Chapter 6, Problem 7E

To determine

Concept Introduction:

Periodic Inventory System: The periodic inventory system records and updates the inventory at the end of a particular period. The inventory balance is not updated after each transaction and it is updated periodically.

Methods of inventory valuation: There are several methods of inventory valuation. Some important methods are explained as follows:

• Specific identification method: Under this method the cost of goods sold and ending inventory units are identifiable and the cost is calculated accurately for each unit sold and in the inventory.

• Weighted Average method: Under this method, the cost per unit of the inventory is calculated as weighted average cost per unit and the cost of goods sold and inventory is calculated with the help of weighted average cost per unit.

• FIFO method: FIFO Stands for First In First Out. Under this method, the units purchased first are assumed to be sold first and cost of goods sold is calculated accordingly. The ending inventory in the method includes the latest units purchased.

• LIFO method: LIFO Stands for Last In First Out. Under this method, the latest units purchased are assumed to be sold first and cost of goods sold is calculated accordingly. The ending inventory in the method includes the oldest units purchased.

Requirement-(a):

To determine: The ending inventory, cost of goods sold and gross margin using the FIFO Perpetual inventory method:

Explanation of Solution

The ending inventory cost of goods sold and gross margin using the FIFO Perpetual inventory method as calculated as follows:

Hemming Company
Perpetual Inventory Record
Using FIFO Method
Date	Purchases			Cost of Goods Sold			Inventory
	Units	Rate	Total Cost	Units	Rate	Total Cost	Units	Rate	Total Cost
Jan. 1							200	$ 10.00	$ 2,000.00
Jan. 10				150	$ 10.00	$ 1,500.00	50	$ 10.00	$ 500.00
Mar. 14	350	$ 15.00	$ 5,250.00				50	$ 10.00	$ 500.00
							350	$ 15.00	$ 5,250.00
Mar. 15				50	$ 10.00	$ 500.00
				250	$ 15.00	$ 3,750.00	100	$ 15.00	$ 1,500.00
Jul. 30	450	$ 20.00	$ 9,000.00				100	$ 15.00	$ 1,500.00
							450	$ 20.00	$ 9,000.00
Oct. 5				100	$ 15.00	$ 1,500.00
				330	$ 20.00	$ 6,600.00	120	$ 20.00	$ 2,400.00
Oct. 26	100	$ 25.00	$ 2,500.00				120	$ 20.00	$ 2,400.00
							100	$ 25.00	$ 2,500.00
Total				880		$ 13,850.00	220		$ 4,900.00

Hence, the cost of goods sold is $13,850 and ending inventory is $4,900

The calculation of Gross Margin is as follows:

Sales Revenue (880 units @ $ 40) = $35,200

Less: Cost of Goods sold -$13,850

Gross Margin = $21,350

To determine

Requirement-(b):

To determine: The ending inventory, cost of goods sold and gross margin using the LIFO Perpetual inventory method:

Explanation of Solution

The ending inventory cost of goods sold and gross margin using the LIFO Perpetual inventory method as calculated as follows:

Hemming Company
Perpetual Inventory Record
Using LIFO Method
Date	Purchases			Cost of Goods Sold			Inventory
	Units	Rate	Total Cost	Units	Rate	Total Cost	Units	Rate	Total Cost
Jan. 1							200	$ 10.00	$ 2,000.00
Jan. 10				150	$ 10.00	$ 1,500.00	50	$ 10.00	$ 500.00
Mar. 14	350	$ 15.00	$ 5,250.00				50	$ 10.00	$ 500.00
							350	$ 15.00	$ 5,250.00
Mar. 15				300	$ 15.00	$ 4,500.00	50	$ 10.00	$ 500.00
							50	$ 15.00	$ 750.00
Jul. 30	450	$ 20.00	$ 9,000.00				50	$ 10.00	$ 500.00
							50	$ 15.00	$ 750.00
							450	$ 20.00	$ 9,000.00
Oct. 5				430	$ 20.00	$ 8,600.00	50	$ 10.00	$ 500.00
							50	$ 15.00	$ 750.00
							20	$ 20.00	$ 400.00
Oct. 26	100	$ 25.00	$ 2,500.00				50	$ 10.00	$ 500.00
							50	$ 15.00	$ 750.00
							20	$ 20.00	$ 400.00
							100	$ 25.00	$ 2,500.00
Total				880		$ 14,600.00	220		$ 4,150.00

Hence, the cost of goods sold is $14,600 and ending inventory is $4,150

The calculation of Gross Margin is as follows:

Sales Revenue (880 units @ $ 40) = $35,200

Less: Cost of Goods sold -$14,600

Gross Margin = $20,600