Question

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

				Units		Unit Cost			Total Cost
1/1		Beginning Inventory		100		$3			$300
1/20		Purchase		500		$4			2,000
7/25		Purchase		100		$5			500
10/20		Purchase		300		$6			1,800
				1,000					$4,600

A physical count of inventory on December 31 revealed that there were 380 units on hand.

Answer the following independent questions.

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. (a)		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		$
4. (b)		Would income have been greater or less?

Answer 1

1. As per FIFO method, the ending inventory would be valued basis the last purchases. i.e. 380 units would be valued as:
300 units valued at purchases on 10/20 @ $6 = $1800
Balance 80 units valued at purchases on 7/25 @ $5 = $400
Total 380 units valued at $2,200 ($1800+$400) under FIFO

2. Under average method, the ending inventory would be valued at cost per unit. i.e. Total cost/Total units = $4600/1000 = $4.6.
Total 380 units valued at $1,748 (380 units @ $4.6 per unit) under average method.

3. As per LIFO method, the ending inventory would be valued basis the initial purchases. i.e. 380 units would be valued as:
100 units purchased on begining inventory @ $3 = $300
Balance 280 units valued at purchases on 1/20 @ $4 = $1120
Total 380 units valued at $1,420 ($300+$1120) under LIFO

4. a. The difference in amount of income if FIFO method was used instead of LIFO, it would be the difference in inventory value as per FIFO - LIFO, i.e. $2,200 - $1,420 = $780.
4.b. The income would be greater in FIFO.