Question

 

Purple Company uses a perpetual inventory system. The company's beginning inventory of a particular product and its purchases during the month of January were as follows:

	Quantity	Unit Cost	Total Cost
Beginning inventory, Jan 1	16	$10	$160
Purchase, Jan 11	14	$12	$168
Purchase, Jan 20	23	$15	$345
Totals	53		$673

On January 25, Purple Company sold 25 units of this product The other 28 units remained in inventory at January 31.

Determine the Cost of Goods Sold for the month of January using the LIFO cost flow assumption.

Determine the Inventory balance on January 31 assuming the company uses FIFO to allocate inventory costs.

Prepare the adjusting entry needed if a physical count of inventory on January 31 reveals that there are only 26 items remaining in inventory and Purple uses the FIFO cost flow assumption.

Considering current replacement costs, what inventory costing method would you recommend that Purple use in order the show the most realistic balance sheet value for inventory at January 31?

Group of answer choices

Specific identification

Average cost

FIFO

LIFO

Answer 1

1) COGS using LIFO :-

COGS = begining inventory + purchases - ending inventory

calculating ending inventory using LIFO :

given ending inventory = 28 units

Using LIFO , assign the cost of oldest inventory to the ending inventory

therefore,ending inventory = 16x10 + 12x12 = 160+144=304

calculating COGS :

COGS using LIFO = 160+168+345 -(304) = 673-304 = $369

2) inventory balance on 31 st using FIFO:-

using FIFO, assign last-in inventory value to ending inventory

given ending inventory = 28 units

therefore, inventory balance on 31st january = 23x15 + 5x12 = $405

3)  the adjusting entry needed if a physical count of inventory on January 31 reveals that there are only 26 items remaining in inventory and Purple uses the FIFO cost flow assumption:-

using FIFO cost of 28 units of inventory balance on 31st january = 23x15 + 5x12 = $405

but if the physical count of inventory on january 31 reveals that there are only, 26 units, new ending inventory amount for 26 units = 23x15 + 3x12 = $381

amount that should be adjusted = 405-381 = $24

therefore, adjusting entry is:

particulars amount amount

inventory adjustment account DR 24

to inventory account 24

4) For a more accurate cost, use the FIFO method of inventory valuation as it assumes the older items that are less costly are the ones sold first.

explanation:

the current replacement cost should be lower of cost or market.

lets consider each option in detail:

Under specific identification method, every item in your inventory is tracked from the time it is stocked to when it is sold. It is usually used for large items that can be easily identified and have widely different features and costs associated with these features.

Under the weighted average cost method, the weighted average is used to determine the amount that goes into the cost of goods sold and inventory.

FIFO is based on the premise that the first inventory purchased is the first to be sold. The remaining assets in inventory are matched to the assets that are most recently purchased or produced.

Under LIFO inventory valuation method, the assumption is that the newer inventory is sold first while the older inventory remains in stock

To assess the method which is best , we need to pay attention to changes in the inventory costs:

· If the inventory costs are escalating or are likely to increase, LIFO costing may be better. As higher cost items are considered sold, it results in higher costs and lower profits.

· In case your inventory costs are falling, FIFO might be the best option for you.

· For a more accurate cost, use the FIFO method of inventory valuation as it assumes the older items that are less costly are the ones sold first.

therefore FIFO is the best method of inventory valuation considering current replacement cost.