In October, Nicole eliminated all existing inventory of cosmetic items. The trou

Question

In October, Nicole eliminated all existing inventory of cosmetic items. The trouble of ordering and tracking each product line had exceeded the profits earned. In December, a supplier asked her to sell a prepackaged spa kit. Feeling she could manage a single product line, Nicole agreed. Nicole’s Getaway Spa (NGS) would make monthly purchases from the supplier at a cost that included production costs and a transportation charge. NGS would keep track of its new inventory using a perpetual inventory system. On December 31, NGS purchased 20 units at a total cost of $5.30 per unit. Nicole purchased 20 more units at $7.30 in February. In March, Nicole purchased 20 units at $9.30 per unit. In May, 40 units were purchased at $9.10 per unit. In June, NGS sold 40 units at a selling price of $11.30 per unit and 50 units at $11.70 per unit.

4.value: 0.25 pointsRequired information Required: 1. State whether the transportation cost included in each purchase should be recorded as a cost of the inventory or immediately expensed. Cost of the Inventory Immediately Expensed

5.value:

2. Compute the Cost of Goods Available for Sale, Cost of Goods Sold, and Cost of Ending Inventory using the first-in, first-out (FIFO) method. (Round "Cost per Unit" to 2 decimal places.)

6.value:

4. Would a different inventory cost flow assumption allow Nicole’s Getaway Spa to better minimize its income tax?

The LIFO method would allow Nicole’s Getaway Spa to better minimize income tax. Product costs have been increasing, so LIFO will produce the highest Cost of Goods Sold, which results in the lowest Income before Income Tax Expense.

The FIFO method would allow Nicole’s Getaway Spa to better minimize income tax. Product costs have been increasing, so FIFO will produce the highest Cost of Goods Sold, which results in the lowest Income before Income Tax Expense.

Explanation / Answer

Units Price Total Price 31-Dec 20 5.3 106 Opening Feb 20 7.3 146 Purchased Mar 20 9.3 186 Purchased May 40 9.1 364 Purchased June 40 11.3 452 Sold June 50 11.7 585 Sold 1) As per IFRS all the expenses which are incurred in purchasing the products should be part of the inventory. Hence, the transportation cost included in each purchase should be recorded as cost of inventory 2) Cost of Goods Available for Sale 106+146+186+364 802 Closing Inventory using the FIFO Method Under FIFO method the units which are available earlier are assumed to be sold first We have sold 90 units in June which are sold from Units Price Total Price 31-Dec 20 5.3 106 Opening 20 0 Feb 20 7.3 146 Purchased 20 0 Mar 20 9.3 186 Purchased 20 0 May 40 9.1 364 Purchased 30 10 We are left with 10 units of inventory which was purchased in May The closing inventory is therefore 10*9.10 91 Cost of Goods Sold = Opening Stock + Purchase - Closing Inventory 106+(146+186+364)-91 711 If LIFO method is used to value the inventory than the closing inventory would be In LIFO the purchases which are purchase last are assume to be sold first Units Price Total Price 31-Dec 20 5.3 106 Opening 10 10 Feb 20 7.3 146 Purchased 20 0 Mar 20 9.3 186 Purchased 20 0 May 40 9.1 364 Purchased 40 0 Cost of Inventory would be 10*5.30 = $53 Therefore Cost of goods sold would be = 106+146+186+364-53 749 The Cost of Goods sold in FIFO method is $ 711 and in LIFO method is $ 749 In case of FIFO method there would be more of net income as compared to LIFO method due to reduce value of Cost of goods sold. Hence,The LIFO method would allow Nicole’s Getaway Spa to better minimize income tax. Product costs have been increasing, so LIFO will produce the highest Cost of Goods Sold, which results in the lowest Income before Income Tax Expense.

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