presented below is information related to radios for the couples company for the

Question

presented below is information related to radios for the couples company for the month of July.

Units unit Units Selling
Date Transaction In Cost Total Sold Price Total
1-Jul Balance 100 $4.10 $410.00
6-Jul Purchase 800 4.30 3,440
7-Jul Sale 300 $7.00 $2,100
10-Jul Sale 300 7.30 2,190
12-Jul Purchase 400 4.51 1,804
15-Jul Sale 200 7.40 1,480
18-Jul Purchase 300 4.60 1,380
22-Jul Sale 400 7.40 2,960
25-Jul Purchase 500 4.58 2,290
30-Jul Sale 200 7.50 1,500

Totals 2,100 $9,324 1400 $10,230

instructions
a) assuming that the periodic inventory method is used, compute the inventory cost at July 31 under each of the following cost flow assumptions
1) FIFO
2) LIFO
3) weighted average

b) answer the following questions
1) which of the methods used above will yield the lowest figure for goross profit for the income statement? Explain why
2) which of the methods used above will yield the lowest figure for ending inventory for the balance sheet? explain why

Explanation / Answer

Ok so first I'm going to compute the ending inventory in units. 100 + 800 - 300 - 300 + 400 - 200 + 300 - 400 + 500 - 200 = 700 units remaining.

So we have 700 units in our inventory. We need to compute the cost of that inventory using each method.


1) First In First Out (FIFO)

Because this method assumes that the first items purchased are the first items sold, I am going to work from the back until I have a total of 700 units (because the oldest items have already been sold and we are left with the 700 newest items). Note that I am only using purchases because sales prices are irrelevant when computing the inventory cost.

(500 * $4.58) + (200 * $4.60) = $3,210


2) Last In First Out

This method assumes that the most recently purchased items are the ones that ae sold first. Therefore, I am going to be working from the beginning because the newest items have already been sold. The units remaining in our inventory are the 700 oldest units.

(100 * $4.10) + (600 * $4.30) = $2,990

3) Weighted Average

For this method, I will first need to compute the weighted average cost per item. To do this we simply add the total cost of all the units and divide that by the total number of units. You will notice that the "Totals" row is a total of all the Purchases (it ignores the Sales). Therefore, we have held a total 2,100 units of inventory through the entire month. The total cost of all those units is $9,324.

$9,324 / 2,100 = $4.44 <-- This is the weighted average cost per unit.

Now that we have the weighted average cost per unit, all we need to do is multiply this by the ending inventory.

$4.44 * 700 = $3,108

b)

1) Gross profit is defined as Sales minus Cost of Goods Sold. Therefore, the method that will yield the lowest profit is the one that has the highest cost of goods sold. However, in this case we computed the cost of inventory, not cost of goods sold. These two things are inversly related. In other words, if I have a high value of remaining inventory, my cost of good sold must be low (because all of that inventory is still in inventory and hasn't been sold). Therefore, the one that will yield the LOWEST gross profit is also the one that has the LOWEST cost of inventory (because this implies higher COGS). In this case, LIFO will yield the lowest gross profit.

2) Last In First Out. The $2,990 computed is the cost of inventory and inventory is always recorded at cost. (revenue can only be realized when the goods are sold). Also notice that the cost per unit is increasing. Therefore, with the LIFO method, we sell off the newer, higher priced, units first; leaving us with an ending inventory filled with only low value, older units.

Related Questions

Navigate

• Browse (All)
• Browse P
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.