APPLY THE CONCEPTS: Determine cost of goods available for sale Sheehan Company i

Question

APPLY THE CONCEPTS: Determine cost of goods available for sale

Sheehan Company is a retailer that uses a periodic inventory system. Management has made the decision to assign costs to inventory using the last-in, first-out (LIFO) method. On January 1, 2011, Sheehan had 10 units in beginning inventory with a cost of $410 assigned to each unit. Sheehan made several purchases during 2011; the data are presented below. Using the information that you have at this point, determine the cost of merchandise available for sale.

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There are four inventory purchase "layers" in this problem. To get the total cost of the purchases, compute the total cost of each "layer" and sum the four layers.

APPLY THE CONCEPTS: Use LIFO costing to determine cost of goods sold and ending inventory

A physical count of the remaining inventory reveals that there are 64 units on hand at the end of the period. Now that you know the number of units and cost of merchandise available for sale during 2011, the next step is to allocate those units to ending inventory or cost of merchandise sold. Recall that beginning inventory and each purchase can be thought of as layers. Each layer must now be allocated to either cost of merchandise sold (an expense) or ending inventory (an asset). Use the tables below to allocate each layer.

Reconcile the allocation of cost of merchandise available for sale to cost of merchandise sold and ending inventory by completing the remainder of the cost of merchandise sold model in the table below.

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Recall that the total number of units sold is equal to the total number available for sale (from the previous part of the problem) less the number remaining in inventory at the end of the period.

Next, you need to allocate this total among the purchase layers. In LIFO, you start with the most recently-purchased layers and work backward until you have reached the count of inventory sold.

The ending inventory layers, then, consist of the oldest inventory layers, working forward until you have reached the count of ending inventory.

2011 Purchases: March 1 20 units @ $390 per unit May 16 70 units @ $440 per unit August 8 20 units @ $460 per unit November 1 40 units @ $450 per unit

Explanation / Answer

Sheehan Company All Amounts in $ Cost of Goods Available for Sale Date Particulars Qty Rate Amount $ 01/01/2011 Opening Inventory 10 410 4100 01/03/2011 Purchases 20 390 7800 16/05/2011 Purchases 70 440 30800 08/08/2011 Purchases 20 460 9200 01/01/2011 Purchases 40 450 18000 31/12/2011 Closing Inventory 64 Sales done 96 Cost of Sales based on LIFO Purchases on 01.01.2011 -40 450 -18000 Purchases on 08.08.2011 -20 460 -9200 Purchases on 16.05.2011 -36 440 -15840 Cost of Sales based on LIFO -43040

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