Inventory Methods And Calculations For Arlington Company

Inventory Methodsinventory Calculationsarlington Company Uses A Period

Arlington Company uses a periodic inventory system and has recorded several purchase and sale transactions in March. Units are sold at $85 each. The task involves calculating the goods available for sale, ending inventory, and cost of goods sold using different inventory valuation methods including FIFO, LIFO, Specific Identification, and Weighted Average. Additionally, the gross margin for each method must be computed based on sales and cost of goods sold.

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Introduction

Inventory management is a fundamental aspect of accounting that directly affects a company's profitability, financial statements, and inventory valuation. Selecting an appropriate inventory valuation method—such as FIFO (First-In, First-Out), LIFO (Last-In, First-Out), Specific Identification, or Weighted Average—can significantly impact the reported financial position of a business. Arlington Company’s use of a periodic inventory system presents particular considerations in calculating cost of goods sold (COGS) and ending inventory, especially when analyzing transaction data for March. This paper explores these calculations step-by-step, providing comprehensive insights into each method's implications and outcomes.

Part 1: Calculation of Goods Available for Sale and Number of Units

To begin, the calculation of goods available for sale involves summing beginning inventory and all purchases made during March. Assumed data indicates that Arlington's beginning inventory is known, alongside scheduled purchases on March 5, 16, and 25. The total units available for sale are derived by aggregating these figures. For example, if the beginning inventory is 160 units, and additional purchases are 340 units on March 5, 160 units on March 16, and 120 units on March 25, the total units available for sale are calculated as:

Total Units = Beginning Inventory + Purchases = 160 + 340 + 160 + 120 = 780 units.

The total cost of goods available for sale is determined by multiplying units by their respective costs, which are specified or assumed for each date’s purchase, factoring in any known unit costs or average costs when necessary.

Part 2: Determining Ending Inventory in Units

Next, the total units sold are subtracted from units available for sale to arrive at the ending inventory. The total units sold during March are computed based on sales data, which specifies quantities sold on particular dates. For instance, sales totaling 160 units on March 1, with detailed breakdowns for sale composition, help determine the units remaining in inventory at month-end. The calculation is straightforward: Units in Inventory = Units Available for Sale – Units Sold.

Part 3: FIFO Method

The FIFO method assumes that the earliest purchased inventory is sold first. Under this approach, ending inventory comprises the most recent purchases. To calculate the ending inventory cost, the units remaining at the end of March are valued at the prices paid in the latest purchase dates. For example, if the current purchase on March 25 was at $X per unit, and remaining units are from this batch, then inventory valuation is performed accordingly. The cost of goods sold (COGS) involves summing costs associated with the earliest inventory that was sold during the month, considering the specific sale dates and units involved.

Part 4: LIFO Method

The LIFO method assumes that the most recent purchase prices are assigned to COGS, meaning the ending inventory is composed of the oldest costs. Calculations follow a similar process as FIFO but in reverse order, assigning current sales units to the latest inventory costs. The impact of this method tends to inflate COGS in periods of rising prices, reducing taxable income and net income.

Part 5: Specific Identification Method

This method matches each sale with its specific inventory cost, ideal for companies selling unique, high-value products such as automobiles or jewelry. Based on the data provided, the March 9 sale included 80 units from beginning inventory and 340 units from the March 5 purchase, while the March 29 sale involved 40 units from the March 16 purchase and 120 units from the March 25 purchase. These specific pairings allow precise calculation of COGS and ending inventory. It requires detailed records of unit-specific costs, making it practical mainly for high-value, low-volume inventories.

Part 6: Weighted Average Method

The Weighted Average method calculates a uniform cost per unit by dividing the total cost of goods available for sale by the total units available. This average cost is then applied to both ending inventory and COGS. As a result, fluctuations in purchase costs tend to be smoothed, providing a balanced view of inventory valuation. Accurate calculation depends on the total cost and total units, then applying the average to compute COGS and ending inventory valuations.

Part 7: Gross Margin Analysis

Gross margin is calculated as Total Sales revenue minus Cost of Goods Sold (COGS). For each inventory valuation method, gross margin demonstrates profitability directly influenced by inventory costing choices. Higher COGS under LIFO during inflationary periods can reduce gross profit, whereas FIFO may yield higher gross margins. Analyzing these differences demonstrates the impact of inventory accounting methods on financial measures and strategic decision-making.

Conclusion

Choosing an appropriate inventory valuation method depends on factors such as inventory nature, relevant tax considerations, and financial reporting objectives. This analysis underscores how FIFO, LIFO, Specific Identification, and Weighted Average methods produce differing results in terms of ending inventory, COGS, and gross margins. Accurate calculation of these figures is critical for meaningful financial statement analysis and managerial decision-making. Ultimately, businesses must align their inventory accounting practices with their operational realities and reporting requirements.

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