Question

Simple Plan Enterprises uses a periodic inventory system. Its records showed the following:

Inventory, December 31, using FIFO → 44 Units @ $17 = $748
Inventory, December 31, using LIFO → 44 Units @ $13 = $572

Transactions in the Following Year	Units			Unit Cost			Total Cost
Purchase, January 9		56			18		$	1,008
Purchase, January 20		106			19			2,014
Sale, January 11 (at $41 per unit)		86
Sale, January 27 (at $42 per unit)		62

Required:

1. Compute the number and cost of goods available for sale, the cost of ending inventory, and the cost of goods sold under FIFO and LIFO.
2. Compute the inventory turnover ratio under the FIFO and LIFO inventory costing methods.
3. Does the inventory method used make a significant difference in the inventory turnover ratio?

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Answer 1

1.

FIFO

Under the FIFO method of inventory valuation, units sold consists of the units from beginning inventory and the earliest purchases. Ending inventory consists of the units from recent purchases.

Number of units available for sale = Beginning inventory + Purchases

= 44 + (56 + 106)

= 206

Cost of goods available for sale = Beginning inventory + Purchases

= $748 + ($1,008 + $2,014)

= $3,770

Ending inventory units = Number of units available for sale - Units sold

= 206 - (86 + 62)

= 58

58 units in ending inventory consists of January 20 purchases.

Ending inventory = 58 units * $19 = $1,102

Cost of goods sold = Cost of goods available for sale - Ending inventory

= $3,770 - $1,102

= $2,668

LIFO

Under the LIFO method of inventory valuation, units sold consists of the units from recent purchases and the ending inventory consists of the units from beginning inventory and the earliest purchases.

Number of units available for sale = Beginning inventory + Purchases

= 44 + (56 + 106)

= 206

Cost of goods available for sale = Beginning inventory + Purchases

= $572 + ($1,008 + $2,014)

= $3,594

Ending inventory units = Number of units available for sale - Units sold

= 206 - (86 + 62)

= 58

58 units in ending inventory consists of 44 units from beginning inventory and 14 units from January 9 purchases

Ending inventory = (44 * $13) + (14 * $18)

= $824

Cost of goods sold = Cost of goods available for sale - Ending inventory

= $3,594 - $824

= $2,770

2.

FIFO

Inventory turnover ratio = Cost of goods sold / Average inventory

= $2,668 / [($748 + $1,102)/2]

= 2.88 times

LIFO

Inventory turnover ratio = Cost of goods sold / Average inventory

= $2,770 / [($572 + $824)/2]

= 3.97 times

3.

Yes