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Chapter6MerchandiseInventoryandCostofGoodsSold379Chapter6MerchandiseInventoryandCostofGoodsSoldCheckPoints(10min.)CP6-1NissanNorthAmericaBalanceSheetDecember31,20X6Currentassets:Inventory(300@$80)…………………..$24,000NissanNorthAmericaIncomeStatementYearEndedDecember31,20X6Salesrevenue[700($80+$40)]……….$84,000Costofgoodssold(700@$80)…………56,000Grossprofit………………………………….$28,000FinancialAccounting6/eSolutionsManual380(10-15min.)CP6-21.(Journalentries)Inventory…………………………………..100,000AccountsPayable…………………….100,000Cash($140,000.20)……………………28,000AmountsReceivable($140,000.80)..112,000SalesRevenue………………………...140,000CostofGoodsSold……………………..60,000Inventory($100,000.60)…………..60,0002.(Financialstatements)BALANCESHEETCurrentassets:Inventory($100,000–$60,000)……………….$40,000INCOMESTATEMENTSalesrevenue………………………………………$140,000Costofgoodssold………………………………..60,000Grossprofit…………………………………………$80,000Chapter6MerchandiseInventoryandCostofGoodsSold381(10min.)CP6-3BillionsInventory…………………………6.4Cash…………………………...6.4AccountsReceivable………….28.5SalesRevenue……………….28.5CostofGoodsSold……………6.2Inventory……………………...6.2Cash………………………………26.3AccountsReceivable……….26.3FinancialAccounting6/eSolutionsManual382(10min.)CP6-41.Inventorycostsareincreasingfrom$10to$14to$18perunit.2.FIFOresultsinthehighestcostofendinginventory($360)becauseunderFIFOtheendinginventoryiscostedatthelastcostsincurredduringtheperiod.Whencostsareincreasing,thelastcostsarethehighestcosts.FIFOresultsinthelowestcostofgoodssold.Thisoccursbecausetheoldestcostsareassignedtocostofgoodssold.Whencostsareincreasing,theoldestcostsarethelowest.FIFOresultsinthehighestgrossprofitbecausecostofgoodssold,theexpense,isthelowest.(Salesrevenueisunaffectedbytheinventorycostingmethod.)3.LIFOresultsinthelowestcostofendinginventory($240)becauseunderLIFO,theendinginventoryiscostedattheoldestcosts.Whencostsareincreasing,theoldestcostsarethelowestcosts.LIFOresultsinthehighestcostofgoodssold.Thisoccursbecausethelastcostsoftheperiodareassignedtocostofgoodssold.Whencostsareincreasing,thelastcostsarethehighest.LIFOresultsinthelowestgrossprofitbecausecostofgoodssold,theexpense,isthehighest.(Salesrevenueisunaffectedbytheinventorycostingmethod.)Chapter6MerchandiseInventoryandCostofGoodsSold383(10min.)CP6-5abcAverageCostFIFOLIFOCostofgoodssold:Average(50@$15*)$750FIFO(10@$10)+(25@$14)+(15@$18)$720LIFO(25@$18)+(25@$14)$800Endinginventory:Average(10@$15*)$150FIFO(10@$18)$180LIFO(10@$10)$100_____*Averagecost=($100+$350+$450)=$15perunit(10+25+25)FinancialAccounting6/eSolutionsManual384(10-15min.)CP6-6Kinko’sIncomeStatementYearEndedDecember31,20XXAverageFIFOLIFOSalesrevenue(600$20)$12,000$12,000$12,000Costofgoodssold(600$9.90*)5,940(100$9)+(500$10)5,900(600$10)6,000Grossprofit6,0606,1006,000Operatingexpenses4,0004,0004,000Netincome$2,060$2,100$2,000_____*Beginninginventory(100@$9.20)…………..$920Purchases(700@$10)…………………………7,000Goodsavailable…………………….……………$7,920Averagecostperunit$7,920/800units…$9.90Chapter6MerchandiseInventoryandCostofGoodsSold385(10min.)CP6-7Kinko’sIncomeStatementYearEndedDecember31,20XXAverageFIFOLIFOSalesrevenue(600$20)$12,000$12,000$12,000Costofgoodssold(600$9.90*)5,940(100$9)+(500$10)5,900(600$10)____________6,000Grossprofit6,0606,1006,000Operatingexpenses4,0004,0004,000Incomebeforeincometax$2,060$2,100$2,000Incometaxexpense(40%)$824$840$800*FromCP6-6(5min.)CP6-8Lands’Endmanagerscandelaypurchasesofinventoryuntilthenextyear.UnderLIFO,highinventorycoststhatwouldhavebeenpaidforinventorydonotbecomeexpenseascostofgoodssoldinthecurrentyear.Asaresult,thecurrentyear’sincomestatementreportsahighernetincomethanLands’Endwouldhavereportedifthecompanyhadreplacedinventorybeforeyearend.Methodtominimizeincometaxexpense.Methodtomaximizereportedincome(beforetax).FinancialAccounting6/eSolutionsManual386(5-10min.)CP6-9MillionsBALANCESHEETCurrentassets:Inventories,atmarket(whichislowerthancost)..$330INCOMESTATEMENTCostofgoodssold[$1,001+($333–$330)]…………$1,004Chapter6MerchandiseInventoryandCostofGoodsSold387(10min.)CP6-101.FIFO2.LIFOGrossprofitpercentage:Grossprofit=$460*=46%$340**=34%Netsalesrevenue$1,000$1,000_____*$1,000–$540=$460**$1,000–$660=$340Inventoryturnover:Costofgoodssold=$540$660Averageinventory($100+$360)/2($100+$240)/2=2.3times=3.9times3.Grossprofitpercentage—FIFOlooksbetter.4.Inventoryturnover—LIFOlooksbetter.FinancialAccounting6/eSolutionsManual388(10-15min.)CP6-111.Beginninginventory……………………………...$300,000+Purchases……………………………………….…1,600,000=Goodsavailable…………………………………...1,900,000–Costofgoodssold……………………………….(1,800,000)=Endinginventory……………………………….…$100,0002.Beginninginventory……………………………..$300,000+Purchases……………………………………….…1,600,000=Goodsavailable…………………………………...1,900,000–Costofgoodssold:Salesrevenue……………………….$3,000,000Lessestimatedgrossprofit(40%)(1,200,000)Estimatedcostofgoodssold……………….(1,800,000)=Estimatedcostofendinginventory…………...$100,000sameChapter6MerchandiseInventoryandCostofGoodsSold389(5-10min.)CP6-12CorrectAmount(Millions)a.Inventory($333+$3)…………………………………$336b.Netsales(unchanged)………………