Financial Accounting-II -Inventories and Cost of goods sold (COGS)
LIFO and FIFO and comparative income statement example
PU BBA | BBA-BI | BBA-TT 2nd Semester
PU 2012 Fall Q. No. 1
The Butawal Furniture Company sold 900 chairs during the year at Rs. 1,600, each. It had a beginning inventory on January 1, 2007, of 200 chairs at a cost of Rs. 1,000 each. The following purchases were made during the year December 31, 2007.
March 200 chairs @ Rs. 1,100
August 300 chairs @ Rs. 1,300
June 100 chairs @ Rs. 1,200
November 200 chairs @ Rs. 1,400
The company incurred operating expense of Rs. 1,60,000 during the year. The company uses the periodic inventory system.
Required:
a. Compute the value of ending inventory and cost of goods sold using LIFO and FIFO method. [5+5]
b. If tax rate is 40%, which method provides more profit? Show your calculation with income statement. [1 + 4]
Solution:
Using the periodic inventory system
Calculation of cost of goods available for sale
| Date of purchase | Units purchased | Unit cost | Total cost (Rs.) |
| Beginning inventory March June August November | 200 200 100 300 200 | 1,000 1,100 1,200 1,300 1,400 | 2,00,000 2,20,000 1,20,000 3,90,000 2,80,000 |
| Total | 1,000 | 12,10,000 |
a.
Calculation of cost of ending inventory and cost of goods sold
Under the FIFO method
Calculation of cost of goods sold
| Date of purchase | Units sold | Unit cost | Total cost (Rs.) |
| Beginning inventory March June August November | 200 200 100 300 100 | 1,000 1,100 1,200 1,300 1,400 | 2,00,000 2,20,000 1,20,000 3,90,000 1,40,000 |
| Total | 900 | 10,70,000 |
Calculation of cost of ending inventory
| Date of purchase | Units on hand | Unit cost | Total cost (Rs.) |
| November | 100 | 1,400 | 1,40,000 |
| Total | 100 | 1,40,000 |
Under the LIFO method
Calculation of cost of goods sold
| Date of purchase | Units sold | Unit cost | Total cost (Rs.) |
| Nov. August June March Beginning inventory | 200 300 100 200 100 | 1,400 1,300 1,200 1,100 1,000 | 2,80,000 3,90,000 1,20,000 2,20,000 1,00,000 |
| Total | 900 | 11,10,000 |
Calculation of cost of ending inventory
| Date of purchase | Units on hand | Unit cost | Total cost (Rs.) |
| Beginning inventory | 100 | 1,000 | 1,00,000 |
| Total | 100 | 1,00,000 |
b.
Butawal Furniture Company
Comparative income statement
| Particulars | FIFO | LIFO |
| Sales revenue (900 chairs @ Rs. 1,600) Less: Cost of goods sold | 14,40,000 10,70,000 | 14,40,000 11,10,000 |
| Gross profit Less: Operating expense | 3,70,000 1,60,000 | 3,30,000 1,60,000 |
| Net Profit before tax Less: Tax @ 40% | 2,10,000 84,000 | 1,70,000 68,000 |
| Net profit | 1,26,000 | 1,02,000 |
From the above calculation, the FIFO method provides more profit to the company having a lower cost of goods sold.