Question

A company that uses a perpetual inventory system made the following cash purchases and sales.  There was no beginning inventory.       

 

January 1:	Purchased 100   units at SAR10 per unit
February 5:	Purchased 60 units   at SAR 12 per unit
March 16:	Sold 40 Units for   SAR 16 per unit

 

1.      Explain the four inventory valuation methods.

2.      Prepare general journal entries to record the March 16 sale using the

                               I.             FIFO inventory valuation method.

                            II.            LIFO inventory valuation method.

Answer 1

1) The four inventory valuation methods are as follows:

a) Specific Identification Method: The specific identification method of inventory costing attaches the actual cost to an identifiable unit of product

b) FIFO Method: The FIFO (first-in, first-out) method of inventory costing assumes that the costs of the first goods purchased are those charged to the cost of goods sold when the company actually sells goods.

c) LIFO Method: The LIFO (last-in, first-out) method of inventory costing assumes that the costs of the most recent purchases are the first costs charged to the cost of goods sold when the company actually sells the goods.

d) Weighted Average Method: The weighted-average method of inventory costing is a means of costing ending inventory using a weighted-average unit cost.

2)	Journal Entries to Record sale on 16th Mar:

FIFO Inventory Valuation Method
Date	General Journal	Debit	Credit
Mar-16	Cash (40 units * SAR 16)	SAR 640
	Sales		SAR 640
Mar-16	Cost Of Goods Sold (40 Units * SAR 10)	SAR 400
	Inventory		SAR 400

LIFO Inventory Valuation Method
Date	General Journal	Debit	Credit
Mar-16	Cash (40 units * SAR 16)	SAR 640
	Sales		SAR 640
Mar-16	Cost Of Goods Sold (40 Units * SAR 12)	SAR 480
	Inventory		SAR 480