Chapter 6, Problem 3APSA

To determine

Requirement1:

Concept Introduction:

Goods available for sale:

The Goods available for sale means that the total goods in hand which can be offered to the customers for sale. This can be expressed in terms of dollars and units. The Total Goods in hand can be computed as a sum of inventory in hand in the beginning of the period and Inventories purchased during the period.

To Determine: TheCost and number of units available for sale.

Explanation of Solution

TheCost of goods available for sale is computed by adding up the cost of goods in hand in the beginning of the period and cost of inventory purchased during the period. And the number of units available f or sale is computed as on the same lines but in units terms.

Cost and Units available for sale
	UNITS	COST PU	AMOUNT
Beginning Inventory Jan-1	600	45	27000
Purchases:
Feb-10 Purchases	400	42	16800
Mar-13 Purchases	200	27	5400
Aug-21 Purchases	100	50	5000
Sept-5 Purchases	500	46	23000
Goods available for sale	1800		77200

To determine

Requirement2:

Ending Inventory:

Ending Inventory units means the number of units left over from the total goods available for sale after units sold deducted from it.

To determine: The Number of Ending Inventory Units.

Explanation of Solution

The ending Inventory units is a difference between units of goods available for sale and units sold and has been computed as under:

Ending Inventory Units
	UNITS
Units Available for sale	1800
Purchase
15-Mar	800
10-Sep	600
Ending Inventory Units	400

To determine

Requirement3-a:

First in First Out: The first in first out method of assigning the cost to goods sold is based on the principle that the goods that are entered first in the store room shall be issued first for sale and hence the cost shall be recorded at its initial prices of goods entered in store room. The perpetual Inventory system means the records are maintained on a continuous basis.

To determine: The Cost assigned to ending Inventory under FIFO.

Explanation of Solution

The FIFO method of perpetual inventory suggests that the goods issued for sale on a particular date shall be assigned cost on the basis of cost of oldest material lies in the store on that particular date.

The Ending Inventory shall be computed as under:

STATEMENT SHOWING INVENTORY RECORD UNDER PERPETUAL FIFO METHOD
	RECIEPTS			COST OF GOODS SOLD			BALANCE
DATE	UNITS	RATE	AMOUNT $	UNITS	RATE	AMOUNT $	UNITS	RATE	AMOUNT $
1-Jan							600	45	27000
10-Feb	400	42	16800				600	45	27000
							400	42	16800
13-Mar	200	27	5400				600	45	27000
							400	42	16800
							200	27	5400
15-Mar				600	45	27000	200	42	8400
				200	42	8400	200	27	5400
21-Aug	100	50	5000				200	42	8400
							200	27	5400
							100	50	5000
5-Sep	500	46	23000				200	42	8400
							200	27	5400
							100	50	5000
							500	46	23000
10-Sep				200	42	8400
				200	27	5400
				100	50	5000
				100	46	4600	400	46	18400
TOTAL	1200		50200	1400		58800	400		18400

Therefore, Ending Inventory is 400 units of $18400.

To determine

Requirement3-b:

Last in First Out: The Last in first out method of assigning the cost to goods sold is based on the principle that the goods that are entered recently in the store room shall be issued first for sale and hence the cost shall be recorded at its recent prices of goods entered in store room. The perpetual Inventory system means the records are maintained on a continuous basis.

To determine: The Cost assigned to ending Inventory under LIFO.

Explanation of Solution

The LIFO method of perpetual inventory suggests that the goods issued for sale on a particular date shall be assigned cost on the basis of cost of newest material lies in the store on that particular date.

The Ending Inventory shall be computed as under:

STATEMENT SHOWING INVENTORY RECORD UNDER PERPETUAL LIFO METHOD
	RECIEPTS			COST OF GOODS SOLD			BALANCE
DATE	UNITS	RATE	AMOUNT $	UNITS	RATE	AMOUNT $	UNITS	RATE	AMOUNT $
1-Jan							600	45	27000
10-Feb	400	42	16800				600	45	27000
							400	42	16800
13-Mar	200	27	5400				600	45	27000
							400	42	16800
							200	27	5400
15-Mar				200	27	5400
				400	42	8400
				200	45	9000	400	45	18000
21-Aug	100	50	5000				400	45	18000
							100	50	5000
5-Sep	500	46	23000				400	45	18000
							100	50	5000
							500	46	23000
10-Sep				500	46	23000
				100	50	5000	400	45	18000
TOTAL	1200		50200	1400		59200	400		18000

Therefore, Ending Inventory is 400 units of $ 18000.

To determine

Requirement3-c:

Weighted Average: The Weighted Average method of issuing inventory is based on principle that the goods shall be issued at a average of prices of goods which are lying in the store room at the time of issuing for sale. The perpetual Inventory system means the records are maintained on a continuous basis.

To determine: The Cost assigned to ending Inventory under Weighted average.

Explanation of Solution

The Weighted Average method of perpetual inventory suggests that the goods issued for sale on a particular date shall be assigned cost on the basis of average cost of material lies in the store on that particular date.

The Ending Inventory shall be computed as under:

STATEMENT SHOWING INVENTORY RECORD UNDER PERPETUAL WEIGHTED AVERAGE METHOD
	RECIEPTS			COST OF GOODS SOLD			BALANCE
DATE	UNITS	RATE	AMOUNT $	UNITS	RATE	AMOUNT $	UNITS	RATE	AMOUNT $
1-Jan							600	45	27000
10-Feb	400	42	16800				600	45	27000
							400	42	16800
13-Mar	200	27	5400				600	45	27000
							400	42	16800
							200	27	5400
Average							1200	41	49200
15-Mar				800	41	32800	400	41	16400
21-Aug	100	50	5000				400	41	16400
							100	50	5000
5-Sep	500	46	23000				400	41	16400
							100	50	5000
							500	46	23000
Average							1000	44.4	44400
10-Sep				600	44.4	26640	400	44.4	17760
TOTAL	1200		50200	1400		59440	500		17760

Therefore, Ending Inventory is 400 units of $17760.

To determine

Requirement3-d:

Specific Identification: Specific Identification method of assigning the cost to goods sold is based on the principle that the goods that have been issued for sale has been specifically identified to be issued from the particular lot of material. Therefore, the cost of that particular lot shall be assigned on the same. The perpetual Inventory system means the records are maintained on a continuous basis.

To determine: The Cost assigned to ending Inventory under Specific Identification.

Explanation of Solution

The Specific Identification method of perpetual inventory suggests that the goods issued for sale on a particular date shall be assigned cost on the basis of cost of material specifically identified as issued from the store on that particular date.

The Ending Inventory shall be computed as under:

STATEMENT SHOWING INVENTORY RECORD UNDER PERIODIC SPECIFIC IDENTIFICATION METHOD
	RECIEPTS			COST OF GOODS SOLD			BALANCE
DATE	UNITS	RATE	AMOUNT $	UNITS	RATE	AMOUNT $	UNITS	RATE	AMOUNT $
Balance Oct1	600	45	27000	600	45	27000
Purchase
10-Feb	400	42	16800	300	42	12600	100	42	4200
13-Mar	200	27	5400	200	27	5400
21-Aug	100	50	5000	50	50	2500	50	50	2500
5-Sep	500	46	23000	250	46	11500	250	46	11500
TOTAL	1800		77200	1400		59000	400		18200

Therefore, Ending Inventory is 400 units of $18200.

To determine

Requirement4:

Gross Profits: Gross Profits means excess of sales revenue over the cost of goods sold.

To determine:Gross profits earned by the company under various methods.

Explanation of Solution

The Gross profits is computed as a difference between the sales revenue and cost of goods sold as assigned under various methods and has been computed as under:

Statement showing Gross Profits earned:
				FIFO	LIFO	Weighted	Specific
						Average	Identification
Sales revenue:
15-Mar	800 units @75			60000	60000	60000	60000
10-Sep	600 units @75			45000	45000	45000	45000
Total sales revenue				105000	105000	105000	105000
Less: Cost of goods sold (as computed Above)				58800	59200	59440	59000
Gross Margin				46200	45800	45560	46000

To determine

Requirement5:

To determine: The Method to be preferred so as to generate higher bonus.

Explanation of Solution

As the bonus is based on gross profit, the method shall be preferred which will give provide lowest cost of goods sold. Therefore, as per above computations, the FIFO method shall be followed as its gives the lowest cost of goods sold and resultant higher gross profit.

The FIFO method of Inventory valuation shall be preferred.