Financial Accounting: Tools for Business Decision-Making (Seventh Canadian Edition) – Reporting and Analyzing Inventory (Chapter 6) Solution Manual and Practice Questions

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SOLUTION MANUAL
CHAPTER 6
REPORTING AND ANALYZING INVENTORY
SUMMARY OF QUESTION TYPES BY LEARNING OBJECTIVE, LEVEL OF
DIFFICULTY, BLOOM’S TAXONOMY, CPA CODES, AND AACSB CODES
Item LO LOD Bloom’s CPA AACSB Item LO LOD Bloom’s CPA AACSB Item LO LOD Bloom’s CPA AACSB
True-False Statements
1. 1 E C F AN 10. 2 E C F AN 19. 5 E C F AN
2. 1 E K F AN 11. 2 E K F AN 20. 5 E C F AN
3. 1 E C F AN 12. 2 M K F AN 21. 5 M K F AN
4. 1 M C F AN 13. 2 E K F AN 22. 5 M K F AN
5. 2 E K F AN 14. 2 M K F AN 23. 5 E C F AN
6. 2 M C F AN 15. 3 M K F AN 24. 5 E C F AN
SO
7. 2 E K F AN 16. 3 E K F AN 25. 5 M K F AN
8. 2 M C F AN 17. 3 M C F AN *26. 6 E C F AN
9. 2 E K F AN 18. 3 M K F AN
Multiple Choice Questions
27. 1 H C F AN 51. 2 E AP F AN 75. 3 M C F AN
28. 1 M K F AN 52. 2 E K F AN 76. 4 H C F AN
29. 1 M K F AN 53. 2 E C F AN 77. 4 M C F AN
30. 1 E K F AN 54. 3 M C F AN 78. 4 M C F AN
31. 1 H C F AN 55. 3 E C F AN 79. 4 E C F AN
32. 1 E K F AN 56. 3 E K F AN 80. 4 E C F AN
33. 2 H C F AN 57. 3 E K F AN 81. 5 E K F AN
34. 2 E AP F AN 58. 3 M K F AN 82. 5 E C F AN
35. 2 E K F AN 59. 3 E K F AN 83. 5 M AP F AN
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36. 2 M AP F AN 60. 3 E K F AN 84. 5 M AP F AN
37. 2 M AP F AN 61. 3 E C F AN 85. 5 H AP F AN
38. 2 M AP F AN 62. 3 E C F AN 86. 5 E C F AN
39. 2 H AP F AN 63. 3 E C F AN 87. 5 E K F AN
40. 2 M C F AN 64. 3 M C F AN 88. 5 E K F AN
41. 2 M AP F AN 65. 3 M C F AN 89. 5 E AP F AN
42. 2 E AP F AN 66. 3 E C F AN 90. 5 E AP F AN
43. 2 M AP F AN 67. 3 E C F AN 91. 5 M C F AN
44. 2 H AP F AN 68. 3 M C F AN 92. 5 H AP F AN
45. 2 M AP F AN 69. 3 E C F AN *93. 6 H C F AN
46. 2 M C F AN 70. 3 E K F AN *94. 6 E K F AN
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47. 2 M AP F AN 71. 3 M C F AN *95. 6 M C F AN
48. 2 M AP F AN 72. 3 E C F AN *96. 6 E AP F AN
49. 2 H AP F AN 73. 3 E K F AN *97. 6 E AP F AN
50. 2 M AP F AN 74. 3 E C F AN *98. 6 M C F AN

LOD: E = Easy M = Medium H = Hard
Bloom’s: AP = Application C = Comprehension K = Knowledge
CPA: F = Financial Reporting
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AACSB: AN = Analytic

*This topic is dealt with in an Appendix to the chapter.
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SUMMARY OF QUESTION TYPES BY LEARNING OBJECTIVE, LEVEL OF
DIFFICULTY, BLOOM’S TAXONOMY, CPA CODES, AND AACSB CODES
(CONT’D)
Item LO LOD Bloom’s CPAAACSB Item LO LODBloom’s CPAAACSB Item LOLODBloom’s CPAAACSB
Exercises
99. 1 H C F AN 107. 3 M AP F AN 115. 5 M C F AN
100. 2 H C F AN 108. 4 H AP F AN 116. 5 M C F AN
101. 2 M C F AN 109. 4 M C F AN *117. 6 M AP F AN
102. 2 H C F AN 110. 4 M AP F AN *118. 6 E C F AN
103. 2 H AP F AN 111. 5 E AP F AN *119. 6 M AP F AN
104. 2 M AP F AN 112. 5 M AP F AN *120. 6 M AP F AN
105. 2,3 E AP F AN 113. 5 E AP F AN *121. 6 M AP F AN
106. 3 M AP F AN 114. 5 M C F AN
SO
Matching
122. 1,2,5E,M K F AN
Short-Answer Essay
123. 1 M C F,E AN,E 125. 2,3 H C F AN 127. 4 M C F,C AN,C
124. 1,5 M AP F AN, E 126. 2,3 M C F AN 128. 5 E
CPA Questions
129. 2 M C F AN 131. 4,5 H K F AN *133. 6 M AN F AN
130. 3 M K F AN 132. 5 M K F AN

LOD: E = Easy M = Medium H = Hard
Bloom’s: AN = Analysis AP = Application C = Comprehension K = Knowledge
CPA: C = Communication E = Professional and Ethical Behaviour F = Financial Reporting
AACSB: AN = Analytic C = Communication E = Ethics
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*This topic is dealt with in an Appendix to the chapter.
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6-3 Reporting and Analyzing Inventory


SUMMARY OF LEARNING OBJECTIVES BY QUESTION TYPE
Item Type Item Type Item Type Item Type Item Type Item Type Item Type
Learning Objective 1
1. TF 3. TF 27. MC 29. MC 31. MC 99. Ex 123. SAE
2. TF 4. TF 28. MC 30. MC 32. MC 122. Ma 124. SAE
Learning Objective 2
5. TF 11. TF 35. MC 41. MC 47. MC 53. MC 105. Ex
6. TF 12. TF 36. MC 42. MC 48. MC 100. Ex 122. Ma
7. TF 13. TF 37. MC 43. MC 49. MC 101. Ex 125. SAE
8. TF 14. TF 38. MC 44. MC 50. MC 102. Ex 126. SAE
9. TF 33. MC 39. MC 45. MC 51. MC 103. Ex 129. CP
10. TF 34. MC 40. MC 46. MC 52. MC 104. Ex
SO
Learning Objective 3
15. TF 55. MC 60. MC 65. MC 70. MC 75. MC 126. SAE
16. TF 56. MC 61. MC 66. MC 71. MC 105. Ex 130. CP
17. TF 57. MC 62. MC 67. MC 72. MC 106. Ex
18. TF 58. MC 63. MC 68. MC 73. MC 107. Ex
54. MC 59. MC 64. MC 69. MC 74. MC 125. SAE
Learning Objective 4
76. MC 78. MC 80. MC 109. Ex 127. SAE
77. MC 79. MC 108. Ex 110. Ex 131. CP
Learning Objective 5
19. TF 24. TF 84. MC 89. MC 112. Ex 122. Ma
20. TF 25. TF 85. MC 90. MC 113. Ex 124. SAE
21. TF 81. MC 86. MC 91. MC 114. Ex 128. SAE
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22. TF 82. MC 87. MC 92. MC 115. Ex 131. CP
23. TF 83. MC 88. MC 111. Ex 116. Ex 132. CP
*Learning Objective 6
*26. TF *94. MC *96. MC *98. MC *118. Ex *120. Ex *133. CP
*93. MC *95. MC *97. MC *117. Ex *119. Ex *121. Ex

Note: TF = True-False MC = Multiple Choice Ma = Matching
Ex = Exercise SAE = Short-Answer Essay CP = CPA Questions

*This topic is dealt with in an Appendix to the chapter.
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6 - 4 Test Bank for Financial Accounting: Tools for Business Decision-Making, Seventh Canadian Edition

CHAPTER LEARNING OBJECTIVES

1. Describe the steps in determining inventory quantities. The steps are (1) determining the ownership of
goods in transit, on consignment, and in similar situations; and (2) taking a physical inventory of goods on
hand.


2. Apply the cost formulas using specific identification, FIFO, and average cost under a perpetual
inventory system. Costs are allocated to the Cost of Goods Sold account each time that a sale occurs in
a perpetual inventory system. The cost is determined by using the specific identification; first-in, first-out
(FIFO); or average cost formula.
Specific identification must be used for goods that are not ordinarily interchangeable. This cost formula
tracks the actual physical flow of goods, allocating the exact cost of each merchandise item to cost of
goods sold and ending inventory.
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If a company’s goods are interchangeable (homogeneous), then either the FIFO or average cost formula
may be used.
The FIFO cost formula assumes a first-in, first-out cost flow for sales. Cost of goods sold consists of the
cost of the earliest goods purchased. Ending inventory consists of the cost of the most recent goods
purchased.
Under the average cost formula, a new weighted (moving) average unit cost is calculated after each
purchase or purchase return and applied to the number of units sold (and as a result, to the number of
units remaining in ending inventory).


3. Explain the effects on the financial statements of choosing each of the inventory cost formulas.
The specific identification cost formula must be used for goods that are not ordinarily interchangeable.
(Typically the goods are unique, high-value items.) Either the FIFO or average cost formula can be used
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for goods that are interchangeable (that is, they are homogeneous or non-distinguishable from one
another). Management should select the cost formula that most closely corresponds to the physical flow of
goods and should report inventory on the statement of financial position at an amount that is closest to the
cost of inventory recently purchased.
Specific identification results in an exact match of costs and revenues on the income statement. When
prices are rising, the average cost formula results in a higher cost of goods sold and lower net income than
FIFO. The average cost formula therefore results in a better allocation on the income statement of more
current (recent) costs with current revenues than does FIFO. In terms of the statement of financial
position, FIFO is considered to be superior because it results in an ending inventory that is closest to
current (replacement) value. All three cost formulas result in the same cash flow before income tax.
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4. Identify the effects of inventory errors on the financial statements. Ignoring the effects of income tax,
an error made in determining the quantities and/or cost of inventory at the end of the year will also affect
cost of goods sold. If ending inventory is overstated, cost of goods sold will be understated and this in turn
will cause net income to be overstated. Therefore, an error that overstates inventory will also overstate net
income and after recording closing entries, the overstatement in net income will be reflected as an
overstatement in retained earnings. In the following period, the overstatement in inventory will flow into
cost of goods sold and overstate cost of goods sold and understate net income, thereby reversing the
effect of the prior-period error. As long as the cost of inventory at the end of this subsequent period is
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determined properly, the reversal of the error will mean that both inventory and retained earnings are not
misstated at the end of the following accounting period.
If an error is made by recording goods in transit as an inventory purchase in a period before title to the
goods changes hands, both inventory and accounts payable will be overstated. If the purchase has
actually occurred but is not recorded or counted, then both inventory and accounts payable will be
understated.
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