Concept explainers
(1)
To calculate: The ending inventory and cost of goods sold using the specific identification method:
(1)
Explanation of Solution
Specific identification method: Specific identification method identifies the cost of each specific unit of inventory available for sale.
Calculate the units of ending inventory:
Calculation of Ending Inventory | |||
Details | Number of Units | Rate Per Unit ($) | Total Cost ($) |
Beginning balance | 8 | ||
Less: Sales - August 4 | (5) | ||
Balance | 3 | ||
Less: Sales - August 26 | (1) | ||
Balance | 2 | 160 | 320 |
Purchases: | |||
August 11 | 10 | ||
Less: Sales - August 13 | (8) | ||
Balance | 2 | 150 | 300 |
August 20 | 10 | ||
Less: Sales August 26 | (10) | ||
Balance | 0 | 140 | - |
August 29 | 11 | 130 | 1,430 |
Ending Inventory | 15 | 2,050 |
Table 1
Therefore, the cost of Ending Inventory in specific identification method is $2,050.
Calculate the cost of goods sold:
Calculation of Cost of Goods Sold | |||
Details | Number of Units | Rate Per Unit ($) | Total Cost ($) |
August 4: Beginning balance | 5 | 160 | 800 |
August 13: August11 Purchase | 8 | 150 | 1,200 |
August 26: | |||
Beginning Inventory | 1 | 160 | 160 |
August 20 Purchase | 10 | 140 | 1,400 |
Cost of Goods Sold | 24 | 3,560 |
Table 2
Therefore, the Cost of Goods Sold in specific identification method is $3,560.
(2)
To calculate: the Ending Inventory and Cost of Goods Sold using FIFO method.
(2)
Answer to Problem 6.2BP
Calculate the cost of ending inventory:
Calculation of Cost of Ending Inventory | |||
Details | Number of Units | Rate per Unit ($) | Total Cost ($) |
August 29 | 11 | 130 | 1,430 |
August 20 | 4 | 140 | 560 |
Ending Inventory | 15 | 1,990 |
Table 3
Therefore, the cost of Ending Inventory in the FIFO is $1,990.
Calculate the cost of goods sold:
Calculation of Cost of Goods Sold | |||
Details | Number of Units | Rate per Unit ($) | Total Cost ($) |
Beginning Inventory | 8 | 160 | 1,280 |
August 11 Purchase | 10 | 150 | 1,500 |
August 20 Purchase | 6 | 140 | 840 |
Cost of Goods Sold | 24 | 3,620 |
Table 4
Therefore, the cost of goods sold in the FIFO Method is $3,620.
Explanation of Solution
First-in-First-Out:
In First-in-First-Out method, the costs of the initially purchased items are considered as cost of goods sold, for the items which are sold first. The value of the ending inventory consists of the recent purchased items.
Working note:
Calculate the units of ending inventory.
Calculation of Ending Inventory (Units) | ||
Details | Number of Units | Number of Units |
Beginning balance | 8 | |
Add: Purchases | ||
August 11 | 10 | |
August 20 | 10 | |
August 29 | 11 | |
Total Goods available for Sale | 39 | |
Less: Sales | ||
August 4 | 5 | |
August 13 | 8 | |
August 26 | 11 | |
Total Sales | (24) | |
Ending Inventory | 15 |
Table 5
- The ending inventory is 15 units.
- In FIFO method the ending inventory comprises of the inventory purchased last, because the inventory purchased first were sold first.
- Therefore, the ending inventory of 15 units Comprises the following
-
- 1. 11 units from August 29th purchase at the rate of $130 per unit, and
- 2. The balance of 5 units from August 20th purchase at the rate of $10 per unit.
For Cost of Goods Sold:
- 24 units are sold.
- As it is FIFO method the earlier purchased items will sell first.
- Hence, the cost of goods sold will be the earlier purchased items and comprises the following:
- 8 units from beginning inventory at the rate of $160 per unit.
- 10 units from August 11th purchase at the rate of $150 per unit, and
- The rest 6 units from the August 20th purchase at the rate of $140 per unit.
(3)
To calculate: The Ending Inventory and Cost of Goods Sold using LIFO method.
(3)
Answer to Problem 6.2BP
Calculate the cost of ending inventory.
Calculation of Cost of Ending Inventory | |||
Details | Number of Units | Rate per Unit ($) | Total Cost ($) |
Beginning Inventory | 8 | 160 | 1,280 |
August 11 | 7 | 150 | 1,050 |
Ending Inventory | 15 | 2,330 |
Table 6
Therefore, the cost of Ending Inventory in the LIFO method is $2,330.
Calculate the cost of goods sold:
Calculation of Cost of Goods Sold | |||
Details | Number of Units | Rate per unit ($) | Total Cost ($) |
August 29 Purchase | 11 | 130 | 1,430 |
August 20 Purchase | 10 | 140 | 1,400 |
August 11 | 3 | 150 | 450 |
Cost of Goods Sold | 24 | 3,280 |
Table 7
Therefore, the Cost of Goods Sold in the LIFO Method is $3,280.
Explanation of Solution
Last-in-Last-Out:
In Last-in-First-Out method, the costs of last purchased items are considered as the cost of goods sold, for the items which are sold first. The value of the closing stock consists of the initial purchased items.
- The ending inventory is 15 units (Refer to Table 5).
- In LIFO method the ending inventory comprises of the inventory purchased first, because the inventory purchased last were sold first.
- Therefore, the ending inventory of 15 units comprises the following:
- 8 units from the beginning inventory at the rate of $150 per unit, and
- 7 units from August 11th purchase at the rate of $150 per unit.
(4)
To calculate: The Ending Inventory and Cost of Goods Sold using Weighted-average method:
(4)
Answer to Problem 6.2BP
Calculate the amount of Ending Inventory:
Therefore, the cost of Ending Inventory in the Weighted-average-cost Method is $2,157.69.
Calculate the Cost of Goods Sold:
Therefore, the Cost of goods sold in the Weighted-average-cost Method is $3,452.31.
Explanation of Solution
Weighted-average cost method:
Under Weighted average cost method, the company calculates a new average cost after every purchase is made. It is determined by dividing the cost of goods available for sale by the units on hand.
Working notes:
Calculate the Weighted-average cost.
Calculate the amount of goods available for sale:
Calculation of Goods Available for Sales | |||
Details | Number of Units | Rate per unit ($) | Total Cost ($) |
Beginning balance | 8 | 160 | 1,280 |
Add: Purchases | |||
August 11 | 10 | 150 | 1,500 |
August 20 | 10 | 140 | 1,400 |
August 29 | 11 | 130 | 1,430 |
Total Goods available for Sale | 39 | 5,610 |
Table 8
(5)
To calculate: the sales revenue and gross profit under the four methods.
(5)
Explanation of Solution
Gross profit method:
This method is use the estimated gross profit for the period to evaluate and ascertain the ending inventory for the period. The gross profit for the period is calculated from the preceding year, which is adjusted for any current period changes in the sales and cost price of the inventory.
The sales revenue and gross profit under the four methods is calculated as follows.
Sales: | Units | Rate Per Unit ($) | Total ($) | ($) | ($) | ($) | ($) |
August 4 | 5 | 225 | 1,125 | ||||
August 13 | 8 | 240 | 1,920 | ||||
August 26 | 11 | 250 | 2,750 | ||||
Total Sales Revenue | 5,795 | 5,795 | 5,795 | 5,795.00 | |||
Cost of Goods Sold | (3,560) | (3,620) | (3,280) | (3,452.31) | |||
Gross Profit | 2,235 | 2,175 | 2,515 | 2,342.69 |
Table 9
(6)
To compare: the ending inventory in FIFO and LIFO.
(6)
Answer to Problem 6.2BP
The ending inventory computed in the FIFO method provides more meaningful.
Explanation of Solution
This is because the ending inventory computed using the FIFO method is $1,990 and LIFO method is $2,330. The current cost of the ending inventory is
(7)
To record: The LIFO adjustment.
(7)
Answer to Problem 6.2BP
Date | Account Title and Explanation |
Post Ref. |
Debit ($) |
Credit ($) |
Inventory (Table 11) | 340 | |||
Cost of Goods Sold | 340 | |||
(To record the LIFO adjustment) |
Table 10
Explanation of Solution
Periodic Inventory System:
Periodic inventory system is a system, in which the inventory is updated in the accounting records on a periodic basis such as at the end of each month, quarter or year. In other words, it is an accounting method which is used to determine the amount of inventory at the end of each accounting period.
- Merchandised inventory is an asset and increased. Therefore, debit the merchandised inventory account with $340.
- Cost of Goods Sold is expense and decreased which will increase the equity. Therefore, credit the cost of goods sold account with $340.
Working note:
Compute the amount of LIFO adjustment:
Particulars | Amount ($) |
Ending inventory valued in LIFO | $2,330 |
Ending inventory valued in FIFO | $1,990 |
LIFO Adjustment | $340 |
Table 11
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Chapter 6 Solutions
Financial Accounting - Access
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