Question

of invenry Valuation. 2.15. The F.L.A.C. Corporation sells a single product. The following is information on inventory purchase, and sales for the current year: Number of Units Unit Cost Sale Price $ 3.00 3.50 $5.00 4.00 January 1 January 10 January 1-March 31 April 25 April 1-June 30 July 10 July 1-September 30 October 15 October 1-December 31 Inventory Purchase Sales Purchase Sales Purchase Sales Purchase Sales 10,000 4,000 8,000 10,000 11,000 6,000 3,000 8,000 9,000 5.50 4.50 6.00 5.00 6.50 (a) Compute the inventory balance and the cost of goods sold expense reported at the end of the year using the following methods: FIFO, LIFO, and average cost. (b) Discuss the effect of each method on the balance sheet and income statement during periods of inflation. 2.16. The following information in

Answer 1

a) Taking values from the question,

The inventory at the beginning of the year i.e. on 1st January is 10,000 units.

Total Quantity purchased 28000

Total Purchase Cost $121000

Opening Stock Value $30000

Below is the table showing the inventory count and cost of goods sold expense as on 31st December under FIFO method:-

Date	Particulars	Quantity	Rate ($)	Amount ($)
January 1	Opening Stock	10000	3	30000
Jaunary 10	Add: Purchases	4000	3.50	14000
Jan-March 31	Less: Sales	8000
April 25	Add: Purchase	10000	4	40000
April-June 30	Less: Sales	11000
July 10	Add: Purchases	6000	4.50	27000
July-September 30	Less: Sales	3000
October 15	Add: Purchases	8000	5	40000
October-December 31	Less: Sales	9000
December 31	Closing Stock	7000

As per FIFO method, the inventory count as on 31st December is 7,000 units. The value of inventory as on December 31 as per FIFO method is $35000 (7000*5) i.e. cost of last purchase lot

The cost of goods sold expense = Opening stock + Purchases- Closing stock

= 30000 + 121000 - 35000

= $116000

Below is the table showing the inventory count and cost of goods sold expense as on 31st December under LIFO method:-

Date	Particulars	Quantity	Rate ($)	Amount ($)
January 1	Opening Stock	10000	3	30000
Jaunary 10	Add: Purchases	4000	3.50	14000
Jan-March 31	Less: Sales	8000
Balance as on March 31		6000	3	18000
April 25	Add: Purchase	10000	4	40000
April-June 30	Less: Sales	11000
Balance as on June 30		5000	3	15000
July 10	Add: Purchases	6000	4.50	27000
July-September 30	Less: Sales	3000
Balance as on September 30	(A)	5000	3	15000
	(B)	3000	4.50	13500
Total Balance	(A+B)	8000		28500
October 15	Add: Purchases	8000	5	40000
October-December 31	Less: Sales	9000
Balance as on December 31	(C)	5000	3	15000
	(D)	2000	4.50	9000
Closing Stock (C+D)		7000		24000

As per LIFO method, the inventory count as on 31st December is 7,000 units. The value of inventory as on December 31 as per LIFO method is $24000 (as per table shown above)

The cost of goods sold expense = Opening stock + Purchases- Closing stock

= 30000 + 121000 - 24000

= $127000

Below is the calculation showing the inventory count and cost of goods sold expense as on 31st December under average cost method:-

Inventory Count = Opening Stock + Purchases - Sales

= 10000+28000-31000

= 7000 units

Value of Inventory as on December 31 = Total closing Quantity * Average Unit Cost

= 7000 * (Cost of goods available for sale / Units available for sale)

= 7000 * (30000+121000)/(10000+28000)

= 7000*151000/38000

= $27816

The cost of goods sold expense = Opening stock + Purchases- Closing stock

= 30000 + 121000 - 27816

= $123184

b) During period of inflation,

(i) the value of inventory in FIFO method gives us approximate current market value / prices since the goods purchased recently lies in stock. Due to this, income will increase due to higher valuation of stock based on recent purchase price. Similarly, due to increased valuation of stock, current assets value will be higher.

(ii) the value of inventory in LIFO method does not gives us current market value / prices since the goods purchased earlier lies in stock. Due to this, income will decrease due to higher cost of goods sold. Similarly, due to decreased valuation of stock, current assets value will be lower.

(iii) the value of inventory in average cost method gives us average values (between LIFO and FIFO). Due to this, income will not have much of an impact. Similarly, due to average valuation of stock, current assets valuation will be average.