Question

Sheffield Inc. is trying to determine whether to use the FIFO or average cost formula. The accounting records show the following selected inventory information:

			Purchases						Cost of Goods Sold						Ending Inventory
Date			Units		Cost		Total		Units		Cost		Total		Units		Cost		Total
Oct.	2		10,500		$12		$126,000								10,500		$12		$126,000
	15		17,500		14		245,000								[1]		[2]
															[3]		[4]		[5]
	29								20,000
									[6]		[7]
									[8]		[9]		[10]		[11]		[12]		[13]

The company accountant has prepared the following partial statement of income to help management understand the financial statement impact of each cost determination cost formula.

		FIFO		Average
Sales		$515,000		$515,000
Cost of goods sold
Gross profit
Operating expenses		215,000		215,000
Income before income tax
Income tax expense (30%)
Net income

(a)

Fill in the missing amounts in the perpetual inventory schedule, assuming the use of the FIFO cost formula.

			Purchases				Cost of Goods Sold				Ending Inventory
Date			Units	Cost	Total		Units	Cost	Total		Units	Cost	Total
	Oct. 2		10,500	$12	$126,000						10,500	$12	$126,000
	15		17,500	14	245,000						enter a number of units	enter a dollar amount
											enter a number of units	enter a dollar amount	$enter a total amount
	29						20,000	(total units sold)
							enter a number of units	$enter a dollar amount

Answer 1

According to the Question, we need to find the missing amount under FIFO Inventory and Average Cost method:

1. First, we will use the FIFO Method:According to this method, the Inventory first comes in will be sold first.

Date	Particulars	Purchases	Cost of Goods sold	Ending Inventory
		Units	Cost	Total	Units	Cost	Total	Units	Cost	Total
Oct 2	Purchases	10,500	$12	$126,000				10500	$12	$126,000
Oct 15	Purchases	17,500	$14	$245,000				10500	$12	$126,000
								17,500	$14	$245,000
Oct 29	Sales			10500	$12	$126,000
				9500	$14	$133,000		8,000	$14	$112,000

Hence, in October 29 the total goods sold were 20,000 units. So according to FIFO method, the Inventory of Oct 2 was first sold and the remaining 9500 sold from Oct 15.

(i)The Cost of Goods sold under FIIFO Method is= Sales of Oct 29

=$126,000+$133,000= $259,000

(ii)Closing Inventory under FIFO Method is =$112,000

2. In next Table, we need to calculate Closing Inventory and Cost of Goods sold under Average Cost method:

Average Cost method: According to this method the cost is per unit cost at which goods is sold is calculated as= Total units/ Total cost.

Date	Particulars	Purchases	Cost of Goods sold	Ending Inventory
		Units	Cost	Total	Units	Cost	Total	Units	Cost	Total
Oct 2	Purchases	10,500	$12	$126,000				10500	$12	$126,000
Oct 15	Purchases	17,500	$14	$245,000				28,000	$13.25	$371,000
Oct 29	Sales				20,000	$13.25	$265,000	8000	$13.25	$106,000

Hence, the amount for cost per unit for goods sold is calculated as=$371,000/28000 units= $13.25.

This amount is multiplied by total units sold= 20,000*13.25= $265,000

(i) Cost of Goods sold under Average cost Inventory method is $265,000

(ii) Closing Inventory is= $106,000

3. Now, we need to prepare the Income Statement under both methods:

Sheffield Inc. Income Statement
Particulars	FIFO	Average cost
Sales-	$515,000	$515,000
Less: Cost of Goods sold-	$259,000	$265,000
Gross Profit-	$256,000	$250,000
Less: Operating Expenses-	$215,000	$215,000
Income before Income tax-	$41,000	$35,000
Less:Income Tax Expense (30%)(wn.1)	$12,300	$10,500
Net Income-	$28,700	$25,000

Working Notes:

1.Income Tax Expense is calculated as= 30% * Income before Income tax

Hence, The Net Income is higher under FIFO Method.