Cost flow assumptions and effects of inventory errors
| Subject: | 💰 Economics |
| Type: | Analytical Essay |
| Pages: | 1 |
| Word count: | 327 |
| Topics: | 💵 Finance, 💳 Microeconomics, 🙋♂️ Management |
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Table of Contents
Assume that Cushing, Inc. uses a PERIODIC INVENTORY system. Calculate cost of goods sold and ending inventory under FIFO and LIFO.
Calculating cost of goods sold and ending inventory using LIFO
- Feb 22: 70*16 = $ 1120
- June 11: (130*16) + (20*15) = $ 2380
- Nov 1: (140*15) + (50*13) = $ 2750
Total Cost of goods sold: $6250
Ending Inventory = Cost of goods available for sale – Cost of goods sold
= 6900 – 6250
Ending inventory = $650
Calculating cost of goods sold and ending inventory using FIFO
- Feb 22: 70*13 = $910
- June 11: (30*13) + (120*15) = $2190
- Nov 1: (40*15) + (150*16) = $3000
Total Cost of goods sold: $6100
Ending Inventory = Cost of goods available for sale – Cost of goods sold
= 6900 – 6100
Ending inventory = $800
Assume that Cushing, Inc., uses a PERPETUAL INVENTORY system. Calculate cost of goods sold and ending inventory under FIFO and LIFO.
Calculating cost of goods sold and ending inventory using LIFO
- Feb 22: 70*13 = $910
- June 11: 150*15= $2250
- Nov 1: 190*16= $3040
Total Cost of goods sold: $6200
Ending Inventory = Cost of goods available for sale – Cost of goods sold
= 6900 – 6200
Ending inventory = $700
Calculating cost of goods sold and ending inventory using FIFO
- Feb 22: 70*13 = $ 910
- June 11: (30*13) + (120*15) = $ 2190
- Nov 1: (40*15) + (150*16) = $ 3000
Total Cost of goods sold: $6100
Ending Inventory = Cost of goods available for sale – Cost of goods sold
= 6900 – 6100
Ending inventory = $800
Explain why the FIFO results for cost of goods sold and ending inventory are the same in your answers to parts A. and B., but the LIFO results are different.
(Ans)- When we calculate Cost of Goods Sold (CGS) using FIFO, no matter what method we use, the earliest price of available goods is used no matter how many other buying transactions occur in the mean time. However while using LIFO; whenever we make a new purchase transaction, the cost per unit value changes to that of the latest purchase.
Explain why the results from the LIFO periodic calculations in part A. cannot possibly represent the actual physical flow of inventory items.
(Ans)- Results using LIFO periodic calculations cannot be actual because in this case, the items are bought and sold frequently. Prices of such items are unstable and change often with a significant difference thus the values being used to calculate profit/loss margin will be faulty.
Offered for reference purposes only.