Question

A firm which prepares its financial statements according to U.S. GAAP and uses a periodic inventory system had the following transactions during the year:

Date	Activity	Tons(000s)	$ per Ton
	Beginning inventory	1	500
February	Purchase	8	540
May	Sales	5	600
July	Purchase	2	575
November	Sales	3	620

The cost of sales (in '000s) is closest to:

Select one:

A. $4,390 using FIFO.

B. $4,435 using LIFO.

C. $4,342 using weighted average.

D. $4,550 using FIFO.

E. $4,280 using LIFO.

Answer 1

Cost of Sales Using FIFO

Total sales quantity in May=5 tons

In FIFO inventory which arrived first is sold first. So accordingly Cost of Sales for May is,

=Begining Inventory Cost + Cost of Inventory Purchased in February

=1ton* $500+ 4tons(5 tons-1 ton)*$540

=$2660

Total sales quantity in November=3 tons

Cost of Sales for November is,

= Cost of 3 ton Inventory Purchased in February

=3tons*$540

=$1620

Cost of Sales as per FIFO=Cost of Sales for May+Cost of Sales for November

=$2660+$1620

=$4280

Cost of Sales Using LIFO

Total sales quantity in May=5 tons

In LIFO inventory which arrived last is sold first. So accordingly Cost of Sales for May is,

=Cost of 5 ton inventory purchased in February

=5tons*540

=$2700

Total sales quantity in November=3 tons

Cost of Sales for November = Cost of 2 ton Inventory Purchased in July +Cost of 1 ton inventory purchased in February

=2*575+1*540

=$1690

Cost of Sales as per FIFO=Cost of Sales for May+Cost of Sales for November

=$2700+$1690

=$4390

Cost of Sales using weighted average

Date	Units	Per Unit Cost	Total Cost	Weighted Average Cost
Opening	1	500.00	500	500
february	8	540.00	4320	535.55 {[4320+500]/(1+8)}
Cost of Sales of 5 tons in May=5*535.55=2678
End of May	4(9ton-5 ton)	535.55	2142.2	2142.2
July	2	575.00	1150	548.7 {[2142.2+1150]/(4+2)}
Cost of Sales of 3 tons in November=3*548.7=1646.1

Cost of Sales as per Weighted Average=Cost of Sales for May+Cost of Sales for November

=2678+1646.1

=$4324.1

So, Cost of Sales is Closest to $4,342 using weighted average. i.e Option C