Save-Mart Center Inc. began operations on May 1 and uses a perpetual inventory s
ID: 2541722 • Letter: S
Question
Save-Mart Center Inc. began operations on May 1 and uses a perpetual inventory system. During May, the company had the following purchases and sales for one of its products:
Purchases
Sales
Date
Units
Unit Cost
Units
Unit Price
May1
120
$100
3
80
$250
8
100
110
13
80
275
15
60
115
20
60
300
27
40
325
Instructions
(a)
Determine the cost of goods sold and cost of ending inventory using (1) FIFO and (2) average cost. Ignore the effect of income tax. (For average cost, use unrounded numbers in your calculations but round to the nearest cent for presentation purposes in your answer.)
(b)
What guidelines should Save-Mart consider in choosing between the FIFO and average cost formulas?
(c)
Which cost formula produces the higher gross profit and net income?
(d)
Which cost formula produces the higher ending inventory valuation?
(e)
Which cost formula produces the higher cash flow?
Purchases
Sales
Date
Units
Unit Cost
Units
Unit Price
May1
120
$100
3
80
$250
8
100
110
13
80
275
15
60
115
20
60
300
27
40
325
Explanation / Answer
CALCULATION OF COST OF ENDING INVENTORY AND COST OF GOODS SOLD UNDER FIFO METHOD PURHASES COST OF GOODS SOLD CLOSING BALANCE Date Particulars Units (A) Rate Per unit Total Cost Units (A) Rate Per unit Total Cost Units (A) Rate Per unit Total Cost May, 01 Purchase 120 $ 100 $ 12,000 120 $ 100 $ 12,000 May , 03 Sales 80 $ 100 $ 8,000 40 $ 100 $ 4,000 May , 08 Purchase 100 $ 110 $ 11,000 40 $ 100 $ 4,000 100 $ 110 $ 11,000 May, 13 Sales 40 $ 100 $ 4,000 40 $ 110 $ 4,400 60 $ 110 $ 6,600 May , 15 Purchase 60 $ 115 $ 6,900 60 $ 110 $ 6,600 60 $ 115 $ 6,900 May , 20 Sales 60 $ 110 $ 6,600 60 $ 115 $ 6,900 May , 20 Sales 40 $ 115 $ 4,600 20 $ 115 $ 2,300 Total 260 $ 27,600 20 $ 2,300 Unit Amount COGS as per FIFO Method 260.00 $27,600.00 CALCULATION OF COST OF ENDING INVENTORY AND COST OF GOODS SOLD UNDER Weighted Average Method Units Rate Amount May ,01 Purchase 120 $100 $12,000 May ,08 Purchase 100 $110 $11,000 May ,15 Purchase 60 $115 $6,900 Total 280 $29,900 Sales = 80+80+60+40 = 260 Closing Stock 20 Cost per unit = $ 29,900 / 280 Units = 106.79 Per Units Closing inventory = $ 106.79 X 20 Units = $2,135.71 COST of Goods Sold = 260 untis X 106.79 = $27,764 Answer =A) FIFO Average Cost Method COGS $27,600 $27,764 Closing inventory $2,300 $2,136 Answer =B) In FIFO method we can take the cost on the basis of first in first out and in average costing we have to take the average of the all purchases made Answer = C) FIFO method will produce heigher Gross profit and net income because it have low COGS Answer = D) FIFO methof have the heigher ending inventory balance Answer = E) Average cost method will produce heigher cash flow because it have low inventory balance at the end
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