INVENTORY

COST FORMULAS

1. SPECIFIC IDENTIFICATION
not ordinarily interchangeable
COS- actual costs of specific items sold

2. FIFO (FIRST-IN, FIRST OUT)

inventories were purchased or produced first are sold first.
unsold invty at the end of the period are recently purchased
periodic or perpetual (same)

3. WEIGHTED AVERAGE
based on WA of beginning invty and all invty purchased.
periodic or perpetual(moving average)

EFFECT OF RETURNS TO INVENTORY, INCREASE OR DECREASE?

PURCHASE RETURN = decrease

SALE = decrease

SALE RETURN = increase

PURCHASE = increase
Problem 1

. Mildred Company is a wholesaler of office supplies. The FIFO periodic inventory is used. The activity
for inventory of calculators during August is as follows:
Units Cost
August 1 Inventory 20,000 36.00 20,000
30,000
7 Purchase 30,000 37.20 (36,000)
12 Sale 36,000 48,000
(38,000)
21 Purchase 48,000 38.00 16,000
22 Sale 38,000 40,000 UNITS

29 Purchase 16,000 38.60

16,000 x 38.60= 617,600
24,000 x 38= 912,000
What is the ending inventory on August 31 ? 1,529,600

A. 1,500,800 C. 1,522,880
B. 1,501,600 D. 1,529,600

Answer is (D).
Beginning inventory 20,000
Purchases (30,000 + 48,000 + 16,000) 94,000
Total units available 114,000
Sales (36,000+ 38,000) ( 74,000)
Ending inventory in units 40,000

From August 21 purchase (24,000 x 38.00) 912,000

From August 29 purchase (16,000 x 38.60) 617,600
Total cost of inventory, August 31 1,529,600
Problem 2

SOLUTION

Answer is (C).
From March 5 purchase (4,500 units x 73.50) 330,750
Whether periodic or perpetual system, the FIFO inventory is the same.

Problem 3

WA-PERIODIC

Lane Company provided the following inventory card during February:

Purchase Units Balance
Price Units Used Units
Jan. 10 100 20,000 20,000
31 10,000 10,000
Feb. 8 110 30,000 40,000
9 Returns from factory (Jan. 10 lot) (1,000) 41,000
28 11,000 30,000
Using the weighted average method, what is the cost of inventory on February 28?
A. 3,120,000 C. 3,180,000
B. 3,150,000 D. 3,300,000

TGAS amount = 2,000,000 + 3,300,000 = 5,300,000 = 106 x 30,000 = 3,180,000

TGAS units = 20,000 + 30,000= 50,000
Answer is (C).
Units Unit costTotal cost
January 10 20,000 100 2,000,000
February 8 30,000 110 3,300,000
50,000 5,300,000
Weighted average unit cost (5,300,000/50,000) 106
Cost of inventory (30,000 x 106) 3,180,000

Problem 4

WA-PERPETUAL OR MOVING AVERAGE

Celine Company provided the following data relating to an inventory item.

Units Unit costTotal cost
Jan. 1 Beginning balance 5,000 200 1,000,000
10 Purchase 5,000 250 1,250,000
15 Sale 7,000
16 Sale return 1,000
30 Purchase 16,000 150 2,400,000
31 Purchase return 2,000 150 300,000
Under the perpetual system, what is the moving average unit cost on January 31?
A. 165 C. 181
B. 167 D. 225

Units Unit cost Total cost

Jan. 1 Beginning balance 5,000 200 1,000,000

10 Purchase 5,000 250 1,250,000

Balance 10,000 225 2,250,000

15 Sale (7,000) 225 (1,575,000)

Balance 3,000 225 675,000

16 Sale return 1,000 225 225,000

Balance 4,000 225 900,000

30 Purchase 16,000 150 2,400,000

Balance 20,000 165 3,300,000

31 Purchase return (2,000) 150 ( 300,000)

 Balance 18,000 167 3,000,000

Observe that the moving average unit cost changes every time there is a new purchase or a purchase return. The
moving average unit cost is not affected by a sale or a sale return.

Problem 5

RELATIVE SALES PRICE

Solid Company purchased a plot of ground for P18,000,000. The entity also paid an independent appraiser for
the land the amount of P500,000. The land was developed as residential lots at a total cost of P41,500,000.
The lots were classified as follows:
Number of lots Sales price per lot
Highland 20 1,000,000
Midland 40 750,000
Lowland 100 500,000

What total cost should be allocated to Highland lots?

A. 8,300,000 C. 11,900,000
B. 8,400,000 D. 12,000,000

Answer is (D).
Sales price Fraction Total cost
Highland ( 20 x 1,000,000) 20,000,000 20/100 12,000,000
Midland (40 x 750,000) 30,000,000 30/100 18,000,000
Lowland (100 x 500,000) 50,000,000 50/100 30,000,000
100,000,000 60,000,000
Problem 6

Avarice Company has a recent gross profit history of 40% of net sales. The following data are available from
the accounting records for the three months ended March 31, 2014:
Inventory - January 1 650,000
Purchases 3,200,000
Net sales 4,500,000
Purchase return 75,000
Freight in , 50,000
Using the gross profit method, what is the estimated cost of inventory on March 31, 2014?
A. 1,120,000 C. 2,025,000
B. 1,125,000 D. 2,700,000

Answer is (B).
Inventory – January 1 650,000
Purchases 3,200,000
Freight-in 50,000
Total 3,250,000
Less: Purchase returns 75,000 3,175,000
Goods available for sale 3,825,000
Less: Cost of sales (4,500,000 x 60%) 2,700,000
Inventory – March 311,125,000

Problem 7

A fire destroyed Newborn Company's inventory on October 31. On January 1, the inventory had a cost
of P2,500,000. During the period January 1 to October 31, the entity had net purchases of P7,500,000
and net sales of P15,000,000. Undamaged inventory at the date of fire had a cost of PI 50,000. The
markup on cost is 66 2/3%. What was the cost of inventory destroyed by fire?
A. 850,000 C. 3,850,000
B. 1,000,000 D. 4,000,000

. Answer is (A).
Goods available for sale (2,500,000 + 7,500,000) 10,000,000
 Cost of goods sold (15,000,000/166 2/3%) (9,000,000)
Inventory - October 31 1,000,000
Undamaged inventory ( 150,000)
Inventory destroyed by fire 850,000

Problem 8

On December 31, 2014, Huff Company provided the following information:

Cost Retail
Inventory, January 1 735,000 1,015,000
Purchases 4,165,000 5,775,000
Additional markups - 210,000
Available for sale 4,900,000 7,000,000
Sales for the year totaled P5,530,000. Markdowns amounted to P70,000. Under the approximate lower of
average cost or marked retail method, what is the inventory on December 31,2014?
A. 980,000 C. 1,400,000
B. 1,078,000 D. 1,540,000

Answer is (A).
Cost Retail
Available for sale 4,900,000 7,000,000
Markdowns ( 70,000)
Sales (5,530,000)
Inventory - December 31 1,400,000
Conservative cost ratio (4,900/7,000) 70%
Inventory - December 31 at cost 980,000
The approximate lower of average cost or market retail method is the same as the conservative or
conventional retail approach.

Problem 9

Domicile Company had the following amounts all at retail:

Beginning inventory 180,000 Purchases 6,000,000
Purchase return 300,000 Net markup 900,000
 Abnormal shortage 200,000 Net markdown 140,000
Sales 3,600,000 Sales return 90,000
Employee discounts 80,000 Normal shortage130,000
What is the ending inventory at retail?
A. 2,720,000 C. 2,880,000
B. 2,800,000 D. 2,920,000

Answer is (A).
Beginning inventory 180,000
Purchases 6,000,000
Purchase return ( 300,000)
Net markup 900,000
Net markdown ( 140,000)
Goods available for sale at retail 6,640,000
Less: Sales3,600,000
Sales return(90,000)
Employee discounts 80,000
Normal shortage 130,000
Abnormal shortage 200,000 3,920,000
Ending inventory at retail 2,720,000

Problem 10

Abscond Company used the retail inventory method to estimate inventory for interim statement purposes.
Data relating to the computation of the inventory on December 31, 2014 are as follows:
Cost Retail
Inventory, January 1 720,000 1,000.000
Purchases 4,080,000 6,300,000
Markup 700,000
Markdown 500,000
Sales 5,900,000
Normal shoplifting losses 100,000
Under the average cost approach, what is the estimated cost of inventory on December 31, 2014?
A. 900,000 C. 1,024,000
B. 960,000 D. 1,500,000
Answer is (B).
 Cost Retail
Inventory – January 1 720,000 1,000,000
Purchases 4,080,000 6,300,000
Markup 700,000
Markdown . (500,000)
Goods available for sale 4,800,000 7,500,000
Cost ratio (4,800/7500) – 64%
Sales (5,900,000)
Normal shrinkage and breakage (100,000)
Inventory at retail 1,500,000
Average cost (1,500,000 x 64%) 960,000

Problem 11

Union Company used the FIFO retail method of inventory valuation. The entity provided the following
information for the current year:

Cost Retail
Beginning inventory 600,000 1,500,000
Purchases 3,000,000 5,500,000
Net additional markups 500,000
Net markdowns 1,000,000
Sales revenue 4,500,000

What is the estimated cost of ending inventory?

A. 960,000 C. 1,040,000
B. 1,000,000 D. 1,200,000

Answer is (D).
Cost Retail
Beginning inventory 600,000 1,500,000
Purchases 3,000,000 5,500,000
Net markups 500,000
Net markdowns . (1,000,000)
Net purchases 3,000,000 5,000,000
Cost ratio (3,000,000/5,000,000) 60%
Goods available for sale 3,600,000 6,500,000
Sales (4,500,000)
Ending inventory 2,000,000
FIFO cost (2,000,000 x 60%) 1,200,000

“All ends well.”

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