Chapter 7, Problem 1PB

To determine

The cost of goods available for sale.

Explanation of Solution

Determine cost of goods available for sale.

Date	Particulars	Units ($)	Unit cost ($)	Total cost ($)
		(a)	(b)	(c = a × b)
January 1	Beginning inventory	250	2.50	625
January 12	Purchased	300	3.00	900
January 26	Purchased	80	4.00	320
	Total	630		$1,845
	Less: Goods sold	350
	Ending inventory	280

Table (1)

Conclusion

Therefore, the cost of goods sold available for sale for 630 units of inventory is $1,845.

Requirement 1.(a)

To determine

The ending inventory and the cost of goods sold under weighted average-cost method.

Explanation of Solution

In Average Cost Method the cost of inventory is priced at the average rate of the goods available for sale. Following is the mathematical representation:

$\text{Weighted-average Cost}=\frac{\text{Total Cost of Goods Available For Sale}}{\text{Total Number of Units Available For Sale}}$

Determine cost of ending inventory under average-cost method.

Date	Particulars	Units	Unit cost ($)	Total cost ($)
		(a)	(b)	(c = a × b)
January 1	Beginning inventory	250	2.50	625
January 12	Purchased	300	3.00	900
January 26	Purchased	80	4.00	320
	Cost of goods available for sale	630		$1,845
	Less: Ending inventory	280	2.93	820
	Cost of goods sold	350		$1,025

Table (2)

Working note:

Determine weighted average unit cost.

$\begin{array}{c}\begin{array}{c}\text{Weighted}\\ \text{average}\text{unit}\text{cost}\end{array}\}=\frac{\left(\begin{array}{l}\text{Cost}\text{of}\text{goods}\\ \text{available}\text{for}\text{sale}\end{array}\right)}{\left(\begin{array}{l}\text{Total}\text{units}\\ \text{available}\text{for}\text{sales}\end{array}\right)}\\ =\frac{\$1,845}{630}\\ =\$2.92\text{per unit}\end{array}$

Conclusion

Hence, the cost of goods sold under weighted average-cost method is $1,025 and the value of ending inventory is $820.

Requirement 1.(b)

To determine

The ending inventory and the cost of goods sold under FIFO.

Explanation of Solution

In First-in-First-Out method, the cost of initial purchased items is sold first. The value of the ending inventory consists the recent purchased items.

Determine the amount of cost of goods sold.

Date	Particulars	Units	Unit cost ($)	Total cost ($)
		(a)	(b)	(c = a × b)
January 1	Beginning inventory	250	2.50	625
January 12	Purchased	100	3.00	300
	Cost of goods sold	350		$925

Table (3)

Determine ending inventory under FIFO method.

Date	Particulars	Units	Unit cost ($)	Total cost ($)
		(a)	(b)	(c = a × b)
January 12	Purchased	200	3.00	600
January 26	Purchased	80	4.00	320
	Ending inventory	280		$920

Table (4)

Conclusion

Hence, the cost of goods sold under FIFO is $925 and the value of ending inventory is $920.

Requirement 1.(c)

To determine

The ending inventory and the cost of goods sold under LIFO.

Explanation of Solution

In Last-in-First-Out method, the cost of last purchased items is sold first. The value of the closing stock consists the initial purchased items.

Determine the amount of cost of goods sold.

Date	Particulars	Units	Unit cost ($)	Total cost ($)
		(a)	(b)	(c = a × b)
January 26	Purchased	80	4.00	320
January 12	Purchased	270	3.00	810
	Cost of goods sold	350		$1,130

Table (5)

Determine ending inventory under LIFO method.

Date	Particulars	Units	Unit cost ($)	Total cost ($)
		(a)	(b)	(c = a × b)
January 1	Beginning inventory	250	2.50	625
January 12	Purchased	30	3.00	90
	Ending inventory	2,150		$715

Table (6)

Conclusion

Hence, the cost of goods sold under LIFO is $1,130 and the value of ending inventory is $715.

Requirement 1.(d)

To determine

The ending inventory and the cost of goods sold under specific identification method.

Explanation of Solution

Specific identification method can be said as identifying the items precisely which are being sold and those which are being stored as closing inventory. The companies are required to keep perfect records of the original cost of each and every individual items of the inventory.

Determine the amount of cost of goods sold.

Date	Particulars	Units	Unit cost ($)	Total cost ($)
		(a)	(b)	(c = a × b)
January 1	Beginning inventory	200	2.50	500
January 12	Purchased	150	3.00	450
	Cost of goods sold	3,350		$950

Table (7)

Determine ending inventory under FIFO method.

Date	Particulars	Units	Unit cost ($)	Total cost ($)
		(a)	(b)	(c = a × b)
January 1	Beginning inventory	50	2.50	125
January 12	Purchased	150	3.00	450
January 26	Purchased	80	4.00	320
	Ending inventory	280		$895

Table (8)

Conclusion

Hence, the cost of goods sold under specific identification method is $950 and the value of ending inventory is $895.

Requirement 2.

To determine

The method of inventory costing results highest in gross profit and minimizes income taxes.

Explanation of Solution

• FIFO method provides a lower cost of goods sold and a higher gross profit than in LIFO.
• By comparing the three inventory method, it is found that the use of LIFO method will minimizes the income taxes because it reports less taxable income as a result of using higher unit costs (in this case) to calculate cost of goods sold.
• A higher Cost of Goods Sold means less Income from Operations. Therefore it reduce tax amount.