FIFO vs LIFO vs Weighted Average Cost Flow

The provided content is related to the purchase and sale of goods by The Shirt Shop. There are three methods used: FIFO (First-In-First-Out), LIFO (Last-In-First-Out), and Weighted Average. The assignment provides journal entries, calculations, and analysis for each method. The main points include: the calculation of cost of goods sold, gross margin, and balance c/d for each method; the difference in results between FIFO, LIFO, and Weighted Average methods; and the conclusion that each method yields different financial statements.

Part 1
1.
WhiIe preparing year end financials, FIFO Method shall be used as a method to account the
inventory mainly due to its wider acceptance and recognition. This method is justifiable due to
its advantages which are as follows:
1. In industries where expiry date of the product plays a major role, earlier batches of
inventory are cleared first due to its limited period usage. FIFO is the most appropriate
method to such industries which takes into consideration the time frame.
2. It becomes easier to maintain accounts under FIFO where ERP systems are not
implemented due to its high costs.
Major Disadvantage:
1. It does not give the real time cost of the products in industries which are traded as
commodities.
2. Activities to perform at year end to correctly account for year end inventory:
1. Physical Stock Taking of the Inventory is the classic way for correct accounting.
2. Goods Receipt Register can be vouched for any receipts not having been accounted.
3. Purchase Orders Summary can be checked to check the closed Purchase Orders.
3.
Inventory is the asset of the business. It is the one which runs the business. It gives us the true
position at a given point of time. For ex, when inventory is slow moving, it is a matter of worry
as it might convert to dead stock. A manufacturer or trader cannot run/sustain in business without
having inventory.
Page 1 of 13

Part 2
Week 4
Answer Key
Textbook: 9th Edition
EXERCISE 5-1A
a. LIFO
b. Weighted Average
c. FIFO
d. LIFO
e. FIFO
EXERCISE 5-2A
Jones Co.
First Purchase
(Cost)
$ 1,060
Second Purchase
(Cost)
$ 1,380
Total Product Cost $ 2,440
(a) (b) (c)
FIFO LIFO W. AVG.
Cost of Goods Sold $ 1,060 $ 1,380 $ 1,220
Ending Inventory $ 1,380 $ 1,060 $ 1,220
Page 2 of 13

EXERCISE 5-3A
The Cortez Company Inventory Purchases
Opening Inventory 10
0
@ $ 60 = $
6,000
First Batch Purchases 15
0
@ $ 68 = $
10,200
Second Batch
Purchases
20
0
@ $ 72 = $
14,400
Goods Available for
Sale
45
0
$
30,600
a.
Cost of Goods Sold:
FIFO Unit
s
Unit
Cost
Cost of Goods
Sold
Opening Inventory 100 @ $ 60 = $ 6,000
First Batch 150 @ $ 68 = $ 10,200
Second Batch 20 @ $ 72 = $ 1,440
$ 17,640
Ending Inventory:
FIFO Unit
s
Unit
Cost
Ending
Inventory
Second Batch 180 @ $ 72 = $ 12,960
b. Cost of Goods Sold
LIFO Unit
s
Unit
Cost
Cost of Goods
Sold
Second Batch 200 @ $ 72 = $ 14,400
First Batch 70 @ $ 68 = $ 4,760
$ 19,160
Ending Inventory
LIFO Unit
s
Unit
Cost
Ending
Inventory
Page 3 of 13

First Batch 80 @ $ 68 = $ 5,440
Opening Inventory 100 @ $ 60 = $ 6,000
$ 11,440
c.
Weighted Average:
Value of Goods
available for Sale
 No of
Units
available
for sale
= Weighted
Average Cost
per unit
$ 30,600  450 = $ 68
Cost of Goods Sold 270 @ $ 68 = $ 18,360
Year End Inventory 180 @ $ 68 = $ 12,240
EXERCISE 5-4A
a. (1) Mason Company
FIFO
Sales 370 units * $90 $33,30
0
Cost of Goods Sold:
Beginning
Inventory
90 units * $40 = $3,600
Purchased Units 280 units * $45 = $12,60
0
$16,20
0
Gross Margin $17,10
0
a. (2)
LIFO
Sales 370 units * $90 $33,30
0
Cost of Goods Sold:
Beginning 60 units * $40 = $2,400
Page 4 of 13

Inventory
Purchased Units 310 units * $45 = $13,95
0
$16,35
0
Gross Margin $16,95
0
a. (3)
Weighted Average
Sales 370 units *
$90
$33,300
Cost of Goods Sold:
Average Cost ((90*$40)+(31
0*$45))/400 =
$43.875
Sold Units 370units *
$43.875
= $16,23
3.75
Gross Margin $17,06
6.25
Page 5 of 13

EXERCISE 5-4A (cont.)
b.
FIFO LIFO
Weighted
Avg.
Gross Margin $17,100 $16,950 $17,06
6.25
Less:
Operating
Expenses
$4,100 $4,100 $4,100
Net Income $13,000 $12,850 $12,96
6.25
c.
Ending Inventory
FIFO 30 units *
$45
$1,350
LIFO 30 units *
$40
$1,200
Weighted
Average
30units*$43.
875
$1,31
6.25
*rounded to the nearest whole dollar.
EXERCISE 5-5A
The Shirt Shop
Summary of Purchase Transactions
Jan
20
Purchase 400 @ $8 = $3,200
Apr
21
Purchase 200 @ $10 = $2,000
July
25
Purchase 280 @ $13 = $3,640
Page 6 of 13

Sept
19
Purchase 90 @ $15 = $1,350
970 $10,19
0
a. (1)
FIFO Units Unit
Cost
Total
(970-810) = 160
units
Out of Sep 19 90 @ $15 $1,350
Out of Jul 25 70 @ $13 $910
160 $2,260
a. (2)
LIFO Units Unit
Cost
Total
(970-810) = 160
units
Out of Jan 20 160 @ $8 $1,280
160 $1,280
a. (3)
Weighted Average
Value of Goods
available for Sale
 No of Units
available
for sale
= Weighted
Average Cost
per unit
$ 10,190  970 = $ 10.50
(970-810) = 160 160 units * $10.5 per $1,680
Page 7 of 13

units unit
Page 8 of 13

EXERCISE 5-5A (cont.)
b.
Note: The purchase entries are the same for all three
methods.
The Shirt Shop
General Journal
Date Account Title Debit Credit
Jan 20 Inventory $3,200
Cash $3,200
Apr 21 Inventory $2,000
Cash $2,000
July 25 Inventory $3,640
Cash $3,640
Sept 19 Inventory $1,350
Cash $1,350
(1) FIFO Sales and Cost of Goods Sold
Cash $24,300
Sales (810 units *$30 per unit) $24,300
Cost of Goods Sold $7,930
Inventory ($10,190 - $2,260) $7,930
(2) LIFO Sales and Cost of Goods Sold
Cash $24,300
Sales (810 units *$30 per unit) $24,300
Cost of Goods Sold $8,910
Inventory ($10,190 - $1,280) $8,910
(3) Weighted Average Sales and Cost of Goods Sold
Cash $24,300
Sales (810 units *$30 per unit) $24,300
Cost of Goods Sold $8,510
Inventory ($10,190 - $1,680) $8,510
Page 9 of 13

Page 10 of 13

EXERCISE 5-5A b. (cont.)
(1) FIFO
Inventory Sales
Cash
$10,190
Cost of Goods
Sold
$7,930
Balance c/d
Cash
$24,300
$2,260
Cost of Goods Sold
$10,190 $10
,190
Inventory$7,
930
Cash
Sales
$24,300
Inventory
$10,190
Balance c/d
$14
,110
$24,300 $24
,300
(2) LIFO
Inventory Sales
Cash
$10,190
Cost of Goods
Sold
$8,910
Balance c/d
Cash
$24,300
$1,280
Cost of Goods Sold
$10,190 $10
,190
Inventory$8,
Page 11 of 13

910
Cash
Sales
$24,300
Inventory
$10,190
Balance c/d
$14
,110
$24,300 $24
,300
(3) Weighted Average:
Inventory Sales
Cash
$10,190
Cost of Goods
Sold
$8,510
Balance c/d
Cash
$24,300
$1,680
Cost of Goods Sold
$10,190 $10
,190
Inventory$8,
510
Cash
Sales
$24,300
Inventory
$10,190
Balance c/d
$14
,110
$24,300 $24
,300
Page 12 of 13

EXERCISE 5-5A (cont.)
c.
FIFO
Sales $24,300
Less:
Cost of Goods Sold $7,930 $7,930
Gross Margin $16,370
LIFO
Sales $24,300
Less:
Cost of Goods Sold $8,910 $8,910
Gross Margin $15,390
Page 13 of 13