Question

#2: Inventory valuation:
All calculations must be indicated via Excel formulas.

1. Calculate the $ ending inventory and $ cost of goods sold using each of the following inventory methods: a. FIFO b. LIFO c. Average cost

	Unit	Unit Cost	Total Cost
Beg. Inventory	1000	4	4000
Purchase 1	1200	5	6000
2	1600	6	9600
3	800	8	6400

Sales: 3200 units

2. Which inventory method would you recommend for reporting for income tax purposes to minimize taxable income? Why?



3. The company is operating in an inflationary environment. Which method should the company use to maximize inventory valuation? Why?

Answer 1

FIFO:

FIFO Method
Periodic Inventory method
Cost of goods available for sale
Date	Explanation	Units	Per unit	Total
Beg	Beginning inventory	1,000	4	4,000
1'	Purchase	1,200	5	6,000
2'	Purchase	1,600	6	9,600
3'	Purchase	800	8	6,400
	Total	4,600		26,000
Ending inventory
Date	Units	Per unit	Total
3'	800	8	6,400
2'	200	6	1,200
1'	-	5	-
Total	1,000		7,600
Cost of goods available for sale			26,000
Less: Ending inventory			7,600
Cost of goods sold			18,400

LIFO:

LIFO Method
Periodic Inventory method
Cost of goods available for sale
Date	Explanation	Units	Per unit	Total
Beg	Beginning inventory	1,000	4	4,000
1'	Purchase	1,200	5	6,000
2'	Purchase	1,600	6	9,600
3'	Purchase	800	8	6,400
	Total	4,600		26,000
Ending inventory
Date	Units	Per unit	Total
Beg	1,000	4	4,000
1'	-	5	-
2'	-	6	-
3'	-	8	-
Total	1,000		4,000
Cost of goods available for sale			26,000
Less: Ending inventory			4,000
Cost of goods sold			22,000

Average cost method
Periodic Inventory method
Cost of goods available for sale
Date	Explanation	Units	Per unit	Total
Beg	Beginning inventory	1,000	4	4,000
1'	Purchase	1,200	5	6,000
2'	Purchase	1,600	6	9,600
3'	Purchase	800	8	6,400
	Total	4,600		26,000
Average cost per unit=		26000/ 4600 =		5.65
Particulars		Units	Per unit	Total
Ending inventory		1,000	5.65	5,652
Cost of goods available for sale				26,000
Less: Ending inventory				5,652
Cost of goods sold				20,348

2.

LIFO provides lowest taxable income as cost of goods sold higher with LIFO

3

FIFO gives highest ending inventory balance