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Financial Accounting-II -Inventories and Cost of goods sold (COGS)
FIFO LIFO example
PU BBA | BBA-BI | BBA-TT 2nd Semester
PU 2016 Fall Q. No. 11
Suyesh and Suyog (S & S) Co, a leading retail chain in the town and is using the periodic inventory system for an item of inventory. The following is an inventory acquisition schedule for the item during year 2009:
| Unit | Unit cost | |
| Beginning inventory Purchases: February 10 March 12 November 10 December 15 | 4,000 2,000 3,000 1,000 2,500 | Rs. 20 18 16 14 12 |
During the year, S & S Co has sold 11,500 units at Rs. 40 each. All expenses except cost o goods sold and taxes amounted to Rs. 61,000. The tax rate is 40%.
Required:
a. Compute cost of goods sold and ending inventory value under each of the following two methods (i) FIFO, and (ii) LIFO.
b. Prepare income statement under each of the method.
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Solution:
a.
Calculation of cost of goods available for sale
| Date of purchase | Units purchased | Unit cost | Total cost (Rs.) |
| Beginning inventory February 10 March 12 November 10 December 15 | 4,000 2,000 3,000 1,000 2,500 | 20 18 16 14 12 | 80,000 36,000 48,000 14,000 30,000 |
| Total | 12,500 | 2,08,000 |
Calculation of cost of goods sold and cost of ending inventory under FIFO and LIFO method
Under the FIFO method
Calculation of cost of goods sold
| Date of purchase | Units sold | Unit cost | Total cost (Rs.) |
| Beginning inventory February 10 March 12 November 10 December 15 | 4,000 2,000 3,000 1,000 1,500 | 20 18 16 14 12 | 80,000 36,000 48,000 14,000 18,000 |
| Total | 12,500 | 1,96,000 |
Calculation of cost of ending inventory
| Date of purchase | Units on hand | Unit cost | Total cost (Rs.) |
| December 15 | 1,000 | 12 | 12,000 |
| Total | 1,000 | 12,000 |
Under the LIFO method
Calculation of cost of goods sold
| Date of purchase | Units sold | Unit cost | Total cost (Rs.) |
| December 15 November 10 March 12 February 10 Beginning inventory | 2,500 1,000 3,000 2,000 3,000 | 12 14 16 18 20 | 30,000 14,000 48,000 36,000 60,000 |
| Total | 11,500 | 1,88,000 |
Calculation of cost of ending inventory
Cost of ending inventory = Cost of goods available for sale – Cost of goods sold = Rs. 2,08,000 – 1,88,000 = Rs. 20,000
b.
S & S Co
Comparative income statement
| Particulars | FIFO | LIFO |
| Sales revenue (11,500 @ Rs. 40) Less: Cost of goods sold | Rs. 4,60,000 1,96,000 | Rs. 4,60,000 1,88,000 |
| Gross profit Less: Operating expenses | 2,64,000 61,000 | 2,72,000 61,000 |
| Net income before tax Less: Tax @ 40% | 2,03,000 81,200 | 2,11,000 84,400 |
| Net income | 1,21,800 | 1,26,600 |