Question

440 SECTION 2 P 8-5 Various inventory costing methods • LO8-1, LO8-4 Assets Ferris Company began January with 6,000 units of its principal product. The cost of each unit is $8. Merchandise transactions for the month of January are as follows: Purchases Unit Cost Total Cost Date of Purchase Jan. 10 Jan. 18 Units 5,000 6,000 $ 45,000 60,000 $ 105,000 Total purchases 11,000 "Includes purchase price and cost of freight. Sales Date of Sale Units Jan. 5 Jan. 12 Jan. 20 Total sales 3,000 2,000 4,000 9,000 8,000 units were on hand at the end of the month. Required: Calculate January's ending inventory and cost of goods sold for the month using each of the following alternatives: 1. FIFO, periodic system 2. LIFO, periodic system 3. FIFO, perpetual system 4. Average cost, periodic system 5. Average cost, perpetual system 6. LIFO Perpetual

please demonstrate how to solve by hand and show all steps! thank you :)

Answer 1

• Perpetual inventory: Calculates cost of goods sold for each sales and records a journal entry for cost of goods sold with each sales transaction.
• Periodic inventory: Follows the same basic principle but it calculates one cost of goods sold amount at the end of the month for all items based on the beginning inventory + all purchases and does not record cost of goods sold with each sales transaction.
  1. FIFO, Periodic system

Under the FIFO method, we will use the oldest inventory at the time of the sale first.

Date	Particulars	Purchases	Cost of goods sold	Ending inventory
Jan 1	Beginning inventory			6000*$8 =$48000
Jan 5	Sales		3000*$8=$24000	3000*$8=$24000
Jan 10	Purchases	5000*$9=$45000		3000*$8=$24000 5000*$9=$45000
Jan 12	Sales		2000*$8=$16000	1000*$8=$8000 5000*$9=$45000
Jan 18	Purchases	6000*$10=$60000		1000*$8=$8000 5000*$9=$45000 6000*$10=$60000
Jan 20	Sales		1000*$8=$8000 3000*$9=$27000	2000*$9=$18000 6000*$10=$60000

Cost of goods sold= $24000+16000+8000+27000 = $75000

Ending inventory = 18000+60000=$78000

2. LIFO, Periodic system

Under the LIFO method, we will use most recent purchases at the time of the sale first.

Date	Particulars	Purchases	Cost of goods sold	Ending inventory
Jan 1	Beginning inventory			6000*$8 =$48000
Jan 5	Sales		3000*$8=$24000	3000*$8=$24000
Jan 10	Purchases	5000*$9=$45000		3000*$8=$24000 5000*$9=$45000
Jan 12	Sales		2000*$9=$18000	3000*$8=$24000 3000*$9=$27000
Jan 18	Purchases	6000*$10=$60000		3000*$8=$24000 3000*$9=$27000 6000*$10=$60000
Jan 20	Sales		4000*$10=$40000	3000*$8=$24000 3000*$9=$27000 2000*$10=$20000

Cost of goods sold= $24000+18000+40000= $82000

Ending inventory = 24000+27000+20000=$71000

3. FIFO, Perpetual system

Date	Particulars	Purchases	Cost of goods sold	Ending inventory
Jan 1	Beginning inventory			6000*$8 =$48000 Total 6000units $48000
Jan 5	Sales		3000*$8=$24000 COGS 3000 units $24000	3000*$8=$24000 Total 3000 units $24000
Jan 10	Purchases	5000*$9=$45000		3000*$8=$24000 5000*$9=$45000 Total 8000units $69000
Jan 12	Sales		2000*$8=$16000 COGS 2000units $16000	1000*$8=$8000 5000*$9=$45000 Total 6000units $53000
Jan 18	Purchases	6000*$10=$60000		1000*$8=$8000 5000*$9=$45000 6000*$10=$60000 Total 12000units $113000
Jan 20	Sales		1000*$8=$8000 3000*$9=$27000 COGS 4000 units $35000	2000*$9=$18000 6000*$10=$60000 Total 8000units $78000

4. Average cost, Periodic system

Under average cost system average cost will be calculated on the basis of all the units that were available for sale i.e. beginning inventory + inventory purchased during the period. Then multiply the unit cost by ending inventory unit and sales unit.

Date	Particulars	Units	Rate	Total
Jan 1	Beginning inventory	6000	8	$48000
Jan 10	Purchases	5000	$9	$45000
Jan 18	Purchases	6000	$10	$60000
Totals		11000		$153000

Calculation of average cost per unit:

Average cost per unit =	153000	=	13.91
	11000

Physical count of inventory:

As we cannot count the inventory here so we are assuming it be same as we expect after all the transactions of purchases and sales and we can calculate the units:

= Units available for sale – Sales = Ending inventory
= 11000 – (3000+2000+4000)
= 11000 – 9000
= 2000

Valuation of Ending inventory and Cost of Sales

Ending inventory	2000 units @ 13.91	=	$27820
Cost of Sales	9000 units @ 13.91	=	$125190