Question

Your answer should be based on your words and your opinion.  Do not copy sentences from the textbook.  

Give an example of a company (or type of company) that would use the following inventory method:

FiFO -

LIFO -

Weighted Average Cost -

Hint - Remember companies are supposed to pick an inventory method that most likely reflects how the inventory actually flows in and out of the company.

Answer 1

Example of ABC company

In the tables below, we use the inventory of a fictitious beverage producer called ABC Bottling Company to see how the valuation methods can affect the outcome of a company’s financial analysis.

The company made inventory purchases each month for Q1 for a total of 3,000 units. However, the company already had 1,000 units of older inventory that was purchased at $8 each for an $8,000 valuation. In other words, the beginning inventory was 4,000 units for the period.

The company sold 3,000 units in Q1, which left an ending inventory balance of 1,000 units or (4,000 units - 3,000 units sold = 1,000 units).

ABC CO. — MONTHLY INVENTORY PURCHASES
Month	Units Purchased	Cost / Each	Value
Jan	1,000	$10	$10,000
Feb	1,000	$12	$12,000
Mar	1,000	$15	$15,000
	3,000 = Total Purchased

ABC CO. — INCOME STATEMENT (SIMPLIFIED), JANUARY—MARCH
Item	LIFO	FIFO	Average Cost
Sales = 3,000 units @ $20 each	$60,000	$60,000	$60,000
Beginning Inventory	8,000	8,000	8,000
Purchases	37,000	37,000	37,000
Ending Inventory	8,000	15,000	11,250
COGS	$37,000	$30,000	$33,750
Expenses	10,000	10,000	10,000
Net Income	$13,000	$20,000	$16,250

COGS Valuation

• Under LIFO, COGS was valued at $37,000 because the 3,000 units that were purchased most recently were used in the calculation or the January, February, and March purchases ($10,000 + $12,000 + $15,000).
• Under FIFO, COGS was valued at $30,000 because FIFO uses the oldest inventory first and then the January and February inventory purchases. In other words, the 3,000 units comprised of (1,000 units for $8,000) + (1,000 units for $10,000 or Jan.) + (1,000 units for $12,000 or Feb.)
• The average cost method resulted in a valuation of $11,250 or (($8,000 + $10,000 + $12,000 + $15,000) / 4).

Below are the Ending Inventory Valuations:

• Ending Inventory per LIFO: 1,000 units x $8 = $8,000. Remember that the last units in (the newest ones) are sold first; therefore, we leave the oldest units for ending inventory.
• Ending Inventory per FIFO: 1,000 units x $15 each = $15,000. Remember that the first units in (the oldest ones) are sold first; therefore, we leave the newest units for ending inventory.
• Ending Inventory per Average Cost: (1,000 x 8) + (1,000 x 10) + (1,000 x 12) + (1,000 x 15)] / 4000 units = $11.25 per unit; 1,000 units X $11.25 each = $11,250. Remember that we take a weighted average of all the units in inventory.