Chapter 6, Problem 4AAPSA

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 periodic Inventory system means the records are maintained only at the end of period.

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

Explanation of Solution

The FIFO method of period 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 during the end of period.

The Ending Inventory shall be computed as under:

STATEMENT SHOWING INVENTORY RECORD UNDER PERIODIC FIFO 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	400	42	16800
13-Mar	200	27	5400	200	27	5400
21-Aug	100	50	5000	100	50	5000
5-Sep	500	46	23000	100	46	4600	400	46	18400
TOTAL	1800		77200	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 periodic Inventory system means the records are maintained at the end of period.

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

Explanation of Solution

The LIFO method of periodic 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 at the end of period.

The Ending Inventory shall be computed as under:

STATEMENT SHOWING INVENTORY RECORD UNDER PERIODIC LIFO METHOD
	RECIEPTS			COST OF GOODS SOLD			BALANCE
DATE	UNITS	RATE	AMOUNT $	UNITS	RATE	AMOUNT $	UNITS	RATE	AMOUNT $
Balance Oct1	600	45	27000	200	45	9000	400	45	18000
Purchase
10-Feb	400	42	16800	400	42	16800
13-Mar	200	27	5400	200	27	5400
21-Aug	100	50	5000	100	50	5000
5-Sep	500	46	23000	500	46	23000
TOTAL	1800		77200	1400		59200	400	45	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 an average of prices of goods which are lying in the store room at the end of period. The periodic Inventory system means the records are maintained at the end of period.

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

Explanation of Solution

The Weighted Average method of periodic 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 during the period.

The Ending Inventory shall be computed as under:

STATEMENT SHOWING INVENTORY RECORD UNDER PERIODIC WEIGHTED AVERAGE METHOD
	RECIEPTS			COST OF GOODS SOLD			BALANCE
DATE	UNITS	RATE	AMOUNT $	UNITS	RATE	AMOUNT $	UNITS	RATE	AMOUNT $
Balance Oct1	600	45	27000
Purchase
10-Feb	400	42	16800
13-Mar	200	27	5400
21-Aug	100	50	5000
5-Sep	500	46	23000
TOTAL	1800	42.89	77200	1400	42.89	60046	400	42.89	17156

Therefore, Ending Inventory is 400 units of $17156.

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 periodic Inventory system means the records are maintained at the end of period.

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

Explanation of Solution

The Specific Identification method of periodic 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 at the end of period.

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	60046	59000
Gross Margin				46200	45800	44954	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.