Financial Accounting-II -Inventories and Cost of goods sold (COGS)
PU BBA | BBA-BI | BBA-TT 2nd Semester
PU 2010 Fall Q. No. 1a
Everest Company’s inventory records for the month of November reveal the following:
| Inventory, November 1 | 300 units @ Rs. 27 |
| November 4, purchase | 375 units @ Rs. 26.50 |
| November 7, sales | 450 units @ Rs. 63 |
| November 13, purchase | 330 units @ Rs. 26 |
| November 18, purchase | 250 units @ Rs. 25.40 |
| November 22, sales | 570 units @ Rs. 63.75 |
| November 24, purchase | 300 units @ Rs. 25 |
| November 28, sales | 165 units @ Rs. 64.50 |
Selling and administrative expenses for the month were Rs. 16,200. Depreciation expense was Rs. 6,000. Everest Company’s tax rate is 35%.
Required:
a. Calculate the cost of goods sold and ending inventory under each of the following three methods (assume a periodic inventory system):
(i) FIFO, (ii) LIFO, and (iii) weighted average [4]
b. Calculate the gross margin and net income under each costing assumption. [2]
c. Under which costing method will Everest pay the least amount of taxes? [2]
Solution:
Under Periodic inventory system
Calculation of cost of goods sold and cost of ending inventory
Calculation of cost of goods sold available for sale
| Date of purchase | Units purchased | Unit cost | Total cost (Rs.) |
| November 1 November 4 November 13 November 18 November 24 | 300 375 330 250 300 | 27 26.50 26 25.40 25 | 8,100 9,937.50 8,580 6,350 7,500 |
| Total | 1,555 | 40,467.5 |
Cost of goods available for sale = Rs. 40,467.5
Units available for sale = 1,555 units
Units sold = 450 + 570 + 165 = 1,185 units
Sales revenue = 450 @ Rs. 63 + 57 @ Rs. 63.75 + 165 @ Rs. 64.50 = Rs. 75,330
i.
Under the FIFO method
Cost of goods sold schedule
| Date of purchase | Units sold | Unit cost | Total cost (Rs.) |
| November 1 November 4 November 13 November 18 | 300 375 330 180 | 27 26.50 26 25.40 | 8,100 9,937.50 8,580 4,572 |
| Total | 1,185 | 31,189.5 |
Cost of ending inventory
| Date of purchase | Units on hand | Unit cost | Total cost (Rs.) |
| November 24 November 18 | 300 70 | 25 25.40 | 7,500 1,778 |
| Total | 370 | 9,278 |
ii.
Under the LIFO method
Cost of goods sold schedule
| Date of purchase | Units sold | Unit cost | Total cost (Rs.) |
| November 24 November 18 November 13 November 4 | 300 250 330 305 | 25 25.40 26 26.50 | 7,500 6,350 8,580 8,082.5 |
| Total | 1,185 | 30,512.5 |
Cos of ending inventory
| Date of purchase | Units hand | Unit cost | Total cost (Rs.) |
| November 4 Nov. 1 | 70 300 | 26.50 27 | 1,855 8,100 |
| Total | 370 | 9,955 |
iii.
Under the weighted average method (WAC)
WAC = Cost of goods available for sale / Units available for sale = 40,467.5 / 1,555 = Rs. 26.02
Cost of goods sold = WAC * Units sold = 26.02 * 1,185 = Rs. 30,833.7
Cost of ending inventory = WAC * Units on hand = 26.02 * 370 = Rs. 9,627.4
b.
Everest Company
Comparative Income statement
| Particulars | FIFO | LIFO | WAC |
| Sales revenue Less: Cost of goods sold | 75,330 31,189.5 | 75,330 30,512.5 | 75,330 30,833.7 |
| Gross margin Less: Operating expenses: Selling & administrative expenses Depreciation expenses | 44,140.5 16,200 6,000 | 44,512.5 16,200 6,000 | 44,496.3 16,200 6,000 |
| Net profit before tax Less: Tax @ 35% | 21,940.5 7,679.18 | 22,312.5 7,809.38 | 22,296.3 7,803.71 |
| Net income | 14,261.32 | 14,503.12 | 14,492.59 |
c. Under the FIFO method, Everest will pay the least tax. It is because the FIFO method has a higher cost of goods sold than other methods