Concept introduction:
Requirement-a:
To discuss: The cost flow from inventory to cost of goods sold for the FIFO method.
Explanation of Solution
The FIFO (first in first out) method assumes that the inventory purchased first is sold first. In other words, this method assumes that the inventories are sold in the same sequence as their sequence of purchase. The inventory purchases are recorded date wise and when goods are sold, the cost of goods sold is calculated by taking the cost of the oldest inventory purchase.
Concept introduction:
Inventory valuation is done using several methods. These methods are FIFO (first in first out) method, LIFO (last in first out) method, weighted average, and specific identification method. Each method has its assumption and the valuation of the inventory and cost of goods sold are done using that assumption.
Requirement-b:
To discuss: The cost flow from inventory to cost of goods sold for the LIFO method.
Explanation of Solution
The LIFO (last in first out) method assumes that the latest inventory purchased is sold first. In other words, this method assumes that the inventories are sold in the opposite sequence of their sequence of purchase. The inventory purchases are recorded date wise and when goods are sold, the cost of goods sold is calculated by taking the cost of the latest inventory purchase.
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Chapter 5 Solutions
Financial Accounting: Information for Decisions
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- Missing Amounts in Cost of Goods Sold Model For each of the following independent cases, fill in the missing amounts.arrow_forwardWhy do companies adopt the LIFO method of inventory costing? Your discussion should include the effects on the income statement and balance sheet.arrow_forwardWhen inventory items are highly specialized, the best inventory costing method is ________. A. specific identification B. first-in, first-out C. last-in, first-out D. weighted averagearrow_forward
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- From beginning to end, place these items in the order of the flow of goods. A. cost of goods sold B. raw materials inventory C. finished goods inventory D. work in process inventoryarrow_forwardIdentify items missing in determining cost of goods sold For (a) through (e), identify the items designated by X and Y. A. Purchases (X + Y) = Net purchases B. Net purchases + X = Cost of inventory purchased C. Inventory (beginning) + Cost of inventory purchased = X D. Inventory available for sale X = Cost of inventory before estimated returns E. Cost of goods sold before estimated returns X = Cost of goods soldarrow_forwardWhat are the components of cost of goods available for sale and cost of goods sold?arrow_forward
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