Presented below is information related to Blowfish radios for the Hootie Company for the month of July.

Units Unit Total Units Selling Total

InCostSoldPrice

Date Transaction

July 1 Balance 100 \(4.10 \) 410

6 Purchase 800 4.20 3,360

7 Sale 300\(7.00 \) 2,100

10 Sale 300 7.30 2,190

12 Purchase 400 4.50 1,800

15 Sale 200 7.40 1,480

18 Purchase 300 4.60 1,380

22 Sale 400 7.40 2,960

25 Purchase 500 4.58 2,290

30 Sale 200 7.50 1,500

Totals 2,100\(9,240 1,400\)10,230

Instructions

(a) Assuming that the periodic inventory method is used, compute the inventory cost at July 31 under each of the following cost flow assumptions.

(1) FIFO.

(2) LIFO.

(3) Weighted-average.

(b) Answer the following questions.

(1) Which of the methods used above will yield the lowest figure for gross profit for the income statement? Explain why.

(2) Which of the methods used above will yield the lowest figure for ending inventory for the balance sheet? Explain why.

Step by step solution

01

Value of ending inventory under FIFO, LIFO, and Weighted Average

$\begin{array}{rcl}\mathrm{Ending}\mathrm{inventory}\mathrm{in}\mathrm{units}& =& \mathrm{Total}\mathrm{inventory}\mathrm{in}-\mathrm{Total}\mathrm{inventory}\mathrm{sold}\\ & =& 2,100-1,400\\ & =& 700\mathrm{Units}\end{array}$

1) Using FIFO

Date	Units	Cost per unit	Amount
July 25	500	$4.58	$2,290
July 18	200	$4.6	$920
Total	700		$3,210

The value of ending inventory by FIFO is $3,210.

2) Using LIFO

Date	Units	Cost per unit	Amount
Beginning	100	$4.10	$410
July 6	600	$4.2	$2,520
Total	700		$2,930

The value of ending inventory by FIFO is $2,930.

3) Using Weighted Average

$\begin{array}{rcl}\mathrm{Average}\mathrm{cost}& =& \frac{\mathrm{Total}\mathrm{value}\mathrm{of}\mathrm{available}\mathrm{units}}{\mathrm{Total}\mathrm{available}\mathrm{units}}\\ & =& \frac{\$9,240}{2,100}\\ & =& \$4.4\end{array}$

$\begin{array}{rcl}\mathrm{Value}\mathrm{of}\mathrm{ending}\mathrm{inventory}& =& \mathrm{Average}\mathrm{cost}\times \mathrm{Ending}\mathrm{inventory}\\ & =& \$4.4\times 700\\ & =& \$3,080\end{array}$

02

Use of method

1)

LIFO method would yield the lowest profit as the value of the cost of goods sold would be high. Further, the value of the closing stock is lowest under the LIFO method.

LIFO yields the lowest profit due to computing COGS at the current or inflationary prices.

2)

The LIFO method would yield the lowest inventory value. The reason for this is the computation of COGS on the current prices and leaving the ending inventory with the historical prices.

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