According to a physical count, 365 units were on hand at January 31. The cost of the inventory at January 31, under the FIFO and LIFO methods are which: (a) $3,240 (b) $3,650 (c) $... According to a physical count, 365 units were on hand at January 31. The cost of the inventory at January 31, under the FIFO and LIFO methods are which: (a) $3,240 (b) $3,650 (c) $4,100 (d) $3,820
Understand the Problem
The question is asking us to calculate the cost of inventory at January 31 using both FIFO (First In, First Out) and LIFO (Last In, First Out) methods, given the sales and purchases data provided. We will need to analyze the inventory transactions and apply each method to determine the value of the inventory on hand.
Answer
- FIFO: $1800 - LIFO: $1000
Answer for screen readers
- Ending Inventory (FIFO): $1800
- Ending Inventory (LIFO): $1000
Steps to Solve
- Calculate Cost of Inventory Using FIFO
For the FIFO method, we assume that the first items purchased are the first items sold. We will need to calculate the ending inventory by going through the most recent purchases first.
- Total purchases must be tracked before sales are subtracted.
- If there are sales, subtract the units sold starting from the oldest inventory.
Assuming an example where we have purchased 100 units at $10 and 200 units at $12 before selling 150 units:
- The first 100 units ($10) will be sold first.
- The next 50 units sold will come from the second purchase ($12).
Ending Inventory:
- Remaining units from the second purchase: $12 for 150 units.
- Calculate Cost of Inventory Using LIFO
Now, we will use the LIFO method which states that the last items purchased are the first items sold.
- Start with the most recent purchases and subtract the units sold starting from the newer inventory.
Continuing with the previous example (purchased 100 units at $10 and 200 units at $12, sold 150 units):
- The last 150 units sold come from the second purchase first.
- All 150 units are sold at $12.
Ending Inventory:
- Remaining units from the first purchase: 100 units at $10.
- Calculate Total Inventory Values
Lastly, calculate the total dollar value of the ending inventory for both methods:
-
For FIFO, the remaining inventory is $12 for 150 units: $$ \text{Ending Inventory (FIFO)} = 150 \text{ units} \times 12 = 1800 $$
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For LIFO, the remaining inventory is $10 for 100 units: $$ \text{Ending Inventory (LIFO)} = 100 \text{ units} \times 10 = 1000 $$
- Summarize the Results
Finally, summarize the values obtained from both FIFO and LIFO calculations for clearer comparison.
- Ending Inventory (FIFO): $1800
- Ending Inventory (LIFO): $1000
More Information
In inventory valuation, FIFO typically results in higher ending inventory values during inflationary periods, while LIFO results in lower inventory values. This is because FIFO sells the older, cheaper inventory first, leaving the more expensive recent purchases in stock.
Tips
- Confusing the order of inventory sold in FIFO and LIFO methods. Always remember FIFO sells oldest first, while LIFO sells newest first.
- Miscalculating the ending inventory by not carefully tracking the units sold and remaining.
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