Accounting Principle – Grade 1 - FCASU – 2nd Term

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Exercises on Chapter 6
Exercise (1)
Gerald D. Englehart Company has the following inventory, purchases, and sales data for the
month of March

The physical inventory count on March 31 shows 500 units on hand. ➔ Ending Inventory
Instructions
• Under a periodic inventory system, determine the cost of inventory on hand at March 31 and the
cost of goods sold for March under (a) FIFO, (b) LIFO, and (c) average-cost.
Answer:
1. To determine Cost of Inventory on Hand “Cost of goods Available for Sale”, it will be equal to
Beginning Inventory cost + Cost of Purchases
Date Units Unit Cost Total Cost
Beginning Inventory March 1 200 $ 4.00 $ 800
Purchases March 10 500 $ 4.50 $ 2,250
March 20 400 $ 4.75 $ 1,900
March 30 300 $ 5.00 $ 1,500
Total 1,400 Unit $ 6,450
Cost of goods on Hand “Available for Sale” = $ 6,450

2. The cost of good Sold for 900 Units (Available for Sale 1,400 units – Ending Inventory 500)
under each method will be as follow:
Under FIFO Method
Under FIFO each, goods purchased earlier will be first goods to be sold, while what we purchased
lately will be included in Ending Inventory
So Cost of Goods Sold for 900 Units under FIFO will be as follow:
Date Units Unit Cost Total Cost
Beginning Inventory March 1 200 $ 4.00 $ 800
Purchases March 10 500 $ 4.50 $ 2,250
March 20 200 $ 4.75 $ 950
Total 900 Unit $ 4,000
Cost of Goods Sold under FIFO = $ 4,000
If we asked about Ending Inventory Cost = Available for Sale – Cost of Goods Sold
= $ 6,450 - $ 4,000 = $ 2,450

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Another Method to get Cost of Good Sold, by calculating Ending Inventory first, then get Cost of Goods
Sold by subtracting Ending Inventory from Total Available for Sale units (Available for Sale – Ending
Inventory)

Under LIFO Method

Under LIFO each, goods purchased lately will be first goods to be sold, while what we purchased
earlier will be included in Ending Inventory
So Cost of Goods Sold for 900 Units under LIFO will be as follow:
Date Units Unit Cost Total Cost
Purchases March 30 300 $ 5.00 $ 1,500
March 20 400 $ 4.75 $ 1,900
March 10 200 $ 4.50 $ 900
Total 900 Unit $ 4,300
Cost of Goods Sold under FIFO = $ 4,300
If we asked about Ending Inventory Cost = Available for Sale – Cost of Goods Sold
= $ 6,450 - $ 4,300 = $ 2,150

Another Method to get Cost of Good Sold, by calculating Ending Inventory first, then get Cost of Goods
Sold by subtracting Ending Inventory from Total Available for Sale units (Available for Sale – Ending
Inventory)

Under Average Cost Method

- The average-cost allocates the cost of goods available for sale on the basis of the weighted-average
unit cost incurred.
- Average Unit Cost = $ 6,450 ÷ 1,400 = $ 4.607 per unit cost
- Ending Inventory = 500 unit x $ 4.607 = $ 2,303.5
- Cost of Goods Sold = Available for Sale – Ending Inventory
= $ 6,450 – 2,303.50 = $ 4,146.50
Or you can get Cost of Goods Sold through = 900 Unit sold x $ 4.607 = $ 4,146.50

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Exercise (2)
In its first month of operations, Weatherall Company made three purchases of merchandise in the following
sequence:
(1) 300 units at $6
(2) 400 units at $7
(3) 200 units at $8.
Assuming Weatherall uses a periodic inventory system and there are 380 units on hand, compute the cost
of the ending inventory under the
(a) FIFO method and
(b) LIFO method,
(c) and Average Cost Method.
Answer:
Under FIFO Method
Under FIFO, to determine the cost of Ending Inventory, it will include units which were purchased lately
Since the Units in hand was 380 unit, So Ending Inventory under FIFO will be as follow:
# Units Unit Cost Total Cost
3 200 $ 8.00 $ 1,600
2 180 $ 7.00 $ 1,260
380 Unit $ 2,860

Under LIFO Method

Under LIFO, to determine the cost of Ending Inventory, it will include units which were purchased first
Since the Units in hand was 380 unit, So Ending Inventory under LIFO will be as follow:
# Units Unit Cost Total Cost
1 300 $ 6.00 $ 1,800
2 80 $ 7.00 $ 560
380 Unit $ 2,360

Under Average Cost Method

- Average Unit Cost = [(300 x $6) + (400 x $7) + (200 x $8)]÷ 900 = $ 6.89 per unit cost
- Ending Inventory = 380 unit x $ 6.89 = $ 2,618.20

Exercise (3)
The management of Mastronardo Corp. is considering the effects of inventory costing methods on its
financial statements and its income tax expense. Assuming that the price the company pays for inventory is
increasing, which method will:
a. Provide the highest net income?
b. Provide the highest ending inventory?
c. Result in the lowest income tax expense?
d. Result in the most stable earnings over a number of years?
Answer
a. Provide the highest net income? ➔ FIFO (As lower cost of inventory will be charged to Cost of goods
sold)
b. Provide the highest ending inventory? ➔ FIFO (As higher cost of inventory will be in stock at the end)
c. Result in the lowest income tax expense? ➔LIFO (As Cost of goods will be higher so income will be
lower hence income tax will be low)
d. Result in the most stable earnings over a number of years? ➔ Weighted Average (as it averages the
effect of prices so gives most stable earning over a number of years)

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Exercise (4)
Glee Distribution markets CDs of the performing artist Unique. At the beginning of October, Glee
had in beginning inventory 2,000 of Unique’s CDs with a unit cost of $7.
During October, Glee made the following purchases of Unique’s CDs.
- Oct. 3 2,500 @ $8
- Oct. 9 3,500 @ $9
- Oct. 19 3,000 @ $10
- Oct. 25 4,000 @ $11
During October, 10,900 units were sold. Glee uses a periodic inventory system.
Instructions
(A) Determine the cost of goods available for sale.
(B) Determine
1) the ending inventory and
2) the cost of goods sold under each of the assumed cost flow methods (FIFO, LIFO, and
average-cost). Prove the accuracy of the cost of goods sold under the FIFO and LIFO
methods.
(C) Which cost flow method results in
1) the highest inventory amount for the balance sheet and
2) the highest cost of goods sold for the income statement?
Answer:
1. To determine “Cost of goods Available for Sale”, it will be equal to Beginning Inventory cost
+ Cost of Purchases
Date Units Unit Cost Total Cost
Beginning Inventory Oct. 1 2,000 $7 $ 14,000
Purchases Oct. 3 2,500 $8 $ 20,000
Oct. 9 3,500 $9 $ 31,500
Oct. 19 3,000 $ 10 $ 30,000
Oct. 20 4,000 $ 11 $ 44,000
Total 15,000 Unit $ 139,500
Cost of goods on Hand “Available for Sale” = $ 139,500

1. To determine “Ending Inventory”, it will be equal to Cost of Goods Available for Sale - Cost of
Goods Sold
Ending Inventory # of Units = 15,000 – 10,900 = 4,100 Unit

Under FIFO Method

Under FIFO, to determine the cost of Ending Inventory, it will include units which were purchased lately
Since the Units in hand was 4,100 unit, So Ending Inventory under FIFO will be as follow:
Date Units Unit Cost Total Cost
Oct. 20 4,000 $ 11 $ 44,000
Oct. 19 100 $ 10 $ 1,000
4,100 Unit $ 45,000
Cost of Goods Sold = Cost of Goods Available for Sale – Ending Inventory Cost
= $ 139,500 - $ 45,000 = $ 94,500

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To Proof Cost of Goods Sold (Solve with other Method)
Under FIFO Method
Under FIFO each, goods purchased earlier will be first goods to be sold
So Cost of Goods Sold for 10,900 Units under FIFO will be as follow:
Date Units Unit Cost Total Cost
Beginning Inventory Oct. 1 2,000 $7 $ 14,000
Purchases Oct. 3 2,500 $8 $ 20,000
Oct. 9 3,500 $9 $ 31,500
Oct. 19 2,900 $ 10 $ 29,000
Total 10,900 Unit $ 94,500

Under LIFO Method

Under LIFO, to determine the cost of Ending Inventory, it will include units which were purchased earlier
Since the Units in hand was 4,100 unit, So Ending Inventory under FIFO will be as follow:
Date Units Unit Cost Total Cost
Oct. 1 2,000 $7 $ 14,000
Oct. 3 2,100 $8 $ 16,800
4,100 Unit $ 30,800

Cost of Goods Sold = Cost of Goods Available for Sale – Ending Inventory Cost
= $ 139,500 - $ 30,800 = $ 108,700

To Proof Cost of Goods Sold (Solve with other Method)

Under LIFO Method
Under LIFO each, goods purchased lately will be first goods to be sold
So Cost of Goods Sold for 10,900 Units under FIFO will be as follow:
Date Units Unit Cost Total Cost
Purchases Oct. 20 4,000 $ 11 $ 44,000
Oct. 19 3,000 $ 10 $ 30,000
Oct. 9 3,500 $9 $ 31,500
Oct. 3 400 $8 $ 3,200
Total 10,900 Unit $ 108,700

Under Average Cost Method

- Average Unit Cost = $ 139,500 ÷ 15,000 = $ 9.30 per unit cost
- Ending Inventory = 4,100 unit x $ 9.30 = $ 38,130
- Cost of Goods Sold = Available for Sale – Ending Inventory
= $ 139,500 – 38,130 = $ 101,370
Or you can get Cost of Goods Sold through = 10,900 Unit sold x $ 9.30 = $ 101,370

(C) Which cost flow method results in

3) the highest inventory amount for the balance sheet and ➔ FIFO shows the highest
inventory amount for the balance sheet
4) the highest cost of goods sold for the income statement ➔ LIFO shows the highest cost of
goods sold for the income statement.

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