The records at the end of January 2012 for Captain Company showed the following

Question

The records at the end of January 2012 for Captain Company showed the following for a particular kind of merchandise Inventory, December 31, 2011, at FIFO: 14 Units@ $16 $224 Inventory, December 31, 2011, at LIFO: 14 Units @ $12 $168 Units 27 54 36 26 Total Unit Cost Cost $14 $378 19 1,026 Transactions Purchase, January 9, 2012 Purchase, January 20, 2012 Sale, January 21, 2012 (at $39 per unit) Sale, January 27, 2012 (at $40 per unit) Required: 1. Compute the inventory turnover ratio under the FIFO and LIFO inventory costing methods. (Do not round intermediate calculations and round your final answers to 2 decimal places.) FIFO Inventory turnover ratio LIFO Inventory turnover ratio 2. Which costing method is the more accurate indicator of the efficiency of inventory management? LIFO

Explanation / Answer

Answer 1. Periodic Method - FIFO Cost of Goods Available for Sale Date Explanation Units Unit Cost Total Cost 1-Jan Op. Inventory                   14              16.00                224 9-Jan Purchases                   27              14.00                378 20-Jan Purchases                   54              19.00            1,026 Total                   95            1,628 Sales: Date Explanation Units Unit Cost Total Cost 21-Jan Sales                   36              39.00            1,404 27-Jan Sales                   26              40.00            1,040 Total                   62            2,444 Ending Inventory (In Units) = 95 Units - 62 Units = 33 Units Value of Ending Inventory Date Units Unit Cost Total Cost 20-Jan                         33             19.00                  627 Total                         33                  627 Cost of Goods Sold: Cost of Goods Available for Sale              1,628 Less: Ending Inventory                  627 Cost of Goods Sold              1,001 Inventory Turnover Ratio = Cost of Goods Sold / Average Inventory Avg. Inventory = ($224 + $627) / 2 = $425.50 Inventory Turnover Ratio - FIFO = $1,001 / $425.50 Inventory Turnover Ratio - FIFO = 2.35 (Approx.) Periodic Method - LIFO Cost of Goods Available for Sale Date Explanation Units Unit Cost Total Cost 1-Jan Op. Inventory                   14              12.00                168 9-Jan Purchases                   27              14.00                378 20-Jan Purchases                   54              19.00            1,026 Total                   95            1,572 Sales: Date Explanation Units Unit Cost Total Cost 21-Jan Sales                   36              39.00            1,404 27-Jan Sales                   26              40.00            1,040 Total                   62            2,444 Ending Inventory (In Units) = 95 Units - 62 Units = 33 Units Value of Ending Inventory Date Units Unit Cost Total Cost 1-Jan                         14                   12                  168 9-Jan                         19             14.00                  266 Total                         33                  434 Cost of Goods Sold: Cost of Goods Available for Sale              1,572 Less: Ending Inventory                  434 Cost of Goods Sold              1,138 Inventory Turnover Ratio = Cost of Goods Sold / Average Inventory Avg. Inventory = ($168 + $434) / 2 = $602 Inventory Turnover Ratio - LIFO = $1,138 / $602 Inventory Turnover Ratio - LIFO = 1.89 (Approx.) Answer 2 -a. FIFO In the changing prices environment, FIFO method is considered more accurate because ending inventories are at the latest prices.

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