Question

Tamarisk, Inc. uses the periodic inventory system and had 150 units in beginning inventory at a total cost of $18,000. The company purchased 2 10 units at a total cost of $31,500. At the end of the year, Tamarisk had 70 units in ending inventory. Compute the cost of the ending inventory and the cost of goods sold under FIFO, LIFO, and average-cost. (Round average cost per unit and final answers to decimal places, s. 1,250) FIFO LIFO Average-cost The cost of the ending inventory S The cost of goods sold

Answer 1

Solution

Tamarisk Inc

1. Computation of the cost of the ending inventory and the cost of goods sold under the fifo, lifo and average cost methods:

Given data –

Beginning inventory – 150 units at total cost $18,000; so, each unit = 18,000/150 = $120

Purchases – 210 units at $31,500; each unit cost = 31,500/210 = $150

FIFO Method –

The FIFO method assumes that goods bought earlier are sold first. Hence, the ending inventory comprises goods from latest purchases and sales (cost of goods sold) comprises beginning inventory and earlier purchases.

Ending inventory 70 units would be valued at latest purchase price of $150 each.

Hence, ending inventory value = 70 x $150 = $10,500

Cost of goods sold –

Sales = (150 + 210) – 70 = 290 units

Of the 290 units sales, 150 units are from beginning inventory and the remaining are from the purchases.

Cost of goods sold = (150 x $120) + (140 x $150) = $39,000

LIFO Method –

LIFO method assumes that sales comprise latest purchases. Hence, ending inventory normally comprise beginning inventory and few earlier purchases.

Ending inventory, 70 units = 70 x $120 = $8,400

Sales 290 units –

210 units from latest purchases and remaining 80 units from beginning inventory.

Cost of goods sold = (210 x $150) + (80 x $120) = $41,100

Average cost method –

The ending inventory and cost of goods sold at an average price, which is computed by dividing total value of inventory with total available units.

Total cost of inventory = $18,000 + $31,500 = $49,500

Total units = 360

Average cost = $49,500/360 = $137.50 per unit

Ending inventory = 70 units x $137.50 = $9,625

Cost of goods sold, 290 units = 290 x $137.50 = $39,875

2. The cost flow method that would result in highest net income is FIFO.

Explanation:

The cost of goods sold under the FIFO method has the least value compared to the LIFO and average cost methods. Lower cost of goods sold indicates higher net income. Hence, FIFO results in highest net income.

3. The cost flow method that would result in inventories approximating current cost in the balance sheet is FIFO.

Explanation:

The ending inventory under the FIFO method comprises latest purchases and hence reflect current cost. Hence, balance sheet inventories approximate current cost under the FIFO method.

4. The cost flow method that would result in the company paying the least taxes in the first year:

Taxes are computed on net income, if the net income is higher taxes would be higher. Hence, the method that would result in lowest net income would result in least taxes for the company.

LIFO method results in highest cost of goods sold, which results in lowest net income. Consequently, the taxes on net income would be least.