Inventory Accounting – Exercise With Answer No.5

Exercise Condition:

Beginning inventory, purchases and sales data for cell phones for March are:

  • Inventory: March 1 1,000 units at $40
  • Purchases: March 5 500 units at $42
  • March 20 450 units at $44
  • Sales: March 8 700 units
  • March 14 600 units
  • March 31 300 units

Assuming the perpetual inventory system is used, costing by the LIFO method, determine the cost of merchandise sold for each sale and the inventory balance after each sale.

Answer & Explanation:

LIFO method means that when we calculate cost of goods sold we assume that first we sell those items which were acquired at the latest. For perpetual cost system, at each moment when we sell goods we are able to estimate cost of goods sold and value of inventory on hand after the sale

1. Sale March 8 – 700 units

GOGS:

First: sell items acquired on March 5 (the latest date before the sale), i.e.
500*$42=21000

Second: sell items (remaining after taking 500 items) from opening inventory March 1 (700-500)*$40=8000

Total cost of goods sold=$29000

Closing inventory:

We sold all items acquired on March 5. Therefore we have on hand March 1 items, i.e. (1000-200)*$40=$32000

2. Sale March 14 – 600 units

Before this sale the latest acquired items are from March 1 opening inventory, i.e. 800 items at $40. We sell part of them 600*$40=$24000 (COGS)

Closing inventory after the sale is (800-600)=200*$40=$8000

3. Sale of March 31 – 300 units

We have on hand the latest acquired inventory on March 20, i.e. 450 at $44
We sell part of it, i.e. 300*$44=$13200 (COGS)

Closing inventory are items as of March 1 200*$40=8000

Remaining items as of March 20 150*$44=6600

Total closing inventory $14600