Chapter 5, Problem 60PB

Calculate cost of goods sold and ending inventory; analyze effects of each method on financial statements; apply lower-of-cost-or-market rule; calculate inventory turnover ratio.

Kami’s Pink Purses buys and then resells a special type of pink purse. Here is some information concerning Kami’s inventory activity during the month of August 2010:

August 2    860 units on hand at a total cost of $51,600

August 6    Sold 400 units at $120 per unit

August 8    Purchased 640 units at $55 per unit

August 12    Purchased 425 units at $50 per unit

August 15    Sold 600 units at $120 per unit

August 21    Purchased 300 units at $50 per unit

August 24    Sold 800 units at $115 per unit

August 31    Purchased 100 units at $45 per unit

Requirements

1. 1. Calculate the value of the ending inventory and cost of goods sold, assuming the company uses a periodic inventory system and the FIFO cost flow assumption.
2. 2. Calculate the value of the ending inventory and cost of goods sold, assuming the company uses a periodic inventory system and the LIFO cost flow assumption.
3. 3. Calculate the value of the ending inventory and cost of goods sold, assuming the company uses a periodic inventory system and the weighted average cost flow assumption.
4. 4. Which of the three methods will result in the highest cost of goods sold for August?
5. 5. Which of the three methods will provide the most current ending inventory value for Kami’s balance sheet at August 31, 2010?
6. 6. How would the differences between the methods affect Kami’s income statement for August and balance sheet at August 31, 2010?
7. 7. Calculate the company’s inventory turnover ratio and average days in inventory for the month for each method in items (1), (2), and (3).
8. 8. At the end of the month, the current replacement cost of the inventory is $32,000. Indicate at what amount the company’s inventory will be reported using the lower-of-cost-or-market rule for each method (FIFO, LIFO, and weighted average cost).