John Adams Company’s record of transactions for the month of April was as follows.

Purchases Sales

April 1 (balance on hand) 600 @ \( 6.00 April 3 500 @ \)10.00

4 1,500 @ 6.08 9 1,400 @ 10.00

8 800 @ 6.40 11 600 @ 11.00

13 1,200 @ 6.50 23 1,200 @ 11.00

21 700 @ 6.60 27 900 @ 12.00

29 500 @ 6.79 4,600

5,300

Instructions

(a) Assuming that periodic inventory records are kept in units only, compute the inventory at April 30 using (1) LIFO and(2) average-cost.

(b) Assuming that perpetual inventory records are kept in dollars, determine the inventory using (1) FIFO and (2) LIFO.

(c) Compute the cost of goods sold assuming periodic inventory procedures and inventory priced at FIFO.

(d) In an inflationary period, which inventory method—FIFO, LIFO, average cost—will show the highest net income?

$\begin{array}{rcl}\mathrm{Ending}\mathrm{Inventory}\left(\mathrm{Units}\right)& =& \mathrm{Total}\mathrm{InventoryAvailable}-\mathrm{Total}\mathrm{Sales}\\ & =& 5,300-4,600\\ & =& 700\mathrm{Units}\end{array}$

a) Value of ending inventory using LIFO

$\begin{array}{rcl}\mathrm{Ending}\mathrm{inventory}\left(\mathrm{LIFO}\right)& =& \mathrm{Beginning}\mathrm{Inventory}\mathrm{value}+\mathrm{April}14\mathrm{Purchase}\mathrm{value}\mathrm{for}100\mathrm{units}\\ & =& 600\times \$6+100\times \$6.08\\ & =& \$3,600+\$608\\ & =& \$4,208\end{array}$

b) Value of ending inventory using average cost

$\begin{array}{rcl}\mathrm{Average}\mathrm{cost}\mathrm{of}\mathrm{inventory}& =& \frac{\mathrm{Total}\mathrm{inventory}\mathrm{value}}{\mathrm{Total}\mathrm{inventory}}\\ & =& \frac{\$33,655}{5,300}\\ & =& \$6.35\end{array}$

$\begin{array}{rcl}\mathrm{Ending}\mathrm{inventory}\left(\mathrm{Average}\right)& =& \mathrm{Ending}\mathrm{inventory}\mathrm{units}\times \mathrm{Average}\mathrm{cost}\\ & =& 700\times \$6.35\\ & =& \$4,445\end{array}$

a) Using FIFO

The value of closing inventory comes out to be $4,715.

a) Using LIFO

The value of closing inventory comes out to be $4,603.

$\begin{array}{rcl}\mathrm{Ending}\mathrm{Inventory}\left(\mathrm{Units}\right)& =& \mathrm{Total}\mathrm{InventoryAvailable}-\mathrm{Total}\mathrm{Sales}\\ & =& 5,300-4,600\\ & =& 700\mathrm{Units}\end{array}$

a) Value of ending inventory using FIFO

$\begin{array}{rcl}\mathrm{Ending}\mathrm{inventory}\left(\mathrm{LIFO}\right)& =& \mathrm{Inventory}\mathrm{value}of500unitsonApril29+\mathrm{April}21\mathrm{Purchase}\mathrm{value}\mathrm{for}200\mathrm{units}\\ & =& 500\times \$6.79+200\times \$6.6\\ & =& \$3,395+\$1,320\\ & =& \$4,715\end{array}$

$\begin{array}{rcl}\mathrm{Cost}\mathrm{of}\mathrm{goods}\mathrm{sold}& =& \mathrm{Total}\mathrm{goods}\mathrm{value}\mathrm{available}\mathrm{for}\mathrm{sale}-\mathrm{Ending}\mathrm{inventory}\mathrm{value}\\ & =& \$33,655-\$4,715\\ & =& \$28,940\end{array}$

The highest net income is the result of the lowest cost of goods sold. The cost of goods sold is the difference between the total available inventory and ending inventory. So, if the ending inventory is high in value, the COGS would be below. FIFO I is based on the historical cost among all the inventory valuing alternatives. Thus under this method, the value of COGS would not be affected due to inflation as inventories at the latest cost are left in the stock. So the COGS would always be lower.