Question

Health Defense sells first aid kits and uses the periodic inventory system to account for its merchandise. The beginning balance of the inventory and its transactions during January were as follows: January 1: Beginning balance of 18 units at $13 each January 12: Purchased 30 units at $14 each January 19: Sold 24 units at a selling price of $30 each January 20: Purchased 24 units at $17 each January 27: Sold 27 units at a selling price of $30 each If the ending inventory is reported at $357, what inventory method was used?

Answer 1

Answer

FIFO inventory method is used.

Explanation

Health Defense is using FIFO (First In First Out Method) Inventory method. Under periodic inventory system, no frequent recording is made throughout the year. Rather physical count is done at the end of the period and cost is assigned to the remaining inventory accordingly. If FIFO inventory method is used in periodic inventory system, ending inventory is valued using the most recent purchases which is the case here.

Opening Inventory :  18 units

Purchased :  30 units

Sold : 24 units

Purchased : 24 units

Sold : 27 units

Ending Inventory therefore is  : 18+30-24+24-27 = 21 units

Dividing the amount of ending inventory by the remaining units in inventory will give us $17 which is the price of most recent purchases.

$357/21 = $17