Question

The following information was available from the inventory record of Rich COmpany for January:

ble from the inventory records of Rich Company for January Unit Cost Total Cost Units Hance at January 1 3,000 $9.77 Purchases: $29,310 January 6 2,000 10.30 20,600 January 26 2,700 10.71 28,917 Sales: January 7 (2,500) January 31 (3,700) nce at January 31 1,500

A. assuming that rich mainains periodic inventory records, what should be the inventory at Jan 31, using the fifo, lifo, and average cost inventory method, rounded to the nearest dollar.

B. assuming that rich maintains perpetual inventory records, what should be the inventory at Jan 31, using the fifo, lifo, and average cost inventory method, rounded to the nearest dollar? (avg cost method not required for perpetual inventory)

*the cut off words are Balance

Answer 1

1)

Periodic Inventory System

In periodic inventory system the updates are made on periodic basis in regular intervals i.e for a month etc.

Example:

Suppose a company has a begining inventory of 500 units and it purchased inventory during the month on 7th day - 1000 units, 13th day - 500 units and 3rd day - 600 units and sold goods on 5th day - 300 units, 11th - 1200 units and 27th day - 700 units. Then the company will show closing stock on 30th day of the month as (500 + 1000 + 500 + 600) - ( 300 + 1200 +700) = 400 units. It will not update its inventory in real-time as and when any transaction takes place.

Computation of Inventory under FIFO, LIFO, WEIGHTED AVERAGE

FIFO

In FIFO the sale is first exhausted from the units which are purchased earlier. The value of inventory under fifo will be:

Description	Units
Total sales:
Sale on 7th jan	2500
Sale on 31st jan	3700
Total Sales in units	6200
Less: Begining Inventory	3000
Balance	3200
Less: Purchase on jan 6th Jan	2000
Balance	1200
Less: Purchase on 26th jan	2700
Closing Balance on 31st Jan	1500 units
Purchase price per unit of inventory on 26th jan	$ 10.71
Value of Inventory on 31st jan	$ 16065

LIFO

In LIFO the sales is first exhausted from the the units which purchased last and so on. The value of inventory under periodic method will be:

Description	Units
Total Sales:
Sale on 7th jan	2500
Sale on 31st jan	3700
Total Sales	6200
Less: Purchase on 26th jan	2700
Balance	3500
Less: Purchase on 6th jan	2000
Balance	1500
Less: Begining inventory	3000
Closing balance of inventory in units	1500
Value per unit of Begining stock	$ 9.77
Value of Closing Inventory on 31st jan	$ 14655

Weighted Average Method

In periodic method the weighted average per unit cost will be =

Total Purchase price including begining inventory / Total Purchased units including begining inventory

So, the per unit cost of Inventory will be -

(3000 X 9.77) + ( 2000 X 10.30) + ( 2700 X 10.71) / (3000 + 2000 + 2700) units

= $ 10.24 per unit

Number of units in closing stock = (3000 + 2000 + 2700) - ( 2500 + 3700) = 1500 Units

So, the value of Closing Inventory = (1500 units X $ 10.24 per unit) = $ 15360

2)

Perpetual Inventory System

Under Perpetual Inventory system the inventory is updated as and when any purchase or sales takes place. It is a Real time process. The Point of Sales machines are used to update inventory under perpetual system.

Computation of Inventory under FIFO, LIFO, WEIGHTED AVERAGE METHOD

FIFO

Date	Purchase	Sales	Balance
Units	Cost	Amount	Units	Cost	Amount	Units	Cost	Amount
1st jan							3000	9.77	29310
6th jan	2000	10.30	20600				3000 2000	9.77 10.30	29310 20600
7th jan				2500	9.77	24425	500 2000	9.77 10.30	4885 20600
26th jan	2700	10.71	28917				500 2000 2700	9.77 10.30 10.71	4885 20600 28917
31st jan				500 2000 1200	9.77 10.30 10.71	4885 20600 28917	1500	10.71	16065

LIFO

Date	Purchase	Sales	Balance
	Unit	Cost	mount	Unit	Cost	Amount	Unit	Cost	Amount
1st jan							3000	9.77	29310
6th jan	2000	10.30	20600				3000 2000	9.77 10.30	29310 20600
7th jan				2000 500	10.30 9.77	20600 4885	2500	9.77	24425
26th jan	2700	10.71	28917				2500 2700	9.77 10.71	24425 28917
31st jan				2700 1000	10.71 9.77	28917 9770	1500	9.77	14655

Weighted Average Method

Date	Puirchase	Sales	Balance
	Unit	Cost	Amount	Unit	Cost	Amount	Unit	Cost	Amount
1st jan							3000	9.77	29310
6th jan	2000	10.30	20600				5000	9.98	49910
7th jan				2500	9.98	24950	2500	9.98	24960
26th jan	2700	10.71	28917				5200	10.36	53877
31st jan				3700	10.36	38332	1500	10.36	15545

Note

Rate on 6th jan = (29310+20600) / (3000 + 2000) = $ 9.98 per unit

Rate on 26th jan = (24960+28917) / ( 2500+2700) = $10.36 per unit