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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 System

Harrington Company had the following data for inventory during a recent year:

Chapter 6, Problem 64E, ( Appendix 6B) Inventory Costing Methods: Periodic System Harrington Company had the following data

Assume that Harrington uses a periodic inventory accounting system.

Required:

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

2. CONCEPTUAL CONNECTION Which method will produce the most realistic amount for income? For inventory?

3. CONCEPTUAL CONNECTION Which method will produce the lowest amount paid for taxes?

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

(a)

Periodic inventory system:

Under periodic inventory system, quauntity and value of sales are recorded and sales are recorded only on value basis thus quantity of cost of goods sold and closing inventory were not available. At the yearend 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=500 units @ $9 each

Purchases=1600 units @$9.40 eachPurchases=1200 units @$10.20 eachPurchases=1400 units @$10.80 eachPurchases=1100 units @$11.30 each

Total Purchased units = 5300

Total available quantity = 5300+500= 5800 unit

Sales=5240 units

Closing inventory = Beginning inventory + Purchase - Sales= 500+53005240= 560 units

Calculation of Closing Inventory as per FIFO Method:

Under this method, which meterial 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
500 @$9 = $4500
1600 @$9.40 = $15040
1200 @$10.20 = $12240
1400 @$10.80 = $15120
560 @$11.30 = $6328 540 @$11
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 method for determining the most realistic amount for income.

To determine

(c)

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 method for determining the lowest amount paid for tax.

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