CHAPTER 6
BRIEF EXERCISE 6-6 Cost of good sold under: Purchases Cost of goods available for sale Less: Ending inventory Cost of goods sold LIFO $6 X 100 $7 X 200 $8 X 150 $ 3,200 1,160 $ 2,040 FIFO $6 X 100 $7 X 200 $8 X 150 $ 3,200 1,410 $ 1,790

Since the cost of goods sold is $250 less under FIFO ($2,040 – $1,790) that is the amount of the phantom profit. It is referred to as “phantom profit” because FIFO matches current selling prices with old inventory costs. To replace the units sold, the company will have to pay the current price of $8 per unit, rather than the $6 per unit which some of the units were priced at under FIFO. Therefore, profit under LIFO is more representative of what the company can expect to earn in future periods. BRIEF EXERCISE 6-7 Inventory Categories Cameras Camcorders DVD players Total valuation Cost $12,000 9,500 14,000 Market $12,100 9,700 12,800 LCM $12,000 9,500 12,800 $34,300

EXERCISE 6-1 Ending inventory—physical count ................................................ 1. No effect—title passes to purchaser upon shipment when terms are FOB shipping point ................................... 2. No effect—title does not transfer to Rodrigo until goods are received .............................................................. $297,000 0 0

Add to inventory: Title passed to Rodrigo when goods were shipped ........................................................................ 4. Add to inventory: Title remains with Rodrigo until purchaser receives goods ................................................... 5. The goods did not arrive prior to year-end. The goods, therefore, cannot be included in the inventory .................. Correct inventory ............................................................................

3.

22,000 35,000 (44,000) $310,000

PROBLEM 6-2A

(a) Date March 1 5 13 21 26 (b)

COST OF GOODS AVAILABLE FOR SALE Explanation Units Unit Cost Beginning Inventory 1,500 $ 7 Purchase 3,000 8 Purchase 5,500 9 Purchase 4,000 10 Purchase 2,000 11 Total 16,000 FIFO

Total Cost $ 10,500 24,000 49,500 40,000 22,000 $146,000

Ending Inventory Unit Date Units Cost March 26 2,000 $11 21 1,500 10 3,500* *16,000 –