EXERCISE 6.

(a) FIFO
Beginning inventory (23 X HK$970) ............. HK$ 22,310
Purchases
Sept. 12 (45 X HK$1,020) ........................ HK$45,900
Sept. 19 (20 X HK$1,040) ........................ 20,800
Sept. 26 (44 X HK$1,050) ........................ 46,200 112,900
Cost of goods available for sale .................. 135,210
Less: Ending inventory (11 X HK$1,050) .... 11,550
Cost of goods sold ........................................ HK$123,660

6-1
EXERCISE 6.4 (Continued)

Proof
Date Units Unit Cost Total Cost
9/1 23 HK$ 970 HK$ 22,310
9/12 45 1,020 45,900
9/19 20 1,040 20,800
9/26 33 1,050 34,650
121 HK$123,660

Average-Cost
Cost of goods available for sale........................................ HK$135,210
Less: Ending inventory (11 X HK$1,024.32*) ................... 11,268
Cost of goods sold ............................................................. HK$123,942
*Average unit cost is HK$1024.32 computed as follows:
HK$135,210 (Cost of goods available
for sale) = HK$1,024.32 (rounded)
132 units (Total units available for sale)
Proof
121 units X HK$1,024.32 = HK$123,943 (HK$1 difference due
to rounding)
(b)
Cost of
goods
FIFO HK$11,550 (ending inventory) + HK$123,660 (COGS) = HK$135,210
Average-cost HK$11,268 (ending inventory) + HK$123,942 (COGS) = HK$135,210
} available
for sale

Under both methods, the sum of the ending inventory and cost of goods sold
equals the same amount, HK$135,210, which is the cost of goods available for
sale.

EXERCISE 6.5
FIFO
Beginning inventory (30 X €9) .............................................. €270
Purchases
May 15 (22 X €11) ........................................................... €242
May 24 (38 X €12) ........................................................... 456 698
Cost of goods available for sale........................................... 968
Less: Ending inventory (22 X €12) ...................................... 264
Cost of goods sold ................................................................ €704

6-2
EXERCISE 6.5 (Continued)

Proof
Date Units Unit Cost Total Cost
5/1 30 € 9 €270
5/15 22 11 242
5/24 16 12 192
68 €704

AVERAGE-COST
Cost of goods available for sale.......................................................... €968
Less: Ending inventory (22 X €10.76*) ............................................... 237
Cost of goods sold ............................................................................... €731

*Average unit cost is €10.76 computed as follows:

€968 (Cost of goods available for sale)

= €10.76 (rounded)
90 units (Total units available for sale)
Proof
68 units X €10.76 = €731 (rounded €1)

EXERCISE 6.6
(a) FIFO
Beginning inventory (200 X £5)............................... £1,000
Purchases
June 12 (300 X £6) ............................................ £1,800
June 23 (500 X £7) ............................................ 3,500 5,300
Cost of goods available for sale ............................. 6,300
Less: Ending inventory (160 X £7)......................... 1,120
Cost of goods sold .................................................. £5,180

6-3
EXERCISE 6.6 (Continued)

AVERAGE-COST
Cost of goods available for sale ............................. £6,300
Less: Ending inventory (160 X £6.30*)................... 1,008
Cost of goods sold .................................................. £5,292
*Average unit cost is:

£6,300 (Cost of goods available for sale)

= £6.30
1,000 units (Total units available for sale)

(b) The FIFO method will produce the higher ending inventory because
costs have been rising. Under this method, the earliest costs are assigned
to cost of goods sold and the latest costs remain in ending inventory.
For Howsham Interiors, the ending inventory under FIFO is £1,120 or
(160 X £7) compared to £1,008 or (160 X £6.30) under average-cost.

(c) The average-cost method will produce the higher cost of goods sold
for Howsham Interiors. The cost of goods sold is £5,292 or [£6,300 –
£1,008] compared to £5,180 or (£6,300 – £1,120) under FIFO.

EXERCISE 6.7

(a) (1) FIFO

Beginning inventory .......................................... NT$300,000
Purchases .......................................................... 680,000
Cost of goods available for sale ....................... 980,000
Less: ending inventory (75 X NT$3,400*) ........ 255,000
Cost of goods sold ............................................ NT$725,000

*NT$680,000 ÷ 200

(2) AVERAGE-COST
Beginning inventory .......................................... NT$300,000
Purchases .......................................................... 680,000
Cost of goods available for sale ....................... 980,000
Less: ending inventory (75 X NT$3,266.67*) ... 245,000
Cost of goods sold ............................................ NT$735,000

*[(NT$300,000 + NT$680,000) ÷ (100 + 200)]

6-4
EXERCISE 6.7 (Continued)

(b) The use of FIFO would result in the higher net income since the earlier
lower costs are matched with revenues.
(c) The use of FIFO would result in inventories approximating current cost in
the statement of financial position, since the more recent units are
assumed to be on hand.
(d) The use of average-cost would result in Thaam paying lower taxes in
the first year since taxable income will be lower.

EXERCISE 6.8
Lower
-of-Cost
Cost NRV -or-NRV
Cameras
Minolta W1,360,000 W1,248,000 W1,248,000
Canon 900,000 912,000 900,000
Total 2,260,000 2,160,000

Light meters
Vivitar 1,500,000 1,380,000 1,380,000
Kodak 1,610,000 1,890,000 1,610,000
Total 3,110,000 3,270,000
Total inventory W5,370,000 W5,430,000 W5,138,000
EXERCISE 6.9
Lower
-of-Cost-
Cost NRV or-NRV
Tennis shoes € 6,800 € 7,000 € 6,800
Running shoes 11,250 10,650 10,650
Basketball shoes 10,000 9,250 9,250
Total inventory €28,050 €26,900 €26,700

EXERCISE 6.10
2019 2020
Beginning inventory ........................................... € 20,000 € 28,000
Cost of goods purchased ................................... 150,000 175,000
Cost of goods available for sale ........................ 170,000 203,000
Corrected ending inventory ............................... 28,000a 41,000b
Cost of goods sold.............................................. €142,000 €162,000
a b
€30,000 – €2,000 = €28,000. €35,000 + €6,000 = €41,000.

6-5
EXERCISE 6.11
(a) 2019 2020
Sales ............................................................................. HK$2,100,000 HK$2,500,000
Cost of goods sold
Beginning inventory ........................................... 320,000 500,000
Cost of goods purchased ................................... 1,730,000 2,040,000
Cost of goods available for sale ........................ 2,050,000 2,540,000
Ending inventory (HK$440,000 + HK$60,000) .... 500,000 520,000
Cost of goods sold.............................................. 1,550,000 2,020,000
Gross profit .................................................................. HK$ 550,000 HK$ 480,000

(b) The cumulative effect on total gross profit for the two years is zero as
shown below:
Incorrect gross profits: HK$490,000 + HK$540,000 = HK$1,030,000
Correct gross profits: HK$550,000 + HK$480,000 = 1,030,000
Difference HK$ 0
(c) Dear Mr./Ms. President:
Because your ending inventory of December 31, 2019 was understated
by HK$60,000, your net income for 2019 was understated by HK$60,000.
For 2020 net income was overstated by HK$60,000.
In a periodic system, the cost of goods sold is calculated by deducting
the cost of ending inventory from the total cost of goods you have
available for sale in the period. Therefore, if this ending inventory figure
is understated, as it was in December 2019, then the cost of goods
sold is overstated and therefore net income will be understated by that
amount. Consequently, this understated ending inventory figure goes
on to become the next period’s beginning inventory amount and is a
part of the total cost of goods available for sale. Therefore, the mistake
repeats itself in the reverse.

The error also affects the statement of financial position at the end
of 2019. The inventory reported in the statement of financial position
is understated; therefore, total assets are understated. The under-
statement of the 2019 net income results in the Owner’s Capital
account balance being understated. The statement of financial position
at the end of 2020 is correct because the understatement of the
Owner’s Capital account at the end of 2019 is offset by the
overstatement of the 2020 net income and the inventory at the end of
2020 is correct.
Thank you for allowing me to bring this to your attention. If you have
any questions, please contact me at your convenience.
Sincerely,

6-6
6-7
 PROBLEM 6.4

(a) GISEL GROUP

Condensed Income Statement
For the Year Ended December 31, 2020
FIFO Average-
cost
Sales revenue............................................. €865,000 €865,000
Cost of goods sold
Beginning inventory ........................... 22,800 22,800
Cost of goods purchased .................. 578,500 578,500
Cost of goods available for sale........ 601,300 601,300
Ending inventory ................................ 39,750a 37,575b
Cost of goods sold ............................. 561,550 563,725
Gross profit ................................................ 303,450 301,275
Operating expenses................................... 147,000 147,000
Income before income taxes ..................... 156,450 154,275
Income tax expense (32%) ........................ 50,064 49,368
Net income ................................................. €106,386 €104,907
a b
15,000 X €2.65 = €39,750. €601,300 ÷ 240,000 units = €2.505.
15,000 x €2.505 = €37,575

(b) (1) The FIFO method produces the more meaningful inventory amount
for the statement of financial position because the units are
costed at the most recent purchase prices.

(2) The FIFO method is most likely to approximate actual physical flow
because the oldest goods are usually sold first to minimize spoilage
and obsolescence.

(3) There will be €696 additional cash available under average-cost

because income taxes are €49,368 under average-cost and
€50,064 under FIFO.

6-8
 PROBLEM 6.5

Cost of Goods Available for Sale

Date Explanation Units Unit Cost Total Cost
October 1 Beginning Inventory 60 €24 €1,440
9 Purchase 120 26 3,120
17 Purchase 70 27 1,890
25 Purchase 80 28 2,240
Total 330 €8,690

Ending Inventory in Units: Sales Revenue

Units available for sale 330 Unit
Sales (100 + 65 + 120) 285 Date Units Price Total Sales
Units remaining in ending inventory 45 October 11 100 €35 € 3,500
22 65 40 2,600
29 120 40 4,800
285 €10,900

(a)
(1) FIFO

(i) Ending Inventory (ii) Cost of Goods Sold

October 25 45 @ €28 = €1,260 Cost of goods available
for sale € 8,690
Less: Ending inventory 1,260
Cost of goods sold € 7,430

(iii) Gross Profit (iv) Gross Profit Rate

Sales revenue €10,900 Gross profit € 3,470
= 31.8%
Cost of goods sold 7,430 Net sales €10,900
Gross profit € 3,470

6-9
PROBLEM 6.5 (Continued)

(2) Average-Cost
cost of goods available for sale
Weighted-average cost per unit:
units available for sale
€8,690
= €26.333
330

(i) Ending Inventory (ii) Cost of Goods Sold

45 @ €26.333 = €1,185* Cost of goods available
for sale €8,690
*rounded to nearest dollar Less: Ending inventory 1,185
Cost of goods sold €7,505

(iii) Gross Profit (iv) Gross Profit Rate

Sales revenue €10,900 Gross profit € 3,395
= 31.1%
Cost of goods sold 7,505 Net sales €10,900
Gross profit € 3,395

(b) Average-cost produces the lower ending inventory value, gross profit,
and gross profit rate because its cost of goods sold is higher than
FIFO.

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6-11