Presented below is information related to radios for the Couples Company for the month of
July.
Units Units Selling
Date Transaction Units In Cost Total Sold Price Total
July 1 Balance 100 $4.10 $ 410
6 Purchase 800 4.30 3,440
7 Sale 300 $7.00 $ 2,100
10 Sale 300 7.30 2,190
12 Purchase 400 4.51 1,804
15 Sale 200 7.40 1,480
18 Purchase 300 4.60 1,380
22 Sale 400 7.40 2,960
25 Purchase 500 4.58 2,290
30 Sale 200 7.50 1,500
Totals 2,100 $9,324 1,400 $10,230
Instructions
(a) Assuming that the periodic inventory method is used, compute the inventory cost at July
31 under each of the following cost flow assumptions.
(1) FIFO.
(2) Weighted-average.
(b) Answer the following questions.
(1) Which of the methods used above will yield the highest figure for gross profit for the
income statement? Explain why.
(2) Which of the methods used above will yield the highest figure for ending
inventory for the t of financial position? Explain why.
(a)
(1) FIFO:
Ending Inventory Cost = (100 units x $4.10) + (400 units x $4.51) + (200 units x $4.60) + (200 units x $4.58) = $2,167
(2) Weighted-average:
Total Cost of Goods Available for Sale = $9,324 + $10,230 = $19,554
Units Available for Sale = 100 + 800 + 300 + 300 + 400 + 200 + 300 + 400 + 500 + 200 = 3,400
Weighted-average Cost = $19,554 / 3,400 = $5.75
Ending Inventory Cost = 200 units x $5.75 = $1,150
(b)
(1) FIFO will yield the highest figure for gross profit for the income statement because under FIFO, the oldest costs are matched with revenue first, resulting in a lower cost of goods sold and higher gross profit.
(2) FIFO will yield the highest figure for ending inventory for the statement of financial position because FIFO assumes that the most recent costs remain in ending inventory, resulting in a higher valuation of ending inventory compared to weighted-average.