Question

1. Daniel Company uses a periodic inventory system. Data for the current year: beginning merchandise inventory (ending inventory December 31, prior year), 2,090 units at $36; purchases, 7,860 units at $38; expenses (excluding income taxes), $192,500; ending inventory per physical count at December 31, current year, 1,660 units; sales, 8,290 units; sales price per unit, $76; and average income tax rate, 32 percent.

How do you find the Average cost (inventory costing method):

Beginning Inventory

Purchases

Goods Available for sale

Ending Inventory

Cost of good sold

2. Pacific Company sells electronic test equipment that it acquires from a foreign source. During the year, the inventory records reflected the following:

	Units	Unit Cost				Total Cost
Beginning inventory	23		$	11,590			$	266,570
Purchases	42			10,090				423,780
Sales (49 units at $24,690 each)

Inventory is valued at cost using the LIFO inventory method.

The management, for various reasons, is considering buying 23 additional units before December 31 year-end at $9,590 each. Restate the income statement (and ending inventory), assuming that this purchase is made on December 31. Assume the LIFO method and the periodic inventory system are used by the company.

Pacific Company

Income Statement

What is the Sales revenue, cost of goods sold, gross profit, expenses is 298,000, and ending inventory?

Answer 1

1) Under average cost method, average cost is used for calculating cost of goods sold and ending inventory.

Calculation of Average Cost (Amounts in $)

	Units	Cost per unit	Total cost
Beginning inventory	2,090	$36	75,240
Purchases	7,860	$38	298,680
Total goods available for sale	9,950		373,920

Average cost per unit = Total cost of goods available/Total units available for sale

= $373,920/9,950 units = $37.5799 per unit

Ending inventory = Units in ending inventory*Average cost per unit

= 1,660 units*$37.5799 = $62,383

Cost of goods sold = Units sold*Average cost per unit

= 8,290 units*$37.5799 = 311,537

Therefore cost of ending inventory and cost of goods sold are $62,383 and $311,537 respectively.

2) Under LIFO costing method, the goods purchased last are sold first and ending inventory would be from goods purchased first (or beginning inventory as the case may be).

Total units available for sale = Beginning Inventory + Total purchases

= 23 units + (42+23 additional units)

= 88 units

Total units in ending inventory = Total units available for sale - Total units sold

= 88 units - 49 units = 39 units

The ending inventory of 39 units will include 23 units of beginning inventory and remaining 16 units from purchases at unit cost of $10,090.

Cost of ending inventory = (23 units*$11,590)+(16 units*$10,090)

= $266,570+$161,440 = $428,010

Cost of goods sold = [(42 units-16 units)*$10,090]+(23 additional units*$9,590)

= $262,340+$220,570 = $482,910

Pacific Company

Income Statement (Amounts in $)

Sales Revenue (49 units*$24,690)	1,209,810
Cost of goods sold	(482,910)
Gross Profit	726,900
Expenses	(298,000)
Net Income	428,900