Question
Analyzing the Effects of four Alternative Inventory Methods company use a periodic inventory system. At the end of the annual accounting period. December 31, 2011. the accounting records for the most popular item in inventory showed the following: Required: Compute the cost of (a) goods available for sale. (b) ending inventory, and (c) goods sold at December 31 2011, under each of the following inventory costing methods (show computations and round to the nearest dollar) : Average cost (round average cost per cost). First-in, first-out . Last-in , first-out. Specific identification, assuming that the first was selected two-fifths from the beginning inventory and three-fifths from the purchase of February 20, 2011. Assume that the second sale was selected from the remainder of the beginning inventory , with the balance from the purchase of June 30, 2011. Evaluating Four Alternative Inventory Methods Based on Income and Cash Flow
Explanation / Answer
Calculation of cost of good avaliable for sale: The cost of beginning Inventory is = Units*Unit cost = 390*$32 (1)Under Average-cost method Beginning Inventory Jan 1, 2011 $12,480 Plus: Purchases a. Purchase, Feb 20 $23,800 b.Purchase, Jun 30 $17,020 Total $53,300 Goods avaliable for sale is $53,300. Average Unit cost = Goods avaliable for sale/Units avaliable for sale Units avaliable for sale is 390+700+460 = 1,550 Average unit cost = $53,330/1,550 =$34.4 Ending inventory: 700 units @ $34.4 = $24,080 Cost of goods sold = Cost of goods avaliable for sale - Ending Inventory = $53,300 - $24,080 = $29,220 (2) Under First-In, First-Out(FIFO): 460
units@$37 from purchase june 30 $ 17,020 240
units@$34 from purchase Feb 20 $8,160 700 units at a cost of $25,180 Cost of goods sold = Cost of goods avaliable for sale - Ending Inventory = $53,330 - $25,180 = $28,120 (3) Last-In, Last-Out: 390 units @ $32 from Jan 1, Inventory = $12,480 310 units @ $34 from Feb 20, = $10,540 700 units at a cost of = $23,020 Cost of goods sold = Cost of goods avaliable for sale - Ending Inventory =$53,330 - $23,020 =$30,280 (4) Specific Identification: 300 units @ $32 = $9,600 300 units @ $34 =$10,200 100 units @ $37 =$3,700 700 units at a cost of = $23,500 Cost of goods sold = Cost of goods avaliable for sale - Ending Inventory = $53,330 - $23,500 =$29,800 Cost of goods sold = Cost of goods avaliable for sale - Ending Inventory = $53,330 - $23,500 =$29,800 Beginning Inventory Jan 1, 2011 $12,480 Plus: Purchases a. Purchase, Feb 20 $23,800 b.Purchase, Jun 30 $17,020 Total $53,300