Type
Solution Manual
Book Title
Financial Accounting Fundamentals 5th Edition
ISBN 13
978-0078025754

978-0078025754 Chapter 5 Lecture Note Part 2

March 26, 2020
VISUAL #5-2
Schedule of Cost of Goods Available
Units Cost* Total
Jan. 1 Beginning Inventory 60 @ $10 = $ 600
Mar. 27 Purchase 90 @ 11 = 990
Aug. 15 Purchase 100 @ 13 = 1,300
Nov. 6 Purchase 50 @ 16 = 800
Goods available for sale 300 $3,690
Units in physical count at year end 70
*CPU= Cost per unit
Cost Flow Assumptions or
Methods of Assigning Cost to Units in Ending Inventory
(Using a Periodic Inventory System)
(1) Specific Identification - requires that each item in an inventory be assigned
its actual invoice cost.
(2) Weighted Average - a weighted average cost per unit is determined based
on total cost and units of goods available for sale. This cost is assigned to
units in the ending inventory.
(3) First-in, First-out (FIFO) - assumes the first units acquired (beginning
inventory) are the first to be sold and that additional sales flow is in the order
purchased. Therefore, the costs of the last items received are assigned to the
ending inventory.
(4) Last-in, First-out (LIFO) - assumes the last units acquired (most recent
purchase) are the first units sold. Therefore, the cost of the first items
acquired (starting with beginning inventory) is assigned to the ending
inventory.
Note: In all methods, Cost of Good Sold equals Cost of Good Available minus
Ending Inventory (as computed by chosen method).
VISUAL #5-3
EI
CGS
Which costs
to assign to
each?
Varies by
method
FIFO
out = sold
(first or earliest
costs)
LIFO
out = sold
(last or most
recent)
In an inflationary
period
(rising prices)
EI
most recent
costs
EI
earliest
costs
CGS
earliest
costs
CGS
most recent
costs
highest
lowest
lowest
highest
OBSERVATIONS
CGA Net Sales
- EI (varies by method) - CGS (affected by method)
CGS (affected by method) Gross Profit (affected by method)
Verbally identify the impact of LIFO & FIFO on net income in a period of rising
prices and a period of declining prices.
Which method(s) will result in the same EI and CGS under both a Perpetual and
Periodic Inventory System?
CGA
always
has 2 parts
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
Alternate Demonstration Problem #1
Chapter 5
The ABC Company had the following inventory record for the month of
January:
Unit
Date
Description
Price
Item
1/1
Beginning
inventory
$20
Z1Z5
1/5
Sale
Z2, Z5
1/11
Purchase
12
Z6Z14
1/28
Sale
Z1, Z3, Z6, Z7, Z8, Z9, Z14
Required:
Assuming a perpetual inventory system is used, determine the cost of
goods sold and the ending inventory
1. FIFO
2. LIFO
3. Weighted average
4. Specific identification
Solution: Alternate Demonstration Problem
Chapter 5
1.
FIFO Perpetual
Date
Purchases
Sales at Cost
Inventory
Balance
1/1
Beginning
Inventory
5 @ $20 = $100
1/5
2 @ $20 = $ 40
3 @ $20 = $ 60
1/11
9 @ 12=$108
3 @ $20 = $ 60
9 @ $12 = 108
$168
1/28
3 @ $20 = $ 60
4 @ $12 = 48
$108
5 @ $12 = $ 60
Ending Inventory
Total CGS
$ 40 + 108 = $148
2.
LIFO Perpetual
Date
Purchases
Sales at Cost
Inventory
Balance
1/1
Beginning
Inventory
5 @ $ 20 = $100
1/5
2 @ $20 = $ 40
3 @ $20 = 60
1/11
9 @ $12=$108
3 @ $20 = $ 60
9 @ $12 = 108
$168
1/28
7 @ $12 = $ 84
3 @ $20 = $ 60
2 @ $12 = 24
$ 84
Ending Inventory
Total CGS
$40 + 84 = $124
3.
Weighted Average Perpetual
Date
Purchases
Sales at Cost
Inventory
Balance
1/1
Beginning
Inventory
5 @ $20 = $100
1/5
2 @ $20 = $ 40
3 @ $20 = $ 60
1/11
9 @ 12=$108
3 @ $20 = $ 60
9 @ $12 = 108
$168
$168/12 = $ 14
CPU
1/28
7 @ $14 = $ 98
5 @ $14 = $ 70
Ending Inventory
Total CGS
$ 40 + 94 = $138
4.
Specific Identification Perpetual
Date
Purchases
Sales at Cost
Inventory
Balance
1/1
Beginning
Inventory
5 @ $ 20 = $100
Z1-Z5
1/5
2 @ $20 = $ 40
Z2, Z5
3 @ $20 = $ 60
Z1, Z3, Z4
1/11
9 @ $12=$108
Z6-Z14
3 @ $20 = $ 60
Z1, Z3, Z4
9 @ $12 = 108
Z6-Z14
$168
1/28
Z1, Z3
2 @ $20 = $ 40
Z6-Z9,& Z14
5 @ $12 = $ 60
$ 100
1 @ $20 = $ 20
Z4
4 @ $12 = 48
Z10-13
$ 68
Ending Inventory
Total CGS
$40 + 100= $140
Alternate Demonstration Problem #2
Chapter 5
M&M Company had the following inventory record for the month of July:
Date
Description
Quantity
Unit Price
Total
July 1
Beginning Inventory
100
$5.00
$ 500.00
5
Purchase #1
400
6.00
2,400.00
18
Purchase #2
500
8.00
4,000.00
27
Purchase #3
200
9.00
1,800.00
Available for Sale
1,200
$8,700.00
July 31
Ending Inventory
400
Required:
Compute the cost of the ending inventory and cost of goods sold using
FIFO method, Weighted Average Method and LIFO method. M&M uses the
periodic inventory system to account for its inventory.
Alternate Demonstration Problem #2 Solution
Chapter 5
M&M Company had the following inventory record for the month of July:
Date
Description
Quantity
Unit Price
Total
July 1
Beginning Inventory
100
$5.00
$ 500.00
5
Purchase #1
400
6.00
2,400.00
18
Purchase #2
500
8.00
4,000.00
27
Purchase #3
200
9.00
1,800.00
Available for Sale
1,200
$8,700.00
July 31
Ending Inventory
400
Required:
Compute the cost of the ending inventory and cost of goods sold using
FIFO method, Weighted Average Method and LIFO method. M&M uses the
periodic inventory system to account for its inventory.
FIFO Method
Ending Inventory
From
Purchase #3 200 x $9 = $1,800.00
Purchase #2 200 x $8 = 1,600.00
Ending Inv. 400 $3,400.00
FIFO Method
Cost of Goods Sold
Goods Available for Sale $ 8,700.00
- Ending Inventory Cost 3,400.00
Cost of Goods Sold $ 5,300.00
Weighted Average Method
Ending Inventory
$ available for Sale = $8,700 = $7.25
# available for Sale 1,200
400 units x $7.25 = $2,900.00
Weighted Average Method
Cost of Goods Sold
Goods Available for Sale $8,700.00
- Ending Inventory Cost 2,900.00
Cost of Goods Sold $ 5,800.00
LIFO Method
Ending Inventory
From
Beg. Inventory 100 x $5 = $ 500.00
Purchase #1 300 x $6 = 1,800.00
Ending Inv. 400 $2,300.00
LIFO Method
Cost of Goods Sold
Goods Available for Sale $ 8,700.00
- Ending Inventory Cost 2,300.00
Cost of Goods Sold $ 6,400.00

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