Determine The Cost Assigned To Ending Inventory And Cost

Determine the cost assigned to ending inventory and to cost of goods sold

Analyze the inventory valuation exercise involving different methods including specific identification, weighted average, FIFO, and LIFO. For each method, you will determine the ending inventory and cost of goods sold based on provided purchase and sales data, considering the company's periodic inventory system. The exercise involves proper rounding of unit costs to three decimal places and final answer rounding to the nearest dollar, omitting dollar signs in responses. The goal is to understand how different inventory costing methods impact financial statements, particularly ending inventory valuation and gross profit.

Sample Paper For Above instruction

Introduction

Inventory valuation is a fundamental aspect of financial accounting that directly influences a company's cost of goods sold (COGS), gross profit, and ending inventory balances. Different methods such as specific identification, weighted average, FIFO (First-In, First-Out), and LIFO (Last-In, First-Out) produce varying effects on financial statements and tax obligations. This paper explores these methods using company data to compare their impacts, highlighting the importance of selecting appropriate inventory costing techniques based on operational realities and regulatory standards.

Company Data and Context

The company in question maintains a periodic inventory system and reports various purchases and sales during a specific period. The data includes beginning inventory, multiple purchase transactions, and sales, with explicit details on quantity, unit cost or retail price, and purchase dates. The inventory data enables computation of the inventory valuation under different costing methods, providing insights into how each method affects reported values.

Specific Identification Method

The specific identification method involves matching each unit sold with its actual purchase cost. Since ending inventory consists of 525 units—290 from March 30 purchase, 80 from March 20 purchase, and 155 from beginning inventory—the calculation assigns the associated costs to ending inventory and COGS accordingly.

Calculating ending inventory: 290 units @ $9.00 (March 30 purchase) = $2,610

Remaining ending inventory: 80 units @ $10.00 (March 20 purchase) = $800, plus 155 units @ $11.00 (beginning inventory) = $1,705. Total ending inventory = $4,115.

COGS is determined by subtracting ending inventory from the cost of goods available for sale (Sum of beginning inventory and purchases). The precise calculation reflects that COGS = total cost of goods sold during the period.

Weighted Average Method

The weighted average method involves dividing the total cost of goods available for sale by total units to compute an average unit cost. This average is then multiplied by units sold and remaining to determine COGS and ending inventory, respectively. Due to rounding, slight discrepancies may occur, but the overall valuation offers a balanced perspective.

Average unit cost = Total cost / Total units = $40,000 / 1,730 units ≈ $23.121

Ending inventory (525 units): 525 units * $23.121 ≈ $12,139

COGS: (1,205 units sold * $23.121) ≈ $27,861

FIFO Method

The FIFO method assumes the earliest inventory costs are recognized first. Starting from the beginning inventory, the oldest costs are assigned to COGS, and the most recent costs are included in ending inventory. This approach typically yields higher ending inventory values during periods of rising prices.

Ending inventory includes the most recent purchases: 290 units @ $9.00, 80 units @ $10.00, and 155 units @ $11.00, summing to the valuation stated above.

COGS comprises the earliest inventory costs, which are detailed in the purchase and sale dates, with calculations aligned to FIFO principles.

LIFO Method

The LIFO method considers the latest purchases as sold first, thus assigning the most recent costs to COGS and older costs to ending inventory. This often results in lower taxable income during inflationary periods due to higher COGS.

Ending inventory under LIFO includes older costs, which are calculated based on remaining inventory after recent sales. The calculations follow the purchase costs in reverse order, ensuring conformity to the LIFO assumption.

Comparison and Implications

By analyzing the calculated values, it's evident that FIFO yields a higher ending inventory valuation compared to LIFO. The weighted average provides a middle ground, balancing the effects of price fluctuations. The choice of inventory method influences net income, tax liabilities, and inventory turnover ratios, emphasizing the importance of methodological consistency and appropriate selection based on economic conditions.

Conclusion

Understanding how different inventory valuation methods impact financial reporting is essential for accurate financial analysis and decision-making. Managers and accountants must consider operational realities, tax implications, and regulatory standards when selecting an inventory cost flow assumption. The exercise exemplifies the practical application of inventory costing principles, demonstrating that the choice of method significantly affects reported profits and asset valuations.

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