Describe how costs flow from inventory to cost of goods sold for the following methods: (a) FIFO and (b) LIFO.
a.
Inventory is a record of finished goods of a company which the can be sold to the customer, work in progress which can be transformed into finished goods and raw material which is a means of production. Inventory is also classified as current asset in the balance sheet and it is valued by FIFO, LIFO and weighted average method.
To determine: FIFO method of inventory accounting.
Answer to Problem 1DQ
FIFO method, the earliest inventories are documented as sold first
Explanation of Solution
FIFO method of inventory management stands for ‘first in first out’, means that the earliest inventory are documented as sold first but it does not mean that the same inventory has been sold first. At the time of sale the cost of earliest good acquired are reported in the financial statement. It will result in rest of the articles in the inventory being recorded for most latest incurred cost. It also result in the historical cost peered against current revenue. This mean profit margin does not reflect the proper matching of cost and revenue. As the costs of goods are increasing continuously the cost of earliest inventory will be of lower value. Lower cost of goods sold will result in higher net income. Higher net income will increase the profit margin ratio as profit margin ratio is calculated by dividing Net income by Net sales.
Introduction:
Inventory is a record of finished goods of a company which the can be sold to the customer, work in progress which can be transformed into finished goods and raw material which is a means of production. Inventory is also classified as current asset in the balance sheet and it is valued by FIFO, LIFO and weighted average method.
To determine: LIFO method of inventory accounting.
Answer to Problem 1DQ
LIFO method, the earliest inventories are documented as sold first
Explanation of Solution
LIFO method used to record inventory in the manner that the latest item is sold first. The cost of the most recent purchased item will be reported as cost of goods sold. So the older purchased item which has lower cost is reported in the inventory while the latest item which has highest cost is matched with sales in the financial statement. Issue with LIFO method is that it will use the cost of good from lasted purchase which will be highest so the net income will reduce. And lowest valued item will be recorded in current asset thus decreasing the current ratio.
Want to see more full solutions like this?
Chapter 5 Solutions
Loose Leaf for Financial Accounting: Information for Decisions
- Explain the difference between the flow of cost and the flow of goods as it relates to inventory.arrow_forwardMissing Amounts in Cost of Goods Sold Model For each of the following independent cases, fill in the missing amounts.arrow_forwardWrite out the formula for the total costs of carrying and ordering inventory, and then use the formula to derive the EOQ model.arrow_forward
- Which of the following summarizes the weighted average cost flow assumption? Weighted average assumes that costs flow in the reverse order incurred. O Weighted average assumes that cost flow is allocated by the physical weight of items purchased. O Weighted average assumes that costs flow at an average of the costs available. O Weighted average assumes that costs flow in the order incurred.arrow_forwardWhat are the inventory accounts used in JIT costing?arrow_forwardProduct costs … a. are costs that are included in the determining the value of the inventory. b. are all of these. c. prime costs d. include direct materials, direct labor, and overhead e. are manufacturing costs.arrow_forward
- What is Cost of Goods Sold (COGS), and where is it reported?arrow_forwardDetermine the cost assigned to ending inventory and to cost of goods sold using LIFO.arrow_forwardThe purpose of costing are as follows EXCEPT: a) Value inventory b) Record costs c) Price products d) Make decisions e) Formulate a balance sheet Make decision Price products Value inventory Record cost All of the abovearrow_forward
- Intermediate Accounting: Reporting And AnalysisAccountingISBN:9781337788281Author:James M. Wahlen, Jefferson P. Jones, Donald PagachPublisher:Cengage LearningCornerstones of Cost Management (Cornerstones Ser...AccountingISBN:9781305970663Author:Don R. Hansen, Maryanne M. MowenPublisher:Cengage LearningFinancial Accounting: The Impact on Decision Make...AccountingISBN:9781305654174Author:Gary A. Porter, Curtis L. NortonPublisher:Cengage Learning
- Managerial Accounting: The Cornerstone of Busines...AccountingISBN:9781337115773Author:Maryanne M. Mowen, Don R. Hansen, Dan L. HeitgerPublisher:Cengage LearningPrinciples of Accounting Volume 1AccountingISBN:9781947172685Author:OpenStaxPublisher:OpenStax CollegeIntermediate Financial Management (MindTap Course...FinanceISBN:9781337395083Author:Eugene F. Brigham, Phillip R. DavesPublisher:Cengage Learning