Chapter 6, Problem 1DQ

To determine

Concept introduction:

Cost Flow from Inventory to Cost of Goods Sold

Cost Flow refers to methods available for moving the company’s product cost from Inventory to Cost of Goods Sold. Methods include FIFO and LIFO. Under FIFO, Cost of goods sold would be purchase price of Goods Purchased earlier. Under LIFO cost of goods sold would reflect goods purchased later.

To discuss

The flow of cost from Inventory to Cost of Goods sold under FIFO and LIFO with appropriate examples

Explanation of Solution

FIFO(First In First Out) Method:

Under FIFO, Cost of Goods sold will comprise of costs which were undertaken earlier by the company on purchase of a product, and inventory will reflect the cost at its current price. Eg. If a product is purchased at prices of $45, $47 and $48, Cost of goods sold will be valued at $45 and $47, whereas Ending Inventory will be valued at $48. It can be demonstrated as below:

Income Statement

Net Sales…………………………….$200

(-)COGS……………………………..$92($45+$47)

Gross Profit………………………….$108

Balance Sheet

Inventory…………………………….$48

LIFO(First In First Out) Method:

Under LIFO, Cost of Goods Sold will comprise of costs which are most recent and inventory will reflect earlier prices of the product. Eg. If a product is purchased at prices of $45, $47 and $48, Cost of goods sold will be valued at $48 and $47, but inventory will be $45. It can be demonstrated as below:

Income Statement

Net Sales…………………………….$200

(-)COGS……………………………..$95($47+$48)

Gross Profit………………………….$105

Balance Sheet

Inventory…………………………….$45