Question

P7-3 Evaluating Four Alternative Inventory Methods Based on Income and Cash Flow LO7-2, 7-3 [The following information applies to the questions displayed below.] At the end of January of the current year, the records of Donner Company showed the following for a particular item that sold at $17.20 per unit: Transactions Units Amount Inventory, January 1 580 $ 2,958 Purchase, January 12 560 3,976 Purchase, January 26 160 1,456 Sale (440) Sale (200)

Compute Cost of Goods Sold under each method of inventory: average cost, FIFO, LIFO, and specific identification. For specific identification, assume that the first sale was selected from the beginning inventory and the second sale was selected from the January 12 purchase. Assume that the company uses periodic inventory system

Prepare a partial income statement under each method of inventory: (a) average cost, (b) FIFO, (c) LIFO, and (d) specific identification. For specific identification, assume that the first sale was selected from the beginning inventory and the second sale was selected from the January 12 purchase Assume that the company uses periodic inventory system.

Answer 1

Ans.	Units sold (440 + 200)   =   640 units
	Rate   =    Total amount / Units
	Date	Units	Total amount	Rate
	1-Jan	580	$2,958	$5.10
	12-Jan	560	$3,976	$7.10
	26-Jan	160	$1,456	$9.10
Ans.   A	Average cost:	Cost of goods available for sale			Cost of goods sold - Periodic Average cost			Ending inventory - Periodic Average cost
		Units	Rate	Total	Units	Rate	Total	Units	Rate	Total
	Beginning inventory	580	$5.10	$2,958	0	$0.00	$0	0	$0.00	$0
	Purchases:
	12-Jan	560	$7.10	$3,976
	26-Jan	160	$9.10	$1,456
	Total	1300		$8,390	640	$6.45	$4,131	660	$6.45	$4,259
	Average cost per unit =   Total cost of goods available for sale / Units available for sale
			$8,390 / 1,300
			$6.45		per unit
	Cost of goods sold =   $4,131
Ans. B	FIFO:	Cost of goods available for sale			Cost of goods sold - Periodic FIFO			Ending inventory - Periodic FIFO
		Units	Rate	Total	Units	Rate	Total	Units	Rate	Total
	Beginning inventory	580	$5.10	$2,958	580	$5.10	$2,958	0	$0.00	$0
	Purchases:
	12-Jan	560	$7.10	$3,976	60	$7.10	$426	500	$7.10	$3,550
	26-Jan	160	$9.10	$1,456				160	$9.10	$1,456
	Total	1300		$8,390	640		$3,384	660		$3,550
	Cost of goods sold =   $3,384
	*In FIFO method the units that have purchased first, are released the first one and the ending inventory
	units remain from the last purchases.
Ans. C	LIFO:	Cost of goods available for sale			Cost of goods sold - Periodic LIFO			Ending inventory - Periodic LIFO
		Units	Rate	Total	Units	Rate	Total	Units	Rate	Total
	Beginning inventory	580	$5.10	$2,958	0	$0.00	$0	580	$5.10	$2,958
	Purchases:
	12-Jan	560	$7.10	$3,976	480	$7.10	$3,408	80	$7.10	$568
	26-Jan	160	$9.10	$1,456	160	$9.10	$1,456	0	$4.00	$0
	Total	1300		$8,390	640		$4,864	660		$3,526
	Cost of goods sold =   $4,864
	*In LIFO method the units that have purchased last, are released the first one and ending inventory units
	remain from the first purchase.
Ans. d	Specific identification	Cost of goods available for sale			Cost of goods sold - Periodic FIFO			Ending inventory - Periodic S. I.
		Units	Rate	Total	Units	Rate	Total	Units	Rate	Total
	Beginning inventory	580	$5.10	$2,958	440	$5.10	$2,244	140	$5.10	$714
	Purchases:
	12-Jan	560	$7.10	$3,976	200	$7.10	$1,420	360	$7.10	$2,556
	26-Jan	160	$9.10	$1,456				160	$9.10	$1,456
	Total	1300		$8,390	640		$3,664	660		$4,726
	Cost of goods sold =   $3,664
Ans. 2	DONNER COMPANY
	Income Stantement (partial)
			Average cost	FIFO	LIFO	Specific identification
	Sales   (640 * $17.20)		$11,008	$11,008	$11,008	$11,008
	Less: Cost of goods sold		-$4,131	-$3,384	-$4,864	-$3,664
	Gross profit		$6,877	$7,624	$6,144	$7,344