Question

E7-7 Analyzing and Interpreting the Financial Statement Effects of FIFO, LIFO. and Weighted Average Cost Scoresby Inc. tracks the number of units purchased and sold throughout each year but annlies inventory costing method at the end of the year, as if it uses a periodic inventory system. Assum its accounting records provided the following information at the end of the annual accountine period, December 31. LO 7-3 Transactions Units Unit Cost 3,000 $ 8 a. Inventory, Beginning For the year: b. Purchase, March 5 c. Purchase, September 19 d. Sale, April 15 (sold for $29 per unit) e. Sale, October 31 (sold for $31 per unit) f. Operating expenses (excluding income tax expense), $250,000 9,500 5,000 4,000 8,000 11

Answer 1

1.

	no. of units	unit cost(in $)	total cost(in $)
OPENING INVENTORY	3000	8	24000
Add :purchases	9500	9	85500
Add :purchases	5000	11	55000
cost of goods sold available for sale	17500	28	164500

2.

particulars	no. of units
opening inventory	3000
Add :purchases	9500
Add :purchases	5000
Less: Sales	4000
Less: Sales	8000
no. of units in ending inventory	5500

3.

cost under FIFO	no. of units	unit cost(in $)	total cost(in $)	working
opening inventory	3000	8	24000
Add :purchases	9500	9	85500
Less: Sales(A)	8000		69000	(3000*8+5000*9)
stock left	4500	9	40500
Add :purchases	5000	11	55000
Less: Sales(B)	8000		79000	(4500*9+3500*11)
closing inventory	1500	11	16500
cost of goods sold			148000	(A+B)
cost under LIFO	no. of units	unit cost(in $)	total cost(in $)	working
opening inventory	3000	8	24000
Add :purchases	9500	9	85500
Less: Sales(A)	8000	9	72000	(8000*9)
stock left	1500	9	13500
stock left	3000	8	24000
Add :purchases	5000	11	55000
Less: Sales(B)	5000	11	55000	(5000*11)
	1500	9	13500	(1500*9)
	1500	8	12000	(1500*8)
closing inventory	1500	8	12000
cost of goods sold			152500	(A+B)
cost under Weighted average	no. of units	unit cost(in $)	total cost(in $)	working
opening inventory	3000	8	24000
Add :purchases	9500	9	85500
total	12500		109500
weighted average		8.76		(109500/12500)
Less: Sales(A)	8000	8.76	70080	(8000*8.76)
stock left	4500	8.76	39420
Add :purchases	5000	11	55000
total	9500		94420
weighted average		9.94		(94420/9500)
Less: Sales(B)	8000	9.94	79520	(8000*9.94)
closing inventory	1500	9.94	14910
cost of goods sold			149600	(A+B)

4.

Income statement
		FIFO(in $)	LIFO(in $)	Weighted Average(in $)
	Sales	116000	116000	116000
add		248000	248000	248000
	total sales	364000	364000	364000
less	cost of goods sold	148000	152500	149600
	gross profit	216000	211500	214400
less	operating expenses	250000	250000	250000
	income from operation	-34000	-38500	-35600

5.

As we can see that there is loss in all the cases (i.e FIFO , LIFO & Weighted average) however, in case of LIFo method we can see that there is highest loss , also in case of FIFO method there is lowest loss, therefore it is advisable that FIFO method should be used. Also , operating expenses should be reduced in order to achieve the profit , As we have gross profit.

6.

In the above case , LIFO method will minimize our income tax cost