ACCT210, Stady Guide 2 sercise 3: The Profit &Prophet; Company is a merchandi mi

Question

ACCT210, Stady Guide 2 sercise 3: The Profit &Prophet; Company is a merchandi ming artists. During the month of March 2012, the se company that sells CDs of company had the following transactions related to its inventory purchases and sales. Date March 1 March 3 March 8 March 10 March 16 March 26 Explanation 1 -#Units Beg. Inv Purchase Purchase 5Unit Price 2,000 5,500 6,000 2.000 $7 $8 $9 $10 Purchase Sales on credit13,000 $20 Requirement l: Determine the company's (I) ending inventory on March 31.2012 and (2) cost of goods sold for March 2012 under each of the inventory cost flow assumptions (including FIFO, LIFO, and weighted average cost). Requirement 2: Which inventory cost flow assumption results in the lowest ending inventory for its balance sheet but the highest cost of goods sold for income statement? Explair. Requirement 3: If the Profit& Prophet Company uses the weighted average cost as its inventory accounting policy, journalizes the company's credit sales on March 26. Credit Debit Accounts Date

Explanation / Answer

1 FIFO Goods purchased first are sold first 13000 units have been sold in the following order: Units Rate Amount Beg inv. 1500 7 10500 Mar 3 purchase 2000 8 16000 Mar 8 purchase 5500 9 49500 Mar 10 purchase 4000 10 40000 116000 Cost of goods sold=116000 Inventory in units=1500+2000+5500+6000+2000-13000=4000 4000 units consists of Units Rate Amount Mar 10 purchase 2000 10 20000 (6000-4000) Mar 16 purchase 2000 11 22000 42000 Value of inventory=42000 LIFO Goods purchased last are sold first 13000 units have been sold in the following order: Units Rate Amount Mar 16 purchase 2000 11 22000 Mar 10 purchase 6000 10 60000 Mar 8 purchase 5000 9 45000 127000 Cost of goods sold=127000 Inventory in units=1500+2000+5500+6000+2000-13000=4000 4000 units consists of Units Rate Amount Beg inv. 1500 7 10500 Mar 3 purchase 2000 8 16000 Mar 8 purchase 500 9 4500 31000 Value of inventory=31000 Weighted averae cost method: Computation of weighted average cost Units Rate Amount Beg inv. 1500 7 10500 Mar 3 purchase 2000 8 16000 Mar 8 purchase 5500 9 49500 Mar 10 purchase 6000 10 60000 Mar 16 purchase 2000 11 22000 17000 158000 Weighted average cost=158000/17000=9.29 Cost of goods sold=Units sold*Weighted average cost=13000*9.29=120770 Value of inventory=inventory in units*Weighted average cost=4000*9.29=37160 2 LIFO method results in lowest ending inventory and highest cost of goods sold This is because LIFO reflects the market price as it consider latest stock. 3 Date Accounts Debit Credit Mar-26 Accounts receivable 260000 Sales 260000 (13000*20) (Being sales on credit recorded) Cost of goods sold 120770 Inventory 120770 (Being cost of goods sold recorded)

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