Question

Hamilton Company uses a periodic inventory system. At the end of the annual accounting period, December 31 of the current year, the accounting records provided the following information for product 1:

	Units	Unit Cost
Inventory, December 31, prior year	2,000		$	5
For the current year:
Purchase, March 21	6,000			4
Purchase, August 1	4,000			2
Inventory, December 31, current year	3,000

Required:

Compute ending inventory and cost of goods sold for the current year under FIFO, LIFO, and average cost inventory costing methods.

	FIFO	LIFO	AVERAGE COST
ENDING INVENTORY	$	$	$
COST OF GOODS SOLD	$	$	$

Answer 1

Under FIFO periodic inventory system, closing stock consists of latest purchases and cost of goods sold is from oldest purchases

So, Value of inventory of 3,000 units will be from August 1 purchases (latest purchases)

= 3,000 x $2

= $6,000

Cost of goods sold

= Opening Inventory + Value of purchases – Closing Inventory

= 2,000 x $5 + 6,000 x $4 + 4,000 x $2 - $6,000

= $10,000 + $24,000 + $8,000 - $6,000

= $36,000

Under LIFO periodic inventory system, closing stock consists of oldest purchases and cost of goods sold is from latest purchases

So, Value of inventory of 3,000 units will be as follows

2,000 units from opening inventory @ $5 + (3,000 – 2,000) units from March 21 purchases @ $4

= $10,000 + $4,000

= $14,000

Cost of goods sold

= Opening Inventory + Value of purchases – Closing Inventory

= 2,000 x $5 + 6,000 x $4 + 4,000 x $2 - $14,000

= $28,000

Average cost per unit

= Total value of (opening units + Purchases) / Total quantity of (opening units + Purchases)

= (2,000 x $5 + 6,000 x $4 + 4,000 x $2) / (2,000 + 6,000 + 4,000)

= $42,000 / 12,000

= $3.50 per unit

So, value of ending inventory

= 3,000 x $3.50

= $10,500

Cost of goods sold

= Opening Inventory + Value of purchases – Closing Inventory

= 2,000 x $5 + 6,000 x $4 + 4,000 x $2 - $10,500

= $31,500