Purchases InvoicesModel
Inventory,
November 1 1st 2nd 3rd
Inventory Count,
October 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 October 31, 2014, by the first-in, first-out method. Present data in columnar form, using the following headings:
Model Quantity Unit Cost Total Cost
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.
2. Determine the cost of the inventory on October 31, 2014, by the last-in, first-out method, following the procedures indicated in (1).
3. Determine the cost of the inventory on October 31, 2014, by the weighted average
cost method, using the columnar headings indicated in (1).
4. Discuss which method (FIFO or LIFO) would be preferred for income tax
purposes in periods of (a) rising prices and (b) declining prices.
Answer:
3. Weighted Average Cost Method
Model Quantity Unit Cost* Total Cost
A10 6 $ 70 $ 420
B15 8 174 1,392
E60 5 69 345
G83 9 253 2,277
J34 15 258 3,870
M90 5 121 605
Q70 8 172 1,376
Total $10,285
* Computations of unit costs:
A10: $70 = [(4 × $64) + (4 × $70) + (4 × $76)] ÷ (4 + 4 + 4)
B15: $174 = [(8 × $176) + (4 × $158) + (3 × $170) + (6 × $184)] ÷ (8 + 4 + 3 + 6)
E60: $69 = [(3 × $75) + (3 × $65) + (15 × $68) + (9 × $70)] ÷ (3 + 3 + 15 + 9)
G83: $253 = [(7 × $242) + (6 × $250) + (5 × $260) + (10 × $259)] ÷ (7 + 6 + 5 + 10)
J34: $258 = [(12 × $240) + (10 × $246) + (16 × $267) + (16 × $270)] ÷ (12 + 10 + 16 + 16)
M90: $121 = [(2 × $108) + (2 × $110) + (3 × $128) + (3 × $130)] ÷ (2 + 2 + 3 + 3)
Q70: $172 = [(5 × $160) + (4 × $170) + (4 × $175) + (7 × $180)] ÷ (5 + 4 + 4 + 7)
4.
a. During periods of rising prices, the LIFO method will result in a lower cost of inventory, a greater amount of cost of merchandise sold, and a lesser amount of net income than the other two methods. For Dymac Appliances, the LIFO method would be preferred for the current year, since it would result in a lesser amount of income tax.
b. During periods of declining prices, the FIFO method will result in a lesser amount of net income and would be preferred for income tax purposes
1. First-In, First-Out Method
Model Quantity Unit Cost Total Cost
A10 4
2
$ 76
70
$ 304
140
B15 6
2
184
170
1,104
340
E60 5 70 350
G83 9 259 2,331
J34 15 270 4,050
M90 3
2
130
128
390
256
Q70 7
1
180
175
1,260
175
Total $10,700
2. Last-In, First-Out Method
Model Quantity Unit Cost Total Cost
A10 4
2
$ 64
70
$ 256
140
B15 8 176 1,408
E60 3
2
75
65
225
130
G83 7
2
242
250
1,694
500
J34 12
3
240
246
2,880
738
M90 2
2
1
108
110
128
216
220
128
Q70 5
3
160
170
800
510
Total $9,845