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Cornerstones of Financial Accounti...

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Jay Rich + 1 other
ISBN: 9781337690881

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Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881
Textbook Problem
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( Appendix 6B) Inventory Costing Methods: Periodic Inventory System

The inventory accounting records for Lee Enterprises contained the following data:

Chapter 6, Problem 63E, ( Appendix 6B) Inventory Costing Methods: Periodic Inventory System The inventory accounting records

Required:

1. Calculate the cost of ending inventory and the cost of goods sold using the FIFO, LIFO, and average cost methods. ( Note: Use four decimal places for per-unit calculations and round all other numbers to the nearest dollar.)

2. CONCEPTUAL CONNECTION Compare the ending inventory and cost of goods sold computed under all three methods. What can you conclude about the effects of the inventory costing methods on the balance sheet and the income statement?

To determine

(a)

Inventory costing methods:

FIFO, LIFO and average cost method, are those method which used for calculation of closing inventory and cost of goods sold.

The cost of ending inventory and the cost of goods sold using the three methods.

Explanation

Periodic inventory system:

Under periodic inventory system, quantity and value of sales are recorded and sales are recorded only on value basis thus quantity of cost of goods sold and closing inventory was not available. At the year end, we calculate closing inventory with physical verification of stock and subtract with available quantity to determine actual quantity sold.

Total available units are:

Opening inventory 1400 units @ $12 each

Purchases=2400 units @$16 eachPurchases=2200 units @$20 each

Total available quantity = 1400+2400+2200=6000 units

Sales(March, 9)=2300 units @$27 eachSales(Sept., 22)=1900 units @$29 each

Calculation of Closing Inventory as per FIFO Method:

Under this method, which material purchased first, issued first for production. However closing inventory includes last purchased materials in stock. Due to latest purchase in closing inventory, higher value of latest purchase effects cost of goods sold as lower and profit margin will be high.

Closing inventory Cost of Goods sold
1400 @$12 = $16800
900 @$16 = $14400
1500 @$16 = $24000
1800 @$20 = $36000 400 @$20 = 8000
Total 1800 @$20 = $36000 4200 units = $63200

Calculation of closing inventory as per LIFO Method:

Under this method, which material purchased last, issued first for production. However closing inventory includes earliest purchased material in stock

To determine

(b)

Inventory costing methods:

FIFO, LIFO and average cost method, are those method which used for calculation of closing inventory and cost of goods sold.

The comparison between cost of ending inventory and the cost of goods sold using the three methods.

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