Question

XYZ uses a periodic inventory system for its main operations (i.e., relates to item a above). The company has been using FIFO method. Upper management is contemplating a change in the method used to report the cost of goods sold. Please help the management to choose the method (either FIFO or DVLIFO) that maximizes earnings to shareholders. A physical inventory count indicated 40,000 units on hand at the end of 2019.

For price index of a year, you can take the most recent per unit price of the year divided by the base year per unit purchase price. Please make sure that you show your calculation of COGS and ending inventory under both FIFO and DVLIFO and explain the reason(s) for the method chosen.

Inventory information 2019 Units Unit Price Beg 25,000 500 Purchases: apr-may 40,000 500 Jun-Jd 35,000 505 Ang-Sept 49,000 515 Oct 24,000 520 Nov-Dec 30,000 545 Total purchase 178,000 Total 213,000 End In units 40,000

    

Unadjusted Trial Balances at the end of 2019

                                                         Debit                Credit

Inventory

12,500,000

Answer 1

Since, the prices are showing increasing trend, the FIFO method will provide higher profits, due to more amount taken in ending inventory that leads to lower Cost of goods sold. Demostration Using FIFO Purchase on Nov-Dec Oct Ending Inventory Units 30000 $ 10000 $ 40000 Price 545 520 $ $ $ Amount 1,63,50,000 52,00,000 2,15,50,000 Price 500 Cost of Goods sold Beginning Inventory (+) Purchases (-) Ending Inventory Cost of Goods sold Units 25000 $ 178000 -40000 163000 $ $ $ Amount 1,25,00,000 9,17,40,000 -2,15,50,000 8,26,90,000 Using LIFO Purchase on Beg Inventory Apr-May Ending Inventory Units 25000 $ 15000 $ 40000 Price 500 500 $ $ $ Amount 1,25,00,000 75,00,000 2,00,00,000 Price 500 Cost of Goods sold Beginning Inventory (+) Purchases (-) Ending Inventory Cost of Goods sold Units 25000 $ 178000 -40000 163000 $ $ $ $ Amount 1,25,00,000 9,17,40,000 -2,00,00,000 8,42,40,000 Conclusion The current inventory valuation method, i.e., FIFO, will provide higher profits due to lower cost of goods sold and higher ending inventory.