Question

Ultimate Corporation has assembled their management team to review their current inventory methods. They wish to ensure the optimal reporting figures for the upcoming quarter.

Below is a summary of their Inventory transactions:

Date	Units Purchased	Purchase Price	Units Sold	Selling Price
Jan 4	1500	$80
Jan 15	800	$76
Feb 8			700	$120
Feb 15	400	$82
Feb 28			1200	$122

Required:

1. Determing the Ending Inventory and Cost of Goods Sold under:
   1. FIFO
   2. LIFO
2. Which inventory method results in the lowest inventory turnover ratio for the quarter?
3. If the company decides to change their inventory reporting method – what would be required?

Answer 1

Assumption : Question is solved using assuming Perpetual Inventory Method is followed.

Question A

A.FIFO

	Goods		Purchased	Cost of	Goods	Sold	Ending	Inventory	Balance
Date / Particulars	Units	Unit Rate	Total	Units	Unit Rate	Total	Units	Unit Rate	Total
Jan 04/Purchases	1,500	80	120,000				1,500	80	120,000
Jan 15/ Purchases	800	76	60,800				1,500	80	120,000
							800	76	60,800
Feb 08 / Sales				700	80	56,000	800	80	64,000
							800	76	60,800
Feb 15/ Purchase	400	82	32,800				800	80	64,000
							800	76	60,800
							400	82	32,800
Feb 28 / Sales				800	80	64,000	400	76	30,400
				400	76	30,400	400	82	32,800
Total	2,700		213,600	1,900		150,400	800		63,200

Value of Ending Inventory as per FIFO = $ 63,200

Value of Cost of Goods Sold as per FIFO = $ 150,400

Part B. LIFO

	Goods		Purchased	Cost of	Goods	Sold	Ending	Inventory	Balance
Date / Particulars	Units	Unit Rate	Total	Units	Unit Rate	Total	Units	Unit Rate	Total
Jan 04/Purchases	1,500	80	120,000				1,500	80	120,000
Jan 15/ Purchases	800	76	60,800				1,500	80	120,000
							800	76	60,800
Feb 08 / Sales				700	80	56,000	800	80	64,000
							800	76	60,800
Feb 15/ Purchase	400	82	32,800				800	80	64,000
							800	76	60,800
							400	82	32,800
Feb 28/ Sales				400	82	32,800	800	80	64,000
				800	76	60,800
Total	2,700		213,600	1,900		149,600	800		64,000

Value of Ending Inventory as per LIFO = $ 64,000

Value of Cost of Goods Sold as per LIFO = $ 149,600

Question 2

Particulars	FIFO	LIFO
Cost of Goods Sold	150,400	149,600
÷ Average Inventory	63,200	64,000
Inventory Turnover Ratio	2.38 Times	2.34 Times

Inventory Turnover Ratio is lower with LIFO Method.

Notes

As the Opening Balance of Inventory was not available Ending Inventory Balance has been used as Average Inventory.

Question 3

It is always considered better to be consistent by using similar accounting policies for one perio to other.

If the company chooses to change their Inventory Method the company should make sure that they effectively monitor the effects of doing that and a proper disclosure is made for that. In addition to that the Company need to adjust it's previous financial statements to be consistent with the changes that the company will encounter duet to change in accounting policies and the user of financial statements get a true and better picture of the financial position of the company.