Question

Amara Ltd was founded on 1st January 2019. Amara sells bed frames to customers. The company has adopted a periodic inventory system together with the average cost cost-flow assumption (AVCO) to determine the Cost of Goods Sold for the year. The company’s inventory transactions for its first year of operation to December 31st, 2019 are as follows:

Date	Description	Units	Cost price per unit	Selling price per unit
Jan 1	Beginning Balance	100	$160
Feb 2	Purchase	500	$140
Mar 15	Sales	350		$200
Jul 28	Purchase	150	$120
Oct 25	Sales	200		$200
Dec 26	Sales	100		$200
Dec 29	Purchase	200	$100

Required:

(a) What amount will Amara Ltd report as its Inventory balance in the Current Asset section of its Balance Sheet? What amount will Amara report as Cost of Goods Sold for the year ended 2019 financial year? (Show all workings)

(b) If Amara Ltd had adopted First-In First-Out (FIFO) as its cost flow assumption on 1st January 2019, what Cost of Goods Sold figure would have been reported in its Statement of Financial Performance for the 2019 financial year? (Show all workings)

(c) Management is aware of another cost-flow assumption; Last-In First-Out (LIFO). Which of the three cost-flow assumptions; AVCO, FIFO or LIFO will yield the highest Gross Profit Margin for the 2019 year if 80% of Sales are on credit?

There is no specific methods required.

Answer 1

	Cost of Goods Available for sale
Activity	Units	Unit Price	Amount
Beginning Inventory	100	$          160.00	$     16,000.00
Purchases
'Feb 2	500	$          140.00	$     70,000.00
'Jul 28	150	$          120.00	$     18,000.00
'Dec 29	200	$          100.00	$     20,000.00
Total	950		$   124,000.00

Units in ending inventory = 950 - 350 - 200 - 100 = 300 units

(a) Average Cost per unit = $124,000 / 950 = $130.53 per unit
Cost of ending inventory = 300 x $130.53 = $39,159
Cost of Goods Sold = $124,000 - $39,159 = $84,841

(b) FIFO method of Inventory Valuation -

FIFO	Cost of Goods Available for sale	Cost of Goods Sold	Ending Inventory
Activity	Units	Unit Price	Amount	Units	Unit Price	Amount	Units	Unit Price	Amount
Beginning Inventory	100	$ 160.00	$16,000.00	100	$ 160.00	$16,000.00
Purchases
'Feb 2	500	$ 140.00	$ 70,000.00	500	$ 140.00	$ 70,000.00
'Jul 28	150	$ 120.00	$ 18,000.00	50	$ 120.00	$ 6,000.00	100	$ 120.00	$12,000.00
'Dec 29	200	$ 100.00	$ 20,000.00				200	$ 100.00	$20,000.00
Total	950		$124,000.00	650		$ 92,000.00	300		$32,000.00

(c)
LIFO method results in highest gross profit margin. In LIFO method, goods purchased at last are sold first. Since prices for purchase are decreasing on every purchase, cost of goods sold being latest purchases is with lower purchase price resulting in lower cost of goods sold and higher gross profit. Gross Profit is Sales revenue less cost of goods sold.

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