E8 13 Altira Corporation Uses A Periodic Inventory System

E8 13altira Corporation Uses A Periodic Inventory System The Followin

Determine the inventory balance Altira would report in its August 31, 2011, balance sheet and the cost of goods sold it would report in its August 2011 income statement using each of the following cost flow methods: 1. First-in, First-out (FIFO) 2. Last-in, First-out (LIFO) 3. Average Cost. The company uses a periodic inventory system, and the following transactions occurred:

• Aug 1 Inventory on hand - 2,000 units; cost $6.10 each.
• Aug 8 Purchased 10,000 units for $5.50 each.
• Aug 14 Sold 8,000 units for $12.00 each.
• Aug 18 Purchased 60,000 units for $5.00 each.
• Aug 25 Sold 7,000 units for $11.00 each.
• Aug 31 Inventory on hand – 3,000 units.

Sample Paper For Above instruction

The determination of inventory balances and cost of goods sold (COGS) under different inventory valuation methods significantly impacts a company's financial statements. Altira Corporation's transactions in August 2011 exemplify typical inventory activities that require application of FIFO, LIFO, and average cost methods under a periodic inventory system. This paper analyzes each method's effect on inventory valuation and COGS, providing an understanding of how inventory management decisions influence financial reporting.

Introduction

Inventory accounting plays a crucial role in portraying a company's financial health accurately. The choice among FIFO, LIFO, and average cost impacts both the inventory value on the balance sheet and the cost of goods sold on the income statement. In periods of rising or falling prices, these methods yield different results, affecting profit margins, tax liabilities, and investor perceptions. This analysis focuses on Altira Corporation's August 2011 transactions to demonstrate the application of these methods.

Methodology

Given the periodic inventory system used by Altira, inventory calculations are performed at the end of the period. The initial inventory and subsequent purchases are considered to determine the cost layers. The following steps are taken:

1. Calculate the total cost of available for sale inventory.
2. Determine the ending inventory based on each inventory valuation method.
3. Compute the COGS by subtracting the ending inventory from the cost of goods available for sale.

Analysis Under FIFO

The FIFO method assumes the earliest goods purchased are sold first. Under this method, the ending inventory comprises the latest purchases.

Beginning inventory on August 1: 2,000 units @ $6.10 = $12,200.

Purchases on August 8: 10,000 units @ $5.50 = $55,000.

Purchases on August 18: 60,000 units @ $5.00 = $300,000.

Total units available: 72,000 units, with total cost $367,200.

Sales: 8,000 units on August 14 and 7,000 units on August 25, totaling 15,000 units sold.

Ending inventory: 3,000 units on August 31.

Under FIFO, the ending inventory consists of the most recent acquisitions, specifically 3,000 units @ $5.00 = $15,000.

The COGS is calculated as total goods available for sale ($367,200) minus ending inventory ($15,000), resulting in $352,200.

Analysis Under LIFO

LIFO assumes the latest purchased goods are sold first. Ending inventory includes the oldest inventory layers.

By August 31, the remaining inventory comprises units from the beginning inventory and earlier purchases: 2,000 units @ $6.10 and 1,000 units @ $5.50 from the August 8 purchase.

Thus, ending inventory: (2,000 @ $6.10) + (1,000 @ $5.50) = $12,200 + $5,500 = $17,700.

COGS is total goods available for sale ($367,200) minus ending inventory ($17,700), equaling $349,500.

Analysis Under Average Cost

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

Average cost per unit = $367,200 / 72,000 units = approximately $5.10.

Ending inventory: 3,000 units @ $5.10 = $15,300.

COGS: $367,200 - $15,300 = $351,900.

Conclusion

Each inventory valuation method produces different figures reflective of various assumptions about the flow of inventory goods. FIFO results in higher ending inventory and slightly lower COGS in an inflationary environment, as it assumes older, higher-cost inventory remains unsold. Conversely, LIFO yields lower ending inventory and higher COGS, aligning with a perspective that recent costs are reflected in expenses. The average cost method provides a balance, smoothing out cost fluctuations over the period.

Understanding these differences enables management and investors to interpret financial statements accurately, considering the implications of inventory management strategies on profitability and tax Liabilities.

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