Financial and Managerial Accounting (Looseleaf) (Custom Package)
Financial and Managerial Accounting (Looseleaf) (Custom Package)
6th Edition
ISBN: 9781259754883
Author: Wild
Publisher: MCG
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Chapter 5, Problem 4PSA
To determine

Inventory:

Inventory refers to the stock or goods which will be sold in the near future and thus is an asset for the company. It comprises of the raw materials which are yet to be processed, the stock which is still going through the process of production and it also includes completed products that are ready for sale. Thus inventory is the biggest and the important source of income and profit for the business.

Periodic inventory system: In periodic inventory system the changes in the stock items are reported periodically unlike recording as and when purchases or sales take place.

Cost of goods available for sale: It basically includes the cost of inventory which is ready for sale within an accounting period. It mainly includes the cost of beginning inventory as well as the stock purchased in that year and the production within that period (if any).

Cost of goods Sold: Cost of goods sold is the total expenses or the cost incurred by the business during the process of manufacturing of goods and is directly related to the production. It generally includes the cost of raw material, labor and other manufacturing support costs.

Gross Profit: The profit made after subtracting or debiting the costs related to the goods sold from the total revenue earned or made through sales in a fiscal year is the gross profit.

Specific identification method: Under this method, there is a continuous tracking of the inventory and the inventory cost at the time of purchase on the basis of unique identity which thus helps in the valuation of the ending inventory as well as the cost of goods sold. This method is used generally when the company is involved in limited expensive goods which are easily identifiable.

Weighted average cost method: In this method the weighted average cost is evaluated after any purchases have been made and transactions are recorded as when purchase or sales take place.

First in first out: In case of First in, first out method, also known as FIFO method, the inventory which was bought first will also be the first one to be taken out.

Last in first out: In case of Last in, first out, also known as LIFO method, the inventory which was bought in the last will be taken out first.

To compute: 1. Cost of goods available for sale and number of units available for sale.
2. Number of units in ending inventory.
3. Cost of ending inventory under the methods mentoned below:
(a) FIFO
(b) LIFO
(c) Weighted average
(d) Specific identification
4. Gross profit for each of the four methods in part 3.
5. The inventory costing method suitable incase of bonus earned on gross profit.

Expert Solution & Answer
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Answer to Problem 4PSA

Solution:

Given info,
Units available for sale are 1,800 units.
Units of goods sold are 1,400 units.

1.

Cost of goods available for sale

Formula to calculate Cost of goods available for sale is,

    Costofgoodsavailableforsale=BeginninginventoryPurchases

Cost and units of goods available for sale:

Explanation of Solution

  • As per gross profit approach the FIFO method is the best to earn more profits or bonus.
  • The bonus will be more on the highest gross profit made by the company and herein it is the FIFO method which resulted in the highest gross profit.
Conclusion
    Particulars Number of units Cost per unit ($) Amount ($) ((Numberofunits)×(Costperunit))
    Beginning Inventory (A) 600 45 27,000
    Purchases:
    Feb 10 400 42 16,800
    March 13 200 27 5,400
    August 21 100 50 5,000
    September 5 500 46 23,000
    Total Purchases (B) 1,200 50,200
    Available for sale (A+B) 1,800 77,200

The cost of goods available for sale is $77,200 and the number of units available for sale is 1,800 units.

2.

Number of units in ending inventory

    Particulars Number of units
    Number of units available for sale (given) 1,800
    Less: units sold (given) 1,400
    Number of units in ending inventory 400


The number of units in ending inventory is 400 units.

3.

(a)

First in First out method (FIFO)

Cost of ending inventory

    Particulars Amount ($)
    Most recent cost; September 5:
    400 units @ $46 per unit 18,400
    Total cost of the ending inventory 18,400

Cost of goods sold

Formula to calculate cost of goods sold is,

    Costofgoodssold=CostofgoodsavailableforsaleCostofendinginventory

Substitute $77,200 for cost of goods available for sale (calculated in (1) part) and $18,400 for cost of ending inventory (as calculated above in the table) in the above formula.

    Costofgoodssold=$77,200$18,400=$58,800

(b)

Last in First out method (LIFO)

Cost of ending inventory

    Particulars Amount ($)
    Earliest cost; Jan 1:
    400 units @ $45 per unit 18,000
    Total cost of the ending inventory 18,000

Cost of goods sold

Formula to calculate cost of goods sold is,

    Costofgoodssold=CostofgoodsavailableforsaleCostofendinginventory

Substitute $77,200 for cost of goods available for sale (calculated in (1) part) and $18,000 for cost of ending inventory (as calculated above in the table) in the above formula.

    Costofgoodssold=$77,200$18,000=$59,200

(c)

Weighted average method

Cost of ending inventory

Formula to calculate cost of ending inventory is,

    Costofendinginventory=(Unitsinendinginventory×weightedaveragecostperunit)

Substitute 400 units for units in ending inventory (calculated in the (2) part) and $42.89 for weighted average cost per unit (working notes).in the above formula.

    Costofendinginventory=400×$42.89=$17,156

Cost of goods sold

Formula to calculate cost of goods sold is,

    Costofgoodssold=CostofgoodsavailableforsaleCostofendinginventory

Substitute $77,200 for cost of goods available for sale (calculated in the (1) part) and $17,156 for cost of ending inventory (as calculated above) in the above formula.

    Costofgoodssold=$77,200$17,156=$60,044

Working Notes:

Calculation of weighted average cost per unit:

    WeightedaverageCostperunit=CostofgoodsavailableforsaleNumberofunitsavailableWeightedaveragecostperunit=$77,2001,800=$42.89perunit

(d)

Specific identification method

Given info,
The ending inventory has,
100 units are from Feb 10,
50 units are from August 21 and
250 units are from September 5.

Cost of Ending Inventory

    Date of Purchase Number of units (A) Cost per unit ($) (B) Amount ($) ((A)×(B))
    Feb 10 100 42 4,200
    August 21 50 50 2,500
    September 5 250 46 11,500
    Cost of Ending Inventory 18,200

Cost of goods sold

Formula to calculate cost of goods sold is,

    Costofgoodssold=CostofgoodsavailableforsaleCostofendinginventory

Substitute $77,200 for cost of goods available for sale (calculated in part (1)) and $18,200 for cost of ending inventory (calculated above in the table) in the above formula.

    Costofgoodssold=$77,200$18,200=$59,000

Under FIFO method, the cost of ending inventory is $18,400 and the cost of goods sold is $58,800.
Under LIFO method, the cost of ending inventory is $18,000 and the cost of goods sold is $59,200.
Under weighted average method, the cost of ending inventory is $17,156 and the cost of goods sold is $60,044.
Under specific identification, the cost of ending inventory is $18,200 and the cost of goods sold is $59,000.

4.

Sales are $50,900 (working notes).
Cost of goods sold in case of FIFO is $31,800. (Calculated in part (3(a))
Cost of goods sold in case LIFO is $33,400. (Calculated in part (3(b))
Cost of goods sold in case of weighted average is $32,960 and (Calculated in part (3(c))
Cost of goods sold in case of specific identification is 32,540. (Calculated in part (3(d))

Gross Profit

Formula to calculate gross profit is,

    GrossProfit=SalesCostofgoodssold
    Particulars FIFO LIFO Weighted average Specific identification
    Sales(working notes) $105,000 $105,000 $105,000 $105,000
    Less: Cost of goods sold $58,800 $59,200 $60,044 $59,000
    Gross profit $46,200 $45,800 $44,956 $46,000

Working notes:

Calculation of sales

    SalesasonMarch15=Numberofunitssold×costperunit=800×$75=$60,000
    SalesasonSeptember5=Numberofunitssold×costperunit=600×$75=$45,000
    Sales=Salesasonmarch15+Salesasonseptember5=$60,000+$45,000=$105,000

The gross profit in case of FIFO it is $46,200, of LIFO it is $45,800, of weighted average it is $44,956 and of specific identification it is $46,000.

5.

FIFO inventory method resulted in highest gross profit that is $46,200 as compared to other four methods.

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Chapter 5 Solutions

Financial and Managerial Accounting (Looseleaf) (Custom Package)

Ch. 5 - Prob. 5DQCh. 5 - Prob. 6DQCh. 5 - Prob. 7DQCh. 5 - Prob. 8DQCh. 5 - Prob. 9DQCh. 5 - Prob. 10DQCh. 5 - Prob. 11DQCh. 5 - What factors contribute to (or cause) inventory...Ch. 5 - Prob. 13DQCh. 5 - Prob. 14DQCh. 5 - Prob. 15DQCh. 5 - Prob. 16DQCh. 5 - Prob. 17DQCh. 5 - Prob. 1QSCh. 5 - Prob. 2QSCh. 5 - Prob. 3QSCh. 5 - Perpetual: Inventory costing with FIFO P1 A...Ch. 5 - Prob. 5QSCh. 5 - Prob. 6QSCh. 5 - Prob. 7QSCh. 5 - Prob. 8QSCh. 5 - A Periodic: Inventory costing with weighted...Ch. 5 - Prob. 10QSCh. 5 - Prob. 11QSCh. 5 - Perpetual: Inventory costing with weighted average...Ch. 5 - Prob. 13QSCh. 5 - Prob. 14QSCh. 5 - Prob. 15QSCh. 5 - Prob. 16QSCh. 5 - Prob. 17QSCh. 5 - Prob. 18QSCh. 5 - Prob. 19QSCh. 5 - QS 5-20 Inventory errors A2 In taking a...Ch. 5 - Prob. 21QSCh. 5 - Prob. 22QSCh. 5 - Prob. 23QSCh. 5 - Prob. 1ECh. 5 - Prob. 2ECh. 5 - Exercise 5-3 Perpetual: Inventory costing methods...Ch. 5 - Prob. 4ECh. 5 - Prob. 5ECh. 5 - Prob. 6ECh. 5 - Prob. 7ECh. 5 - Prob. 8ECh. 5 - Prob. 9ECh. 5 - Prob. 10ECh. 5 - Prob. 11ECh. 5 - Prob. 12ECh. 5 - Prob. 13ECh. 5 - Prob. 14ECh. 5 - Prob. 15ECh. 5 - Prob. 16ECh. 5 - Prob. 17ECh. 5 - Prob. 18ECh. 5 - Prob. 1PSACh. 5 - Prob. 2PSACh. 5 - Prob. 3PSACh. 5 - Problem 5-4AA Periodic: Alternative cost flows...Ch. 5 - Prob. 5PSACh. 5 - Prob. 6PSACh. 5 - Prob. 7PSACh. 5 - Prob. 8PSACh. 5 - Prob. 9PSACh. 5 - Prob. 10PSACh. 5 - Prob. 1PSBCh. 5 - Prob. 2PSBCh. 5 - Prob. 3PSBCh. 5 - Prob. 4PSBCh. 5 - Prob. 5PSBCh. 5 - Prob. 6PSBCh. 5 - Prob. 7PSBCh. 5 - Prob. 8PSBCh. 5 - Prob. 9PSBCh. 5 - Prob. 10PSBCh. 5 - Prob. 5SPCh. 5 - Prob. 1BTNCh. 5 - Prob. 2BTNCh. 5 - Prob. 3BTNCh. 5 - Prob. 4BTNCh. 5 - Prob. 5BTNCh. 5 - Prob. 6BTNCh. 5 - Prob. 7BTNCh. 5 - Prob. 8BTNCh. 5 - Prob. 9BTN
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