ercise 5-1A E s Required For each of the following situations, indicate whether
ID: 341901 • Letter: E
Question
ercise 5-1A E s Required For each of the following situations, indicate whether FIFO, LIFO, or weighted average applies: a. In a period of falling prices, net income would be highest. b. In a period of falling prices, the unit cost of goods would be the same for ending inventory Ex ffect of inventory cost flow assumption on financial statement and cost of goods sold. c. In a period of rising prices, net income would be highest. d. In a period of rising prices, cost of goods sold would be highest. e. In a period of rising prices, ending inventory would be highest. Exercise 5-2A Allocating product cost between cost of goods sold and ending inventory Jones Co. started the year with no inventory. During the year, it purchased two identical inven- tory items at different times. The first purchase cost $1,060 and the other, $1,380. Jones sold one of the items during the year Required Based on this information, how much product cost would be allocated to cost of goods sold and ending inventory on the year-end financial statements, assuming use of a. FIFO? b. LIFO c. Weighted averageExplanation / Answer
5-1A)
a) In this case the prices are falling and net income is the highest. Net income would be highest only if the cost of good sold is at its lowest. Cost of goods sold will be lowest when the unit cost of goods sold is lowest and that is possible when the goods purchased in the last are sold first because prices are falling. Hence LIFO method will apply in this case.
b) The unit cost of good sold would be same for ending inventory and cost of goods sold under the weighted average method whether the prices are rising or falling. Hence Weighted average method will apply in this case.
c) In this case the prices are rising and net income is the highest. Net income would be highest only if the cost of good sold is at its lowest. Cost of goods sold will be lowest when the unit cost of goods sold is lowest and that is possible when the goods purchased first are sold first because prices are rising. Hence FIFO method will apply in this case.
d) The prices are rising and the cost of goods sold is the highest. This is possible when the unit cost of goods sold is highest. It means that the goods purchased in the last are sold first as the prices are rising. Therefore the LIFO method will apply in this case.
e) The prices are rising and ending inventory is the highest. This is possible when the cost of goods sold and unit cost of goods sold is lowest. It means that the goods purchased first are sold first as the prices are rising. Therefore the FIFO method will apply in this case.
5-2A)
a) Under FIFO method, the goods purchased first will be allocated to cost of good sold and other will be considered as cost of ending inventory.
Cost of goods sold = $1,060
Ending Inventory = $1,380
b) Under LIFO method, the goods purchased last will be allocated to cost of goods sold and other will be considered as cost of ending inventory.
Cost of goods sold = $1,380
Ending Inventory = $1,060
c) Under weighted averge, weighted average unit cost will be allocated to both cost of goods sold and ending inventory.
Weighted Avg cost = ($1,060+$1,380)/2 = $1,220
Cost of goods sold = $1,220
Ending Inventory = $1,220
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