Question

Gladstone Company tracks the number of units purchased and sold throughout each accounting period but applies its inventory costing method at the end of each period, 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 Unit Cost 1,800 $ 50 Transactions Beginning inventory, January 1 Transactions during the year: a. Purchase, January 30 6. Sale, March 14 ($100 each) c. Purchase, May 1 d Sale, August 31 ($100 each) 62 2,500 (1, 450) 1, 200 (1,900) 80 Assuming that for Specific identification method (item 1d) the March 14 sale was selected two-fifths from the beginning inventory and three-fifths from the purchase of January 30. Assume that the sale of August 31 was selected from the remainder of the beginning inventory, with the balance from the purchase of May 1. Required: 1. Compute the amount of goods available for sale, ending inventory, and cost of goods sold at December 31 under each of the following inventory costing methods: Amount of Goods Ending Inventory Available for Sale cost of Goods Sold a. Last-in, first-out b. Weighted average cost C. First-in, first-out d. Specific identification

Answer 1

1) First-in, first out will result in the highest gross profit. (As its cost of goods sold is the least among 4 methods) Answer: Amount of Cost of Goods Ending Goods Available for Inventory Sold Sale a. Last-in, first-out $341,000 $111,700 $229,300 b. Weighted average cost $341,000 $133,300 $207,700 c. First-in, first-out $341,000 $154,900 $186,100 d. Specific identification $341,000 $142,660 $198,340 Last-in, first-out will result in the lowest income taxes. (As its cost of goods sold is the highest among 4 methods, its gross profit will be the least and so income taxes will also be the least) Workings: FIFO stands for First In First Out which means that cost of goods sold must consider cost of those goods earlier. As a result, ending inventory will contain cost of recent purchases. LIFO stands for Last In First Out which means that cost of goods sold must consider cost of those goods recently. As a result, ending inventory will contain cost of initial purchases or beginning inventory. Under weighted average inventory method, total value of purchases shall be divided by total number of units purchased to calculated unit cost. Cost of ending inventory shall be calculated by multiplying number of units on hand by unit cost calculated. Under specific identification method, cost of ending inventory shall be calculated by multiplying number of goods available on hand from each transaction by respective transactions purchase price per unit.

Under LIFO: NOTE: (a) Units 1,800 (b) Rate $50 (a) x (b) Amount $90,000 Ending inventory of 2150 units shall consist of 1800 units from beginning bal. & remaining 350 units from Jan. 30's purchase. Therefore, $62 Beg. Bal. Jan. 30 2,500 1,200 5,500 Beg. Bal. Purchases: Jan. 30 May. 1 Available for sale Sales: Mar. 14 Aug. 1 Ending inventory units $155,000 $96,000 $341,000 Ending inventory from Ending inventory from Cost of Ending inventory Available for sale Cost of Goods Sold $90,000 [1800 units x $50] $21,700 [350 units x $62] $111,700 $341,000 [Ref: NOTE] $229,300 [$341000 - $111700] -1,450 -1,900 $100 $100 $145,000 $190,000 $335,000 --> Total sale value 2,150 Under Average Cost Method: Ending inventory of 2150 units shall consist of 2150 units from entire lot. Under Specific Identification Method: Mar. 14 Aug. 1 Available for sale - Dollar value Available for sale - Units Weighted Average cost per unit # of units in ending inventory Cost of Ending inventory Available for sale Cost of Goods Sold $341,000 (Ref: NOTE] 5,500 (Ref: NOTE] $62.00 [$341000 / 5500 units] 2,150 [Ref: NOTE] $133,300 [2150 units x $62] $341,000 [Ref: NOTE] $207,700 [$341000 - $133300] Cost of goods sold for Cost of goods sold for Cost of Goods Sold Available for sale Cost of Ending inventory $82,940 [(1450 x 2/5 x $50) + (1450 x 3/5 x $62)] $115,400 [(1800 - (1450 x 2/5)) < $50) + (1900 - (1800 - (1450 x 2/5))) $80] $198,340 $341,000 [Ref: NOTE] $142,660 ($341000 - $198340]

Under FIFO: Ending inventory of 2150 units shall consist of 1200 units from May. 1's purchase and balance 950 units from Jan. 30's purchase. Therefore, Jan. 30 May. 1 Ending inventory from Ending inventory from Cost of Ending inventory Available for sale Cost of Goods Sold $58,900 [950 units x $62] $96,000 [1200 units x $80] $154,900 $341,000 [Ref: Workings] $186,100 ($341000 - $154900]