Chapter 6, Problem 4AP

a.

To determine

Ascertain the cost of goods sold and the ending inventory cost at December 31, 2012 under first-in first out method.

Explanation of Solution

Periodic inventory system: The method or system of recording the transactions related to inventory occasionally or periodically are referred to as periodic inventory system.

First-in-First-Out (FIFO): In this method, items purchased initially are sold first. So, the value of the ending inventory consist the recent cost for the remaining unsold items.

Ascertain the cost of goods sold and the ending inventory cost for the month of April under first-in first out method as follows:

Ending inventory:

Calculation of Cost of Ending Inventory
Details	Number of Units	Rate per Unit ($)	Total Cost ($)
December 30 (Refer Table 2)	1,200	29	34,800
August 9 (Refer Table 2)	800	26	20,800
Ending Inventory	2,000		55,600

Table (1)

Therefore, the ending inventory of Company A under first-in first out method is $55,600.

Calculate the Cost of Goods Sold:

Here,

Goods available for sale is $115,200 (Refer Table 2)

Ending inventory is $55,600 (Refer Table 1)

$\begin{array}{c}\text{Cost of goods sold = Goods available for sale }-\text{ Ending inventory}\\ \text{=}\text{\$115,200 }-\$55,600\\ =\$59,600\end{array}$

Therefore, the cost of goods sold of Company A under first-in first out under method is $59,600.

Working note:

Calculate the total cost and goods available for sales

Calculation of Goods Available for Sales
Details	Number of Units	Rate per Unit ($)	Total Cost ($)
Beginning balance	1,000	20	20,000
Add: Purchases
April 6	1,800	22	39,600
August 9	800	26	20,800
December 30	1,200	29	34,800
Total Goods available for Sale	4,800		115,200
Less: Sales:
February 2	400
July 10	1,600
October 23	800
Ending Inventory	2,000

Table (2)

b.

To determine

Ascertain the cost of goods sold and the ending inventory cost at December 31, 2012 under last-in first out method.

Explanation of Solution

Last-in-First-Out (LIFO): In this method, items purchased recently are sold first. So, the value of the ending inventory consist the initial cost for the remaining unsold items.

Ascertain the cost of goods sold and the ending inventory cost for the month of April under last-in first out method as follows:

Ending inventory:

Calculation of Cost of Ending Inventory
Details	Number of Units	Rate per Unit ($)	Total Cost ($)
Beginning Balance (Refer Table 2)	1,000	20	20,000
April 6 (Refer Table 2)	1,000	22	22,000
Ending Inventory	2,000		42,000

Table (3)

Therefore, the ending inventory of Company A under last-in first out method is $42,000.

Calculate the Cost of Goods Sold:

Here,

Goods available for sale is $115,200 (Refer Table 2)

Ending inventory is $42,000 (Refer Table 3)

$\begin{array}{c}\text{Cost of goods sold}=\text{Goods available for sale }-\text{ Ending inventory}\\ =\$115,200-\$42,000\\ =\$73,200\end{array}$

Therefore, the cost of goods sold of Company A under first-in first out under method is $73,200.

c.

To determine

Ascertain the cost of goods sold and the ending inventory cost for the month of April under weighted average cost method.

Explanation of Solution

Weighted-average Cost Method:  In this method, the inventories are priced at the average rate of goods available for sales.

Ascertain the cost of goods sold and the ending inventory cost for the month of April under weighted average cost method as follows:

Ending inventory:

Here,

Weighted- average cost per unit is $24 (1)

Number of units in ending inventory is 2,000 units (Refer Table 2)

$\begin{array}{c}\text{Cost of Ending inventory = }\left(\begin{array}{l}\text{Number of units in Ending inventory }\\ \times \text{ Weighted-average cost per unit}\end{array}\right)\\ =2,000\text{ units }\times \text{ \$24}\\ \text{=}\text{\$48,000}\end{array}$

Therefore, the ending inventory of Company A under weighed average cost method is $48,000.

Calculate the Cost of Goods Sold:

Goods available for sale is $115,200 (Refer Table 1)

Ending inventory is $48,000

$\begin{array}{c}\text{Cost of goods sold = Goods available for sale }-\text{ Ending inventory}\\ \text{=}\text{\$115,200 }-\$48,000\\ =\$67,200\end{array}$

Therefore, the cost of goods sold of Company A under weighed average cost method is $67,200.

Working note:

Calculate weighted average cost per unit

Here,

Total cost of goods available for sale is $115,200 (Refer Table 2)

Total units of goods available for sale is 4,800 units (Refer Table 2)

$\begin{array}{c}\begin{array}{l}\text{Weighted-average}\\ \text{ Cost}\end{array}\}=\frac{\text{Total Cost of Goods Available For Sale}}{\text{Total number of units Available for Sale}}\\ =\frac{\$115,200}{\text{4,800 Units}}\\ =\$24\end{array}$ (1)

d.

To determine

Identify the inventory cost method that is more appropriate if Company A produces perishable items.

Explanation of Solution

Identify the inventory cost method that is more appropriate if Company A produces perishable items as follows:

1. Reflect the likely goods flow through the business:

If the goods flow is to be reflected through the business, use FIFO method because the perishable goods should be used before they time-out, expire, or become old (editions)

2. Minimize income tax for the period:

If the income tax is to be minimized, use LIFO method because cost of goods sold is higher and eventually lower net income resulting in a lower income tax, hence, tax savings are possible.

3.  Report the largest amount of net income for the period:

If the company wants to report higher net income, FIFO method should be used because high price products are used earlier under the FIFO method. The low price or older price results in the low cost of goods sold. Low cost of goods sold results in high net income.