Inventory Transactions perpectual vs periodic systems The Lothridge Wholesale

Inventory transactions perpectual vs periodic systems

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Inventory Transactions-perpectual vs. periodic systemsThe Lothridge Wholesale Beverage Company purchases soft drinks from producers and then sells them to retailers. The company began 2016 with merchandise inventory of $120,000 on hand. During 2016, additional merchandise is purchased on account at a cost of $600,000. Lothridge’ssuppliers offer credit terms of 2/10, n/30. All discounts were taken. Lothridge uses the net method to record purchase discounts. All purchases are made f.o.b. shipping point. Freight charges paid by Lothridge totaled $16,000. Merchandise with a net of discount cost of $20,000 was returned to suppliers for credit. Sales for the year, all on account, totaled $830,000. The cost of the soft drinks sold is $550,000. $154,000 of inventory remained on hand at the end of 2016.
Inventory Transactions-perpectual vs. periodic systems (continued)
Inventory Cost Flow Assumptions Specific identification Average cost First-in, first-out (FIFO) Last-in, first-out (LIFO)
Refers to matching each unit sold during the period or each unit on hand at the end of the period with its actual cost Used by companies selling unique, expensive products with low sales volume This makes it relatively easy and economically feasible to associate each item with its actual cost Example: Automobiles have unique serial numbers that can be used to match a specific auto with the invoice identifying the actual purchase price Specific Identification Specific Identification Method
Applied by computing a moving average unit cost each time additional inventory is purchased The new average is determined after each purchase by: o summing the cost of the previous inventory balance and the cost of the new purchase o dividing this total cost by the number of units on hand The average cost is computed only at the end of the period Average Cost Method Periodic Average Cost: Perpetual Average Cost
that the units sold are the most recent units purchased ending inventory consists of the units acquired first Last-in, First-out (LIFO) LIFO assumes:
Comparison of Cost Flow Methods The average cost method produces amounts that fall in between the FIFO and LIFO amounts for both cost of goods sold and ending inventory During rising costs: o FIFO results in a lower cost of goods sold and higher ending inventory than LIFO During declining costs: o FIFO will result in a higher cost of goods sold and lower ending inventory than LIFO
Factors influencing method choice Physical Flow Income Taxes and Net Income LIFO Conformity Rule LIFO Reserves LIFO Liquidation

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