Question

Inventory Case Study

Nicole Matthews is the sole owner of Nature's Cosmetics, Inc. In December, 2015, a supplier, Spa Manufacturing, Inc., asked her to include a prepackaged spa kit with her cosmetics line. Feeling that she could manage an additional product line, Nicole agreed. Nicole's company, Nature's Cosmetics would make monthly purchases from the supplier at a cost that included production costs and transportation charges. Nicole would keep track of the new inventory line by using a perpetual inventory system.

On January 15, Nicole purchased 10 units at a total cost of $6 per unit. At the end of the month, January 31, she paid the totaLamount due to Spa Manufactur ing,Inc. On February 5,she purchased 30 more units at $8, but she returned 5 defective units on February 8. February, 15 she paid the full amount due to Spa Manufacturing ,Inc. On February 25,she sold 15 units to Sheila Davis for $40 per unit.

March 1,she purchased 15 units at $10 per unit, and on March 15 she sold 30 units to Lola Guthrie for $40 per unit. On May 1,she purchased an additional 50 units for $10 per unit.

Directions:

1. Prepare a Table that includes the below headings and subheadings:

Purchases				Cost of Goods Sold			Ending Inventory
Date	Units	Cost/Unit	Total Cost	Units	Cost/ Unit	Total Cost	Units	Cost/ Unit	Total Cost

Use the Table to compute Cost of Goods Sold and Ending Inventory (include both units and total dollars):

a) First In, First Out (FIFO)

b) Last In,First Out (LIFO)

c) Weighted Average Cost

3) Use the three Tables to answer the following questions :

a) Explain why merchandising companies have to use an inventory cost flow method.

b.When prices are increasing , which inventory cost flow method will yield the:

i) Highest ending inventory cost

ii) Lowest ending inventory cost

iii) Highest cost of goods sold

iv) Lowest cost of goods sold

v) Highest gross profit

vi) Lowest gross profit

c) Compared to FIFO and LIFO, when prices are increasing, the ending inventory for weighted average cost will be?

d) Compared to FIFO and LIFO, when when prices are increasing, the cost of goods sold for weighted average cost will be?

4) Using the FIFO Method from the Table created in question #2, prepare journal entries for all of the applicable transactions .

5) Open T Accounts, and post the journal entries to the T Accounts.

6) Using the LIFO Method from the Table created in question #2, prepare journal entries for all of the applicable transactions.

7) Open T Accounts, and post the journal entries to the T Accounts .

Answer 1

a.	FIFO METHOD
	Purchases				Cost of Goods Sold			Ending Inventory
	Date	Units	Cost/Unit	Total Cost	Units	Cost/ Unit	Total Cost	Units	Cost/Unit	Total Cost
	15-Jan	10	6.00	60.00	-	-	-	10	6.00	60.00
	5-Feb	30	8.00	240.00	-	-	-	10	6.00	60.00
		-	-	-	-	-	-	30	8.00	240.00
	8-Feb	-5	6.00	-30.00	-	-	-	5	6.00	30.00
		-	-	-	-	-	-	30	8.00	240.00
	25-Feb	-	-	-	5	6.00	30.00	20	8.00	160.00
		-	-	-	10	8.00	80.00	-	-	-
	1-Mar	15	10.00	150.00	-	-	-	20	8.00	160.00
		-	-	-	-	-	-	15	10.00	150.00
	15-Mar	-	-	-	20	8.00	160.00	5	10.00	50.00
		-	-	-	10	10.00	100.00	-	-	-
	1-May	50	10.00	500.00	-	-	-	5	10.00	50.00
								50	10.00	500.00
b.	LIFO METHOD
	Purchases				Cost of Goods Sold			Ending Inventory
	Date	Units	Cost/Unit	Total Cost	Units	Cost/ Unit	Total Cost	Units	Cost/Unit	Total Cost
	15-Jan	10	6.00	60.00	-	-	-	10	6.00	60.00
	5-Feb	30	8.00	240.00	-	-	-	10	6.00	60.00
		-	-	-	-	-	-	30	8.00	240.00
	8-Feb	-5	8.00	-40.00	-	-	-	10	6.00	60.00
		-	-	-	-	-	-	25	8.00	200.00
	25-Feb	-	-	-	15	8.00	120.00	10	6.00	60.00
		-	-	-	-	-	-	10	8.00	80.00
	1-Mar	15	10.00	150.00	-	-	-	10	6.00	60.00
		-	-	-	-	-	-	10	8.00	80.00
		-	-	-	-	-	-	15	10.00	150.00
	15-Mar	-	-	-	15	10.00	150.00	5	6.00	30.00
		-	-	-	10	8.00	80.00
		-	-	-	5	6.00	30.00
	1-May	50	10.00	500.00	-	-	-	5	6.00	30.00
								50	10.00	500.00
c.	Weighted Average Method
	Purchases				Cost of Goods Sold			Ending Inventory
	Date	Units	Cost/Unit	Total Cost	Units	Cost/ Unit	Total Cost	Units	Cost/Unit	Total Cost
	15-Jan	10	6.00	60.00	-	-	-	10	6.00	60.00
	5-Feb	30	8.00	240.00	-	-	-	40	7.50	300.00
	8-Feb	-5	7.50	-37.50	-	-	-	35	7.50	262.50
	25-Feb	-	-	-	15	7.50	112.50	20	7.50	150.00
	1-Mar	15	10.00	150.00	-	-	-	35	8.57	300.00
	15-Mar	-	-	-	30	8.57	257.14	5	8.57	42.86
	1-May	50	10.00	500.00	-	-	-	55	9.87	542.86