Question

Aranas Manufacturing, a tool retailer, began year 20x7 with 21,500 units of product in its January 1 inventory, at a cost of $12.50 for each unit. It made successive purchases of its product in year 20x7, as follows. The company uses a periodic inventory system. On December 31, 20x7, a physical count reveals that 35,000 units of its product remain in inventory.

Mar. 7	25,000 units	@ $16 each
May 25	41,500 units	@ $19 each
Aug. 1	22,750 units	@ $23 each
Nov. 10	38,100 units	@ $24 each

Instructions

Using the template provided below.

1. Compute the number and total cost of the units available for sale in year 20x7.
2. Compute the amounts assigned to the 20x7 ending inventory, and the cost of goods sold for FIFO, LIFO, and weighted average.
3. The 113,850 units sold are $31 each. Prepare comparative income statements for the three inventory costing methods of FIFO, LIFO, and weighted average, which include a detailed cost of goods sold section as part of each statement. (Round your average cost per unit to 2 decimal places.)
4. As the chief accountant of Aranas Company, provide recommendations, giving all reasons based on your research on retail industry inventory best practices, management on:
   1. Which inventory method (FIFO, LIFO, average cost, or specific identification) you should use.
   2. Whether it is a good idea to keep using the periodic system as opposed to the perpetual inventory system.

Answer 1

FIFO
	RECEIPTS			ISSUES			BALANCE (AVAILABLE FOR SALE)
Date	Qty	Rate	Amount	Qty	Rate	Amount	Qty	Rate	Amount
01/01/19							21500	12.50	268750
07/03/19	25000	16	400000
25/05/19	41500	19	788500
01/08/19	22750	23	523250
10/11/19	38100	24	914400
				21500	12.50	268750
				25000	16	400000
				41500	19	788500
				22750	23	523250
				3100	24	74400
							35000	24	840000
Total				113850		2054900	35000	24	840000
LIFO
	RECEIPTS			ISSUES			BALANCE (AVAILABLE FOR SALE)
Date	Qty	Rate	Amount	Qty	Rate	Amount	Qty	Rate	Amount
01/01/19							21500	12.5	268750
07/03/19	25000	16	400000
25/05/19	41500	19	788500
01/08/19	22750	23	523250
10/11/19	38100	24	914400
				11500	16	184000
				41500	19	788500
				22750	23	523250
				38100	24	914400
							13500	16	216000
							21500	12.50	268750
Total				113850		2410150	35000		484750
WAM
	RECEIPTS			ISSUES			BALANCE (AVAILABLE FOR SALE)
Date	Qty	Rate	Amount	Qty	Rate	Amount	Qty	Rate	Amount
01/01/19							21500	12.50	268750
07/03/19	25000	16	400000				46500	14.38	668750
25/05/19	41500	19	788500				88000	16.56	1457250
01/08/19	22750	23	523250				110750	17.88	1980500
10/11/19	38100	24	914400				148850	19.45	2894900
				113850	19.45	2214205
Total				113850		2214205	35000	19.45	680695

The average cost method may be applied during periods of price fluctuations and it is better method where numerous production process are involved in manufacturing companies.

The method which is most suitable, is the one which should be applied consistently year after year.