Financial Accounting
4th Edition
ISBN: 9781259307959
Author: J. David Spiceland, Wayne M Thomas, Don Herrmann
Publisher: McGraw-Hill Education
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Chapter 6, Problem 7RQ
Cheryl believes that companies report cost of goods sold and ending inventory based on actual units sold and not sold. Her accounting instructor explains that most companies account for cost of goods sold and ending inventory based on assumed units sold and not sold. Help her understand why companies are allowed to do this.
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Cheryl believes that companies report cost of goods sold and ending inventory based on actual units sold and not sold. Her accounting instructor explains that most companies account for cost of goods sold and ending inventory based on assumed units sold and not sold. Help her understand why companies are allowed to do this.
Companies that sell products and goods will have inventory and cost of goods sold accounts. The basic cost of goods sold equation is:
Beginning Inventory + Purchases – Ending Inventory = Cost of Goods Sold
The ending inventory of one period is the beginning inventory of the next period. Businesses that offer services do not normally sell products as their primary business activity but may sell them to supplement their services.
What additional accounts would you expect to find in a manufacturing firm and how do they relate to the cost of goods sold?
You may recall from Principles I that “Cost of goods sold” for a retailer is figured as shown below:
Beginning inventory+ Purchases= Cost of goods available for sale– Ending inventory= Cost of goods sold
(A) How does the “Cost of Goods Sold” section of the income statement differ between merchandising and manufacturing companies and how is it calculated for manufacturing companies?
(B) Inventory on the balance sheet is also different for a manufacturing company than for a retailer. What are the three types of inventory on a manufacturer’s balance sheet? After naming all three, select one and discuss it.
Chapter 6 Solutions
Financial Accounting
Ch. 6 - 1.What is inventory? Where in the financial...Ch. 6 - Prob. 2RQCh. 6 - What is the difference among raw materials...Ch. 6 - Prob. 4RQCh. 6 - Prob. 5RQCh. 6 - What is a multiple-step income statement? What...Ch. 6 - Cheryl believes that companies report cost of...Ch. 6 - What are the three primary cost flow assumptions?...Ch. 6 - 9.Which cost flow assumption generally results in...Ch. 6 - Prob. 10RQ
Ch. 6 - Prob. 11RQCh. 6 - 12.Explain how LIFO generally results in lower...Ch. 6 - Prob. 13RQCh. 6 - Explain how freight charges, purchase returns, and...Ch. 6 - Explain the method of reporting inventory at lower...Ch. 6 - 16.How is cost of inventory determined? How is net...Ch. 6 - 17.Describe the entry to adjust from cost to net...Ch. 6 - Prob. 18RQCh. 6 - Prob. 19RQCh. 6 - How is gross profit calculated? What is the gross...Ch. 6 - 21.Explain how the sale of inventory on account is...Ch. 6 - Prob. 22RQCh. 6 - Prob. 23RQCh. 6 - Prob. 24RQCh. 6 - Understand terms related to types of companies...Ch. 6 - Prob. 6.2BECh. 6 - Calculate cost of goods sold (LO62) At the...Ch. 6 - Prob. 6.4BECh. 6 - Calculate ending inventory and cost of goods sold...Ch. 6 - Calculate ending inventory and cost of goods sold...Ch. 6 - Calculate ending inventory and cost of goods sold...Ch. 6 - Prob. 6.8BECh. 6 - Identify financial statement effects of FIFO and...Ch. 6 - Prob. 6.10BECh. 6 - Record freight charges for inventory using a...Ch. 6 - Record purchase returns of inventory using a...Ch. 6 - Prob. 6.13BECh. 6 - Prob. 6.14BECh. 6 - Prob. 6.15BECh. 6 - Prob. 6.16BECh. 6 - Prob. 6.17BECh. 6 - Prob. 6.18BECh. 6 - Record purchase returns of inventory using a...Ch. 6 - Refer to the information in BE613, but now assume...Ch. 6 - Prob. 6.21BECh. 6 - Prob. 6.22BECh. 6 - Calculate cost of goods sold (LO62) Russell Retail...Ch. 6 - Prob. 6.2ECh. 6 - Prob. 6.3ECh. 6 - Calculate inventory amounts when costs are rising...Ch. 6 - Calculate inventory amounts when costs are...Ch. 6 - Record Inventory transactions using o perpetual...Ch. 6 - Record inventory purchase and purchase return...Ch. 6 - Prob. 6.8ECh. 6 - Prob. 6.9ECh. 6 - Prob. 6.10ECh. 6 - Record transactions using a perpetual system...Ch. 6 - Record transactions using a perpetual system...Ch. 6 - Calculate inventory using lower of cost and net...Ch. 6 - Prob. 6.14ECh. 6 - Calculate cost of goods sold, the inventory...Ch. 6 - Prob. 6.16ECh. 6 - Prob. 6.17ECh. 6 - Prob. 6.18ECh. 6 - Record inventory purchases and sales using a...Ch. 6 - Mulligan Corporation purchases inventory on...Ch. 6 - Complete the accounting cycle using Inventory...Ch. 6 - Calculate ending inventory and cost of goods sold...Ch. 6 - Prob. 6.2APCh. 6 - Prob. 6.3APCh. 6 - Prob. 6.4APCh. 6 - Calculate ending inventory end cost of goods sold...Ch. 6 - Record transactions using a perpetual system,...Ch. 6 - Prob. 6.7APCh. 6 - Prob. 6.8APCh. 6 - Record transactions and prepare a partial income...Ch. 6 - Prob. 6.10APCh. 6 - Calculate ending inventory and cost of goods sold...Ch. 6 - Prob. 6.2BPCh. 6 - Prob. 6.3BPCh. 6 - Prob. 6.4BPCh. 6 - Prob. 6.5BPCh. 6 - Record transactions using a perpetual system,...Ch. 6 - Prob. 6.7BPCh. 6 - Use the inventory turnover retio end gross profit...Ch. 6 - Record transactions and prepare a partial income...Ch. 6 - Determine the effects of inventory errors using...Ch. 6 - Great Adventures (This is a continuation of the...Ch. 6 - Prob. 6.2APFACh. 6 - Prob. 6.3APFACh. 6 - Comparative Analysis American Eagle Outfitters,...Ch. 6 - Prob. 6.5APECh. 6 - Prob. 6.6APIRCh. 6 - Written Communication You have just been hired as...Ch. 6 - Prob. 6.8APEM
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- You may recall from Principles I that “Cost of goods sold” for a retailer is figured as shown below: Beginning inventory+ Purchases= Cost of goods available for sale– Ending inventory= Cost of goods sold (A) How does the “Cost of Goods Sold” section of the income statement differ between merchandising and manufacturing companies and how is it calculated for manufacturing companies? (B) Inventory on the balance sheet is also different for a manufacturing company than for a retailer. What are the three types of inventory on a manufacturer’s balance sheet? After naming all three, select one and discuss it. Please type out so I can read correctly*arrow_forwardIndicate whether the following statements are true or false. 1. A merchandising company reports gross profit but a service company does not. 2. Under a periodic inventory system, a company determines the cost of goods sold each time a sale occurs. 3. A service company is likely to use accounts receivable but a merchandising company is not likely to do so. 4. Under a periodic inventory system, the cost of goods on hand at the beginning of the accounting period plus the cost of goods purchased less the cost of goods on hand at the end of the accounting period equals cost of goods sold.arrow_forwardA retail business like Best Buy experiences some loss of inventory due to shoplifting, employee theft, or errors. The difference between the physical inventory count at the end of the accounting period and the balance of Merchandise Inventory in the accounting records is called ___________. Group of answer choices inventory reduction. inventory theft. inventory loss. inventory shrinkage or inventory shortage.arrow_forward
- Select all that apply Determine which of the following statements are correct regarding the difference between physical flow and the cost flow of inventory Check all that apply) A business may adopt any cost flow assumption when accounting for perishable sems Perishable-items Usually have an actual physical flow of FIFO Penshable items neve an actual physical flow of LIFO Cost flow in an assumption about which goods/items are sold Physical flow refers to the actual movement of goodsarrow_forwardUsing the LIFO method, calculate the cost of ending inventory and cost of goods sold for Cambell Corporation.arrow_forwardI'm having trouble finding the opening direct material inventory on the cost of goods sold (the very last one). Can you show me how to get answer?arrow_forward
- Journal entries for recording revenue and costs for service provider. For a traditional inventory-carrying companies, recording journal entries for revenue and costs is something like the following: Dr. Cash $100 Cr. Revenue $100 Dr. Cost of goods sold $50 Cr. Inventory $50 How does the journal entry work for service companies such as SaaS firms that do not carry inventory?arrow_forwardAs a new account assistant, Miss Fizah has been assigned to calculate the amount that should appear on Terrar Bhd’s financial statement for inventory under the lower-of-cost-or-NRV (LCRNV) rule as applied to each item in inventory. The company applies the loss method and uses an Allowance Account to record for the write down of the inventory to net realisable value (NRV). However, Madam Rabiatul, Terrar Bhd’s accountant had an argument with Mr. Zaman, senior accountant of the company regarding the method to be used to record the write down of the inventories. Madam Rabiatul wants to use the loss method to write down inventory because it is more clearly discloses the decline in the net realisable value and does not distort the cost of goods sold. But, Mr. Zaman prefers the cost-of-goods-sold method to write down because it does not call attention to the decline in net realizable value. On 31 December 2018, the Terrar Bhd recorded an intangible asset, patent, at a revalued amount of…arrow_forwardYou have been asked by the financial vice president to develop a short presentation on the LCNRV method for inventory purposes. The financial VP needs to explain this method to the president because it appears that a portion of the company’s inventory has declined in value. Instructions The financial vice president asks you to answer the following questions. a. What is the purpose of the LCNRV method? b. What is meant by “net realizable value”? c. Do you apply the LCNRV method to each individual item, to a category, or to the total of the inventory? Explain. d. What are the potential disadvantages of the LCNRV method?arrow_forward
- The hypothetical flow is one of the methods used to determine the cost of inventory and the cost of goods sold, and assuming that the company uses the perpetual inventory system, discuss this method in detail, supporting your answer with a practical example to determine the cost of goods sold and the cost of inventory and the reasons for the difference in results for each method (FIFO, LIFO?arrow_forwardYou are at a company picnic and the company president starts a conversation with you. The president says “Since we use the perpetual inventory system, there is no reason to take a physical count of our inventory.” What is your response to the president’s remarks?arrow_forwardSuppose you are being interviewed for a bookkeeping job for a retailer that uses a perpetual inventory system. The employer feels that the only way to determine whether or not the person being interviewed actually understands how to record transactions, is to ask them to provide an example showing the accounts (no amounts necessary) that would be debited and credited for the following: Purchase merchandise inventory on account. Sale of goods on account Return of part of the merchandise purchased in 1. above to the supplier. Payment to supplier, taking advantage of the discount that was offered. Return of goods by customer for credit. Payment received from customer, taking advantage of discount that was offered.arrow_forward
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