Problem Solving Survival Guide to accompany Financial Accounting, 8th Edition

SOLUTION TO EXERCISE 6-3

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Abbreviations:

CGAS = Cost of Goods Available for Sale

EI = Ending Inventory

NS = Net Sales Revenue

CGS = Cost of Goods Sold

TIP: Examine your solution to the exercise above and judge the reasonableness of your answers. What do you expect the relationship of the answers to be?

1. Because the trend of the acquisition costs was upward, the ending inventory and gross profit figures computed under LIFO should be lower than the ending inventory and gross profit figures computed under FIFO.
2. The cost of the ending inventory determined by using the average cost method should be between the amount of the ending inventory determined by using the LIFO method and the amount of the ending inventory determined by using the FIFO method.

TIP: When working a problem which requires the computation of either ending inventory or cost of goods sold, remember that the total of the ending inventory and the cost of goods sold should equal the total cost of goods available for sale during the period (beginning inventory plus the net cost of the purchases).

TIP: Sales revenue represents the selling prices of goods sold; whereas, cost of goods sold expense represents the cost ...