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saturnfireprincessTSHW
Dec 16, 2006, 06:49 PM
Hi! I'm a homeschooler and I'm stuck at the LIFO, FIFO, & average method in my accounting.
I have the answeres but I don't know how to get them. I need someone to explane in great detail!!!:) Here is the problem:


Cox Retail Store has gathered the following info. About a particular item that is regularly carried as part of its stock of merchandise.
BEGINNING INVENTORY: Units: 100 Units cost: $8.00
Purchases: Mar. 1st 200 $7.00
July 15 500 $6.00
SALES: Feb. 5 200
June 15 200
Sept. 20 200
PROBLEMS:
(1) If the AVERAGE method is used, Cox's Inventory would be- $1,300

(2) If the FIFO method is used, Cox's inventory would be- $1,200

(3) If the LIFO method is used, Cox's inventory would be- $1,500

(4) If the LIFO method is used the cost of goods would be- $3,700

(5) If the FIFO method is used the cost of goods would be- $ 4,000

(6) If the average method is used, the cost of goods will be- $3,900

OK. And Here is something else I need some help with:


Playthings Inc. has operated with an average rate of gross profit of 40% sales. Sales from Jan. 1st until a fire destroyed the business on Mar. 15 totaled $48,000. The inventory on Jan. 1 was $12,000 and purchases during the period totaled $30,000. An insurance claim for merchandise destroyed was ________________?
($28,000) or ($19,200) or ($13,200) or ($12,000)

I need to no the answere to this one AND it needs to be explaned to me!
I would greatly appreciate it if somebody would help me out!!!!!;)

:D

CaptainForest
Dec 16, 2006, 10:42 PM
Let's say you buy 100 units @ $2 per unit today. And in 4 days you buy another identical 100 units but @ $3 per unit. Then you go and sell 100 units. Which of the 200 total units did you sell? The ones @ $2 or $3 or a mixture?

FIFO
First in First out. That means the first ones you buy are deemed to be the first ones you sell.

So, let's take a look at the problem you posted.

BEGINNING INVENTORY:
Units: 100 Units cost: $8.00
Purchases: Mar. 1st 200 $7.00
July 15 500 $6.00
SALES: Feb. 5 200
June 15 200
Sept. 20 200

Therefore, how many units do you have left at the end of the year?

Beginning of 100 + Purchases of 200 and 500 – Sales of 200 and 200 and 200 = 200 units left at the end of the year.

Therefore, since the OLD stuff went first, the 200 units are deemed to be the NEW stuff under the FIFO method.

So our last purchase was for 500 units @ $6 so therefore the inventory we have left is:

FIFO inventory = 200 units x $6 = $1,200

And what would the cost of goods be?

Well, if we sold 600 units, it is the FIRST 600 units we have on the books.

So we have 100 units @ $8 and then another 200 units @ $7 and then another 500 units @ $6.

So:
100 units @ $8 = 800
200 units @ $7 = 1,400

Now only 300 of the 500 since we only need a total of 600 units…
300 units @ $6 = 1,800

Total Cost of Goods = 800 + 1,400 + 1,800 = $4,000



Now let's move on to the LIFO method.

The LIFO method is virtually identical to the FIFO method except instead of First in First Out, it is Last in First Out.

Therefore, it is assumed that the last products you buy will be sold first.

Inventory is still 200 units left but this time it is:
100 units @ $8 = 800
100 of the 200 units @ $7 = 700

LIFO Inventory = 800 + 700 = $1,500

Cost of Goods:
Still 600 units, but this time at:
500 units @ $6 = 3,000
And 100 of 200 units @ $7 = 700

LIFO Cost of Goods = 3,000 + 700 = $3,700



Now let's move on to the average method.

Basically, this method says, lets take an average of the inventory and deal with it that way.

So the average value of all the inventory is:
100 units @ $8 = $800
200 units @ $7 = $1,400
500 units @ $6 = $3,000

Total inventory = $800 + $1,400 + $3,000 = $5,200 for 800 units.

Therefore, each unit is $5,200 / 800 = $6.50

Average Method Inventory:

We still only have the 200 units left, that does not change.

This time they are valued at 200 x 6.50 = $1,300

Average Method Cost of Goods:
We still have 600 units sold and since we are deeming all units to cost $6.50, then the calculation is 600 x 6.50 = $3,900

CaptainForest
Dec 16, 2006, 10:50 PM
So the second question asks us what is the total value of the merchandise that was destroyed?

Let x equal the total amount of sales that the company makes.
Sales = x
Cost of Goods Sold = ?
Gross Profit = 0.40x (b/c they tell us that Gross Profit is 40% of the sales)

Now they tell us that sales b/w Jan. 1 and the Mar. 15 fire were $48,000

So…

Sales = 48,000
Cost of Goods Sold = ?
Gross Profit = 48,000 x .40 = 19,200

Therefore, Cost of Goods Sold MUST BE 48,000 – 19,200 = $28,800


Now on to the inventory:
The beginning inventory was $12,000
Plus, the purchases of $30,000
Less, what we sold which is $28,800 as calculated above

That leaves us with an insurance claim for lost inventory of 12,000 + 30,000 – 28,800 = $13,200