Question

Inventory Costing Methods—Periodic System

Following is an inventory acquisition schedule for Weaver Corp. for 2017:

		Units		Unit Cost
Beginning inventory		5,000		$10
Purchase:
February 4		3,000		9
April 12		4,000		8
September 10		2,000		7
December 5		1,000		6

During the year, Weaver sold 12,500 units at $12 each. All expenses except cost of goods sold and taxes amounted to $20,000. The tax rate is 30%.

  Compute cost of goods sold and ending inventory under each of the following three methods assuming a periodic inventory system:

Inventory Costing Method	Ending Inventory	Cost of Goods Sold
Weighted average	$	$
FIFO
LIFO

2. Prepare income statements under each of the three methods.

Weaver Corp.
Income Statement
For the Year Ended December 31, 2017
	Weighted Average	FIFO	LIFO
	$	$	$
	$	$	$
	$	$	$
	$	$	$

3. Which method do you recommend so that Weaver pays the least amount of taxes during 2017?

4. If Weaver anticipates that unit costs for inventory will increase throughout 2018, will it be able to switch from your recommended method for 2017 to another method in 2018 to lower its taxes?

Answer 1

FIFO method states that inventory purchased first will be sold first while LIFO method assumes that inventory purchased later will be sold first

Weighted average method takes weighted average into consideration

Total units available = 5,000+3,000+4,000+2,000+1,000 = 15,000 units

Units sold = 12,500

Ending Inventory = 2,500 units

Total cost = 5,000*10 + 3,000*9 + 4,000*8 + 2,000*7 + 1,000*6 = 129,000

FIFO:

Ending Inventory = 1,000*6 + 1,500*7 = $16,500

COGS = 129,000-16,500 = $112,500

LIFO:

Ending inventory = 2,500*10 = $25,000

COGS = $104,000

Weighted average =:

Ending inventory = 2,500*129,000/15,000 = $21,500

COGS = $107,500

2.Income Statement

Weaver Corp.
Income Statement
For the Year Ended December 31, 2017
	Weighted Average	FIFO	LIFO
Sales	$150,000	150,000	150,000
Less: Cost of goods sold	107,500	112,500	104,000
Other Expenses	20,000	20,000	20,000
Profit	22,500	17,500	26,000
Less: Tax @30%	6,750	5,250	7,800
Net Income	15,750	12,250	18,200

3.Which method do you recommend so that Weaver pays the least amount of taxes during 2017?

FIFO

If Weaver anticipates that unit costs for inventory will increase throughout 2018, will it be able to switch from your recommended method for 2017 to another method in 2018 to lower its taxes?

In the event of rising costs, LIFO method will lead to lower taxes