Question

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Ming Company uses a perpetual inventory system. It entered into the following purchases and sales transactions for April. (For specific identification, the April 9 sale consisted of 8 units from beginning inventory and 27 units from the April 6 purchase; the April 30 sale consisted of 12 units from beginning inventory, 3 units from the April 6 purchase, and 10 units from the April 25 purchase.)

1. Compute cost of goods available for sale and the number of units available for sale. 2. Compute the number of units in ending inventory. 3. Compute the cost assigned to ending inventory using (a) FIFO, (b) LIFO, (c) weighted average, and (d) specific identification. (Round all amounts to cents.) 4. Compute gross profit earned by the company for each of the four costing methods in part 3.

   *Check (3) Ending inventory: FIFO, $24,000; LIFO, $15,000; WA, $20,000 (4) LIFO gross profit, $549,500*
   

Answer 1

Cost of goods sold

Cost of goods sold is the cost for the company for goods which are sold. Cost of goods would include purchase price of goods sold or manufacturing costs of goods sold.

Inventory

Inventory are the goods which are not yet sold by company and therefore are assets of business. These are shown as current assets as the inventory are generally sold within one year from balance sheet date and therefore converted into cash.

FIFO method

Under this method, goods which are purchased first are sold first and therefore the remaining goods are part of inventory. The inventory is valued based on latest purchases and therefore value of inventory is higher.

LIFO method

Under this method, goods which are purchased latest are sold first and the earlier goods purchased are held as inventory and therefore inventory is valued based on earlier goods and therefore value of inventory would be lower as earlier purchase would cost lower than current purchase.

Specific identification method

Under this method, company is able to identify the ending inventory is from which batch of purchases and therefore is able to value inventory based on purchase price of that batch of purchases.

Weighted average method

Under this method, inventory is valued based on weighted average cost of purchases. In this method, weighted average per unit is calculate which is multiplied by ending inventory in units to calculate value of inventory.

Gross profit

Gross profit is the excess of profit earned over sales which is calculated as sales less cost of goods sold. Gross profit is the profit earned after deducting the direct cost of goods from sale.

Formula to calculate gross profit

1.

Calculation of cost of goods available for sale and number of units available for sale is shown below

Thus, number of units available for sale is 65 and cost of goods available for sale is $235,500.

Following shows the working

2.

Calculation of number of units in ending inventory is shown below

Thus, number of units in ending inventory is 5 units.

3.

a.

Calculation of cost assigned to ending inventory using FIFO method is shown below

Thus, cost assigned to ending inventory using FIFO method is $24,000.

Following shows the working

b.

Calculation of cost assigned to ending inventory using LIFO method is shown below

Thus, cost assigned to ending inventory using LIFO method is $15,000.

Following shows the working

c.

Calculation of cost assigned to ending inventory using weighted average method is shown below

Following shows the working

d.

Calculation of cost assigned to ending inventory using specific identification method is shown below

Thus, cost assigned to ending inventory using specific identification method is $22,500.

Following shows the working

4.

Calculation of gross profit for each of the four costing method is shown below.

Following shows the working