A company made the following merchandise purchases and sales during the month of
ID: 2416273 • Letter: A
Question
A company made the following merchandise purchases and sales during the month of May:
May 1 purchased
380
units at
$15 each
May 5 purchased
270
units at
$17 each
May 10 sold
400
units at
$50 each
May 20 purchased
300
units at
$22 each
May 25 sold
400
units at
$50 each
There was no beginning inventory. If the company uses the LIFO periodic inventory method, what would be the cost of the ending inventory?
May 1 purchased
380
units at
$15 each
May 5 purchased
270
units at
$17 each
May 10 sold
400
units at
$50 each
May 20 purchased
300
units at
$22 each
May 25 sold
400
units at
$50 each
Explanation / Answer
"Periodic" means that the Inventory account is not updated during the accounting period. Instead, the cost of merchandise purchased from suppliers is debited to an account called Purchases. At the end of the accounting year the Inventory account is adjusted to equal the cost of the merchandise that is unsold. The other costs of goods will be reported on the income statement as the cost of goods sold.
"LIFO" is an acronym for Last In, First Out. Under the LIFO cost flow assumption, the last (or recent) costs are the first ones to leave inventory and become the cost of goods sold on the income statement. The first (or oldest) costs will be reported as inventory on the balance sheet.
Remember that the costs can flow differently than the goods. In other words, if Corner Shelf Bookstore uses LIFO, the owner may sell the oldest (first) book to a customer, but can report the cost of goods sold of $90 (the last cost).
It's important to note that under LIFO periodic (not LIFO perpetual) we wait until the entire year is over before assigning the costs. Then we flow the year's last costs first, even if those goods arrived after the last sale of the year.
Let's illustrate periodic LIFO by using the given data:
300
100
22
17
6,600
1,700
170
230
17
15
2,890
3,450
LIFO will always result in the least amount of profit. (The reason is that the last costs will always be higher than the first costs. Higher costs result in less profits and usually lower income taxes.)
Details units cost per unit Total cost first purchase (May 1) 380 15 5,700 second purchase (May 5) 270 17 4,590 third purchase (May 20) 300 22 6,600 Total goods available for sale 950 16,890 Less: cost of goods sold Sold May 25= 400 units300
100
22
17
6,600
1,700
sold May 10 = 400 units170
230
17
15
2,890
3,450
cost of the ending inventory 150 15 2,250Related Questions
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