Inventory

Practice as You Learn

Practice as You Learn

 

Practice Problem 1 – Calculate Cost of Goods Sold

The following information was taken from the records of XYZ Company:

Sales 2,900,000
Ending RM Inventory 130,000
Ending FG Inventory 885,000
Selling Expense 450,000
Purchase Discounts 12,000
Depreciation Expenses 110,000
Freight In 6,000
Beginning FG Inventory 420,000
Administrative Expenses 395,000
Purchase Returns 26,000
Beginning RM Inventory 100,000
Purchases 2,150,000

Calculate the cost of goods sold for XYZ Company:

Answer
Use the formula and ignore all other items on the list:

Beginning FG Inventory $   420,000
+ Purchases $2,150,000
+ Freight In  $       6,000
– Purchase returns $   (26,000)
– Purchase discounts $   (12,000)
= Available for sale $2,538,000
– Ending FG Inventory $ (885,000)
= Cost of Goods Sold $1,653,000

Use only finished goods inventory, this is the inventory that is sold to customers.

Ignore items that are not related to purchases and finished goods inventory.

Practice Problem 2 – Periodic FIFO, LIFO, Average

The Company had the following transactions during the first quarter:

                                                             Units             Cost-per-unit
January 1 Beginning Balance 900 $11
January 15 Purchased 500 $10
February 2 Sold 600  
February 5 Purchased 400 $12
February 18 Sold 700  
March 15 Purchased 600 $11

Determine the value of ending inventory and cost of goods sold for the quarter using
the periodic method (CGS is determined at the end of the period, ignore dates sold)

A) FIFO
B) LIFO
C) Average Cost

Answer
1st – line up the purchases in date order, get total cost, and subtract the total quantity
sold to get ending inventory quantity:

It does not matter when the inventory is sold. Wait until the end of the period and value cost of goods sold based on the quantity of inventory at year end

                                                                          Units      x Cost-per-unit = Total Cost
January 1 Beginning Balance     900     $11 $9,900
January 15 Purchased     500     $10 $5,000
February 5 Purchased     400     $12 $4,800
March 15 Purchased     600     $11 $6,600
Total Available     2,400 $26,300
– Total Sold     (1,300) ??
= Ending Inventory Total     1,100 ??

 

FIFO (first in – first out):

Units purchased first are sold first.
Work down starting with the first purchases until total units sold is 1,300.

                                                                            Units      x Cost-per-unit = Total CGS
January 1 Beginning Balance     900     $11 $9,900
January 15 Purchased     400     $10 $4,000
Total sold       1,300   $13,900

Do not take all 500 of the 1/15 purchase. Only add the quantity that will equal the 1,300 total quantity sold.

FIFO Ending Inventory:

Available          $26,300
– CGS               ($13,900)
= Inventory       $12,400

LIFO (last in – first out): 

Units purchased last are sold first. 
Work up starting with the last purchases until total units sold is 1,300

                                                                          Units      x total = Total    CGS
March 15 Purchased     600     $11 $ 6,600
February 5 Purchased     400     $12 $ 4,800
January 15 Purchased     300     $10 $ 3,000
        1,300   $14,400

Do not use all 500 of the 1/15 purchase. Only include enough to get to the 1,300 total units sold.

 

LIFO Ending Inventory:

Available          $26,300
– CGS              ($14,400)
= Inventory      $11,900

Weighted Average:

Inventory is valued at the average purchase cost.
Total available cost divided by total available units = average cost per unit

                                                                          Units      x Cost-per-unit = Total Cost
January 1 Beginning Balance     900 $11 $9,900
January 15 Purchased     500 $10 $5,000
February 5 Purchased     400 $12 $4,800
March 15 Purchased     600 $11 $6,600
Available     2,400 $26,300

Average cost =
$26,300 / 2,400 = $10.96

$10.96
x    1,300
= $14,248 CGS

Available          $26,300
– CGS              ($14,248)
= Inventory       $12,052

Practice Problem 3 – Perpetual FIFO, LIFO, Moving Average

The Company had the following transactions during the first quarter:

                                                                      Units       Cost-per-unit
January 1 Beginning Balance 900              $11
January 15 Purchased 500              $10
February 2 Sold 600
February 5 Purchased 400              $12
February 18 Sold 700
March 15 Purchased 600              $11

Determine the value of ending inventory and cost of goods sold for the quarter using the perpetual method

A) FIFO
B) LIFO
C) Moving Average Cost

Answer
Cost of Goods Sold is determined when the sale occurs.
Only inventory available just before the sale is used to determine which units were sold.

A) FIFO is the same for periodic and perpetual.
Do the easier periodic computation.
The answer is the same as the answer to practice problem 2 for FIFO.

B) LIFO

1st Set up purchases and sales in date order.
Only units on hand before the sale are included in units sold
The last purchase at the time of the sale is the unit that is sold.

        Purchases       Sales
Units Cost
per-unit
Sold Cost
per unit
CGS
January 1 Beginning Balance 900 $11
January 15 Purchased 500 $10
February 2 Sold (600) 500 $10 $5,000 from 1/15
100 $11 $1,100 from BI
February 5 Purchased 400 $12
February 18 Sold (700) 400 $12 $4,800 from 2/5
300 $11 $3,300 from BI
March 15 Purchased   600 $11 _______
Total CGS: $14,200

February 2nd sales:
The last ones purchased before the sale are the 500 units.
Sell those units first and then sell the other 100 (what it takes to get to a total of 600) from BI, the next one before.

This leaves only 800 units from the beginning in inventory

February 18th sales:
The last ones purchased before the sale are the 400 units.
Sell those units first and then sell the other 300 (what it takes to get to a total of 700) from the next one still available – from beginning inventory.
The January 15th purchase was sold on 2/2.

Only 500 units left from the beginning in inventory
(900 – 100 1st sale – 400 2nd sale) plus the 600 purchased on March 15th on hand at the end of the period.

Ending Inventory:

Beginning Inventory    500  x $11 =  $ 5,500
Last Purchase   600  x $11 =  $ 6,600
Total Ending Inventory 1,100              $12,100

Double check your computations.
The total available less cost of goods sold must equal ending inventory.

Total Available $26,300 **
– Cost of Goods Sold ($14,200)
Ending Inventory $12,100

** Total available is computed in the answers to problem 2.

C) Moving Average:

Compute a new moving average after each purchase.
Record the cost of the sale using the most recent moving average cost per unit.
Sales do not change the moving average cost per unit.

Steps to take:

1) After every purchase compute a new moving average.
Total cost divided by total units = moving average cost per unit

2) CGS is computed as units sold x the last moving average just before the sale.
Sales do not change the moving average.

3) Compute an ending balance for units and inventory dollars after every sale.

4) Add purchases and compute a new moving average to use for the next sale.

Double check your computations. The total available (BI + all purchases) less cost of goods sold must equal ending inventory (you may have a small rounding difference).

Total Available                $26,300
– Cost of Goods Sold      ($14,154)
Ending Inventory            $12,146

Practice Problem 4 – Record Inventory Transactions using the Periodic Method:

A company purchased inventory at a cost of $65,000 on June 1. The company returned goods that cost $6,000 on June 12. On June 14, goods with a cost of $21,000 were sold to the customer for $42,000. Inventory actually counted at the end of June totaled $48,000. The company paid for the inventory purchased on June 8th. Purchases had terms of 1/10, n 30. Beginning inventory is $12,000. All amounts in the problem are stated gross.

Make the appropriate journal entries for the transactions related to inventory using
1) the gross method
2) the net method

Answer
1st: Compute the net amount of inventory and payment transactions.

Purchase on 6/1 $65,000 – 1% discount of $650 = $64,350 net
Return $6,000 – 1% discount of $60 = $5,940 net
Inventory Sold $21,000 – 1% discount of $210 = $20,790 net
Beginning Inventory $12,000 – 1% discount of $120 = $11,880 net
Ending Inventory $48,000 – 1% discount of $480 = $47,520 net
Payment on 6/8 $65,000 – $6,000 = $59,000 – 1% of $590 = $58,410 net

The periodic method uses purchase accounts.
The inventory account is not used and cost of goods sold is not recorded until the final adjustment.

	1) Gross Method:					2) Net Method:

Purchases	65,000	              Purchase	      Purchases	     64,350
      A/P 		         65,000				          A/P 			64,350


A/P		6,000		                Return	     A/P		      5,940
      Purchase Returns   6,000				           Purchase Returns	5,940


A/R		42,000		                 Sale	      A/R		42,000
      Sales		42,000				                   Sales		  42,000


			     Paid before 10 days, take the discount

Accounts Pay   59,000		    Payment	      Accounts Pay      58,410
      Cash		             58,410					Cash		   58,410
      Purchase Dsct.            590

 

                                           Adjusting Entry

CGS                                22,410                     CGS                                  22,770	    
Purchase Returns             6,000                     Purchase Returns               5,940	
Inventory(ending)            48,000                     Inventory (ending)             47,520
Purchase Discounts             590                            Inventory (beginning)             11,880
      Inventory (beginning)         12,000                   Purchases                              64,350   	
      Purchases                          65,000                            
     

Adjust:
Move purchases, purchase returns and purchase discounts to CGS
Remove beginning Inventory and add ending inventory (or record a debit to inventory for 35,640 for the change)
Plug to CGS to balance the journal entry

Practice Problem 5 – Record Inventory Transactions using the Perpetual Method:

A company purchased inventory for a cost of $65,000 on June 1. The company returned goods with a cost of $6,000 on June 12. On June 14, goods with a cost of $21,000 were sold to the customer for $42,000. Inventory actually counted at the end of June totaled $48,000. The company paid for the inventory purchased on June 8th. Purchases had terms of 1/10, n 30. Beginning inventory is $12,000. All amounts in the problem are stated gross.

Make the appropriate journal entries for the transactions related to inventory using
1) the gross method
2) the net method

Answer
 1st: Compute the net amount of inventory and payment transactions.

Purchase $65,000 – 1% discount of $650 = $64,350 net
Return $6,000 – 1% discount of $60 = $5,940 net
Inventory Sold $21,000 – 1% discount of $210 = $20,790 net
Beginning Inventory $12,000 – 1% discount of $120 = $11,880 net
Ending Inventory $48,000 – 1% discount of $480 = $47,520 net
Payment $65,000 – $6,000 = $59,000 – 1% of $590 = $58,410 net

     1)   Gross Method:					   2)  Net Method:

Inventory	    65,000	              Purchase	      Inventory		64,350
      A/P 		     65,000				      A/P 			 64,350


Cash		6,000		       Return	     Cash		         5,940
      Inventory		   6,000				           Inventory		5,940


A/R		           42,000		          Sale	      A/R		         42,000
      Sales		              42,000				   Sales		          42,000

Cost of Goods Sold    21,000			               CGS		          20,790
      Inventory                   21,000 				      Inventory	          20,790


				Paid before 10 days, take the discount

Accounts Pay   59,000		    Payment	      Accounts Pay      58,410
      Cash		             58,410					     Cash		   58,410
      Purchase Dsct.            590    

                            Adjusting Entry

  Cost of Goods Sold   2,000			Cost of Goods Sold    1,980
	  Inventory		    2,000			  Inventory	          1,980

     

The difference in Cost of Goods Sold for the two methods is equal to the payment
discount. The discount amount is in inventory and will not be part of cost of goods sold until the inventory is sold.