FIFO vs LIFO vs Weighted Average Cost Flow
Added on 2019-09-16
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Part 11.WhiIe preparing year end financials, FIFO Method shall be used as a method to account theinventory mainly due to its wider acceptance and recognition. This method is justifiable due toits advantages which are as follows:1.In industries where expiry date of the product plays a major role, earlier batches ofinventory are cleared first due to its limited period usage. FIFO is the most appropriatemethod to such industries which takes into consideration the time frame.2.It becomes easier to maintain accounts under FIFO where ERP systems are notimplemented due to its high costs.Major Disadvantage:1.It does not give the real time cost of the products in industries which are traded ascommodities.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 trueposition at a given point of time. For ex, when inventory is slow moving, it is a matter of worryas it might convert to dead stock. A manufacturer or trader cannot run/sustain in business withouthaving inventory.Page 1 of 13
Part 2Week 4Answer KeyTextbook: 9th EditionEXERCISE 5-1Aa. LIFOb. Weighted Averagec. FIFOd. LIFO e. FIFOEXERCISE 5-2AJones Co.First Purchase(Cost)$ 1,060Second Purchase(Cost)$ 1,380Total Product Cost$ 2,440(a)(b)(c)FIFOLIFOW. AVG.Cost of Goods Sold$ 1,060$ 1,380$ 1,220Ending Inventory$ 1,380$ 1,060$ 1,220Page 2 of 13
EXERCISE 5-3AThe Cortez Company Inventory PurchasesOpening Inventory100@$ 60=$6,000First Batch Purchases150@$ 68=$10,200Second BatchPurchases200@$ 72=$14,400Goods Available forSale450$30,600a.Cost of Goods Sold:FIFOUnitsUnitCostCost of GoodsSoldOpening Inventory100@$ 60=$ 6,000First Batch150@$ 68=$ 10,200Second Batch20@$ 72=$ 1,440$ 17,640Ending Inventory: FIFOUnitsUnitCost EndingInventorySecond Batch180@$ 72=$ 12,960b. Cost of Goods SoldLIFOUnitsUnitCost Cost of GoodsSoldSecond Batch200@$ 72=$ 14,400First Batch70@$ 68=$ 4,760$ 19,160Ending InventoryLIFOUnitsUnitCost EndingInventoryPage 3 of 13
First Batch80@$ 68=$ 5,440Opening Inventory100@$ 60=$ 6,000$ 11,440c.Weighted Average:Value of Goodsavailable for SaleNo ofUnitsavailablefor sale=WeightedAverage Costper unit$ 30,600450=$ 68Cost of Goods Sold270@$ 68=$ 18,360Year End Inventory180@$ 68=$ 12,240EXERCISE 5-4Aa. (1) Mason CompanyFIFOSales370 units * $90$33,300Cost of Goods Sold:BeginningInventory90 units * $40=$3,600Purchased Units280 units * $45=$12,600$16,200Gross Margin$17,100a. (2)LIFOSales370 units * $90$33,300Cost of Goods Sold:Beginning60 units * $40=$2,400Page 4 of 13
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