Question

E7-7 Analyzing and Interpreting the Financial Statement Effects of FIFO, LIFO, and Weighted Average Cost (LO 7-3] Scoresby Inc. tracks the number of units purchased and sold throughout each year but applies its inventory costing method at the end of the year, as if it uses a periodic inventory system. Assume its accounting records provided the following information at the end of the annual accounting period, December 31. Units 4,000 Unit Cost $20 Transactions a. Inventory, Beginning For the year: b. Purchase, March 5 c. Purchase, September 19 d. Sale, April 15 (sold for $65 per unit) e. Sale, October 31 (sold for $68 per unit) f. Operating expenses (excluding income tax expense), $610,000 10,000 6,000 4,400 9,000 21 23 Required: 1. Calculate the number and cost of goods available for sale. 2. Calculate the number of units in ending inventory. 3. Compute the cost of ending inventory and cost of goods sold under (a) FIFO, (b) LIFO, and (c) weighted average cost. 4. Prepare an income statement that shows the FIFO method, LIFO method and weighted average method. 6. Which inventory costing method minimizes income taxes?

Answer 1

Date		Units	Unit cost	Total cost
	Inventory, beginning	4000	$20	$80000
Mar 5	Purchase	10000	$21	210000
Sep 19	Purchase	6000	$23	138000
	Total	20000		$428000

1) Number of goods available for sale= 20000 units

Cost of goods available for sale= $428000

2) Sales units= 4400+9000= 13400 units

Ending inventory units= Number of goods available for sale-Sales units

= 20000-13400= 6600 units

3) FIFO

Cost of goods sold= (4000*$20+9400*$21)= $277400

Ending inventory= (600*$21+6000*$23)= $150600

LIFO

Cost of goods sold= (6000*$23+7400*$21)= $293400

Ending inventory= (2600*$21+4000*$20)= $134600

Weighted-Average method

Average cost per unit= Cost of goods available for sale/ Number of goods available for sale

= $428000/20000

= $21.40

Cost of goods sold= (13400*$21.40)= $286760

Ending inventory= (6600*$21.40)= $141240

4) Total sales= (4400*$65+9000*$68)= $898000

	FIFO	LIFO	Weighted Average
Sales	$898000	$898000	$898000
Less: Cost of goods sold	(277400)	(293400)	(286760)
Gross profit	620600	604600	611240
Less: Operating expenses	(610000)	(610000)	(610000)
Income before tax	$10600	$(5400)	$1240

5) LIFO inventory costing method minimizes income taxes as the income before tax of the LIFO method is negative that means under LIFO method company is suffering from loss.