Question

In: Accounting

Company Z had the following transactions in its first year of operations: (1) On January 15,...

Company Z had the following transactions in its first year of operations:

(1) On January 15, purchased 5,000 units of inventory for $20 each

(2) On March 1, purchased 10,000 units of inventory for $22 each

(3) On March 30, sold 7,000 units of inventory for $48 each

(4) On June 20, purchased 9,000 units of inventory for $25 each

(5) On August 10, sold 12,000 units of inventory for $50 each

(6) On September 3, sold 1,000 units of inventory $49 each

Company Z records transactions using a perpetual system. Calculate the cost of goods sold and ending inventory using (1) average cost, (2) FIFO, and (3) LIFO.

Company Z asks you to advise them on which inventory method to use. What method would you choose if the company wants to take out a loan from a bank in the near future that requires the company to meet a large threshold for its current assets’ value? What method would you choose if the company has a near-term investment opportunity that requires more cash on hand? Explain your answers.

Solutions

Expert Solution

FIFO METHOD PURHASES COST OF GOODS SOLD ENDING INVENTORY
Date Particulars Units Rate Total Cost Units Rate Total Cost Units Rate Total Cost
Jan.15 Purchases 5000 $                     20.00 $               100,000 5000 $         20.00 $    100,000
March.01 Purchases 10000 $                     22.00 $               220,000 5000 $         20.00 $    100,000
10000 $         22.00 $    220,000
March.30 Sales 5000 $             20.00 $      100,000
2000 $             22.00 $         44,000 8000 $         22.00 $    176,000
June.20 Purchases 9000 $                     25.00 $               225,000 8000 $         22.00 $    176,000
9000 $         25.00 $    225,000
Aug.10 Sales 8000 $             22.00 $      176,000
4000 $             25.00 $      100,000 5000 $         25.00 $    125,000
Sept.03 Sales 1000 $             25.00 $         25,000 4000 $         25.00 $    100,000
Total 24000 $               545,000 20000 $      445,000 4000 $    100,000
LIFO METHOD PURHASES COST OF GOODS SOLD ENDING INVENTORY
Date Particulars Units Rate Total Cost Units Rate Total Cost Units Rate Total Cost
Jan.15 Purchases 5000 $                     20.00 $               100,000 5000 $         20.00 $    100,000
March.01 Purchases 10000 $                     22.00 $               220,000 5000 $         20.00 $    100,000
10000 $         22.00 $    220,000
March.30 Sales 7000 $             22.00 $      154,000 5000 $         20.00 $    100,000
3000 $         22.00 $      66,000
June.20 Purchases 9000 $                     25.00 $               225,000 5000 $         20.00 $    100,000
3000 $         22.00 $      66,000
9000 $         25.00 $    225,000
Aug.10 Sales 3000 $             22.00 $         66,000
9000 $             25.00 $      225,000 5000 $         20.00 $    100,000
Sept.03 Sales 1000 $             20.00 $         20,000 4000 $         20.00 $      80,000
Total 24000 $               545,000 20000 $      465,000 4000 $      80,000
Average Cost Method PURHASES COST OF GOODS SOLD ENDING INVENTORY
Date Particulars Units Rate Total Cost Units Rate Total Cost Units Rate Total Cost
Jan.15 Purchases 5000 $                     20.00 $               100,000 5000 $         20.00 $    100,000
March.01 Purchases 10000 $                     22.00 $               220,000 15000 $         21.33 $    320,000
March.30 Sales 7000 $             21.33 $      149,333 8000

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