The FIFO Costing Method - Assignment Example

Munaf Usmani Academia Research May 25, PSB 12.4 Part (A) General Journal Account s and Explanation Debit Credit Apr 6 Inventory SalesTax Receivable Account Payable-Robert Ltd 840 84 924 Apr 7 Cost of Sales-Freight 44 Cash 44 Apr 8 Accounts Receivable Sales Tax Payable 990 90 Sales 900 Apr 8 Cost of Sales 600 Inventory 600 Apr 10 Accounts Payable-Robert Ltd 44 Inventory Sales Tax Payable 40 4 Apr 11 Inventory 330 Cash 330 Apr 13 Account Payable-Robert Ltd 880 Discount Availed Cash 26.4 853.6 Apr 14 Inventory Sales Tax Payable 500 50 Accounts Payable-Martina 550 Apr 15 Cash 55 Inventory Sales Tax Payable 50 5 Apr 17 Cost of Sales-Freight 33 Cash 33 Apr 18 Accounts Receivable 990 Sales Tax Payable 90 Sales 900 Apr 18 Cost of Sales 530 Inventory 530 Apr 20 Cash 550 Accounts Receivable 550 Apr 21 Accounts Payable-Martina 550 Discount Availed 11 Cash 539 Apr 21 Cash 230 Sales Tax Receivable 230 Apr 27 Member Allowance 33 Cash 33 Apr 30 Cash 550 Account Receivable 550 Part (B) T-Accounts Inventory Apr1 Opening Balance 1700 Apr8 Cost of Sales 600 Apr6 A/C Pay Robert Ltd 840 Apr10 A/C Pay Robert Ltd 44 Apr11 Cash 330 Apr15 Cash 55 Apr14 Accounts Payable-Martina 500 Apr18 Cost of Sales 530 Apr30 Closing Inventory 2141 3370 3370 A/C Payable- Robert Apr10 Apr10 Inventory Sales Tax Payable 40 4 Apr6 Inventory 924 Apr13 Discount Availed 26.4 Apr13 Cash 853.6 924 924 Cost of sales- Freight Apr7 Cash 44 Apr30 Carried Down Bal 77 Apr17 Cash 33 77 77 Accounts Receivable Apr8 Sales Tax Payable 90 Apr20 Cash 550 Apr8 Sales 900 Apr30 Cash 550 Apr18 Sales Tax Payable 90 Apr30 A/C Rec Closing 880 Apr18 Sales 900 1980 1980 Sales Tax Apr01 GST Paid 780 Apr01 Opening Bal 550 Apr21 Apr06 Cash Accounts Payable-Robert 550 84 Apr08 Apr10 Apr14 Accounts Receivable A/C Pay-Robert A/C Pay-Martina 90 4 50 Apr18 Apr21 Accounts Receivable Cash 90 230 Apr30 GST Receivable 400 1414 1014 Sales Apr27 Cash 33 Apr8 Accounts Receivable 900 Apr30 Sales During Year 1767 Apr18 Accounts Receivable 900 1800 1800 Cost of Sales Apr8 Inventory 600 Apr30 Carry Down Value 1130 Apr18 Inventory 530 1130 1130 Cash Apr01 Opening Balance 2500 Apr07 Cost of Sales-Freight 44 Apr15 Apr15 Inventory Sales Tax Payable 50 5 Apr11 Inventory 330 Apr20 Apr21 A/C Rec Sales Tax Receivable 550 230 Apr13 Apr17 A/C Pay Cost of Sales-Freight 853.6 33 Apr30 A/C Rec 550 Apr21 A/C Pay-Martina 539 Apr27 Member Allowance 33 Cash in Hand 2052.4 3885 3885 Discount Availed Discount taken 37.4 Apr13 A/C Pay-Robert 26.4 Apr21 A/C Pay-Martina 11 37.4 37.4 A/C Payable- Martina Apr14 Apr10 Inventory Sales Tax Payable 500 50 Apr21 Apr21 Discount Availed Cash 11 539 550 550 Share Capital Share Capital End. 4200 Apr01 Share Capital Beg. 4200 4200 4200 Member Allowance Apr27 Cash 33 33 33 Part (C) Trial Balance Particular Debit Credit       Cash 2052   Cost of Sales 1130   Cost of Sales-Freight 77   Inventory 2141   A/C Rec 880   Sales   1767 Sales Tax Rec 400   Discount Availed 37   Member Allowance   33 Share Capital   4200   6717 6000 PSB 5.4 Part A Income Statements FIFO LIFO Sales $865,000.00 $865,000.00 Cost of Goods Sold ($559,500.00) ($567,000.00) Gross profit $305,500.00 $298,000.00 Operating Exp ($147,000.00) ($147,000.00) Earning Before Tax $158,500.00 $151,000.00 Tax (32%) ($50,720.00) ($48,320.00) Net Profit $107,780.00 $102,680.00 Inventory Management FIFO LIFO Units $ Amount Units $ Amount Beginning Inventory 15,000 $34,000.00 15,000 $34,000.00 Purchases 230,000 $578,500.00 230,000 $578,500.00 Total Inventory Available 245,000 $612,500.00 245,000 $612,500.00 Cost of Goods Solds:         15000 @ $2.267/unit $34,000.00 70000 @ $2.65/unit $185,500.00 60000 @ $2.3/unit $138,000.00 50000 @ $2.6/unit $130,000.00 50000 @ $2.5/unit $125,000.00 50000 @ $2.5/unit $125,000.00 50000 @ $2.6/unit $130,000.00 55000 @ $2.3/unit $126,500.00 50000 @ $2.65/unit $132,500.00     Total COGS 225000 $559,500.00 225000 $567,000.00         Ending Inventory 20,000 $53,000.00 20,000 $45,500.00 Part B. 1. The FIFO costing method produces a more meaningful inventory amount as compared to the LIFO costing method. This is primarily due to the fact that in FIFO, the oldest inventory is assumed to be utilized. As a consequence, remaining inventory valued at FIFO more closely represents current or replacement cost. This signifies that the inventory in hand is almost the market value of the units held, and thus the replacement cost of these goods would be in close proximity to the cost of inventory being held. Part B.2. When comparing the two methods, we cannot say with surety which method will yield greater profits. In our current case however, the FIFO method will result in higher profits due to the fact that the older inventory was at held at a lower cost. The new inventory costs more, due to which the Cost of Goods Sold goes up in the LIFO method. However, when we talk to about meaningful profits, then I would say that the LIFO method is more relevant. This is because FIFO results in "inventory profits"; profits that arise merely from holding inventory; and fails to provide the best matching of costs and revenues. Thus in terms of more meaningful profit, I would say that LIFO is more meaningful as it depicts a better matching better revenues and costs. Part B.3. FIFO is the costing method which depicts a better approximation of actual physical flow of goods. This is because companies generally use the oldest items in inventory first so they can continually roll the stock and prevent deterioration or obsolescence. Furthermore, it’s a matter of common sense that inventory bought in the last quarter cannot be used in the first three quarters, thus the physical flow of goods initiates from the inventory in hand at the beginning. Part B.4. There will be more cash available for the management under the FIFO method and not the LIFO method. The exact amount which would be available to the management based on the income statements generated would be $5,100. This is due to the fact that in FIFO, the cost of goods is lesser, resulting in greater profits. In the LIFO method, the cost of inventory is much higher, and thus our profits shrink. The assumption that is being made here is that the net profit after taxation is the cash which is available for the management. As the income statements in Part A prove, FIFO would provide more cash rather than LIFO. Part B.5. The gross profit will be lower in the average cost method when compared to the FIFO method because average cost method accounts for the expensive inventory as well as the cheaper inventory. Likewise, average cost method will yield a greater gross profit when compared to LIFO as average cost partially incorporates the cheaper inventory while LIFO is only the more expensive inventory. It is pertinent to note here that this is valid for our particular case, and may be completely different for a situation in which the more recent inventory is cheaper than previously acquired inventory. In such an instance, the results would be the exact opposite of what has been stated. Works Cited Scott C. Gibson. “LIFO vs. FIFO: a return to the basics”. www.findarticles.com. October 2002. Web. May 24, 2010. Read More