Calculating the Value of Ending Inventory and Cost of Goods Sold: Lower-of-Cost-
ID: 2566778 • Letter: C
Question
Calculating the Value of Ending Inventory and Cost of Goods Sold: Lower-of-Cost-or-Market Methocd The following inventory data is taken from the financial records of Fernandez, Inc, a personal computer software manufacturer. No. of Units Unit Cost Total Cost 160,000 $1.00 $160,000 90,000 Beginning inventory (Gan. 1) May 5 60,000 1.50 60,000 2.00 20,000 280,000 250,000 30,000 Purchases: Sept.3 Total available for sale Less: Sales Ending inventory (Dec 31) Expected replacement cost per unit $370,000 1.40 Sales for No. of the year Units Sold Feb. 3 120,000 Jun. 30 30,000 Oct,5 100,000 250,000Explanation / Answer
Periodic
FIFO - Ending Inventory
Date
No. of Units
Unit cost
Total Cost
Beg. Inventory
$1.00
$0
May. 5
$1.50
$0
Sept. 3
30000
$2.00
$60,000
Total
30000
$60,000
FIFO - Cost of goods sold
Date
No. of Units
Unit cost
Total Cost
Beg. Inventory
160000
$1.00
$1,60,000
May. 5
60000
$1.50
$90,000
Sept. 3
30000
$2.00
$60,000
Total
250000
$3,10,000
LIFO - Ending Inventory
Date
No. of Units
Unit cost
Total Cost
Beg. Inventory
30000
$1.00
$30,000
May. 5
$1.50
$0
Sept. 3
$2.00
$0
Total
30000
$30,000
LIFO - Cost of goods sold
Date
No. of Units
Unit cost
Total Cost
Beg. Inventory
130000
$1.00
$1,30,000
May. 5
60000
$1.50
$90,000
Sept. 3
60000
$2.00
$1,20,000
Total
250000
$3,40,000
Weighted Average Method
Date
No. of Units
Unit cost
Total Cost
Beg. Inventory
160000
$1.00
$1,60,000
May. 5
60000
$1.50
$90,000
Sept. 3
60000
$2.00
$1,20,000
Total
280000
$3,70,000
Cost per unit
$1.32
Ending Inventory
30000
$39,643
Cost of goods sold
250000
$3,30,357
Perpetual
FIFO
Date
No. of Units
Unit cost
Total Cost
COGS
Beg. Inventory
160000
$1.00
$1,60,000
Feb. 3
-120000
$1.00
-$1,20,000
-$1,20,000
Balance
40000
$1.00
$40,000
May. 5
60000
$1.50
$90,000
June. 30
-30000
$1.00
-$30,000
-$30,000
Balance
10000
$1.00
$10,000
60000
$1.50
$90,000
Sept. 3
60000
$2.00
$1,20,000
Oct. 5
-10000
$1.00
-$10,000
-60000
$1.50
-$90,000
-30000
$2.00
-$60,000
-$1,60,000
Ending Inventory
30000
$2.00
$60,000
-$3,10,000
LIFO
Date
No. of Units
Unit cost
Total Cost
COGS
Beg. Inventory
160000
$1.00
$1,60,000
Feb. 3
-120000
$1.00
-$1,20,000
-$1,20,000
Balance
40000
$1.00
$40,000
May. 5
60000
$1.50
$90,000
June. 30
-30000
$1.50
-$45,000
-$45,000
Balance
40000
$1.00
$40,000
30000
$1.50
$45,000
Sept. 3
60000
$2.00
$1,20,000
Oct. 5
-10000
$1.00
-$10,000
-30000
$1.50
-$45,000
-60000
$2.00
-$1,20,000
-$1,75,000
Ending Inventory
30000
$1.00
$30,000
-$3,40,000
Weighted average
Date
No. of Units
Unit cost
Total Cost
COGS
Beg. Inventory
160000
$1.00
$1,60,000
Feb. 3
-120000
$1.00
-$1,20,000
-$1,20,000
Balance
40000
$1.00
$40,000
May. 5
60000
$1.50
$90,000
total
100000
$1.30
$1,30,000
June. 30
-30000
$1.30
-$39,000
-$39,000
Balance
70000
$1.30
$91,000
Sept. 3
60000
$2.00
$1,20,000
Total
130000
$1.62
$2,11,000
Oct. 5
-100000
$1.62
-$1,62,308
-$1,62,308
Ending Inventory
30000
$1.62
$48,692
-$3,21,308
1. Complete the following table
Method
Periodic
Perpetual
Ending Inventory
Cost of goods sold
Ending Inventory
Cost of goods sold
FIFO
$60,000
$3,10,000
$60,000
$3,10,000
LIFO
$30,000
$3,40,000
$30,000
$3,40,000
Weighted average
$39,643
$3,30,357
$48,692
$3,21,308
2. Which method you recommend for use for income tax purpose.
LIFO method has given highest cost of goods sold, therefore LIFO method is recommended for income tax purpose.
3. Which method you recommend in inflationary environment.
In LIFO Method, the cost of goods sold is computed with the price of most recent purchase. Hence it will give higher cost of goods sold, and therefore LIFO Method is recommended.
4. Which method you recommend in deflationary environment.
In FIFO Method, the cost of goods sold is computed with the price of oldest purchase. Hence it will give higher cost of goods sold, and therefore FIFO Method is recommended.
Periodic
FIFO - Ending Inventory
Date
No. of Units
Unit cost
Total Cost
Beg. Inventory
$1.00
$0
May. 5
$1.50
$0
Sept. 3
30000
$2.00
$60,000
Total
30000
$60,000
FIFO - Cost of goods sold
Date
No. of Units
Unit cost
Total Cost
Beg. Inventory
160000
$1.00
$1,60,000
May. 5
60000
$1.50
$90,000
Sept. 3
30000
$2.00
$60,000
Total
250000
$3,10,000
LIFO - Ending Inventory
Date
No. of Units
Unit cost
Total Cost
Beg. Inventory
30000
$1.00
$30,000
May. 5
$1.50
$0
Sept. 3
$2.00
$0
Total
30000
$30,000
LIFO - Cost of goods sold
Date
No. of Units
Unit cost
Total Cost
Beg. Inventory
130000
$1.00
$1,30,000
May. 5
60000
$1.50
$90,000
Sept. 3
60000
$2.00
$1,20,000
Total
250000
$3,40,000
Weighted Average Method
Date
No. of Units
Unit cost
Total Cost
Beg. Inventory
160000
$1.00
$1,60,000
May. 5
60000
$1.50
$90,000
Sept. 3
60000
$2.00
$1,20,000
Total
280000
$3,70,000
Cost per unit
$1.32
Ending Inventory
30000
$39,643
Cost of goods sold
250000
$3,30,357
Perpetual
FIFO
Date
No. of Units
Unit cost
Total Cost
COGS
Beg. Inventory
160000
$1.00
$1,60,000
Feb. 3
-120000
$1.00
-$1,20,000
-$1,20,000
Balance
40000
$1.00
$40,000
May. 5
60000
$1.50
$90,000
June. 30
-30000
$1.00
-$30,000
-$30,000
Balance
10000
$1.00
$10,000
60000
$1.50
$90,000
Sept. 3
60000
$2.00
$1,20,000
Oct. 5
-10000
$1.00
-$10,000
-60000
$1.50
-$90,000
-30000
$2.00
-$60,000
-$1,60,000
Ending Inventory
30000
$2.00
$60,000
-$3,10,000
LIFO
Date
No. of Units
Unit cost
Total Cost
COGS
Beg. Inventory
160000
$1.00
$1,60,000
Feb. 3
-120000
$1.00
-$1,20,000
-$1,20,000
Balance
40000
$1.00
$40,000
May. 5
60000
$1.50
$90,000
June. 30
-30000
$1.50
-$45,000
-$45,000
Balance
40000
$1.00
$40,000
30000
$1.50
$45,000
Sept. 3
60000
$2.00
$1,20,000
Oct. 5
-10000
$1.00
-$10,000
-30000
$1.50
-$45,000
-60000
$2.00
-$1,20,000
-$1,75,000
Ending Inventory
30000
$1.00
$30,000
-$3,40,000
Weighted average
Date
No. of Units
Unit cost
Total Cost
COGS
Beg. Inventory
160000
$1.00
$1,60,000
Feb. 3
-120000
$1.00
-$1,20,000
-$1,20,000
Balance
40000
$1.00
$40,000
May. 5
60000
$1.50
$90,000
total
100000
$1.30
$1,30,000
June. 30
-30000
$1.30
-$39,000
-$39,000
Balance
70000
$1.30
$91,000
Sept. 3
60000
$2.00
$1,20,000
Total
130000
$1.62
$2,11,000
Oct. 5
-100000
$1.62
-$1,62,308
-$1,62,308
Ending Inventory
30000
$1.62
$48,692
-$3,21,308
1. Complete the following table
Method
Periodic
Perpetual
Ending Inventory
Cost of goods sold
Ending Inventory
Cost of goods sold
FIFO
$60,000
$3,10,000
$60,000
$3,10,000
LIFO
$30,000
$3,40,000
$30,000
$3,40,000
Weighted average
$39,643
$3,30,357
$48,692
$3,21,308
2. Which method you recommend for use for income tax purpose.
LIFO method has given highest cost of goods sold, therefore LIFO method is recommended for income tax purpose.
3. Which method you recommend in inflationary environment.
In LIFO Method, the cost of goods sold is computed with the price of most recent purchase. Hence it will give higher cost of goods sold, and therefore LIFO Method is recommended.
4. Which method you recommend in deflationary environment.
In FIFO Method, the cost of goods sold is computed with the price of oldest purchase. Hence it will give higher cost of goods sold, and therefore FIFO Method is recommended.
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