Question

Scrappers Supplies tracks the number of units purchased and sold throughout each accounting period but applies its inventory costing method at the end of each period, as if it uses a periodic inventory system. Assume its accounting records provided the following information at the end of the annual accounting period, December 31.

Transactions		Units			Unit Cost
Beginning inventory, January 1			200		$	38
Transactions during the year:
a.	Purchase on account, March 2		350			40
b.	Cash sale, April 1 ($54 each)		(350	)
c.	Purchase on account, June 30		250			44
d.	Cash sale, August 1 ($54 each)		(70	)

TIP: Although the purchases and sales are listed in chronological order, Scrappers determines the cost of goods sold after all of the purchases have occurred.

Required:
1.	Compute the cost of goods available for sale, cost of ending inventory, and cost of goods sold at December 31 under each of the following inventory costing methods: (Round "Cost per Unit" to 2 decimal places.)

a.	Last-in, first-out.

b.	Weighted average cost.

c.	First-in, first-out.

d.	Specific identification, assuming that the April 1 sale was selected one-fifth from the beginning inventory and four-fifths from the purchase of March 2. Assume that the sale of August 1 was selected from the purchase of June 30.

2-a.	Of the four methods, which will result in the highest gross profit?
	Last-in, first-out Weighted average cost First-in, first-out Specific identification

2-b.	Of the four methods, which will result in the lowest income taxes?
	Last-in, first-out Weighted average cost First-in, first-out Specific identification

Answer 1

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Part 1
		LIFO		Weighted Average		FIFO		Specific Ident
Beginning Inventory		200*$38	$    7,600	200*$38	$                      7,600	200*$38	$    7,600	200*$38	$    7,600
Add: Purchase
		350*$40	$ 14,000	350*$40	$                    14,000	350*$40	$ 14,000	350*$40	$ 14,000
		250*$44	$ 11,000	250*$44	$                    11,000	250*$44	$ 11,000	250*$44	$ 11,000
Cost of Goods Available for Sale			$ 32,600		$                    32,600		$ 32,600		$ 32,600
Average Rate (Weighted Average)					$32,600/800 Units)
					$                      40.75
Cost of Goods Sold:
		250*$44	$ 11,000	420*$40.75	$                    17,115	200*$38	$    7,600	(70*$38)+(280*$40)	$ 13,860
		170*$40	$    6,800			220*$40	$    8,800	70*$44	$    3,080
Total Cost of Goods Sold			$ 17,800		$                    17,115		$ 16,400		$ 16,940
Ending Inventory
		200*$38	$    7,600	380*$40.75	$                    15,485	130*$40	$    5,200	130*$38	$    4,940
		180*$40	$    7,200			250*$44	$ 11,000	70*$40	$    2,800
								180*$44	$    7,920
Ending Inventory			$ 14,800		$                    15,485		$ 16,200		$ 15,660
Part 2a
First-in, First out
(Since COGS is lowest in this case)
Part 2b
Last-in, First out
(Since COGS is highest in this case, and hence lower profit and lower tax)