Question

pplying and Analyzing Inventory Costing Methods
At the beginning of the current period, Chen carried 1,000 units of its product with a unit cost of $32. A summary of purchases during the current period follows.

	Units	Unit Cost	Cost
Beginning Inventory	1,000	$32	$32,000
Purchase #1	1,800	34	61,200
Purchase #2	800	38	30,400
Purchase #3	1,200	41	49,200

During the current period, Chen sold 2,800 units.

(a) Assume that Chen uses the first-in, first-out method. Compute both cost of good sold for the current period and the ending inventory balance. Use the financial statement effects template to record cost of goods sold for the period.
Ending inventory balance $Answer

Cost of goods sold              $Answer

Use negative signs with answers, when appropriate.

	Balance Sheet
Transaction	Cash Asset	+	Noncash Assets	=	Liabilities	+	Contributed Capital	+	Earned Capital
Record FIFO cost of goods sold	Answer		Answer		Answer		Answer		Answer

Income Statement
Revenue	-	Expenses	=	Net Income
Answer		Answer		Answer

(b) Assume that Chen uses the last-in, first-out method. Compute both cost of good sold for the current period and the ending inventory balance.
Ending inventory balance  $Answer

Cost of goods sold              $Answer

(c) Assume that Chen uses the average cost method. Compute both cost of good sold for the current period and the ending inventory balance.
Ending inventory balance $Answer
Cost of goods sold              $Answer

(d) Which of these three inventory costing methods would you choose to:

1. Reflect what is probably the physical flow of goods?	LIFO FIFO Average Cost
2. Minimize income taxes for the period?	LIFO FIFO Average Cost
3. Report the largest amount of income for the period?	LIFO FIFO Average Cost

Answer 1

(a)

FIRST IN FIRST OUT (FIFO) METHOD

Units

Dollars

Beginning inventory

1,000

Purchased during the period

3,800

(1800+800+1200)

Total units available

4,800

$172,800

(32000+61200+30400+49200)

Less:Units Sold

2,800

Ending Inventory

2,000

Ending Inventory Balance:

Purchase #3: 1200*$41

$49,200

Purchase$2(2000-1200)*$38

$30,400

Total Ending Inventory Balance

$79,600

Cost of goods sold

$93,200

(172800-79600)

BALANCE SHEET

INCOME STATEMENT

Transaction

Cash Asset

+

Non Cash assets

=

Liabilities

+

Contributed Capital

+

Earned Capital

Revenue

-

Expense

=

Net Income

Record FIFO Cost of goods sold

-$93,200

-$93,200

$93,200

-$93,200

(b)

LAST IN FIRST OUT (LIFO) METHOD

Units

Ending Inventory

2,000

Ending Inventory Balance:

Beginning Inventory: 1000*$32

$32,000

Purchase$1(2000-1000)*$34

$34,000

Total Ending Inventory Balance

$66,000

Cost of goods sold

$106,800

(172800-6600)

(c)

AVERAGE COST METHOD

Units

Ending Inventory

2,000

Average Cost of Inventory:

Total Inventory available in dollar

$172,800

(From (a)

Total inventory available in units

4,800

(From (a)

Average Cost of Inventory:

$36

(172800/4800)

Total Ending Inventory Balance

$72,000

(2000*36)

Cost of goods sold

$100,800

(2800*36)

(d)

1

Reflect physical flow of goods

FIFO

2

Minimize income tax for the period

LIFO

(Cost of goods sold is highest)

3

Report Largest amount of Income

FIFO

(Cost of goods sold is lowest)