Financial Accounting-II -Inventories and Cost of goods sold (COGS)
LIFO FIFO WAC method example
PU BBA | BBA-BI | BBA-TT 2nd Semester
PU 2010 Spring Q. No. 1
Following information pertains to Acer Co. for the month of January, 2010.
- Beginning inventory is 125 units @ Rs. 10.
- Operating expenses for the month is Rs. 1,500.
- Tax rate for the company is 30%.
- Following table pertains the information about purchase and sale of inventory for Jan. 2010.
| Date | Purchase | Sale |
| Jan 3 Jan 9 Jan 14 Jan 19 Jan 23 Jan 25 Jan 31 | 100 @ Rs. 11 – 125 @ Rs. 12 100 @ Rs. 13 – 150 @ Rs. 15 – | – 150 @ Rs. 20 – – 200 @ Rs. 20 – 150 @ Rs. 20 |
Required:
a. Prepare the cost of goods sold and ending inventory under LIFO, FIFO, and weighted costing method. [9]
b. Prepare income statement under LIFO, FIFO, and weighted average costing method and which method does provide low tax expenses. [5+1)
Solution:
Under the periodic inventory system
Here, Units sold = 150 + 200 + 150 = 500 units
Sales revenue = 150 @ Rs. 20 + 200 @ Rs. 20 + 150 @ Rs. 20 = Rs. 10,000
Calculation of cost of goods available for sale
| Date of purchase | Units purchased | Unit cost | Total cost (Rs.) |
| Beginning inventory Jan 3 Jan 14 Jan 19 Jan 25 | 125 100 125 100 150 | 10 11 12 13 15 | 1,250 1,100 1,500 1,300 2,250 |
| Total | 600 | Rs. 7,400 |
a.
Calculation of cost of goods sold and cost of ending inventory
Under the FIFO method
Calculation of cost of goods sold
| Date of purchase | Units sold | Unit cost | Total Cost (Rs.) |
| Beginning inventory Jan 3 Jan 14 Jan 19 Jan 25 | 125 100 125 100 50 | 10 11 12 13 15 | 1,250 1,100 1,500 1,300 7,50 |
| Total | 500 | Rs. 5,900 |
Calculation of cost of ending inventory
| Date of purchase | Units on hand | Unit cost | Total cost (Rs.) |
| Jan 25 | 100 | 15 | 1,500 |
| Total | 100 | Rs. 1,500 |
Under the LIFO method
Calculation of cost of goods sold
| Date of purchase | Units sold | Unit cost | Total cost (Rs.) |
| Jan 25 Jan 19 Jan 14 Jan 3 Beginning inventory | 150 100 125 100 25 | 15 13 12 11 10 | 2,250 1,300 1,500 1,100 250 |
| Total | 500 | Rs. 6,400 |
Cost of ending inventory
| Date of purchase | Units on hand | Unit sold | Total cost (Rs.) |
| Beginning inventory | 100 | 10 | 1,000 |
| Total | 100 | Rs. 1,000 |
Under the weighted average costing (WAC) method
WAC per unit = Cost of goods available for sale / Units available for sale = 7,400 / 600 = Rs. 12.33
Cost of goods sold (COGS)= WAC * units sold = 12.33 * 500 = Rs. 6,165
Cost of ending inventory = WAC * units on hand = 12.33 * 100 = Rs. 1,233
b.
Acer Co.
Comparative Income Statement
Jan. 31, 2010
| Particulars | FIFO | LIFO | WAC |
| Sales revenue Less: Cost of goods sold | 10,000 5,900 | 10,000 6,400 | 10,000 6,165 |
| Gross profit Less: Operating expenses | 4,100 1,500 | 3,600 1,500 | 3,835 1,500 |
| Net profit before tax Less: Tax @ 30% | 2,600 780 | 2,100 630 | 2,335 700.5 |
| Net income | 1,820 | 1,470 | 1,634.5 |
From the above calculation, the LIFO method provides less tax. It is because it has a higher cost of goods sold than other methods.