llowing Simans Co uses a periodic inventory system The purch

llowing Simans Co. uses a periodic inventory system. The purchases of a particular product during the year are shown below: Beginnimg imventory... 400 units @ 600 units 700 units S 8.00 $10.00 12.00 $14.00 am. Apr. 18Purchase Aug. 11Purchase Oct. 23 Purchase 300 units @ The number of units sold during the year was 1,500. Each unit was sold for $20. 1. Refer to the above data. Compute the cost of goods sold for the current year based on the LIFQ method of imventory valuation. 2. Refer to the above data Compute the cost of the ending mventory based on the LIFQ method of inventory valuation. 3. Refer to the above data. Compute the cost of goods sold for the current year based on the FIFQ method of inventory 4. Refer to the above data. Compute the cost of the endmg inventory based on the FIFQ method of inventory valuation. 5. Refer to the above data. Compute the cost of goods sold based on the average-cost method of inventory valuation. 6. Refer to the above data. Compute the gross profit for the current year based on the LIFQ method of inventory valuation. 7. Refer to the above data Compute the gross profit for the current year based on the FIFOmethod of inventory valuation. valuation. 8. Which of the following results in the cost of goods sold being stated at the most current acquisition costs? a. Average cost b. FIFO c. LIFO d. Specific identification e. None of the above 9. During a period of falling prices, which of the following methods is likely to result in reporting the lowest income tax expense? a. Average cost b. FIFO c. LIFO d. Specific identification e. None of the above

Solution

List of Formulas used:

1. Cost of goods sold = Opening Inventory+Purchase Cost-Closing Inventory

2. Gross Profit = Sales-Cost of goods sold

Using Information form the Question

1. cost of opening inventory= 400*8=$3200

2. total Purchase Cost= 600*10+700*12+300*14=$18600

3.closing inventory (units) = Acquired- sold=2000-1500=500

4.sales= 1500units@20=$30000

Intrepretations:

1. FIFO = First In First Out i.e the goods which are bought previously(old) would be sold first therefore only the goods which are bought last (new) would form part of closing inventory.

2.LIFO= Last in First Out i.e the goods which are bought last (new) would be sold first therefore only the goods which are bought first (old) would form part of closing inventory.

FOR ANSWER NO. 3,4 & 7

Answer 4.) Using Intrepratation 1.)Cost of closing stock= cost of units left after selling 1500 Units Chronologically. i.e cost of 300 units purchased on Oct 23, (300*14=$4200) & 200 units purchased on Aug 11, (200*12=$2400).

Therefore total cost of closing inventory as per FIFO= $4200+$2400=$6600.

Answer 3.) Cost of Goods Sold{Fomula 1}= $3200(Info.1.)+$18600(Info.2.)-$6600(as per Ans. 4.)

=$3200+$18600-$6600= $15200

Answer 7.) Gross Profit{Formula 2}=$30000(Info.4)-$15200(as per Ans. 3.)

=$30000-$15200=$14800

FOR ANSWER NO 1,2 &6

Answer 2.) Cost of closing Inventory = using intrepretation 2. i.e old goods would form part of closing stock out of 500 units,,400units form Jan1.($400*8=$3200) &100 units from Apr 18 ($100*10)

Cost of Closing inventory= $3200+$1000=$4200

Answer 1.)Cost of Goods Sold{Fomula 1}= $3200(Info.1.)+$18600(Info.2.)-$4200(as per Ans. 2.)

=$3200+$18600-$4200= $17600.

Answer 6.) Gross Profit{Formula 2}=$30000(Info.4)-$17600(as per Ans. 1.)

=$30000-$17600=$12400

For Answer No. 5

Average Cost Method

Cost of Inventory at any point of time = Opeing Inventory+Purchase Cost/ No. of units held at time

Assumption used :1500 units are sold after Oct 23,

Units held on Oct 23,= 400+600+700+300=2000

Average cost of Inventory on Oct23,=$3200(Info1.)+18600(Info 2.)/2000.....as above

=$3200+$18600/2000= $21800/2000= $10.9 per unit

units held at the year end=2000-1500= 500units

Cost of Closing Inventory as per avg. cost method= 500*10.9(from above)= $5450.......(A)

Cost of Goods Sold{formula 1.)=$3200(Info1.)+$18600(Info2.)-$5450(From (A))

=$3200+$18600-$5450=$16350

Answer 8.) Option (c) LIFO as explained earlier As per LIFO Method i.e last in First Out i.e new goods would be sold first, therefore current acquisition forms part of cost of goods sold.

Answer 9.) Option (b) FIFO as given in event of falling prices if FIFO method is used i.e old goods would be sold first and new goods of reduced prices would form part of closing inventory, the closing inventory would be lower, therefore our Gross Profit & Net Profit would be lower and Hence Income Tax Expense would be Lower.