Chapter 6, Problem 67APSA

Inventory Costing Methods

Anderson’s Department Store has the following data for inventory, purchases, and sales of merchandise for December.

Anderson’s uses a perpetual inventory system. All purchases and sales were for cash.

Required:

1. Compute cost of goods sold and the cost of ending inventory using FIFO.

2. Compute cost of goods sold and the cost of ending inventory using LIFO.

3. Compute cost of goods sold and the cost of ending inventory using the average cost method. ( Note: Use four decimal places for per-unit calculations.)

4. Prepare the journal entries to record these transactions assuming Anderson chooses to use the FIFO method.

5. CONCEPTUAL CONNECTION Which method would result in the lowest amount paid for taxes?

To determine

(a)

Inventory costing methods:

FIFO, LIFO and average cost method, are those method which used for calculation of closing inventory and cost of goods sold.

The cost of ending inventory and the cost of goods sold using the FIFO.

Answer to Problem 67APSA

Particular	$\text{ FIFO \$}$
Cost of goods sold	$567.70$
Closing inventory value	$58.80$

Explanation of Solution

The given information is as follows:

Total available units are:

$\text{Opening inventory}=1\text{0 units @ \$8 each}$

$\begin{array}{c}\text{Purchases}=22\text{ units @ \$8}\text{.80 each}\\ \text{Purchases}=26\text{ units @ \$9}\text{.05 each}\\ \text{Purchases}=12\text{ units @ \$9}\text{.80 each}\end{array}$

$\text{Total Purchased units = 60}$

$\begin{array}{c}\text{Total available quantity = 60}+10\\ \text{= 70 units}\end{array}$

$\text{Sales}=64\text{ units}$

$\begin{array}{c}\text{Closing inventory }=\text{Beginning inventory + Purchase}-\text{Sales}\\ \text{=10}+60-64\\ =6\text{ units}\end{array}$

Calculation of Closing Inventory as per FIFO Method:

Under this method, which material purchased first, issued first for production. However closing inventory includes last purchased materials in stock. Due to latest purchase in closing inventory, higher value of latest purchase effects cost of goods sold as lower and profit margin will be high.

	Closing inventory	Cost of Goods sold
		$\text{10 units @ \$8}=\text{\$80}$
		$\text{9 units @ \$8}\text{.8}=\text{\$79}\text{.2}$
		$\text{13 units @ \$8}\text{.8}=\text{\$114}\text{.4}$
		$\text{12 units @ \$9}\text{.05}=\text{\$108}\text{.6}$
		$\text{14 units @ \$9}\text{.05}=\text{\$126}\text{.70}$
	$\text{6 units @ \$9}\text{.80}=\text{\$58}\text{.80}$	$\text{6 units @ \$9}\text{.80}=\text{\$58}\text{.80}$
Total	$\text{6 units @ \$9}\text{.80}=\text{\$58}\text{.80}$	$\text{64 units = \$567}\text{.70}$

To determine

(b)

Inventory costing methods:

FIFO, LIFO and average cost method, are those method which used for calculation of closing inventory and cost of goods sold.

The cost of ending inventory and the cost of goods sold using the LIFO.

Answer to Problem 67APSA

Particular	$\text{LIFO \$}$
Cost of goods sold	$578.50$
Closing inventory value	$48$

Explanation of Solution

The given information is as follows:

Total available units are:

$\text{Opening inventory}=1\text{0 units @ \$8 each}$

$\begin{array}{c}\text{Purchases}=22\text{ units @ \$8}\text{.80 each}\\ \text{Purchases}=26\text{ units @ \$9}\text{.05 each}\\ \text{Purchases}=12\text{ units @ \$9}\text{.80 each}\end{array}$

$\text{Total Purchased units = 60}$

$\begin{array}{c}\text{Total available quantity = 60}+10\\ \text{= 70 units}\end{array}$

$\text{Sales}=64\text{ units}$

$\begin{array}{c}\text{Closing inventory }=\text{Beginning inventory + Purchase}-\text{Sales}\\ \text{=10}+60-64\\ =6\text{ units}\end{array}$

Calculation of closing inventory as per LIFO Method:

Under this method, which material purchased last, issued first for production. However closing inventory includes earliest purchased material in stock. Due to earliest purchase material in stock, lower value of earliest purchased effects cost of goods sold as high and profit margin will be lower.

	Ending Inventory	Cost of Goods sold
		$\text{19 units @ \$9}\text{.05}=\text{\$171}\text{.95}$
		$\text{7 units @ \$9}\text{.05}=\text{\$63}\text{.35}$
		$\text{18 units @ \$8}\text{.8}=\text{\$158}\text{.4}$
		$\text{12 units @ \$9}\text{.80}=\$117.60$
		$\text{4 units @ \$8}\text{.80}=\$35.32$
	$\text{6 units @ \$8}\text{.00}=\text{\$48}$	$\text{4 units @ \$8}=\$32$
Total	$\text{6 units @ \$8}\text{.00}=\text{\$48}$	$64\text{ units}=\$578.50$

To determine

(c)

Inventory costing methods:

FIFO, LIFO and average cost method, are those method which used for calculation of closing inventory and cost of goods sold.

The cost of ending inventory and the cost of goods sold using the average cost method.

Answer to Problem 67APSA

Particular	$\text{Average cost \$}$
Cost of goods sold	$565.061$
Closing inventory value	$53.70$

Explanation of Solution

The given information is as follows:

Total available units are:

$\text{Opening inventory}=1\text{0 units @ \$8 each}$

$\begin{array}{c}\text{Purchases}=22\text{ units @ \$8}\text{.80 each}\\ \text{Purchases}=26\text{ units @ \$9}\text{.05 each}\\ \text{Purchases}=12\text{ units @ \$9}\text{.80 each}\end{array}$

$\text{Total Purchased units = 60}$

$\begin{array}{c}\text{Total available quantity = 60}+10\\ \text{= 70 units}\end{array}$

$\text{Sales}=64\text{ units}$

$\begin{array}{c}\text{Closing inventory }=\text{Beginning inventory + Purchase}-\text{Sales}\\ \text{=10}+60-64\\ =6\text{ units}\end{array}$

Calculation of closing inventory as per weighted average method:

Under this method, average cost per unit of inventory is calculated and closing inventory value is to be calculated on that basis. Average cost of inventory is changed on purchase high or low. However we follow indirect method of average cost to calculate closing inventory.

As the fist two sales are done only from two purchases and beginning inventory and the third sale is done including all purchases. Hence, there will requirement of two average cost for computing the cost of goods sold.

$\begin{array}{c}\text{Weighted average cost per unit}=\text{Cost of Goods available for sale}÷\text{Units available for sale}\\ \text{=}\left\{\left(10\text{ units}\times \$8\right)+\left(\text{22 units}\times \$8.8\right)+\left(\text{26 units}\times \$9.05\right)\right\}÷58\\ =\left(\$80+\$193.60+\$235.30\right)÷58\\ =\$8.744\end{array}$

$\begin{array}{c}\text{Weighted average cost per unit}=\text{Cost of Goods available for sale}÷\text{Units available for sale}\\ \text{=}\left\{\left(10\text{ units}\times \$8\right)+\left(\text{22 units}\times \$8.8\right)+\left(\text{26 units}\times \$9.05\right)+\left(12\text{ units}\times 9.80\right)\right\}÷70\\ =\left(\$80+\$193.60+\$235.30+117.60\right)÷70\\ =\$8.95\end{array}$

	Closing inventory	Cost of Goods sold
		$\text{19 units @ \$8}\text{.744 = \$166}\text{.708}$
		$\text{25 units @ \$8}\text{.744 = \$219}\text{.353}$
		$\text{20 units @ \$8}\text{.95}=\text{\$179}\text{.000}$
Total	$6\text{ units @ \$8}\text{.95}=\$53.70$	$\text{64 units}=\text{\$565}\text{.061}$

To determine

(d)

Inventory costing methods:

FIFO, LIFO and average cost method, are those method which used for calculation of closing inventory and cost of goods sold.

The journal entries for recording the transaction on the basis of FIFO method.

Answer to Problem 67APSA

The journal entries of recording sales and purchases of the company for the Anderson Department Store recorded properly as per FIFO basis is as follows:

On cash purchases:

Date	Particular	Debit $	Credit $
$\text{Dec 2}$	Inventory $\left(22\text{ units}\times \$8.80\right)$	$194$
	Cash		$194$
	(To record transportation cost)

On cash purchases:

Date	Particular	Debit $	Credit $
$\text{Dec 5}$	Inventory $\left(26\text{ units}\times \$9.05\right)$	$235$
	Cash		$235$
	(To record purchase entry)

On cash sales:

Date	Particular	Debit $	Credit $
$\text{Dec 7}$	Cash $\left(\text{19 units}\times \$20\right)$	$380$
	Sales Revenue		$380$
	(To record cash sales)

After above sales, cost of goods sold computed on FIFO basis:

Date	Particular	Debit $	Credit $
$\text{Dec 7}$	Cost of Goods sold $\left(\text{10 units}\times \$8.8\right)+\left(\text{9 units}\times \$9.05\right)$	$159$
	Inventory		$159$
	(To record cost of goods sold)

On cash sales:

Date	Particular	Debit $	Credit $
$\text{Dec 10}$	Cash $\left(\text{25 units}\times \$20\right)$	$500$
	Sales Revenue		$500$
	(To record cash sales)

After above sales, cost of goods sold computed on FIFO basis:

Date	Particular	Debit $	Credit $
$\text{Dec 10}$	Cost of Goods sold $\left(\text{13 units}\times \$8.8\right)+\left(\text{12 units}\times \$9.05\right)$	$223$
	Inventory		$223$
	(To record cost of goods sold)

On cash purchases:

Date	Particular	Debit $	Credit $
$\text{Dec 12}$	Inventory $\left(\text{12 units}\times \$9.80\right)$	$118$
	Cash		$118$
	(To record purchase entry)

On cash sales:

Date	Particular	Debit $	Credit $
$\text{Dec 14}$	Cash $\left(\text{20 units}\times \$20\right)$	$400$
	Sales Revenue		$400$
	(To record cash sales)

After above sales, cost of goods sold computed on FIFO basis:

Date	Particular	Debit $	Credit $
$\text{Dec 14}$	Cost of Goods sold $\left(\text{14 units}\times \$9.05\right)+\left(\text{8 units}\times \$9.80\right)$	$205$
	Inventory		$205$
	(To record cost of goods sold)

Explanation of Solution

On cash purchases:

Date	Particular	Debit $	Credit $
$\text{Dec 2}$	Inventory $\left(22\text{ units}\times \$8.80\right)$	$194$
	Cash		$194$
	(To record transportation cost)

On cash purchases:

Date	Particular	Debit $	Credit $
$\text{Dec 5}$	Inventory $\left(26\text{ units}\times \$9.05\right)$	$235$
	Cash		$235$
	(To record purchase entry)

On cash sales:

Date	Particular	Debit $	Credit $
$\text{Dec 7}$	Cash $\left(\text{19 units}\times \$20\right)$	$380$
	Sales Revenue		$380$
	(To record cash sales)

After above sales, cost of goods sold computed on FIFO basis

Date	Particular	Debit $	Credit $
$\text{Dec 7}$	Cost of Goods sold $\left(\text{10 units}\times \$8.8\right)+\left(\text{9 units}\times \$9.05\right)$	$159$
	Inventory		$159$
	(To record cost of goods sold)

On cash sales:

Date	Particular	Debit $	Credit $
$\text{Dec 10}$	Cash $\left(\text{25 units}\times \$20\right)$	$500$
	Sales Revenue		$500$
	(To record cash sales)

After above sales, cost of goods sold computed on FIFO basis

Date	Particular	Debit $	Credit $
$\text{Dec 10}$	Cost of Goods sold $\left(\text{13 units}\times \$8.8\right)+\left(\text{12 units}\times \$9.05\right)$	$223$
	Inventory		$223$
	(To record cost of goods sold)

On cash purchases:

Date	Particular	Debit $	Credit $
$\text{Dec 12}$	Inventory $\left(\text{12 units}\times \$9.80\right)$	$118$
	Cash		$118$
	(To record purchase entry)

On cash sales:

Date	Particular	Debit $	Credit $
$\text{Dec 14}$	Cash $\left(\text{20 units}\times \$20\right)$	$400$
	Sales Revenue		$400$
	(To record cash sales)

After above sales, cost of goods sold computed on FIFO basis

Date	Particular	Debit $	Credit $
$\text{Dec 14}$	Cost of Goods sold $\left(\text{14 units}\times \$9.05\right)+\left(\text{8 units}\times \$9.80\right)$	$205$
	Inventory		$205$
	(To record cost of goods sold)

To determine

(e)

Inventory costing methods:

FIFO, LIFO and average cost method, are those method which used for calculation of closing inventory and cost of goods sold.

The method for determining the lowest amount paid for tax.

Answer to Problem 67APSA

The cost of goods sold of LIFO method is higher and value of closing inventory is lower than other methods which mean LIFO method provides lowest tax expenses in all methods.

Explanation of Solution

Comparison of closing inventory and Cost of goods sold as per above three methods:

Particular	$\text{ FIFO \$}$	$\text{LIFO \$}$	$\text{Average cost \$}$
Cost of goods sold	$567.70$	$578.50$	$565.061$
Closing inventory value	$58.80$	$48$	$53.70$

According the evaluation of the above table, it can be concluded that the lowest tax paid is provided by the LIFO method as the expense of cost of goods sold is highest which makes the income low and lower closing value of inventory also makes the income lower. Thus, the LIFO is the required method.