Question

Beginning Inventory First Purchase Second Purchase Total Available Ending Inventory $ 10.00 $ 1.250.00 $ 1200 $ 1,200.00 S 15.00 $3,750.00 55) Calculate the inventory turnover ratio using the LIFO method. A) 1.56 B) 2.03 C) 1.51 D) 1.22

Answer 1

Option (B) is correct

Under LIFO (Last in first out), units that were purchased last or most recent purchases will be sold first.First we will total sales units and cost of goods sold as per below.

Total sales (units) = Total available inventory - Ending inventory

Total sales = 475 - 225 = 250 units

These 250 units are sold from the most recent purchases of second purchase @ $15. So,

Cost of goods sold = 250 * $15 = $3750

Next we will calculate ending inventory as per below:

Ending inventory comprises 225 units. These 225 units are from first purchase and beginning inventory, as second purchase have already been sold out.

So, value of ending inventory is:

From beginning inventory = $1250

From first purchase = $1200

Ending inventory = $1250 + $1200 = $2450

Next, we will calculate average inventory as below:

where, Average inventory = Beginning inventory + Ending inventory / 2

Ending inventory = $2450, Beginning inventory = $1250

Average inventory = ($1250 + $2459) / 2 = $3700 / 2 = $1850

Now, we will calculate inventory turnover ratio as pwer below:

Inventory turnover ratio = Cost of goods sold / Average inventory

Putting the values in the above formula, we get,

Inventory turnover ratio = $3750 / $1850 = 2.03