Question

Part I Jason Company uses a perpetual inventory system and reported the following transactions involving inventory during the month of December 2018: December 1 Beginning inventory 4 Purchases 13 Sales 21 Purchases 26 Sales 30 Purchases 100 units 200 units 150 units 300 units 375 units 400 units @ $8.00 @ $8.25 @ $11.20 @ $8.50 @ $11.20 @ $8.75 Required: (Show all workings and rounded amounts to one decimal place of a dollar) a. Calculate the Cost of Goods Sold and Ending Inventory as of December 31, 2018 using First-In-First-Out (FIFO) method. b. Calculate the Cost of Goods Sold and Ending Inventory as of December 31, 2018 using Weighted Average Cost method. Part II (5 marks) Financial analysts and investors are very interested in how quickly a company is turning over its inventory as quick turnover yields higher profits. There are events that may have an effect on the inventory turnover ratio. Required: For each of the following two events, indicate and explain whether inventory turnover would increase, decrease or not be affected. a. Change from Weighted Average Cost method to First-In, First-Out method during an inflationary environment. b. Cut sales prices in order to increase sale.

Answer 1

Answer to Part-I (First question in the list):

FIFO Method: FIFO stands for First In First Out which means that cost of goods sold must consider cost of those goods initially. As a result, ending inventory will contain cost of recent purchases. Under perpetual method, inventory records are updated continously. Purchases Cost of Goods Sold Balance Units Amount Units Units Rate Rate Amount Rate Amount $8.00 $800 Dec. 1 100 $8.00 $8.25 $800 $1,650 $2,450 $8.25 $1,650 [100 x $8] [200 x $8.25] Dec. 4 200 100 200 300 $800 $413 $1,213 $8.00 $8.25 Dec. 13 100 $8.25 $1,237.5 [150 x $8.25] 50 150 150 $8.50 $2,550 $8.25 $8.50 $1,237.5 $2,550.0 $3,787.5 [150 x $8.25] [300 х $8.5] Dec. 21 300 150 300 450 150 $8.25 $8.50 $1,238 $1,913 $3,150 Dec. 26 $8.50 $637.5 [75 x $8.5] 225 75 375 [75 x $8.5] [400 x $8.75] $8.75 $3,500 $8.50 $8.75 $637.5 $3,500.0 $4,137.5 (Ending Inventory) Dec. 30 400 75 400 $4,363 (Cost of Goods Sold) 525 475

Weighted Average Method: Under weighted average inventory method, total value of purchases shall be divided by total number of units purchased to calculate unit cost. Cost of goods sold shall be calculated by multiplying number of units sold by unit cost calculated just before the date of sale perpetully. Cost of Goods Sold Purchases Ending Inventory Units Units Units Rate Amount Rate Amount Rate Amount $800.0 Dec. 1 $8.0000 100 $8.25 $1,650 $8.1667 $2,450.0 [Rate = $2450 / $8.1667] Dec. 4 200 300 $8.1667 $1,225 $8.1667 $1,225.0 [Rate = $1225 / $8.1667] Dec. 13 150 150 $8.50 $2,550 $8.3889 $3,775.0 [Rate = $3775 / $8.3889] Dec. 21 300 450 $8.3889 $3,146 $8.3889 $629.2 [Rate = $629.2 / $8.3889] Dec. 26 375 75 $8.75 $3,500 $8.6930 $4,129.2 [Rate = $4129.2 / $8.693] Dec. 30 400 475 $4,371 (Total Cost of Goods Sold) $8.6930 $4,129.2 525 475 (Ending Inventory)