Question

Alternative Inventory Methods Nevens Company uses a periodic inventory system. During November, the following transactions occurred: Date Transaction Units Cost/Unit November 1 Balance 500 $3.50 8 Sale 350 13 Purchase 300 4.00 21 Purchase 200 5.00 28 Sale 150 Required: 1. Compute the cost of goods sold for November and the inventory at the end of November for each of the following cost flow assumptions. If required, round your answers to the nearest dollar. FIFO Cost of Goods Sold $ Ending Inventory $ LIFO Cost of Goods Sold $ Ending Inventory $ Average cost (In your computations, round per unit costs to the nearest cent.) Cost of Goods Sold $ Ending Inventory $ 2. will result in the highest inventory valuation and the lowest amount reported as cost of goods sold. Cost will result in lowest inventory valuation and highest amount reported as cost of goods and hence the lowest net income and taxes paid. falls in between the other two assumptions for both ending inventory valuations and cost of goods sold.

Answer 1

Ans. 1	Total units sold (350 + 150)   =    500 units
Ans. 1 a	FIFO:	Cost of goods available for sale			Cost of goods sold - Periodic FIFO			Ending inventory - Periodic FIFO
		Units	Rate	Total	Units	Rate	Total	Units	Rate	Total
	Beginning inventory	500	$3.50	$1,750	500	$3.50	$1,750	0	$0.00	$0
	Purchases:
	13-Nov	300	$4.00	$1,200				300	$4.00	$1,200
	21-Nov	200	$5.00	$1,000				200	$5.00	$1,000
	Total	1000		$3,950	500		$1,750	500		$2,200
	*In FIFO method the units that have purchased first, are released the first one and the ending inventory
	units remain from the last purchases.
Ans. 1 b	LIFO:	Cost of goods available for sale			Cost of goods sold - Periodic LIFO			Ending inventory - Periodic LIFO
		Units	Rate	Total	Units	Rate	Total	Units	Rate	Total
	Beginning inventory	500	$3.50	$1,750	0	$0.00	$0	500	$3.50	$1,750
	Purchases:
	13-Nov	300	$4.00	$1,200	300	$4.00	$1,200	0		$0
	21-Nov	200	$5.00	$1,000	200	$5.00	$1,000	0		$0
	Total	1000		$3,950	500		$2,200	500		$1,750
	*In LIFO method the units that have purchased last, are released the first one and ending inventory units
	remain from the first purchase.
Ans. 1 c	Average cost:	Cost of goods available for sale			Cost of goods sold - Periodic Average cost			Ending inventory - Periodic Average cost
		Units	Rate	Total	Units	Rate	Total	Units	Rate	Total
	Beginning inventory	500	$3.50	$1,750	0	$0.00	$0	0	$0.00	$0
	Purchases:
	13-Nov	300	$4.00	$1,200
	21-Nov	200	$5.00	$1,000
	Total	1000		$3,950	500	$3.95	$1,975	500	$3.95	$1,975
	Average cost per unit =   Total cost of goods available for sale / Units available for sale
			$3,950 / 1000
			$3.95		per unit
Ans. 2 a	FIFO periodic will result in the highest inventory valuation and the lowest amount reported as cost of goods sold.
Ans. 2 b	LIFO Periodic Cost will result in lowest inventory valuation and highest amount reported as cost of goods
	and hence the lowest net income and taxes paid.
Ans. 2 c	Average cost falls in between the other two assumption (LIFO and FIFO) for both ending inventory valuations ($1,750 < $1,975 < $2,200)
	and cost of goods sold ($2,200 > $1,975 > $1,750).