Question

Assume that JR Tire Store completed the following perpetual inventory transactions for a line of tires: (Click the icon to view the transactions.) Read the requirements. Requirement 1. Compute cost of goods sold and gross profit using the FIFO Inventory costing method. Begin by computing the cost of goods sold and cost of ending merchandise inventory using the FIFO inventory costing method. Enter the transactions in chronological order, calculating new inventory on hand balances after each transaction. Once all of the transactions have been entered into the perpetual record, calculate the quantity and total cost of merchandise inventory purchased, sold, and on hand at the end of the period. (Enter the olde Inventory layers first.) Inventory on Hand i More Info Purchases Unit Cost Total Cost Cost of Goods Sold Unit Total Quantity Cost Cost Unit Cost Total Cost Date Quantity Quantity Oct. 1 Oct. 1 Beginning merchandise inventory 11 Purchase 23 Sale 26 Purchase 29 Sale 22 tires @ $ 14 tires @ $ 18 tires @ S 10 tires @ S 19 tires @ $ 53 each 71 each 84 each 74 each 84 each Print Print [ Done Enter any number in the edit fields and then continue to the next question,

Answer 1

Inventory:

Inventory represents the inventory purchased by a firm for re-sale, which has not been sold as on the date of the balance sheet. The inventory is disclosed in assets side of the balance sheet under the head Current Assets. Inventory is also disclosed in the credit side of the trading account of the firm.

Inventory purchases opens up two approaches for a company with which they can record the purchases so that inventory can be recorded under the proper accounting system. The first method is the perpetual inventory system method and the second one is the periodic inventory system method.

Perpetual Inventory system:

Under perpetual inventory system of recording inventory, whenever a purchase or sale of inventory is made, each time there is an update made to the inventory account. Thus every purchase whenever is made is directly recorded in the inventory account under the perpetual inventory system of recording inventory.

Cost of goods sold:

The cost of goods sold shows the total manufacturing costs incurred in a period that is direct materials cost, direct labor cost and manufacturing overhead cost.

Cost of goods sold represents the direct cost associated with the production of the goods that is to be sold by the company. Cost of goods includes the cost related to materials, direct labor costs and direct expenses which are used in the production of goods.

Ending inventory:

The cost of ending inventory is computed by deducting cost of goods sold from the cost of goods available for sale. The cost of goods available for sale is computed by adding the beginning inventory and the purchases made during the period.

FIFO method: Under FIFO method of valuing inventory, inventories are sold in the order in which they are acquired. Cost of goods sold is ascertained by assigning the cost of units purchased earlier. Hence, inventory at last is available from recent purchases. When FIFO method is used the cost of goods sold in a period is computed by adding the cost of the units in the beginning inventory or old inventory and then the cost of remaining units which represents the goods manufactured during the period that is new inventory.

Following shows the cost of goods sold and ending inventory as per FIFO Method: A B C D E F G H I J Perpetual inventory record: FIFO Method Purchases Cost of goods sold Inventory on hand Quantity Unit Cost Total Cost Quantity Unit Cost Total Cost Quantity Unit Cost Total Cost (S) (5) 3 Date 6 October 1 7 October 11 14 971 5994 22 22 14 x $53 S53 x $71 $1,166 S1,166 $994 $2,160 $212 $994 $1,206 18 $53 $954 4 10 October 23 11 x $53 x 571 14 13 October 26 10 x $74 $740 S212 4 14 10 x S53 $71 $74 $994 $740 $1,946 SO 16 17 October 29 4 14 1 $53 x 571 $74 SO $2120 $994 $74 $1.280 $2,234 9 S53 x $71 x $74 0 9 19 $666 5666 S666 21 Total $1,734 37

Following schedule shows the calculation: Perpetual inventory record: FIFO Method Purchases Cost of goods sold Unit Cost Total Cost Quantity Unit Cost Total Cost ($) (S) (s) ($) 3 Date Quantity Inventory on hand Quantity Unit Cost Total Cost (S) (S) 6 October 1 7 October 11 14 x 571 =1471 10 October 23 $53 =1853 13 October 26 10 $74 = 1074 *$53 =22*53 x 553 =2253 *$71 =1471 =J7+JS x SS3 53 x 571 =1471 =J10+J11 S53453 *$71 =1471 *$74 = 1074 =SUM(J13-J15) * 530 $710 x $74974 =SUM(J17:19) J20 10 17 October 29 x $53433 *$71 =1471 x $74-1974 =SUMG17.G19) G10+G20 20 21 Total SUM(B7:B20) SUM(D7:D20) SUM(E7:20) -H19 Gross Profit: Gross Profit is the profit which a company eams after reducing the costs that are related to the production from sales revenue of its products. Gross profit is computed by deducting the cost of goods sold from sales revenue.

Following schedule shows the gross profit using FIFO Method: B Calculation of gross profit WNH (S) 4 Net Sales (18 x $84) + (19 x $84) 5 Less: Cost of goods sold 6 Gross Profit 3,108 2.234 874 The gross profit using FIFO Method is $874. Following schedule shows the calculation: Calculation of gross profit (S) 4 Net Sales (18 x $84) +(19 x $84) =(18*84)+(19*84) Less: Cost of goods sold 2234 6 Gross Profit =B4-B5

LIFO Method: Under the LIFO method of valuation of merchandise inventory and cost of goods sold, the valuation is taken on last in first out basis. As such value of merchandise inventory represents earlier purchases while value of cost of goods sold represents latest purchases. In the LIFO method it is assumed that the cost of goods sold represents latest purchases. It is assumed in this method the valuation is taken on the basis of last in first out. So, this method is based on the assumption basis.

Following shows the cost of goods sold and ending inventory as per LIFO Method: A B C D E F Perpetual inventory record: LIFO Method Purchases Cost of goods sold Inventory on hand Quantity Unit Cost Total Cost Quantity Unit Cost Total Cost Quantity Unit Cost Total Cost (S) (S) (S) 6 October 1 7 October 11 14 x $71 $994 22 22 14 S53 $53 $71 $1,166 $1,166 $994 $2,160 $954 10 October 23 14 4 x $71 x S53 $994 S212 $1,206 18 0 $53 $71 12 13 October 26 10 x 574 5740 18 10 $53 $74 14 $954 $954 $740 $1,694 $477 15 16 October 29 17 10 9 x $74 x $53 9 0 x $53 $74 SO $740 $530 $1,270 $2,264 19 Total 24 $1,734 37 $477 $477

Following schedule shows the calculation: Perpetual inventory record: LIFO Method Purchases Cost of goods sold Unit Cost Total Cost Quantity Unit Cost Total Cost (5) ($) (5) (5) Quantity Inventory on hand Quantity Unit Cost Total Cost (S) ($) 22 6 October 1 7 October 11 14 x $71 = 14071 22 10 October 23 18 * $71 =1471 S53453 =G10+G11 * $532233 x S53 =2253 x 571 =1471 =J7+J8 * $53 =1853 x $71 071 J10+J11 x 353 =18 53 x $74 =10*74 =SUM(J13:14) x 533 -9°53 x $74 -0.74 =SUMJ16J17) 13 October 26 10 X $74 =1074 18 10 Is 16 October 29 10 x $7410749 x S53 =10*530 =SUM(G16 G17) =G10+G18 9 19 Total =SUM(B7:B18) =SUM(D7:D18) =SUM(E7:E18) -18 Gross Profit: Gross Profit is the profit which a company eams after reducing the costs that are related to the production from sales revenue of its products. Gross profit is computed by deducting the cost of goods sold from sales revenue.

Following schedule shows the gross profit using LIFO Method: B Calculation of gross profit (S) 11 Net Sales (18 x $84) + (19 x $84) 12 Less: Cost of goods sold 13 Gross Profit 3,108 2,264 844 The gross profit using LIFO Method is $844). Following schedule shows the calculation: 00 Calculation of gross profit (S) 11 Net Sales (18 x $84) + (19 x 584) =(18*84)+(19*84) 12 Less: Cost of goods sold 2264 13 Gross Profit =B11-B12

Weighted Average cost: Under this method average cost per unit is calculated by dividing costs of goods available for sale by total units available for sale. This method is also termed as weighted average method in case of periodic inventory system. Formula for computation of Average cost per unit: Cost of goods available for sale Average cost per unit = = Units available for sale

Following shows the cost of goods sold and ending inventory as per veighted average Method: A B C D E F G H I J Perpetual inventory record: Weighted Average Method Purchases Cost of goods sold Inventory on hand Quantity Unit Cost Total Cost Quantity Unit Cost Total Cost Quantity Unit Cost Total Cost (S) (S) (S) (S) (S) (S) 3 Date 6 October 1 7 October 11 1 4 x $71.00 $994 18 x $60.00 $1,080 10 October 23 11 October 26 22 x $53.00 22 x $53.00 14 $71.00 36 $60.00 18 x $60.00 18 x $60.00 10 x $74.00 28 $65.00 9 x $65.00 $1,166 $1,166 $994 $2,160 $1,080 $1,080 $740 $1,820 $585 $585 10 x 574.00 $740 $65.00 14 October 29 15 Total 19 37 $1,235 $2,3159 $1,734

Following schedule shows the calculation: Perpetual inventory record: Weighted Average Method Purchases Cost of goods sold Unit Cost Total Cost Quantity Unit Cost Total Cost ($) ($) 3 Date Quantity Quantity Inventory on hand Unit Cost Total Cost (S) (S) 6 October 1 7 October 11 14 x$71.00 =1471 18 20 October 23 11 October 26 10 22 $53.00 =22*53 * $53.00 =22*53 * $71.00 =1471 =H7 H8 =19 H9 = 17+J8 x $60.00 =18.60 18 560.00 =1860 18 $60.00 =1860 10 x $74.00 = 10*74 =H11 H12 =J13/H13 =SUMJ11:12) x 565.00 = 19*65 9 $65.00 =9065 G10+G14 H14 14 x 574.00 =10*74 12 14 October 29 15 Total 19 =SUM(D7:D14) =SUM(E 7:14) =SUM(B7:B14) Gross Profit: Gross Profit is the profit which a company ears after reducing the costs that are related to the production from sales revenue of its products. Gross profit is computed by deducting the cost of goods sold from sales revenue.

Following schedule shows the gross profit using weighted average Method: Calculation of gross profit (S) 18 Net Sales (18 x $84)+(19 x $84) 19 Less: Cost of goods sold 20 Gross Profit 3.108 2.315 793 The gross profit using Weighted average Method is $ 793. Following schedule shows the calculation: Calculation of gross profit 18 Net Sales (18 x $84) +(19 x 584) 19 Less: Cost of goods sold 20 Gross Profit =(18*84)+(19*84) 2315 =B18-B19

4. The cost of goods sold and the value of ending inventory depends on the inventory cost flow assumption method selected to value the ending inventory and determine the cost of goods sold. The gross profit when FIFO method is used is $874. when LIFO method is used is $844 and when weighted average method is used is $793. The method in which the gross profit is largest is FIFO method because there is rise in the cost of inventory and the cost of goods sold under the FIFO method is lowest. When there is rise in the cost of inventory, the cost of goods sold as per the FIFO method will be lower because in this method it is assumed that the inventory which is acquired first by the company is required to be sold first. So, the units purchased earlier have lower costs which result in lower cost of goods sold when compared with the weighted average cost method. Therefore, the cost of goods sold will be higher when weighted average method will be used. The ending inventory as per the FIFO method will be higher when compared with the weighted average method in case of rising prices because the ending inventory belongs to the purchases made by the company recently.