Question

Alternative Inventory Methods Frate Company was formed on December 1, 2015, and uses the periodic inventory system. The following information is available from Frate's inventory records for Product Ply:
Units Unit Cost
January 1, 2016 (beginning inventory) 1,700 $5.00
Purchases:
January 6, 2016 2,400 6.00
January 25, 2016 2,100 6.50
February 17, 2016 1,500 7.00
March 27, 2016 1,800 7.50

A physical inventory on March 31, 2016 shows 3,400 units on hand.

Required:
Prepare schedules to compute the ending inventory at March 31, 2019, under each of the following inventory methods:

a. FIFO
b. LIFO
c. Weighted average

Show supporting computations in good form.

Answer 1

Answer:

Part a.

Ending Inventory = (100 units x $6.50 + 1,500units x $7.00 + 1,800 units x $7.50)

                                = $24,650

Part b.

Ending Inventory = (100 units x $6.50 + 1,500units x $7.00 + 1,800 units x $7.50)

                             = $24,650

Part c.

Ending Inventory = 3,400 units x $6.37

                             =$21,658

Explanation:

It is important to note that Frate Company uses the periodic inventory system.  In periodic inventory system, inventory valuation and cost of sales are determined at the end of the period.

Units Sold = Opening units + Purchases - Closing units

                 = 1,700 + (2,400 + 2,100 + 1,500 + 1,800) - 3,400

                 = 6,100 units

FIFO

First In First Out (FIFO) assumes that the inventory that was purchased first is the first to be delivered to the customer. Therefore, inventory valuation is at the latest prices.

Ending Inventory = (100 units x $6.50 + 1,500units x $7.00 + 1,800 units x $7.50)

                             = $24,650

LIFO

Last In First Our (LIFO) assumes that the last inventory purchased is the first to be delivered to the customer. Therefore, inventory valuation is at the earlier prices.

Ending Inventory = (1,700 units x $6.00 + 1,700 units x $5.00)

                             = $18,700

Weighted Average

In weighted average method, the unit cost of inventory is recalculated after every purchase made. Therefore the inventory valuation is at the most recent calculated unit cost.

Ending Inventory = Units on hand x Average unit cost

where,

Average unit cost = Total Cost for unit available for sale ÷ units available for sale

                              = (1,700x $5.00 + 2,400 x6.00+ 2,100x 6.50+ 1,500 x7.00+ 1,800 x7.50) ÷ (1,700 + 2,400 + 2,100 + 1,500+ 1,800)

                              = $6.37

therefore,

Ending Inventory = 3,400 units x $6.37

                             =$21,658