Question

Orion Iron Corp. tracks the number of units purchased and sold throughout each year but applies its inventory costing method at the end of the year, 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 Unit Units Cost 200 $12 points 10 Transactions a. Inventory, Beginning For the year: b. Purchase, April 11 c. Purchase, June 1 d. Sale, May 1 (sold for $45 per unit) e. Sale, July 3 (sold for $45 per unit) f. Operating expenses (excluding income tax expense), $16,000 600 450 200 400 13 eBook Required: Hint Print 1. Calculate the number and cost of goods available for sale. 2. Calculate the number of units in ending inventory. 3. Compute the cost of ending inventory and cost of goods sold under (a) FIFO, (b) LIFO, and (c) weighted average cost. 4. Prepare an income statement that shows under the FIFO method, LIFO method and weighted average method. 6. Which inventory costing method minimizes income taxes? References

Answer 1

1 & 2.

Available for sale:
	Units
Opening inventory	200
Add: Purchases
April-11	600
June-1	450
Available for sale	1250
Less: Sales
May-1	-200
July-3	-400
Ending inventory	650

	Cost ($)	Calculation
Opening inventory	2400	200*12
Add: Purchases
April-11	6000	600*10
June-1	5850	450*13
Cost of goods sold	14250

3.

FIFO	Units	Unit Cost ($)	Cost ($)
Inventory of June-1	450	13	5850
Inventory of April-11	200	10	2000
Value under FIFO	650	12.08	7850
LIFO
Opening inventory	200	12	2400
Inventory of April-11	450	10	4500
Value under LIFO	650	10.62	6900

Weighted average cost

Weighted average cost of inventory = Cost of goods sold / Available for sale units = 14250/1250 = $11.4

Closing inventory = 650 * 11.4 = $7410

4.

Income statement
	FIFO	LIFO	Weighted average
Sales (600*$45)	27000	27000	27000
Less:
Opening Inventory (200*$12)	-2400	-2400	-2400
Purchases [(600*10+450*13)]	-11850	-11850	-11850
Operating expenses	-16000	-16000	-16000
Add: Closing inventory	7850	6900	7410
Gross Profit	4600	3650	4160

6. Reporting of higher expense results in lower taxable income and thus low tax liability. LIFO method results in minimizing income tax however, this method of accounting is not accepted by US GAAP.