Question

Shanrock Company uses the periodic inventory method and had the following inventory information available:

                                                               Units               Unit Cost           Total Cost

1/1         Beginning Inventory                    100                    $4                   $   400

1/20       Purchase                                     400                    $6                     2,400

7/25       Purchase                                     200                    $7                     1,400

10/20     Purchase                                     300                    $8                   2,400

                                                               1,000                                           $6,600

A physical count of inventory on December 31 revealed that there were 400 units on hand.

Instructions

Answer the following independent questions and show computations supporting your answers.

1.    Assume that the company uses the FIFO method. The value of the ending inventory at December 31 is $__________.

2.    Assume that the company uses the Average-Cost method. The value of the ending inventory on December 31 is $__________.

3.    Assume that the company uses the LIFO method. The value of the ending inventory on December 31 is $__________.

4.    Determine the difference in the amount of income that the company would have reported if it had used the FIFO method instead of the LIFO method. Would income have been greater or less?

Answer 1

Inventory value under various method:

a) FIFO method: First in, First Out - The value of ending inventory of 400 units will be based on last purchases i.e. 300 units @ $8 = $2,400 and 100 units @ 7 = $700. Total 400 units value of ending inventory under FIFO = $3,100 ($2400+$700)

b) Average-Cost method: The value of ending inventory of 400 units will be based on average cost of units. i.e. Total cost of $6,600 divided by 1000 total units = $6,600/1000 = $6.6 per unit * 400 units = $2,640

c) LIFO method: Last in, First Out - The value of ending inventory of 400 units will be based on inital purchases i.e. 100 units @ $4 = $400 and 300 units @ 6 = $1,800. Total 400 units value of ending inventory under FIFO = $2,200 ($400+$1800)

If the company would have followed FIFO instead of LIFO, the impact on the income would be higher by $900 (difference between inventory valuation between FIFO ($3100) and LIFO ($2200))