Concept explainers
Requirement 1.
The cost of goods available for sale.
Requirement 1.
Explanation of Solution
Determine cost of goods available for sale.
Date | Particulars | Units ($) | Unit cost ($) | Total cost ($) |
(a) | (b) | (c = a × b) | ||
a. | Beginning inventory | 300 | 12 | 3,600 |
b. | Purchased | 900 | 10 | 9,000 |
c. | Purchased | 800 | 13 | 10,400 |
Total | 2,000 | $23,000 |
Table (1)
Therefore, the cost of goods sold available for sale for 2,000 units of inventory is $23,000.
Requirement 2.
To Calculate: The number of units in ending inventory.
Requirement 2.
Explanation of Solution
Number of units in ending inventory:
Therefore, the number of units in ending inventory is 1,100units.
Requirement 3.(a)
To Calculate: The cost ending inventory and the cost of goods sold under FIFO.
Requirement 3.(a)
Explanation of Solution
In First-in-First-Out method, the cost of initial purchased items is sold first. The value of the ending inventory consists the recent purchased items.
Calculate ending inventory and cost of goods sold under FIFO method.
Determine the amount of cost of goods sold.
Date | Particulars | Units | Unit cost ($) | Total cost ($) |
(a) | (b) | (c = a × b) | ||
a. | Beginning inventory | 300 | 12 | 3,600 |
b. | Purchased | 600 | 10 | 6,000 |
Cost of goods sold | 900 | $9,600 |
Table (2)
Determine ending inventory under FIFO method.
Date | Particulars | Units | Unit cost ($) | Total cost ($) |
(a) | (b) | (c = a × b) | ||
b. | Purchased | 300 | 10 | 3,000 |
c. | Purchased | 800 | 13 | 10,400 |
Ending inventory | 1,100 | $13,400 |
Table (3)
Hence, the cost of goods sold under FIFO is $9,600 and the value of ending inventory is $13,400.
Requirement 3.(b)
To Calculate: The cost ending inventory and the cost of goods sold under LIFO.
Requirement 3.(b)
Explanation of Solution
In Last-in-First-Out method, the cost of last purchased items is sold first. The value of the closing stock consists the initial purchased items.
Determine the amount of cost of goods sold.
Date | Particulars | Units | Unit cost ($) | Total cost ($) |
(a) | (b) | (c = a × b) | ||
c. | Purchased | 800 | 13 | 10,400 |
b. | Purchased | 100 | 10 | 1,000 |
Cost of goods sold | 900 | $11,400 |
Table (4)
Determine ending inventory under LIFO method.
Date | Particulars | Units | Unit cost ($) | Total cost ($) |
(a) | (b) | (c = a × b) | ||
a. | Beginning inventory | 300 | 12 | 3,600 |
b. | Purchased | 800 | 10 | 8,000 |
Ending inventory | 1,100 | $11,600 |
Table (5)
Hence, the cost of goods sold under LIFO is $11,400 and the value of ending inventory is $11,600.
Requirement 3.(c)
The ending inventory and the cost of goods sold under average-cost method.
Requirement 3.(c)
Explanation of Solution
In Average Cost Method the cost of inventory is priced at the average rate of the goods available for sale. Following is the mathematical representation:
Determine cost of ending inventory under average-cost method.
Date | Particulars | Units | Unit cost ($) | Total cost ($) |
(a) | (b) | (c = a × b) | ||
a. | Beginning inventory | 300 | 12 | 3,600 |
b. | Purchased | 900 | 10 | 9,000 |
c. | Purchased | 800 | 13 | 10,400 |
Cost of goods available for sale | 2,000 | 23,000 | ||
Less: Ending inventory | 1,100 | 11.5 | 12,650 | |
Cost of goods sold | $10,350 |
Table (6)
Determine cost of goods sold under average cost method.
Working note:
Determine weighted average unit cost.
Hence, the cost of goods sold under weighted average cost method is $10,350 and the value of ending inventory is $12,650.
Requirement 4.
To Prepare: An income statement.
Requirement 4.
Explanation of Solution
Particulars | FIFO | LIFO | Weighted Average |
Sales Revenue | 36,000 | 36,000 | 36,000 |
Cost of Goods Sold | 9,600 | 11,400 | 10,350 |
Gross Profit | 26,400 | 24,600 | 25,650 |
Operating Expenses | 19,500 | 19,500 | 19,500 |
Income from Operations | $6,900 | $5,100 | $6,150 |
Table (7)
Working Note:
Calculate the amount of sales revenue:
Therefore, the income from operation for FIFO is $6,900, LIFO is $5,100 and weighted average method is $6,150.
Requirement 5.
To Compare: The income from operations and ending inventory amount reported in three methods.
Requirement 5.
Explanation of Solution
Comparison of Amounts | |||
Particulars | FIFO | LIFO | Weighted Average |
Income from Operations | 6,900 | 5,100 | 6,150 |
Ending Inventory | 13,400 | 11,600 | 12,650 |
Table (8)
To Explain: The similarities and differences.
Explanation of Solution
- From the above table, it clearly shows the income from operation under three methods.
- The differences in inventory have a dollar–for–dollar effect on Income from operations.
- The method with the highest ending inventory always has the highest Income from operations.
- In most cases, the weighted average method falls between the FIFO and LIFO methods.
Requirement 6.
Themethod of inventory costing minimizes income taxes.
Requirement 6.
Explanation of Solution
- By comparing the three inventory method, it is found that the use of LIFO method will minimizes the income taxes because it reports less taxable income as a result of using higher unit costs (in this case) to calculate cost of goods sold.
- A higher Cost of Goods Sold means less Income from Operations. Therefore it reduce tax amount.
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Chapter 7 Solutions
Fundamentals Of Financial Accounting
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