FAR 7.02 - INVENTORY COSTING METHODS

Question 1

FAR 7.02 - INVENTORY COSTING METHODS

During January 20X3, Metro Co., which maintains a perpetual inventory system, recorded the following information pertaining to its inventory:

Units | Unit cost | Total cost | Units on hand

– Balance 1/1/X3: 1,000 Units / $1/Unit / $1,000 Total Cost / 1,000 Units on Hand

– Purchased on 1/7/X3: 600Units / $3/Unit / $1,800 Total Cost / 1,600 Units on Hand

– Sold on 1/20/X3: 900Units / 700 Units on Hand

– Purchased on 1/25/X3: 400 Units / $5 Unit Cost / $2,000 Total Cost / 1,100 Units on Hand

Under the moving-average method, what amount should Metro report as inventory at January 31, 20X3?

$2,640
$3,225
$3,300
$3,900

Answer 1

$3,225

EXPLANATION:

The moving-average method requires that a new unit cost be computed each time goods are purchased.

The new unit cost is used to cost all sales of inventory until the next purchase. After the 1/7/x3 purchase, Metro owns 1,600 units (1,000 + 600) at a total cost of $2,800 ($1,000 + $1,800).

Therefore, the moving-average unit cost at that time is $1.75 ($2,800 ÷ 1,600 units).

After the 1/20/x3 sale of 900 units (at a unit of cost of $1.75), Metro owns 700 units at a unit cost of $1.75 (700 x $1.75 $1,225).

The 1/25/x3 purchase of 400 units at a total cost of $2,000 increases inventory to its 1/31/x3 balance of $3,225 ($1,225 + $2,000).

The new unit cost (not required) is $2.93 ($3,225 ÷ 1,100).

Question 2

FAR 7.02 - INVENTORY COSTING METHODS

Which inventory costing method would a company that wishes to minimize profits in a period of rising prices use?

FIFO.
Dollar-value LIFO.
Moving average.
Weighted average.

Answer 2

Dollar-value LIFO.

EXPLANATION:

During a period of rising prices, FIFO, which reports cost of sales based on the earliest units purchased, will report the highest ending inventory and therefore the highest profit, while LIFO, which reports cost of sales based on the most recent unit purchased, will report the lowest inventory and the lowest profit.

Either average approach will provide results in between FIFO and LIFO.

Question 3

FAR 7.02 - INVENTORY COSTING METHODS

Which of the following inventory valuation methods produce(s) the same dollar amount result in ending inventory in both periodic and perpetual inventory systems?

FIFOLIFO
No No
Yes Yes
No Yes
Yes No

Answer 3

FIFO- Yes, LIFO-No

EXPLANATION:

Since FIFO assumes that ending inventory consists of the most recent purchases, the FIFO cost flow assumption leads to the same ending inventory balance under both the perpetual and periodic systems.

Under the LIFO cost flow assumption, the most recent goods purchased are assumed to be sold while older inventory is assumed to remain on hand.

When using the periodic method under LIFO, it is assumed that all sales occur at the end of the period and are taken from the latest purchases.

Since goods cannot be sold before they are purchased, the perpetual method will require that early sales be charged against the most recent purchases as of the date of sale and will lead to a different ending inventory balance.

Question 4

FAR 7.02 - INVENTORY COSTING METHODS

West Co. recorded the following inventory information during the month of February:

Units | Unit cost| Total Cost | UnitsOnHand

– Balance on 2/1:
800Units, $2/Unit, $1,600 Total Cost, 800 Units on Hand

– Purchased on 2/8:
1,000Units, $3/Unit,$3,000Total Cost, 1,800 Units on Hand

-- Sold on 2/14: 
1,500 Units, 300 Units on Hand

-- Purchased on 2/17: 
2,000 Units, $1/Unit, $2,000Total Cost, 2,300 Units on Hand

– Sold on 2/23:
1,600 Units. 700 Units on Hand

– Purchased on 2/28:
800Units, $4/Unit,$3,200 Total Cost, 1,500Units

West uses the LIFO method to cost inventory. What amount should West report as inventory at the end of February under each of the following methods of recording inventory?

Perpetual: $4,200, Periodic: $3,700.
Perpetual: $3,700, Periodic: $4,200.
Perpetual: $3,700, Periodic: $3,700.
Perpetual: $4,200, Periodic: $4,200

Answer 4

Perpetual: $4,200, Periodic: $3,700.

EXPLANATION:

Under the perpetual method, purchases and sales are recognized as they occur.

As a result, the sale of 1,500 units on 2/14 would consist of the 1,000 units purchased on 2/8 and 500 of those in beginning inventory, leaving 300 from beginning inventory.

The 1,600 units sold on 2/23 all would have come from the 2,000 purchased on 2/17, leaving 400 of those units in ending inventory.

As a result, ending inventory would consist of 300 from beginning inventory at $2, or $600, 400 from the purchase on 2/17 at $1, or $400, and the 800 purchased on 2/28 at $4, or $3,200 for a total of $4,200.

Under the periodic method, it is assumed that all sales occurred at the end of the period.

As a result, the total sales of 3,100 units would have included the 800 purchased on 2/28, the 2,000 purchased on 2/17, and 300 of those purchased on 2/8.

Ending inventory would consist of the 800 units in beginning inventory at $2 per unit, or $1,600, and the 700 remaining from the purchase on 2/8 at $3 per unit, or $2,100, for a total of $3,700.