E6-7 Jones Company had 100 units in beginning inventory at a total cost of $10,0

Question

E6-7
Jones Company had 100 units in beginning inventory at a total cost of $10,000. The company purchased 200 units at a total cost of $26,000. At the end of the year, Jones had 80 units in ending inventory.


Compute the cost of the ending inventory and the cost of goods sold under (1) FIFO, (2) LIFO, and (3) average-cost.

FIFO LIFO Average-Cost
Ending Inventory $ $ $
Cost of goods sold $ $ $



Which cost flow method would result in the highest net income?




Which cost flow method would result in inventories approximating current cost in the balance sheet?




Which cost flow method would result in Jones paying the least taxes in the first year?

Explanation / Answer

Beginning inventory per unit cost = 10000/100 = 100 Purchased inventory per unit cost = 26000/200 =130 Weighted Average cost = 26000+10000 /300 = 120 FIFO LIFO AVG_COST Ending Inventory 80*130 = 10400 80*100 = 8000 80*120 = 9600 COGS 100*100+120*130 200*130 + 20*100 =220*120 =25600 = 28000 =26400 Highest Net income will occur when COGS is minimum i.e. in case of FIFO Weighted Average will result in inventories approximating current cost in the balance sheet. Least taxes mean least income which would come when COGS is highest so in LIFO method

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