Homework Answers
Solution:
LO3
- Correct answer is LIFO Method
Reason: This method affects on the value of closing stock. LIFO stands for (Last in First Out) which means that inventory purchased at last should be sold out first.
In the given case Inventory cost is rising by the passage of time, which means inventory purchased earlier should be cheaper than the inventory purchased at last. So if we use this method, value of closing inventory is lowest because inventory purchased at earlier date (Cheaper Inventory) is remained at the end.
Closing Inventory is inversely related with Cost of goods sold (COGS). Therefore, the value of COGS is highest while using this method.
- Correct answer is LIFO Method
Reason: This method affects on the value of closing stock. LIFO stands for (Last in First Out) which means that inventory purchased at last should be sold out first.
In the given case Inventory cost is rising by the passage of time, which means inventory purchased earlier should be cheaper than the inventory purchased at last. So if we use this method, value of closing inventory is lowest because inventory purchased at earlier date (Cheaper Inventory) is remained at the end.
Closing Inventory is directly related with Net Income. Therefore, Net Income is also lowest while using this method.
LO6
- Formulas for Inventory Turnover and Day’s Sales Inventory
- Inventory Turnover = Cost of Goods Sold / Average Inventory
- Day’s Sales Inventory = (Average Inventory / Cost of Goods Sold) * 365 days
- Calculation of Inventory Turnover and Day’s Sales Inventory
- Inventory Turnover = Cost of Goods Sold / Average Inventory
= $11,000 / 3,500
= 3.1428 times
- Day’s Sales Inventory = (Average Inventory / Cost of Goods Sold) * 365 days
= ($3,500 / 11,000) * 365 days
= 116 Days
Workings:
Average Inventory = (Beginning Inventory + Ending Inventory) / 2
= ($4,000 + 3,000) / 2
= $3,500
Add Answer to:
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