Inventory Costing Methods Periodic Method Merit Company Uses

inventory Costing Methods Periodic Methodmerit Company Uses The Pe

Calculate the cost of goods sold and ending inventory for May using three inventory costing methods—first-in, first-out (FIFO); last-in, first-out (LIFO); and weighted average cost—assuming a periodic inventory system. Use the provided purchase and sales data for May, round answers to the nearest dollar.

Refer to the same data but assume a perpetual inventory system to calculate the cost of goods sold for the May 16 sale using FIFO, LIFO, and weighted average cost methods. Round answers to the nearest dollar.

For Chen Sales Corporation, using a periodic system, compute the cost of goods sold and ending inventory for 2012 under FIFO, LIFO, and weighted average cost methods, considering purchases and sales of product A throughout the year. Additionally, evaluate which of these inventory costing methods best reflect the typical flow of perishable goods, minimize income taxes, and report the highest net income, providing explanations for each choice.

Sample Paper For Above instruction

Inventory valuation is a critical aspect of financial accounting, directly impacting reported net income and inventory on balance sheets. Among various methods, first-in, first-out (FIFO), last-in, first-out (LIFO), and weighted average cost are prevalent. This paper analyzes these methods in the context of periodic and perpetual inventory systems using case data from Merit Company and Chen Sales Corporation.

Merit Company’s Inventory Methods Under Periodic System

During May, Merit Company experienced multiple transactions, including beginning inventory, purchases, and sales. For the periodic system, calculating cost of goods sold (COGS) and ending inventory involves summing the costs of inventory available for sale during the period, applying the respective methods, and determining which units correspond to sold and remaining inventories.

FIFO Method:

Under FIFO, the earliest purchased inventory is assumed sold first. Beginning with the starting inventory of 150 units at $30 and subsequent purchases, the 180 units sold on May 16 would consist of the initial 150 units at $30 and 30 units from the next purchase at $35, totaling a COGS of $(150 \times 30) + (30 \times 35)$ = $4,500 + $1,050 = $5,550. Remaining units in inventory would be calculated accordingly, resulting in an ending inventory value based on the most recent purchases.

LIFO Method:

Conversely, LIFO assumes the most recent inventory was sold first. Therefore, the 180 units sold on May 16 would be from the latest purchase of 160 units at $36 each and the remaining 20 units from the previous batch at $35 each. The COGS calculation would be (160 × 36) + (20 × 35) = $5,760 + $700 = $6,460, with ending inventory comprising the initial inventory and earlier purchases.

Weighted Average Cost Method:

The weighted average cost per unit is determined by dividing the total cost of available inventory by the total units available for sale during May. Summing the costs: (150 × $30) + (100 × $35) + (160 × $36) = $4,500 + $3,500 + $5,760 = $13,760. The total units are 150 + 100 + 160 = 410. Therefore, the average cost per unit = $13,760 / 410 ≈ $33.61. COGS for 180 units sold would be 180 × $33.61 ≈ $6,050. The ending inventory includes remaining units valued at this average cost.

Perpetual Inventory System Calculations

Applying the same data, but under a perpetual system, inventory records are updated after each purchase and sale, affecting COGS calculation at the time of each transaction.

FIFO in Perpetual System:

For the sale on May 16, the units sold are sourced from the earliest purchase records. The first units in stock at the start are 150 units at $30, and the next purchase is 100 units at $35. COGS would include the entire initial inventory (150 units at $30) and 30 units from the second purchase at $35, totaling $5,550. Remaining inventory after sale will consist of the remaining units from the latest purchase.

LIFO in Perpetual System:

Here, the units sold are assumed from the latest purchase. The 160 units at $36 are sold first, with the remaining 20 units needed to reach 180 sold from the previous inventory at $35, leading to a COGS of $6,460, similar to the periodic approach but calculated after each transaction.

Weighted Average Cost in Perpetual System:

After each purchase, a new average cost per unit is recalculated, and the cost of goods sold on May 16 is determined based on this ongoing average, resulting in more precise inventory valuation aligned with real-time transactions.

Chen Sales Corporation’s Inventory Valuation Methods

In 2012, Chen Sales Corporation purchased and sold 1,000 units of product A, with several additional purchases. For each method—FIFO, LIFO, and weighted average—the yearly cost of goods sold and ending inventory are calculated, considering the timing and costs of each purchase.

FIFO Method:

Assuming FIFO, the earliest costs are matched against sales. The initial purchase of 1,000 units at $20 is exhausted as units are sold throughout the year, with subsequent purchases at $22 and other prices allocated accordingly. The COGS includes the cost of the earliest units sold, leaving the latest purchase prices in inventory, yielding the highest ending inventory value and potentially the lowest cost of goods sold.

LIFO Method:

Using LIFO, the most recent purchases are considered sold first, typically resulting in higher COGS and lower ending inventory during inflationary periods, which could minimize taxable income.

Weighted Average Method:

The continuous recalculation of average costs during the year smooths out price fluctuations, generally leading to middle ground figures for COGS and ending inventory.

Choosing the Appropriate Inventory Method for Perishable Goods

When dealing with perishable items, selecting a suitable inventory costing method depends on specific business goals:

  1. Reflecting Goods Flow: FIFO best mirrors actual perishable goods’ flow, as items are typically sold in the order received, minimizing spoilage and obsolescence.
  2. Minimizing Income Taxes: LIFO often results in higher COGS during inflation, reducing taxable income for the period.
  3. Maximizing Reported Net Income: FIFO generally reports higher net income during periods of rising prices due to lower COGS, making it preferable for financial reporting purposes.

In conclusion, the choice of inventory valuation method significantly influences financial statements, tax obligations, and inventory management. For perishable goods, FIFO aligns with actual stock flow and minimizes waste, while LIFO can offer tax advantages during inflationary periods. The weighted average method provides a balanced approach, smoothing out price fluctuations.

References

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  • Anthony, R. N., & Govindarajan, V. (2021). Management Control Systems. McGraw-Hill Education.
  • International Accounting Standards Board. (2018). IAS 2 Inventories. IFRS Foundation.
  • American Institute of CPAs. (2022). Accounting Standards Codification (ASC) 330. Inventory.
  • AccountingTools. (2023). Inventory Costing Methods. Retrieved from https://www.accountingtools.com
  • Investopedia. (2023). Inventory Valuation Methods. Retrieved from https://www.investopedia.com
  • Financial Accounting Standards Board. (2019). Accounting Standards Update (ASU). Revenue Recognition and Inventory. FASB.

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