Question

In its first month of operations, Literacy for the Illiterate opened a new bookstore and bought merchandise in the following order: (1) 400 units at $7 on January 1, (2) 600 units at $10 on January 8, and (3) 930 units at $11 on January 29. Assume 1,130 units are on hand at the end of the month. Calculate the cost of goods available for sale, cost of goods sold, and ending inventory under the (a) FIFO, (b) LIFO, and (c) weighted average cost flow assumptions. Assume perpetual inventory system and sold 800 units between January 9 and January 28. (Round your intermediate calculations to 2 decimal places.)

Answer 1

Answer:

(a) FIFO

Cost of Goods Sold  = $6,800

Ending Inventory  = $12,230

(b) LIFO

Cost of Goods Sold  = $7,400

Ending Inventory  = $11,630

(c) weighted average cost

Cost of Goods Sold  = $7,040

Ending Inventory  = $11,990

Explanation:

Perpetual inventory method ensures that cost of sales and inventory value is determined after each and every transaction.

FIFO

This method assumes that the units to arrive first, will be sold first. This means the cost of sales is based on the earlier (old) prices and inventory valuation is based on recent (later) prices.

Cost of Goods Sold = 400 x $7 + 400 x $10 = $6,800

Ending Inventory = 200 x $10 + 930 x $11 = $12,230

LIFO

This method assumes that the units to arrive last , will be sold first. This means the cost of sales is based on the recent (later) prices  and inventory valuation is based on earlier (old) prices.

Cost of Goods Sold = 600 x $10 + 200 x $7 = $7,400

Ending Inventory = 200 x $7 + 930 x $11 = $11,630

Weighted Average Cost Method

A new unit cost is calculated with each and every purchase made. This new unit cost is then used to determine the cost of goods sold and the value of inventory.

New Unit Cost - 8 jan = (400 x $7 + 600 x $10) ÷ 1,000 = $8.80

New Unit Cost - 29 jan = (200x $8.80 + 930 x $11) ÷ 1,130 = $10.61

therefore,

Cost of Goods Sold = 800 x $8.80 = $7,040

Ending Inventory = 1,130 x $10.61 = $11,990