Question

A company sells 1,900 units during the year. In addition, the company uses a periodic inventory system, has a beginning inventory of 600 units that were purchased at $10 per unit, and has the following purchases and sales. What is the company's ending inventory if it uses the FIFO method? Date Units purchased Cost per unit January 1,000 $11 May 900 $12 October 700 $14

Answer 1

Given Information:

Sales – 1900 units

Opening Inventory – 600 units or $6000 (600 units * $10)

Purchases made during the year:

(i) January – 1000 units at $11 per unit

(ii) May – 900 units at $12 per unit

(iii) October – 700 units at $14 per unit

Note: Periodic inventory system is a method of inventory valuation where businesses physically count their products at the end of specific periods. In this question, company valued its opening inventory in this method, which is given as 600 units at $10 per unit.

*FIFO Method – This is an inventory valuation method in which the assumption is, the oldest units in the inventory have been sold first. That is First in First out (FIFO). The products that are purchased first will be sold first.

Since the company uses FIFO Method for its inventory valuation, the computation will be as follows:

Total sales is 1900 units

As per FIFO method, the units sold will be the ones purchased first. That is 600 units of opening inventory, 1000 units purchased in January and 300 units purchased in May.

Therefore the closing inventory comprises of 600 units (that is 900 units – 300 units sold) and 700 units purchased in October.

Value of closing inventory as per FIFO Method:

600 units at $12 per unit = $7200

700 units at $14 per unit = $9800

Closing Inventory (units) = 1300 (600+700)

Closing Inventory ($) = $17000 ($7200 + $9800).