Jones Company had 100 units in beginning inventory at a total cost of $10,000. The company purchased 200 units at a total cost of $26,000. At the end of the year, Jones had 80 units in ending inventory.
Compute the cost of the ending inventory and the cost of goods sold under (1) FIFO, (2) LIFO, and (3) average-cost.
FIFO LIFO Average-Cost
Ending Inventory $ $ $
Cost of goods sold $ $ $
Which cost flow method would result in the highest net income?
LIFOAverage-CostFIFO
Which cost flow method would result in inventories approximating current cost in the balance sheet?
LIFOAverage-CostFIFO
Which cost flow method would result in Jones paying the least taxes in the first year?
LIFOAverage-CostFIFO
To compute the cost of the ending inventory and the cost of goods sold under different cost flow methods, we first need to understand the principles behind each method.
1. FIFO (First-In, First-Out): Under FIFO, it is assumed that the oldest units are sold first, and the newer units remain in inventory. This follows the assumption that the cost of inventory reflects the most recent purchase costs.
2. LIFO (Last-In, First-Out): Under LIFO, it is assumed that the newest units are sold first, and the oldest units remain in inventory. This follows the assumption that the cost of inventory reflects older purchase costs.
3. Average-Cost: Under average-cost, the cost of goods sold and the cost of ending inventory are determined by averaging the cost per unit across all units available for sale.
Now, let's calculate the cost of the ending inventory and the cost of goods sold under each method:
1. FIFO:
Since 80 units are left in the ending inventory, it is assumed that these units are from the most recent purchase of 200 units. So, the cost of the ending inventory under FIFO is calculated as:
80 units * cost per unit of the most recent purchase of 200 units.
To find the cost per unit of the most recent purchase, divide the total cost of the purchase by the number of units:
Cost per unit = Total cost of the purchase / Number of units
2. LIFO:
Under LIFO, it is assumed that the 80 units remaining in the ending inventory are from the initial beginning inventory of 100 units and the purchase of 100 units from the most recent purchase. So, the cost of the ending inventory under LIFO is calculated as:
80 units * cost per unit of the initial beginning inventory.
3. Average-Cost:
To calculate the average cost per unit, add the total cost of the beginning inventory and the total cost of the purchase, and divide by the total number of units:
Average cost per unit = (Total cost of beginning inventory + Total cost of purchase) / (Number of units in beginning inventory + Number of units purchased)
Then calculate the cost of the ending inventory under average-cost as:
80 units * average cost per unit
To determine the cost of goods sold, subtract the cost of the ending inventory from the total cost of goods available for sale (beginning inventory + purchase).
Next, let's answer the questions:
- Which cost flow method would result in the highest net income?
The FIFO method would result in the highest net income because it assumes that the older units, which could have a lower cost, are sold first. This leads to a lower cost of goods sold and therefore higher net income.
- Which cost flow method would result in inventories approximating current cost in the balance sheet?
The FIFO method would result in inventories approximating current cost in the balance sheet because it is based on the assumption that the most recent inventory items are still on hand.
- Which cost flow method would result in Jones paying the least taxes in the first year?
The LIFO method would result in Jones paying the least taxes in the first year because it assumes that the newer, potentially more expensive units, are sold first. This leads to a higher cost of goods sold, reducing taxable income, and therefore lower taxes.
By following the above steps, you can calculate the cost of the ending inventory and the cost of goods sold under FIFO, LIFO, and average-cost methods, as well as determine the impact of each method on net income and taxes.