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Chapter 8
Inventory Estimation
PROBLEM 1: TRUE OR FALSE
1. FALSE – (50,000 gross profit ÷ 150,000 COGS) = 33.33%
GPR based on cost

2. FALSE (40% GPR ÷ 60% COGS) = 66.67%

3. TRUE (33.33% GPR ÷ 133.33% SALES) = 25%

4. FALSE
 (10 + 140) = 150 TGAS;
 (120 x 100%/120%) = 100 COGS;
 150 – 100 = 50 ending inventory

5. TRUE

Inventory
beg. 20
Net
100
purchases 120 COGS (squeeze)
-

PROBLEM 2: MULTIPLE CHOICE – THEORY

1. D
Choice (a) is incorrect. PAS 2 allows the use of estimates if the
estimate reasonably approximates the cost.
Choice (b) is incorrect. The GPR based on cost is 25% (20% ÷
80%).
Choice (c) is incorrect. The cost ratio is 80% (100% ÷ 125%).

2. C
3. C
4. A
5. C

PROBLEM 3: MULTIPLE CHOICE – COMPUTATIONAL

1. D
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Solution:
GPR based on sales
Inventory
beg. 80,000
Net purchases
(340,000 – 4,000 + 339,000
12,000) 348,000 COGS (454K – 2K) x 75%
89,000 end.

GPR based on cost

Inventory
beg. 80,000
Net purchases 361,60
(340,000 – 4,000 + 348,00 COGS (454K – 2K) x 100% ÷
0 0
12,000) 125%
66,400 end.

2. D
Solution:
Inventory
beg. 162,000
3,018,60
Net purchases 3,412,000 0 COGS (4.654M - 10K) x 65%
555,400 end.
(56,000) Goods in-transit
(443,00
0) Actual inventory
56,400 Loss due to theft

3. D
Solution:
2001
Net sales (788,000 - 16,000) 772,000
Cost of sales:
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Inventory, beg. (Jan. 1, 2001) -

Purchases 860,000
Purchase returns & allow. (46,120)
Inventory, end. (Jan. 1, 2002) (173,120) (640,760)
Gross profit - 2001 131,240

GPR on sales - 2001 (131,240 ÷ 772K) 17%

Add: 3%
GPR on sales - 2002 20%

Inventory -
2002
173,12
beg. 0
COGS
Net purchases 627,40 652,80 [(836K - 20K) x
(692K - 64.6K) 0 0 80%]
147,72
0 end.

147,72
Ending inventory, 2002 0
Less: Cost of undamaged goods (24K selling price x (19,200
80%) )
Less: Salvage value of damaged goods (3,600)
124,92
Inventory loss 0

4. A
Solution:
Accounts payable Inventory
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- beg. beg. 30,000

Payments Net Net
to suppliers 80,000 90,000 purchases purchases 90,000 120,000 COGS
end. 10,000 - end.

5. A
Solution:

6. B
Solution:
Raw materials
beg. 11,000
Purchase
s 150,000 146,000 DM
15,000 end.

WIP
beg. 20,000
Direct materials 146,000
Direct labor 60,000
Factory overhead:
Indirect factory labor 30,000
Taxes and depn. - factory
bldg. 10,000
Utilities (60% x 25,000) 15,000 257,000 COGM
24,000 end.

Finished goods
beg. 12,500
260,50
COGM 257,000 0 COGS
9,000 end.
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7. D
Solutions:
Cost Retail
Inventory at January 1, 2002 45,000 75,000
Purchases 270,000 590,000
Freight-in 6,750
Markups 50,000
Markdowns (20,000)
TGAS 321,750 695,000
Net sales * (612,000)
Ending inventory at retail 83,000

*Net sales 590,000

Add back: Sales discounts 10,000
Normal shrinkage 12,000
Adjusted net sales 612,000

 Average cost method

Cost ratio Total goods avail. for sale at cost
(Average cost = Total goods avail. for sale at sales
method) price or at retail
(321,750 ÷ 695,000) = 46.29%

Ending inventory = (83,000 x 46.29%) = 38,420.70

COGS = (321,750 – 38,420.70) = 283,329.30

 FIFO cost method

TGAS at cost less beg. inventory at
Cost ratio
cost
(FIFO cost =
TGAS at retail less beg. inventory at
method)
retail

(321,750 – 45,000) ÷ (695,000 – 75,000) = 276,750 ÷ 620,000 =

44.64%
Ending inventory = (83,000 x 44.64%) = 37,051.20
COGS = (321,750 – 37,051.20 ) = 284,698.80

8. C
Solution:
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Cost Retail
Inventory, January 1 20,000 28,000
Net purchases (a) 103,200 143,400
Departmental transfers-in (debit) 2,000 3,000
Departmental transfers-out (credit) (1,600) (2,400)
Net markups (12,000 - 4,000) 8,000
Net markdowns (24,000 - 6,000) (18,000)
Abnormal spoilage (theft and casualty loss) (10,000) (14,000)
Total goods available for sale 113,600 148,000
Net sales (b) (84,000)
Ending inventory at retail 64,000
(a)

Cost Retail
Purchases 110,600 160,600
Freight-In 4,000 -
Purchase discounts (1,000) -
Purchase returns (10,400) (17,200)
Net purchases 103,200 143,400

(b) Net sales is computed as follows:

Sales 87,600
Sales returns ( 5,000)
Employee discounts 1,000
Normal spoilage 400
Net sales 84,000

Cost ratio Total goods avail. for sale at cost

(Average cost = Total goods avail. for sale at sales price or
method) at retail

Average cost ratio = (113,600 ÷ 148,000) = 76.76%

Ending inventory at retail 64,000

Multiply by: Average cost ratio 76.76%
Ending inventory at cost 49,126

Total goods available for sale at cost 113,600

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Ending inventory at cost ( 49,126)

Cost of goods sold 64,474

9. A
Solution:
FIFO cost ratio:
Cost ratio TGAS at cost less beg. inventory at cost
(FIFO cost =
method) TGAS at retail less beg. inventory at retail
FIFO cost ratio = [(113,600 – 20,000) ÷ (148,000 – 28,000)]
= 78%

Ending inventory at retail 64,000

Multiply by FIFO cost ratio 78%
Ending inventory at cost 49,920

Total goods available for sale at cost 113,600

Ending inventory at cost ( 49,920)
Cost of goods sold 63,680

10. A
Solution:
Cost Retail
Inventory, beg. 36,000
Purchases 320,000
Purchase discounts (3,000)
Freight-in 18,000
TGAS 371,000 530,000 (a)

(a)
Sales 454,000
Sales returns (2,000)
Ending inventory @ sales price 78,000
TGAS @ sales price 530,000
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Total goods avail. for sale at cost

Cost ratio = Total goods avail. for sale at sales
price

Cost ratio = 371,000 ÷ 530,000 = 70%

Ending inventory @ sales price 78,000

Multiply by: Cost ratio 70%
Ending inventory @ cost 54,600
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PROBLEM 4: CLASSROOM ACTIVITY

Inventory
1,064,35
Jan. 1, 20x1 2
630,64
Purchases 482,016 4 COGS*
915,72 Jan. 7,
4 20x1

*Cost of goods sold is computed as follows:

Total sales (Jan. 1 to Jan. 6) 900,920
Multiply by: 70%
COGS 630,644

915,72
Inventory, Jan. 7, 20x1 4
(126,51
Less: Goods in transit (Jan. 6 purchase) 6)
(20,000
Less: Cost of undamaged goods )
Less: Salvage value of partially damaged goods (354 x
2) (708)
768,50
Inventory loss 0
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PROBLEM 5: FOR CLASSROOM DISCUSSION

1. Solutions:
GPR based on GPR based on
sales cost
Net sales 600,000
Less:
400,000 (200K ÷ 600K) (200K ÷ 400K)
COGS
Gross profit 200,000 33.33% 50%

2. Solution: (40% ÷ 60%) = 66.67%

3. Solution: (50% mark-up based on cost ÷ (100% cost + 50%

mark-up) = 33 1/3%

4. Solution: (100% ÷ 142.86%) = 70%

5. Solution:
Accounts payable
30,000 beg.
Payments 480,000 510,000 Net purchases (squeeze)
end. 60,000

Inventory
beg. 80,000
Net COGS (585K - 15K) x
510,000
purchases 427,500 75%
Freight-in 5,000
167,500 end.
(28,000) goods in-transit
(32,000) consigned goods
(2,500) salvage value
105,000 Inventory loss

6. Solution:
Inventory
beg. 80,000
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Gross
517,000
purchases 3,000 Purchase returns
Freight-in 5,000 4,000 Purchase discounts
427,500 COGS
(585K - 15K) x 100%/133 1/3%
167,500 end.
Undamaged (20% x
(33,500)
167.5K)
(25,125) Salvage value
(50% x 167.5K x 30%)
108,875 Inventory loss

7. Solutions:
Cost Retail
Inventory, beg. 300,000 375,000
Net purchases (a) 1,056,000 1,495,000
Departmental Transfers-In 2,000 3,000
Net mark-ups (20,000 – 2,000) 18,000
Net mark-downs (6,000 – (5,000)
1,000)
Abnormal spoilage (8,000) (11,000)
TGAS 1,350,000 1,875,000
Net sales (b) (1,375,000)
EI @ retail 500,000

(a)
@ cost: 1,180,000 + 30,000 - 150,000 - 4,000 = 1,056,000;
@ retail: 1,500,000 – 5,000 = 1,495,000
(b)

Normal spoilage 400

Sales 1,428,000
Sales returns (56,000)
Employee discounts 2,600
Net sales 1,375,000

Cost ratios:

Total goods avail. for sale at cost

Cost ratio
= Total goods avail. for sale at sales
(Average cost)
price

Average cost ratio = (1,350,000 ÷ 1,875,000) = 72.00%

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TGAS at cost less beg. inventory at

Cost ratio cost
=
(FIFO) TGAS at retail less beg. inventory at
retail

FIFO cost ratio = [(1,350,000 – 300,000) ÷ (1,875,000 –

375,000)] = 70.00%

Average FIFO
Cost ratios 72.00% 70.00%
Multiply by: EI @ retail 500,000 500,000
Ending inventory @
cost 360,000 350,000

Average FIFO
TGAS @ cost 1,350,000 1,350,000
Ending inventory @ cost (360,000) (350,000)
Cost of goods sold 990,000 1,000,000