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

Answer & Explanation:

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