Eddings Company had a beginning inventory of 400 units of Product XNA at a cost of $8.00 per unit. During the year, purchases were:
Feb. 20 600 units at $9 Aug. 12 300 units at $11
May 5 500 units at $10 Dec. 8 200 units at $12
Eddings Company uses a periodic inventory system. Sales totaled 1,500 units.
1. Determine the cost of goods available for sale.
2.Determine (1) the ending inventory, and (2) the cost of goods sold under each of the assumed cost flow methods (FIFO, LIFO, and average-cost).
3.Which cost flow method results in (1) the lowest inventory amount for the balance sheet, and (2) the lowest cost of goods sold for the income statement? a.Lowest inventory amount
b. Lowest cost of goods sold
To calculate the cost of goods available for sale, we need to calculate the total cost of the beginning inventory and all the purchases made throughout the year.
1. Cost of Goods Available for Sale:
Beginning Inventory:
400 units * $8.00 per unit = $3,200
Purchases:
Feb. 20: 600 units * $9.00 per unit = $5,400
May 5: 500 units * $10.00 per unit = $5,000
Aug. 12: 300 units * $11.00 per unit = $3,300
Dec. 8: 200 units * $12.00 per unit = $2,400
Total Purchases Cost:
$5,400 + $5,000 + $3,300 + $2,400 = $16,100
Cost of Goods Available for Sale:
$3,200 + $16,100 = $19,300
2. FIFO (First-In, First-Out) Method:
Under FIFO, we assume that the items sold were the ones acquired first.
Ending Inventory (based on FIFO):
Starting with the most recent purchase (Dec. 8):
200 units * $12.00 per unit = $2,400
Cost of Goods Sold (based on FIFO):
1,500 units - 200 units = 1,300 units
600 units from Feb. 20 purchase: $9.00 per unit
500 units from May 5 purchase: $10.00 per unit
200 units from Aug. 12 purchase: $11.00 per unit
Cost of Goods Sold (FIFO):
(600 units * $9.00) + (500 units * $10.00) + (200 units * $11.00) = $10,600
LIFO (Last-In, First-Out) Method:
Under LIFO, we assume that the items sold were the ones acquired most recently.
Ending Inventory (based on LIFO):
Starting with the earliest purchase (Feb. 20):
400 units - 600 units (Feb. 20 purchase) = -200 units (Shortage)
Cost of Goods Sold (based on LIFO):
1,500 units - 400 units (beginning inventory) = 1,100 units
600 units from Aug. 12 purchase: $11.00 per unit
500 units from May 5 purchase: $10.00 per unit
Cost of Goods Sold (LIFO):
(600 units * $11.00) + (500 units * $10.00) = $11,600
Average-Cost Method:
Under the average-cost method, we calculate the weighted average cost per unit based on the total cost of goods available for sale.
Average Cost per Unit:
($3,200 + $16,100) / (400 units + 600 units + 500 units + 300 units + 200 units) = $17,300 / 2,000 units = $8.65 per unit
Ending Inventory (based on Average-Cost):
Starting with the earliest purchase (Feb. 20):
400 units - 1,100 units (Feb. 20 + Aug. 12 purchases) = -700 units (Shortage)
Cost of Goods Sold (based on Average-Cost):
1,500 units - 400 units (beginning inventory) = 1,100 units
600 units from May 5 purchase: $10.00 per unit
500 units from Dec. 8 purchase: $12.00 per unit
Cost of Goods Sold (Average-Cost):
(600 units * $10.00) + (500 units * $12.00) = $9,800
3. Lowest Inventory Amount:
The LIFO method results in the lowest inventory amount for the balance sheet as it assumes that the most recent costs are the ones remaining in inventory. In this case, the ending inventory would be -200 units.
Lowest Cost of Goods Sold:
The FIFO method results in the lowest cost of goods sold for the income statement as it assumes that the oldest costs are the ones sold first. In this case, the cost of goods sold would be $10,600.
Therefore, the answers to the questions are:
a. Lowest Inventory Amount: LIFO method (-200 units)
b. Lowest Cost of Goods Sold: FIFO method ($10,600)