Name Acc 308 Exam 2 Use The Following

Name Acc 308exam 2use The Followin

Use the following information for problems #1, 2 and 3:

Beginning Balance January 1: 80 units @ $50 each

Purchase January 18: 40 units @ $51 each

Purchase January 28: 40 units @ $52 each

Sales January 12: 30 units

Sales January 22: 30 units

Sales January 31: 45 units

Paper For Above instruction

The inventory management system significantly affects the calculation of ending inventory and cost of goods sold (COGS). In this paper, we analyze the impacts of three different inventory valuation methods: LIFO perpetual, LIFO periodic, and average cost (weighted average) perpetual, using the provided transactional data. We will methodically compute the ending inventory and COGS under each method, providing insights into how each approach influences financial reporting and decision-making.

Introduction

Inventory management and valuation are critical components of financial accounting that influence profitability, tax liabilities, and financial ratios. Different methods such as LIFO (Last-In, First-Out), FIFO (First-In, First-Out), and weighted average determine how inventory costs are assigned to sold items and remaining stock. This paper focuses on LIFO perpetual, LIFO periodic, and the average cost method, based on the provided data, to illustrate their calculations and implications.

Discussion and Calculations

1. LIFO Perpetual Inventory System

The perpetual system records inventory and COGS after each transaction. Using the provided data:

  • Beginning inventory (Jan 1): 80 units @ $50 = $4,000
  • Jan 18 purchase: 40 units @ $51
  • Jan 28 purchase: 40 units @ $52

Sales Log:

  • Jan 12: Sold 30 units
  • Jan 22: Sold 30 units
  • Jan 31: Sold 45 units

Calculations:

Jan 12 Sale (30 units): The earliest inventory is from Jan 1, 80 units @ $50. Under LIFO, the last units added are sold first. Since there is enough inventory at $50, the entire sale is from beginning inventory.

  • Units sold: 30 @ $50
  • Remaining inventory: 50 units @ $50

Cost of goods sold: 30 x $50 = $1,500

Post Jan 12:** Remaining inventory:

  • 50 units @ $50
  • 40 units @ $51
  • 40 units @ $52

Jan 22 Sale (30 units):

Apply LIFO: the most recent purchase before Jan 22 was Jan 28 at $52, then Jan 18 at $51, then beginning inventory at $50.

  • Use units from Jan 28 purchase first: 30 units @ $52

COGS: 30 x $52 = $1,560

Remaining inventory after Jan 22:

  • 10 units @ $52
  • 40 units @ $51
  • 50 units @ $50

Jan 31 Sale (45 units):

Use LIFO: first from remaining Jan 28 units at $52:

  • 10 units @ $52

Remaining units to sell: 35 units

  • Next from Jan 18 at $51: 35 units @ $51

COGS: (10 x $52) + (35 x $51) = $520 + $1,785 = $2,305

Remaining inventory after Jan 31:

  • 5 units @ $51
  • 50 units @ $50

Final Calculations:

Ending inventory:

  • Remaining 5 units @ $51 = $255
  • 50 units @ $50 = $2,500

Total ending inventory: $2,755

COGS:

Jan 12: $1,500

Jan 22: $1,560

Jan 31: $2,305

Total COGS: $1,500 + $1,560 + $2,305 = $5,365

2. LIFO Periodic Inventory System

Under periodic LIFO, inventory and COGS are computed at the period's end based on total purchases and sales during the period.

Stock Movements Summary:

  • Beginning Inventory: 80 units @ $50
  • Purchases: 40 units @ $51, 40 units @ $52

Sales total: 30 + 30 +45 = 105 units

COGS Calculation:

Total units available: 80 + 40 + 40 = 160 units

Using LIFO, COGS would be calculated from the latest units first.

  • Assign 40 units @ $52 = $2,080
  • Remaining 65 units to cover sales: from 40 units @ $51 = $2,040 and 25 units @ $50 = $1,250

Final COGS: $2,080 + $2,040 + $1,250 = $5,370

Remaining inventory:

  • 15 units @ $50 = $750
  • 15 units @ $51 = $765
  • 0 units @ $52

Remaining inventory value: $750 + $765 = $1,515

3. Average Cost (Weighted Average) Perpetual System

Calculate the average cost per unit after each purchase and apply it to sales.

Calculations:

Initially:

  • 80 units @ $50 = $4,000

Average cost after initial inventory:

  • Average = $50

Jan 18 purchase (adding 40 units @ $51):

  • Total cost = $4,000 + (40 x $51) = $4,000 + $2,040 = $6,040
  • Total units = 80 + 40 = 120 units
  • New average cost = $6,040 / 120 ≈ $50.33 per unit

Jan 28 purchase (adding 40 units @ $52):

  • Total cost = $6,040 + (40 x $52) = $6,040 + $2,080 = $8,120
  • Total units = 120 + 40 = 160 units
  • New average cost = $8,120 / 160 ≈ $50.75 per unit

Sales:

  • Jan 12: Sold 30 units at $50.33 (average) = COGS: 30 x $50.75 ≈ $1,522.50
  • Remaining units: 130 units at $50.75
  • Jan 22: Sold 30 units at $50.75 = COGS: $1,522.50
  • Remaining units: 100 units @ $50.75
  • Jan 31: Sold 45 units at $50.75 = COGS: $2,288.75

Total COGS: $1,522.50 + $1,522.50 + $2,288.75 ≈ $5,333.75

Remaining inventory: 55 units @ $50.75 = $2,791.25

Conclusion

The calculations reveal how inventory valuation methods impact financial statements. The LIFO perpetual method assigns costs based on recent purchases, often reducing taxable income and reflecting current costs. LIFO periodic aggregates purchases over the period, which may differ from the perpetual method. The average cost smooths cyclical fluctuations, providing stability. Managers must choose the method aligning with their financial goals, considering tax implications, inventory turnover, and financial statement presentation.

References

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  • AccountingTools. (2020). Inventory valuation methods: FIFO, LIFO, and weighted average. Retrieved from https://www.accountingtools.com/articles/inventory-valuation-methods.html
  • AccountingCoach. (2021). Inventory valuation methods: FIFO, LIFO, and weighted average. Retrieved from https://www.accountingcoach.com/blog/inventory-valuation-methods
  • Chartered Professional Accountants Ontario. (2017). Principles of inventory management and valuation. CPA Ontario Publications.
  • Kieso, D. E., Weygandt, J. J., & Warfield, T. D. (2016). Intermediate Accounting (16th Edition). Wiley.
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  • Financial Accounting Standards Board (FASB). (2020). Accounting Standards Codification (ASC) Topic 330: Inventory. FASB.

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