Chapter 7, Problem 7.6E

Requirement 1.

To determine

The cost of goods available for sale.

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)

Conclusion

Therefore, the cost of goods sold available for sale for 2,000 units of inventory is $23,000.

Requirement 2.

To determine

To Calculate: The number of units in ending inventory.

Explanation of Solution

Number of units in ending inventory:

$\begin{array}{c}\begin{array}{l}\text{Number of units in}\\ \text{ending inventory}\end{array}\}=\left(\begin{array}{l}\text{Total units available for sale}\\ -\text{ Total units of sales}\end{array}\right)\\ =\left(2,000-900\right)\\ \text{=1,100 units}\end{array}$

Conclusion

Therefore, the number of units in ending inventory is 1,100units.

Requirement 3.(a)

To determine

To Calculate: The cost ending inventory and the cost of goods sold under FIFO.

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)

Conclusion

Hence, the cost of goods sold under FIFO is $9,600 and the value of ending inventory is $13,400.

Requirement 3.(b)

To determine

To Calculate: The cost ending inventory and the cost of goods sold under LIFO.

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)

Conclusion

Hence, the cost of goods sold under LIFO is $11,400 and the value of ending inventory is $11,600.

Requirement 3.(c)

To determine

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

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:

$\text{Weighted-average Cost}=\frac{\text{Total Cost of Goods Available For Sale}}{\text{Total Number of Units Available For Sale}}$

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.

$\begin{array}{c}\text{Cost of goods sold = }\left(\begin{array}{l}\text{Number of units sold}\times \\ \text{Weighted average unit cost}\end{array}\right)\\ =\left(900\times \$11.5\right)\\ =\$10,350\end{array}$

Working note:

Determine weighted average unit cost.

$\begin{array}{c}\begin{array}{c}\text{Weighted}\\ \text{average}\text{unit}\text{cost}\end{array}\}=\frac{\left(\begin{array}{l}\text{Cost}\text{of}\text{goods}\\ \text{available}\text{for}\text{sale}\end{array}\right)}{\left(\begin{array}{l}\text{Total}\text{units}\\ \text{available}\text{for}\text{sales}\end{array}\right)}\\ =\frac{\$23,000}{2,000}\\ =\$11.5\text{per unit}\end{array}$

Conclusion

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 determine

To Prepare: An income statement.

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:

$\begin{array}{c}\text{Sales revenue}=\left[\begin{array}{l}\left(\begin{array}{l}\text{Number of units sold on May 1 }\\ \times \text{Sales per unit }\end{array}\right)\\ \text{+}\left(\begin{array}{l}\text{ Number of units sold on July 3 }\\ \times \text{Sales per unit }\end{array}\right)\end{array}\right]\\ =\left[\begin{array}{l}\left(\text{300}\times \$40\right)\\ \text{+}\left(\text{600}\times \$40\right)\end{array}\right]\\ =\left[\$12,000\text{ +\$24,000}\right]\\ =\$36,000\end{array}$

Conclusion

Therefore, the income from operation for FIFO is $6,900, LIFO is $5,100 and weighted average method is $6,150.

Requirement 5.

To determine

To Compare: The income from operations and ending inventory amount reported in three methods.

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 determine

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.

To determine

Themethod of inventory costing minimizes income taxes.

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.