Question

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

                                                             Units       Unit Cost           Total Cost

1/1       Beginning Inventory               100                  $4                    $400

1/20     Purchase                                  400                  $6                    $2400

7/25     Purchase                                  200                  $7                    $1400

10/20   Purchase                                  300                  $8                    $2400

1,000                                      $6,600

A physical county if inventory on December 31 revealed that there were 400 units on hand

Answer questions below and show computations supporting the answer:

Assume that the company uses the FIFO method. The value of the ending inventory at

December 31 is ________.

Assume that the company uses the Average-Cost method. The value of the ending inventory on December 31 is ________.

Assume that the company uses the LIFO method. The value of the ending inventory on

December 31 is ________.

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.

Would income have been greater or less?

Answer 1

1) Workings: If the company uses LIFO method, then all the material which arrived early would have issued and the balance 400 units are from purchase on 10/20, 300 units at $8 per unit and 100 unit from purchase on 7/25 at $7 per unit.

Therefore the value of the ending inventory on December 31 under FIFO method is = [(300X8)+(100X7)] = $3,100

??2) If average cost method is used then, average cost per unit = 6600/1000= $6.6

Therefore the value of the ending inventory on December 31 under average cost method is = ?(300X6.6) = $1,980

?** ?Weighted average considered.

3) If LIFO method is used the all the late arrivals would have been issued first and the balance remaining consist of 100 units from the beginning inventory and 200 units from the first purchase.

Therefore the value of the ending inventory on December 31 under LIFO method is = [(100X4)+(200X6)] = $1,600

4) If ending inventory is increased then the profit will increase as it will increase the credit side of PL account.

Ending inventory under FIFO Method = $3,100

Ending inventory under LIFO Method = $1,600

Difference in the amount of income = 3100-1600 = $1,500.

The income will be grater as the ending inventory is greater in the FIFO method.