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:
- FIFO
- LIFO
- 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
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