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Cost of Goods Sold & Inventory Analysis

Chapter 7 discusses the reporting and interpretation of Cost of Goods Sold (COGS) and inventory. It includes exercises on inferring missing amounts from income statements, reporting inventory at the lower of cost or net realizable value, and analyzing the impact of using LIFO versus FIFO on inventory and COGS for Ford Motor Company. The chapter emphasizes the importance of accurate inventory valuation and the implications of different accounting methods on financial reporting.

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5 views4 pages

Cost of Goods Sold & Inventory Analysis

Chapter 7 discusses the reporting and interpretation of Cost of Goods Sold (COGS) and inventory. It includes exercises on inferring missing amounts from income statements, reporting inventory at the lower of cost or net realizable value, and analyzing the impact of using LIFO versus FIFO on inventory and COGS for Ford Motor Company. The chapter emphasizes the importance of accurate inventory valuation and the implications of different accounting methods on financial reporting.

Uploaded by

吕冉东
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© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Chapter 7

Reporting and Interpreting Cost of Goods Sold and


Inventory
ANSWERS TO QUESTIONS
E7–3.
Inferring Missing Amounts Based on Income Statement Relationships

Supply the missing dollar amounts for the income statement for each of the following
independent cases:

(Italics and bold for missing amounts only.)


Pretax
Beg. Total Cost of Income
Sales Inven- Pur- Avail- Ending Goods Gross Ex- or
Case Revenue tory chases able Inventory Sold Profit penses (Loss)
A $ 650 $100 $700 $800 $500 $300 $350 $200 $150
B 1,100 200 900 1,100 300 800 300 150 150
C 600 150 350 500 300 200 400 100 300
D 800 150 550 700 300 400 400 200 200
E 1,000 200 900 1,100 600 500 500 550 (50)

E7–12.
Reporting Inventory at Lower of Cost or Net Realizable Value
H.T. Tan Company is preparing the annual financial statements dated December 31 of the
current year. Ending inventory information about the five major items stocked for regular sale
follows:
Lower of
Item Quantity Total Cost Total Net Realizable Cost or
Value NRV

A 50 x $15 = $ 750 x $12 = $ 600 $ 600


B 80 x 30 = 2,400 x 40 = 3,200 2,400
C 10 x 48 = 480 x 52 = 520 480
D 70 x 25 = 1,750 x 30 = 2,100 1,750
E 350 x 10 = 3,500 x 5 = 1,750 1,750
Total $8,880 $8,170 $6,980

Inventory valuation that should be used (lower of cost or NRV) $6,980

E7–18.
Analyzing Notes to Adjust Inventory from LIFO to FIFO
The following note was contained in a prior year Ford Motor Company annual report
Required:
1) What amount of ending inventory would have been reported in the current year if Ford
had used only FIFO?
2) The cost of goods sold reported by Ford for the current year was $113,345 million.
Determine the cost of goods sold that would have been reported if Ford had used only
FIFO for both years.
3) Explain why Ford management chose to use LIFO for certain of its inventories
(dollars in millions)

Req. 1 The reported ending inventory (using LIFO) for Ford was $5,901 million. If FIFO
were used exclusively, the ending inventory would have been $928 million
higher than reported, or $6,829 million.

Req. 2 The restated cost of goods sold amount must reflect the restatement of both
beginning and ending inventory:

Beginning LIFO adjustment .................................. $865 million


Less: Ending LIFO adjustment .............................. 928 million
Impact on Cost of Goods Sold .............................. $ (63) million
If FIFO had been used exclusively, cost of goods sold would have been
$113,345 - $63 = $113,282 million. In this case, FIFO cost of goods sold is less
than LIFO cost of goods sold. This is likely the result of increasing prices.

Req. 3 When costs are rising, LIFO normally produces lower net income before taxes
and lower current tax payments.

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