CHAPTER 8

Valuation of Inventories: A Cost-Basis Approach

SOLUTIONS TO PROBLEMS
PROBLEM 8-1
1.

$175,000 ($175,000 X .20) = $140,000;

$140,000 ($140,000 X .10) = $126,000, cost of goods purchased

2.

$1,100,000 + $69,000 = $1,169,000. The $69,000 of goods in transit on which title had
passed on December 24 (f.o.b. shipping point) should be added to 12/31/12 inventory. The
$29,000 of goods shipped (f.o.b. shipping point) on January 3, 2013, should remain part of
the 12/31/12 inventory.

3.

Because no date was associated with the units issued or sold, the periodic (rather than
perpetual)
inventory
method
must
be
assumed.
FIFO inventory cost:

1,000 units at $24

1,000 units at 23
Total

$ 24,000
23,000
$ 47,000

LIFO inventory cost:

1,500 units at $21

500 units at 22
Total

$ 31,500
11,000
$ 42,500

Average cost:

1,500 at $21
2,000 at 22
3,500 at 23
1,000 at 24
8,000

$ 31,500
44,000
80,500
24,000
$180,000

Totals
$180,000 8,000 = $22.50

Ending inventory (2,000 X $22.50) is $45,000.

PROBLEM 8-1 (Continued)
4.

Computation of price indexes:

12/31/12

$264,000
$240,000

= 110

12/31/13

$286,720
$256,000

= 112

Dollar-value LIFO inventory 12/31/12:

Increase $240,000 $200,000 =
12/31/12 price index
Increase in terms of 110
Base inventory
Dollar-value LIFO inventory
Dollar-value LIFO inventory 12/31/13:

$ 40,000
X
1.10
44,000 2012 Layer
200,000
$244,000

Increase $256,000 $240,000 =

12/31/13 price index
Increase in terms of 112
2012 layer
Base inventory
Dollar-value LIFO inventory
5.

$ 16,000
X
1.12
17,920 2013 Layer
44,000
200,000
$261,920

The inventoriable costs for 2013 are:

Merchandise purchased..............................................
Add: Freight-in...........................................................
Deduct: Purchase returns..........................................
Purchase discounts....................................
Inventoriable cost.......................................................

$909,400
22,000
931,400
$16,500
6,800

23,300
$908,100

PROBLEM 8-3

(a)

1.

2.

8/10
Purchases.....................................................................
Accounts Payable................................................

12,000

8/13
Accounts Payable..........................................................
Purchase Returns and Allowances.......................

1,200

8/15
Purchases.....................................................................
Accounts Payable................................................

16,000

8/25
Purchases.....................................................................
Accounts Payable................................................

20,000

8/28
Accounts Payable..........................................................
Cash....................................................................

16,000

12,000

1,200

16,000

20,000

16,000

Purchasesaddition to beginning inventory in cost of goods sold section of income

statement.

Purchase returns and allowancesdeduction from purchases in cost of goods sold section of
the income statement.
Accounts payablecurrent liability in the current liabilities section of the balance sheet.
(b)

1.

8/10
Purchases.....................................................................
Accounts Payable ($12,000 X .98).......................
8/13

11,760
11,760

Accounts Payable..........................................................
Purchase Returns and Allowances
($1,200 X .98)..................................................
PROBLEM 8-3 (Continued)
8/15
Purchases.......................................................................
Accounts Payable ($16,000 X .99)........................
8/25
Purchases.......................................................................

1,176
1,176

15,840
15,840
19,600

Accounts Payable ($20,000 X .98)........................

8/28
Accounts Payable...........................................................
Purchase Discounts Lost.................................................
Cash.....................................................................
2.

3.
(c)

8/31
Purchase Discounts Lost.................................................
Accounts Payable
(.02 X [$12,000 $1,200]).................................

19,600
15,840
160
16,000
216
216

Same as part (a) (2) except:

Purchase Discounts Losttreat as financial expense in income statement.

The second method is better theoretically because it results in the inventory being
carried net of purchase discounts, and purchase discounts not taken are shown as an
expense. The first method is normally used, however, for practical reasons.

PROBLEM 8-4

(a)

Purchases
Total Units

Sales
Total Units

April 1 (balance on hand)

April 4
April 11
April 18
April 26
April 30
Total units
Total units sold
Total units (ending inventory)

100
400
300
200
600
200
1,800
1,450
350

April 5
April 12
April 27
April 28
Total units

300
200
800
150
1,450

Assuming costs are not computed for each withdrawal:

1.

First-in, first-out.
Date of Invoice
April 30

No. Units

Unit Cost

Total Cost

200

$5.80

$1,160

April 26

2.

Last-in, first-out.
Date of Invoice
April 1
April 4

150

5.60

840
$2,000

No. Units

Unit Cost

Total Cost

100
250

$5.00
5.10

$ 500
1,275
$1,775

No. Units

Unit Cost

Total Cost

100
400
300
200
600
200
1,800

$5.00
5.10
5.30
5.35
5.60
5.80

$ 500
2,040
1,590
1,070
3,360
1,160
$9,720

PROBLEM 8-4 (Continued)

3.

Average cost.
Cost of Part X available.
Date of Invoice
April 1
April 4
April 11
April 18
April 26
April 30
Total Available

Average cost per unit = $9,720 1,800 = $5.40.

Inventory, April 30 = 350 X $5.40 = $1,890.
(b)

Assuming costs are computed for each withdrawal:

1.

First-in, first out.

The inventory would be the same in amount as in part (a), $2,000.

PROBLEM 8-4 (Continued)

2.

Last-in, first-out.

Date
April 1
April 4

Purchased
No. of
Unit
units
cost
100
400

300

300

200

200

$5.1
0

5.30

April 12

April 18

Unit
cost

$5.00
5.10

April 5

April 11

Sold
No. of
units

5.35

5.3
0

No. of
units

Balance*
Unit
cost Amount

100
100
400
100

$5.00
5.00
5.10
5.00

100
100
100
300
100

5.10
5.00
5.10
5.30
5.00

100
100
100

5.10
5.30
5.00

500
2,540
1,010

2,600

1,540

April 26

600

100
100
200
100
100
100
200
600

5.60

April 27

600 @
800 200 @

April 28

100 @
150

April 30

200

50 @

5.10
5.30
5.35
5.00
5.10
5.30
5.35
5.60

2,610

5,970

5.6
0
5.3
5

5.3
0
5.1
0

5.80

100
5.00
100
5.10
100 @ 5.30
100
5.00
50

5.10

100
50
200

5.00
5.10
5.80

1,540

755

1,915

Inventory, April 30 is $1,915.

*The balance on hand is listed in detail after each transaction.
PROBLEM 8-4 (Continued)
3.

Average cost.

Date

Purchased
No. of
Unit
units
cost

Sold
No. of
Unit
units
cost

No. of
units

April 1

100

$5.00

100

April 4

400

5.10

500

April 5
April 11

300
300

$5.080
0

5.30

April 12

200
500

200

5.212
0

300

April 18

200

5.35

500

April 26

600

5.60

1,100

April 27

800

April 28

150

5.448
7
5.448
7

300
150

Balance
Unit
cost*
Amount
$5.000
0
5.080
0
5.080
0
5.212
0
5.212
0
5.267
2
5.448
7
5.448
7
5.448
7

$
500.00
2,540.0
0
1,016.0
0
2,606.0
0
1,563.6
0
2,633.6
0
5,993.6
0
1,634.7
2
817.3
3

April 30

200

5.80

350

5.649
5

1,977.3
3

Inventory, April 30 is $1,977.33

*Four decimal places are used to minimize rounding errors.

PROBLEM 8-8

(a)

1.

2.

3.

Ending inventory in units

Portable
6,000 + 15,000 14,000 =
Midsize
8,000 + 20,000 24,000 =
Flat-screen
3,000 + 10,000 6,000 =

Ending inventory at current cost

Portable
7,000 X $110 =
Midsize
4,000 X $300 =
Flat-screen
7,000 X $500 =

Ending inventory at base-year cost

Portable
7,000 X $100 =
Midsize
4,000 X $250 =
Flat-screen
7,000 X $400 =

4.

Price index
$5,470,000 $4,500,000 = 1.2156

5.

Ending inventory
$3,800,000 X 1.0000 =
700,000* X 1.2156 =

7,000
4,000
7,000
18,000

$ 770,000
1,200,000
3,500,000
$5,470,000

$ 700,000
1,000,000
2,800,000
$4,500,000

$3,800,000
850,920
$4,650,920

*($4,500,000 $3,800,000 = $700,000)

6.

Cost of goods sold

Beginning inventory..............................................................
Purchases
[(15,000 X $110) + (20,000 X $300) +
(10,000 X $500)]................................................................
Cost of goods available.........................................................
Ending inventory...................................................................
Cost of goods sold...........................................................
PROBLEM 8-8 (Continued)
7.

Gross profit
Sales revenue
[(14,000 X $150) + (24,000 X $405) +
(6,000 X $600)].....................................................................
Cost of goods sold....................................................................
Gross profit..............................................................................

$ 3,800,000
12,650,000
16,450,000
(4,650,920)
$11,799,080

$15,420,000
11,799,080
$ 3,620,920

(b)

1.

Ending inventory at current cost restated to base cost

Portable
$ 770,000 1.10a =
Midsize
1,200,000 1.20b =
Flat-screen
3,500,000 1.25c =

$
700,000
$ 1,000,000
$ 2,800,000

a. $110 $100
b. $300 $250
c. $500 $400
2.

Ending inventory
Portable
Midsize
Flat-screen

3.

4.

$ 600,000 X 1.00 =
100,000 X 1.10 =
1,000,000 X 1.00 =
1,200,000 X 1.00 =
1,600,000 X 1.25 =

600,000
110,000
1,000,000
1,200,000
2,000,000
$ 4,910,000

Cost of good sold

Cost of good available..............................................................
Ending inventory......................................................................
Cost of goods sold..............................................................

$16,450,000
(4,910,000)
$11,540,000

Gross profit
Sales revenue..........................................................................
Cost of goods sold....................................................................
Gross profit..............................................................................

$15,420,000
11,540,000
$ 3,880,000

CA 8-5
(a) 1. Inventories are unexpired costs and represent future benefits to the owner. A balance sheet
includes a listing of unexpired costs and future benefits of the owners assets at a specific
point in time. Because inventories are assets owned at the specific point in time for which a
balance sheet is prepared, they must be included in order that the owners financial
position will be presented fairly.
2. Beginning and ending inventories are included in the computation of net income only for
the purpose of arriving at the cost of goods sold during the period of time covered by the
statement. Goods included in the beginning inventory which are no longer on hand are
expired costs to be matched against revenues earned during the period. Goods included in
the ending inventory are unexpired costs to be carried forward to a future period, rather
than expensed.
(b) Financial accounting has as its goal the proper reporting of financial transactions and events in
accordance with generally accepted accounting principles. Income tax accounting has as its
goal the reporting of taxable transactions and events in conformity with income tax laws and
regulations. While the primary purpose of an income tax is the production of tax revenues to
finance the operations of government, income tax laws and regulations are often produced by
various forces. The income tax may be used as a tool of fiscal policy to stimulate all of the
segments of the economy or to decelerate the economy. Some income tax laws may be passed
because of political pressures brought to bear by individuals or industries. When the purposes
of financial accounting and income tax accounting differ, it is often desirable to report
transactions or events differently and to report the deferred tax consequences of any existing
temporary differences as assets or liabilities.

(c) FIFO and LIFO are inventory costing methods employed to measure the flow of costs. FIFO
matches the first cost incurred with the first revenue produced while LIFO matches the last
cost incurred with the first revenue produced after the cost is incurred. (This, of course,
assumes a perpetual inventory system is in use and may not be precisely true if a periodic
inventory system is employed.) If prices are changing, different costs would be matched with
revenue for the same quantity sold depending upon whether the LIFO or FIFO system is in use.
(In a period of rising or falling prices FIFO tends to value inventories at approximate market
value in the balance sheet and LIFO tends to match approximately the current replacement
cost of an item with the revenue produced.)