Question

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P7-3 (Algo) Evaluating Four Alternative Inventory Methods Based on Income and Cash Flow LO7-2, 7-3

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At the end of January of the current year, the records of Donner Company showed the following for a particular item that sold at $18.60 per unit:

Transactions	Units	Amount
Inventory, January 1	670	$	3,752
Purchase, January 12	640		4,864
Purchase, January 26	200		1,920
Sale	(530)
Sale	(200)

P7-3 Part 1

Required:

1a. Assuming the use of a periodic inventory system, compute Cost of Goods Sold under each method of inventory: average cost, FIFO, LIFO, and specific identification. For specific identification, assume that the first sale was selected from the beginning inventory and the second sale was selected from the January 12 purchase.

1b. Assuming the use of a periodic inventory system, prepare a partial income statement under each method of inventory: (a) average cost, (b) FIFO, (c) LIFO, and (d) specific identification. For specific identification, assume that the first sale was selected from the beginning inventory and the second sale was selected from the January 12 purchase.

Answer 1

1a. Below is the table for cost of goods sold under each inventory method:

Gross Margin	FIFO	LIFO	Average Cost	Specific ID
Cost of goods sold	4,208	5,948	5,094	4,488

Below is the summary of computation:

1. FIFO method: 670*5.6+60*7.6 = 4208 (Begining inventory + partial 12 Jan purchase)

2. LIFO method: 200*9.6+530*7.6 = 5948 (Purchase on 26th Jan + Partial 12 Jan purchase)

3. Average cost: Below is the computation of average cost:

Particulars	Units	Rate	Value
Beginning inventory	670	5.6	3752
Jan 12	640	7.6	4864
Jan 26	200	9.6	1920
Total	1510		10536
	Average cost	(value / units)	6.98

4. Specific ID: 530*5.6+200*7.6 = 4488 (First sale from inventory as on Jan 1 and second sale from purchase on Jan 12)

1b. Below is the partial income statement with Sales value, cost of goods sold and Gross profit details:

Gross Margin	FIFO	LIFO	Average Cost	Specific ID
Sales	13,578	13,578	13,578	13,578
Less: Cost of goods sold	4,208	5,948	5,094	4,488
Gross profit	9,370	7,630	8,484	9,090

Note: Sales value is computed as 730 * 18.6 as given in the question.