Question

Assume that a retailer’s beginning inventory and purchases of a popular item during January included (1) 500 units at $9.00 in beginning inventory on January 1, (2) 650 units at $10.00 purchased on January 8, and (3) 950 units at $11.00 purchased on January 29. The company sold 550 units on January 12 and 750 units on January 30.

Required:

1. Calculate the cost of goods sold for the month of January under (a) FIFO (periodic calculation), (b) FIFO (perpetual calculation), (c) LIFO (periodic calculation), and (d) LIFO (perpetual calculation).

Answer 1

Solution

FIFO method states that goods purchased first should be sold first
LIFO method states that goods purchased later are sold first
Periodic method updates records at the end of the period
Records are updated at every transaction under perpetual method
	FIFO periodic	FIFO perpetual	LIFO periodic	LIFO perpetual
Beginning Inventory	4,500 (500x9)	4,500 (500x9)	4,500 (500x9)	4,500 (500x9)
Jan 8 Purchases	6,500 (650x10)	6,500 (650x10)	6,500 (650x10)	6,500 (650x10)
Jan 29 Purchases	10,450 (950x11)	10,450 (950x11)	10,450 (950x11)	10,450 (950x11)
Total cost of goods available	21,450	21,450	21,450	21,450
Units sold	1,300 (550+750)	1,300 (550+750)	1,300 (550+750)	1,300 (550+750)
Cost of Goods sold	9,350 500x9 + 650x10 +(1300-500-650)x11	9,350 500x9 + 650x10 +(1300-500-650)x11	6,950 950x11 + (1300-950)x10	13,750 550x10+750x11

In order to save taxes, LIFO periodic should be used as maximum COGS will lead to lower income and hence lower taxes

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