Question

Priya Industries, a software manufacturer, uses the periodic inventory system. They had the following transactions for the month of June: Beginning Inventory 400 units @ $32 per unit Purchase #1 420 units @ $33 per unit Purchase #2 480 units @ $35 per unit Purchase #3 500 units @ $37 per unit Purchase #4 550 units @ $39 per unit Priya sold 1,330 units throughout the period. Required: 1. Calculate the a) Ending Inventory and b) Cost of Goods Sold, assuming that the company uses the Last-in, First-out (LIFO) inventory valuation method. 2. Calculate the a) Ending Inventory and b) Cost of Goods Sold, assuming that the company uses the First-in, First-out (FIFO) inventory valuation method. 3. Calculate the a) Ending Inventory and b) Cost of Goods Sold, assuming that the company uses the Average Cost inventory valuation method. 4. Which inventory valuation method produces the highest Net Income? Which method produces the highest Ending Inventory? Which method reduces taxes? 5. What method would Priya Industries most likely use for the physical flow of the inventory? (This means, how would they physically move the inventory out of their warehouse). Why?

Answer 1

Answer:

Beginning Inventory = 400 Units * $32 = $12,800

Cost of Purchases = (420 Units * $33) + (480 Units * $35) + (500 Units * $37) + (550 Units * $39)
Cost of Purchases = $13,860 + $16,800 + $18,500 + $21,450
Cost of Purchases = $70,610

Cost of Goods available for Sale = $12,800 + $70,610
Cost of Goods available for Sale = $83,410

Requirement 1.
Cost of Goods Sold = (550 Units * $39) + (500 Units * $37) + (280 Units * $35)
Cost of Goods Sold = $21,450 + $18,500 + $9,800
Cost of Goods Sold = $49,750

Ending Inventory = Cost of Goods available for sale – Cost of Goods Sold
Ending Inventory = $83,410 - $49,750
Ending Inventory = $33,660

Requirement 2.
Cost of Goods Sold = (400 Units * $32) + (420 Units * $32) + (480 Units * $35) + (30 Units * $37)
Cost of Goods Sold = $12,800 + $13,860 + $16,800 + $1,110
Cost of Goods Sold = $44,570

Ending Inventory = Cost of Goods available for sale – Cost of Goods Sold
Ending Inventory = $83,410 - $44,570
Ending Inventory = $38,840

Requirement 3.
Average Cost per Unit = Cost of Goods available for Sale / Units available for sale
Units available for sale = 400 + 420 + 480 + 500 + 550 = 2,350 Units

Average Cost per Unit = $83,410 / 2,350
Average Cost per Unit = $35.49

Cost of Goods Sold = 1,330 * $35.49
Cost of Goods Sold = $47,202

Ending Inventory = Cost of Goods available for sale – Cost of Goods Sold
Ending Inventory = $83,410 - $47,202
Ending Inventory = $36,208

Requirement 4.
FIFO method would result in highest Net Income as it has lowest Cost of Goods Sold.

FIFO Method results in highest Ending Inventory.

LIFO method would result in lowest Income taxes, as it has highest cost of goods sold which will reduces income before taxes.