In: Accounting
Q1 :- Explain the effects of inventory valuation methods on the cost of ending inventory, income and income taxes ?
Q2 :- Given the following information, determine the cost of ending inventory at November 30 using the Weighted Average perpetual inventory method.
November 3: 15 units
were purchased at $8 per unit.
November 11: 18 units were purchased at $9.50 per unit.
November 15: 15 units were sold at $45 per unit
November 18: 30 units
were purchased at $10.75 per unit
November 30: 20 units were sold at $55 per unit
Weighted Average method 10 Unit Cost of goods areavailable for sale/Number of units available for sale Calculate cost of goods available for sale 15*$8 +18 * $9.5+30*$10.75/63 Number of units available for sale 15+18+30 63
How different Inventory methods can affect net Income
Inventory includes raw material , partially finished goods . the perpetual system tracks each purchase and sale with continually updated Inventory balances and cost of goods sold . Under multiple valuation method of Inventory includes FIFO , LIFO an Weighted Average method
FIFO method having couple of advantage like - Easy to apply , normal physical flow of goods,no manupulation of income is possible ,the Inventory amount in the Balance sheet at current Market value. Other valuation method LIFO are based on the fact that prices have risen, Under LIFO shows the largest cost of goods sold of any of the costing methods because the newest cost charged to cost of goods sold are also the higher cost The higher the cost of goods sold , the smaller the Net Income
LIFO argue that is the better matching cost and revenue than ther other method.
KIFO method also have tax benefit , this method represents lowest taxable Income . The internal Revenue services allows companies to use of LIFO for tax purpose only when they use LIFO for financial reporting purposes
Weighted Averagemethid taking a middle of the road approach . This method reduce the effect of buying or not buying . A company can manupulate income under the wweighted average costing method by buying and falling to buy goods near year end
The four inventory costing method specific identification FIFO , LIFO , Weighted Average involve assumptions about how cost ffow through a business
All four method of Inventory costing are acceptable , no single method is the only correct method
If a company wants to match sales revenue with current cost of goods sold . it would use LIFO if a company seeks to reduce its income tax , it would also used LIFO
The FIFO method represents of historical cost with revenue ,