Chapter 6, Problem 1AP

1. (a)

To determine

Calculate the following using FIFO method.

• Sales Revenue
• Cost of Goods Sold
• Ending Inventory

Explanation of Solution

First-in-First-Out:

In First-in-First-Out method, the costs of the initially purchased items are considered as cost of goods sold, for the items which are sold first. The value of the ending inventory consists of the recent purchased items.

• Compute the sales revenue:

Date	Number of units	Cost per unit ($)	Total Amount($)
July, 31	40	500	20,000
August, 22	30	500	15,000
November, 20	90	500	45,000
December, 8	40	500	20,000
Total	200		100,000

Table (1)

Note: $\text{Total Amount}=\text{Number of units}\times \text{Cost per unit}$

Therefore, the total sales revenue is $100,000.

• Compute the cost of goods sold.

Cost of goods sold:

Cost of goods sold is the accumulate total of all direct cost incurred in manufacturing the goods or the products which has been sold during a period. Cost of goods sold involves direct material, direct labor, and manufacturing overheads.

• 200 units are sold.
• As it is FIFO method the earlier purchased items will be sold first.
• Hence, the cost of goods sold will be the earlier purchased items.

Calculation of cost of goods sold
Details	Number of Units	Rate per unit ($)	Total Cost ($)
July, 17	50	150	7,500
August, 12	40	160	6,400
October, 27	80	170	13,600
December, 4	30	180	5,400
Total	200		32,900

Table (2)

Therefore, the cost of goods sold is $32,900.

• Compute the cost of ending inventory:

Ending Inventory:

Ending inventory is the quantity of inventory that the company has in stock at the end of its financial year.

Calculate the units of ending inventory:

$\begin{array}{c}\text{Ending inventory units }=\text{Total goods available for sale – sales}\\ =\text{270 Units – 70Units}\\ =\text{200Units}\end{array}$

Calculate the cost of ending inventory:

• The ending inventory is 70 units.
• In FIFO method the ending inventory comprises of the inventory purchased last, because the inventory purchased first were sold first.
• Therefore, the ending inventory of 70 units from December 4^th purchases.

Calculation of cost of ending inventory
Details	Number of Units	Rate per Unit ($)	Total Cost ($)
December, 4	70	180	12,600
Ending Inventory	70		12,600

Table (3)

Therefore, the cost of Ending Inventory in the FIFO is $12,600.

(b)

To determine

Prepare a gross profit section of a partial income statement of G Adventures.

Explanation of Solution

The gross profit section of a partial income statement of G Adventures is prepared as follows:

G Adventures, Incorporation
Partial Income Statement
For the year ended December 31,2022
Details	Amounts ($)
Sales Revenue	100,000
Less: Cost of Goods Sold	32,900
Gross Profit	67,100

Table (4)

Therefore, the gross profit of G Adventure is $67,100.

2. (a)

To determine

Record the cost of goods sold.

Explanation of Solution

Periodic Inventory System:

Periodic inventory system 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.

Lower-of-cost-or-market value:

The lower-of-cost-or-market value is a method which requires the reporting of the ending merchandise inventory in the financial statement of a company, at its current market value (net realizable value) or at its historical cost price, whichever is less.

Record the cost of goods sold:

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
	Cost of Goods Sold (1)		5,600
	Inventory			5,600
	(To record the LIFO adjustment)

Table (5)

• Cost of Goods Sold is expense and increased which will decrease the equity. Therefore, debit the cost of goods sold account with $5,600.
• Merchandised inventory is an asset and decreased. Therefore, credit the merchandised inventory account with $5,600.

Compute the amount of ending inventory using lower-of-cost-or-market value method.

Computation of Ending Inventory – Lower-of-cost-or-market Value Method
Inventories	Quantity (Units)	Rate Per Unit($)		Total Cost($)		LCM ($)
		Cost Price ($)	Market Price ($)	Cost Price ($)	Market Price ($)
MU Watches	70	180	100	12,600	7,000	7,000
Total						7,000

Table (6)

Therefore, the amount of ending inventory in LCM is $7,000.

Note:

$\begin{array}{l}\text{Total Cost Price}=\text{Number of Units}\times \text{Cost per Unit}\\ \text{Total Market Cost}=\text{Number of Units}\times \text{Market price per Unit}\end{array}$

Working note:

Compute the write- down inventory:

$\begin{array}{c}\text{Write-down inventory}=\text{Total cost price}-\text{Total market price}\\ =\text{\$12,600}-\$7,000\\ =\$5,600\end{array}$ (1)

(b)

To determine

Ascertain the amount that MU inventory would report in the December 31, 2022 balance sheet.

Explanation of Solution

G Adventures should report lower of cost price or market price of the inventories in its balance sheet. Therefore, G Adventures should report $7,000.

(c)

To determine

Prepare an updated gross profit section of a partial income statement of G Adventures.

Explanation of Solution

Compute the partial income statement of G Incorporation:

G Adventures, Incorporation
Partial Income Statement
For the year ended December 31,2022
Details	Amounts ($)
Sales Revenue	100,000
Less: Cost of Goods Sold	38,500(2)
Gross Profit	61,500

Table (7)

Working note:

Compute the updated gross profit section of G Adventures:

$\begin{array}{c}\text{Cost of goods sold}=\left(\begin{array}{l}\text{Original cost of inventory}\\ \text{+ Write-down inventory}\end{array}\right)-\left(\begin{array}{l}\text{Additional cost }\\ \text{of goods sold}\end{array}\right)\\ =\left(\$32,000+\$5,600(1)\right)-\$5600\\ =\$38,500\end{array}$ (2)

Therefore, the gross profit of G Adventure is $21,500.