Lesson 2.2 Discussion - Inventory costing methods \' Must post first. Subscribe

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Lesson 2.2 Discussion - Inventory costing methods ' Must post first. Subscribe Hide Description Remember that inventory is shown on the balance sheet at an amount equal to what the merchandise cost. However, determining that cost is not necessarily as easy as it sounds. Consider this problem: At the beginning of the current year, John Bach opened a music store that sells compact discs of classical music. The store is called Strictly Classical During the year, Strictly Classical purchased 10,000 compact discs for $7 each. At the end of the year, a physical inventory count revealed that 1,000 of those discs were on hand. What value should be shown for ending inventory on the year-end balance sheet? (Answer: 1,000 $7 $7,000) But, how realistic is it that every item of merchandise that a business purchases during a year has the same cost? Take a look at this scenario: Assume instead that Strictly Classical purchased 10,000 compact discs as follows Date Cost/Unit Total Cost No. of Discs Purchased 800 2,200 4,000 3,000 10,000 $7.00 7.50 $7.25 $7.40 $5,600 16,500 29,000 22,200 $73,300 an. Mar. 8 June 23 Sept. 15 Total If the year-end inventory reveals 1,000 discs on hand, what is the inventory value on the balance sheet? What is the store's cost of goods sold? It depends, doesn't it, on which discs you sold and which ones are still there? For most companies, you must make an assumption about which discs are the ones in ending inventory and which discs were sold. There are three commonly used inventory methods, each of wch is allowed under Generally Accepted Accounting Principles (GAAP).

Explanation / Answer

Cost of Ending Inventory

FIFO = 1,000 x $7.40 = $7,400

LIFO = (800 x $7) + (200 x $7.50) = $7,100

Average Cost = $73,300 / 10,000 = $7.33 per unit

= 1,000 x $7.33 = $7,330

Cost of Goods Sold

FIFO = ( 800 x $7) + ( 2,200 x $7.50) + ( 4,000 x $7.25) + (2,000 x $7.40) = $65,900

LIFO = ( 3,000 x $7.40) + ( 4,000 x $7.25) + ( 2,000 x $7.50) = $66,200

Average Cost = 9,000 x $7.33 = $65,970

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