Question

pplying and Analyzing Inventory Costing Methods
At the beginning of the current period, Chen carried 1,000 units of its product with a unit cost of $15. A summary of purchases during the current period follows. During the period, Chen sold 2,800 units.

	Units	Unit Cost	Cost
Beginning Inventory	1,000	$ 15	$ 15,000
Purchase #1	1,800	14	25,200
Purchase #2	800	16	12,800
Purchase #3	1,200	19	22,800

(a) Assume that Chen uses the first-in, first-out method. Compute both cost of good sold for the current period and the ending inventory balance. Use the financial statement effects template to record cost of goods sold for the period.
Ending inventory balance $Answer
Cost of goods sold              $Answer

Use negative signs with answers, when appropriate.

	Balance Sheet
Transaction	Cash Asset	+	Noncash Assets	=	Liabilities	+	Contributed Capital	+	Earned Capital
Record FIFO cost of goods sold	Answer		Answer		Answer		Answer		Answer

Income Statement
Revenue	-	Expenses	=	Net Income
Answer		Answer		Answer

(b) Assume that Chen uses the last-in, first-out method. Compute both cost of good sold for the current period and the ending inventory balance.
Ending inventory balance $Answer
Cost of goods sold              $Answer

(c) Assume that Chen uses the average cost method. Compute both cost of good sold for the current period and the ending inventory balance. (Hint: Round average cost per unit two decimal places prior to calculating the Ending inventory balance. Calculate the Cost of Goods Sold (CGS) as: (CGS = Cost of goods available for sale - Ending inventory balance.)
Ending inventory balance $Answer
Cost of goods sold              $Answer

(d) Which of these three inventory costing methods would you choose to:

1. Reflect what is probably the physical flow of goods?	LIFO FIFO Average Cost
2. Minimize income taxes for the period?	LIFO FIFO Average Cost
3. Report the largest amount of income for the period?	LIFO FIFO Average Cost

Answer 1

Solution:

Let us first calculate the goods available for sale:

	Units	Unit Cost	Total units cost
Beginning inventory	1,000	$15	$15,000
Purchase #1	1,800	$14 per unit	$25,200
Purchase#2	800	$16 per unit	$12,800
Purchase#3	1,200	$19 per unit	$22,800
Units available for sale	4,800	$15.79 per unit (average cost)	$75,800
Units sold	(2,800)
Ending inventory	2,000

a.) FIFO method:

Available for sale	4,800 units	$75,800
Cost of goods sold	1000 units × $15 per unit + 1800 units × $14	$40,200 ($15,000 + $25,200)
Ending inventory	2,000 units	$35,600

Balance sheet

Transaction	Cash asset	+	Non cash asset	=	Liabilities	+	Contributed capital	+	Earned Capital
FIFO COGS			-$40,200

Income statement:

Revenue	-	Expenses	=	Net income
		$40,200

b.) LIFO method:

Available for sale	4,800 units	$75,800
Cost of goods sold	1200 units × $19 per unit + 800 units × $16 per unit+ 800 units ×$14 per unit	$46,800 ($22,800 + 12,800 + $11,200)
Ending inventory	2,000 units	$29,000

c.)

Weighted average method:

Cost per unit = Total sales / Total units

= $75,800 / 4,800 units

=$15.79

Available goods for sale	4,800 units	$75,800
Cost of goods sold	2,800 units × $15.79 per unit	$44,212
Ending inventory	2,000 units	$31,588

d.) These three inventory costing methods would we choose to:

1.Reflect what is probably the physical flow of goods	FIFO	Because most entities try to get rid of the oldest stock first to avoid obsolescence.
2.Minimize income tax for the period	LIFO	Because, it yields the highest cost of goods sold expenses.
3.Report the largest amount of income for the period	FIFO	Because, it yields the lowest cost of goods sold expenses.