4. Inventory valuation methods: computations and concepts. Wild Riders Surfboard
ID: 2446686 • Letter: 4
Question
4. Inventory valuation methods: computations and concepts.
Wild Riders Surfboard Company began business on January 1 of the current year. Purchases of surfboards were as follows:
Date Quantity Unit Cost Total Cost
1/3 100 $125 $12,500
4/3 200 $135 $27,000
6/3 100 $145 $14,500
7/3 100 $155 $15,500
Total 500 $69,500
Wild Riders sold 400 boards at $250 per board on the dates listed below. The company uses a perpetual inventory system.
Date Quantity Sold Unit Price Total Sales
3/17 50 $250 $12,500
5/17 75 $250 $18,750
8/10 275 $250 $68,750
Total 400 $100,000
Instructions
a. Calculate cost of goods sold, ending inventory, and gross profit under each of the following inventory valuation methods:
• First-in, first-out
• Last-in, first-out
• Weighted average
b. Which of the three methods would be chosen if management’s goal is to
(1) produce an up-to-date inventory valuation on the balance sheet?
(2) show the lowest net income for tax purposes?
Explanation / Answer
Using First In First Out; the computations are as follows:
Purchase
Sale
Closing stock
units
unit cost
Total costs
units
unit cost
Total costs
units
unit cost
Total costs
Date
3rd Jan
Purchase
100
125
12,500
17th March
50
250
12,500
50
125
6,250
3rd April
Purchase
200
135
27,000
200
135
27,000
17th May
75
250
18,750
175
135
23,625
3rd June
Purchase
100
145
14,500
100
145
14,500
3rd July
Purchase
100
155
15,500
100
155
15,500
10th Aug
275
250
68,750
100
155
15,500
The cost of goods sold is as follows:
Sales
Units
Unit cost
Total cost
17th March
50
125
6250
17th May
50
125
6250
17th May
25
135
3375
10th Aug
175
135
23625
10th Aug
100
145
14500
54000
The gross profit = Sales-Cost of goods sold
= 100,000-54,000
=46,000
The inventory is $15,500.
Purchase
Sale
Closing stock
units
unit cost
Total costs
units
unit cost
Total costs
units
unit cost
Total costs
Date
3rd Jan
Purchase
100
125
12,500
17th March
50
250
12,500
50
125
6,250
3rd April
Purchase
200
135
27,000
200
135
27,000
17th May
75
250
18,750
175
135
23,625
3rd June
Purchase
100
145
14,500
100
145
14,500
3rd July
Purchase
100
155
15,500
100
155
15,500
10th Aug
275
250
68,750
100
155
15,500
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