Concept explainers
1.
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.
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.
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.
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.
The value of inventory on October 31, 2016 using first in first out method under periodic inventory system.
1.
Explanation of Solution
The tabular column showing inventory cost is presented as follows:
Model | Quantity ($) | Unit cost ($) | Total cost ($) |
A10 | 4 | 76 | 304 |
2 | 70 | 140 | |
B15 | 6 | 184 | 1,104 |
2 | 170 | 340 | |
E60 | 5 | 70 | 350 |
G83 | 9 | 259 | 2,331 |
J34 | 15 | 270 | 4,050 |
M90 | 3 | 130 | 390 |
2 | 128 | 256 | |
Q70 | 7 | 180 | 1,260 |
1 | 175 | 175 | |
Total | 10,700 |
Table (1)
Hence, the ending inventory on October 31, 2016 under First in First out Method is $10,700.
2.
The value of inventory on October 31, 2016 using last in first out method under periodic inventory system.
2.
Explanation of Solution
The tabular column showing inventory cost is presented as follows:
Model | Quantity ($) | Unit cost ($) | Total cost ($) |
A10 | 4 | 64 | 256 |
2 | 70 | 140 | |
B15 | 8 | 176 | 1,408 |
E60 | 3 | 75 | 225 |
2 | 65 | 130 | |
G83 | 7 | 242 | 1,694 |
2 | 250 | 500 | |
J34 | 12 | 240 | 2,880 |
3 | 246 | 738 | |
M90 | 2 | 108 | 216 |
2 | 110 | 220 | |
1 | 128 | 128 | |
Q70 | 5 | 160 | 800 |
3 | 170 | 510 | |
Total | 9,845 |
Table (2)
Hence, the ending inventory on October 31, 2016 under Last in First out Method is $9,845.
3.
The value of inventory on October 31, 2016 using weighted average method under periodic inventory system.
3.
Explanation of Solution
The tabular column showing inventory cost is presented as follows:
Model | Quantity ($) | Unit cost ($) | Total cost ($) |
A10 | 6 | 70 (1) | 256 |
B15 | 8 | 174 (2) | 1,392 |
E60 | 5 | 69 (3) | 345 |
G83 | 9 | 253 (4) | 2,277 |
J34 | 15 | 258 (5) | 3,870 |
M90 | 5 | 121 (6) | 605 |
Q70 | 8 | 172 (7) | 1,376 |
Total | 10,285 |
Table (3)
Working notes:
Computation of unit cost for Model A10:
Computation of unit cost for Model B15:
Computation of unit cost for Model E60:
Computation of unit cost for Model G83:
Computation of unit cost for Model J34:
Computation of unit cost for Model M90:
Computation of unit cost for Model Q70:
Hence, the ending inventory on October 31, 2016 under weighted average cost Method is $10,285.
4. (a)
To discuss: the method that would be preferred for income tax purposes in the period of rising prices.
4. (a)
Explanation of Solution
During the period of rising prices, the last in first out method will result in lower cost of inventory, the cost of merchandise sold will be higher, and net income would be lower than other two methods. Therefore, the LIFO method would be preferred for the current year because it would effect in lower income tax.
(b)
To discuss: the method that would be preferred for income tax purposes in the period of declining prices.
(b)
Explanation of Solution
During the period of declining prices, the first in first out method (FIFO) will result in lower cost of inventory, the cost of merchandise sold will be higher, and net income would be lower than other two methods. Therefore, the FIFO method would be preferred for the current year because it would effect in lower income tax.
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Chapter 7 Solutions
EBK ACCOUNTING
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