Question

Exercise 6-8

Kingbird, Inc. uses the periodic inventory system and had 145 units in beginning inventory at a total cost of $18,125. The company purchased 290 units at a total cost of $58,000. At the end of the year, Kingbird had 70 units in ending inventory.

a.Compute the cost of the ending inventory and the cost of goods sold under FIFO, LIFO, and average-cost. (Round average-cost per unit and final answers to 0 decimal places, e.g. 1,250.)

b. Which cost flow method would result in the highest net income?

c. Which cost flow method would result in inventories approximating current cost in the balance sheet?

d. Which cost flow method would result in Kingbird paying the least taxes in the first year?

Answer 1

Cost of units sold = Beginning inventory unit+ purchases - ending inventory units

Cost of units sold = 145+290-70 = 365 unit sales

a.

Cost of ending inventory and cost of goods sold under FIFO method:

Cost of goods sold
	Units	Amount
Beginning inventory	145	$18,125
Purchases	220 (365-145)	44,000 ($58,000/290*220)
Cost of goods sold	365	$62,125
Ending inventory:
	Units	Amount
Beginning inventory	0	0
Purchases	70	14,000 ($58,000/290*70)
Cost of ending inventory	70	$14,000

Cost of ending inventory and cost of goods sold under LIFO method:

Cost of goods sold
	Units	Amount
Purchases	290	$58,000
Beginning inventory	75 (365-290	9,375 ($18,125/145*75)
Cost of goods sold	365	$67,375
Ending inventory:
	Units	Amount
Purchases	0	0
Beginning inventory	70	8,750 ($18,125/145*70)
Cost of ending inventory	70	$8,750

Cost of ending inventory and cost of goods sold under Weighted average method:

Weighted average cost per unit = $18,125+58,000 / 145+290

Weighted average cost per unit = $76,125 / 435 = $175 per unit

Cost of goods sold = 365*$175 = $63,875

Cost of ending inventory = 70*$175 = $12,250

b.

FIFO method would result in highest net income.

Since FIFO method cost of goods sold is lower than the other two method. The net income will be higher than the other two method

c.

FIFO method would result in inventories approximating current cost in the balance sheet. Since ending inventories are valued at current prices.

d.

LIFO method would result in paying least taxes in the first year. Since its cost of goods sold is higher resulting in lower income before tax which will result in lower taxes.