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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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Alternative Inventory Methods Nevens Company uses a periodic inventory system. During November, the following transactions occurred:

Chapter 7, Problem 11E, Alternative Inventory Methods Nevens Company uses a periodic inventory system. During November, the

Required:

  1. 1. Compute the cost of goods sold for November and the inventory at the end of November for each of the following cost flow assumptions:
    1. a. FIFO
    2. b. LIFO
    3. c. Average cost
  2. 2. Next Level What can you conclude about the effects of the inventory cost flow assumptions on the financial statements?

1.

To determine

Ascertain the cost of goods sold and ending inventory for November under a) FIFO, b) LIFO and c) average cost methods.

Explanation

Inventory:

Inventory refers to the entire stock of goods purchased, goods utilized and goods maintained by the company in the course of the regular business activities.

Cost of goods sold:

Cost of goods sold is the total of all the expenses incurred by a company to sell the goods during the given period.

The ending inventory for November are as shown below:

  • FIFO Method:
DateParticularsAmount ($)
 Ending inventory (500 units)
 200 units at $5 per unit (200×$5)$ 1,000
 300 units at $4 per unit (300×$4)$ 1,200
 Total Ending inventory$ 2,200

Table (1)

The ending inventory for November under the FIFO method is $ 2,200.

  • LIFO Method:
DateParticularsAmount ($)
 Ending inventory (500 units)
 500 units at $5 per unit (500×$3.50)$ 1,750
 Total Ending inventory$ 1,750

Table (2)

The ending inventory for November under the LIFO method is $1,750.

  • Average Cost Method:
ParticularsUnits (A)Amount ($) (B)Amount ($)(C =A×B)
Ending inventory (500 units)   
November 1500$ 3.50 $ 1,750
November 13300$ 4

2.

To determine

Describe the effects of inventory cost flow on financial statements.

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