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
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.
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
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
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
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
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
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
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
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.