Question

E8.9 (L03) (FIFO and Average-Cost Determination) LoBianco Company's record of transactions for the month of April was as follows. Purchases Sales April 1 (balance on hand) 600 @ $6.00 April 3 500 @ $10.00 1,500 @ 6.08 9 1,300 @ 10.00 800 @ 6.40 11 600 @ 11.00 1,200 @ 6.50 23 1,200 @ 11.00 700 @ 6.60 27 900 @ 12.00 500 @ 6.79 4,500 5,300 Instructions (Round unit price averages to four decimal places.) a. Assuming that periodic inventory records are kept, compute the inventory at April 30 using (1) FIFO and (2) average-cost. b. Assuming that perpetual inventory records are kept in both units and dollars, determine the inventory at April 30 using (1) FIFO and (2) average-cost. c. In an inflationary period, which inventory method-FIFO or average-cost-will show the highest net income?

Answer 1

a)

i) Valuation under FIFO:

	Purchases			Sales			Balance
Date	Quantity	Rate Per Unit	Total	Quantity	Rate Per Unit	Total	Quantity	Rate Per Unit	Total
April       1	Balance						600	$6.00	$3,600
3				500	$6.00	$3,000	100	$6.00	$600
4	1500	$6.80	$10,200				100	$6.00	$600
							1500	$6.80	$10,200
8	800	$6.40	$5,120				100	$6.00	$600
							1500	$6.80	$10,200
							800	$6.40	$5,120
9				100	$6.00	$600	300	$6.80	$2,040
				1200			800	$6.40	$5,120
11				300	$6.80	$2,040	500	$6.40	$3,200
				300	$6.40	$1,920
13	1200	$6.50	$7,800				500	$6.40	$3,200
							1200	$6.50	$7,800
21	700	$6.60	$4,620				500	$6.40	$3,200
							1200	$6.50	$7,800
							700	$6.60	$4,620
23				500	$6.40	$3,200	500	$6.50	$3,250
				700	$6.50	$4,550	700	$6.60	$4,620
27				500	$6.50	$3,250	300	$6.60	$1,980
				400	$6.60	$2,640
29	500	$6.79	$3,395				300	$6.60	$1,980
							500	$6.79	$3,395
Total Inventory Value									$5,375

ii) Average Cost Method:

	Purchases			Sales			Balance
Date	Quantity	Rate Per Unit	Total	Quantity	Rate Per Unit	Total	Quantity	Rate Per Unit	Total
April       1	Balance						600	$6.00	$3,600
3				500	$6.00	$3,000	100	$6.00	$600
4	1500	$6.80	$10,200				1600	$6.75	$10,800
8	800	$6.40	$5,120				2400	$6.63	$15,920
9				1300	$6.63	$8,619	1100	$6.63	$7,293
11				600	$6.63	$3,978	500	$6.63	$3,315
13	1200	$6.50	$7,800				1700	$6.54	$11,115
21	700	$6.60	$4,620				2400	$6.56	$15,735
23				1200	6.54	$7,848	1200	$6.56	$7,872
27				900	6.56	$5,904	300	$6.56	$1,968
29	500	$6.79	$3,395				800	$6.70	$5,363

In an inflationary environment, the cost of goods includes the less expensive items while ending inventory includes the more expensive items. This means that the net income and ending inventory amounts are higher under the FIFO method. However, in a deflationary environment, the FIFO method is likely to generate lower net income.