Question

Orion Iron Corp. tracks the number of units purchased and sold throughout each year but applies its inventory costing method at the end of the year, 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 a. Inventory, Beginning 300 $ 14 For the year: b. Purchase, April 11 950 12 c. Purchase, June 1 850 15 d. Sale, May 1 (sold for $42 per unit) 300 e. Sale, July 3 (sold for $42 per unit) 630 f. Operating expenses (excluding income tax expense), $18,200 Required: 1. Calculate the number and cost of goods available for sale. 2. Calculate the number of units in ending inventory. 3. Compute the cost of ending inventory and cost of goods sold under (a) FIFO, (b) LIFO, and (c) weighted average cost. 4. Prepare an income statement that shows under the FIFO method, LIFO method and weighted average method. 6. Which inventory costing method minimizes income taxes?

Answer 1

1. Calculate the number and cost of goods available for sale.

Number of goods available for sale = 300+950+850 = 2100 Units

Cost of goods available for sale = (300*14+950*12+850*15) = 28350

2) ENding inventory unit = 2100-300-630 = 1170 UNits

3. Compute the cost of ending inventory and cost of goods sold under (a) FIFO, (b) LIFO, and (c) weighted average cost

	Cost of ending inventory	Cost of goods sold
FIFO	(850*15+320*12) = 16590	28350-16590 = 11760
LIFO	(300*14+870*12) = 14640	28350-14640 = 13710
Weighted average	28350/2100*1170 = 15795	28350-15795 = 12555

4. Prepare an income statement that shows under the FIFO method, LIFO method and weighted average method

	FIFO	LIFO	Weighted average
Sales	930*42 = 39060	39060	39060
Cost of goods sold	11760	13710	12555
Gross profit	27300	25350	26505
Operating expense	18200	18200	18200
Net income	9100	7150	8305

6) LIFO method has minimize income tax