Glickman Acc111 End Of Chapter 6 Test 40 P
Glickman Acc111 End Of Chapter 6 Test 40 P
Glickman Acc111 End Of Chapter 6 Test – (40 points) Please show all calculations!!! Morton Company uses the periodic inventory method for the year 20XX and had the following information. Units Cost Total Cost Jan 1 Beginning Inventory 100 $4.00 $ 400 Feb 15 Purchase 400 $5.00 $ 2,000 Jun 20 Purchase 200 $7.00 $ 1,400 Nov15 Purchase 300 $8.00 $ 2,400 Cost of Goods Available for Sale A physical count of inventory on December 31 revealed that there were 350 units on hand. Determine the cost of the 350 units in the inventory and the cost of goods sold by each of the following methods, presenting details of your computations AND prepare an Income Statement assuming Sales were $10,000 and Operating Expenses were $2,000.
Don’t forget titles! A. FIFO Ending Inventory Computation Income Statement Cost of Goods Sold Computation B. LIFO Ending Inventory Computation Income Statement Cost of Goods Sold Computation C. Average Cost Ending Inventory Computation Income Statement Cost of Goods Sold Computation D. Which method gives the highest net income? _________________________
Paper For Above instruction
The given problem involves calculating the ending inventory and cost of goods sold (COGS) for Morton Company using three different inventory valuation methods: FIFO, LIFO, and Average Cost. Additionally, a comparative analysis of net income based on these methods is required, along with preparing an income statement assuming sales of $10,000 and operating expenses of $2,000. Using the periodic inventory method, the calculations consider beginning inventory, purchases throughout the year, and physical inventory count at year-end.
Introduction
Inventory valuation is a critical aspect of financial accounting, affecting the determination of gross profit, net income, and the value of inventory reported on the balance sheet. The FIFO (First-In, First-Out), LIFO (Last-In, First-Out), and Average Cost methods are among the most common inventory valuation techniques. Each method impacts the cost of goods sold and ending inventory differently, influencing a company's profitability and tax liabilities.
Inventory Data and Assumptions
- Beginning Inventory: 100 units @ $4.00
- Purchases:
- February 15: 400 units @ $5.00
- June 20: 200 units @ $7.00
- November 15: 300 units @ $8.00
- Total units available for sale: 100 + 400 + 200 + 300 = 1000 units
- Cost of Goods Available for Sale: $400 + $2000 + $1400 + $2400 = $6200
- Physical count at December 31: 350 units on hand
- Sales: $10,000
- Operating expenses: $2,000
Calculations for FIFO Method
Ending Inventory (FIFO)
FIFO assumes that the oldest inventory is sold first. Hence, the ending inventory comprises the most recent purchases.
Units on hand: 350
Starting from the latest purchases:
- November 15: 300 units @ $8.00 = $2,400
- Remaining units needed: 50
- June 20 purchase: 200 units @ $7.00 = $1,400
Note that only 50 units are needed from the June purchase, so ending inventory consists of:
- 300 units @ $8.00 = $2,400
- 50 units @ $7.00 = $350
Total ending inventory: $2,400 + $350 = $2,750
Cost of Goods Sold (FIFO)
Goods available: 100 units @ $4.00, 400 units @ $5.00, 200 units @ $7.00, 300 units @ $8.00
Units sold: 1000 - 350 = 650 units
First, sell the oldest inventory:
- 100 units @ $4.00 = $400
- 400 units @ $5.00 = $2,000
- 150 units @ $7.00 = $1,050
Total COGS: $400 + $2,000 + $1,050 = $3,450
Income Statement (FIFO)
Sales: $10,000
Cost of Goods Sold: $3,450
Gross Profit: $10,000 - $3,450 = $6,550
Operating Expenses: $2,000
Net Income: $6,550 - $2,000 = $4,550
Calculations for LIFO Method
Ending Inventory (LIFO)
LIFO assumes selling the most recent inventory first. The ending inventory consists of the oldest purchases:
- 100 units @ $4.00 = $400
- 250 units @ $5.00 = $1,250
Total ending inventory: $400 + $1,250 = $1,650
Cost of Goods Sold (LIFO)
Units sold: 650
From the most recent purchases:
- 300 units @ $8.00 = $2,400
- 200 units @ $7.00 = $1,400
- 150 units @ $5.00 = $750
Total COGS: $2,400 + $1,400 + $750 = $4,550
Income Statement (LIFO)
Sales: $10,000
Cost of Goods Sold: $4,550
Gross Profit: $10,000 - $4,550 = $5,450
Operating Expenses: $2,000
Net Income: $5,450 - $2,000 = $3,450
Calculations for Average Cost Method
Average Cost per Unit
Total cost of goods available for sale: $6,200
Total units: 1,000
Average cost per unit: $6,200 / 1,000 = $6.20
Ending Inventory
350 units @ $6.20 = $2,170
Cost of Goods Sold
650 units @ $6.20 = $4,030
Income Statement (Average Cost)
Sales: $10,000
Cost of Goods Sold: $4,030
Gross Profit: $10,000 - $4,030 = $5,970
Operating Expenses: $2,000
Net Income: $5,970 - $2,000 = $3,970
Analysis of Results
The FIFO method results in the highest net income ($4,550), as it assigns the older, lower-cost inventory to COGS, resulting in higher gross profit. Conversely, LIFO shows the lowest net income ($3,450), as it uses the most recent, higher-cost inventory for COGS, reducing gross profit. The Average Cost method provides a middle ground with net income of approximately $3,970. The choice of inventory valuation can significantly impact financial statements and tax liabilities.
Conclusion
In summary, FIFO leads to higher net income in periods of rising prices, while LIFO results in lower net income but may offer tax advantages. The Average Cost method smooths out price fluctuations, providing a balanced view. Companies select their inventory valuation method based on strategic financial and tax considerations, emphasizing the importance of understanding these methods' implications on financial reporting.
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