CHAPTER 6

REPORTING AND ANALYZING INVENTORY

Summary of Question TYPEs by LEARNING Objective, Level of difficulty, BLOOM’S TAXONOMY, CPA CODES, and AACSB Codes

LOD: E = Easy M = Medium H = Hard

Bloom’s: AP = Application C = Comprehension K = Knowledge

CPA: F = Financial Reporting

AACSB: AN = Analytic

*This topic is dealt with in an Appendix to the chapter.

Summary of Question TYPEs by LEARNING Objective, Level of difficulty, BLOOM’S TAXONOMY, CPA CODES, and AACSB Codes

(Cont’d)

LOD: E = Easy M = Medium H = Hard

Bloom’s: AN = Analysis AP = Application C = Comprehension K = Knowledge

CPA: C = Communication E = Professional and Ethical Behaviour F = Financial Reporting

AACSB: AN = Analytic C = Communication E = Ethics

*This topic is dealt with in an Appendix to the chapter.

SUMMARY OF LEARNING OBJECTIVES BY QUESTION TYPE

Note: TF = True-False MC = Multiple Choice Ma = Matching

Ex = Exercise SAE = Short-Answer Essay CP = CPA Questions

*This topic is dealt with in an Appendix to the chapter.

CHAPTER LEARNING OBJECTIVES

1. Describe the steps in determining inventory quantities. The steps are (1) determine the ownership of goods in transit, on consignment, and in similar situations; (2) take a physical inventory of goods on hand; and (3) if the cost of the physical inventory counted is different from the balance in the Inventory account, adjust it along with the Cost of Goods Sold account.

To prevent theft of inventory, companies implement internal controls such as physical safeguards, review and reconciliation with periodic inventory counts, and segregation of accounting duties from custody of inventory.

2. Apply the cost formulas using specific identification, FIFO, and average cost under a perpetual inventory system. Allocate costs to the Cost of Goods Sold account each time that a sale occurs in a perpetual inventory system. The cost is determined by using the specific identification; first-in, first-out (FIFO); or average cost formula.

Specific identification is used for goods that are not ordinarily interchangeable. Typically, the goods are unique, high-value items. This cost formula tracks the actual physical flow of goods, allocating the exact cost of each merchandise item to Cost of Goods Sold and ending inventory.

If a company’s goods are interchangeable (homogeneous), then either the FIFO or average cost formula may be used.

The FIFO cost formula assumes a first-in, first-out cost flow for sales. Cost of goods sold consists of the cost of the earliest goods purchased. Ending inventory consists of the cost of the most recent goods purchased.

Under the average cost formula, a new weighted (moving) average unit cost is calculated after each purchase or purchase return and applied to the number of units sold (and as a result, to the number of units remaining in ending inventory).

3. Explain the effects on the financial statements of choosing each of the inventory cost formulas. Management should select the cost formula that most closely corresponds to the physical flow of goods and should report inventory on the statement of financial position at an amount that is closest to the cost of inventory recently purchased.

Specific identification results in an exact match of costs and revenues on the statement of income. When prices are rising, the average cost formula results in a higher cost of goods sold and lower net income than FIFO. The average cost formula therefore results in a better allocation on the statement of income of more current (recent) costs with current revenues than does FIFO. In terms of the statement of financial position, FIFO is better because it results in an ending inventory that is closest to current (replacement) value. All three of the cost formulas result in the same cash flow before income tax.

4. Identify the effects of inventory errors on the financial statements. Ignoring the effects of income tax, an error made in determining the quantities and/or cost of inventory at the end of the year will also affect cost of goods sold. If ending inventory is overstated, cost of goods sold will be understated, and net income will be overstated. Therefore, after recording closing entries, the overstatement in net income transfers into an overstatement in retained earnings matching the overstatement in inventory and balancing the effect of the error on the statement of financial position. Assuming the error made in the first period has not been found or corrected, in the following period, when the overstated inventory is sold, its cost flows into cost of goods sold, overstating that expense. This in turn lowers net income by exactly the same amount that overstated net income in the prior period. By the end of the second period, net income from both periods will now be included in retained earnings. Because the errors in the net incomes of these periods are now offset, Retained Earnings is now correct. Inventory is also correct at the end of the second period, assuming the company counted inventory correctly at that time.

If an error occurs by recording goods in transit as an inventory purchase in a period before title to the goods changes hands, both Inventory and Accounts Payable will be overstated. If a company has purchased inventory but failed to record and count that inventory, then both Inventory and Accounts Payable will be understated.

5. Demonstrate the presentation and analysis of inventory. Inventory is valued at the lower of its cost and net realizable value, which can result in the recording of a writedown if the net realizable value is less than cost. We record the writedown with a debit to Cost of Goods Sold and a credit to Inventory.

We report ending inventory as a current asset on the statement of financial position at the lower of cost and net realizable value. We report cost of goods sold as an expense on the statement of income.

The inventory turnover ratio is a measure of liquidity. We calculate it by dividing the cost of goods sold by average inventory [(beginning inventory + ending inventory) ÷ 2]. We can convert inventory turnover into days in inventory by dividing 365 days by the inventory turnover ratio. Inventory turnover relates inversely to days in inventory: as one rises, the other falls. In general, companies want a reasonably higher inventory turnover and lower days in inventory ratio than the industry average.

6. Apply the FIFO and average cost formulas under a periodic inventory system (Appendix 6A). Under the FIFO cost formula, companies determine the quantity of ending inventory and then allocate the cost of the most recent goods purchased to that ending inventory. By deducting the cost of ending inventory from the cost of goods available for sale, cost of goods sold can be determined. Alternatively, companies can also determine the cost of goods sold by applying the cost of the earliest goods on hand to cost of goods sold. The cost of goods sold and ending inventory amounts under FIFO are the same regardless of whether a periodic or perpetual inventory system is used.

Under the average cost formula, we divide the total cost of goods available for sale during the period by the units available for sale during the same period to calculate a weighted average cost per unit. Then we multiple this average unit cost by the number of units remaining in inventory to calculate the ending inventory. By subtracting ending inventory from the cost of goods available for sale, we can determine cost of goods sold. Alternatively, we can calculate cost of goods sold by multiplying the average unit cost by the number of units sold. The main difference between a periodic and a perpetual inventory system is that in a periodic system, average cost is determined only once (at the end of the accounting period), while average cost is determined at the date of each sale in a perpetual inventory system.

TRUE-FALSE STATEMENTS

1. A system of internal control is not needed when a company regularly takes a physical inventory.

2. Consigned goods are held for sale by one party, although ownership of the goods is retained by another party.

3. Once goods leave the premises of the seller, they should never be added to the seller’s physical inventory count.

4. In order to remove the cost of items sold from inventory, a unit cost must be determined.

5. When using the perpetual system, the average cost formula relies on a simple average calculation.

6. If prices never changed, there would be no need for alternative inventory cost formulas.

7. Inventory cost formulas such as FIFO and average cost, deal more with the flow of costs than with the flow of goods.

8. The first-in, first-out (FIFO) inventory cost formula results in an ending inventory valued at the most recent cost.

9. The specific identification formula is desirable when a company sells a large number of low-unit-cost items.

10. If a company has no beginning inventory and the unit cost of inventory items does not change during the year, the unit cost assigned to the cost of goods sold will be the same under FIFO and average cost formulas.

11. A company may use more than one inventory cost formula if it has different types of inventory.

12. The cost formula a company chooses should correspond as closely as possible to the actual physical flow of goods.

13. The FIFO inventory cost formula agrees closely to the actual physical movement of goods in most businesses.

14. The inventory cost formula that best matches cost and revenues is FIFO.

15. A change in the method of cost formula for inventory must be disclosed in the financial statements.

16. Approximating the physical flow of inventory is not important when selecting an inventory cost formula.

17. All three methods of inventory cost formula will produce the same cumulative cost of goods sold over the life cycle of the business.

18. When the value of inventory is lower than its cost, the inventory is written down to its net realizable value.

19. If net realizable value of the inventory is lower than its cost, the total assets on the statement of financial position and net income on the statement of income will be reduced.

20. Inventory that originally cost $100 had been written down to its net realizable value (NRV) of $75. Subsequently, the NRV of the inventory recovered to equal its cost of $100. In this situation, the amount of the $25 ($100 – $75) prior writedown in value should be reversed.

21. An inventory writedown from cost to net realizable value should not be made in the period in which the price decline occurs.

22. The lower of cost and net realizable value should be applied to the total inventory, rather than to individual inventory items.

23. A low inventory turnover ratio could mean a company is at risk of experiencing inventory shortages.

24. A high inventory turnover ratio indicates that minimal funds are tied up in inventory.

25. In the average cost formula used in a periodic inventory system, the same weighted average cost per unit is used to calculate all of the goods sold during the period.

*26. The results under FIFO in a perpetual inventory system are the same as in a periodic inventory system.

Answers to True-False Statements

MULTIPLE CHOICE QUESTIONS

27. Goods in transit shipped

(a) FOB shipping point should be included in the buyer’s ending inventory.

(b) FOB destination should not be excluded from the buyer’s ending inventory.

(c) FOB shipping point should not be included in the buyer’s ending inventory.

(d) FOB destination should not be included in the seller’s ending inventory.

28. The factor that determines whether or not goods should be included in a physical count of inventory is

(a) physical possession.

(b) ownership.

(c) management's judgement.

(d) whether or not the purchase price has been paid.

29. If goods in transit are shipped FOB destination,

(a) the seller has legal title to the goods until they are delivered.

(b) the buyer has legal title to the goods during transit.

(c) the transportation company has legal title to the goods while the goods are in transit.

(d) no one has legal title to the goods until they are delivered.

30. To accurately determine inventory quantities, a company must

(a) use the perpetual inventory system.

(b) employ an independent company to conduct inventory counts.

(c) rely on the warehouse records.

(d) take a physical inventory.

31. Westcom Corporation's goods in transit at December 31 include (1) sales made FOB destination, (2) sales made FOB shipping point, (3) purchases made FOB destination, and (4) purchases made FOB shipping point. Which items should be included in Westcom's inventory at December 31?

(a) (2) and (3)

(b) (1) and (4)

(c) (1) and (3)

(d) (2) and (4)

32. Goods held on consignment are

(a) never owned by the consignee.

(b) included in the consignee’s ending inventory.

(c) kept for sale on the premises of the consignor.

(d) not included in anyone’s ending inventory.

33. Cost of goods available for sale is:

(a) beginning inventory + cost of goods sold.

(b) cost of goods sold + purchases.

(c) purchases + ending inventory.

(d) ending inventory + cost of goods sold.

34. The specific identification cost formula may be used when:

(a) goods are interchangeable.

(b) goods are not unique.

(c) goods can not be distinguished from one another.

(d) goods are individually identifiable.

35. In periods of falling prices

(a) FIFO will result in a higher ending inventory valuation than the average cost formula.

(b) FIFO will result in a higher cost of goods sold than the average cost formula.

(c) the average cost formula will result in a higher cost of goods sold than the FIFO cost formula.

(d) the average cost formula will result in a lower ending inventory valuation than the FIFO cost formula.

36. A company just starting in business purchased three merchandise inventory items at the following prices. March 2, $150; March 7, $160; and March 15, $180. If the company sold two units for $250 each on March 10 and March 20, and used the FIFO cost formula in a perpetual inventory system, the gross profit for March would be

(a) $200.

(b) $190.

(c) $180.

(d) $150.

Ex. 105

Roddick Corporation has just completed a physical inventory count at year end, December 31, 2022. Only the items on the shelves, in storage, and in the receiving area were counted. The inventory amounted to $115,500. Roddick uses a perpetual inventory system. During the year-end audit, the independent CPA discovered the following additional information:

1. There were goods in transit on December 31, 2022, from a supplier with terms FOB destination, costing $12,750. Because the goods had not arrived, they were excluded from the physical inventory count.

2. On December 27, 2022, a regular customer purchased goods for cash amounting to $1,500 and left them for pickup on January 4, 2023. Roddick had paid $1,800 for the goods and, because they were on hand, included them in the physical inventory count.

3. Roddick Corporation, on the date of the inventory count, received notice from a supplier that goods ordered earlier, at a cost of $15,000, had been delivered to the transportation company on December 28, 2022; the terms were FOB shipping point. Because the shipment had not arrived on December 31, 2022, it was excluded from the physical inventory.

4. On December 31, 2022, there were goods in transit to customers, with terms FOB shipping point, amounting to $1,200 (expected delivery on January 8, 2023). Because the goods had been shipped, they were excluded from the physical inventory count.

5. On December 31, 2022, Roddick shipped $3,750 worth of goods to a customer, FOB destination. This shipment arrived on January 5, 2023. Because the goods were not on hand, they were not included in the physical inventory count.

6. Roddick Corporation, as the consignee, had goods on consignment that cost $7,500. Because these goods were on hand at December 31, 2022, they were included in the physical inventory count.

Instructions

Analyze the above information and calculate a corrected amount for the ending inventory. Explain the rationale for your treatment of each item.

Ex. 106What is shrinkage and how is it recorded?

Ex. 107 Why can companies only use the specific identification cost formula when goods are not ordinarily interchangeable?

Ex. 108

Hansen Corporation uses the perpetual inventory system and had the following information available:

Units Unit Cost Total Cost

Jan 1 Beginning inventory 15 $4.00 $ 60

20 Purchase 60 4.40 264

21 Sale 65 - -

Jul 25 Purchase 30 4.20 126

Oct 20 Purchase 45 4.80 216

Nov 15 Sale 75 - -

Instructions

Answer the following independent questions and show calculations supporting your answers:

(a) Assume that the company uses the FIFO cost formula. The cost of goods sold for the Jan 21 sale was $__________.

(b) Assume that the company uses the average cost formula. The cost of goods sold for the Jan 21 sale was $__________. (Use unrounded numbers in your calculations but round to the nearest cent for presentation purposes in your answer.)

(c) Assume that the company uses the average cost formula. The value of the inventory after the Nov 15 sale was $__________. (Use unrounded numbers in your calculations but round to the nearest cent for presentation purposes in your answer.)

(d) Assume that the company uses the FIFO cost formula. The value of the inventory after the Oct 20 purchase is $__________.

Ex. 109

Owl Ltd. sells many products. Hoot is one of its popular items. Below is an analysis of the inventory purchases and sales of Hoot for the month of March. Owl uses the perpetual inventory system.

Purchases Sales

Units Unit Cost Units Selling Price/Unit

Mar 1 Beginning inventory 600 $40

3 Purchase 100 60

4 Sales 190 $80

10 Purchase 100 66

16 Sales 275 120

19 Sales 220 120

25 Sales 75 120

30 Purchase 460 75

Instructions

(a) Using the FIFO cost formula, calculate the cost of goods sold for March. Show calculations.

(b) Using the average cost formula, calculate the ending inventory at March 31. Show calculations and use unrounded numbers in your calculations but round to the nearest cent for presentation purposes in your answer.

Ex. 110

Kiwi Ltd., which uses a perpetual inventory system, recorded the following inventory transactions for this year:

Purchases Sales

Units Unit Cost Units Selling Price/Unit

Apr 1 Beginning inventory 90 $ 16

25 Purchase 300 18

May 4 Purchase 130 20

16 Sale 240 $32

Jun 4 Purchase 100 24

Instructions

(a) Using the FIFO cost formula, calculate the cost of goods sold for the quarter ended June 30. Show calculations.

(b) Using the average cost formula, calculate the ending inventory at June 30. Show calculations and use unrounded numbers in your calculations but round to the nearest cent for presentation purposes in your answer.

Ex. 111

Rayleigh Corporation, which uses a perpetual inventory system, recorded the following inventory transactions during the last two months of 2022:

Purchases Sales

Units Unit Cost Units Selling Price/Unit

Nov 1 Beginning inventory 210 $120

13 Purchase 140 116

29 Sale 192 $174

Dec 3 Purchase 100 112

16 Sale 104 168

Instructions

(a) Using the FIFO cost formula, calculate the cost of goods sold for the two months of November and December. Show calculations.

(b) Using the average cost formula, calculate the ending inventory at December 31. Show calculations and use unrounded numbers in your calculations but round to the nearest cent for presentation purposes in your answer.

Ex. 112

Coucous Corp. uses the perpetual inventory system. Information related to Coucous’ inventory for September is given below:

Sep 1 Beginning inventory 200 units @ $10.00 = $ 2,000

8 Purchase 600 units @ $10.40 = 6,240

12 Sale 500 units

16 Purchase 400 units @ $10.80 = 4,320

24 Purchase 100 units @ $11.60 = 1,160

29 Sale 400 units

Instructions

(a) Calculate the ending inventory using the FIFO cost formula at September 30 (show calculations).

(b) Calculate the ending inventory using the average cost formula at September 30 (show calculations).

Ex. 113

Glamorous Gold Inc. opened for business on April 1, 2022 selling unique jewellery, which it purchases from local artisans. During April, the company made the following purchases:

Date Inventory Tag Number Cost

Apr 1 001 $2,750

Apr 3 002 600

Apr 5 003 1,150

004 2,300

Apr 10 005 700

Apr 13 006 1,200

007 3,900

Apr 26 008 600

009 1,700

Apr 30 010 2,400

On April 30, only inventory items 006, 008, and 010 remained in inventory.

Instructions

(a) Calculate the cost of goods sold for April using the specific identification cost formula.

(b) Discuss whether or not specific identification is an appropriate cost formula for this company.

Ex. 114

Complete the table by identifying the cost formula that provides the following advantage:

ADVANTAGE COST FORMULA

1. Tracks the actual physical flow ________________

2. Ending inventory is closest to replacement cost ________________

3. Approximates the physical flow of most retailers ________________

4. Exactly matches costs and revenues ________________

5. Smooths the effects of price changes ________________

Ex. 115

Houle Limited reported the following summarized annual data at the end of 2022:

Sales revenue $3,500,000

Cost of goods sold* 1,700,000

Gross profit 1,800,000

Operating expenses 1,200,000

Income before income tax $ 600,000

*Based on an ending inventory of $420,000, using FIFO.

The controller of the company is considering a switch from FIFO to average cost. He has determined that on an average cost basis, the ending inventory would have been $320,000.

Instructions

(a) Restate the summary information on an average cost basis.

(b) If you were the management of this business, what would your reaction be to this proposed change?

Ex. 116How does a company determine which cost formula to use and can more than one formula be used?

Ex. 117 Explain how an overstatement of inventory in Year 1 would result in an understatement of profit for the next year (Year 2) but correct net income for the two years combined.

Ex. 118

For each of the independent events listed below, analyze the impact on the indicated items at the end of the current year by placing the appropriate code letter in the box under each item.

Code: O = item is overstated

U = item is understated

NA = item is not affected

Items _

Assets Shareholders’ Cost of Net income

Equity Goods Sold

1. The ending inventory in the previous period was overstated.

—————————————————————————————————————————–

2. A physical count of goods on hand at the end of the current year resulted in some goods being counted twice.

—————————————————————————————————————————–

3. Goods purchased on account in December of the current year and shipped FOB shipping point were recorded as purchases, but were not included in the count of goods on hand on December 31 because they had not arrived by December 31.

—————————————————————————————————————————–

4. Goods purchased on account in December of the current year and shipped FOB destination were recorded as purchases, but were not included in the count of goods on hand on December 31 because they had not arrived by December 31.

—————————————————————————————————————————–

5. The internal auditors discovered that the ending inventory in the previous period was understated $15,000 and that the ending inventory in the current period was overstated $25,000.

Ex. 119

Condensed statement of incomes for Collingwood Limited are shown below for two years:

2021 2022

Sales $92,000 $106,000

Cost of goods sold 54,000 65,000

Gross profit 38,000 41,000

Operating expenses 15,000 15,000

Income before income tax $23,000 $ 26,000

Instructions

(a) Calculate the corrected net income before income tax for 2021 and 2022, assuming that the inventory as of the end of 2021 was mistakenly understated by $7,000.

2021 $____________ 2022 $____________

(b) Calculate the ending retained earnings at the end of 2022, assuming retained earnings at the end of 2021 was $195,000 and at the end of 2022, $205,000.

Ex. 120

Miller’s Grocery reported the following selected information:

2021 2022

Cost of goods sold $837,000 $900,000

Ending inventory 64,000 55,000

Miller made two errors:

1. 2021 ending inventory was overstated by $5,000.

2. 2022 ending inventory was understated by $9,000.

Instructions

Assuming the errors have not been corrected, indicate the dollar effect that the errors had on the items listed below. Also indicate if the amounts are overstated (O) or understated (U).

2021 2022

Overstated/ Overstated/

Amount Understated Amount Understated

Total assets $_________ _______ $_________ _______

Shareholders’ equity $_________ _______ $_________ _______

Cost of goods sold $_________ _______ $_________ _______

Income before income tax $_________ _______ $_________ _______

Ex. 121

Copper Mining Inc. has been stock-piling copper inventory in anticipation of better prices. Unfortunately, the market has not improved and at year end, December 31, 2021, inventory with a cost of $4.5 million is worth $3.5 million if it could be sold.

During the next year, the prices start to recover, but the company still has not sold the inventory. At December 31, 2022, the market value of the same copper inventory has increased and is worth $4.6 million.

Instructions

(a) Prepare the adjusting entry required at December 31, 2021 to record the decline in the value of the inventory, assuming Copper Mining uses a perpetual inventory system.

(b) Prepare the adjusting entry required at December 31, 2022, if any.

Ex. 122

The following information is available from recent financial statements of Competitor A and Competitor B:

(Amounts in millions)

Competitor A Competitor B

Ending inventory $ 7,500 $ 5,210

Beginning inventory 8,100 6,059

Cost of goods sold 23,760 33,616

Sales 30,251 39,950

Instructions

(a) Calculate the inventory turnover and days in inventory for both companies.

(b) What conclusions concerning the management of inventory can be drawn from these data?

Ex. 123

The following information is available for Franklin Corporation for 2022:

Beginning inventory $1,100,000

Ending inventory 1,200,000

Cost of goods sold 8,050,000

Sales 7,000,000

Instructions

Calculate the inventory turnover and days in inventory for Franklin Corporation.

Ex. 124

Solve for the missing amounts:

A B C

Sales $100,000 $239,000 $438,000

Cost of goods sold (a) 122,000 345,000

Inventory, beginning of year 23,000 45,000 (h)

Inventory, end of year 17,000 39,000 105,000

Average inventory (b) (e) 101,500

Gross profit 46% (f) (i)

Inventory turnover (c) (g) (j)

Days in inventory (d) 126 (k)

Ex. 125

Parts Plus has the following individual inventory items at cost and net realizable value:

Part Units Unit Cost NRV per Unit

X123 20 $5.00 $4.50

Y135 30 3.00 3.75

Z246 25 4.25 5.00

A369 10 1.10 1.10

B258 15 2.30 2.00

Instructions

(a) Determine the lower of cost and net realizable value of the ending inventory for Parts Plus.

(b) Prepare the journal entry required, if any, to record the adjustments from cost to net realizable value.

Ex. 126

Codify Lighting has the following groups of inventory and net realizable value for its light fixtures:

Cost NRV

Ceiling Lights $23,500 $18,100

Chandeliers 17,500 15,100

Table Lamps 19,300 21,800

Floor Lamps 16,000 19,400

Desk Lamps 8,700 6,200

Total Inventory $85,000 $80,600

Instructions

(a) Determine the lower of cost and net realizable value of the ending inventory for Codify Lighting.

(b) Prepare the journal entry required, if any, to record the adjustments from cost to net realizable value.

Ex. 127

What information must companies disclose in the financial statement or the notes to the financial statements when reporting inventory?

*Ex. 128

Owl Ltd. sells many products. Hoot is one of its popular items. Below is an analysis of the inventory purchases and sales of Hoot for the month of March. Owl uses the periodic inventory system.

Purchases Sales

Units Unit Cost Units Selling Price/Unit

Mar 1 Beginning inventory 600 $40

3 Purchase 100 60

4 Sales 190 $80

10 Purchase 100 66

16 Sales 275 120

19 Sales 220 120

25 Sales 75 120

30 Purchase 460 75

Instructions

1. Determine the total units available for sale and the cost of goods available for sale, the number of units sold, and the number of units in ending inventory.
2. Determine the cost of goods sold and ending inventory under a periodic inventory system using (1) FIFO and (2) average cost.

*Ex. 129

Hansen Corporation uses the periodic inventory system and had the following information available:

Units Unit Cost Total Cost

Jan 1 Beginning inventory 15 $4.00 $ 60

20 Purchase 60 4.40 264

21 Sale 65 - -

Jul 25 Purchase 30 4.20 126

Oct 20 Purchase 45 4.80 216

Nov 15 Sale 75 - -

Instructions

Answer the following independent questions and show calculations supporting your answers:

(a) Assume that the company uses the FIFO cost formula. The cost of goods sold for the Jan 21 sale was $__________.

(b) Assume that the company uses the average cost formula. The cost of goods sold for the Jan 21 sale was $__________. (Use unrounded numbers in your calculations but round to the nearest cent for presentation purposes in your answer.)

(c) Assume that the company uses the average cost formula. The value of the inventory after the Nov 15 sale was $__________. (Use unrounded numbers in your calculations but round to the nearest cent for presentation purposes in your answer.)

(d) Assume that the company uses the FIFO cost formula. The value of the inventory after the Oct 20 purchase is $__________.

*Ex. 130

Breaker Corp. uses the periodic inventory system, and has the following information about purchases and sales during the year:

Jan 1 Beginning inventory 300 items @ $6 = $ 1,800

May 1 Purchases 900 items @ $10 = 9,000

Total 1,200 items $10,800

Total sales 600 items

Dec 31 Ending inventory 600

Instructions

Calculate the cost to be assigned to ending inventory for each of the cost formula below:

(a) Average $____________

(b) FIFO $____________

*Ex. 131

Coucous Corp. uses the periodic inventory system. Information related to Coucous’ inventory for September is given below:

Sep 1 Beginning inventory 200 units @ $10.00 = $2,000

8 Purchase 600 units @ $10.40 = 6,240

16 Purchase 400 units @ $10.80 = 4,320

24 Purchase 100 units @ $11.60 = 1,160

1,300 units $13,720

Instructions

(a) Calculate the ending inventory using FIFO assuming 400 units remain on hand at September 30 (show calculations).

(b) Calculate the ending inventory using average cost assuming 400 units remain on hand at September 30 (show calculations).

*Ex. 132

Alto Ltd. uses the periodic inventory system and had the following inventory information available:

Units Unit Cost Total Cost

Jan 1 Beginning inventory 200 $8 $ 1,600

20 Purchase 1,000 $10 10,000

Jul 25 Purchase 200 $12 2,400

Nov 20 Purchase 600 $14 8,400

2,000 $22,400

A physical count of inventory on December 31 showed that there were 700 units on hand.

Instructions

Answer the following independent questions and show calculations supporting your answers.

(a) Assume that the company uses FIFO. The value of the ending inventory at December 31 is $__________.

(b) Assume that the company uses average cost. The value of the ending inventory on December 31 is $__________.

(c) Determine the difference in the amount of net income that the company would have reported if it had used FIFO instead of average cost. Would net income have been greater or less?

*Ex. 133

Harmony Corporation uses the periodic inventory system and had the following inventory information available:

Units Unit Cost Total Cost

Jan 1 Beginning inventory 15 $4.00 $ 60

20 Purchase 60 4.40 264

Jul 25 Purchase 30 4.20 126

Oct 20 Purchase 45 4.80 216

150 $666

A physical inventory count on December 31 showed that there were 50 units on hand.

Instructions

Answer the following independent questions and show calculations supporting your answers:

(a) Assume that the company uses FIFO. The value of the ending inventory at December 31 is $__________.

(b) Assume that the company uses average cost. The value of the ending inventory on December 31 is $__________.

(c) Assume that the company uses average cost. The value of cost of goods sold for the year ended December 31 is $__________.

(d) Assume that the company uses FIFO. The value of the cost of goods sold for the year ended December 31 is $__________.