Question

Scoresby Inc. tracks the number of units purchased and sold throughout each year but applies its inventory costing method at the end of the year, as if it uses a periodic inventory system. Assume its accounting records provided the following information at the end of the annual accounting period, December 31.

  

Transactions	Units			Unit Cost
a. Inventory, Beginning		1,500		$	28
For the year:
b. Purchase, March 5		7,500			29
c. Purchase, September 19		3,500			31
d. Sale, April 15 (sold for $73 per unit)		2,200
e. Sale, October 31 (sold for $76 per unit)		6,500
f. Operating expenses (excluding income tax expense), $398,000

  

Required:

1. 1. Calculate the number and cost of goods available for sale.
2. 2. Calculate the number of units in ending inventory.
3. 3. Compute the cost of ending inventory and cost of goods sold under (a) FIFO, (b) LIFO, and (c) weighted average cost.
4. 4. Prepare an income statement that shows the FIFO method, LIFO method and weighted average method.
5. 6. Which inventory costing method minimizes income taxes?

Answer 1

Ans. 1			Cost of goods available for sale
			Units	Cost per unit	Total cost
	Beginning inventory		1500	$28.00	$42,000
	Purchases:
	05-Mar		7500	$29.00	$217,500
	19-Sep		3500	$31.00	$108,500
	Total Cost of goods available for sale		12500		$368,000
Ans. 2	Total units sold (2,200 + 6,500)   =    8,700 units
	Ending inventory units = Units available for sale - Total units sold
	12,500 - 8700
	3,800 units
Ans. 3	FIFO:	Cost of goods available for sale			Cost of goods sold - Periodic FIFO			Ending inventory - Periodic FIFO
		Units	Rate	Total	Units	Rate	Total	Units	Rate	Total
	Beginning inventory	1500	$28.00	$42,000	1500	$28.00	$42,000	0	$28.00	$0
	Purchases:
	05-Mar	7500	$29.00	$217,500	7200	$29.00	$208,800	300	$29.00	$8,700
	19-Sep	3500	$31.00	$108,500		$31.00		3500	$31.00	$108,500
	Total	12500		$368,000	8700		$250,800	3800		$117,200
	*In FIFO method the units that have purchased first, are released the first one and the ending inventory
	units remain from the last purchases.
Ans.	LIFO:	Cost of goods available for sale			Cost of goods sold - Periodic LIFO			Ending inventory - Periodic LIFO
		Units	Rate	Total	Units	Rate	Total	Units	Rate	Total
	Beginning inventory	1500	$28.00	$42,000	0	$28.00	$0	1500	$28.00	$42,000
	Purchases:
	05-Mar	7500	$29.00	$217,500	5200	$29.00	$150,800	2300	$29.00	$66,700
	19-Sep	3500	$31.00	$108,500	3500	$31.00	$108,500	0	$31.00	$0
	Total	12500		$368,000	8700		$259,300	3800		$108,700
	*In LIFO method the units that have purchased last, are released the first one and ending inventory units
	remain from the first purchase.
Ans.	Average cost:	Cost of goods available for sale			Cost of goods sold - Periodic Average cost			Ending inventory - Periodic Average cost
		Units	Rate	Total	Units	Rate	Total	Units	Rate	Total
	Beginning inventory	1500	$28.00	$42,000
	Purchases:
	05-Mar	7500	$29.00	$217,500
	19-Sep	3500	$31.00	$108,500
	Total	12500		$368,000	8700	$29.44	$256,128	3800	$29.44	$111,872
	Average cost per unit =   Total cost of goods available for sale / Units available for sale
	$368,000 / 12,500
	$29.44	per unit
Ans. 4	SCORESBY INC.
	Income Statements
	For the Year Ended December 31
			FIFO	LIFO	Weighted
					average
	Sales		$654,600	$654,600	$654,600
	Cost of goods sold		-$250,800	-$259,300	-$256,128
	Gross profit		$403,800	$395,300	$398,472
	Operating expenses		-$398,000	-$398,000	-$398,000
	Income from operations		$5,800	-$2,700	$472
	*Calculation of sales:
	Date	Units	Rate	Cost
	15-Apr	2200	$73.00	$160,600
	31-Oct	6500	$76.00	$494,000
	Total sales			$654,600
Ans. 5	LIFO inventory costing method minimizes income taxes because it has a lowest income from operations
	(Loss) and income tax is calculated or charged on this income from operations.