Cost flow assumptions and effects of inventory errors

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

  1. 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

  1. 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.

  1. 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.

2003                                    2002
Sales…………..                             $541,200                              $523,600

Cost of Goods Sold:
Beginning inventory…     $67,900                           $85,300
Cost of goods purchased $393,000                          366,500
———–                          ———-
Cost of goods
availible for sale………….$460,900                           $451,800
Less: ending
inventory……………………  (79,800)                           (67,900)    // [91,400 – 23,500]

Cost of goods sold…………                (381,100)                             (383,900)
———-                              ———–
Gross profit…………………                  $160,100                            $139,700
Operating expenses………                  (103,700)                              (94,700)

Net income (ignoring income taxes)      $56,400                              $45,000

*note: Ending inventory of 2002 will be the beginning inventory of 2003

  1. Combined net income of 2002-2003 before correction:

32,900 + 68,500 = $101,400

Combined net income of 2002-2003 after correction:

56,400 + 45,000 = $101,400

  1. There will be no effect on the net income or owner’s equity of 2004 as the ending inventory of 2003 is correct.
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