Cost flow assumptions and effects of inventory errors - Math Problem Example

Cost flow assumptions and effects of inventory errors *5.28* A. Assume that Cushing, Inc. uses a PERIODIC INVENTORY system. Calculate cost of goodssold and ending inventory under FIFO and LIFO.
Calculating cost of goods sold and ending inventory using LIFO
Feb 22: 70*16 = $ 1120
June 11: (130*16) + (20*15) = $ 2380
Nov 1: (140*15) + (50*13) = $ 2750
Total Cost of goods sold: $6250
Ending Inventory = Cost of goods available for sale - Cost of goods sold
= 6900 - 6250

Ending inventory = $650
Calculating cost of goods sold and ending inventory using FIFO
Feb 22: 70*13 = $ 910
June 11: (30*13) + (120*15) = $ 2190
Nov 1: (40*15) + (150*16) = $ 3000
Total Cost of goods sold: $6100
Ending Inventory = Cost of goods available for sale - Cost of goods sold
= 6900 - 6100

Ending inventory = $800
B. Assume that Cushing, Inc., uses a PERPETUAL INVENTORY system. Calculate cost of goods sold and ending inventory under FIFO and LIFO.
Calculating cost of goods sold and ending inventory using LIFO
Feb 22: 70*13 = $ 910
June 11: 150*15= $ 2250
Nov 1: 190*16= $ 3040
Total Cost of goods sold: $6200
Ending Inventory = Cost of goods available for sale - Cost of goods sold
= 6900 - 6200

Ending inventory = $700
Calculating cost of goods sold and ending inventory using FIFO
Feb 22: 70*13 = $ 910
June 11: (30*13) + (120*15) = $ 2190
Nov 1: (40*15) + (150*16) = $ 3000
Total Cost of goods sold: $6100
Ending Inventory = Cost of goods available for sale - Cost of goods sold
= 6900 - 6100

Ending inventory = $800
C. Explain why the FIFO results for cost of goods sold and ending inventory are the same in your answers to parts A. and B., but the LIFO results are different.
(Ans)- When we calculate Cost of Goods Sold (CGS) using FIFO, no matter what method we use, the earliest price of available goods is used no matter how many other buying transactions occur in the mean time. However while using LIFO; whenever we make a new purchase transaction, the cost per unit value changes to that of the latest purchase.
D. Explain why the results from the LIFO periodic calculations in part A. cannot possibly represent the actual physical flow of inventory items.
(Ans)- Results using LIFO periodic calculations cannot be actual because in this case, the items are bought and sold frequently. Prices of such items are unstable and change often with a significant difference thus the values being used to calculate profit/loss margin will be faulty.
*5.30*
A.
2003 2002
Sales.............. $541,200 $523,600
Cost of Goods Sold:
Beginning inventory... $67,900 $85,300
Cost of goods purchased $393,000 366,500
----------- ----------
Cost of goods
availible for sale.............$460,900 $451,800
Less: ending
inventory........................ (79,800) (67,900) // [91,400 - 23,500]
Cost of goods sold............ (381,100) (383,900)
---------- -----------
Gross profit..................... $160,100 $139,700
Operating expenses......... (103,700) (94,700)
Net income (ignoring income taxes) $56,400 $45,000
*note: Ending inventory of 2002 will be the beginning inventory of 2003
B. Combined net income of 2002-2003 before correction:
32,900 + 68,500 = $101,400

Combined net income of 2002-2003 after correction:

56,400 + 45,000 = $101,400
C. There will be no effect on the net income or owner's equity of 2004 as the ending inventory of 2003 is correct. Read More