Tutorial 7: Ch 8 Inventory
SSA Chapter 8: E8-18, P 8-7, P 8-9
E 8-18 (LO6) Inventory Ratios
Atkins Inventory turnover: ￡720,000/￡50,000 = 14.4 times
Number of days’ sales in inventory: 365/14.4 = 25.3 days
Burbank Inventory turnover: ￡850,000/￡$86,000 = 9.9 times
Number of days’ sales in inventory: 365/9.9 = 36.9 days
Atkins Computers is handling its inventory more efficiently, as shown by its
higher inventory turnover and its lower days’ sales in inventory.
P 8-7 (LO3) The Effect of Inventory Errors
1. The effect of each of these errors on gross margin is as follows:
(a) No effect (liabilities are understated).
(b) Ending inventory is understated, $4,400.
(c) Net purchases are overstated, $900.
(d) Net purchases are understated, $1,200.
(e) Net purchases are overstated, $3,100.
(f) Ending inventory is overstated, $800.
The following analysis shows how these errors affect cost of goods sold:
Beginning Net Goods Ending
Cost of
Error Inventory + Purchases = Available –
Inventory = Goods Sold
(a) No effect No effect No effect No effect
(b) No effect No effect No effect $4,400
understated $4,400 overstated
(c) No effect $900 overstated $900 overstated No effect
(d) No effect $1,200 understated $1,200 understated No effect
(e) No effect $3,100 overstated $3,100 overstated No effect
(f) No effect No effect No effect $800
overstated $800 understated
Totals No effect $2,800 overstated $2,800 overstated $3,600
understated $6,400 overstated
If cost of goods sold is overstated by $6,400, gross margin is understated by
$6,400. The correct gross margin is $31,400 ($25,000 + $6,400).
Chapter 8
2. Since the ending inventory of 2021 becomes the beginning inventory of 2022,
net income would be $3,600 overstated.
P 8-9 (LO4) Cost Formulas for Inventory
1. a. FIFO
Beginning inventory units ...... 460
Purchase, January 16.............. 110
Purchase, February 16 ............ 105
Purchase, March 10 ................. 150
Total units available ................ 825
Units sold:
January 25 ........................... (216)
February 27 ......................... (307)
March 30 .............................. (190)
Total units sold ........................ (713)
Ending inventory ..................... 112
Units Total Cost
Ending inventory ................................ 112(at NT$28) NT$ 3,136
Cost of goods available for sale ....... NT$25,300
Less ending inventory ....................... 3,136
Cost of goods sold ............................. NT$22,164
Gross margin:
Sales revenue ...................................... NT$31,500*
Less cost of goods sold .................... 22,164
Gross margin....................................... NT$ 9,336
*Sales revenue:
216 at NT$45= NT$ 9,720
307 at 40= 12,280
190 at 50= 9,500
NT$31,500
Chapter 8
P 8-9 (LO4) (Continued)
b. Weighted Average cost
Units Total Cost
Beginning inventory ........................... 460 (at NT$30) NT$13,800
Purchase, January 16......................... 110 (at NT$32) 3,520
Purchase, February 16 ....................... 105 (at NT$36) 3,780
Purchase, March 10 ............................ 150 (at NT$28) 4,200
825 NT$25,300
$25,300
825 = NT$30.67 average cost (rounded)
Ending inventory:
112 at NT$30.67 = NT$3,435
Cost of goods sold:
Cost of goods available for sale ....... NT$25,300
Less ending inventory ....................... 3,435
Cost of goods sold ............................. NT$21,865
Gross margin:
Sales revenue ...................................... NT$31,500
Less cost of goods sold .................... 21,865
Gross margin....................................... NT$ 9,635
2. In this case, the weighted average cost formula results in higher gross
margin. The reason for this unusual result is that prices are neither going up
nor going down consistently, but are moving randomly in both directions.
Since the higher costs are the average costs (not the earliest), the weighted
average cost formula keeps more of these costs in inventory than FIFO.