Calculate Ending Inventory And Cost Of Goods Sold

Calculate Ending Inventory And Cost Of Goods Sold Using The Last In Fi

Calculate ending inventory and cost of goods sold using the last in, first out (LIFO); moving; and weighted average methods. Tony Merchandise Company has the following information for the month of February: Feb. 2 Beginning inventory 20 units @ $12 per unit Feb. 5 Purchase 20 units @ $16 per unit Feb. 8 Sale 12 units Feb. 21 Purchase 12 units @ $18 per unit Feb. 25 Sale 14 units. Answer the following questions for Tony Merchandise Company: Calculate the dollar ending inventory if first in, first out (FIFO) is used. Calculate the cost of goods sold if LIFO is used. Calculate the dollar ending inventory if weighted average is used. According to the generally accepted accounting principles (GAAP), discuss the objectives of inventory costing. Discuss the consequences of selecting one method instead of others.

Paper For Above instruction

Introduction

Inventory valuation methods are fundamental to accurate financial reporting and effective managerial decision-making within a firm. They influence key financial statements, such as the income statement and balance sheet, by determining cost of goods sold (COGS) and ending inventory. The choice among the commonly used inventory costing methods—FIFO, LIFO, and weighted average—has significant implications for a company's financial appearance, tax obligations, and operational insights. This paper calculates the ending inventory and COGS for Tony Merchandise Company using these methods and discusses the fundamental objectives of inventory costing under generally accepted accounting principles (GAAP). It further examines the consequences of choosing one inventory valuation method over another for a company’s financial health and strategic planning.

Calculations of Inventory Methods for Tony Merchandise Company

1. FIFO (First-In, First-Out) Method

FIFO assumes that the oldest inventory items are sold first, and the remaining inventory comprises the most recent purchases.

Beginning Inventory (Feb 2): 20 units @ $12

Purchase (Feb 5): 20 units @ $16

Sale (Feb 8): 12 units

Purchase (Feb 21): 12 units @ $18

Sale (Feb 25): 14 units

To compute the ending inventory using FIFO:

- First, allocate the sale of 12 units on Feb 8 from the beginning inventory (20 units @ $12).

- The remaining inventory after this sale:

- 8 units @ $12 (remaining from beginning inventory),

- 20 units @ $16,

- 12 units @ $18.

- The Feb 25 sale of 14 units would be allocated starting from the latest purchase:

- 12 units @ $18 (all 12 units from the Feb 21 purchase),

- 2 units @ $16 from February 5 purchase.

Remaining inventory after the Feb 25 sale:

- 18 units @ $16 (since two units have been sold from the Feb 5 purchase), and

- 8 units @ $12.

Calculating the ending inventory:

- 18 units @ $16 = $288

- 8 units @ $12 = $96

Total ending inventory (FIFO): $384

2. LIFO (Last-In, First-Out) Method

LIFO assumes the most recent inventory is sold first.

Sale on Feb 8 (12 units):

- 12 units @ $16 (from Feb 5 purchase) are sold.

Remaining inventory after Feb 8:

- 8 units @ $12,

- 20 units @ $16,

- 12 units @ $18.

Sale on Feb 25 (14 units):

- 12 units @ $18 (from Feb 21 purchase),

- 2 units @ $16 (remaining from Feb 5 purchase).

Remaining inventory after Feb 25:

- 18 units @ $16 (original 20 units minus 2 sold),

- 8 units @ $12.

Calculate the cost of goods sold (LIFO):

- Feb 8 sale: 12 units @ $16 = $192

- Feb 25 sale: 12 units @ $18 = $216,

- plus 2 units @ $16 = $32

Total COGS = $192 + $216 + $32 = $440

Ending inventory under LIFO:

- 18 units @ $16 = $288

- 8 units @ $12 = $96

Total ending inventory: $384

3. Weighted Average Method

Weighted average cost per unit is calculated by dividing the total cost of goods available for sale by the total units available for sale.

Total units available for sale:

- 20 units @ $12 = $240

- 20 units @ $16 = $320

- 12 units @ $18 = $216

Total units = 52

Total cost of goods available for sale:

- $240 + $320 + $216 = $776

Weighted average cost per unit:

- $776 / 52 units ≈ $14.92 per unit

Cost of goods sold:

- For sales of 12 units (Feb 8): 12 × $14.92 ≈ $179.04

- For sales of 14 units (Feb 25): 14 × $14.92 ≈ $208.88

Total COGS ≈ $387.92

Ending inventory:

- Remaining units: 52 - (12 + 14) = 26 units

- 26 units × $14.92 ≈ $387.92

Discussion on Objectives of Inventory Costing per GAAP

The primary objectives of inventory costing under GAAP are to ensure that inventory is accurately valued on the balance sheet and that cost of goods sold accurately reflects the cost of inventory sold during the period. Accurate inventory valuation provides stakeholders with reliable financial information on the company's assets and profitability, aiding in decision-making, compliance, and strategic planning (Kieso et al., 2019).

In addition, inventory valuation methods serve to systematically allocate costs and provide consistency in financial reporting over periods. GAAP mandates specific principles to ensure consistency, comparability, and transparency. FIFO typically reflects current market values more accurately in inflationary periods, as the ending inventory comprises recent purchases. Conversely, LIFO can reduce taxable income during inflation but may distort true inventory valuation. The weighted average method seeks to smooth out price fluctuations, providing a middle ground between FIFO and LIFO.

Consequences of Selecting Different Inventory Methods

Choosing an inventory valuation method has profound consequences on financial statements, taxation, and managerial decision-making. For example, using FIFO during inflationary periods generally results in higher ending inventory and net income, which could lead to higher taxes. Conversely, LIFO tends to produce lower net income and lower taxes but may understate inventory value, impacting working capital assessments and borrowing capacity (Brigham & Ehrhardt, 2019).

The weighted average method offers simplicity and moderate effects, but it may not reflect current costs accurately or provide relevant insights into inventory valuation during periods of significant price volatility. The choice also influences key financial ratios such as gross profit margin, inventory turnover, and return on assets, impacting investor perception and creditworthiness (Gibson, 2018).

Furthermore, the selection of inventory method can affect managerial decisions related to pricing, production, and inventory management. For instance, firms employing LIFO may focus more on cost control to mitigate lower recorded profits, while FIFO users might prioritize inventory replenishment strategies to align with their valuation approach.

In conclusion, a company's selection of inventory valuation method should align with its financial strategy, tax planning, and industry practices. Consistency in applying chosen methods is crucial for comparability over periods and compliance with GAAP regulations.

Conclusion

The computation of ending inventory and cost of goods sold for Tony Merchandise Company illustrates how different inventory valuation methods—FIFO, LIFO, and weighted average—produce varying financial results. While FIFO tends to provide a higher valuation of ending inventory, LIFO offers a tax advantage in inflationary periods by reducing taxable income. The weighted average method offers a balanced approach, smoothing out cost fluctuations. Alongside these calculations, understanding the objectives of inventory costing under GAAP is essential to ensure accurate and transparent financial reporting. The choice among these methods carries significant strategic implications, influencing profitability, tax liabilities, and financial ratios, highlighting the importance of aligning inventory valuation practices with overall corporate objectives and regulatory standards.

References

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