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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.
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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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Company Z had the following transactions in its first year of
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(1) On January 15, purchased 5,000 units of inventory for $20
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(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
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