Concept explainers
(a) (1)
Periodic Inventory System: It is a system in which the inventory is updated in the accounting records on a periodic basis such as at the end of each month, quarter or year. In other words, it is an accounting method which is used to determine the amount of inventory at the end of each accounting period.
In First-in-First-Out method, the cost of initial purchased items are sold first. The value of the ending inventory consists the recent purchased items.
In Last-in-First-Out method, the cost of last purchased items are sold first. The value of the closing stock consists the initial purchased items.
In Average Cost Method the cost of inventory is priced at the average rate of the goods available for sale. Following is the mathematical representation:
To Compute: The cost of ending inventory and cost of goods sold using FIFO.
(a) (1)
Explanation of Solution
Calculate the ending inventory using FIFO method.
Calculation of ending inventory under FIFO Method | |||
Particulars | Units | Unit Cost ($) | Total Cost ($) |
(a) | (b) | [(c) = (a) × (b)] | |
June 12 | 30 | 6 | 180 |
June 23 | 200 | 7 | 1,400 |
Ending inventory | 230 | 1,580 |
Table (1)
Calculate the cost of goods sold using FIFO method.
FIFO Method | |||
Particulars | Units | Unit Cost ($) | Total Cost ($) |
(a) | (b) | [(c) = (a) × (b)] | |
Beginning inventory | 120 | 5 | 600 |
Add Purchases: | |||
June 12 | 370 | 6 | 2,220 |
June 23 | 200 | 7 | 1,400 |
Cost of goods available for sale | 4,220 | ||
Less: Ending inventory (Table 1) | 1,580 | ||
Cost of goods sold | 2,640 |
Table (2)
Therefore, the cost of ending inventory, and cost of goods sold under FIFO method is $1,580, and $2,640.
(2)
To Compute: The cost of ending inventory and cost of goods sold using, LIFO.
(2)
Explanation of Solution
Calculate the ending inventory using LIFO method.
Calculation of ending inventory under LIFO Method | |||
Particulars | Units | Unit Cost ($) | Total Cost ($) |
(a) | (b) | [(c) = (a) × (b)] | |
June 1 | 120 | 5 | 600 |
June 23 | 110 | 6 | 660 |
Ending inventory | 230 | 1,260 |
Table (3)
Calculate the cost of goods sold using LIFO method
LIFO Method | |||
Particulars | Units | Unit Cost ($) | Total Cost ($) |
(a) | (b) | [(c) = (a) × (b)] | |
Beginning inventory | 120 | 5 | 600 |
Add Purchases: | |||
June 12 | 370 | 6 | 2,220 |
June 23 | 200 | 7 | 1,400 |
Cost of goods available for sale | 4,220 | ||
Less: Ending inventory (Table 3) | 1,260 | ||
Cost of goods sold | 2,960 |
Table (4)
Therefore, the cost of ending inventory, and cost of goods sold under LIFO method is $1,260, and $2,960.
(3)
To Compute: The cost of ending inventory and cost of goods sold using Average-cost method.
(3)
Explanation of Solution
Calculate cost of ending inventory using Average-Cost method.
Ending inventory units = 230
Weighted average unit cost = $6.116 (1)
Calculate cost of goods sold using Average-Cost method.
Total units purchased = 460
Weighted average unit cost = $6.116 (1)
Working Notes:
Calculate weighted average unit cost.
Total cost of goods available for sale = $4,220 (Table 5)
Total number of units available for sale = 690 (Table 6)
Calculate the total cost of goods available for sale.
Particulars | Units | Unit Cost ($) | Total Cost ($) |
(a) | (b) | [(c) = (a) × (b)] | |
Beginning inventory | 120 | 5 | 600 |
Add Purchases: | |||
June 12 | 370 | 6 | 2,220 |
June 23 | 200 | 7 | 1,400 |
Cost of goods available for sale | 4,220 |
Table (5)
Calculate the total number of units available for sale.
Particulars | Units |
Beginning inventory | 120 |
Add Purchases: | |
June 12 | 370 |
June 23 | 200 |
Number of units available for sale | 690 |
Table (6)
Therefore, the cost of ending inventory, and cost of goods sold under average cost method is $1,406.68, and $2,813.36.
(b)
The costing method which gives highest inventory, and highest cost of goods sold.
(b)
Answer to Problem 6.7E
Details | FIFO ($) | LIFO ($) | Average-Cost ($) |
Ending Inventory |
1,580 (Highest) |
1,260 (Lowest) | 1406.68 |
Cost of Goods Sold |
2,640 (Lowest) |
2,960 (Highest) | 2,813.36 |
Table (7)
Explanation of Solution
FIFO method gives lowest cost of goods sold and highest closing inventory since cost of goods are lower in the beginning because purchases are at lower rate. LIFO method gives highest cost of goods sold and lowest closing inventory
Therefore, the FIFO method gives the highest ending inventory, and the LIFO method gives the highest cost of goods sold.
(c)
To Relate: The average-cost values for ending inventory, and cost of goods sold with ending inventory, and cost of goods for FIFO and LIFO.
(c)
Explanation of Solution
Average cost method calculates inventory issues based on average cost. Hence cost of goods sold will be higher than FIFO but lower than LIFO method in case of increasing cost of purchase.
Therefore, the ending inventory will be lower than FIFO and higher than LIFO method.
(d)
To Explain: The reason for the average cost
(d)
Explanation of Solution
The calculated average cost is shown in above computation is $6.116. In general average cost is calculated with the decimal points to get the correct values.
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Chapter 6 Solutions
Financial Accounting: Tools for Business Decision Making, 8th Edition
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