# Answered Essay: Analyzing and Interpreting the Financial Statement Effects of Periodic FIFO, LIFO, and Weighted Average Cost [LO 7-3]

Analyzing and Interpreting the Financial Statement Effects of Periodic FIFO, LIFO, and Weighted Average Cost [LO 7-3]

 Orion Iron Corp. tracks the number of units purchased and sold throughout each year but applies its inventory costing method at the end of the year, as if it uses a periodic inventory system. Assume its accounting records provided the following information at the end of the annual accounting period, December 31.

 Transactions Units Unit Cost a. Inventory, Beginning 300 \$ 12 For the year: b. Purchase, April 11 900 10 c. Purchase, June 1 800 13 d. Sale, May 1 (sold for \$40 per unit) 300 e. Sale, July 3 (sold for \$40 per unit) 600 f. Operating expenses (excluding income tax expense), \$19,500

 Calculation of cost of goods sold ,ending inventory value and Net Operating Incomeusing FIFO periodic inventory system Units in ending Inventory = Beginning Inventory + Purchases – Sales = 300 units + 1700 units – 900 units = 1100 units As we are following FIFO method , the Units in ending inventory will be out of latest purchases. Value of Units in ending Inventory = (800 units * \$13) + (300 units * \$10) = \$13400 Cost of goods sold = Value of beginning Inventory + Cost of purchases – Value of Ending Inventory Cost of goods sold = (300 units * \$12) + [(900 units *\$10)+(800 units * \$13)] – \$13400 = \$9600 Calculation of Net Operating Income (FIFO Method) Sales \$36,000 Less : Cost of goods sold \$9,600 Gross Margin \$26,400 Less : Operating Expenses \$19,500 Net operating Income \$6,900 Calculation of cost of goods sold ,ending inventory value and Net Operating Incomeusing LIFO periodic inventory system Units in ending Inventory = Beginning Inventory + Purchases – Sales = 300 units + 1700 units – 900 units = 1100 units As we are following LIFO method , the Units in ending inventory will be out of old purchases. Value of Units in ending Inventory = (300 units * \$12) + (800 units * \$10) = \$11600 Cost of goods sold = Value of beginning Inventory + Cost of purchases – Value of Ending Inventory Cost of goods sold = (300 units * \$12) + [(900 units *\$10)+(800 units * \$13)] – \$11600 = \$13400 Calculation of Net Operating Income (LIFO Method) Sales \$36,000 Less : Cost of goods sold \$13,400 Gross Margin \$22,600 Less : Operating Expenses \$19,500 Net operating Income \$3,100 Calculation of cost of goods sold ,ending inventory value and Net Operating Income using Weighted Average periodic inventory system Units in ending Inventory = Beginning Inventory + Purchases – Sales = 300 units + 1700 units – 900 units = 1100 units Weighted Average cost per unit = (Cost of beginning Inventory+Cost of purchases) / (Units in Beginning Inventory + Purchased Units) Weighted Average cost per unit = (\$3600 + \$19400) / (300 units + 1700 Units) = \$11.50 per unit Cost of goods sold = Units sold * Weighted Average cost per unit Cost of goods sold = 900 units * \$11.50 = \$10350 Value of ending Inventory = 1100 units * \$11.50 = \$12650 Calculation of Net Operating Income (Weighted Average Method) Sales \$36,000 Less : Cost of goods sold \$10,350 Gross Margin \$25,650 Less : Operating Expenses \$19,500 Net operating Income \$6,150 Analysis Net operating Income and value of ending inventory using FIFO method is on higher side compared to LIFO and Weighted average method.
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