Question

Simple Plan Enterprises uses a periodic inventory system. Its records showed the following:

Inventory, December 31, using FIFO → 50 Units @ $20 = $1,000
Inventory, December 31, using LIFO → 50 Units @ $16 = $800

Transactions in the Following Year	Units			Unit Cost			Total Cost
Purchase, January 9		62			21		$	1,302
Purchase, January 20		112			22			2,464
Sale, January 11 (at $44 per unit)		92
Sale, January 27 (at $45 per unit)		68

Required:

1. Compute the number and cost of goods available for sale, the cost of ending inventory, and the cost of goods sold under FIFO and LIFO.
2. Compute the inventory turnover ratio under the FIFO and LIFO inventory costing methods.
3. Does the inventory method used make a significant difference in the inventory turnover ratio?

Answer 1

1) FIFO :Under this method ,units acquired first are sold first .so ending inventory is left from inventory purchased at last. Units sold= 92+68

                     = 160 Units

Ending units = Units available for sale -units sold

                 =224-160

                   = 64 units

	Quantity	Unit cost	Total
Beginning inventory	50	20	1000
Purchase Jan 9	62	21	1302
Purchase Jan 20	112	22	2464
number and cost of goods available for sale	224		4766

cost of Ending Inventory :

	Quantity	unit cost	Total
Jan 20	64	22	1408
Cost of ending inventory			1408

Cost of goods sold = cost of goods available for sale -ending inventory

                             = 4766 -1408

                              = 3358

LIFO Method :Units acquired last are sold first so ending inventory is left from beginning inventory and then from initial purchase .

	Quantity	Unit cost	Total
Beginning inventory	50	16	800
Purchase Jan 9	62	21	1302
Purchase Jan 20	112	22	2464
number and cost of goods available for sale	224		4566

cost of Ending Inventory :

	Quantity	unit cost	Total
Beginning inventory	50	16	800
Jan 9	14	21	294
Cost of ending inventory	64		1094

Cost of goods sold = cost of goods available for sale -ending inventory

                             = 4566 - 1094

                              = 3472

2)

	FORMULA	FIFO	LIFO
Average inventory	[Beginning inventory +ending inventory]/2	[1000+1408]/2 1204	[800+1094]/2 947
Inventory turnover ratio	cost of goods sold/Average inventory	3358/1204	3472/947
		2.79 times	3.67 times

3)Yes ,The method for inventory accounting results in significant difference in inventory turnover ratios from 2.79 under FIFO to 3.67 under LIFO .