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LIFO and FIFO method. XYZ Company - periodic inventory

XYZ Company uses the periodic inventory method and had the following inventory information available:
Units Unit Cost Total Cost
1/1 Beginning Inventory 100 $4 $ 400
1/20 Purchase 400 $5 2,000
7/25 Purchase 300 $6 1,800
10/20 Purchase 200 $7 1,400
1,000 $5,600

A physical count of inventory on December 31 revealed that there were 300 units on hand.

Instructions
Answer the following independent questions and show computations supporting your answers.
1. Assume that the company uses the FIFO method. The value of the ending inventory at December 31 is $__________.

2. Assume that the company uses the Average Cost method. The value of the ending inventory on December 31 is $__________.

3. Assume that the company uses the LIFO method. The value of the ending inventory on December 31 is $__________.

4. Determine the difference in the amount of income that the company would have reported if it had used the FIFO method instead of the LIFO method. Would income have been greater or less?

Solution Preview

Question 1
If the company is using FIFO, it is assumed that the sales come from the first purchases (in chronological order).

Let's calculate the exact values. The firm had 1,000 units of the good, counting the beginning inventory and the purchases. The inventory at the end of the year showed that there were 300 units left. Therefore, the firm sold 700 units during the year. Now, under the FIFO method, these units have to come from the earliest possible purchases.

- Beginning inventory: 100 units
- First purchase: 400 units (total = 500 units - not enough to cover the 700 units)
- Second purchase: 300 units (total = 800 units - now it's enough)

Therefore, using this method, the firm assumes it ...

Solution Summary

A sentence or two with each computation so you can learn the logic and rules.

$2.19