Question

Applying and Analyzing Inventory Costing MethodsAt the beginning of the current period, Chen carried 1,000 units of its product with a unit cost of $32. A summary of purchases during the current period follows.

Units Unit Cost Cost

Beginning Inventory .... 1,000 $32 $32,000

Purchases: #1 ......... 1,800 34 61,200

#2 ......... 800 38 30,400

#3 ......... 1,200 41 49,200

During the current period, Chen sold 2,800 units.

a. Assume that Chen uses the first-in, first-out method. Compute both cost of goods sold for the current period and the ending inventory balance. Use the financial statement effects template to record costof goods sold for the period.

b. Assume that Chen uses the last-in, first-out method. Compute both cost of goods sold for the current period and the ending inventory balance.

c. Assume that Chen uses the average cost method. Compute both cost of goods sold for the current period and the ending inventory balance.

d. Which of these three inventory costing methods would you choose to:

1. Reflect what is probably the physical flow of goods? Explain.

2. Minimize income taxes for the period? Explain.

3. Report the largest amount of income for the period? Explain.

Answer 1

d.

1. i) To reflect physical flow of goods as Latest stock are preferred in market to sell - uSE LIFO as last purchased will be sold/moved first and moving backwards. It is having least usage.

ii) To reflect all stock are equal and irrespective of their time of purchase then use - Average cost, as it considers cost of all transactions.

iii) To reflect physical flow of goods as Old stock are preferred in market or if it is of perishable nature - then use FIFO method, as first purchased will be sold and moved first and the moving forward.

2. To minimise income tax use LIFO method as it inflate Cost of Goods Sold with latest inflated prices and deflate closing stock value with old lower prices, on that basis income will be less and so less taxes will be paid.

3. To report largest amount of income for the period use FIFO as it deflate cost of goods sold with past lower prices and inflate closing stock value with latest inflated prices, on that basis income will be higher due to lower cost.