Inventory Accounting – Exercise With Answer No.4

Exercise Condition:

Hayes Sales had the following transaction for T-shirts for 2008, its first year of operations had the following transactions:

• January 20 Purchase 450 units @ \$6
• April 21 Purchased 200 units @ \$8
• July 25 Purchased 150 units @ \$10
• Sept. 19 Purchased 75 units @ \$9

During the year Hayes sold 775 shirts for \$20 each

Compute the amount of ending inventory Hayes would report on the balance sheet assuming the following cost flow assumptions:

1. FIFO

2. LIFO

3. Weighted Average

1. Under FIFO method we assume that first those items which were acquired at the earliest dates are sold.

So we sell:

• 450 items acquired on Jan 20
• 200 items acquired on April 21
• 125 (775-450-200) items acquired on July 25

Since we need only cost of closing inventory, we do not calculate cost of good sold, but estimate which items are left in inventory, i.e.

• 150-125=25 items acquired on July 25, and
• all 75 items acquired on Sept 19

Cost of this inventory is:

• 25*\$10=\$250
• 75*\$9=\$675
• total \$925, value of closing inventory under FIFO method

2. Under LIFO we assume that first we sell those items which were acquired at the latest dates, i.e.:

• 75 items acquired on Sept 19
• 150 items acquired on July 25
• 200 items acquired on April 21
• 350 items (775-75-150-200) acquired on January 20.

So 100 items acquired on January 20 are left in closing inventory and its cost is 100*\$6=\$600, i.e. value of inventory on the balance sheet under LIFO method

3. Weighted average method – we need to calculate average price of one item

Total units acquired are 450+200+150+75=875

Total value of all units acquired

• 450*6=2,700
• 20,088=1,600
• 150*10=1,500
• 75*9=675
• total 6475

Average price of one unit is 6,475/875=\$7.4

Total items 875, 775 sold, 100 left

Value of closing inventory under Weighted average method is 100*\$7.4=\$740