Question

Steve Company buys and sells one product. Its beginning inventory, purchases, and sales during calendar-year 2018 follow.

Date                                     Units Acquired at Cost                                         Sold at Retail    

Jan.     1 Beg. inventory    400 units @ $14  =  $  5,600                

Jan.  15                                                                                     Sale                   200 units @ $30            

Mar. 10 Purchase             200 units @ $15  =  $  3,000                

Apr.   1                                                                                      Sale                        200 units @ $30

May   9 Purchase              300 units @ $16  =  $  4,800                

Sep. 22 Purchase              250 units @ $20  =  $  5,000                

Nov.   1                                                                                      Sale                 300 units @ $35            

Nov. 28 Purchase             100 units @ $21  =  $  2,100                         

Totals Units Available for Sale 1,250 units =  $20,500                       Total Units Sold 700 units         

Additional tracking data for specific identification: (1) January 15 sale—200 units @ $14, (2) April 1 sale—200 units @ $15, and (3) November 1 sale—200 units @ $14 and 100 units @ $20.

1. Compute the cost of goods available for sale.

2. Apply the four different methods of inventory costing (FIFO, LIFO, weighted average, and specific identification) to compute ending inventory and cost of goods sold under each method using the periodic system.

Specific Identification

FIFO

LIFO

Avg Cost

3. Compute gross profit earned by the company for each of the four costing methods in part 2. Also, report the inventory amount reported on the balance sheet for each of the four methods.

Specific Identification

• Gross Profit
• Ending Inventory

FIFO

LIFO

Average Costs

4. In preparing financial statements for year 2018, the financial officer was instructed to use FIFO but failed to do so and instead computed cost of goods sold according to LIFO, which led to a $1,400 overstatement in cost of goods sold from using LIFO. Determine the impact on year 2018’s income from the error. Also determine the effect of this error on year 2019’s income. Assume no income taxes.

5. Management wants a report that shows how changing from FIFO to another method would change net income. Prepare a table showing (1) the cost of goods sold amount under each of the four methods, (2) the amount by which each cost of goods sold total is different from the FIFO cost of goods sold, and (3) the effect on net income if another method is used instead of FIFO. Page 231

Other Issues/Questions

1. During a period of rising costs, which method (LIFO/FIFO/Wtd Average) will provide the highest net income?

2. Using the information provided below, what is the inventory value using lower of cost or market?

Product              Units                   Cost             Market

Helmets                24                      $50                  $54

Bats                      17                      $78                  $72

3. Using the information provided below, calculate the inventory turnover.

                                                                    2013                 2012

Cost of goods sold                                      $643,825        $426,650

Ending Inventory                                            97,400            87,750

Answer 1

1.1 FIFO Method -

1.2 Cost of Goods Sold, Gross Profit and Ending Inventory -

2.1 LIFO -

2.2 Cost of Goods Sold, Gross Profit and Ending Inventory -

3.1 Weighted Average -

3.2 Cost of Goods Sold, Gross Profit and Ending Inventory -

4.1 Specific Identification -

4.2 Cost of Goods Sold, Gross Profit and Ending Inventory -

5. Highest Net Income in the - FIFO Method

6. Inventory value using lower of cost or market -

7. Inventory Turnover Ration 2013 -