SM 06

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Eighth Canadian Edition
CHAPTER 6
Inventory Costing
Learning Objectives
1. Describe the steps in determining inventory quantities.
2. Calculate cost of goods sold and ending inventory in a
perpetual inventory system using the specific identification,
FIFO, and weighted average methods of cost determination.
3. Explain the financial statement effects of inventory cost
determination methods.
4. Determine the financial statement effects of inventory errors.
5. Value inventory at the lower of cost and net realizable value.
6. Demonstrate the presentation and analysis of inventory.
7. Calculate ending inventory and cost of goods sold in a
periodic inventory system using FIFO and weighted average
inventory cost formulas (Appendix 6A).
8. Estimate ending inventory using the gross profit and retail
inventory methods (Appendix 6B).
Solutions Manual 6-1 Chapter 6

© 2018 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited.
Summary of Questions by Learning Objectives and Bloom’s Taxonomy
Ite LO BT Item LO BT Ite LO BT Ite LO BT Ite LO BT

m m m m
Questions
1. 1 C 6. 2 C 11. 4 K 16. 6 K 21. 7 C
2. 1 C 7. 3 C 12. 5 C 17. 6 AN 22. 8 K
3. 1 C 8. 3 C 13. 5 K 18. 6 C 23. 8 C
4. 2 C 9. 3 K 14. 5 C 19. 7 C 24. 8 C
5. 2 C 10. 4 C 15. 6 K 20. 7 K
Brief Exercises
1. 1 K 5. 2 AP 9. 3 C 13. 5 AP 17. 7 AP
2. 1 AP 6. 2 AP 10. 3 C 14. 5 AP 18. 2,7 AP
3. 2 AP 7. 2 AP 11. 4 AN 15. 6 AN 19. 8 AP
4. 2 AP 8. 2 AP 12. 4 AN 16. 6 AN 20. 8 AP
Exercises
1. 1 K 5. 2 AP 9. 4 AN 13. 7 AP 17. 8 AP
2. 1 AP 6. 2,3 AP 10. 5 AP 14. 7 AP 18. 8 AP
3. 2 AP 7. 2,3 AP 11. 5,6 AP 15. 2,7 AP
4. 2 AP 8. 4 AN 12. 6 AN 16. 2,7 AP
Problems
1. 1 AP 4. 2,3 AP 7. 1,4 AN 10. 6 AN 13. 2,7 AP
2. 2 AP 5. 2,3 AP 8. 4,6 AN 11. 7 AP 14. 8 AP
3. 2,4 AP 6. 2,3 AP 9. 5 AP 12. 2,7 AP 15. 8 AP

Legend: The following abbreviations will appear throughout the

solutions manual file.
LO Learning objective
Bloom's
BT Taxonomy
K Knowledge
C Comprehension
AP Application
AN Analysis
S Synthesis
E Evaluation
Difficulty: Level of difficulty
S Simple
M Moderate
C Complex
Time: Estimated time to complete in minutes
AACSB Association to Advance Collegiate Schools of Business
Communication Communication
Ethics Ethics
Analytic Analytic
Tech. Technology
Diversity Diversity
Reflec. Thinking Reflective Thinking
CPA CM CPA Canada Competency Map
Ethics Professional and Ethical Behaviour
PS and DM Problem-Solving and Decision-Making
Comm. Communication
Self-Mgt. Self-Management
Team & Lead Teamwork and Leadership
Reporting Financial Reporting
Stat. & Gov. Strategy and Governance
Mgt. Accounting Management Accounting
Audit Audit and Assurance
Finance Finance
Tax Taxation
ASSIGNMENT CLASSIFICATION TABLE

Brief Problems Problems
Learning Objectives Questions Exercises Exercises Set A Set B

1. Describe the steps in 1, 2, 3 1, 2 1, 2 1, 7 1, 7

determining inventory
quantities.
2. Calculate cost of goods 4, 5, 6 3, 4, 5, 6, 3, 4, 5, 6, 2, 3, 4, 5, 2, 3, 4, 5,

sold and ending inventory in 7, 8 7, *15, 6, *12, 6, *12,
a perpetual inventory *16 *13 *13
system using the specific
identification, FIFO, and
weighted average methods
of cost determination.
3. Explain the financial 7, 8, 9 9, 10 6, 7 4, 5 4, 5

statement effects of
inventory cost
determination methods.
4. Determine the financial 10, 11, 11, 12 8, 9 3, 7, 8 3, 7, 8

statement effects of
inventory errors
5. Value inventory at the lower 12, 13, 14 13, 14 10, 11 6, 9 6, 9
of cost and net realizable
value.
6. Demonstrate the 15, 16, 17, 15, 16 11, 12 8, 10 8, 10
presentation and analysis of 18
inventory.
*7. Calculate ending inventory *19, *20, *17, *18 *13, *14, *11, *12, *11, *12,
and cost of goods sold in a *21 *15, *16 *13 *13
periodic inventory system
using FIFO and weighted
average inventory cost
formulas (Appendix 6A).
*8. Estimate ending inventory *22, *23, *19, *20 *17, *18 *14, *15 *14, *15
using the gross profit and *24
retail inventory methods
(Appendix 6B).

ASSIGNMENT CHARACTERISTIC TABLE

Problem Difficulty Time
Number Description Level Allotted (min.)
1A Identify items in inventory. Moderate 20-25
2A Apply specific identification. Simple 15-20
3A Apply perpetual FIFO. Record sales and inventory Moderate 20-25

adjustment, calculate gross profit, and answer
questions.
4A Apply perpetual weighted average and answer Moderate 20-25

questions.
5A Apply perpetual FIFO and weighted average. Answer Moderate 35-45

questions about financial statement effects.
6A Record transactions using perpetual weighted average. Moderate 35-45

Apply LCNRV.
7A Determine effects of inventory errors. Complex 25-30
8A Determine effects of inventory errors. Calculate Complex 35-45

inventory turnover.
9A Apply LCNRV and prepare adjustment. Moderate 20-25
10A Calculate ratios. Simple 15-20
*11A Apply periodic FIFO and weighted average. Simple 20-25
*12A Apply periodic and perpetual FIFO. Moderate 40-45
*13A Apply periodic and perpetual weighted average. Moderate 40-45
*14A Determine inventory loss using gross profit method. Moderate 20-30
*15A Determine ending inventory using retail method. Moderate 20-30
1B Identify items in inventory. Moderate 20-25
2B Apply specific identification. Simple 15-20
3B Apply perpetual weighted average. Record sales and Moderate 20-25

inventory adjustment, calculate gross profit, and answer
questions.
4B Apply perpetual FIFO and answer questions. Moderate 20-25

ASSIGNMENT CHARACTERISTICS TABLE (Continued)
Problem Difficulty Time

Number Description Level Allotted (min.)
5B Apply perpetual FIFO and weighted average. Answer Moderate 35-45

questions about financial statement effects.
6B Record transactions using perpetual FIFO. Apply Moderate 35-45

LCNRV.
7B Determine effects of inventory errors. Complex 25-30
8B Determine effects of inventory errors. Calculate Complex 35-45

inventory turnover.
9B Apply LCNRV and prepare adjustment. Moderate 20-25
10B Calculate ratios. Simple 15-20
*11B Apply periodic FIFO and weighted average. Simple 20-25
*12B Apply periodic and perpetual weighted average. Moderate 40-45
*13B Apply periodic and perpetual FIFO. Moderate 40-45
*14B Determine inventory loss using gross profit method. Moderate 20-30
*15B Determine ending inventory using retail method. Moderate 20-30

BLOOM’S TAXONOMY TABLE

Correlation Chart between Bloom’s Taxonomy, Study Objectives and End-of-
Chapter Material
Learning Objective Knowledge Comprehension Application Analysis Synthesis Evaluation

1. Describe the steps BE6.1 Q6.1 BE6.2 P6.7A
in determining E6.1 Q6.2 E6.2 P6.7B
inventory Q6.3 P6.1A
quantities. P6.1B
2. Calculate cost of Q6.4 BE6.3

goods sold and Q6.5 BE6.4
ending inventory in Q6.6 BE6.5
a perpetual BE6.6
inventory system BE6.7
using the specific BE6.8
identification, *BE6.18
FIFO, and E6.3
weighted average E6.4
methods of cost E6.5
determination. E6.6
E6.7
*E6.15
*E6.16
P6.2A
P6.3A
P6.4A
P6.5A
P6.6A
P6.2B
P6.3B
P6.4B
P6.5B
P6.6B
*P6.12A
*P6.13A
*P6.12B
*P6.13B
3. Explain the Q6.9 Q6.7 E6.6
financial Q6.8 E6.7
statement effects P6.4A
of inventory cost BE6.9 P6.5A
determination BE6.10 P6.4B
methods. P6.5B
4. Determine the Q6.11 Q6.10 P6.3A BE6.11

financial P6.3B BE6.12
statement effects E6.8
of inventory E6.9
errors. P6.7A
P6.8A
P6.7B
P6.8B

BLOOM’S TAXONOMY TABLE (Continued)
Learning Objective Knowledge Comprehension Application Analysis Synthesis Evaluation

5. Value inventory at Q6.13 Q6.12 BE6.13
the lower of cost Q6.14 BE6.14
and net realizable E6.10
value. E6.11
P6.6A
P6.6B
P6.9A
P6.9B
6. Demonstrate the Q6.15 Q6.18 BE6.15 Q6.17

presentation and Q6.16 BE6.16 E6.11 P6.8A
analysis of E6.12 P6.10A
inventory. P6.8B
P6.10B
*7 Calculate ending *Q6.20 *Q6.19 *BE6.17

inventory and cost *Q6.21 *BE6.18
of goods sold in a *E6.13
periodic inventory *E6.14
system using *E6.15
FIFO and *E6.16
weighted average *P6.11A
inventory cost *P6.12A
formulas *P6.13A
(Appendix 6A). *P6.11B
*P6.12B
*P6.13B
*8. Estimate ending *Q6.22 *Q6.23 *BE6.19
inventory using *Q6.24 *BE6.20
the gross profit *E6.17
and retail *E6.18
inventory *P6.14A
methods *P6.15A
(Appendix 6B). *P6.14B
*P6.15B
Broadening Your BYP6.3 BYP6.1 Santé

Perspective BYP6.4 BYP6.2 Smoothie
BYP6.5 BYP6.6 Saga

ANSWERS TO QUESTIONS
1. Taking a physical inventory involves counting, weighing, or measuring
each kind of inventory on hand. This is normally done when the store is
closed. Tom will probably count items, and mark the quantity, description,
location, and inventory number on pre-numbered inventory tags. Retailers,
such as a hardware store, generally have thousands of different items to
count. Later, unit costs will likely be applied to the inventory quantities
using either specific identification or a cost formula.
Many businesses also use electronic devices, such as hand-held

scanners. Information on the scanners can be uploaded to the perpetual
inventory system to partially automate taking an inventory.
LO 1 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
2. Goods in transit should be included in the inventory of the company (buyer

or seller) that has ownership of the goods. This is determined by the terms
of sale and is evidenced by the free on board (FOB) terms. When the
terms are FOB shipping point, ownership of the goods passes to the buyer
when the public carrier accepts the goods from the seller. When the terms
are FOB destination, ownership of the goods remains with the seller until
the goods reach the buyer.
3. Consigned goods are goods held on a company’s premises (the

consignee) but belong to someone else (the consignor). The consignee
agrees to sell the goods for a fee but never takes ownership of the goods
even though the goods are physically located on the consignee’s
premises. Therefore, the consignor, not the consignee, owns the goods
and should include them in inventory.
4. Specific identification is appropriate when goods are uniquely identifiable

or produced for a specific purpose, for example, automobiles. GAAP does
not allow companies to use specific identification when goods are
interchangeable.
LO 2 BT: C Difficulty: S Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

QUESTIONS (Continued)
5. Specific identification tracks the actual physical flow of goods in the

system and matches the cost of a particular item of inventory against its
sale price. Each item is uniquely identifiable and can be traced back to its
purchase cost, for example, automobiles. This gives the specific
identification method the advantage of producing financial results that are
more accurate. Specific identification may be more expensive to operate
since each item must be tracked individually in the accounting system.
The FIFO cost formula assumes that the first goods purchased are the
first goods sold. The weighted average cost formula determines the cost
using a weighted average of the cost of the items purchased. Both the
FIFO and the weighted average cost formulas assume a flow of goods
that may not exactly match the actual flow of physical goods. These cost
formulas can be used in both a periodic and perpetual inventory system,
whereas the specific identification method can only be used in a
perpetual system. An example of merchandise that would be valued
using the FIFO basis is electronic products, whereas merchandise such
as clothing might be valued on a weighted average basis.
6. Disagree. The weighted average cost per unit is calculated by dividing the
cost of goods available for sale by the units available for sale at the date
of each purchase. This means that every purchase of product can change
the weighted average cost per unit. Sales of product mean that items of
inventory are removed from the cost “pool” at the weighted average cost.
This does not change the weighted average cost (unless by rounding).
LO 2 BT: C Difficulty: C Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
7. a. Cash: No effect. The cash impact of the purchase and sale is the
same regardless of which inventory cost formula is chosen. The
inventory cost formula simply allocates the cost of goods available for
sale between cost of goods sold and ending inventory.
b. Ending inventory: In a period of rising prices, FIFO will produce a
higher ending inventory as inventory is costed using the most recent
(higher) prices; Weighted average will produce a lower ending
inventory as ending inventory is costed at an average of all the
inventory available for sale during the accounting period.
c. Cost of goods sold: The cost of goods sold effect is opposite to that of
ending inventory. Hence, cost of goods sold will be lower under FIFO
and higher under weighted average cost.
d. Profit: Because of the effect on the cost of goods sold, profit will be
higher under FIFO and lower under weighted average cost.

8. The weighted average cost formula results in more recent costs being
reflected in cost of goods sold. This formula better matches current costs
with current revenues and provides a better income statement valuation.
The FIFO cost formula provides the better inventory valuation because
the cost of older items is transferred to cost of goods sold. This leaves the
more recently purchased items in ending inventory, which better reflects
replacement cost.
9. a. Choose a method that corresponds as closely as possible to the

physical flow of goods.
b. Report an inventory cost on the balance sheet that is close to the
inventory’s recent costs.
c. Use the same method for all inventories having a similar nature and
use in the company.
LO 3 BT: K Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
10. a. Mila Company's 2020 profit will be overstated (O) $5,000.
Beginning inventory Sales

+ Purchases – Cost of goods sold U $5,000
= Cost of goods = Gross profit/Profit O $5,000
available for sale
– Ending inventory O $5,000
= Cost of goods sold U $5,000
b. Mila’s 2021 profit will be understated (U) $5,000 since the ending
inventory of 2020 becomes the beginning inventory of 2021.
Beginning inventory O $5,000 Sales

+ Purchases – Cost of goods sold O $5,000
= Cost of goods = Gross profit/Profit U $5,000
available for sale O $5,000
– Ending inventory 0000000
= Cost of goods sold O $5,000
c. The combined profit for the two years will be correct because the
errors offset each other (O $5,000 in 2020 and U $5,000 in 2021).

11. Common errors that occur related to inventory include:

Recording errors
Errors in taking the physical count
Errors caused by not properly investigating goods in transit or goods on
consignment
Pricing errors for the ending inventory
Errors in the compilation or summarizing of the inventory count
Errors in arriving at the proper value for the lower of cost and net
realizable value
12. Lucy should know the following:
a. A departure from the cost basis of accounting for inventories is

justified when the utility (revenue-producing ability) of the goods is no
longer as great as its cost. The writedown to net realizable value
should be recognized in the period in which the decline in utility
occurs.
b. Net realizable value means the estimated selling price less any
estimated costs required to complete the sale.
13. Net realizable value is the selling price of an inventory item, less any
estimated costs required to make the item saleable.
LO 5 BT: K Difficulty: S Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
14. No. Net realizable value is usually higher than cost because this is the
nature of selling merchandise inventory for a profit. The recognition of the
gain occurs when the inventory is sold, in accordance with revenue
recognition criteria.
LO 5 BT: C Difficulty: S Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
15. To be classified as inventory, an asset must be owned by the business

and must be in a form ready for sale.

16. The additional disclosures on the financial statements concerning

inventory include
a. Details of inventory categories such as raw materials and finished
goods.
b. The cost determination method used (specific identification, FIFO,
or weighted average).
c. A statement that the inventory is reported at the lower of cost and
net realizable value.
d. The amount of cost of goods sold.
e. The amount of any writedown to net realizable value.
f. The amount of any reversals of previous writedowns, including the
reason why the writedown was reversed.
17. A decrease in the days sales in inventory from one year to the next would
usually be seen as an improvement in the company’s efficiency in
managing inventory. It means that less inventory is being held relative to
sales.
LO 6 BT: AN Difficulty: S Time: 5 min. AACSB: Analytic CPA: cpa-t001 cpa-t005

CM: Reporting and Finance
18. The inventory turnover ratio measures the number of times, on average,
inventory is sold (turned over) during the period. Although there is no right
number of times, there would be an optimum number of times depending
on to which industry the business belongs. Having too high an inventory
turnover ratio can result in too few items left in inventory, causing a
stockout or shortage, which may upset customers. Having too low a
turnover may add risks to the business that the inventory will go out of
date, deteriorate, or become obsolete and lose its resale value. In
addition, too slow an inventory turnover brings on additional costs to the
business such as warehousing and financing. Inventory ties up the firm’s
cash and can compromise working capital.
LO 6 BT: C Difficulty: M Time: 5 min. AACSB: Analytic CPA: cpa-t001 cpa-t005

*19. It is necessary to calculate cost of goods available for sale in a periodic

inventory system because we wait until the end of the period to allocate
the amount to ending inventory (unsold) and cost of goods sold (sold).

*20. The cost flow relationships for inventory can be translated into the
following equations: (1) Beginning Inventory + Cost of Goods Purchased
= Cost of Goods Available for Sale, (2) Cost of Goods Available for Sale –
Cost of Goods Sold = Ending Inventory.
*21. In a periodic system, the average is a weighted average calculated at the

end of the period based on total goods available for sale for the entire
period. In a perpetual system, the weighted average is calculated after
each purchase (goods available for sale in dollars ÷ goods available for
sale in units). A new weighted average must be calculated with each
purchase and thus the weighted average becomes a moving average.
*22. Inventories must be estimated when (1) a company uses the periodic
inventory system and management wants interim (monthly or quarterly)
financial statements but a physical inventory is only taken annually, or (2)
a fire or other type of casualty makes it impossible to take a physical
inventory. An estimate of the inventory can also help to test the
reasonableness of the inventory balance that was determined when a
physical count was done.
*23. Disagree. A company’s gross profit margin does not necessarily remain
constant from year to year. Gross profit can change due to changes in
merchandising policies or in market conditions. The accuracy of the
method is also affected by the mix of products sold during the year and
whether the method is applied to a product line, a department, or the
company as a whole. The year-end inventory count also serves internal
control purposes. It helps management examine the presence of
merchandise and its physical condition.
*24. The retail inventory method is an averaging technique and may produce
an incorrect inventory valuation if the blend of inventory items in ending
inventory is not the same as in cost of goods available for sale. It produces
an estimate of ending inventory based on the weighted average cost
formula.

SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 6.1
a. Ownership of the goods belongs to the consignor

(Helgeson). Thus, these goods should be included in
Helgeson’s inventory.
b. The goods in transit should not be included in inventory

as title remains with the seller until the goods reach the
buyer (Helgeson).
c. The goods being held belong to the customer. They

should not be included in Helgeson’s inventory.
d. Ownership of these goods rests with the other company

(the consignor). These goods should not be included in
Helgeson’s inventory.
e. The goods in transit to a customer should not be included

in inventory as title passes to the buyer when the public
carrier accepts the goods from the seller (Helgeson).
BRIEF EXERCISE 6.2
The correct cost of inventory is:
Total cost per inventory count $55,500

a. Inventory held for alterations (1,500)
b. Inventory held on consignment (4,250)
c. Goods shipped FOB shipping point
prior to Dec. 31 2,875
Freight on inventory purchase 310
d. Goods shipped FOB destination prior to Dec. 31 0
Freight on inventory purchase 0
Correct inventory cost at December 31 $52,935
LO 1 BT: AP Difficulty: C Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 6.3
Cost of Goods Sold
Painting Total Cost

3 $2,900
4 3,900
Total $6,800
Ending Inventory
Painting Total Cost

1 $ 500
2 2,500
Total $3,000
LO 2 BT: AP Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting
BRIEF EXERCISE 6.4
a. 2 FIFO
b. 1 Specific identification
c. 3 Weighted Average
d. 3 Weighted Average
e. 3 Weighted Average
f. 1 Specific identification
g. 1 Specific identification

BRIEF EXERCISE 6.5

Purchases Cost of goods sold Inventory balance
Date Units Cost Total Units Cost Total Units Cost Total
June 1 200 $25.00 $5,000.00 200 $25.00 $5,000.00
7 400 $22.00 $8,800.00 (a) (b) (c)

200 $25.00 5,000.00
400 $22.00 8,800.00
13,800.00
18 (d) (e)
200 $25.00 $5,000.00 (f) (g) (h)
150 $22.00 $3,300.00 250 $22.00 5,500.00
$8,300.00
26 350 $20.00 $7,000.00 (i) (j) (k)
250 $22.00 5,500.00
350 $20.00 7,000.00
12,500.00

BRIEF EXERCISE 6.6

Weighted Average Calculations
Date Purchases Cost of goods sold Inventory balance Total WA Cost
Units Cost Total Units Cost Total Units Cost Total Units Cost per unit
01-Jun Beginning inventory A B B÷A
400 $25.00 $10,000.00 400 $25.00 $10,000.00
(a) (b) (c)
07-Jun 600 22.00 13,200.00 1,000 23.20 23,200.00 400 $10,000.00
600 13,200.00
1,000 23,200.00 $23.20
(d) (e) (f) (g) (h)
18-Jun 550 $23.20 $12,760.0 450 23.20 10,440.00 1,000 23,200.00
0
-550 -12,760.00
450 10,440.00 $23.20
(i) (j) (k)
26-Jun 450 20.00 9,000.00 900 21.60 19,440.00 450 10,440.00
450 9,000.00
900 19,440.00 $ 21.60
(a) 1,000 = 400 + 600
(b) ($10,000.00 + $13,200.00) ÷ (400 + 600) = $23.20
(c) $23,200.00 = $10,000.00 + $13,200.00
(d) see (b) above
(e) $12,760.00 = 550 × $23.20
(f) 450 = 1,000 – 550
(g) see (b) above
(h) $10,440.00 = 450 × $23.20 (or $23,200.00 - $12,760.00)
(i) 900 = 450 + 450
(j) $21.60 = ($10,440.00 + $9,000.00) ÷ (450 + 450)
(k) $19,440.00 = 900 × $21.60 (or $10,440.00 + $9,000.00)

BRIEF EXERCISE 6.7

a. FIFO
Nov. 1 Beginning inventory
10 $5.00 $50 10 $5.00 $50
4 20 5.50 110 10 5.00 50
20 5.50 110
160
7 20 6.00 120 10 5.00 50
20 5.50 110
20 6.00 120
280
10 10 $5.00 $50 20 5.50 110
20 6.00 120
230
12 20 5.50 110
_ _ 10 6.00 60 10 6.00 60
170
Total 50 $280 40 $220 10 $60
Check: Cost Units

Cost of goods available for sale $280.00 50
Less: cost of goods sold 220.00 40
Ending inventory $ 60.00 10

BRIEF EXERCISE 6.7 (Continued)

b. Weighted Average
Nov 1 Beginning inventory A B B÷A
10 $5.00 $50.00 10 $5.00 $50.00
4 20 5.50 110.00 30 5.33 160.00 10 $50.00
20 110.00
30 160.00 $5.33
7 20 6.00 120.00 50 5.60 280.00 30 160.00
20 120.00
50 280.00 $5.60
10 10 $5.60 $56.00 40 5.60 224.00 50 280.00
-10 -56.00
40 224.00 $5.60
12 30 5.60 168.00 10 5.60 56.00 40 224.00
-30 -168.00
10 56.00 $5.60
Total 50 $280.00 40 $224.00 10 $ 56.00

Cost of goods available for Cost of goods sold Ending inventory
sale-
Check: Cost Units
Cost of goods available for sale $280.00 50
Less: cost of goods sold 224.00 40

BRIEF EXERCISE 6.8
a. FIFO
Date Account Titles and Explanation Debit Credit
Nov. 4 Merchandise Inventory (20 × $5.50)... 110

Accounts Payable.......................... 110
To record purchase on account.
Nov. 12 Accounts Receivable.......................... 240

Sales (30 × $8.00)........................... 240
To record sales on account.
Cost of Goods Sold1............................ 170

Merchandise Inventory…………… 170
1
([20 × $5.50] + [10 × $6.00])
To record cost of goods sold.
b. Weighted Average
Nov. 4 Merchandise Inventory (20 × $5.50)... 110

Accounts Payable.......................... 110
Nov. 12 Accounts Receivable.......................... 240

Sales (30 × $8.00)........................... 240
Cost of Goods Sold (30 × $5.60)........ 168

Merchandise Inventory.................. 168
LO 2 BT: AP Difficulty: S Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 6.9
a. FIFO
b.Weighted average cost
c. Weighted average cost
d.FIFO
BRIEF EXERCISE 6.10
a. Weighted average cost gives the higher inventory valuation

when prices are falling. This is because the cost of the units
is a blend of older and newer items. Under the FIFO system,
ending inventory is composed of newer items purchased at a
lower cost.
b. FIFO gives the higher cost of goods sold amount. This is

because the cost of the units purchased earlier, at a higher
cost, are assumed to have been sold first and are allocated
to cost of goods sold.
c. The selection of a cost formula does not affect cash flow.

The cost formula is a method of allocating costs to cost of
goods sold and ending inventory. It does not involve the
inflow or outflow of cash.
d. In selecting a cost formula, the company should consider

their type of inventory and its actual physical flow. While it is
not essential to match the actual physical flow to the cost
formula, it does give the company an indication as to its flow
of costs throughout the period. The company should also
consider the method that will report inventory on the balance
sheet that is close to the inventory’s recent costs.

BRIEF EXERCISE 6.11
Assets = Liabilities + Owner’s Equity
2020 No Effect No Effect No Effect

2021 No Effect No Effect No Effect
2020
Beginning inventory O $23,000 Sales

+ Purchases - Cost of goods sold O $23,000
Cost of goods
available for sale O $23,000 Gross profit/Profit U $23,000
- Ending inventory
Cost of goods sold O $23,000
Note that the inventory error first occurred on December 31, 2019
and that 2019 profit and owner’s equity would be overstated by
$23,000. The 2020 profit is understated by $23,000. This error is
added to the prior year’s overstatement of $23,000, and the two
errors cancel out. Owner’s equity at the end of 2020 is correct. The
ending inventory is also correct at the end of 2020.
2021
Since the 2020 error reverses the impact of an error originally

occurring in 2019, there would be no impact on the 2021 financial
statements. Profit, owner’s equity, and ending inventory would all
be correctly stated (assuming no new errors have occurred).
LO 4 BT: C Difficulty: M Time: 15 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 6.12
a. The understatement of ending inventory caused cost of goods

sold to be overstated by $7,000 and profit to be understated by
$7,000. The correct profit for 2020 is $97,000 ($90,000 + $7,000).
Beginning inventory Sales
+ Purchases - Cost of goods sold O $7,000
Cost of goods
available for sale Gross profit / Profit U $7,000
- Ending inventory U $7,000
Cost of goods sold O $7,000
b. Total assets and owner’s equity in the balance sheet will both
be understated by the amount that ending inventory is
understated, $7,000. If profit is understated, then owner’s
equity is also understated as profit is a component of owner’s
equity. Using the accounting equation:
A = L + OE
U$7,000 = U$7,000
c. The error arising in 2020, if left uncorrected, will flow through

into 2021. The 2020 error will affect the 2021 beginning
inventory by an understatement of $7,000. This causes cost of
goods sold to be understated $7,000 and profit to be overstated
$7,000.
Beginning inventory U $7,000 Sales
+ Purchases - Cost of goods sold U $7,000
Cost of goods Gross profit / Profit
available for sale O $7,000
- Ending inventory
Cost of goods sold U $7,000
Total assets and owner’s equity in the balance sheet will both
be correct since 2021 ending inventory is correct. The 2020
error causes an understatement of 2020 profit of $7,000 and an
overstatement of 2021 profit of $7,000, causing the total profit
for the two-year period to self correct. This causes owner’s
capital in 2021 to be correctly stated.

LO 4 BT: C Difficulty: M Time: 20 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 6.13
a.

Inventory Categories Cost NRV LCNRV Adj.

Personal computers $27,000 $21,500 $21,500 $5,500
Servers 18,000 19,500 18,000 N/A
Total solution printers 10,000 8,500 8,500 1,500
Total $55,000 $49,500 $48,000 $7,000*
b. *The entry to record the adjustment would be:

Cost of goods sold............................ 7,000
Merchandise inventory............. 7,000
To record adjustment to cost of goods sold.
BRIEF EXERCISE 6.14
The correct ending inventory should be $48,000.
The correct cost of goods sold should be $425,500 ($418,500 +

$7,000).
BRIEF EXERCISE 6.15
Inventory turnover = $1,150,000 ÷ [($132,000 + $143,000) ÷ 2]

= 8.4 times
Days sales in inventory = 365 ÷ 8.4

= 43.5 days
LO 6 BT: AN Difficulty: M Time: 5 min. AACSB: Analytic CPA: cpa-t001 cpa-t005


BRIEF EXERCISE 6.16
The company’s inventory management has deteriorated in 2021.

The inventory turnover ratio went from 9.1 in 2020 to 8.4 in 2021.
The decrease in this ratio means that the company is selling its
inventory fewer times in 2021 than in 2020. The days sales in
inventory shows this deterioration by interpreting the turnover
ratio in days that inventory is on hand. We can see that the
number of days that inventory is on hand has increased from 40.1
days in 2020 to 43.5 days in 2021.

*BRIEF EXERCISE 6.17
Goods Available for Sale

Units Unit Cost Total Cost
st
1 purchase 200 $8 $1,600
2nd purchase 250 7 1,750
3rd purchase 300 6 1,800
Goods available for sale 750 $5,150
Ending inventory in units 400
Number of units sold 350
a. FIFO
Ending Inventory:
Purchase Units Unit Cost Total Cost
rd
3 300 $6 $1,800
nd
2 100 7 700
Total 400 $2,500
Cost of goods sold: $5,150 – $2,500 = $2,650
Check of cost of goods sold:

Purchase Units Unit Cost Total Cost
st
1 200 $8 $1,600
nd
2 150 7 1,050
Total 350 $2,650

*BRIEF EXERCISE 6.17 (Continued)
b. Weighted Average
Weighted average unit cost: $5,150  750 units = $6.87 per unit
Ending Inventory: 400 units × $6.87 per unit = $2,748

350 units × $6.87 per unit = $2,405
(rounding the weighted average cost per unit to the
nearest penny introduces a slight rounding difference).
a. and b. The journal entries are the same.
Jan. 3 Purchases (1,000 × $4.50).................. 4,500

Accounts Payable.......................... 4,500
To record purchases on account.
9 Accounts Receivable.......................... 5,500

Sales (550 × $10)............................ 5,500
15 Cash..................................................... 8,500
Sales (850 × $10)............................ 8,500
To record cash sales.
LO 2,7 BT: AP Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

Net sales............................................................................ $275,000

Less: Estimated gross profit (45% × $275,000)............. 123,750
Estimated cost of goods sold.......................................... $151,250
Cost of goods available for sale ($40,000 + $160,000). . $200,000

Less: Estimated cost of goods sold.............................. 151,250
Estimated cost of ending inventory................................ $ 48,750

At Cost At Retail
Goods available for sale $35,000 $50,000
Net sales 40,000
Ending inventory at retail $10,000
Cost-to-retail ratio = $35,000 ÷ $50,000 = 70%
Estimated cost of ending inventory = $10,000 × 70% = $7,000

SOLUTIONS TO EXERCISES
EXERCISE 6.1
1. Do not include in inventory – Sam’s does not own items held

on consignment for another company.
2. Include in inventory – Because the shipping terms are FOB

destination, Sam’s owns the goods until they arrive at the
customer’s premises.
3. Do not include in inventory – Shipping terms FOB destination

means that Sam’s does not own the items until delivered to
their premises.

shipping point, Sam’s owns the goods in transit.

shipping point, ownership has transferred to Sam’s and
Sam’s pays the freight charges.
6. Do not include in inventory – Because freight costs paid

by the seller are freight-out or delivery expense, they are
included in operating expenses, not as part of the cost of
inventory.
LO 8 BT: K Difficulty: C Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting

EXERCISE 6.2
Ending inventory—physical count.................................. $281,000

Adjustments:
1. Add to inventory: Title passed to Moghul when
goods were shipped................................................... 95,000
2. Add to inventory: Title remains with Moghul until
buyer receives goods................................................. 35,000
3. Add to inventory: Consignor (Moghul) own goods. 30,500
4. Add to inventory: Title passed to Moghul when
goods were shipped................................................... 28,000
$469,500
LO 1 BT: AP Difficulty: C Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

EXERCISE 6.3
a. Carrie’s Car Emporium should use the specific identification

instead of one of the other cost formulas. Specific
identification is used when a company sells items that are not
interchangeable. In the case of cars, these items are not
interchangeable. Each car has a unique identifiable VIN
(vehicle identification number), along with its cost.
b.
Cost of Ending
Description Cost Goods Sold Inventory
2018 Red Jeep $15,000 $15,000
2019 Blue Honda 12,000 12,000
2020 Black Audi 25,000 $25,000
2017 Grey Toyota 18,000 18,000
2017 Green Range Rover 10,000 ______ 10,000
$80,000 $27,000 $53,000
c.
Dec. 22 Cash..................................................... 33,000

Sales ($16,500 × 2)......................... 33,000
Cost of Goods Sold1........................... 27,000

Merchandise Inventory................. 27,000
1
($15,000 + $12,000)

EXERCISE 6.4
a. FIFO
Purchases Cost of goods sold Balance
May 1 Beginning inventory
400 $4.00 $1,600 400 $4.00 $1,600
3 300 $4.00 $1,200 100 4.00 400
4 1,300 $4.10 5,330 100 4.00 400
1,300 4.10 5,330
5,730
14 700 $4.40 3,080 100 4.00 400
1,300 4.10 5,330
700 4.40 3,080
8,810
16 100 4.00 400 400 4.10 1,640
900 4.10 3,690 700 4.40 3,080
4,090 4,720
18 400 4.10 1,640 700 4.40 3,080
29 500 4.75 2,375 700 4.40 3,080
500 4.75 2,375
Total 2,900 $12,385 1,700 $6,930 1,200 $5,455
Cost of goods available Cost of goods sold Ending inventory
for sale

EXERCISE 6.4 (Continued)
Check:
Cost Units
Cost of goods available for sale $12,385 2,900
Less: cost of goods sold 6,930 1,700
Ending inventory $ 5,455 1,200
b.
May 3 Accounts Receivable.......................... 2,100

Sales (300 × $7.00)......................... 2,100
Cost of Goods Sold............................. 1,200

Merchandise Inventory (300 × $4.00) 1,200
4 Merchandise Inventory (1,300 × $4.10) 5,330


Sales (1,000 × $7.00)...................... 7,000
Cost of Goods Sold1............................ 4,090

Merchandise Inventory.................. 4,090
1
[(100 × $4.00) + (900 × $4.10)]
c. Sales ($2,100 + $7,000 + [400 × $7.50]) $12,100

Cost of goods sold 6,930
Gross profit $5,170

EXERCISE 6.5
a. Weighted Average
Jan. 1 Beginning inventory A B B÷A
1,000 $12.00 $12,000 1,000 $12.00 $12,000
Feb. 15 2,000 18.00 36,000 3,000 16.00 48,000 1,000 12,000
2,000 36,000
3,000 48,000 $16.00
Apr. 24 2,500 16.00 40,000 500 16.00 8,000 3,000 48,000
-2,500 -40,000
500 8,000 $16.00
June 6 3,500 23.00 80,500 4,000 22.13 88,500 500 8,000
3,500 80,500
4,000 88,500 $ 22.13
Oct. 18 2,000 22.13 44,260 2,000 22.12 44,240 4,000 88,500
-2,000 -44,260
2,000 44,240 $22.12
Dec. 4 1,400 26.00 36,400 ____ ______ 3,400 23.72 80,640 2,000 44,240
_ 1,400 36,400
3,400 80,640 $23.72
Totals 7,900 $164,900 4,500 $84,260 3,400 $80,640
Cost of goods available for - Cost of goods sold = Ending inventory
sale

Check:
Cost Units
Ending inventory $ 80,640 3,400
b.
June 6 Merchandise Inventory (3,500 × $23). 80,500

Oct. 18 Accounts Receivable.......................... 66,000

Sales (2,000 × $33)......................... 66,000

1
(2,000 × $22.13)
c. Sales ([2,500 × $30] + $66,000) $141,000

Gross profit $56,740

EXERCISE 6.6
a. (1) FIFO

July 1 Beginning inventory
150 $5.00 $750.00 150 $5.00 $ 750.00
July 150 5.00 750.00
12 230 6.75 1,552.50
230 6.75 1,552.50 2,302.50
July 150 $5.00 $750.00
20 100 6.75 675.00 130 6.75 877.50
1,425.00
July 130 6.75 877.50
28 490 7.00 3,430.00
490 7.00 3,430.00 4,307.50
Total 870 $5,732.50 250 $1,425 620 $4,307.50
Cost of goods available Cost of goods sold = Ending inventory
-for sale
Check:
Cost Units
Cost of goods available for sale $5,732.50 870
Less: cost of goods sold 1,425.00 250
Ending inventory $4,307.50 620

(2) Weighted Average

01-Jul Beginning inventory A B B÷A
150 $5.00 $750.00 150 $5.00 $750.00
12-Jul 230 6.75 1,552.50 380 6.06 2,302.50 150 $750.00
230 1,552.50
380 2,302.50 $ 6.06
$1,515.0
20-Jul 250 $6.06 0 130 6.06 787.50 380 2,302.50
-250 -1,515.00
130 787.50 $ 6.06
28-Jul 490 7.00 3,430.00 620 6.80 4,217.50 130 787.50
490 3,430.00
620 4,217.50 $ 6.80
$5,732.5 $1,515.0 $4,217.5
Total 870 0 250 0 620 0
Cost of goods available - Cost of goods sold = Ending inventory
sale
Check:
Cost Units
Less: Cost of goods
sold 1,515.00 250

b.
Cost of Goods Ending

Sold Inventory
FIFO—Perpetual $1,425.00 $4,307.50
Weighted Average— $1,515.00 $4,217.50

Perpetual
The FIFO cost formula will produce the higher ending

inventory because costs have been rising. Under this formula,
the earliest costs are assigned to cost of goods sold, and the
latest costs remain in ending inventory. For Dene Company,
the ending inventory under FIFO is $4,307.50 compared to
$4,217.50 under weighted average cost.
c. The weighted average cost formula will produce the higher

cost of goods sold for Dene Company. Under the weighted
average cost formula some of the most recent costs are
averaged into cost of goods sold, and the earliest costs are
averaged into the ending inventory. The cost of goods sold is
$1,515.00 for the weighted average compared to $1,425.00
under FIFO.

EXERCISE 6.7
a. (2)
(1) Weighted
FIFO Average
Sales ($15 × 1,180) $17,700 $17,700
Cost of goods sold 8,060 7,787
Gross profit $ 9,640 $ 9,913
Gross profit is different under the two methods because a

different flow of goods is assumed. Under the FIFO method,
the earliest costs are assigned to cost of goods sold. Since
product costs are decreasing, this means that older, higher
costs are flowing to cost of goods sold. Under the weighted
average method, the older, higher costs are averaged into
cost of goods sold with newer, lower costs, producing a lower
amount than the FIFO method.
b. The choice of inventory cost formula does not affect cash

flow. It affects the allocation of costs between inventory and
cost of goods sold.

EXERCISE 6.8
a.
2021 2020
Ending inventory, incorrect $30,000 $30,000
Error $4,000U $5,500 O
Ending inventory, correct $34,000 $24,500
Cost of goods sold, incorrect $170,000 $175,000

Error – beginning inventory 2021 5,500O
Error – ending inventory 2020 5,500 U
Error – ending inventory 2021 4,000O
Cost of goods sold, correct $160,500 $180,500
b. In 2020 profit is overstated by $5,500, the amount of the

error in ending inventory. This error flows through to
owner’s equity in 2020 to produce an overstatement of
$5,500.
In 2021 both errors have an impact. The net effect is an

understatement of profit by $9,500. This is a result of the
$5,500 overstatement of the beginning inventory plus
$4,000 understatement of ending inventory.
Owner’s equity in 2021 would show only an understatement

of $4,000. The $5,500 overstatement of 2020 would be offset
by the $5,500 understatement in profit caused by the
impact on beginning inventory in 2021.
c. It is important that Glacier Fishing Gear correct these

errors because users of the financial statements look at the
results for individual years and also look at any trends.
LO 4 BT: AN Difficulty: C Time: 25 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

EXERCISE 6.9
a.
MARRAKESH COMPANY
Income Statement (Partial)
December 31
________________________________________________________
2021 2020
Sales.................................................................. $500,000 $500,000
Cost of goods sold*.......................................... 430,000 390,000
Gross profit....................................................... $ 70,000 $110,000
* Cost of goods sold (2020) = $410,000 – $20,000 = $390,000

Cost of goods sold (2021) = $410,000 + $20,000 = $430,000
b. The cumulative effect on total gross profit for the two years is
zero, as shown below:
2021 2020
Incorrect gross profits: $90,000 + $90,000 = $180,000
Correct gross profits: $70,000 + $110,000 = 180,000
Difference $ 0
LO 4 BT: AN Difficulty: C Time: 20 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

EXERCISE 6.10
a.
Cost NRV LCNRV
Clothing $ 665 $ 570 $ 570
Jewellery 1,440 2,016 1,440
Greeting cards 47 94 47
Stuffed toys 672 2,184 672
Total inventory $2,824 $4,864 $2,729
b. Cost of Goods Sold1................................... 95

Merchandise Inventory....................... 95
1
($2,824 – $2,729)
To write down inventory to lower net realizable value.

EXERCISE 6.11
a.
Cost NRV LCNRV
Cameras
Nikon $10,125 $ 9,000
Canon 6,800 7,225
Total 16,925 16,225 $16,225
Lenses
Sony 2,970 2,728
Sigma 4,300 4,400
Total 7,270 7,128 7,128
Total
inventory $24,195 $23,353 $23,353
b. Cost of Goods Sold1................................... 842

Merchandise Inventory....................... 842
1
($24,195 – $23,353)
To write down inventory to lower net realizable value.
c. In the notes to the financial statements, the following

information should be reported: (1) the major inventory
classifications; (2) the cost determination method; (3) the
value of inventory reported at net realizable value ($23,353);
(4) the cost of goods sold; and (5) the amount of the
writedown to net realizable value ($842).

EXERCISE 6.12
a.
2021 2020
Inventory
turnover $50,000 $51,200
[($20,000 + $30,000) ÷ 2] [($30,000 + $34,000) ÷ 2]
= 2.00 times = 1.60 times
Days sales in
inventory 365 ÷ 2.00 = 183 days 365 ÷ 1.60 = 228 days
Gross profit
margin ($125,000 – $50,000) ($128,000 – $51,200)
$125,000 $128,000
= 60.0% = 60.0%
b. Inventory turnover has increased from 1.60 (2020) to 2.00

(2021). As well, days sales in inventory has decreased from
228 days (2020) to 183 days (2021). Both of these ratios
indicate that it is taking less time to sell inventory.
The gross profit margin has remained at the same level of

60%. The sales volume and cost of goods sold have also
remained relatively constant from 2020 to 2021. The
improvement in inventory turnover and days sales in
inventory comes from decreasing the level of merchandise on
hand. Whereas the gross profit margin has remained
constant, lowering the quantity of merchandise on hand
usually lowers carrying costs and increases overall
profitability.
The increase in inventory turnover (and decrease in days

sales in inventory) indicate an improving liquidity.



*EXERCISE 6.13
a. FIFO
Ending Inventory:
Date Units Unit Cost Total Cost
Apr. 16 15 $12 $180
Apr. 12 10 11 110
25 $290
Cost of Goods Sold: $915 – $290 = $625
Weighted Average
Weighted Average unit cost: $915 ÷ 90 units = $10.17 (rounded)

per unit
Ending Inventory: 25 units × $10.17 per unit = $254 (rounded)
Cost of Goods Sold: $915 – $254 = $661
b. FIFO
Check of Cost of Goods Sold:

Apr. 1 30 $ 8 $240
Apr. 12 35 11 385
65 $625
Weighted Average
Check of Cost of Goods Sold: 65 units × $10.17 per unit = $661

(rounded)

*EXERCISE 6.14
a.
Cost of Goods Available for Sale
Unit Total
Date Units Cost Cost
July 1 150 $5.00 $ 750.00
12 230 6.75 1,552.50
28 490 7.00 3,430.00
Total 870 $5,732.50
1. FIFO Ending Inventory:

June 28 490 $7.00 $3,430.00
12 130 6.75 877.50
620 $4,307.50
Cost of Goods Sold: $5,732.50-$4,307.50 = $1,425.00
Check of Cost of Goods Sold:

June 1 150 $ 5.00 $ 750
12 100 6.75 675
250 $1,425
2. Weighted Average
Weighted Average unit cost: $5,732.50 ÷ 870 units = $6.59 per

unit
Ending inventory: 620 units x $6.59 per unit = $4,085.80

Cost of goods sold: $5,732.50 – $4,085.80 = $1,646.70

*EXERCISE 6.14 (Continued)
b. The weighted average cost is not $6.25 because the weighted

average cost method uses a weighted average unit cost, not a
simple average of unit costs ($5 + $6.75 + $7 = $18.75 ÷ 3 =
$6.25).
c.
Cost of Ending
Goods Sold Inventory
FIFO—Periodic $1,425.00 $4,307.50
FIFO—Perpetual 1,425.00 4,307.50
Weighted Average— 1,646.70 4,085.80

Periodic
Weighted Average— 1,515.00 4,217.50
Perpetual
FIFO: The results are identical using either the periodic or the
perpetual inventory systems.
Weighted Average: Cost of goods sold is $131.70 lower and

ending inventory $131.70 higher using a perpetual system.
This is because in the perpetual system, the higher priced
purchases on July 28 are not considered in the last sale; in
the periodic system the weighted average is based on all the
purchases and is applied to all the sales.

*EXERCISE 6.15
a. FIFO

Oct.1 Beginning
inventory
25 $295 $7,375 25 $295 $7,375
Oct. 10 30 300 9,000 25 295 7,375
30 300 9,000
16,375
Oct. 12 25 $295 $7,375
17 300 5,100 13 300 3,900
12,475
Oct. 13 35 305 10,675 13 300 3,900
35 305 10,675
14,575
Oct. 25 13 300 3,900
32 305 9,760 3 305 915
13,660
Oct. 27 20 310 6,200 3 305 915
20 310 6,200
7,115
Total 110 $33,250 87 $26,135 23 $7,115

Cost of goods - Cost of goods sold = Ending inventory
available for sale
Check:
Cost Units
Cost of goods available for sale $33,250 110
Less: cost of goods sold 26,135 87
Ending inventory $ 7,115 23


Weighted Average
Unit
s Cost Total Units Cost Total Units Cost Total Units Cost per unit
Oct 1 Beginning inventory A B B÷A
$295.0
25 $295.00 $7,375.00 25 0 $7,375.00
10 30 300.00 9,000.00 55 297.73 16,375.00 25 $7,375.00
30 9,000.00
$297.
55 16,375.00 73
$12,504.6
12 42 $297.73 6 13 297.72 3,870.34 55 16,375.00
-42 -12,504.66
13 3,870.34 297.72
13 35 305.00 10,675.00 48 303.03 14,545.34 13 3,870.34

35 10,675.00
48 14,545.34 303.03
25 45 303.03 13,636.35 3 303.00* 908.99 48 14,545.34
-45 -13,636.35
3 908.99 303.00*
27 20 310.00 6,200.00 23 309.09 7,108.99 3 908.99
20 6,200.00
23 7,108.99 309.09
$26,141.0
Total 110 $33,250.00 87 1 23 $7,108.99
sale
Check:
Cost Units
Less: Cost of goods sold 26,141.01 87
Ending Inventory $7,108.99 23
* discrepancy due to rounding the unit cost to 2 decimal places


b.
Unit Total
Date Units Cost Cost
Oct 1 25 $295 $ 7,375
Oct. 10 30 300 9,000
Oct. 13 35 305 10,675
Oct. 27 20 310 6,200
Total 110 $33,250
FIFO
Ending Inventory:
Oct. 27 20 $310 $6,200
13 3 305 915
23 $7,115
Cost of Goods Sold: $33,250 – $7,115 = $26,135
Weighted Average
Weighted average cost per unit: $33,250 ÷ 110 units = $302.27 per unit
Ending inventory: 23 × $302.27 = $6,952.21
Cost of goods sold: $33,250 – $6,952.21 = $26,297.79

*EXERCISE 6.16
a. Perpetual
Weighted
FIFO Average
Dr. Cr. Dr. Cr.
Oct. 10 Merchandise Inventory 9,000 9,000
Accounts Payable 9,000 9,000
12 Cash 18,900 18,900

Sales 18,900 18,900
Cost of Goods Sold 12,475 12,504.66

Merchandise Inventory 12,475 12,504.66
b. Periodic
Weighted
FIFO Average
Dr. Cr. Dr. Cr.
Oct. 13 Purchases 10,675 10,675
Accounts Payable 10,675 10,675
25 Cash 20,700 20,700

Sales 20,700 20,700

*EXERCISE 6.17
Net sales ($90,000 – $1,500 – $700)................................. $87,800

Less: Estimated gross profit (40% × $87,800).............. 35,120
Beginning inventory......................................................... $25,000

Cost of goods purchased
($51,200 – $2,400 – $1,300 + $2,200)...................... 49,700
Cost of goods available for sale...................................... 74,700
Less: Estimated cost of goods sold.............................. 52,680
Estimated cost of merchandise inventory..................... $22,020
*EXERCISE 6.18
Men’s Women’s
Shoes Shoes
Cost Retail Cost Retail

Beginning inventory $ 36,000 $ 58,050 $ 45,000 $ 95,750
Goods purchased 216,000 348,400 315,000 670,200
Goods available for sale $252,000 406,450 $360,000 765,950
Net sales 365,000 635,000
Ending inventory at retail $ 41,450 $130,950
Cost to retail ratio: $252,000 = 62% $360,000 = 47%

$406,450 $765,950
Estimated cost of
ending inventory $41,450 × 62% $130,950 × 47%
= $25,699 = $61,547

SOLUTIONS TO PROBLEMS
PROBLEM 6.1A
a.
1. Include the unsold portion of $510 ($875 – $365) in Carberry’s inventory.
Title passes to the buyer on sale.
2. Exclude the items from Carberry’s inventory. These goods have been
sold.
3. Exclude the items from Carberry’s inventory. These goods are owned
by Craft Producers.
4. Title to the goods does not transfer to the customer until March 3.
Include the $950 in ending inventory.
5. Carberry owns the goods once they are shipped on February 26.
Include inventory of $405 ($375 + $30).
6. Include $630 in inventory. These goods have not yet been sold.
7. Title of the goods does not transfer to Carberry until March 2. Exclude
this amount from the February 28 inventory.
8. The sale will be recorded on February 26. The goods should be

excluded from Carberry’s inventory at the end of February.
b. $65,000 Original Feb. 28 inventory valuation

+510 1.
+950 4.
+405 5.
+630 6.
$67,495 Revised Feb. 28 inventory valuation

PROBLEM 6.1A (Continued)
Taking It Further
The accountant would consider overlooking item 4. A sale to a customer has

taken place but the legal ownership of the merchandise is transferred after
year end. Recording this transaction in February will increase profit and
increase the accountant’s bonus. Intentionally not correcting this error
would be unethical.

PROBLEM 6.2A
Cost of goods sold Ending inventory

Cost/ Sales price/ Cost/
Model Serial # Unit Unit Model Serial # Unit
Nov. 8 Corolla C81362 $20,000 $22,000 Corolla C63825 $15,000
Camry G62313 26,000 28,000 Tundra F1883 22,000
18 Camry G71891 25,000 27,000 Camry G71811 27,000
Venza X3892 27,000 31,000 Venza X4212 28,000
Tundra F1921 25,000 29,000 Venza X4214 31,000
$123,000 $137,000 Tundra F2182 23,000
Camry G72166 30,000
$176,000
Taking It Further:
EastPoint Toyota should use the specific identification method because the vehicles are large
dollar value items that are specifically identifiable and they are not interchangeable.

PROBLEM 6.3A
a.

Nov. 1 Beginning inventory
60 $50 $3,000 60 $50 $3,000
9 100 46 4,600 60 50 3,000
100 46 4,600
7,600
15 60 $50 $3,000
60 46 2,760 40 46 1,840
5,760
22 150 44 6,600 40 46 1,840
150 44 6,600
8,440
29 40 46 1,840
120 44 5,280 30 44 1,320
7,120
30 45 42 1,890 30 44 1,320
45 42 1,890
3,210
Total 355 $16,090 280 $12,880 75 $3,210
Check:
Cost Units


b.
Nov. 22 Merchandise Inventory (150 × $44).... 6,600

Sales (160 × $60)............................ 9,600

Merchandise Inventory
1
[(40 × $46) + (120 × $44)]............... 7,120
c. Sales ([120 × $66] + $9,600) $17,520

Gross profit $ 4,640
d. The entry to record the adjustment would be:
Cost of Goods Sold (2 × $44)............. 88

Revised gross profit would be: $4,640 – $88 = $4,552
e. The merchandise inventory on the balance sheet would be

overstated by $88, as well as the owner’s capital account by
the same amount. On the income statement, the cost of goods
sold would be understated by $88. This would lead to an
overstatement of gross profit by $88 and of profit by $88.

Taking It Further:
The FIFO cost formula produces more meaningful inventory
amounts for the balance sheet because the units are costed at the
most recent purchase prices. These prices approximate
replacement cost, which is the most relevant value for decision
making.
The FIFO cost formula is more likely to approximate actual
physical flow because the oldest goods are usually sold first to
minimize spoilage and obsolescence.

PROBLEM 6.4A
a.
Weighted Average
Calculations
Units Cost Total Units Cost Total Unit Cost Total Units Cost per unit
s
Nov. 1 Beginning inventory A B B÷A
60 $50.00 $3,000.00 60 $50.00 $3,000.00
9 100 46.00 4,600.00 160 47.50 7,600.00 60 3,000.00
100 4,600.00
160 7,600.00 $47.50
15 120 47.50 5,700.00 40 47.50 1,900.00 160 7,600.00
-120 -5,700.00
40 1,900.00 47.50
22 150 44.00 6,600.00 190 44.74 8,500.00 40 1,900.00
150 6,600.00
190 8,500.00 44.74
29 160 44.74 7,158.40 30 44.72* 1,341.60 190 8,500.00
-160 -7,158.40
30 1,341.60 44.72*
30 45 42.00 1,890.00 ____ ______ 75 43.09 3,231.60 30 1,341.60
45 1,890.00
75 3,231.60 43.09
Totals 355 $16,090.00 280 $12,858.40 75 $3,231.60
Cost of goods available for sale - Cost of goods sold = Ending inventory
*discrepancy due to rounding the unit cost to 2 decimal places


Check:
Cost Units
Ending inventory $ 3,231.60 75
b.
Nov. 15 Accounts Receivable.......................... 7,920
Sales (120 × $66)............................ 7,920

1
(120 × $47.50)
c. Before making the change to the FIFO cost formula, the

company must consider if the FIFO formula would result in
more relevant information in the financial statements. Or has
the physical flow of inventory changed from average flow to
FIFO?
Comparison
Weighted
FIFO Average
Ending Cost of Ending Cost of
Inventory Goods Sold Inventory Goods Sold
$3,210 $12,880 $3,231.60 $12,858.40
If prices continue to fall, the FIFO cost formula will continue

to yield lower ending inventory and higher cost of goods
sold than the weighted average cost formula.

Taking It Further:
In selecting a cost formula, management should consider their

circumstances—the type of inventory and the flow of costs
throughout the period. Management should also consider their
financial reporting objectives. In the final determination, however,
management should select the cost formula that will provide the
most relevant financial information for decision-making.

PROBLEM 6.5A
a. (1) FIFO

June 1 Beginning inventory
5 $105 $525 5 $105 $525
4 2 $105 $210 3 105 315
18 5 $115 575 3 105 315
5 115 575
890
30 3 105 315
3 115 345 2 115 230
660
July 5 5 120 600 2 115 230
5 120 600
830
12 2 115 230
1 120 120 4 120 480
350
25 2 120 240 2 120 240
Total 15 $1,700 13 $1,460 2 $240
Check:
Cost Units
Ending inventory $ 240 2


Weighted Average
Calculations
June 1 Beginning inventory A B B÷A
5 $105.00 $525.00 5 $105.00 $525.00
4 2 $105.00 $210.00 3 105.00 315.00 5 $525.00
-2 -210.00
3 315.00 $105.00
18 5 115.00 575.00 8 111.25 890.00 3 315.00
5 575.00
8 890.00 111.25
30 6 111.25 667.50 2 111.25 222.50 8 890.00
-6 667.50
2 222.50 111.25
July 5 5 120.00 600.00 7 117.50 822.50 2 222.50
5 600.00
7 822.50 117.50
12 3 117.50 352.50 4 117.50 470.00 7 822.50
-3 -352.50
4 470.00 117.50
25 2 117.50 235.00 2 117.50 235.00 4 470.00
-2 235.00
2 235.00 117.50
Totals 15 $1,700.00 13 $1,465.00 2 $235.00
sale

a. (Continued)
Check:
Cost Units
b.
Weighted
FIFO Average
Sales*................................................................. $3,105 $3,105

Cost of goods sold........................................... 1,460 1,465
Gross profit....................................................... $1,645 $1,640
* Sales = (2 × $210) + (6 × $235) + (3 × $255) + (2 × $255)
Taking It Further:

throughout the period. In the final determination, however,

a.
PROBLEM 6.6A
Weighted Average
Calculations
Date Purchases Cost of goods sold Inventory balance Total WA
Cost
July 1 Beginning inventory A B B÷A
25 $10.00 $250.00 25 $10.00 $250.00
5 55 9.00 495.00 80 9.31 745.00 25 $250.00
55 495.00
80 745.00 $9.31
8 70 $9.31 $651.70 10 9.33* 93.30 80 745.00
-70 -651.70
10 93.30 9.33*
15 55 8.00 440.00 65 8.20 533.30 10 93.30
55 440.00
65 533.30 8.20
20 55 8.20 451.00 10 8.23* 82.30 65 533.30
-55 -451.00
10 82.30 8.23*
25 10 7 70.00 20 7.62 152.30 10 82.30
10 70.00
20 152.30 7.62
Totals 145 $1,255.00 125 $1,102.70 20 $152.30
sale
* discrepancy due to rounding the unit cost to 2 decimal places.

a. (Continued)
Check: Cost Units

GENERAL JOURNAL
Date Account Titles Debit Credit
July 5 Merchandise Inventory (55 × $9). . 495.00

Cash............................................ 495.00
To record cash purchase.
8 Cash (70 × $15)...............................1,050.00

Sales........................................... 1,050.00
Cost of Goods Sold (70 × $9.31)... 651.70

Merchandise Inventory............. 651.70
15 Merchandise Inventory (55 × $8). . 440.00

Cash.......................................... 440.00
20 Cash................................................ 660.00
Sales (55 × $12)........................ 660.00
Cost of Goods Sold (55 × $8.20)... 451.00

Merchandise Inventory............ 451.00
25 Merchandise Inventory (10 × $7). . 70.00

Cash.......................................... 70.00

b. The total cost of ending inventory is $152.30 and consists of

20 units.
c. Since the weighted average cost per unit of $7.62 is less than
net realizable value, no entry is required to adjust the amount
to lower of cost and net realizable value.
Cost: $152.30
Calculated net realizable value: $160 (20 × $8)
d. The ending inventory should be valued at $152.30, the lower of

cost and net realizable value.
The cost of goods sold is $1,102.70.
Taking It Further:
If Amelia had used FIFO instead of weighted average, the cost of

the ending inventory on July 31 would be calculated as follows:
(10 units × $7) + (10 units × $8) = $150
The FIFO cost is lower than net realizable value, so no adjustment

is required. The inventory will be presented on the balance sheet
at its cost basis of $150.

PROBLEM 6.7A
a.
Year Ended December 31, 2019
Total Owner's Cost of
Assets Equity Goods Sold Profit
As reported $ 850,000 $ 650,000 $ 500,000 $ 70,000
Impact of
Dec.31/2019
inventory
overstatement O 20,000 O 20,000 U 20,000 O 20,000
Correct amount $ 830,000 $ 630,000 $ 520,000 $ 50,000

As reported $ 900,000 $ 700,000 $ 550,000 $80,000
Impact of
Dec.31/2019
inventory
overstatement NE NE O 20,000 U 20,000
Impact of
Dec.31/2020
inventory
understatement U 32,000 U 32,000 O 32,000 U 32,000
Correct amount $ 932,000 $ 732,000 $ 498,000 $ 132,000

As reported $ 925,000 $ 750,000 $ 550,000 $90,000
Impact of
Dec.31/2020
inventory
understatement NE NE U 32,000 O 32,000
Correct amount $ 925,000 $ 750,000 $ 582,000 $ 58,000

b. The errors in calculating the company’s ending inventory will

not have an impact on the company’s cash account. The cash
balances will be correctly stated at December 31, 2019, 2020,
and 2021.
Taking It Further:
Part a. shows that even though 2021 year-end inventory and

owner’s equity are correct, the income statement shows the
impact of the 2020 error on cost of goods sold and profit. In
addition, comparative amounts for 2020 and 2019 would show
incorrect amounts for inventory, owner’s equity, cost of
goods sold, and profit. These errors impact trend and
profitability analyses and would need to be corrected.
LO 1,4 BT: AN Difficulty: C Time: 30 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 6.8A
a. (Incorrect)
HARRISON COMPANY
Income Statement
Year Ended July 31
2021 2020 2019

Sales $350,000 $330,000 $310,000
Cost of goods sold 245,000 235,000 225,000
Gross profit 105,000 95,000 85,000
Operating expenses 76,000 76,000 76,000
Profit $ 29,000 $ 19,000 $ 9,000
(Corrected)
HARRISON COMPANY
Income Statement
Year Ended July 31
2021 2020 2019

Sales $350,000 $330,000 $310,000
Cost of goods sold 270,000** 210,000* 225,000
Gross profit 80,000 120,000 85,000
Profit $ 4,000 $ 44,000 $ 9,000
** $270,000 = $245,000 + $10,000 + $15,000

* $210,000 = $235,000 – $10,000 – $15,000

b. The impact of these errors on owner’s equity at July 31, 2021

is zero because the total of the profit over the three-year
period is the same with the incorrect statements as it is with
the correct statements. However, using the incorrect numbers
it appears the company’s profit is increasing at a steady rate
over the three-year period when in fact it increased
substantially in 2020 and decreased substantially in 2021.
c. Inventory turnover = Cost of goods sold ÷ Weighted average

inventory
Incorrect
2020: $235,000 ÷ [($45,000 + $35,000) ÷ 2] = 5.88

2021: $245,000 ÷ [($55,000 + $45,000) ÷ 2] = 4.90
Corrected
2020: $210,000 ÷ [($55,000 + $35,000) ÷ 2] = 4.67

2021: $270,000 ÷ [($55,000 + $55,000) ÷ 2] = 4.91
Taking it Further:
The incorrect annual profits show an increasing trend of

profitability with profits increasing at a steady rate from $9,000 in
2019 to $19,000 in 2020 and then to $29,000 in 2021.
The corrected profit shows a large increase in profitability in 2020

followed by a large decrease in 2021. Profits increased from $9,000
to $44,000 in 2020 and subsequently decreased to $4,000 in 2021.
It is not possible to determine if the errors were deliberate or not.

Certain factors can indicate a higher likelihood that the errors are
deliberate. For example, if management bonuses are tied to trends
in profitability or income smoothing, then it may be possible the
errors were deliberate.

PROBLEM 6.9A
a.
Tonnes Total Cost Total NRV LCNRV
(1) Sept. 30 2,500 $1,262,500 $1,350,000 $1,262,500
(2) Oct. 31 2,000 1,070,000 1,040,000 1,040,000
b. (1) Sept. 30 No entry
(2) Oct. 31 Cost of Goods Sold.................. 30,000

Merchandise Inventory........ 30,000
To write down inventory to lower
c. An adjusting entry is required at November 30 because the

inventory, on which a previous writedown had been
recorded, is still on hand and the net realizable value has
partly recovered. If the inventory on hand at October 31 had
been sold, then an adjusting entry would not be required.
The adjustment is:
Nov. 30 Merchandise Inventory............ 20,000

Cost of Goods Sold1............ 20,000
1
[($530 – $520) × 2,000]
To record partial recovery of writedown
of inventory to lower net realizable value.
d. The notes should disclose the cost determination method,

the value of inventory reported at net realizable value, the
amount of any writedown to net realizable value (for the
month of October) and reversals of previous writedowns (for
the month of November), including the reason why the
writedown was reversed. This type of disclosure would be
required if the company prepares monthly financial
statements.

Taking It Further:
Essentially all companies are required to report inventory at

LCNRV on the balance sheet. A few exceptions apply such as
inventory items that will be used in production of finished goods
where the sales price of the finished good is stable.

PROBLEM 6.10A
a.
PepsiCo. Inc. 2016

$28,209
Inventory
($2,723 + $2,720) = 10.37 times
turnover
2

Days sales in 365 ÷ 10.37 = 35 days
inventory

Gross profit ($62,799 - $28,209)
= 55.08%
margin $62,799
PepsiCo. Inc. 2015

$28,731
Inventory
($2,720 + $3,143) = 9.80 times
turnover
2

inventory

Gross profit ($63,056 - $28,731)
= 54.44%
margin $63,056

a. (Continued)
Coca-Cola
Company 2016
$16,465
Inventory
($2,675 + $2,902) = 5.90 times
turnover
2

inventory

Gross profit ($41,863 - $16,465)
= 60.67%
margin $41,863
Coca-Cola
Company 2015
$17,482
Inventory
($2,902 + $3,100) = 5.83 times
turnover
2

inventory

Gross profit ($44,294 - $17,482)
= 60.53%
margin $44,294

b.
PepsiCo’s inventory turnover improved and days sales in
inventory showed an improvement of 2 days from 2015 to 2016.
PepsiCo’s gross profit margin showed a slight improvement from
54.44% to 55.08%.
Coca-Cola’s inventory turnover and days sales in inventory

improved slightly from 2015 and 2016. Coca-Cola’s gross profit
margin also showed a very slight improvement from 60.53% to
60.67%.
It is meaningful to compare these two companies in terms of their

ratios because the companies operate in the same industry. They
are different in terms of their size and a ratio analysis eliminates
this difference and makes for a meaningful comparison. Although
PepsiCo has a better inventory turnover than Coca-Cola, it earns
substantially less gross profit as a percentage of sales. It would be
useful to know if their accounting polices differ in any significant
ways.
Taking It Further:

throughout the period. Management selects the cost formula that
best approximates the physical flow of goods or represents recent
costs on the balance sheet. Both Pepsi and Coca-Cola have
different types of inventories such as ingredients for raw
materials, and finished goods such as concentrates, syrups,
beverages, and snack and other foods. A cost formula such as
weighted average is better suited for products such as
concentrates or syrups. Other products such as snack foods,
where freshness is important, would be better tracked with a cost
method such as FIFO.



*PROBLEM 6.11A
a. Cost of Goods Available for Sale
Date Explanation Units Unit Cost Total Cost

Jan. 1 Beginning inventory 200 $110 $22,000
Mar. 15 Purchase 80 111 8,880
July 20 Purchase 60 110 6,600
Sept. 4 Purchase 25 108 2,700
Dec. 2 Purchase 10 103 1,030
Total 375 $41,210
b. Number of units sold = 375 units available for sale – 35 units

on hand at the end of the year = 340 units sold
Sales = 340 units × $290 = $98,600
c. (1) FIFO
Ending Inventory:
Dec. 2 10 $ 103 $1,030
Sep. 4 25 108 2,700
35 $3,730

Jan. 1 200 $110 $22,000
Mar.15 80 111 8,880
July 20 60 110 6,600
340* $37,480
*340 = 375 – 35

*PROBLEM 6.11A (Continued)
c. (Continued)
Ending inventory: 35 units × $109.89 per unit = $3,846
d.
Weighted
FIFO Average
Sales revenue (340 × $290) $98,600 $98,600
Gross profit $61,120 $61,236
Taking It Further:
The Baby Store should continue to use the weighted average cost
method. GAAP requires that a cost determination method be
applied consistently from year to year. Changes in cost
determination methods are allowed only if the physical flow of
inventory has changed and the new method results in more
relevant information. The company cannot change methods simply
because they wish to achieve a particular outcome for profit. One
user, or set of users, should not be considered above other users.

*PROBLEM 6.12A
a. Cost of goods available for sale

July 1 Beginning inventory 400 $3.00 $1,200
10 Purchase 1,300 3.10 4,030
13 Purchase 700 3.40 2,380
27 Purchase 600 3.75 2,250
Total 3,000 $9,860
Number of units of ending inventory = 3,000 units available for

sale – 1,700* units sold = 1,300 units of ending inventory.
*1,700 units sold = 300 + 1,000 + 400
b. FIFO — periodic:
Ending Inventory:
July 27 600 $ 3.75 $2,250
July 13 700 3.40 2,380
1,300 $4,630
Sales revenue $10,400 *

*(300 × $6.00) + (1,000 × $6.00) + (400 × $6.50)


c. FIFO—Perpetual
July 1 Beginning inventory
400 $3.00 $1,200 400 $3.00 $1,200
2 300 $3.00 $ 900 100 3.00 300
10 1,300 3.10 4,030 100 3.00 300
1,300 3.10 4,030
4,330
11 100 3.00 300
900 3.10 2,790 400 3.10 1,240
3,090
13 700 3.40 2,380 400 3.10 1,240
700 3.40 2,380
3,620
27 600 3.75 2,250 400 3.10 1,240
700 3.40 2,380
600 3.75 2,250
5,870
28 400 3.10 1,240 700 3.40 2,380
_______ ______ _____ _______ __600 3.75 2,250
4,630
Total 3,000 $9,860 1,700 $5,230 1,300 $4,630
Cost of goods available - Cost of goods sold = Ending inventory
for sale

Check:
Cost Units
Ending inventory $4,630 1,300
Sales revenue $10,400

d. (1) FIFO periodic

GENERAL JOURNAL
July 10 Purchases (1,300 × $3.10)............. 4,030

Cash............................................ 4,030
11 Cash................................................ 6,000
Sales (1,000 × $6.00)................. 6,000
To record cash sale.

(2) FIFO perpetual

GENERAL JOURNAL
July 10 Merchandise Inventory1................. 4,030

Cash (1,300 × $3.10).................. 4,030
1
(1,300 × $3.10)
11 Cash................................................ 6,000
Sales (1,000 × $6.00)................. 6,000
Cost of Goods Sold2...................... 3,090

Merchandise Inventory............. 3,090
2
[(100 × $3.00) + (900 × $3.10)]
e. Comparison:
Periodic Perpetual
Ending inventory $4,630 $4,630
Gross profit 5,170 5,170
The numbers are the same because regardless of the system

(perpetual or periodic), the first costs are assigned to the cost of
goods sold.

Taking It Further:
Companies are required to disclose their inventory cost

determination method (FIFO, weighted average, or specific
identification), but not whether a periodic or perpetual system is
used. This additional level of information does not provide
information that is relevant to users of financial information. The
differences between FIFO and weighted average, for example,
would inform users of how costs flow to the income statement
when increases or decreases in costs occur. This pattern is not
affected by the choice between periodic and perpetual systems
when FIFO is used and not materially different when weighted
average is used.

*PROBLEM 6.13A
a.
Goods Available for Sale
Jan. 5 10 $1,000 $10,000
Jun. 11 10 1,200 12,000
Oct. 18 15 1,300 19,500
Dec. 20 20 1,500 30,000
Total 55 $71,500
Number of units of ending inventory = 55 units available for

sale – 50* units sold = 5 units of ending inventory.
*50 units sold = 15 + 35
b. Weighted average cost per unit: $71,500 ÷ 55 = $1,300
Ending inventory = 5 × $1,300 = $6,500
Cost of goods sold = $71,500 – $6,500 = $65,000

*(15 × $2,000) + (35 × $2,000)

c. Weighted Average—perpetual
Jan. 1 Beginning inventory A B B÷A
0 $0 $0 0 $0 $0
5 10 1,000 10,000 10 1,000 10,000

June 11 10 1,200 12,000 20 1,100 22,000 10 10,000
10 12,000
20 22,000 $1,100
July 4 15 1,100 16,500 5 1,100 5,500 20 22,000
-15 16,500
5 5,500 1,100
Oct. 18 15 1,300 19,500 20 1,250 25,000 5 5,500
15 19,500
20 25,000 1,250
Dec. 20 20 1,500 30,000 40 1,375 55,000 20 25,000
20 30,000
40 55,000 1,375
29 35 1,375 48,125 5 1,375 6,875 40 55,000
-35 -48,125
5 6,875 1,375
Totals 55 $71,500 50 $64,625 5 $6,875
sale

Check:
Cost Units

d. (1) Weighted Average periodic

GENERAL JOURNAL
Dec. 20 Purchases (20 × $1,500)................ 30,000

Cash............................................ 30,000
29 Cash................................................ 70,000
Sales (35 × $2,000).................... 70,000

d. (Continued)
(2) Weighted Average perpetual

GENERAL JOURNAL
Dec. 20 Merchandise Inventory1................. 30,000

Cash............................................ 30,000
1
(20 × $1,500)
29 Cash................................................ 70,000
Sales (35 × $2,000).................... 70,000
Cost of Goods Sold (35 × $1,375). 48,125

e. Comparison:
Perpetual Periodic
The numbers are different. Using the perpetual system, the

weighted average cost is recalculated after every purchase.
Because the prices are rising, this results in a lower cost of goods
sold.

Taking It Further:
Under the periodic system, the weighted average cost is

calculated at the end of the period and involves a weighted
average of beginning inventory and all purchases during the
period. This weighted average cost is applied to the total volume
of items sold throughout the period to calculate cost of goods
sold, even though some sales have occurred before some of the
purchases. This pattern of cost flows yields a higher cost of goods
sold in a period of rising prices and a lower ending inventory than
applying a perpetual weighted average method. In a period of
increasing prices, the perpetual weighted average method will
yield higher ending inventory, but lower cost of goods sold and
higher gross profit than the periodic weighted average method.
Although applying the perpetual weighted average method yields a
higher profit in a period of rising prices, this does not represent a
real benefit in most circumstances. The differences in the
information that is available to manage inventory under the
perpetual system, the cost of implementing a perpetual system,
and the type of inventory involved will usually outweigh the
differences caused by the flow of costs to the income statement.

*PROBLEM 6.14A
a.
November
Net sales ($674,000 – $14,000)......................................... $660,000
Cost of goods sold
Beginning inventory.................................. $34,050
Purchases.................................. $441,190
Less: Purchase returns
and allowances......................... 17,550
Net purchases............................ 423,640
Add: Freight in........................ 6,860
Cost of goods purchased.......................... 430,500
Cost of goods available for sale............... 464,550
Ending inventory........................................ 39,405
Cost of goods sold....................................................... 425,145
Gross profit....................................................................... $234,855
b.
Gross profit margin = $234,855 = 35.6%
$660,000
c.
December
Net sales ($965,390 – $26,000)......................................... $939,390
Less: Estimated gross profit (35.6% × $939,390).......... 334,423
Beginning inventory......................................................... $ 39,405

Purchases.......................................................... $621,660
Less: Purchase returns
and allowances................................. 22,575
Net purchases................................................... 599,085
Freight in........................................................... 12,300
Cost of goods purchased................................................ 611,385
Less: Estimated cost of goods sold............................... 604,967
Estimated inventory lost in fire....................................... $ 45,823

Taking It Further:
The gross profit method assumes that the gross profit ratio
remains constant from November to December. The gross profit
ratio will be affected by merchandising policies or market
conditions. In addition, the gross profit ratio may be affected by
the product mix included in the sales amount. This method is more
accurate when applied to a department or product line, rather than
to operations as a whole.

*PROBLEM 6.15A
Women’s Shoes Men’s Shoes

Beginning inventory $ 276,000 $424,000 $ 191,000 $ 323,000
Purchases 1,181,000 1,801,000 1,046,000 1,772,000
Purchase returns (24,600) (37,000) (21,900) (36,400)
Freight in 6,000 7,200
Goods available for sale$1,438,400 2,188,000 $1,222,300 2,058,600
Net sales (1,798,000) (1,626,000)
Ending inventory at retail $ 390,000 $ 432,600
Cost-to-retail ratio:
Women’s Shoes—$1,438,400 ÷ $2,188,000 = 65.7%
Men’s Shoes—$1,222,300 ÷ $2,058,600 = 59.4%
Estimated ending inventory at cost:
$390,000 × 65.7% = $256,230—Women’s Shoes
$432,600 × 59.4% = $256,964—Men’s Shoes

Taking It Further:
Women’s Shoes—$381,250 × 65.7% = $250,481 per count

256,230 estimated
$ 5,749 loss at cost
Loss at retail = $390,000 – $381,250 = $8,750
Men’s Shoes—$426,100 × 59.4% = $253,103 per count

256,964 estimated
Loss at retail = $432,600 – $426,100 = $6,500

PROBLEM 6.1B
a. 1. The unsold portion of these goods $510 ($875 – $365) is

owned by Carberry Company, not Morden Company and
should not be included in Morden Company’s count.
Therefore, no adjustment is required because it was
correct to not include them.
2. $750 should be included in inventory as the goods were

shipped FOB shipping point on February 27. Title passes
to Morden on February 27, the date of shipping.
3. The goods should not be included in inventory as they

were shipped FOB shipping point on February 26. Title to
the goods transfers to the customer on February 26, the
date of shipping. Since these items were not on the
premises, they were not counted in inventory. No
correction is required.
4. The amount should not be included in inventory as they

were shipped FOB destination and not received until
March 2. The seller still owns the inventory. Since these
items were not on the premises, they were not counted in
the ending inventory valuation. No correction is required.
5. The sale will be recorded on March 2. The goods should

be included in inventory at the end of February at their
cost of $360. Since they were in the shipping department,
they were not included in the inventory count.
6. The damaged goods should not be included in inventory

because they are not saleable and have no value.
Therefore, no adjustment is required because it was
correct not to include them.

PROBLEM 6.1B (Continued)
a. (Continued)
7. As these items have been sold, they should be excluded

from Morden’s inventory. Therefore, no adjustment is
required because it was correct to not include them.
8. Include $620 in inventory. These goods have not yet been

sold.
b. $56,000 Original Feb. 28 inventory valuation

+750 2.
+360 5.
+620 8.
$57,730 Revised Feb. 28 inventory valuation
Taking It Further
The owner might tell the accountant not to correct item 8. This
transaction relates to the timing of when inventory is transferred
to cost of goods sold. Not correcting this item would cause a
discrepancy between the inventory records and the count and
trigger an adjusting entry. Since the items are not yet sold to
customers, no sale would be recorded in the same accounting
period as the charge to cost of goods sold. This would decrease
gross profit and minimize income taxes. This would, however,
cause the business to pay more taxes in the following year when
the merchandise is sold and the sale is recorded on the income
statement. The sale would have no offsetting cost of goods sold
and the full sales price would be taxable, rather than the gross
profit. The owner might consider telling the accountant not to
correct item 5 as well if the sale is not recorded in the February
year end. Recording the sale in the same period as the cost of
goods sold increases gross profit and increases the income taxes.
Intentionally not correcting these items is unethical behaviour for
the owner and the accountant.

PROBLEM 6.2B
Cost of Goods Sold Ending Inventory

Cost/ Sales Cost/
Model Serial # Unit price/ Model Serial # Unit
Unit
July 10 Civic SZ5828 $26,600 $29,800 Accord ST8411 $27,600
13 Fit YH4418 26,300 28,900 Fit YH5632 26,600
Accord ST0944 27,200 28,700 Civic SZ6148 26,600
Civic SZ5824 26,700 29,850 $80,800
27 Civic SZ6132 26,800 28,800
Accord ST0815 26,200 27,000
Fit YH6318 26,500 29,500
$186,300 $202,550
Taking It Further:
EastPoint Honda should use the specific identification method because it sells items that are
specifically identifiable and not interchangeable.

PROBLEM 6.3B
a.
June 1 Beginning inventory A B B÷A
20 $50.00 $1,000.00 20 $50.00 $1,000.00
4 85 55.00 4,675.00 105 54.05 5,675.00 20 $1,000.00
85 4,675.00
105 5,675.00 $54.05
10 90 $54.05 $4,864.50 15 54.03* 810.50 105 5,675.00
90 4,864.50
15 810.50 54.03*
18 35 58.00 2,030.00 50 56.81 2,840.50 15 810.50
35 2,030.00
50 2,840.50 56.81
25 30 56.81 1,704.30 20 56.81 1,136.20 50 2,840.50
-30 -1,704.30
20 1,136.20 56.81
28 15 60.00 900.00 35 58.18 2,036.20 20 1,136.20
15 900.00
35 2,036.20 58.18
Totals 155 $8,605.00 120 $6,568.80 35 $2,036.20
sale
* discrepancy due to rounding the unit price to 2 decimal places

Check:
Cost Units
b.
June 10 Accounts Receivable..........................8,100.00

Sales (90 × $90).............................. 8,100.00
To record sale on account.
Cost of Goods Sold (90 × $54.05)......4,864.50

Merchandise Inventory.................. 4,864.50
18 Merchandise Inventory (35 × $58)......2,030.00

Accounts Payable.......................... 2,030.00
c. The entry to record the adjustment would be:
Cost of Goods Sold ($58.18 × 3)........ 174.54

Merchandise Inventory.................. 174.54
d. The merchandise inventory on the balance sheet would be

overstated by $174.54, as well as the owner’s capital account
by the same amount. On the income statement, the cost of
goods sold would be understated by $174.54. This would lead
to an overstatement of gross profit by $174.54 and of profit by
$174.54.

Taking It Further:
The weighted average cost formula produces the more meaningful

profit because weighted average costs are matched against
current revenues (sales).

PROBLEM 6.4B
a.

June 1 Beginning inventory
20 $50 $1,000 20 $50 $1,000
20 50 1,000
85 55 4,675 85 55 4,675
4
5,675
20 $50 $1,000
70 55 3,850 15 55 825
10
4,850
15 55 825
35 58 2,030 35 58 2,030
18
2,855
15 55 825
15 58 870 20 58 1,160
25 1,695
20 58 1,160
15 60 900 15 60 900
28
2,060
30 155 $8,605 120 $6,545 35 $2,060
Check:
Cost Units
Ending inventory $2,060 35

PROBLEM 6-4B (Continued)
b.
June 25 Accounts Receivable.......................... 2,850
Sales (30 × $95).............................. 2,850
To record sale on account.

1
([15 × $55] + [15 × $58])
c. Comparison
Weighted
FIFO Average
Ending Cost of Ending Cost of
Inventory Goods Sold Inventory Goods Sold
$2,060 $6,545 $2,036.20 $6,568.80
If prices continue to rise, the FIFO cost formula will continue

to yield higher ending inventory and lower cost of goods sold
than the weighted average cost formula.
Taking It Further:
Before making the change to the weighted average cost formula,

the company must consider if the weighted average formula would
result in more relevant information in the financial statements. For
example, has the physical flow of inventory changed from FIFO to
weighted average?

throughout the period. Management should also consider their
financial reporting objectives. In the final determination, however,

PROBLEM 6.5B
a. (1) FIFO

Feb. 1 Beginning inventory
36 $21 $756 36 $21 $756
7 18 $21 $ 378 18 21 378
23 50 20 1,000 18 21 378
50 20 1,000
1,378
26 18 21 378
32 20 640 18 20 360
1,018
Mar. 10 24 19 456 18 20 360
24 19 456
816
23 18 20 360 19 19 361
5 19 95
_____ ______ 455
110 $2,212 91 $1,851 19 $361
Cost of goods
available for sale - Cost of goods sold = Ending inventory
Check:
Cost Units

Weighted Average
Calculations
Feb. 1 Beginning inventory A B B÷A
36 $21.00 $756.00 36 $21.00 $756.00
7 18 $21.00 $378.00 18 21.00 378.00 36 $756.00
-18 -378.00
18 378.00 $21.00
23 50 20.00 1,000.00 68 20.26 365.00 18 378.00
50 1,000.00
68 1,378.00 $20.26
26 50 20.26 1,013.00 18 20.28* 365.00 68 1,378.00
-50 -1,013.00
18 365.00 $20.28*
Mar. 10 24 19.00 456.00 42 19.55 821.00 18 365.00
24 456.00
42 821.00 $19.55
23 23 19.55 449.65 19 19.54* 371.35 42 821.00
-23 -449.65
19 371.35 $19.54*
Totals 110 $2,212.00 91 $1,840.65 19 $371.35
sale
*discrepancy due to rounding the unit cost to 2 decimal places

Check:
Cost Units
Ending inventory $371.35 19
b.
Weighted
FIFO Average
Sales1................................................................. $2,743 $2,743.00

Cost of goods sold........................................... 1,851 1,840.65
Gross profit....................................................... $ 892 $ 902.35
1
Sales = (18 × $32) + (50 × $30) + (23 × $29)
Taking It Further:
In selecting a cost formula, Bennett Basketball should consider

their circumstances—the type of inventory and the flow of costs
throughout the period. In the final determination, however, Bennett
Basketball should select the cost formula that will provide the

PROBLEM 6.6B
a.
GENERAL JOURNAL
Oct. 5 Merchandise Inventory1............... 1,430

Cash......................................... 1,430
1
(110 × $13)
8 Cash.............................................. 2,800
Sales (140 × $20)..................... 2,800
Cost of Goods Sold2.................... 1,880

Merchandise Inventory........... 1,880
2
(60 × $14) + (80 × $13)
15 Merchandise Inventory (52 × $12) 624

Cash......................................... 624
20 Cash.............................................. 1,120
Sales (70 × $16)....................... 1,120
Cost of Goods Sold3.................... 870

Merchandise Inventory........... 870
3
(30 × $13) + (40 × $12)
25 Merchandise Inventory3.........165
Cash......................................... 165
3
(15 × $11)

b. Ending Inventory (FIFO):

Oct. 25 15 $ 11 $165
15 12 12 144
27* $309
*27 = 60 + 110 – 140 + 52 – 70 + 15
c. Cost: $309
Net realizable value: 27 × $10 = $270
The inventory should be valued at its net realizable value of

$270. This is the lower of cost and net realizable value.
Cost of Goods Sold ($309 – $270)..... 39

d.
The cost of goods sold is $2,495:
Cost of goods sold per a.* $2,750

Plus: write down to NRV ($309 – $270) 39
Cost of goods sold reported _____
on the income statement $2,789
*$2,750 = $1,880 + $870

Taking It Further:
Oct. 1 Beginning inventory A B B÷A
60 $14.00 $840.00 60 $14.00 $840.00
5 110 13.00 1,430.00 170 13.35 2,270.00 60 840.00
110 1,430.00
170 2,270.00 $13.35
8 140 13.35 $1,869.00 30 13.37* 401.00 170 2,270.00
-140 -1,869.00
30 401.00 13.37*
15 52 12.00 624.00 82 12.50 1,025.00 30 401.00
52 624.00
82 1,025.00 12.50
20 70 12.50 875.00 12 12.50 150.00 82 1,025.00
-70 -875.00
12 150.00 12.50
25 15 11.00 165.00 27 11.67 315.00 12 150.00
15 165.00
27 315.00 11.67
Total 237 $3,059.00 210 $2,744.00 27 $315.00

s
*discrepancy due to rounding of the unit cost to 2 decimal places

Check:
Cost Units
Ending Inventory $315.00 27
The ending inventory cost under the weighted average cost formula is
$315. The October 31 balance sheet amount would be $270, the lower
of cost and net realizable value. The balance sheet amount is the
same under both methods, because net realizable value is lower than
cost under both cost formulae.

PROBLEM 6.7B
a.

As reported $525,000 $250,000 $ 300,000 $ 40,000
Impact of Dec. 31/19
inventory
overstatement O 20,000 O 20,000 U 20,000 O 20,000
Correct amount $505,000 $230,000 $ 320,000 $ 20,000

As reported $575,000 $275,000 $335,000 $ 50,000
inventory
overstatement NE NE O 20,000 U 20,000
inventory
understatement U 30,000 U 30,000 O 30,000 U 30,000
Correct amount $605,000 $305,000 $285,000 $100,000

As reported $600,000 $280,000 $315,000 $ 60,000
inventory
understatement NE NE U 30,000 O 30,000
Correct amount $600,000 $280,000 $345,000 $ 30,000

b. The errors in calculating the company’s ending inventory will not

have an impact on the company’s cash account. The cash
balances will be correctly stated at December 31, 2019, 2020, and
2021.
Taking It Further:
Part a. shows that even though inventory and owner’s equity are
correct, the income statement shows the impact of the 2020 error
on cost of goods sold and profit. In addition, comparative
amounts for 2020 and 2019 would show incorrect amounts for
inventory, owner’s equity, cost of goods sold, and profit. These
errors impact trend and profitability analyses and should be
corrected.

PROBLEM 6.8B
a. (Incorrect)
JAMES COMPANY
Income Statement
Year Ended July 31
2021 2020 2019

Sales $648,000 $624,000 $600,000
Cost of goods sold 540,000 510,000 480,000
Gross profit 108,000 114,000 120,000
Profit $ 8,000 $14,000 $20,000
(Corrected)
JAMES COMPANY
Income Statement
Year Ended July 31
2021 2020 2019

Sales $648,000 $624,000 $600,000
Cost of goods sold 520,000* 500,000** 510,000***
Gross profit 128,000 124,000 90,000
Profit (loss) $ 28,000 $24,000 $(10,000)
* $520,000 = $540,000 – $20,000

** $500,000 = $510,000 + $20,000 – $30,000
*** $510,000 = $480,000 + $30,000
b. The combined effect of the errors at July 31, 2021 before

correction is nil. The error in 2020 closing inventory is offset
by the error in 2021 opening inventory and the error in the
2019 purchases is offset by the error in 2020 purchases. The
trend over the three years is completely opposite using the
incorrect numbers as compared to the correct numbers.

c. Inventory turnover ratio = Cost of goods sold ÷ Weighted average

inventory
Incorrect
2020: $510,000 ÷ [($60,000 + $70,000) ÷ 2] = 7.85

2021: $540,000 ÷ [($40,000 + $60,000) ÷ 2] = 10.80
Corrected
2020: $500,000 ÷ [($70,000 + $40,000) ÷ 2] = 9.09

2021: $520,000 ÷ [($40,000 + $40,000) ÷ 2] = 13.00
Taking it Further:
The incorrect annual profits show a decreasing trend of profitability

with profits decreasing from $20,000 in 2019 to $14,000 in 2020 and
then to $8,000 in 2021.
The corrected profit (loss) show an increasing trend in profitability

with profits increasing from a loss of $10,000 to profits of $24,000 in
2020 and then to a profit of $28,000 in 2021.
It is not possible to determine if the errors were deliberate or not.

Certain factors can indicate a higher likelihood that the errors are
deliberate. Management bonuses tied to trends in profitability or a
desire to maintain profitability every year could encourage deliberate
misstatement.

PROBLEM 6.9B
a.
Total Cost Total NRV LCNRV
(1) June 30 $2,520,000 $2,925,000 $2,520,000
(2) July 31 4,216,000 3,813,000 3,813,000
b.
(1) June 30 No entry
(2) July 31 Cost of Goods Sold1................. 403,000

Merchandise Inventory........ 403,000
1
($4,216,000 – $3,813,000)
To write down inventory to lower
c. An adjusting entry is required at August 31 because some of the

inventory, on which a previous writedown had been recorded, is
still on hand and the net realizable value has fully recovered. If
the inventory on hand at July 31 had been sold, then an
adjusting entry would not be required. The adjustment is:
Aug. 31 Merchandise Inventory2........... 325,000

Cost of Goods Sold.............. 325,000
2
[($680 – $615) × 5,000]
To record partial recovery of writedown
of inventory to lower net realizable value.
d. The notes should disclose the cost determination method, the

value of inventory reported at net realizable value, the amount of
any writedown to net realizable value (for the month of July), and
reversals of previous writedowns (for the month of August),
including the reason why the writedown was reversed. This type
of disclosure would be required if the company prepares
monthly financial statements.

Taking It Further:
Reporting inventory at the LCNRV is important to not overstate the

value of inventory on the balance sheet. It would be misleading to
report inventory, an asset, at an amount higher than what it could be
sold for because inventory is held for resale purposes. If assets are
overstated, this would mean that expenses are understated, which
will cause profit and owner’s equity to be overstated.

PROBLEM 6.10B
a.
Home Depot, Inc. 2017

$62,282
Inventory
($12,549 + $11,809) = 5.11 times
turnover
2

inventory

Gross profit ($94,595 - $62,282)
= 34.16%
margin $94,595
Home Depot, Inc. 2016

$58,254
Inventory
($11,809 + $11,079) = 5.09 times
turnover
2

inventory

Gross profit ($88,519 - $58,254)
= 34.19%
margin $88,519

a. (Continued)
Lowe’s
Companies, Inc. 2017
$42,553
Inventory
($10,458 + $9,458) = 4.27 times
turnover
2

inventory

Gross profit ($65,017 - $42,553)
= 34.55%
margin $65,017
Lowe’s
Companies, Inc. 2016
$38,504
Inventory
($9,458 + $8,911) = 4.19 times
turnover
2

inventory

Gross profit ($59,074 - $38,504)
= 34.82%
margin $59,074

b. Both Home Depot’s and Lowe’s inventory turnover improved

very slightly and days sales in inventory showed an
improvement of 1 day in the case of Home Depot and 2 days in
the case of Lowe’s from 2016 to 2017. In addition, Home Depot’s
and Lowe’s gross profit margins are essentially the same in the
two years.
The inventory turnover improvement helped profit increase for

both companies in 2017.
It is meaningful to compare these two companies in terms of

their ratios because the companies operate in the same
industry. They are different in terms of their size and a ratio
analysis eliminates this difference and makes for a meaningful
comparison. Although Home Depot has a better inventory
turnover than Lowe’s, it earns practically identical gross profit
as a percentage of sales. It would be useful to know if their
accounting polices differ in any significant ways.
Taking It Further:
To use the retail inventory method to value 70% of its inventory,

Home Depot has to have demonstrated that the use of this technique
does not have a material effect on the ultimate measurement of the
cost of inventory shown on the financial statements. Consequently,
there is no impact on the comparison between Home Depot and
Lowe’s.


*PROBLEM 6.11B
a. Cost of Goods Available for Sale

Jan. 1 Beginning inventory 150 $65 $ 9,750
Feb. 17 Purchase 70 65 4,550
Apr. 12 Purchase 40 66 2,640
Jul. 10 Purchase 30 68 2,040
Oct. 26 Purchase 25 70 1,750
Total 315 $20,730
b. Number of units sold = 315 units available for sale – 20 units on

hand at the end of the year = 295 units sold
Sales = 295 units × $135 = $39,825
c. (1) FIFO
Ending Inventory:
Oct. 26 20 $70 $1,400
20 $1,400

Jan. 1 150 $65 $ 9,750
Feb. 17 70 65 4,550
Apr. 12 40 66 2,640
Jul. 10 30 68 2,040
Oct. 26 5 70 350
295* $19,330
*295 = 315 – 20

*PROBLEM 6.11B (Continued)
c. (Continued)
(2) WEIGHTED AVERAGE
Ending inventory: 20 units × $65.81 per unit = $1,316
d.
Weighted
FIFO Average
Sales revenue (295 × $135) $39,825 $39,825
Gross profit $20,495 $20,411
Taking It Further:
Big Kids Store should continue to use the FIFO cost formula. GAAP
requires that cost determination methods be applied consistently
from year to year. Changes in cost determination methods are
allowed only if the physical flow of inventory has changed and the
new method results in more relevant information. The company
cannot change methods simply because they wish to achieve a
particular outcome for profit. One user, or set of users, should not be
considered above other users.

*PROBLEM 6.12B
a.
Apr. 1 400 $4.00 $1,600
10 1,300 4.10 5,330
25 1,200 4.50 5,400
27 600 4.75 2,850
Total 3,500 $15,180
Number of units of ending inventory = 3,500 units available for

sale – 2,700* units sold = 800 units of ending inventory.
*2,700 units sold = 300 + 1,000 + 1,400
b. Weighted average cost per unit: $15,180 ÷ 3,500 = $4.34
Ending inventory = 800 × $4.34 = $3,472
Cost of goods sold = $15,180 – $3,472 = $11,708

*(300 × $7.00) + (1,000 × $7.00) + (1,400 × $7.50)

*PROBLEM 6-12B (Continued)
c. Weighted Average—perpetual
Apr. 400 $4.00 $1,600.00 400 $4.0 $1,600.0
1 0 0
2 300 $4.0 $1,200.00 100 4.00 400.00 400 $1,600.00
0
-300 -1,200.00
100 400.00 $4.00
10 1,300 4.10 5,330.00 1,400 4.09 5,730.00 100 400.00
1,300 5,330.00
1,400 5,730.00 4.09
11 1000 4.09 4,090.00 400 4.10* 1,640.00 1,400 5,730.00
-1,000 -4,090.00
400 1,640.00 4.10*
25 1,200 4.50 5,400.00 1,600 4.40 7,040.00 400 1,640.00
1,200 5,400.00
1,600 7,040.00 4.40
27 600 4.75 2,850.00 2,200.00 4.50 9,890.00 1,600 7,040.00
600 2,850.00
2,200 9,890.00 4.50
29 1,40 4.50 6,300.00 800 4.49* 3,590.00 2,200 9,890.00
0 -1,400 -6,300.00
800 3,590.00 4.49*
Totals 3,500 $15,180.00 2,70 $11,590.00 800 $3,590.0
0 0
*discrepancy due to rounding unit cost to 2 decimal places

Check: Cost Units

Less: Cost of goods sold 11,590 2,700
Ending Inventory $3,590 800

d. (1) Weighted Average periodic

GENERAL JOURNAL
April 25 Purchases (1,200 × $4.50)............. 5,400

Cash............................................ 5,400
29 Cash................................................ 10,500
Sales (1,400 × $7.50)................. 10,500

d. (2) Weighted Average perpetual

GENERAL JOURNAL
April 25 Merchandise Inventory1................. 5,400

Cash............................................ 5,400
1
(1,200 × $4.50)
29 Cash................................................ 10,500
Sales (1,400 × $7.50)................. 10,500
Cost of Goods Sold (1,400 × $4.50) 6,300

e. Comparison:
Perpetual Periodic
The numbers are different. Using the perpetual system, the weighted
average cost is recalculated after every purchase. Because the prices
are rising this results in a lower cost of goods sold.

Taking It Further:
Companies are required to disclose their inventory cost determination

method (FIFO, weighted average, or specific identification), but not
whether a periodic or perpetual system is used. This additional level
of information does not provide information that is relevant to users
of financial information. The differences between FIFO and weighted
average, for example, would inform users of how costs flow to the
income statement when increases or decreases in costs occur. This
pattern is not materially affected by the choice between periodic and
perpetual systems when using weighted average costing.

*PROBLEM 6.13B
a. Cost of goods available for sale

Feb. 7 Purchase 20 $100 $ 2,000
Apr. 12 Purchase 20 120 2,400
Jul. 18 Purchase 25 130 3,250
Oct. 26 Purchase 40 150 6,000
Total 105 $13,650
Number of units of ending inventory = 105 units available for sale

– 85* units sold = 20 units of ending inventory.
*85 units sold = 35 + 50

b.
Ending Inventory at Dec. 31:
Oct. 26 20 $150 $3,000
Total 20 $3,000

*(35 × $120) + (50 × $160)

c. FIFO—Perpetual

Feb. 1 Beginning inventory
0 $0 $0 0 $0 $0
7 20 100 2,000 20 100 2,000
Apr. 12 20 120 2,400 20 100 2,000
20 120 2,400
4,400
30 20 $100 $2,000
15 120 1,800 5 120 600
3,800
Jul. 18 25 130 3,250 5 120 600
25 130 3,250
3,850
Oct. 26 40 150 6,000 5 120 600
25 130 3,250
40 150 6,000
9,850
Nov. 12 5 120 600
25 130 3,250
00 1,400 20 150 3,000 20 150 3,000
6,850
Total 105 $13,650 85 $10,650 20 $3,000
Check:
Cost Units
Less: Cost of goods sold 10,650 85
Ending Inventory $3,000 20
Sales revenue is 35 x $120 + 50 x $160 = $12,200

d. (1) FIFO periodic

GENERAL JOURNAL
Apr. 12 Purchases (20 × $120)................... 2,400

Accounts Payable..................... 2,400
30 Accounts Receivable..................... 4,200

Sales (35 × $120)....................... 4,200
(2) FIFO perpetual

GENERAL JOURNAL
Apr. 12 Merchandise Inventory1................. 2,400

Accounts Payable..................... 2,400
1
(20 × $120)
30 Accounts Receivable..................... 4,200

Sales (35 × $120)....................... 4,200
Cost of Goods Sold2...................... 3,800

1
[(20 × $100) + (15 × $120)]

e. Comparison:
Perpetual Periodic
The numbers are the same because regardless of the system

(perpetual or periodic), the first costs are assigned to the cost of
goods sold.
Taking It Further:
When using FIFO, the periodic and perpetual systems produce the
same results. The benefits from using perpetual versus periodic will
depend on the differences in the information that is available to
manage inventory under the perpetual system versus the cost of
implementing a perpetual system. This also depends on the type of
inventory involved.

*PROBLEM 6.14B
a. February
Net sales ($310,000 – $7,000).......................................... $303,000

Cost of goods sold
Beginning inventory............................... $ 18,500
Net purchases
($204,000 – $5,300)............... $198,700
Add: Freight in....................... 4,000
Cost of goods purchased...................... 202,700
Cost of goods available for sale........... 221,200
Less: Ending inventory.......................... 26,200
Cost of goods sold................................................... 195,000
Gross profit....................................................................... $108,000
b.
Gross profit margin = $108,000 = 35.6%
$303,000
c. March
Net sales ($293,500 – $6,800).......................................... $286,700

Less: Estimated gross profit (35.6% × $286,700).......... 102,065
Beginning inventory......................................................... $ 26,200

Net purchases ($197,000 – $4,940)................. $192,060
Add: Freight in.................................................. 3,940
Cost of goods purchased................................................ 196,000
Less: Estimated cost of goods sold............................... 184,635
Estimated total cost of ending inventory....................... 37,565
Less: Inventory not lost (20% × $37,565)....................... 7,513
Estimated inventory lost in fire (80% × $37,565)........... $ 30,052

Taking It Further:
The gross profit method assumes that the gross profit ratio remains
constant from February to March. The gross profit ratio can be
affected by merchandising policies or market conditions. In addition,
the gross profit ratio may be affected by the product mix included in
the sales amount. This method is more accurate when applied to a
department or product line, rather than to operations as a whole.
*PROBLEM 6.15B
Clothing Jewellery
Beginning inventory $ 55,600 $ 98,000 $ 34,000 $ 54,000
Purchases 775,000 1,445,000 565,000 923,000
Purchase returns (41,000) (71,500) (17,200) (25,700)
Freight in 8,900 6,700
Goods avail. for sale $798,500 1,471,500 $588,500 951,300
Net sales (1,268,000) (839,600)
Ending inventory at retail $ 203,500 $ 111,700
Cost-to-retail ratio:
Clothing—$798,500 ÷ $1,471,500 = 54.3%
Jewellery—$588,500 ÷ $951,300 = 61.9%
Estimated ending inventory at cost:
$203,500 × 54.3% = $110,501—Clothing

$111,700 × 61.9% = $69,142—Jewellery

Taking It Further:
Clothing—$100,750 × 54.3% = $54,707 per count

110,501 estimated
Loss at retail = $203,500 – $100,750 = $102,750
Jewellery—$40,300 × 61.9% = $24,946 per count

69,142 estimated
Loss at retail = $111,700 – $40,300 = $71,400

BYP6.1 FINANCIAL REPORTING PROBLEM
a. Inventories are valued at the lower of cost and net realizable

value.
b. Aritzia Inc. uses the weighted average cost formula to

determine cost
c. The specific identification method would not be appropriate.

Most of the goods sold by Aritzia are not individually
distinguishable.
d. Amounts are reported in thousands of Canadian dollars.
Inventory as a percentage of current assets

2018: $78,833 ÷ $210,756 = 37.4%
2017: $74,184 ÷ $169,078 = 43.9%
Cost of sales as a percentage of net revenue

2015: $447,776 ÷ $743,267 = 60.2%
2014: $401,658 ÷ $667,181 = 60.2%
Inventory as a percentage of current assets decreased from 2017

to 2018 and cost of sales as a percentage of total revenue
remained constant indicating that gross profit is stable over the
past two years and fewer of the current assets are tied up in
inventory.

BYP 6.1 (Continued)
e.
Aritzia Inc. 2018

$447,776
Inventory
($78,833 + $74,184) = 5.9 times
turnover
2

Days sales 365 ÷ 5.9 = 62 days
in inventory

Aritzia Inc. 2017

$401,658
Inventory
($74,184 + $77,331) = 5.3 times
turnover
2

Days sales 365 ÷ 5.3 = 69 days
in inventory

Aritzia’s inventory management has improved in 2018. The

inventory turnover and day’s sales in inventory show that
inventory is turning over (being sold or moved) 7 days faster than
in the previous year.

365
2.52 times
Weygandt, = 145Trenholm,
Kieso, Kimmel, days Warren, Novak Accounting Principles, Eighth Canadian Edition
BYP6.2 INTERPRETING FINANCIAL STATEMENTS
a.
Inventory Turnover Days Sales in Inventory

$565,640
201
7 ($231,576 + $217,788) ÷ 2
= 2.52 times
$551,194 365
= 141 days
201 ($217,788 + $208,395) ÷ 2 2.59 times
6 = 2.59 times
The ratios have weakened. This means that the inventory is

being sold less quickly in 2017 than in 2016.
b. Indigo applies the lower of cost and net realizable value rule.
The amount of inventory writedowns as a result of net realizable
value being lower than cost was $9.0 million in fiscal 2017. At
April 1, 2017, there was $2.8 million of inventory on hand that
had net realizable value equal to cost.
c. Amazon.com, Inc. would have a better balance sheet valuation

because FIFO results in an ending inventory value that
approximates replacement cost. This will cause difficulties in
comparing the two companies because it is impossible to know
what the inventory valuation of Amazon.com would have been
had it used moving weighted average. However, if inventory
costs are relatively stable, both inventory methods would yield
similar results.

BYP6.3 COLLABORATIVE LEARNING ACTIVITY
All of the material supplementing the collaborative learning activity,

including a suggested solution, can be found in the Collaborative
Learning section of the Instructor Resources site accompanying this
textbook.

BYP6.4 COMMUNICATION ACTIVITY
Subject: 2020 Ending Inventory Error
From: controller.small [email protected]
Sent: February 10, 2022
To: Mutahir Kazmi, President
Hello Mr. Kazmi,
I wanted to clarify the situation with respect to the ending inventory

error of 2020 and its impact on the financial statements of 2020 and
2021.
The combined gross profit and profit for 2020 and 2021 are correct.
However, the gross profit and profit for each individual year are
incorrect.
As you know, the 2020 ending inventory was understated by $1

million. This error will cause the 2020 profit to be incorrect because
the ending inventory is used to calculate the 2020 cost of goods sold.
An understatement of ending inventory results in an overstatement of
cost of goods sold. Therefore, gross profit (sales – cost of goods
sold) is understated, as is profit.
Unless corrected, this error will also affect the 2021 profit. The 2020
ending inventory is also the 2021 beginning inventory. Therefore, the
2021 beginning inventory is also understated, which causes an
understatement of cost of goods sold. The 2021 gross profit and
profit are subsequently overstated.
If the error is not corrected, the gross profit and profit for 2020 and
2021 will be incorrect. Although the combined profits will be correct,
(because the understatement in 2020 cancels the overstatement in
2021), the profit trend may be misleading.

BYP6.5 “ALL ABOUT YOU” ACTIVITY
a. Selling on consignment means that the supplier of the

inventory (in this case you the student) retains ownership of
the merchandise and becomes the consignor. The store (the
consignee) sells the merchandise on your behalf but does not
own it. The store usually takes a commission as its fee for
selling the merchandise and remits the remainder to the
consignor.
b.The advantage for the student is that ownership of the books

is retained. If the student changes his/her mind about selling
the books, the student still owns them and can take them
back. In some arrangements, the consignor may be able to
state the price he/she wants to receive for the books. The
disadvantage is that the seller (consignor) does not get paid
until the books have been sold.
c. The consignment arrangement may specify various aspects of

the transaction to protect both parties. For example:
 commission to be kept by the seller (consignee);
 who determines the selling price (in the case of the used
textbooks, the second-hand bookstore may be in a better
position to determine the likely selling price);
 how long the goods will be kept, or when the arrangement
is terminated;
 who assumes the risks of loss and damage to
merchandise for sale.

BYP6.5 (Continued)
d. Your books may be lost or stolen from the store, the seller may
not pay you when the books are sold, or you may wait a very
long time for the books to sell in the store. You may get
substantially less money than you hoped to receive.
e. Any textbook’s contents will become out of date and inaccurate

at some point. The ability to sell any used textbook is highly
dependent on the edition currently in print. If the goal is to
recoup money by selling a textbook, then the textbook should
be sold as soon as it is no longer needed for the student’s use.
Many students keep their accounting textbooks during their
studies as a reference tool as they progress to more advanced
levels.

BYP6.6 Santé Smoothie Saga
a. Natalie has been using the specific identification method to track

her inventory of juicers. She has been able to do this because
each juicer has a unique serial number. This allows her to match
the exact cost of the juicer to the sales revenue when the juicer is
sold. But it also allows Natalie to manipulate profit by choosing
the specific juicer to sell. To prevent this, Accounting Standards
for Private Enterprises (ASPE) and International accounting
standards (IFRS) do not allow companies to use specific
identification when goods are interchangeable.
Instead, Natalie will need to choose either the weighted average

cost or FIFO cost formulas. In this situation, I recommend the
weighted average cost formula because the juicers are identical.
Since she is selling juicers and the inventory items are not
subject to spoilage or obsolescence, the FIFO cost formula
would not be advantageous.
b. Natalie has purchased juicers #3, #4, #5, #6, and #7. She has sold
juicers #2, #4, and #5 and has returned juicer #6. At the end of
August, her ending inventory would consist of juicers #1, #3, and
#7 using the specific identification method:
Ending Inventory: Juicer #1 - #12459 $545

Juicer #3 - #49295 550
Juicer #7 - #72531 571
Total $1,666
Cost of Goods Sold: Juicer #2 - #23568 $545

Juicer #4 - #56204 550
Juicer #5 - #62897 550
Total $1,645

BYP6.6 (Continued)
c. Moving Weighted Average–Perpetual
Weighted Average
Calculations
July 1 Beginning inventory A B B÷A
2 $545.00 $1,090.00 2 $545.00 $1,090.00
14 3 550.00 1,650.00 5 548.00 2,740.00 2 $1,090.00
3 1,650.00
5 2,740.00 $548.00
19 1 $548.00 $548.00 4 548.00 2,192.00 5 2,740.00
-1 -548.00
4 2,192.00 548.00
Aug. 17 2 571.00 1,142.00 6 555.67 3,334.00 4 2,192.00
2 1,142.00
6 3,334.00 555.67
18 -1 571.00 -571.00 5 552.60 2,763.00 6 3,334.00
-1 -571.00
5 2,763.00 552.60
27 2 552.60 1,105.20 3 552.60 1,657.80 5 2,763.00
-2 -1,105.20
3 1,657.80 552.60
Totals 6 $3,311.00 3 $1,653.20 3 $1,657.80

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Eighth Canadian Edition
BYP6.6 (Continued)
Check:
Cost Units
d. Comparison
From c.
From b. Moving
Specific Weighted
Identification Average Difference
Cost of Goods Sold $1,645.00 $1,653.20 $8.20
Ending Inventory 1,666.00 1,657.80 8.20
GENERAL JOURNAL
Aug. 31 Cost of Goods Sold............................ 8.20

Merchandise Inventory................. 8.20

BYP6.6 (Continued)
e.
GENERAL JOURNAL
July 3 No entry.
14 Merchandise Inventory......................1,650.00
19 Cash....................................................1,050.00
Sales .............................................. 1,050.00
19 Cost of Goods Sold............................ 548.00

Aug. 3 No entry.
17 Merchandise Inventory......................1,142.00
18 Accounts Payable.............................. 571.00

To record purchase return.
27 Cash....................................................2,100.00
Sales .............................................. 2,100.00
27 Cost of Goods Sold ($552.60 × 2).....1,105.20

Merchandise Inventory................. 1,105.20

Legal Notice
Copyright
Copyright © 2019 by John Wiley & Sons Canada, Ltd. or related companies. All rights
reserved.
The data contained in these files are protected by copyright. This manual is furnished
under licence and may be used only in accordance with the terms of such licence.
The material provided herein may not be downloaded, reproduced, stored in a retrieval
system, modified, made available on a network, used to create derivative works, or
transmitted in any form or by any means, electronic, mechanical, photocopying,
recording, scanning, or otherwise without the prior written permission of John Wiley &
Sons Canada, Ltd.
MMXVIII x F1


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What are the steps involved in determining inventory quantities?

What are the steps involved in determining inventory quantities?

What are the different inventory costing methods discussed in the chapter?

What are the different inventory costing methods discussed in the chapter?

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Eighth Canadian Edition

Solutions Manual 6-1 Chapter 6

Summary of Questions by Learning Objectives and Bloom’s Taxonomy

Ite LO BT Item LO BT Ite LO BT Ite LO BT Ite LO BT

Solutions Manual 6-2 Chapter 6

Legend: The following abbreviations will appear throughout the

ASSIGNMENT CLASSIFICATION TABLE

Solutions Manual 6-3 Chapter 6

1. Describe the steps in 1, 2, 3 1, 2 1, 2 1, 7 1, 7

2. Calculate cost of goods 4, 5, 6 3, 4, 5, 6, 3, 4, 5, 6, 2, 3, 4, 5, 2, 3, 4, 5,

3. Explain the financial 7, 8, 9 9, 10 6, 7 4, 5 4, 5

4. Determine the financial 10, 11, 11, 12 8, 9 3, 7, 8 3, 7, 8

Solutions Manual 6-4 Chapter 6

ASSIGNMENT CHARACTERISTIC TABLE

1A Identify items in inventory. Moderate 20-25

2A Apply specific identification. Simple 15-20

3A Apply perpetual FIFO. Record sales and inventory Moderate 20-25

4A Apply perpetual weighted average and answer Moderate 20-25

5A Apply perpetual FIFO and weighted average. Answer Moderate 35-45

6A Record transactions using perpetual weighted average. Moderate 35-45

7A Determine effects of inventory errors. Complex 25-30

8A Determine effects of inventory errors. Calculate Complex 35-45

9A Apply LCNRV and prepare adjustment. Moderate 20-25

10A Calculate ratios. Simple 15-20

*11A Apply periodic FIFO and weighted average. Simple 20-25

*12A Apply periodic and perpetual FIFO. Moderate 40-45

*13A Apply periodic and perpetual weighted average. Moderate 40-45

*15A Determine ending inventory using retail method. Moderate 20-30

1B Identify items in inventory. Moderate 20-25

2B Apply specific identification. Simple 15-20

3B Apply perpetual weighted average. Record sales and Moderate 20-25

4B Apply perpetual FIFO and answer questions. Moderate 20-25

Solutions Manual 6-5 Chapter 6

ASSIGNMENT CHARACTERISTICS TABLE (Continued)

Problem Difficulty Time

5B Apply perpetual FIFO and weighted average. Answer Moderate 35-45

6B Record transactions using perpetual FIFO. Apply Moderate 35-45

7B Determine effects of inventory errors. Complex 25-30

8B Determine effects of inventory errors. Calculate Complex 35-45

9B Apply LCNRV and prepare adjustment. Moderate 20-25

10B Calculate ratios. Simple 15-20

*11B Apply periodic FIFO and weighted average. Simple 20-25

*12B Apply periodic and perpetual weighted average. Moderate 40-45

*13B Apply periodic and perpetual FIFO. Moderate 40-45

*15B Determine ending inventory using retail method. Moderate 20-30

Solutions Manual 6-6 Chapter 6

BLOOM’S TAXONOMY TABLE

Learning Objective Knowledge Comprehension Application Analysis Synthesis Evaluation

2. Calculate cost of Q6.4 BE6.3

4. Determine the Q6.11 Q6.10 P6.3A BE6.11

Solutions Manual 6-7 Chapter 6

BLOOM’S TAXONOMY TABLE (Continued)

Learning Objective Knowledge Comprehension Application Analysis Synthesis Evaluation

6. Demonstrate the Q6.15 Q6.18 BE6.15 Q6.17

*7 Calculate ending *Q6.20 *Q6.19 *BE6.17

7 Calculate ending Q6.20 Q6.19 BE6.17