Cost flow assumptions and effects of inventory errors

Subject: Economics
Pages: 1
Word count: 327
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Assume that Cushing, Inc. uses a PERIODIC INVENTORY system. Calculate cost of goods sold and ending inventory under FIFO and LIFO.

Calculating cost of goods sold and ending inventory using LIFO

  • Feb 22: 70*16 = $ 1120
  • June 11: (130*16) + (20*15) = $ 2380
  • Nov 1: (140*15) + (50*13) = $ 2750

Total Cost of goods sold: $6250

Ending Inventory = Cost of goods available for sale – Cost of goods sold

= 6900 – 6250

Ending inventory = $650

Calculating cost of goods sold and ending inventory using FIFO

  • Feb 22: 70*13 = $910
  • June 11: (30*13) + (120*15) = $2190
  • Nov 1: (40*15) + (150*16) = $3000

Total Cost of goods sold: $6100

Ending Inventory = Cost of goods available for sale – Cost of goods sold

= 6900 – 6100

Ending inventory = $800

Assume that Cushing, Inc., uses a PERPETUAL INVENTORY system. Calculate cost of goods sold and ending inventory under FIFO and LIFO.

Calculating cost of goods sold and ending inventory using LIFO

  • Feb 22: 70*13 = $910
  • June 11: 150*15= $2250
  • Nov 1: 190*16= $3040

Total Cost of goods sold: $6200

Ending Inventory = Cost of goods available for sale – Cost of goods sold

=    6900 – 6200

Ending inventory = $700

Calculating cost of goods sold and ending inventory using FIFO

  • Feb 22: 70*13 = $ 910
  • June 11: (30*13) + (120*15) = $ 2190
  • Nov 1: (40*15) + (150*16) = $ 3000

Total Cost of goods sold: $6100

Ending Inventory = Cost of goods available for sale – Cost of goods sold

=    6900 – 6100

Ending inventory = $800

Explain why the FIFO results for cost of goods sold and ending inventory are the same in your answers to parts A. and B., but the LIFO results are different.

(Ans)-  When we calculate Cost of Goods Sold (CGS) using FIFO, no matter what method we use, the earliest price of available goods is used no matter how many other buying transactions occur in the mean time. However while using LIFO; whenever we make a new purchase transaction, the cost per unit value changes to that of the latest purchase.

Explain why the results from the LIFO periodic calculations in part A. cannot possibly represent the actual physical flow of inventory items.

(Ans)- Results using LIFO periodic calculations cannot be actual because in this case, the items are bought and sold frequently. Prices of such items are unstable and change often with a significant difference thus the values being used to calculate profit/loss margin will be faulty.

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