Excercise 5-25 Inventory cost methods - periodic system The following informatio
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Question
Excercise 5-25 Inventory cost methods - periodic system
The following information is avaible concerning the inventory of Carter inc,
Begining invenotory Unit Unit cost
200 10
11
12
13
15
Purchases: March 5,$300. June 12,$400, August 23, $250 October 2, $150
During the year Carter sold 1,000 units, it uses a periodic inventory system.
1. Caluclate ending inventory and cost of goods sold for each of the following three methods:a wieughed average b. FIFO c. LIFO
2. Assume an estimated tax rate of 30% how much more or less will carter pay in taxes by using FIFO instead of LIFO? Explain your answer
3. Assume that carter prepares its financial statement ub accordance with IFRS. Which costing method should it sue to pay the least amount of taxes? Explain your answer.
Explanation / Answer
Requirement 1:
a)Calculation of Ending Inventory and Cost of Goods Sold using Weighted Average Method:
Ending Inventory:
Opening Inventory 200
Add: Purchases (300+400+250+150) 1100
Less: Sales (1000)
Ending Inventory 300
Beginning Inventory
Purchases
Available Inventory
Quantity
Unit Cost
Value
Quantity
Unit Cost
Value
Quantity
Unit Cost
Value
200
10
2000
300
11
3300
500
10.6
5300
400
12
4800
900
11.22
10100
250
13
3250
1150
11.61
13350
150
15
2250
1300
11.27
14650
Ending Inventory = 300 * 11.27 = $3381
Cost of Goods Sold = 1000 * 11.27 = $11270
b)Calculation of Ending Inventory and Cost of Goods Sold using FIFO Method:
Beginning Inventory
Purchases
Sales
Ending Inventory
Qty
Cost
Value
Qty
Cost
Value
Qty
Cost
Value
Qty
Cost
Value
200
10
2000
200
10
2000
300
11
3300
300
11
3300
400
12
4800
400
12
4800
250
13
3250
100
13
1300
150
13
1950
150
13
1950
150
15
2250
150
150
13
15
1950
2250
13600
11400
4200
Ending Inventory = $4200
Cost of Goods Sold = $11400
c)Calculation of Ending Inventory and Cost of Goods Sold using LIFO Method:
Beginning Inventory
Purchases
Sales
Ending Inventory
Qty
Cost
Value
Qty
Cost
Value
Qty
Cost
Value
Qty
Cost
Value
200
10
2000
200
10
2000
300
11
3300
200
11
2200
100
11
1100
400
12
4800
400
12
4800
250
13
3250
250
13
3250
150
15
2250
150
15
2250
13600
12500
300
3100
Ending Inventory = $3100
Cost of Goods Sold = $12500
Requirement 2:
Ending Inventory under FIFO method = $4200
Ending Inventory under LIFO method = $3100
Estimated Tax Rate = 30%
Net Income increases by $1100 (4200 - 3100) if FIFO is used instead of LIFO.
Estimated increase in taxes = Increase in net income * tax rate
= $1100 * 30%
= $330
Requirement 3:
Ending inventory is least in case of LIFO method when compared to other methods. More Ending Inventory leads to more net income which in turn leads to payment of more taxes.
Hence costing method to be used is LIFO to pay the least taxes.
Beginning Inventory
Purchases
Available Inventory
Quantity
Unit Cost
Value
Quantity
Unit Cost
Value
Quantity
Unit Cost
Value
200
10
2000
300
11
3300
500
10.6
5300
400
12
4800
900
11.22
10100
250
13
3250
1150
11.61
13350
150
15
2250
1300
11.27
14650
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