Inventory by Three Cost Flow Methods

Details regarding the inventory of appliances on January 1, 20Y7, purchases invoices during the year, and the inventory count on December 31, 20Y7, of Amsterdam Appliances are summarized as follows:

Purchases Invoices

Model

Inventory, January 1

1st

2nd

3rd

Inventory Count, December 31

A10

4 at $ 64

4 at $ 70

4 at $ 76

6

B15

8 at $176

4 at 158

3 at 170

6 at 184

8

E60

3 at 75

3 at 65

15 at 68

9 at 70

5

G83

7 at 242

6 at 250

5 at 260

10 at 259

9

J34

12 at 240

10 at 246

16 at 267

16 at 270

15

M90

2 at 108

2 at 110

3 at 128

3 at 130

5

Q70

5 at 160

4 at 170

4 at 175

7 at 180

8

Instructions:

1. Determine the cost of the inventory on December 31, 20Y7, by the first-in, first-out method.

If the inventory of a particular model comprises one entire purchase plus a portion of another purchase acquired at a different unit cost, use a separate line for each purchase. Under FIFO, if a model is in inventory at two different costs, enter the remaining units that were purchased most recently first.

First-In, First-Out Method
Model		Quantity	Unit Cost	Total Cost
A10			$	$
B15
E60
G83
J34
M90
Q70
	Total			$

2. Determine the cost of the inventory on December 31, 20Y7, by the last-in, first-out method, following the procedures indicated in (1). Under LIFO, if a model is in inventory at two different costs, enter the remaining units that were purchased earliest first.

Last-In, First-Out Method
Model		Quantity	Unit Cost	Total Cost
A10			$	$
B15
E60
G83
J34
M90
Q70
	Total			$

3. Determine the cost of the inventory on December 31, 20Y7, by the average cost method.

Average Cost Method
Model		Quantity	Unit Cost	Total Cost
A10			$	$
B15
E60
G83
J34
M90
Q70
	Total			$

4. Which method (FIFO or LIFO) would be preferred for income tax purposes in periods of rising prices? LIFO

Which method (FIFO or LIFO) would be preferred for income tax purposes in periods of declining prices? FIFO

Feedback

1.In the FIFO method, the first units purchased are assumed to be the first to be sold. Therefore, ending inventory costs for the period are calculated by taking the number of items remaining in the physical inventory times the most recent purchase price. If the number of items in the last purchase layer is less than the number in ending inventory, the balance of the ending inventory items must be recorded at the cost of the second to last purchase cost.

2. In the LIFO method, the last units purchased are assumed to be the first to be sold. Therefore, the remaining ending inventory for the period is made up of the earliest costs from the beginning inventory. If the number of units in the ending inventory is greater than the units in the beginning inventory, the excess units will be recorded at the cost of the first purchase.

3. In the weighted average cost method, the average cost of all available units purchased is applied to the number of units sold and those in ending inventory. Therefore, you must first obtain a unit cost by dividing the total cost of all units available for sale by the number of units available for sale. Then, multiply the number of items remaining in the physical inventory times this unit cost.

4. Recall that the FIFO method reports higher gross profit, net income, and income taxes than the LIFO method when costs (prices) are increasing. Also, rising prices mean that items purchased later will cost more than items purchased earlier. In the case of the FIFO method, the ending inventory costs for the period are calculated based on the most recent prices; consider this cost flow in your answer regarding both inventory and cost of goods sold.