Question

PROBLEM 2: 20 POINTS Irish Company uses the periodie inventory method and had the folowing inventory information available: Unit Cos $5 Total Cost $ 500 Units 1/1 Beginning Inventory Purchase 100 1/20 7/25 400 2,400 1,400 Purchase Purchase 200 10/20 300 2,400 $6.200 1.000 A physical count of inventory on December 31 revealed that there were 480 units on hand Instructions Answer the tollowing independent questions and ahow computations supporting your answers 1. Assume that the company uses the FIFO method. The value of the anding inventory at December 31 is 5 2. Assume that the company uses the Average-Cost method. The value of the ending inventory on December 31 is $ Assume that the company uses the LIFO method The value of the ending inventory on December 31 is $ 3. Determine the difference in the amouunt of income that the company would have reported if it had used the FIFO method instead of the LIFO method. Would income have been greater or less? 4.

Answer 1

Periodic Method FIFO Method: Requirement 1 Date Activity 01-Jan Beginning Inventory 20-Jan purchase 25-Jul purchase 20-Oct purchase No of units Unit cost Total Cost 100 $ 5.00 $ 500.00 400 $ 6.00 $ 2,400.00 200 $ 7.00 $ 1,400.00 300 $ 8.00 $ 2,400.00 Purchases Less : Sales Ending Inventory Units 1000 520 480 Cost of goods available for sale $ 6,700.00 Ending Inventory 480 units : 180 units @ $7 300 units @ $8 $ $ 1,260 2,400 Cost of Ending Inventory $ 3,660 Note : FIFO Method assumes that goods which are purchased first will be sold first SO. Ending inventory consists of units which are purchased last

Periodic Method Average Cost Method : Requirement 2 Date Activity 01-Jan Beginning Inventory 20-Jan purchase 25-Jul purchase 20-Oct purchase No of units Unit cost Total Cost 100 $ 5.00 $ 500.00 400 $ 6.00 $ 2,400.00 200 $ 7.00 $ 1,400.00 300 $ 8.00 $ 2,400.00 Purchases Less : Sales Ending Inventory Units 1000 520 480 $ 6,700.00 Cost of goods available for sale Average Cost per Unit = $6000/1000 $ 6.700000 Ending Inventory 480 units : 480 Units @ $6.7 $ 3,216 Cost of Ending Inventory $ 3,216 Note : Avg cost method assumes that goods are sold at avg cost per unit Therefore, Ending inventory will also be valued at avg cost per unit Periodic Method LIFO Method: Requirement 3 Date Activity 01-Jan Beginning Inventory 20-Jan purchase 25-Jul purchase 20-Oct purchase No of units Unit cost Total Cost 100 $ 5.00 $ 500.00 400 $ 6.00 $ 2,400.00 200 $ 7.00 $ 1,400.00 300 $ 8.00 $ 2,400.00 Purchases Less : Sales Ending Inventory Units 1000 520 480 Cost of goods available for sale $ 6,700.00 Ending Inventory 480 units : 100 units @ $5 380 units @ $6 $ 500 2,280 Cost of Ending Inventory 2,780 Note : LIFO Method assumes that goods which are purchased last will be sold first SO. Ending inventory consists of units which are purchased first

Requirement 4 FIFO Working Note Computation of cost of goods sold Cost of goods available for sale Less : Ending inventory Cost of goods sold LIFO 6,700.00 $ 6,700.00 -3660.00 $ (2,780) 3,040.00 $ 3,920.00 Since cost of goods sold is high in LIFO when compared to FIFO, profit is much lower when LIFO is used Solution if company used FIFO method instead of lifo method net income would be greater Difference (3920-3040) = $880 More