[ronda57368]

Lakia Corporation reported the following current-year purchases and sales data for its only product:
Date Activities Units Acquired at Cost Units Sold at Retail
Jan.1 Beginning Inventory 120 Units @ $6.00 = $720
Jan. 10 Sales 70 Units @ $15
Mar. 7 Purchase 200 Units @ $5.50 = 1,100
Mar. 15 Sales 125 Units @ $15
July 28 Purchase 500 Units @ $5.00 = 2,500
Oct. 3 Purchase 375 Units @ $4.40 = 1,650
Oct. 5 Sales 600 Units @ $15
Dec. 19 Purchase 100 Units @ $4.10 = 410
Totals 1,295 Units $6,380 795 Units
------------- -------- -----------

Lakia uses a perpetual inventory system. Ending inventory consists of 500 units, 400 from the July 28 purchase and 100 from the December 19 purchase. Determine the cost assigned to ending inventory and to cost of goods sold using (a) specific identification, (b) weighted average, (c) FIFO, and (d) LIFO.

(a)
(b) $2,350
(c)
(d) $2,498

[smokedetector]

Here are my notes, and hopefully they help.

Average Cost:

(cost of goods available for sale)/(Units available for sale)=Avg unit cost
(avg unit cost)x(ending inventory)=cost of ending inventory
(Cost of goods available for sale)-(cost of ending inventory)=cost of goods sold


FIFO:

1) (Goods Available for sale)-(sales)=ending inventory
2) (ending inventory)-->allocate to most recent prices = cost of ending inventory
(for example, if you bought 100 @ $10 on June 1st and 200 @ 20 on June 15, and you have 150 ending inventory, you allocate all 150 to the latest price, $20. However, if you bought 200 @ $10 on June 1st and 100 @ $20 on June 15, and you have 150 ending inventory, you allocate 100 @ $20 and the remaining 50 @$10... if this doesn't make sense, let me know and I'll try to explain better)
3) (Cost of Goods available for sale)-(Cost of ending inventory)=Cost of goods sold


LIFO:

is basically fifo except when you allocate the ending inventory, you assign it to the first price you paid, rather than the last

[morgaine300]

(a) Is actually easy. Specific identification is going to give you the very specific units which are in ending inventory. You have 400 left from the 7/28 purchase. What was their cost? And therefore how much is 400 of them? You also have 100 from the 12/19 purchase. What was their cost? And therefore how much is 100 of them? And you add them together because all 500 are in your ending inventory.

Since all the ones available for sale (1295 units -- you'll have to pick out those purchases and add up the total cost), have to either go away or stay, then the ones gone (cost of goods sold) and the ones that stayed (ending inventory) have to add up to that original total.
i.e. available for sale - cost of goods sold = ending inventory
and available for sale - ending inventory = cost of goods sold

ALWAYS. This works for all methods. For the specific identification, it's much faster to get the ending inventory first and then subtract to get cost of goods sold.

(b) You're off, but I could tell you where you went wrong more easily if you showed your work.

(c) What smokedetector said ONLY works for FIFO when you're doing perpetual. That's because what he (he?) described is really how you would want to do periodic, not perpetual. It just so happens that for FIFO only, it comes out the same either way. But if you have to show your work, you won't get away with it.

(d) You have to know how to do perpetual properly in order to get this one, cause the method described for (c) won't work for LIFO. (Occasionally it might work depending on circumstances, but usually won't.) And this is pretty difficult to describe in writing like this, without being able to sit down in person and do it. Since I'm trying to make up some explanations and examples for a FAQs section eventually anyway, I will use this opportunity to make an Excel file with a LIFO perpetual example in it, which is attached. I tend to like to color-code things so that people can follow what I'm doing with what. (Or maybe I just like to play with the colors. :-))