Inventory Problems: The Following Data Regarding Purchases

Inventory Problemsa The Following Data Regarding Purchases And Sales

This assignment includes analyzing inventory transactions using various inventory valuation methods. The first part requires calculating the cost of merchandise sold and ending inventory using FIFO, LIFO, and weighted average methods based on given purchase and sales data. The second part involves computing these values for a different set of transactions involving a newly formed corporation, Brutus Corporation, during its first month of operation, using FIFO and LIFO periodic inventory methods.

Paper For Above instruction

Understanding inventory valuation methods is fundamental in accounting because it directly impacts the calculation of cost of goods sold (COGS), gross profit, and ending inventory on the financial statements. Each method—FIFO (First-In, First-Out), LIFO (Last-In, First-Out), and Weighted Average—has different assumptions about the flow of inventory costs, which can influence the reported profitability and inventory valuation, especially during periods of fluctuating prices.

Part A: Inventory Cost Calculations

Initial Data Overview:

  • June 1: Beginning inventory of 25 units at $12 each.
  • June 8: Purchase of 20 units at $13.
  • June 20: Sale of 20 units.
  • June 20: Purchase of 20 units at $14.
  • June 30: Sale of 25 units.
  • July 1: Purchase of 15 units at $15.

Note: The original prompt contains some ambiguities or formatting issues, but based on standard inventory problems, this is the interpreted data. For the sake of clarity, the calculations follow these data points under FIFO, LIFO, and Weighted Average methods.

1. FIFO (First-In, First-Out)

FIFO assumes that the oldest inventory items are sold first. Therefore, the units sold are valued at the oldest costs available.

Calculation of Cost of Goods Sold (COGS):

  • Sale on June 20 (20 units):
  • 25 units at $12 (remaining from beginning inventory): 20 units at $12 = $240
  • Sale on June 30 (25 units):
  • Remaining 5 units at $12 = $60
  • Next 20 units at $13 (purchase on June 8): 20 units at $13 = $260

Total COGS:

  • 20 units at $12 + 5 units at $12 + 20 units at $13 = $240 + $60 + $260 = $560

Ending Inventory:

  • Remaining units after sales:
  • 0 units at $12 (all sold)
  • 0 units at $13 (all sold)
  • Remaining units from June 20 purchase: 0 units at $14 (since 20 purchased at $14 after June 8, but no sale occurred at this point)

Recalculated with the provided data:

- Units remaining after sales:

  • From June 20 purchase: 20 units at $14 (unsold)
  • From July 1 purchase: 15 units at $15 (unsold)

Total Ending Inventory: (20 units at $14) + (15 units at $15) = $280 + $225 = $505

2. LIFO (Last-In, First-Out)

Assumes the most recent inventory items are sold first.

Calculation of COGS:

  • June 20 sale (20 units):
  • 20 units at $14 (most recent purchase): 20 units at $14 = $280
  • June 30 sale (25 units):
  • Remaining 5 units at $14 (after previous sale): 5 units at $14 = $70
  • Next, 20 units at $13 (earlier purchase): 20 units at $13 = $260

Total COGS: $280 + $70 + $260 = $610

Ending Inventory:

  • Remaining units:
  • Remaining 0 units at $14 (after 25 units sold)
  • Next is 0 units at $13
  • Remaining 20 units at $12 from initial inventory: all unsold, since FIFO would have sold earliest first
  • Remaining units at July 1 purchase: 15 units at $15

Total Ending Inventory:

  • 15 units at $15 = $225
  • Remaining 0 at $12, $13, $14, durations exhausted due to sales

3. Weighted Average Method

The weighted average cost per unit is calculated by dividing the total cost of inventory available for sale by the total units available for sale.

Calculation of Weighted Average Cost:

  • Total units available:
  • 25 units at $12
  • 20 units at $13
  • 20 units at $14
  • 15 units at $15
  • Total cost:
  • 25 * 12 = 300
  • 20 * 13 = 260
  • 20 * 14 = 280
  • 15 * 15 = 225
  • Sum of costs: 300 + 260 + 280 + 225 = 1065
  • Total units: 25 + 20 + 20 + 15 = 80 units
  • Weighted average cost per unit: 1065 / 80 ≈ $13.31

Cost of Goods Sold:

  • Units sold: 20 + 25 = 45 units
  • COGS: 45 * 13.31 ≈ $599.85

Ending Inventory:

  • Remaining units: 80 - 45 = 35 units
  • Ending inventory: 35 * 13.31 ≈ $465.85

Part B: Brutus Corporation Inventory Calculations

Brutus Corporation's transactions involve multiple purchases over a month with varying unit costs. The total units purchased and sold are specified, and the task is to compute the Cost of Merchandise Sold (COMS) and ending inventory using FIFO and LIFO periodic inventory methods.

Purchase Data Summary:

  • May 1: 500 units at $25.00
  • May 4: 300 units at $24.00
  • May 8: 700 units at $23.00
  • May 20: 250 units at $25.25
  • May 28: 550 units at $26.00

Total units purchased: 500 + 300 + 700 + 250 + 550 = 2300 units

Total units sold: 1525 units

1. FIFO Periodic Method

Under FIFO periodic inventory valuation, units sold are attributed to the earliest purchases, reflecting a first-in, first-out flow assumption over the entire period.

Cost of Goods Sold Calculation:

  • Sold units: 1,525 units
  • Allocate starting from earliest purchase:
  • May 1 (500 units @ $25): all sold
  • Remaining units needed: 1025
  • May 4 (300 units @ $24): all sold
  • Remaining needed: 725
  • May 8 (700 units @ $23): 700 units sold, remaining needed: 25
  • Remaining units at May 8 (250 units at $23): only 25 needed, so 25 * $23 = $575

Total COGS:

  • May 1: 500 units * $25 = $12,500
  • May 4: 300 units * $24 = $7,200
  • May 8: 700 units * $23 = $16,100
  • Remaining 25 units * $23 = $575
  • Sum: $12,500 + $7,200 + $16,100 + $575 = $36,375

    • Ending Inventory Calculation:

    • Remaining units after sale:
    • May 8: 700 - 25 = 675 units at $23
    • May 20: 250 units at $25.25 (unsold)
    • May 28: 550 units at $26.00 (unsold)

    Cost of Ending Inventory:

    • May 8: 675 units * $23 = $15,525
    • May 20: 250 units * $25.25 = $6,312.50
    • May 28: 550 units * $26 = $14,300

    Total ending inventory: $15,525 + $6,312.50 + $14,300 = $36,137.50

    2. LIFO Periodic Method

    Under LIFO, the most recent purchases are allocated to units sold, with older inventory remaining at period end.

    Cost of Goods Sold Calculation:

    • Sell 1,525 units starting from latest purchase:
    • May 28: 550 units @ $26: all sold
    • Remaining needed: 975 units
    • May 20: 250 units @ $25.25: all sold
    • Remaining needed: 725 units
    • May 8: 700 units @ $23: parts of this are sold
    • Selling 725 units:
      • 700 units @ $23 = $16,100
      • Remaining 25 units @ $23 = $575

    Total COGS:

    • May 28: 550 * $26 = $14,300
    • May 20: 250 * $25.25 = $6,312.50
    • May 8: 725 * $23 = $16,675
  • Sum: $14,300 + $6,312.50 + $16,675 = $37,287.50

    • Ending Inventory Calculation:

    • Remaining units:
    • May 8: 700 - 725 (sold units from May 8): negative, so 0 units left at $23
    • Remaining units are from earlier purchases:
    • May 4: 300 units at $24, all remaining
    • May 1: 500 units at $25, all remaining

    Ending inventory:

    • May 4: 300 units * $24 = $7,200
    • May 1: 500 units * $25 = $12,500

    Total ending inventory: $7,200 + $12,500 = $19,700

    Conclusion

    The choice of inventory valuation method significantly influences reported net income and inventory valuation. FIFO results in lower COGS during periods of rising prices, leading to higher net income. Conversely, LIFO reports higher COGS and lower net income in such scenarios. The weighted average smooths out cost fluctuations, providing a middle-ground estimate. For Brutus Corporation, FIFO resulted in a slightly lower COGS and higher ending inventory, whereas LIFO produced a higher COGS and lower ending inventory, reflecting their respective assumptions about inventory flow.

    References

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