PR 7-3A Periodic inventory by three methods
Bulldog Appliances uses the periodic inventory system. Details regarding the inventory
of appliances at September 1, 2011, purchases invoices during the next 12 months, and
the inventory count at August 31, 2012, are summarized as follows:
Purchases Invoices
Model Inventory,September 1 1st 2nd 3rd Inventory Count, August 31
AZ09 __ 4 at $ 32 4 at $ 35 4 at $ 38 5
GA85 8 at $ 88 4 at $ 79 3 at $ 85 6 at $ 92 7
HI71 3 at 75 3 at 65 15 at 68 9 at 70 5
KS32 7 at 242 6 at 250 5 at 260 10 at 259 9
MS17 12 at 80 10 at 82 16 at 89 16 at 90 13
ND52 2 at 108 2 at 110 3 at 128 3 at 130 5
WV63 5 at 160 4 at 170 4 at 175 7 at 180 8
Instructions
1. Determine the cost of the inventory on August 31, 2012, by the first-in, first-out method.
Present data in columnar form, using the following headings:
Model Quantity Unit Cost Total Cost
If the inventory of a particular model comprises one entire purchase plus a portion
of another purchase acquired at a different unit cost, use a separate line for each
purchase.
2. Determine the cost of the inventory on August 31, 2012, by the last-in, first-out method,
following the procedures indicated in (1).
3. Determine the cost of the inventory on August 31, 2012, by the average cost method,
using the columnar headings indicated in (1).
4. Discuss which method (FIFO or LIFO) would be preferred for income tax
purposes in periods of (a) rising prices and (b) declining prices.
Answer:
3. Average Cost Method
Model Quantity Unit Cost* Total Cost AZ09 5 $ 35 $ 175 GA85 7 87 609 HI71 5 69 345 KS32 9 253 2,277 MS17 13 86 1,118 ND52 5 121 605 WV63 8 172 1,376 Total............................................................... $6,505
*Computations of unit costs:
AZ09: $35 = [(4 × $32) + (4 × $35) + (4 × $38)] ÷ (4 + 4 + 4) GA85: $87 = [(8 × $88) + (4 × $79) + (3 × $85) + (6 × $92)] ÷ (8 + 4 + 3 + 6) HI71: $69 = [(3 × $75) + (3 × $65) + (15 × $68) + (9 × $70)] ÷ (3 + 3 + 15 + 9) KS32: $253 = [(7 × $242) + (6 × $250) + (5 × $260) + (10 × $259)] ÷ (7 + 6 + 5 + 10) MS17: $86 = [(12 × $80) + (10 × $82) + (16 × $89) + (16 × $90)] ÷ (12 + 10 + 16 + 16) ND52: $121 = [(2 × $108) + (2 × $110) + (3 × $128) + (3 × $130)] ÷ (2 + 2 + 3 + 3) WV63: $172 = [(5 × $160) + (4 × $170) + (4 × $175) + (7 × $180)] ÷ (5 + 4 + 4 + 7)
4. a. During periods of rising prices, the LIFO method will result in a lower cost of inventory, a greater amount of cost of merchandise sold, and a lesser amount of net income than the other two methods. For Bulldog Appliances, the LIFO method would be preferred for the current year, since it would result in a lesser amount of income tax.
b. During periods of declining prices, the FIFO method will result in a lesser amount of net income and would be preferred for income tax purposes.
of appliances at September 1, 2011, purchases invoices during the next 12 months, and
the inventory count at August 31, 2012, are summarized as follows:
Purchases Invoices
Model Inventory,September 1 1st 2nd 3rd Inventory Count, August 31
AZ09 __ 4 at $ 32 4 at $ 35 4 at $ 38 5
GA85 8 at $ 88 4 at $ 79 3 at $ 85 6 at $ 92 7
HI71 3 at 75 3 at 65 15 at 68 9 at 70 5
KS32 7 at 242 6 at 250 5 at 260 10 at 259 9
MS17 12 at 80 10 at 82 16 at 89 16 at 90 13
ND52 2 at 108 2 at 110 3 at 128 3 at 130 5
WV63 5 at 160 4 at 170 4 at 175 7 at 180 8
Instructions
1. Determine the cost of the inventory on August 31, 2012, by the first-in, first-out method.
Present data in columnar form, using the following headings:
Model Quantity Unit Cost Total Cost
If the inventory of a particular model comprises one entire purchase plus a portion
of another purchase acquired at a different unit cost, use a separate line for each
purchase.
2. Determine the cost of the inventory on August 31, 2012, by the last-in, first-out method,
following the procedures indicated in (1).
3. Determine the cost of the inventory on August 31, 2012, by the average cost method,
using the columnar headings indicated in (1).
4. Discuss which method (FIFO or LIFO) would be preferred for income tax
purposes in periods of (a) rising prices and (b) declining prices.
Answer:
1. First-In, First-Out Method
Model Quantity Unit Cost Total Cost AZ09 4 $ 38 $ 152 1 35 35 GA85 6 92 552 1 85 85 HI71 5 70 350 KS32 9 259 2,331 MS17 13 90 1,170 ND52 3 130 390 2 128 256 WV63 7 180 1,260 1 175 175 Total............................................................... $6,756
2. Last-In, First-Out Method
Model Quantity Unit Cost Total Cost AZ09 4 $ 32 $ 128 1 35 35 GA85 7 88 616 HI71 3 75 225 2 65 130 KS32 7 242 1,694 2 250 500 MS17 12 80 960 1 82 82 ND52 2 108 216 2 110 220 1 128 128 WV63 5 160 800 3 170 510 Total............................................................... $6,244
Model Quantity Unit Cost* Total Cost AZ09 5 $ 35 $ 175 GA85 7 87 609 HI71 5 69 345 KS32 9 253 2,277 MS17 13 86 1,118 ND52 5 121 605 WV63 8 172 1,376 Total............................................................... $6,505
*Computations of unit costs:
AZ09: $35 = [(4 × $32) + (4 × $35) + (4 × $38)] ÷ (4 + 4 + 4) GA85: $87 = [(8 × $88) + (4 × $79) + (3 × $85) + (6 × $92)] ÷ (8 + 4 + 3 + 6) HI71: $69 = [(3 × $75) + (3 × $65) + (15 × $68) + (9 × $70)] ÷ (3 + 3 + 15 + 9) KS32: $253 = [(7 × $242) + (6 × $250) + (5 × $260) + (10 × $259)] ÷ (7 + 6 + 5 + 10) MS17: $86 = [(12 × $80) + (10 × $82) + (16 × $89) + (16 × $90)] ÷ (12 + 10 + 16 + 16) ND52: $121 = [(2 × $108) + (2 × $110) + (3 × $128) + (3 × $130)] ÷ (2 + 2 + 3 + 3) WV63: $172 = [(5 × $160) + (4 × $170) + (4 × $175) + (7 × $180)] ÷ (5 + 4 + 4 + 7)
4. a. During periods of rising prices, the LIFO method will result in a lower cost of inventory, a greater amount of cost of merchandise sold, and a lesser amount of net income than the other two methods. For Bulldog Appliances, the LIFO method would be preferred for the current year, since it would result in a lesser amount of income tax.
b. During periods of declining prices, the FIFO method will result in a lesser amount of net income and would be preferred for income tax purposes.
