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

Expert Answer

 

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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