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_forwardWrite out the formula for the total costs of carrying and ordering inventory, and then use the formula to derive the EOQ model.arrow_forwardCompute(a)the cost of goods purchased and (b) the cost of goods soldarrow_forward
- calculate cost of goods sold, gross margin and ending inventory using i) FIFO and ii) Weighted - averagearrow_forwardDefine Cost of goods sold at normal and Cost of goods sold at actual.arrow_forwardA traditional income statement classifies costs by function; costs are classified as either product costs or period costsarrow_forward
- Cost of goods available for sale consist of two elements: beginning inventory and ending inventory (TRUE / FALSE)arrow_forwardExplain an example how to calculate net cost of inventory.arrow_forwardWhat does it mean that product costs fl ow through inventory on their way to the income statement?arrow_forward
- Please help me with this question:arrow_forwardThe economic order quantity (EOQ) is used to: a) Maximize inventory levels b) Determine credit terms c) Calculate selling price d) Minimize total inventory costsarrow_forwardThe difference between sales and marginal cost is______________ a. Fixed Cost b. Profit c. Sales price d. Contributionarrow_forward
- Cornerstones of Cost Management (Cornerstones Ser...AccountingISBN:9781305970663Author:Don R. Hansen, Maryanne M. MowenPublisher:Cengage LearningManagerial Accounting: The Cornerstone of Busines...AccountingISBN:9781337115773Author:Maryanne M. Mowen, Don R. Hansen, Dan L. HeitgerPublisher:Cengage LearningIntermediate Accounting: Reporting And AnalysisAccountingISBN:9781337788281Author:James M. Wahlen, Jefferson P. Jones, Donald PagachPublisher:Cengage Learning
- Principles of Accounting Volume 1AccountingISBN:9781947172685Author:OpenStaxPublisher:OpenStax CollegeIntermediate Financial Management (MindTap Course...FinanceISBN:9781337395083Author:Eugene F. Brigham, Phillip R. DavesPublisher:Cengage Learning