Question

On May 1, a tire store had a beginning inventory of 20 tires which it purchased for $300 each.

On May 5th, the store purchased 4 more tires for $350 each.

On May 12th, the store purchased 6 more tires for $400 each.

In May, the store sold a total of 12 tires.

Question: At the end of May, will the tire stores total assets on its balance sheet be higher if it uses the LIFO or weighted average inventory method? Why?

Answer 1

At the end of May, the tire stores total assets on its balance sheet be higher if it uses the Weighted average method.

WHY?

Under the Last in first out (LIFO) method of inventory valuation, Cost of goods sold consists of the units from recent purchases. Ending inventory consists of the units from beginning inventory and earliest purchases.

Under the Weighted average method of inventory valuation both Cost of goods sold and Ending inventory are valued at average unit cost.

As the prices are rising, Ending inventory will be lower under LIFO method and higher under Weighted average method.

PROOF :

Ending inventory = Beginning inventory + Purchases - Sales

= 20 tires + (4 tires + 6 tires) - 12 tires

= 18 tires

FIFO ending inventory = 18 tires * $300 each = $5,400

Weighted average price = Cost of goods available for sale / Number of units available for sale

= (20*$300) + (4*$350) + (6*$400) / (20 + 4 + 6)

= $9,800 / 30

= $327

Ending inventory = 18 units * $327 = $5,886