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Question 11E

Expert-verified
Found in: Page 426

### Intermediate Accounting (Kieso)

Book edition 16th
Author(s) Donald E. Kieso, Jerry J. Weygandt, Terry D. Warfield
Pages 1552 pages
ISBN 9781118743201

# John Adams Company’s record of transactions for the month of April was as follows.Purchases SalesApril 1 (balance on hand) 600 @ $6.00 April 3 500 @$10.004 1,500 @ 6.08 9 1,400 @ 10.008 800 @ 6.40 11 600 @ 11.0013 1,200 @ 6.50 23 1,200 @ 11.0021 700 @ 6.60 27 900 @ 12.0029 500 @ 6.79 4,6005,300Instructions(a) Assuming that periodic inventory records are kept in units only, compute the inventory at April 30 using (1) LIFO and(2) average-cost.(b) Assuming that perpetual inventory records are kept in dollars, determine the inventory using (1) FIFO and (2) LIFO.(c) Compute the cost of goods sold assuming periodic inventory procedures and inventory priced at FIFO.(d) In an inflationary period, which inventory method—FIFO, LIFO, average cost—will show the highest net income?

Value of closing inventory would be highest under FIFO, and the value of COGS would be highest under LIFO.

See the step by step solution

## Value of ending inventory under the periodic system

a) Value of ending inventory using LIFO

b) Value of ending inventory using average cost

 Units Rate Amount Beginning Inventory 600 $6$3600 April 4 Purchase 1,500 $6.08$9120 April 8 Purchase 800 $6.40$5120 April 13 Purchase 1,200 $6.50$7800 April 21 Purchase 700 $6.60$4620 April 29 Purchase 500 $6.79$3395 Total 5,300 $33,655 ## Value of ending inventory under the perpetual system a) Using FIFO  Date Purchase Cost of Goods Sold Balance April 1 Beginning Balance (600 units @$6) $3,600 April 3 500 units @$6 -$3,000$600 April 4 1,500 units @ $6.08$9,120 $9,720 April 8 800 units @$6.40 $5,120$14,840 April 9 100 units @ $6 -$600 1300 units @ $6.08 -$7,904 $6,336 April 11 200 units @$6.08 -$1,216 400 units @$6.40 -$2,560$2,560 April 13 1200 units @ $6.50$7,800 April 21 700 units @ $6.60$4,620 $14,980 April 23 400 units @$6.40 -$2,560 800 units @$6.50 -$5,200$7,220 April 27 400 units @ $6.50 -$2,600 500 units @ $6.60 -$3,300 $1,320 April 29 500 units$6.79 $3,395$4,715

The value of closing inventory comes out to be $4,715. a) Using LIFO  Date Purchase Cost of Goods Sold Balance April 1 Beginning Balance (600 units @$6) $3,600 April 3 500 units @$6 -$3,000$600 April 4 1,500 units @ $6.08$9,120 $9,720 April 8 800 units @$6.40 $5,120$14,840 April 9 800 units @ $6.40 -$5,120 600 units @ $6.08 -$3,648 $6,072 April 11 600 units @$6.08 -$3,648$2,424 April 13 1200 units @ $6.50$7,800 April 21 700 units @ $6.60$4,620 $14,844 April 23 700 units @$6.60 -$4,620 500 units @$6.50 -$3,250$6,974 April 27 700 units @ $6.50 -$4,550 200 units @ $6.08 -$1,216 $1,208 April 29 500 units$6.79 $3,395$4,603

The value of closing inventory comes out to be \$4,603.

## Value of COGS under the periodic system using FIFO

a) Value of ending inventory using FIFO

## Inventory valuation method producing highest net income

The highest net income is the result of the lowest cost of goods sold. The cost of goods sold is the difference between the total available inventory and ending inventory. So, if the ending inventory is high in value, the COGS would be below. FIFO I is based on the historical cost among all the inventory valuing alternatives. Thus under this method, the value of COGS would not be affected due to inflation as inventories at the latest cost are left in the stock. So the COGS would always be lower.