Financial and Managerial Accounting
Financial and Managerial Accounting
7th Edition
ISBN: 9781259726705
Author: John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting Principles
Publisher: McGraw-Hill Education
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Chapter 5, Problem 1PSB
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.

Perpetual Inventory System

In perpetual inventory system there is a continuous recording of transactions as and when they take place that is purchase and sale transactions are recorded whenever they occur.

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.

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.

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.

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.

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 following methods:

    (a) FIFO
    (b)LIFO
    (c) Weighted average
    (d) Specific identification
4. Gross profit for each of the four methods in part

Given info,

Date Particulars Units acquired Cost per unit ($) Units sold Retail price per unit ($)
Apr 1 Beginning inventory 20 3,000
Apr 6 Purchase 30 3,500
Apr 9 Sales 35 12,000
Apr 17 Purchase 5 4,500
Apr 25 Purchase 10 4,800
Apr 30 Sales 25 14,000
Total 65 60

The ending inventory consists of 5 units from April 17.

Expert Solution & Answer
Check Mark

Explanation of Solution

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:

Particulars Number of units Cost per unit ($) Amount ($) ( ( Numberofunits )×( Costperunit ) )
Beginning Inventory ( A ) 20 3000 60,000
Purchases:
April 6 30 3,500 105,000
April 17 5 4,500 22,500
April 25 10 4,800 48,000
Total Purchases ( B ) 45 175,500
Available for sale ( A+B ) 65 235,500
Table (1)
The cost of goods available for sale is $235,500 and the number of units available for sale is 740 units.

(2)

Number of units in ending inventory

Particulars Number of units
Number of units available for sale (given) 65
Less: units sold (given) 60
Number of units in ending inventory 5
Table (2)

The number of units in ending inventory is 5 units.

3.

(a)

First in, First out method (FIFO)

Ending inventory

Financial and Managerial Accounting, Chapter 5, Problem 1PSB , additional homework tip  1

Date Purchases Cost of goods sold Ending inventory
Quantities (units) Unit cost ($) Total cost ($) Quantities (units) Unit cost ($) Total cost ($) Quantities (units) Unit cost ($) Balance ($)
Apr 1. 20 3,000 60,000
Apr 6 30 3,500 105,000 20 30 } 3,000 3,500 } 60,000 105,000 } =165,000
Apr 9 20 15 } 3,000 3,500 } 60,000 52,500 } =112,500 15 3,500 52,500
Apr 17 5 4,500 22,500 15 5 } 3,500 4,500 } 52,500 22,500 } =75,000
Apr 25 10 4,800 48,000 15 5 10 } 3,500 4,500 4,800 } 52,500 22,500 48,000 } =123,000
Apr 30 15 5 5 } 3,500 4,500 4,800 } 52,500 22,500 24,000 } =99,000 5 4,800 24,000
Table (4)

Cost of goods sold

Formula to calculate cost of goods sold is,

    Costofgoodssold=CostofgoodsavailableforsaleCostofendinginventory

Substitute $235,500for cost of goods available for sale (calculated in part (1)) and $24,000 for cost of ending inventory (as calculated above in the table) in the above formula.

    Costofgoodssold=$235,500$24,000 =$211,500

Under FIFO method, the amount of ending inventory is $24,000 and cost of goods sold is $211,500.

(b)

Last in, first out method (LIFO)

Ending inventory

Financial and Managerial Accounting, Chapter 5, Problem 1PSB , additional homework tip  2

Date Purchases Cost of goods sold Ending inventory
Quantities (units) Unit cost ($) Total cost ($) Quantities (units) Unit cost ($) Total cost ($) Quantities (units) Unit cost ($) Balance ($)
Apr 1. 20 3,000 60,000
Apr 6 30 3,500 105,000 20 30 } 3,000 3,500 } 60,000 105,000 } =165,000
Apr 9 30 5 } 3,500 3,000 } 105,000 15,000 } =120,000 15 3,000 45,000
Apr 17 5 4,500 22,500 15 5 } 3,000 4,500 } 45,000 22,500 } =67,500
Apr 25 10 4,800 48,000 15 5 10 } 3,000 4,500 4,800 } 45,000 22,500 48,000 } =115,500
Apr 30 10 5 10 } 4,800 4,500 3,000 } 48,000 22,500 30,000 } =100,500 5 3,000 15,000
Table (6)

Cost of goods sold

Formula to calculate cost of goods sold is,

    Costofgoodssold=CostofgoodsavailableforsaleCostofendinginventory

Substitute $235,500for cost of goods available for sale (calculated in part (1)) and $15,000 for cost of ending inventory (as calculated above in the table) in the above formula.

    Costofgoodssold=$235,500$15,000 =$220,500

Under LIFO method, the amount of ending inventory is $15,000 and cost of goods sold is $220,500.

(c)

Weighted Average Method

Ending inventory

Financial and Managerial Accounting, Chapter 5, Problem 1PSB , additional homework tip  3

Date Purchases Cost of goods sold Ending inventory
Quantities (units) Unit cost ($) Total cost ($) Quantities (units) Unit cost ($) Total cost ($) Quantities (units) Unit cost ($) Balance ($)
Apr 1. 20 3,000 60,000
Apr 6 30 3,500 105,000 50 3,300 165,000
Apr 9 35 3,300 115,500 15 3,300 49,500
Apr 17 5 4,500 22,500 20 3,600 72,000
Apr 25 10 4,800 48,000 30 4,000 120,000
Apr 30 25 4,000 100,000 5 4,000 20,000
Table (8)

Working Notes:

Calculation of weighted average cost per unit:

    WeightedAverageCostperunit= Costofgoodsavailableforsale Numberofunitsavailable
    Weightedaveragecostperunit(asonApril6)=( $3,000×20+$3,500×30 20units+30units ) =( $165,000 50 ) =$3,300perunit
    Weightedaveragecostperunit(asonApril17)=( $3,300×15+$4,500×5 15units+5units ) =( $72,000 20 ) =$3,600perunit
    Weightedaveragecostperunit(asonApril25)=( $3,600×20+$4,800×10 20units+10units ) =( $120,000 30 ) =$4,000perunit

Cost of goods sold

Formula to calculate cost of goods sold is,

    Costofgoodssold=CostofgoodsavailableforsaleCostofendinginventory

Substitute $235,500for cost of goods available for sale (calculated in part (1)) and $20,000 for cost of ending inventory (as calculated above in the table) in the above formula.

    Costofgoodssold=$235,500$20,000 =$215,500

Under weighted average method, the amount of ending inventory is $20,000 and cost of goods sold is $215,500.

(d)

Specific identification method

Given info,
The ending inventory consists of 5 units from April 17.

Cost of Ending Inventory

Date of Purchase Number of units (A) Cost per unit ($) (B) Amount ($) ( ( A )×( B ) )
April 17 5 4,500 22,500
Cost of Ending Inventory 22,500
Table (9)

Cost of goods sold

Formula to calculate cost of goods sold is,

    Costofgoodssold=CostofgoodsavailableforsaleCostofendinginventory

Substitute $235,500for cost of goods available for sale (calculated in part (1)) and $22,500 for cost of ending inventory (calculated above in the table) in the above formula.

    Costofgoodssold=$235,500$22,500 =$213,000

The cost of ending inventory is $22,500 and the cost of goods sold is $213,000.

4.
Sales are $770,000 (working notes).
Cost of goods sold in case of FIFO is $211,500. (Calculated in part (3(a))
Cost of goods sold in case LIFO is $220,500.(Calculated in part (3(b))
Cost of goods sold in case of weighted average is $215,500 and (Calculated in part (3(c))
Cost of goods sold in case of specific identification is 213,000.(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) $770,000 $$770,000 $770,000 $770,000
Less: Cost of goods sold $211,500 $220,500 $215,500 $213,000
Gross profit $558,500 $549,500 $554,500 $557,000
Table (10)

Working notes:

Calculation of sales

    SalesasonApril9=Numberofunitssold×costperunit =35×$12,000 =$420,000
    SalesasonApril30=Numberofunitssold×costperunit =25×$14,000 =$350,000
    Sales=SalesasonApril9+SalesasonApril30 =$420,000+$350,000 =$770,000

The gross profit in case of FIFO it is $558,500, of LIFO it is $549,500, of weighted average it is $554,500 and of specific identification it is $557,000.

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Chapter 5 Solutions

Financial and Managerial Accounting

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 - Prob. 20QSCh. 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 - Problem 5-8BA Periodic: Income comparisons and...Ch. 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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