
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? |
The correct answer is: FIFO |
|||
2. Minimize income taxes for the period? |
The correct answer is: LIFO |
|||
3. Report the largest amount of income for the period? |
The correct answer is: FIFO |