Question

John Adams Company’s record of transactions for the month of April was as follows.

Purchases Sales

April 1 (balance on hand) 600 @ \( 6.00 April 3 500 @ \)10.00

4 1,500 @ 6.08 9 1,400 @ 10.00

8 800 @ 6.40 11 600 @ 11.00

13 1,200 @ 6.50 23 1,200 @ 11.00

21 700 @ 6.60 27 900 @ 12.00

29 500 @ 6.79 4,600

5,300

Instructions

(a) Assuming that periodic inventory records are kept in units only, compute the inventory at April 30 using (1) LIFO and(2) average-cost.

(b) Assuming that perpetual inventory records are kept in dollars, determine the inventory using (1) FIFO and (2) LIFO.

(c) Compute the cost of goods sold assuming periodic inventory procedures and inventory priced at FIFO.

(d) In an inflationary period, which inventory method—FIFO, LIFO, average cost—will show the highest net income?

Short answer

Value of closing inventory would be highest under FIFO, and the value of COGS would be highest under LIFO.

Step-by-step solution

Value of ending inventory under the periodic system

$\begin{array}{rcl}\mathrm{Ending}\mathrm{Inventory}\left(\mathrm{Units}\right)& =& \mathrm{Total}\mathrm{InventoryAvailable}-\mathrm{Total}\mathrm{Sales}\\ & =& 5,300-4,600\\ & =& 700\mathrm{Units}\end{array}$

a) Value of ending inventory using LIFO

$\begin{array}{rcl}\mathrm{Ending}\mathrm{inventory}\left(\mathrm{LIFO}\right)& =& \mathrm{Beginning}\mathrm{Inventory}\mathrm{value}+\mathrm{April}14\mathrm{Purchase}\mathrm{value}\mathrm{for}100\mathrm{units}\\ & =& 600\times \$6+100\times \$6.08\\ & =& \$3,600+\$608\\ & =& \$4,208\end{array}$

b) Value of ending inventory using average cost

	Units	Rate	Amount
Beginning Inventory	600	$6	$3600
April 4 Purchase	1,500	$6.08	$9120
April 8 Purchase	800	$6.40	$5120
April 13 Purchase	1,200	$6.50	$7800
April 21 Purchase	700	$6.60	$4620
April 29 Purchase	500	$6.79	$3395
Total	5,300		$33,655

$\begin{array}{rcl}\mathrm{Average}\mathrm{cost}\mathrm{of}\mathrm{inventory}& =& \frac{\mathrm{Total}\mathrm{inventory}\mathrm{value}}{\mathrm{Total}\mathrm{inventory}}\\ & =& \frac{\$33,655}{5,300}\\ & =& \$6.35\end{array}$

$\begin{array}{rcl}\mathrm{Ending}\mathrm{inventory}\left(\mathrm{Average}\right)& =& \mathrm{Ending}\mathrm{inventory}\mathrm{units}\times \mathrm{Average}\mathrm{cost}\\ & =& 700\times \$6.35\\ & =& \$4,445\end{array}$

Value of ending inventory under the perpetual system

a) Using FIFO

Date	Purchase	Cost of Goods Sold	Balance
April 1	Beginning Balance (600 units @ $6)		$3,600
April 3		500 units @ $6	-$3,000
			$600
April 4	1,500 units @ $6.08		$9,120
			$9,720
April 8	800 units @ $6.40		$5,120
			$14,840
April 9		100 units @ $6	-$600
		1300 units @ $6.08	-$7,904
			$6,336
April 11		200 units @ $6.08	-$1,216
		400 units @ $6.40	-$2,560
			$2,560
April 13	1200 units @ $6.50		$7,800
April 21	700 units @ $6.60		$4,620
			$14,980
April 23		400 units @ $6.40	-$2,560
		800 units @ $6.50	-$5,200
			$7,220
April 27		400 units @ $6.50	-$2,600
		500 units @ $6.60	-$3,300
			$1,320
April 29	500 units $6.79		$3,395
			$4,715

The value of closing inventory comes out to be $4,715.

a) Using LIFO

Date	Purchase	Cost of Goods Sold	Balance
April 1	Beginning Balance (600 units @ $6)		$3,600
April 3		500 units @ $6	-$3,000
			$600
April 4	1,500 units @ $6.08		$9,120
			$9,720
April 8	800 units @ $6.40		$5,120
			$14,840
April 9		800 units @ $6.40	-$5,120
		600 units @ $6.08	-$3,648
			$6,072
April 11		600 units @ $6.08	-$3,648
			$2,424
April 13	1200 units @ $6.50		$7,800
April 21	700 units @ $6.60		$4,620
			$14,844
April 23		700 units @ $6.60	-$4,620
		500 units @ $6.50	-$3,250
			$6,974
April 27		700 units @ $6.50	-$4,550
		200 units @ $6.08	-$1,216
			$1,208
April 29	500 units $6.79		$3,395
			$4,603

The value of closing inventory comes out to be $4,603.

Value of COGS under the periodic system using FIFO

$\begin{array}{rcl}\mathrm{Ending}\mathrm{Inventory}\left(\mathrm{Units}\right)& =& \mathrm{Total}\mathrm{InventoryAvailable}-\mathrm{Total}\mathrm{Sales}\\ & =& 5,300-4,600\\ & =& 700\mathrm{Units}\end{array}$

a) Value of ending inventory using FIFO

$\begin{array}{rcl}\mathrm{Ending}\mathrm{inventory}\left(\mathrm{LIFO}\right)& =& \mathrm{Inventory}\mathrm{value}of500unitsonApril29+\mathrm{April}21\mathrm{Purchase}\mathrm{value}\mathrm{for}200\mathrm{units}\\ & =& 500\times \$6.79+200\times \$6.6\\ & =& \$3,395+\$1,320\\ & =& \$4,715\end{array}$

$\begin{array}{rcl}\mathrm{Cost}\mathrm{of}\mathrm{goods}\mathrm{sold}& =& \mathrm{Total}\mathrm{goods}\mathrm{value}\mathrm{available}\mathrm{for}\mathrm{sale}-\mathrm{Ending}\mathrm{inventory}\mathrm{value}\\ & =& \$33,655-\$4,715\\ & =& \$28,940\end{array}$

Inventory valuation method producing highest net income

The highest net income is the result of the lowest cost of goods sold. The cost of goods sold is the difference between the total available inventory and ending inventory. So, if the ending inventory is high in value, the COGS would be below. FIFO I is based on the historical cost among all the inventory valuing alternatives. Thus under this method, the value of COGS would not be affected due to inflation as inventories at the latest cost are left in the stock. So the COGS would always be lower.