Question

Big Fish Tackle Co. Ltd. reports the following inventory transactions for its fishing rods for the month of April. The company uses a perpetual inventory system.

Date		Explanation	Units	Unit Cost/Price	Total Cost
Apr.	1	Beginning inventory	50	$230	$11,500
	6	Purchases	35	240	8,400
	9	Sales	(55)	350
	14	Purchases	40	245	9,800
	20	Sales	(50)	360
	28	Purchases	30	250	7,500

Instructions

1. Using FIFO, determine the cost of goods sold and the cost of ending inventory.
2. Record journal entries for the sales transactions on April 9 and April 20.
3. Assume that Big Fish Tackle wants to change to the average cost formula. Explain what guidelines the company must consider before making this change.
4. If the company does change to the average cost formula and prices continue to rise, explain whether you expect the cost of goods sold and ending inventory amounts to be higher or lower than these amounts when using FIFO.

Answer 1

Answer.

FIFO

Cost of goods sold=$24800

Ending inventory=$12400

Journal entries

Average cost method

The company will assume that after every purchase and sale average cost per unit will be calculated for further transaction to record at the per unit cost.

If company changes to average cost method and prices keep on rising, then we'll see lower Cost of goods sold and lower ending inventory than in FIFO. This is beacause in FIFO method inventory and cost of goods sold will be evaluated at rising price where as in average method cost of goods sold and ending inventory will be evaluated at aveeaav cost per unit which is lower than the FIFO per unit cost.