Applying and Analyzing Inventory Costing Methods

Applying and Analyzing Inventory Costing Methods

At the beginning of the current period, Chen carried 1,000 units of its product with a unit cost of $10. A summary of purchases during the current period follows. During the period, Chen sold 2,800 units.

	Units	Unit Cost	Cost
Beginning Inventory	1,000	$ 10	$ 10,000
Purchase #1	1,800	11	19,800
Purchase #2	800	13	10,400
Purchase #3	1,200	15	18,000

(a) Assume that Chen uses the first-in, first-out method. Compute both cost of good sold for the current period and the ending inventory balance.

Use the financial statement effects template to record cost of goods sold for the period.

Ending inventory balance  $Answer 28400

Cost of goods sold             $Answer 29800

Use negative signs with answers, when appropriate.

	Balance Sheet
Transaction	Cash Asset	+	Noncash Assets	=	Liabilities	+	Contributed Capital	+	Earned Capital
Record FIFO cost of goods sold	Answer 0		Answer -29800		Answer 0		Answer 0		Answer -29800

 

Income Statement
Revenue	–	Expenses	=	Net Income
Answer 0		Answer 29800		Answer -29800

(b) Assume that Chen uses the last-in, first-out method. Compute both cost of good sold for the current period and the ending inventory balance.

Ending inventory balance  $Answer 21000

Cost of goods sold               $Answer 37200

(c) Assume that Chen uses the average cost method. Compute both cost of good sold for the current period and the ending inventory balance.

(HINT: Do not round average cost per unit for calculations.)
Ending inventory balance  $Answer 24250

Cost of goods sold             $Answer 33950

(d) Which of these three inventory costing methods would you choose to:

1. Reflect what is probably the physical flow of goods?	LIFO FIFO Average Cost The correct answer is: FIFO
2. Minimize income taxes for the period?	LIFO FIFO Average Cost The correct answer is: LIFO
3. Report the largest amount of income for the period?	LIFO FIFO Average Cost The correct answer is: FIFO

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