Question

Scoresby Inc. tracks the number of units purchased and sold throughout each year but applies its inventory costing method at the end of the year, as if it uses a periodic inventory system. Assume its accounting records provided the following information at the end of the annual accounting period, December 31.

  

Transactions	Units			Unit Cost
a. Inventory, Beginning		4,000		$	22
For the year:
b. Purchase, March 5		10,000			23
c. Purchase, September 19		6,000			25
d. Sale, April 15 (sold for $67 per unit)		4,300
e. Sale, October 31 (sold for $70 per unit)		9,000
f. Operating expenses (excluding income tax expense), $606,000

Required:

1. 1. Calculate the number and cost of goods available for sale.
2. 2. Calculate the number of units in ending inventory.
3. 3. Compute the cost of ending inventory and cost of goods sold under (a) FIFO, (b) LIFO, and (c) weighted average cost.
4. 4. Prepare an income statement that shows the FIFO method, LIFO method and weighted average method.
5. 6. Which inventory costing method minimizes income taxes?

Answer 1

Date	Unit	Unit cost	Total costs
March 1	4,000	$22	$88,000
March 5	10,000	23	230,000
September 19	6,000	25	150,000
Total	20,000		$468,000

Average cost per unit = $468,000 / 20,000 = $23.4

1.

Number of cost of goods available for sale = 20,000 units

2.

Number of units in ending inventory = 20,000 - 4,300 - 9,000 = 6,700 units

3.

Cost of goods sold = Cost of goods available for sale - Cost of ending inventory

	FIFO	LIFO	Weighted average
Cost of ending inventory	$166,100 [$150,000+16,100(700*$23)]	$150,100 [$88,000+62,100(2,700*$23)]	156,780 (6,700*$23.4)
Cost of goods sold	301,900 ($468,000-166,100)	317,900 ($468,000-150,100)	311,220 (13,300*$23.4)

4.

	FIFO	LIFO	Weighted average
Sales (4,300*$67)+(9,000*$70)	$918,100	$918,100	$918,100
Less: Cost of goods sold	301,900	317,900	311,220
Gross margin	616,200	600,200	606,880
Less: Operating expenses	606,000	606,000	606,000
Net operating income	$10,200	$(5,800)	$880

6.

LIFO method minimizes income taxes.