T6 - Chapter 6: Inventories and cost of sales 1. FIFO,...

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1 Chapter 6: Inventories and cost of sales 1. FIFO, LIFO, weighted average and specific identification in perpetual inventory system: Problem 6-1A (TB) Refer to TB225 for the questions ANSWER: (1) Cost of goods AVAILABLE FOR SOLD (NOT SOLD!) = opening + purchases = 41 units ($23300) (2) Closing inventory = 41 – 29 = 12 units (3) Value of closing inventory (and cost of goods sold as well will DEPEND ON the cost flow assumption adopted) For FIFO: CGS = 5 x $500 + 16 x $550 + 4 x $550 + 4 x $600 = $15900 CI = $23300 - $15900 = $7400 Checking the answer of CI: count the value of closing inventory! For LIFO: 20 x $550 + 1 x $500 + 8 x $620 = $16460 CI = $23300 - $16460 = $6840 For WA: WA cost for sales on Jan 9 = (5 x $500 + 20 x $550) / 25 = $540 x 21 = $11340 WA cost for sales on Jan 29 = (4 x $540 + 6 x $600 + 10 x $620) / 20 = $598 x 8 = $4784 CI = $23300 - $11340 - $4784 = $7176 For specific identification CGS = 4 x $500 + 17 x $550 + 2 x $600 + 6 x $620 = $16270 CI = $23300 - $16270 = $7030 4. FIFO LIFO Weighted Average Specific Identifi-catio n Sales* . ................................................... $25,450 $25,450 $25,450 $25,450 Less: Cost of goods sold . ....................... 15,900 16,460 16,124 16,270 Gross profit . .......................................... $ 9,550 $ 8,990 $ 9,326 $ 9,180 NOTE ON LIFO: 1. In Hong Kong, under HKAS 2 Inventories, LIFO is not allowed and hence LIFO CANNOT be used in BOTH external reporting and tax computation purpose. 2. In general, LIFO will yield the lowest gross profit because of positive inflation effect. ($1 today has a higher spending power than $1 in future)
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2 2. Ownership of inventory The value of inventory in your warehouse at the financial year – end is NOT necessarily the closing inventory of your company. You will have to consider situation like:
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This note was uploaded on 11/22/2011 for the course BUSI 1002 taught by Professor Liu during the Fall '10 term at HKU.

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T6 - Chapter 6: Inventories and cost of sales 1. FIFO,...

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