Question

COGS and Inventory Valuation

Kane Sporting Goods Company uses the periodic inventory system, and the following information about the Company’s football inventory is available:

Date	Transaction	Units	Cost per Unit	Total Cost
1/1	Beginning Inventory	1,000	$12.00	$12,000
4/22	Purchase	4,000	$14.00	$56,000
8/25	Purchase	5,000	$16.40	$82,000
		10,000		$150,000

During the year, 7,200 footballs were sold at $30 each.

Compute the following (PLEASE SHOW YOUR WORK!):

A. Dollar value of ending inventory using First-in, first-out (FIFO

B. Cost of goods sold using Last-in, first-out (LIFO)  

C. Weighted average cost per unit

D. Gross profit for the year using the FIFO method.

E. Which method will result in the lowest taxable income?

Answer 1

A) Calculation for ending inventory under periodic FIFO:

Receipts	Receipts	Receipts	COGS	COGS	COGS	Ending inventory	Ending inventory	Ending inventory
Qty	Rate	Amount	Qty	Rate	Amount	Qty	Rate	Amount
1,000 4,000 5,000	12.00 14.00 16.40	12,000 56,000 82,000	1,000 4,000 2,200	12.00 14.00 16.40	12,000 56,000 36,080	2,800	16.40	45,920
				Total COGS	104,080

B) Calculation for cost of goods sold under periodic LIFO :

Receipts	Receipts	Receipts	COGS	COGS	COGS	Ending inventory	Ending inventory	Ending inventory
Qty	Rate	Amount	Qty	Rate	Amount	Qty	Rate	Amount
1,000 4,000 5,000	12.00 14.00 16.40	12,000 56,000 82,000	5,000 2,200	16.40 14.00	82,000 30,800	1,000 1,800	12.00 14.00	12,000 25,200
				Total COGS	112,800

C) Calculation for weighted average cost perunit

Qty of opening inventory and purchase	Rate	Cost
1,000	12.00	12,000
4,000	14.00	56,000
5,000	16.40	82,000
Total quantity = 10,000		Total cost = 150,000

Weighted average cost per unit = Total cost / Total quantity

Weighted average cost per unit = $ 150,000 / 10,000 = $ 15.00

D) Calculation for gross profit under periodic FIFO :

Gross profit = Sales revenue - COGS

Gross profit = [ 7,200 X $ 30 ] - $ 104,080 = $ 111,920

E) Due to regular inflation , cost price of materials increases day by day and under  LIFO method, latest purchased materials recorded as COGS.

Which gives highest COGS, and due to that , gross profit would be minimum which resulted lowest taxable income .