E7-14 Analyzing and Interpreting the Effects of the LIFO/FIFO Choice on Inventor

Question

E7-14 Analyzing and Interpreting the Effects of the LIFO/FIFO Choice on Inventory Turnover Ratio [LO 7-2, LO 7-3, LO 7-5] Simple Plan Enterprises uses a periodic inventory system. Its records showed the following Inventory, December 31, using FIFO 38 Units Inventory, December 31, using LIFO 38 Units $14 $532 $10 $380 Transactions in the Following Year Purchase, January 9 Purchase, January 20 Sale, January 11 (at S38 per unit) Sale, January 27 (at S39 per unit) Units Unit Cost Total Cost $15 16 750 1,600 50 100 80 56 Required 1. Compute the number and cost of goods available for sale, the cost of ending inventory, and the cost of goods sold under FIFO and LIFO FIFO LIFO Number of Goods Available for Sale (Units) Cost of Goods Available for Sale Cost of Ending Inventory Cost of Goods Sold 2. Compute the inventory turnover ratio under the FIFO and LIFO inventory costing methods. (Round your answers to 2 decimal places.) FIFO LIFO Inventory Turnover Ratio 3. The inventory method used does make a significant difference in the inventory turnover ratio Yes No

Explanation / Answer

Ans.1 FIFO LIFO Number of goods available for sale (units) 188 188 Cost of goods available for sale 2882 2730 Cost of ending inventory 832 590 Cost of goods sold 2050 2140 *Calculation: Number of goods available for sale (units): Units beginning inventory 38 Purchase 50 Purchase 100 188 Cost of goods available for sale: FIFO units rate beginning inventory 38 14 532 Purchase 50 15 750 Purchase 100 16 1600 188 2882 Cost of goods available for sale: LIFO units rate beginning inventory 38 10 380 Purchase 50 15 750 Purchase 100 16 1600 188 2730 Cost of goods sold: FIFO 11-Jan sales 80 units: 1-Jan beginning inventory 38 14 532 9-Jan Purchase 42 15 630 Total 80 1162 1162 27-Jan sales 56 units: 9-Jan Purchase 8 15 120 Purchase 48 16 768 56 888 888 Total Cost of Goods Sold: (FIFO) 2050 Cost of goods sold: LIFO 11-Jan sales 80 units: 9-Jan Purchase 80 16 1280 Total 80 1280 1280 27-Jan sales 56 units: 20-Jan Purchase 20 16 320 9-Jan Purchase 36 15 540 56 860 860 Total Cost of Goods Sold: (LIFO) 2140 *Cost of Ending inventory =   Cost of goods available for sale - Cost of goods sold FIFO 2882 - 2050 832 LIFO 2730 - 2140 590 ANS.2 FIFO LIFO Inventory turnover ratio 3.01 4.41 *inventory turnover ratio = cost of goods sold / Average inventory FIFO 2050 / 682     =      3.01 times *Average inventory   = (Opening inventory + Closinging inventory) / 2 (532 + 832) / 2 682 LIFO 2140 / 485   =   4.41 times *Average inventory   = (Opening inventory + Closinging inventory) / 2 (380 + 590) / 2 485 Ans.3 Yes The inventory method used makes a significant difference in inventory turnover ratio. The inventory turnover ratio shows that a company have better management than other company.

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