Accounting Exercises With Answers - Inventory Accounting - Ex. 2

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Accounting Exercises With Answers - Inventory Accounting - Ex. 2

Exercise Condition:

The units of an item available for sale during the year were as follows:

Jan 1 Inventory 27 units at $120
Feb 17 Purchase 54 units at $138
July 21 Purchase 63 units at $156
Nov 23 Purchase 36 units at $165

There are 50 units of the item in the physical inventory at December 31. The periodic inventory system is used. Determine the inventory cost by (a) FIFO, (b) LIFO and (c) the Average cost method.

Answer & Explanation:

1. FIFO - we assume that in closing inventory we have those units which were acquired at the latest date.

50 items left, they include:

Nov 23 purchase 36*$165=$5940
July 21 purchase 14 (50-36)*$156=$2184

Total FIFO closing inventory cost=$8124

2. LIFO - we assume that in closing inventory we have those units which were acquired at the earliest date.

50 items include:

Jan 1 opening inventory 27*$120=$3240
Feb 17 purchases 23 (50-27)*$138=$3174

Total LIFO closing inventory cost=$6414

3. Average price - we need to know average price of one unit. Calculate total units (in opening inventory and purchased during the period): 27+54+63+36=180

Calculate total cost of inventory:

27*$120=$3240
54*$138=$7452
63*$156=$9828
36*$165=$5940
Total=$26460
Average cost $26460/180=$147

Cost of closing inventory under average price method is 50*$147=$7350

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