Applying and Analyzing Inventory Costing Methods At the beginning of the current period, Chen carried 1,000 units of its product with a unit cost of $32. A summary of purchases during the current period follows.

Unit cost is $32

Units Unit Cost Cost
Beginning Inventory 1,000 $32 $32,000
Purchase #1 1,800 34 61,200
Purchase #2 800 38 30,400
Purchase #3 1,200 41 49,200
During the current period, Chen sold 2,800 units.

(a) Assume that Chen uses the first-in, first-out method. Compute both cost of good sold for the current period and the ending inventory balance. Use the financial statement effects template to record cost of goods sold for the period.
Ending inventory balance $Answer
Cost of goods sold $Answer

Use negative signs with answers, when appropriate.

Balance Sheet

Transaction Cash Asset +
Noncash

Assets

= Liabilities +
Contributed

Capital

+
Earned

Capital

Record FIFO cost of goods sold Answer Answer Answer Answer Answer
Income Statement

Revenue
-
Expenses
=
Net

Income

Answer Answer Answer

(b) Assume that Chen uses the last-in, first-out method. Compute both cost of good sold for the current period and the ending inventory balance.
Ending inventory balance $Answer
Cost of goods sold $Answer

(c) Assume that Chen uses the average cost method. Compute both cost of good sold for the current period and the ending inventory balance.
Ending inventory balance $Answer
Cost of goods sold $Answer

(d) Which of these three inventory costing methods would you choose to:

1. Reflect what is probably the physical flow of goods?
LIFO FIFO Average Cost
2. Minimize income taxes for the period?
LIFO FIFO Average Cost
3. Report the largest amount of income for the period?
LIFO FIFO Average Cost

Applying and Analyzing Inventory Costing Methods

Chen

a1. Cost of goods sold   2,800 units = $93,200

a2. Ending Inventory  2,000 units = $79,600

b1. Cost of goods sold 2,800 units = $106,800

b2. Ending Inventory  2,000 units = $66,000

c1. Cost of goods sold 2,800 units = $100,800 (2,800 *$36)

c2. Ending inventory 2,000 units = $72,000 (2,000 * $36)

d1. To reflect the physical flow of goods, I would choose the FIFO method.

d2. To minimize income taxes for the period only, I would choose the LIFO method.

d3. LIFO method would report the largest amount of income for the period.

NB: LIFO is chosen only for the current period.  In the subsequent period the gain will reverse.

Explanation:

a) Data and Calculations:

                                   Units    Unit    Cost Cost   Total Cost

Beginning Inventory  1,000    $32     $32,000     $32,000

Purchase #1               1,800       34        61,200       93,200

Purchase #2                800       38       30,400      123,600

Purchase #3              1,200       41       49,200      172,800

Total                         4,800               $172,800

Average cost = $172,800/4,800 = $36

Sales during the period = 2,800 units

b) FIFO (First-in, first-out) method:

Computation of:

1. Cost of goods sold

Beginning Inventory  1,000    $32     $32,000

Purchase #1               1,800       34        61,200

Cost of goods sold   2,800                $93,200

2. Ending Inventory

Purchase #2                800       38       30,400

Purchase #3              1,200       41       49,200

Ending Inventory      2,000               $79,600

c) LIFO (Last-in, first-out) method:

Computation of:

1. Cost of goods sold

Purchase #1                 800       34        27,200

Purchase #2                800       38       30,400

Purchase #3              1,200       41       49,200

Cost of goods sold   2,800              $106,800

2. Ending Inventory

Beginning Inventory  1,000    $32     $32,000

Purchase #1               1,000       34       34,000

Ending Inventory      2,000                $66,000

d) Average Method:

                                   Units    Unit    Cost Cost   Total Cost  Average Cost

Beginning Inventory  1,000    $32     $32,000     $32,000       $32

Purchase #1               1,800       34        61,200       93,200       $33.29

Purchase #2                800       38       30,400      123,600       $34.33

Purchase #3              1,200       41       49,200      172,800       $36

answer; whoever is willing and able to pay the price;

answer(d) encourage cooperation by improving the chances of mutually agreeable transactions;