The total cost of these units was 12000a physical

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the period.The total cost of these units was $12,000.A physical inventory at the end of the year determined that during the year Houston sold 550 units and had 450 units in inventory at December 31. The question then is how to determine what prices to use to value the goods sold and the ending inventory.The sum of the cost allocated to the units sold plus the cost of the units in inventory must be $12,000, the total cost of all goods available for sale. FIRST-IN, FIRST-OUT (FIFO) The FIFO (first-in,first-out) method assumes that the earliest goods purchased are the first to be sold. FIFO often parallels the actual physical flow of merchandise; it gener- ally is good business practice to sell the oldest units first. Under the FIFO method, therefore, the costs of the earliest goods purchased are the first to be recognized E T H I C S N O T E A major disadvantage of the specific identification method is that management may be able to manipulate net income. For example, it can boost net income by selling units purchased at a low cost, or reduce net income by selling units purchased at a high cost. PDF Watermark Remover DEMO : Purchase from to remove the watermark
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in determining cost of goods sold. (This does not necessarily mean that the oldest units are sold first, but that the costs of the oldest units are recognized first. In a bin of picture hangers at the hardware store, for example, no one really knows, nor would it matter, which hangers are sold first.) Illustration 6-5 shows the allocation of the cost of goods available for sale at Houston Electronics under FIFO. 256 Chapter 6 Inventories Illustration 6-5 Allocation of costs—FIFO method COST OF GOODS AVAILABLE FOR SALE Date Explanation Units Unit Cost Total Cost Jan. 1 Beginning inventory 100 $10 $ 1,000 Apr. 15 Purchase 200 11 2,200 Aug. 24 Purchase 300 12 3,600 Nov. 27 Purchase 400 13 5,200 Total 1,000 $12,000 STEP 1: ENDING INVENTORY STEP 2: COST OF GOODS SOLD Unit Total Date Units Cost Cost Nov. 27 400 $13 $5,200 Cost of goods available for sale $12,000 Aug. 24 50 12 600 Less: Ending inventory 5,800 Total 450 $5,800 Cost of goods sold $ 6,200 Cost of goods sold $6,200 $1,000 $2,200 $5,200 $600 $3,000 Ending inventory Warehouse $5,800 H E L P F U L H I N T Note the sequencing of the allocation: (1) Compute ending inventory, and (2) deter- mine cost of goods sold. H E L P F U L H I N T Another way of thinking about the calculation of FIFO ending inventory is the LISH assumption last in still here. Under FIFO, since it is assumed that the first goods purchased were the first goods sold, ending inventory is based on the prices of the most recent units pur- chased. That is, under FIFO, companies obtain the cost of the ending inventory by taking the unit cost of the most recent purchase and working backward until all units of inventory have been costed . In this example, Houston Electronics prices the 450 units of ending inventory using the most recent prices.The last purchase was 400 units at $13 on November 27. The remaining 50 units are priced using the unit cost of the second most recent purchase, $12, on August 24. Next, Houston
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