Cost Total
1/1 Beg. 50 @ $30 = $1,500

Inv.
50 @ $30 = $1,500
3/15 Pur. 200 $35 = $7,000 200 @ $35 = $7,000
@
5/30 Sold 50 @ $30 = $1,500 -0-

120 $35 = $4,200 80 @ $35 = $2,800
@
80 @ $35 = $2,800
8/10 Pur 275 $40 = $11,00 275 @ $40 =$11,000
@ 0
11/20 80 @ $35 = $ -0-

Sold 2,800
260 @ $40 = $10,40 15 @ $40 = $600
0
Ending Inventory: 15 units @ $40 = $600
b. A problem arises when Weighted Average is applied to

intermittent sales and purchase transactions. Weighted
Average requires that average cost be computed when
each sale is made. This problem is often overcome by
recording only quantities of units sold on a perpetual
basis. At the end of the accounting period, costs are
then assigned perpetually to the units that have been
sold.
8-84
EXERCISE 8-10B
a.
Original Woodwork
a. b. c. d. e. f. g. h.
Unit Ind.
Cost Mkt. Lower Total Total Item
I Quanti Per Val. Cost/Mk Cost Market Lower
tem ty Unit per t. Cost/Mk
Unit t.
(b x c) (b x d) (b x e)
P 100 $ 16 $ 12 $ 12 $1,600 $1,200 $1,200
D 50 18 16 16 900 800 800
S 20 24 26 24 480 520 480
J 15 20 22 20 300 330 300
$3,280 $2,850 $2,780
1. Ending inventory using the individual item method: $2,780

2. Ending Inventory using the aggregate method: $2,850
b.
1. Cost of Goods Sold* 500
Inventory 500
2. Cost of Goods Sold** 430
Inventory 430
*$3,280 − $2,780 = $500

**$3,280 − $2,850 = $430
8-85
EXERCISE 8-11B
a.
a. b. c. d. e. f. g.
Cost Market Unit Total Total
Item Quantit Per Per Unit Lower Cost Lower
y Unit Cost/Mkt. Cost/Mkt.
(b x c) (b x e)
B 100 $40 $36 $36 $ 4,000 $ 3,600
C 150 60 56 56 9,000 8,400
D 90 20 30 20 1,800 1,800
Totals $14,800 $13,800
The inventory would be carried at $13,800, the lower of

cost or market applied to individual inventory items.
b. Under the periodic method, the amount of ending inventory

would be shown at the lower of cost or market in the
schedule of cost of goods sold. By lowering the ending
inventory, cost of goods sold is increased. The loss is
automatically included in cost of goods sold.
8-86
EXERCISE 8-12B
Deep Woods Hunting Goods
a. Gross Margin: Sales x Gross Margin %

$137,500 x 25% = $34,375
b. Cost of Goods Sold: Sales x Cost of Goods Sold %

$137,500 x 75% = $103,125
c. Computation of Ending Inventory:

Less: Cost of Goods Sold (Est.) (103,125)
Ending Inventory (Est.) $ 21,875
d. Lost Inventory: Estimated Ending Inventory $21,875

Less: Undamaged Inventory (2,000)
EXERCISE 8-13B
June 14 Inventory Account $338,000

Balance
Less: Cost of Unrecorded Sale (42,000)
Balance in the Warehouse 296,000
Less: 5% Shrinkage (14,800)
Less: Amount of Inventory in (75,000)
Showroom
8-87
8-88
EXERCISE 8-14B
Short Company
The uncounted inventory will only affect The Short Company’s

balance sheet if the book amount of the inventory is actually
written down to the counted amount. The perpetual system
records the actual amount of goods as they are purchased
and sold. However, if an adjustment is actually made on the
books, the reduction in inventory would cause the inventory
amount shown on the balance sheet to be understated.
EXERCISE 8-15B
Tefall Company
Item Year Amount Affected Effect
Number
1. 2006 Beginning Inventory NA
3. 2006 Goods Available for NA
Sale
4. 2006 Cost of Goods Sold Overstated
5. 2006 Gross Margin Understated
6. 2006 Net Income Understated
7. 2007 Beginning Inventory Understated
9. 2007 Goods Available for Understated
Sale
10. 2007 Cost of Goods Sold Understated
11. 2007 Gross Margin Overstated
12. 2007 Net Income Overstated
8-89
EXERCISE 8-16B
Asset FMV LCM HC/AC

Inventory X
Prepaid Rent X
Cash X X
Held-to-Maturity X
Securities
Machinery X
Available-for-Sale X
Securities
Certificate of Deposit X
Trading Securities X
8-90
EXERCISE 8-17B
a.
Type C + Inv. = L + S. Rev. − Exp. = Net Cash
ash Sec. iab. Equity Inc. Flows
Held − + NA NA NA NA NA −IA
Trading − + NA NA NA NA NA −OA
Availabl − + NA NA NA NA NA −IA
e
b.
Blass Brothers
Held-to- Availabl
Classified as: Maturity Trading e-for-
Sale
Revenue $10,000 $10,000 $10,000
Expenses (4,000) (4,000) (4,000)
Net Income $ 6,000 $13,000 $ 6,000
8-91
EXERCISE 8-18B a.
Circuit Electronics
Horizontal Statements Models
(1) Held-to-Maturity
Balance Sheet Income Statement Statement
Unreal. Rev./ Exp. of
Event Cash + Inv. = Liab. + Ret. + Gain. Gain − / = Net Inc. Cash Flows
Sec. Ear. Loss
1. (75,000) + 75,000 = NA + NA + NA NA − NA = NA (75,000)
IA
2. 4,500 + NA = NA + 4,500 + NA 4,500 − -0- = 4,500 4,500 OA
3. 15,000 + (12,500 = NA + 2,500 + NA 2,500 − -0- = 2,500 15,000 IA
)
4. NA + NA = NA + NA + NA NA − NA = NA NA
Totals (55,500) + 62,500 = -0- + 7,000 + -0- 7,000 − -0- = 7,000 (55,500)
1
NC
(2) Trading
Unreal. Rev./ Exp./
Event Cash + Inv. = Liab + Ret. + Gain Gain − Loss = Net Inc. Cash Flow
Sec. . Ear.
1. (75,000 + 75,000 = NA + NA + NA NA − NA = NA (75,000)OA
)
2. 4,500 + NA = NA + 4,500 + NA 4,500 − NA = 4,500 4,500 OA
3. 15,000 + (12,500 = NA + 2,500 + NA 2,500 − NA = 2,500 15,000 OA
)
4. NA + (12,500 = NA + (12,500 + NA NA − 12,500 = (12,500 NA
) ) )
Totals (55,500 + 50,000 = -0- + (5,500) + -0- 7,000 − 12,500 = (5,500) (55,500)NC
)
(3) Available-for-Sale
Unreal. Rev./ Exp.
Event Cash + Inv. = Liab. + Ret. + Gain Gain − / = Net Inc. Cash Flow
8-92
Sec. Ear. Loss
1. (75,000 + 75,000 = NA + NA + NA NA − NA = NA (75,000)IA
)
2. 4,500 + NA = NA + 4,500 + NA 4,500 − NA = 4,500 4,500 OA
3. 15,000 + (12,500 = NA + 2,500 + NA 2,500 − NA = 2,500 15,000 IA
)
4. NA + (12,500 = NA + NA + (12,500 NA − NA = NA NA
) )
Totals (55,500 + 50,000 = -0- + 7,000 + (12,500 7,000 − -0- = 7,000 (55,500)NC
) )
1
Cash is negative because these transactions do not reflect any beginning balances.
8-93
b. (1) Held-to-Maturity $7,000

(2) Trading $(5,500)
(3) Available-for-Sale $7,000
c. The amount of change in total cash from these activities

is the same for all three classifications ($55,500). Held-
to-maturity and available-for-sale securities each had a
net cash inflow from operating activities of $4,500, while
trading securities had a net cash outflow of $55,500 from
operating activities.
d. (1) Held-to-Maturity $62,500

(2) Trading $50,000
(3) Available-for-Sale $50,000
8-94
EXERCISE 8-19B
Transactions are recorded in the accounting equation for the

use of the instructor.
Assets = Stockholders’ Equity
Event Cash + Inv. = C. Stock + Ret. + Unreal.

Sec. Earn. Gain
Beg. Bal. 60,000 60,000 -0- -0-
1. Pur. Sec. (30,000 30,000 -0- -0- -0-
)
2. Inv. Rev. 800 -0- -0- 800 -0-
3. Sold Sec 10,000 (7,000) -0- 3,000 -0-
4. Pur. Sec. (10,000 10,000 -0- -0- -0-
)
Totals 30,800 33,000 60,000 3,800 -0-
5. Mkt. Val. if -0- -0- -0- -0- -0-
HM
5. Mkt. Val. if -0- 1,000 -0- 1,000 -0-
TR
5. Mkt. Val. if -0- 1,000 -0- -0- 1,000
AS
8-95
EXERCISE 8-19B. (cont.)
Deal Inc.
Financial Statements For Year Ended 2002
Classified as: Held Trading Availabl
e
Income Statements
Investment Revenue $ 800 $ 800 $ 800
Realized Gain 3,000 3,000 3,000
Net Income $3,800 $4,800 $3,800
Balance Sheets
Assets
Cash $30,800 $30,800 $30,800
Investment Securities 33,000 34,000 34,000
Total Assets $63,800 $64,800 $64,800
Common Stock $60,000 $60,000 $60,000
Act.:
Inflow from Invest. $ 800 $ 800 $ 800
Revenue
Outflow to Purchase -0- (40,000) -0-
Securities
Securities
Net Cash Inflow from Oper. 800 (29,200) 800
Act.
Act.:
Outflow to Purchase (40,000) -0- (40,000)
Securities
Securities
8-96
Net Cash Flow from (30,000) -0- (30,000)
Investing Act.
Act.
Net Change in Cash (29,200) (29,200) (29,200)
Balance
Ending Cash Balance $30,800 $ 30,800 $30,800
8-97
EXERCISE 8-20B
The three classifications of investment securities are:
1. Held-to-Maturity Securities: An example of held-to-

maturity securities would be bonds that are intended
to be held to their maturity date.
2. Trading Securities: An example of trading securities

would more likely be stocks that are intended to be
held a short time and are traded on a regular basis for
the purpose of generating profit.
3. Available-for-Sale Securities: An example would be

stocks and bonds that are neither trading nor held-to-
maturity. The company may buy a stock with the
intention of holding it until it appreciates and it may be
sold within a short period of time or held for several
years. Intent determines the classification.
8-98
SOLUTIONS TO PROBLEMS - SERIES B - CHAPTER 8
PROBLEM 8-21B
Paul’s Bicycle Shop
Inventory Purchases
Beginning Inventory 20 @ $280 = $56,000
0
0
0
Total 46 $138,200
0

FIFO Unit Unit Cost of Goods
s Cost Sold
From Beginning 200 @ $280 = $ 56,000
Inventory
From Second 80 @ 330 = 26,400
Purchase
Ending Inventory:
FIFO Unit Unit Ending
s Cost Inventory
From Second 60 @ $330 = $19,800
Purchase
Cost of Goods Sold:

LIFO Unit Unit Cost of Goods
s Cost Sold
From Second 140 @ $330 = $46,200
Purchase
From Beginning 140 @ 280 = 39,200
Inventory
8-99
Ending Inventory: 60 @ $280 = $16,800

LIFO Unit Unit Ending
s Cost Inventory
From Beginning 60 $280 = $16,800
Inventory
8-100
PROBLEM 8-21B a. (cont.)
Weighted Average
Units
$138,200 ÷ 460 = $300.435
Cost of Goods Sold: 400 @ $300.43 = $120,174

units 5
Ending Inventory: 60 units @ $300.43 = $18,026
5
b.
Weighte
FIFO LIFO d
Average
Sales (400 units @ $450) $180,00 $180,00 $180,00
0 0 0
Cost of Goods Sold (118,400 (121,40 (120,17
) 0) 4)
Gross Margin 61,600 58,600 59,826
Salaries Expenses (30,000) (30,000) (30,000)
Income Tax (25%) (7,900) (7,150) (7,457)
Net Income $23,700 $21,450 $22,369
8-101
PROBLEM 8-21B (cont.)
c. The Accounting Equation is provided for the use of the

instructor.
Event Assets = Stockholders’

Equity
Cash Inventor = C. Stock Ret.
y Earn.
FIFO Cost Flow
Beginning Balance $ 50,800 $56,000 $43,000 $63,800
1. First Purchase (36,000) 36,000
3a. Sale of 180,000 180,000
Inventory
3b. Cost of Goods (118,40 (118,400
Sold 0) )
4. Paid Sal. (30,000) (30,000)
Expense
5. Paid Income Tax (7,900) (7,900)
Totals $110,700 $19,800 $43,000 $87,500
LIFO Cost Flow
1. First Purchase (36,000) 36,000
3a. Sale of 180,000 180,000
Inventory
3b. Cost of Goods (121,40 (121,400
Sold 0) )
4. Paid Sal. (30,000) (30,000)
Expense
5. Paid Income Tax (7,150) (7,150)
Totals $111,450 $16,800 $43,000 $85,250
Weighted Average
1. First Purchase (36,000) 36,000
3a. Sale of 180,000 180,000
8-102
Inventory
3b. Cost of Goods (120,17 (120,174
Sold 4) )
4. Paid Sal. (30,000) (30,000)
Expense
5. Paid Income Tax (7,457) (7,457)
Totals $111,143 $18,026 $43,000 $86,169
8-103
PROBLEM 8-21B (cont.) c.
Financial Statements
For Year Ended December 31,2007
FIFO LIFO Weight.
Av.
Income Statements
Sales $180,000 $180,00 $180,000
0
Cost of Goods Sold (118,400 (121,400 (120,174)
) )
Gross Margin 61,600 58,600 59,826
Salaries Expense (30,000) (30,000) (30,000)
Income Tax Expense (7,900) (7,150) (7,457)
Net Income $23,700 $21,450 $22,369
Balance Sheets
Assets
Cash $110,700 $111,45 $111,143
0
Inventory 19,800 16,800 18,026
Total Assets $130,500 $128,25 $129,169
0
Common Stock $43,000 $43,000 $43,000
0
8-104
PROBLEM 8-21B c. (cont.)

For the Year Ended December 31, 2007
FIFO LIFO Weight.
Av.
Cash Flows From Oper.
Act.:
Cash Inflow from $180,000 $180,00 $180,000
Customers 0
Cash Outflow for (82,200) (82,200) (82,200)
Inventory
Cash Outflow for Sal. (30,000) (30,000) (30,000)
Exp.
Cash Outflow for Income (7,900) (7,150) (7,457)
Tax
Act.
Cash Flows From Investing -0- -0- -0-
Act.
Act.
Balance
0
8-105
PROBLEM 8-22B
Provided for the use of the instructor:
Fred’s Fireplaces
Sales and Purchase Transactions for 2008
Date Sales Purchases Cost of Goods Sold Inventory

Price Cost Cost Cost Total
Units Per = Total Unit Per Total Unit per Total Unit per
Unit s Unit s Unit s Unit
1/1 60 @$350 = $21,000
60 @$350 = $21,000
3/5 50 @$370 = $18,50 50 @$370 = $18,500
0
4/10 40 @$45 = $18,00 40 @$350 = $14,00 20 @$350 = $ 7,000

0 0 0 50 @$370 = $18,500
6/19 50 @$45 = $22,50 20 @$350 = $

0 0 30 @$370 = 7,000 20 @$370 = $ 7,400
$11,10
0
20 @$370 = $ 7,400
9/16 50 @$390 = $19,50 50 @$390 = $19,500
0
11/2 35 @$47 = $16,45 20 @$370 = $

8 0 0 15 @$390 = 7,400 35 @$390 = $13,650
5,85
0
Total Sales $56,95 COGS $45,35 End $13,650

s 0 0 Inv.
8-106
a.
Fred’s Fireplaces
General Journal, 2008
3/5 Inventory 18,500
Cash 18,500
4/10 Cash 18,000
Sales 18,000
Inventory 14,000
6/19 Cash 22,500
Sales 22,500
Inventory 18,100
9/16 Inventory 19,500
Cash 19,500
11/28 Cash 16,450
Sales 16,450
Inventory 13,250
*See previous schedule for computation.
b. Sales $56,950
c. Ending Inventory $13,650 (See previous computation)
8-107
PROBLEM 8-23B
Ed’s Repair Service
Individual Item Lower

of Cost or Market
Unit Unit Total Total LCM
Item Quantit Cost Marke Cost Market Unit per Total
y t s Unit
P1 80 $80 $90 $ $ 7,200 80 @ $80 $

6,400 6,400
P2 60 60 66 3,600 3,960 60 @ $60 3,600
P3 100 140 130 14,000 13,000 100 @ $130 13,000
P4 50 130 140 6,500 7,000 50 @ $130 6,500
$30,50 $31,160 $29,50

0 0
a. $29,500
b.
Debit Credit
Cost of Goods Sold (Inventory 1,000
Loss)*
Inventory 1,000
*($30,500 − $29,500)
c. $30,500
d. No entry; cost is lower than market.
e. Under the periodic system the amount of ending

inventory would be shown at the lower of cost or market
in the schedule of cost of goods sold. By lowering the
ending inventory, cost of goods sold is increased. Any
loss is automatically included in cost of goods sold.
8-108
PROBLEM 8-24B
Hank’s Fun House
a. 1.Estimated Gross Margin:
Sales x Gross Margin %: $1,140,000 x .30 = $342,000
2. Estimated Cost of Goods Sold:
Sales − Gross Margin: $1,140,000 − $342,000= $798,000

Or:
Sales x Cost of Goods Sold %: $1,140,000 x 70% =
$798,000
3. Estimated Inventory at October 6:

Less: Cost of Goods Sold (798,000)
Ending Inventory $ 44,000
b. Loss: Total Inventory $ 44,000

Less: Undamaged (20,000)
Total Loss $ 24,000
c. Under the perpetual inventory system, if records are

maintained accurately, the balance in the inventory
account should be equal to the amount of the inventory
on hand at the time of the loss. Any differences would be
attributable to lost, stolen, or damaged goods.
8-109
PROBLEM 8-25B
Elle’s Eatery
2006 2007 Total
Net Sales $60,000 $70,000 $130,000
Gross Margin $ $33,500 $ 62,500
29,000
Gross Margin % $62,500 ÷ $130,00 = 48%

0
Cost of Goods Sold $67,500 ÷ 130,000 = 52%
%
a. Computation of Gross Margin:
Sales $56,500
Less: Sales Discounts (2,500)
Net Sales 54,000
x Gross Margin % 48%
b. Computation of Ending Inventory:

Plus: Transportation-In 2,000
Less: Cost of Goods Sold (28,080)*
Ending Inventory $27,420
*$54,000 x 52% = $28,080
8-110
PROBLEM 8-26B
Error No.1 Amount of Effect

Error
Sales, 2006 NA NA
Ending Inventory, NA NA
12/31/06
Gross Margin, 2006 $2,000 −
Beginning Inventory, NA NA
1/1/07
2006
Net Income, 2006 NA NA
Retained Earnings, NA NA
12/31/06
Total Assets, 12/31/06 NA NA

Error
Sales, 2006 $500 −
Ending Inventory, 300 +
12/31/06
Gross Margin, 2006 200 −
Beginning Inventory, 300 +
1/1/07
Cost of Goods Sold, 300 −
2006
Net Income, 2006 200 −
Retained Earnings, 200 −
12/31/06
Total Assets, 12/31/06 200 −

Error
Sales, 2006 NA NA
8-111
Ending Inventory, $1,800 −
12/31/06
Beginning Inventory, 1,800 −
1/1/07
2006
Net Income, 2006 1,800 −
12/31/06
Total Assets, 12/31/06 1,800 −
8-112
PROBLEM 8-27B
(a). Held-to-Maturity
T-Accounts
Equity

1. 15,000 3. 12,000 3. 12,000 8. 6,000 1. 15,000
2. 50,000 4. 17,000 6. 16,000 Bal.
15,000
5. 400 6. 16,000 Bal.
22,000
8. 6,400 7. 1,000 Dividends
9. 900 7. 1,000
Bal. Bal.1,000
26,700
Service Revenue
2. 50,000
Bal.
50,000
Investment Income
5. 400
9. 900
Bal. 1,300
Gain on Sale of
Invest.
8. 400
Bal. 400
Operating Expenses
4. 17,000
Bal.
17,000
8-113
8-114
(b). Trading
T-Accounts
Equity

1. 15,000 3. 12,000 3. 12,000 8. 6,000 1. 15,000
2. 50,000 4. 17,000 6. 16,000 Bal.
15,000
5. 400 6. 16,000 10.
2,000
8. 6,400 7. 1,000 Bal. Dividends
20,000
9. 900 7. 1,000
Bal. Bal.1,000
26,700
Service Revenue
2. 50,000
Bal.
50,000
Investment Income
5. 400
9. 900
Bal. 1,300
Gain on Sale of
Invest.
8. 400
Bal. 400
Operating Expenses
4. 17,000
Bal.
17,000
8-115
(Income Account)
Unrealized
Gain/Loss
10. 2,000
Bal. 2,000
8-116
(c). Available-for-Sale
T-Accounts
Equity
Cash Investment Common Stock
Securities
1. 15,000 3. 12,000 3. 12,000 8. 6,000 1. 15,000
2. 50,000 4. 17,000 6. 16,000 10. Bal.
2,000 15,000
5. 400 6. 16,000 Bal.
20,000
8. 6,400 7. 1,000 Dividends
9. 900 7. 1,000
Bal. Bal.1,000
26,700
(Equity Account)
Unrealized
Gain/Loss
10. 2,000
Bal.2,000
Service Revenue
2. 50,000
Bal.
50,000
Investment Income
5. 400
9. 900
Bal. 1,300
Gain on Sale of
Invest.
8. 400
Bal. 400
8-117
Operating
Expenses
4. 17,000
Bal.
17,000
8-118
Brogan’s Trucking Company

Investment Securities Held Trading Availab
Classified As: le
Income Statements
Services Revenue $50,000 $50,00 $50,00
0 0
Operating Expenses (17,000 (17,000 (17,000
) ) )
Net Operating Income 33,000 33,000 33,000
Investment Revenue 1,300 1,300 1,300
Realized Gains 400 400 400
Unrealized Loss -0- (2,000) -0-
Net Income $34,700 $32,70 $34,70
0 0
Balance Sheets
Assets
Cash $26,700 $26,70 $26,70
0 0
Investment Securities @ 22,000 -0- -0-
Cost
Investment Securities @ -0- 20,000 20,000
Market
Total Assets $48,700 $46,70 $46,70
0 0
Common Stock $15,000 $15,00 $15,00
0 0
Retained Earnings* 33,700 31,700 33,700
Unrealized Loss -0- -0- (2,000)
8-119
0 0
*Net Income above less $1,000 dividends
8-120
Brogan’s Trucking Company

Classified As: e
Act.:
Cash Inflow from $50,00 $50,000 $50,00
Customers 0 0
Cash Inflow from Invest. 1,300 1,300 1,300
Rev.
Outflow for Expenses (17,00 (17,000 (17,000
0) ) )
Outflow to Purchase -0- (28,000 -0-
Securities )
Securities
Act.
Act.:
Outflow to Purchase (28,00 -0- (28,000
Securities 0) )
Securities
Net Cash Flow from Investing (21,60 -0- (21,600
Act. 0) )
Cash Flows From Financing
Act.:
Inflow from Stock Issue 15,000 15,000 15,000
Outflow for Dividends (1,000) (1,000) (1,000)
Net Cash Flow from 14,000 14,000 14,000
Financing Act.
8-121
Plus: Beginning Cash Balance -0- -0- -0-
0 0
8-122
PROBLEM 8-28B
a.
Even Balance Sheet Income Statement Stmt. of
t
Asset = Liab. + S. Rev. − Exp. = Net Cash
s Equity Inc. Flows
1. + NA + NA NA NA + FA
2. +− NA NA NA NA NA − IA
3. +− NA NA NA NA NA − OA
4. + NA + + NA + NA
5. + NA + NA NA NA NA
7. − NA − NA + − NA
9. − NA − NA + − NA
10. − NA − NA + − NA
b. The directional effect is the same for events 9 and 10. In

both events, you are reducing inventory and recording an
expense that reduces stockholders’ equity. However, the
amounts would be different during periods of changing
prices.
8-123
ATC 8-1
Financial Statement Analysis
a. Inventory turnover:
$25,445 ÷ $400 = 63.61 times
Average days to sell inventory:
365 days ÷ 63.6 = 5.7 days (Wow!)
b. FIFO. See Note 1 on page 31 of the annual report.
c. Unlike most companies, including other direct marketers such as Land’s End, Dell does
not need to maintain significant quantities of “finished goods” inventory. Dell builds
computers “to order”, so its inventory includes an inventory of parts. See Note 9 on page
42 of the annual report. Conversely, Land’s End must maintain many different sizes and
colors of each of its clothing products, so it can fill customers’ orders on a timely basis.
Additionally, Dell is famous for its very efficient “just-in-time” inventory system, which
results in very low inventory levels.
8-124
ATC 8-2
a.
Blue Bird Company
Inventory Purchases
Beginning Inventory 100 @ $50 = $ 5,000

70 @ 55 = 3,850
Total 520 $28,750
FIFO
Cost of Goods Sold:
Cost per Cost of Goods
FIFO Units Unit Sold
From Beginning Inventory 100 @ $50 = $ 5,000
From Beginning Inventory 70 @ 55 = 3,850
From Second Purchase 150 @ 58 = 8,700
Ending Inventory: 100 units @ $58 = $5,800
LIFO
Cost of Goods Sold:
Cost per Cost of Goods
LIFO Units Unit Sold
From Beginning Inventory 70 @ 55 = 3,850
Ending Inventory: 100 units @ $50 = $5,000
8-125
ATC 8-2 a. (cont.)
Weighted Average
Total Cost ÷ Total Units = Cost per Unit

$28,750 ÷ 520 = $55.288
Cost of Goods Sold 420 units @ $55.288 = $23,221
Ending Inventory 100 units @ $55.288 = $5,529
Blue Bird Company
Weighted
Income Statements FIFO LIFO Average
Sales (220 @$80; 200 @ $90) $35,600 $35,600 $35,600

Gross Margin 12,650 11,850 12,379
Income Tax (30%) (2,835) (2,595) (2,754)
Net Income $6,615 $6,055 $6,425
b. LIFO may be preferred for tax purposes in a period of rising prices because it will result in
the lowest net income and, consequently, the lowest amount of tax paid for the year.
FIFO may be preferred for financial statement purposes because it will result in the higher
net income in a period of rising prices. The higher net income is more favorable to
stockholders. Because LIFO generally results in a deferral of the payment of income tax,
if it is used for tax reporting, it must also be used for financial statement purposes to
prevent abuse by taxpayers.
8-126
ATC 8-3
Real World Case
Note, all dollar amounts are in millions.

a. Sales for 2000 $141,230.0
x decrease in gross margin percentage (11.9% - 10.7%) 0.012
Decrease in 2000's pretax earnings due
to the lower gross margin $ 1,694.8
b. Ending inventory for 2000 $ 7,514.0

x Ford’s interest rate 0.075
x increased portion of a year to sell inventory
from 1999 to 2000 (22 days - 17 days) 5 ÷ 365
Increase in financing cost per inventory cycle 7.7
x inventory cycles per year for 2000 (365/22) 16.6
Decrease in 2000 pretax earnings due to increased financing
cost resulting from longer time to sell inventory $ 127.8
c. Decrease in 2000's pretax earnings

due to the lower gross margin (see a. above) $ 1,694.8
Decrease in 2000 pretax earnings due to increased financing
cost resulting from longer time to sell inventory (see b. above) 127.8
Total 1,822.6
÷ Decrease in pretax earnings from 1999 to 2000 ÷ 2,008.0
Percentage of decrease in pretax earnings resulting from the
lower gross margin percentage and the longer time to sell
inventory 90.8%
8-127
ATC 8-4
Inventory turnover: $7,518,000 ÷ $289,000 = 26 inventory turnovers
365 ÷ 26 = 14 days to sell inventory
The average days to sell inventory is 14 days. However, the average shelf life for the fruit
sold is only 10 days. The inventory does not appear to be good collateral for the loan.
8-128
ATC 8-5
a. First the company's gross margins must be calculated:
Cosmos Fantasy
Sales $2,000,000 $2,000,000
Cost of Goods Sold (1,200,000) (1,260,000)
Gross Margin $ 800,000 $ 740,000
Gross margin %:
Cosmos: $800,000 ÷ $2,000,000 = 40%
Fantasy: $740,000 ÷ $2,000,000 = 37%
Cosmos appears to be charging more in relation to cost of goods sold.
b. Inventory turnover ratios:

Cosmos: $1,200,000 ÷ $240,000 = 5.0 times
Fantasy: $1,260,000 ÷ $180,000 = 7.0 times
Average days to sell inventory:
Cosmos: 365 days ÷ 5.0 = 73 days
Fantasy: 365 days ÷ 7.0 = 52 days
Cosmos appears to incur the higher costs to finance inventory for two reasons: (1) it
takes the longest time to sell its inventory, and (2) it has more inventory than Fantasy.
c. Other things being equal, this would indicate a company sells its product at a lower price.
The lower the price, the more quickly goods should sell. “Other things” are not equal in
this problem. Fantasy is using LIFO while Cosmos is using FIFO. Assuming prices are
rising, LIFO causes the gross margin percentage to be lower, due to the higher cost of
goods sold. LIFO also causes ending inventory to appear to be lower. The higher cost of
goods sold and the lower ending inventory resulting from LIFO both cause the inventory
turnover ratio to be higher than if FIFO is being used. However, neither the lower gross
margin percentage nor the higher inventory turnover ratio that results from using LIFO
have any effect on cash flows, except for the related income tax effects.
8-129
ATC 8-5 (cont.)
d. First, calculate the accounts receivable turnover ratio:
Cosmos: $2,000,000 ÷ $320,000 = 6.3 times

Fantasy: $2,000,000 ÷ $320,000 = 6.3 times
Next, calculate the average days to collect accounts receivable:
Both companies: 365 days ÷ 6.3 = 58 days
Finally, using the “average days to sell inventory” calculated in part b. and the “average
days to collect accounts receivable,” calculated above, determine the length of the
operating cycle.
Cosmos Fantasy
Days to sell inventory (see b.) 73 52

Days to collect receivables 58 58
Operating cycle 131 110
The shorter a company’s operating cycle, the more quickly it gets its cash back and
the more quickly this cash can be reinvested. The quicker money is reinvested, the
more money can be made. As noted above in c., this is not entirely true if the shorter
operating cycle results from using different inventory flow assumptions.
8-130
ATC 8-6
a.
The following amounts would be shown on the balance sheet at December 31, 2001:
Assets:
Investments
Available for Sale $19,978.5
Held-to-maturity $143.0
Trading securities $16,535.7
Stockholders’ Equity:
Unrealized gains on investment securities
(Available for Sale) $871.4 (951.3 − 79.9)
b. The memo should include an explanation of the difference in intent between available-for-
sale, held-to-maturity, and trading securities. Also the memo should include an
explanation of how each is reported on the balance sheet.
8-131
ATC 8-7
a. When the LIFO method is used, tax law requires companies to use the same cost flow
method for financial reporting that they use for tax reporting. Consequently, if the
company uses LIFO for tax purposes, then it is legally bound to use the same method
in its financial statements. Accordingly, it would be illegal for Coolage to follow Bailey’s
instructions. It is not unethical to report certain items one way on the tax return and a
different way on the financial statements, so long as there is no legal requirement
preventing it. Indeed, this is common business practice. The requirement for
consistency between LIFO on the tax return and LIFO on the income statement is an
exception to the general rule. Nevertheless, it would be illegal and unethical to violate
the tax laws.
b. The switch to FIFO would increase the amount of ending inventory reported on Far
Eastern’s balance sheet. Assuming an inflationary economy, the first inventory
purchased, which would be the lower cost inventory, would be the first inventory
expensed when goods are sold under FIFO. This would leave the higher cost
inventory in ending inventory which is the cost that would appear on the balance
sheet.
c. It would be unwise to pay $400,000 of additional taxes in order to increase the amount
of reported net income by $800,000. Since LIFO reduces cash outflow for taxes, it
increases the value of the company to its owners. The switch to FIFO would decrease
the value of the company and thereby would act to deter rather than stimulate
investment. According to accounting research, investors are not fooled by deceptive
reporting practices. They make investment decisions on the basis of the economic
consequences (i.e., cash consequences) rather than spurious values that may be
reported in the financial statements.
8-132
ATC 8-8
Using the EDGAR Database
NOTE: This solution was accurate as of January 3, 2002. However, the EDGAR
database is subject to update at any time, so this solution will likely be “dated”
at the time you assign this case to your students.
These data are from the February 3, 2001 financial statements and dollar amounts are
in thousands.
a. Gap Company had 3,676 stores and total merchandise inventory of $1,904,153. The
average inventory per store was $518.
b. During its 2000 fiscal year, Gap opened 731 new stores and closed 73 existing stores,
for a net increase of 658 stores. (See the “properties” section of MD&A)
c. Quarter Sales During Each Quarter

1 $2,731,990
2 2,947,714
3 3,414,668
4 4,579,088
d. Gap has higher sales during the third and fourth quarters due to Christmas sales. Yes,
its inventory must also vary throughout the year to support the changing level of sales.
8-133

Chapter 08 Solution of Fundamental of Financial Accouting by EDMONDS (4th Edition)

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ANSWERS TO QUESTIONS - CHAPTER 8

1. 1. First In, First Out - The inventory cost flow method

3. Weighted Average - The inventory cost flow method

4. Specific Identification - The inventory cost flow

2. One advantage of the specific identification method is that

3. FIFO allocates the cost of the first units purchased to the

4. LIFO allocates the cost of the last units purchased to the

5. In an inflationary period, i.e., a period where prices are

6. In an inflationary period, FIFO will produce the largest

7. Flow of costs refers to the assumption that is made for the

8. In a world where there is no income tax, the choice of cost

Beginning inventory $ -0-

Merchandise purchased 1,000 units @ 25 25,000

Cost of Goods Sold 850 units @ 25 21,250

Ending Inventory 150 units @ 25 3,750

Cost of goods sold will be the same for all methods

Beginning inventory 150 units @ 25 $ 3,750

Units sold 1,500

FIFO: 150 units @ 25 $ 3,750

LIFO 1,500 units @ 27 $40,500

Weighted Average: Total Cost ÷ Total Units = Cost per

11. It may be advantageous to use FIFO for financial

12. In an inflationary period, for a business subject to income

13. A deflationary period, i.e., a period of falling prices, would

14. When using a perpetual inventory system, each item

15. "Lower of cost or market" is an accounting convention that

16. For merchandise that has declined in value, the "lower of

17. In certain situations it is not possible or practical to take a

18. It is generally easier to manipulate net income when a

19. Goods Available for Sale $123,000

20. When using the periodic method, an overstated ending

23. Operating Cycle = average number of days to sell

24. Historical cost information is used in financial statements

25. FASB requires market value information to be disclosed for

26. Market value of marketable investment securities is easy

Some items of property, plant and equipment may be

27. The two primary types of investment securities are debt

29. An equity security is acquired when an investor gives

30. The primary securities market is made up of transactions

31. Marketable securities are those that are regularly traded

32. The three categories of investment securities are:

Trading: securities that are bought and sold for the

Available-for-sale: all marketable securities not properly

33. The equity method must be used to account for

(a) (b) (c)

*Average Cost per Unit: $3,000 + $4,000 = $7,000;

a. Cost of Goods Sold:

Ending Inventory: 190 units @ Second Purchase Cost of $68

Ending Inventory: 190 units. 90 @ first purchase price $60

Cost of Goods Sold 260 @ $59.11 = $15,368.89

a. (1) Porter Company

Net cash flow from operating activities will be the same

Ending Inventory 100 units @ $22= $2,200

*This amount is computed in the Summary of Purchase

Difference in Gross Margin: $20,200 − $20,100 = $100

Note to Instructor: Cost of goods sold can be computed on a

EXERCISE 8-6A (cont.)

b. Income tax savings would be the difference between the

*Computation of cash paid for inventory: