CHAPTER 7
Inventories
EXERCISES
Ex. 7–1
Switching to a perpetual inventory system will strengthen Triple Creek Hardware’s
internal controls over inventory, since the store managers will be able to keep
track of how much of each item is on hand. This should minimize shortages of
good-selling items and excess inventories of poor-selling items.
On the other hand, switching to a perpetual inventory system will not eliminate
the need to take a physical inventory count. A physical inventory must be taken to
verify the accuracy of the inventory records in a perpetual inventory system. In
addition, a physical inventory count is needed to detect shortages of inventory
due to damage or theft.
Ex. 7–2
a.
Appropriate. The inventory tags will protect the inventory from customer theft.
b. Inappropriate. The control of using security measures to protect the inventory
is violated if the stockroom is not locked.
c.
Inappropriate. Good controls include a receiving report, prepared after all
inventory items received have been counted and inspected. Inventory
purchased should only be recorded and paid for after reconciling the receiving
report, the initial purchase order, and the vendor’s invoice.
7-8
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CHAPTER 7
Inventories
Ex. 7–3
a.
Portable DVD Players
Purchases
Quantity
Date
Apr.
1
6
14
140
Unit
Cost
Total
Cost
40
30
b.
160
43
Inventory
Unit
Cost
Unit
Cost
Quantity
Total
Cost
90
39
3,510
30
80
45
39
40
40
1,170
3,200
1,800
Quantity
5,600
19
25
30
Cost of Merchandise Sold
6,880
Balances
Total
Cost
120
30
30
140
60
39
39
39
40
40
4,680
1,170
1,170
5,600
2,400
15
15
160
40
40
43
600
600
6,880
7,480
9,680
Since the prices rose from $39 for the April 1 inventory to $43 for the purchase on April 30, we would
expect that under last-in, first-out the inventory would be lower.
Note to Instructors: Exercise 7–4 shows that the inventory is $7,465 under LIFO.
7-9
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CHAPTER 7
Inventories
Ex. 7–4
Portable DVD Players
Purchases
Quantity
Date
Apr.
1
6
14
Unit
Cost
Total
Cost
Cost of Merchandise Sold
Inventory
Unit
Cost
Unit
Cost
Quantity
Total
Cost
90
39
3,510
19
110
40
4,400
25
30
15
40
39
1,200
585
30
30
140
160
40
43
5,600
6,880
Balances
Quantity
Total
Cost
120
30
30
140
30
30
15
39
39
39
40
39
40
39
4,680
1,170
1,170
5,600
1,170
1,200
585
15
160
39
43
585
6,880
7,465
9,695
7-10
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CHAPTER 7
Inventories
Ex. 7–7
a.
$22,880 ($440 × 52 units)
b.
$22,000 [($400 × 12 units) + ($420 × 20 units) + ($440 × 20 units)] = $4,800 + $8,400 + $8,800
Ex. 7–8
Date
Jan.
1
Mar.
18
May
2
Aug.
9
Oct.
20
Dec. 31
Purchases
Unit
Quantity
Cost
1,800
700
Balances
Total
Cost
Cost of Merchandise Sold
Unit
Total
Quantity Cost
Cost
800
150.00
1,500
154.50
155.00 279,000
160.50 112,350
Inventory
Quantity Unit Cost
1,000
150.00
120,000
200
150.00
2,000
154.50
231,750
500
154.50
1,200
158.00
351,750
1,200
158.00
Total
Cost
150,000
30,000
309,000
77,250
189,600
189,600
Ex. 7–9
Date
Jan.
1
Apr.
19
June 30
Sept.
2
Nov. 15
Dec. 31
Purchases
Unit
Quantity
Cost
Total
Cost
12,000
48.00 576,000
2,000
Balances
50.00 100,000
Cost of Merchandise Sold
Unit
Total
Quantity Cost
Cost
5,000
40.00
9,000
46.40
Inventory
Quantity Unit Cost
8,000
40.00
200,000
3,000
40.00
15,000
46.40
417,600
6,000
46.40
8,000
47.30
617,600
8,000
47.30
7-13
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Total
Cost
320,000
120,000
696,000
278,400
378,400
378,400
CHAPTER 7
Inventories
Ex. 7–13
Cost
Inventory Method
a.
b.
c.
FIFO
LIFO
Weighted average cost
Merchandise
Inventory
Merchandise
Sold
$39,888
34,920
37,440
$77,112
82,080
79,560
Cost of merchandise available for sale:
42 units at $720……………………………………………………...……………
58 units at $780………………………………………………...…………………
20 units at $816………………………………………………………..…………
30 units at $840………………………………………………….………………
150 units (at an average cost of $780)…………………………………………
a.
$ 30,240
45,240
16,320
25,200
$117,000
First-in, first-out:
Merchandise inventory:
30 units at $840…………………………………………………..………………
18 units at $816………………………………………...…………………………
48 units……………………………………………………..………………………
$25,200
14,688
$39,888
Merchandise sold:
$117,000 – $39,888…………………………………….……………………………
$77,112
b. Last-in, first-out:
c.
Merchandise inventory:
42 units at $720……………………………………………...……………………
6 units at $780………………………………………….………………………
48 units…………………………………………………………...………………
$30,240
4,680
$34,920
Merchandise sold:
$117,000 – $34,920……………………………………………..……………………
$82,080
Weighted average cost:
Merchandise inventory:
48 units at $780 ($117,000 ÷ 150 units)…………………………………………
$37,440
Merchandise sold:
$117,000 – $37,440…………………………………...……………………………
$79,560
7-16
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CHAPTER 7
Inventories
Ex. 7–19
When an error is discovered affecting the prior period, it should be corrected. In
this case, the merchandise inventory account should be debited and the owner’s
capital account credited for $33,000.
Failure to correct the error for 2013 and purposely misstating the inventory and
the cost of merchandise sold in 2014 would cause the income statements for the
two years to not be comparable. The balance sheet at the end of 2014 would be
correct, however, since the 2013 inventory error reverses itself in 2014.
Ex. 7–20
a.
Apple: 52.5 {$39,541,000 ÷ [($1,051,000 + $455,000) ÷ 2]}
American Greetings: 4.0 {$682,368 ÷ [($179,730 + $163,956) ÷ 2]}
b. Lower. Although American Greetings’ business is seasonal in nature, with
most of its revenue generated during the major holidays, much of its
nonholiday inventory may turn over very slowly. Apple, on the other hand,
turns its inventory over very fast because it maintains a low inventory, which
allows it to respond quickly to customer needs. Additionally, Apple’s
computer products can quickly become obsolete, so it cannot risk building
large inventories.
7-19
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