Question

Kirtland Corporation uses a periodic inventory system. At the end of the annual accounting period, December 31, 2012, the accounting records for the most popular item in inventory showed the following:

Transactions Units Unit Cost
Beginning inventory, January 1, 2012 400 $3.00
Transactions during 2012:
a. Purchase, January 30 600 3.2
b. Purchase, May 1 460 3.5
c. Sale ($5 each) -160
d. Sale ($5 each) -700
Compute the amount of (a) goods available for sale, (b) ending inventory, and (c) cost of goods sold at December 31, 2012, under each of the following inventory costing methods:

1. Average cost.

2. First-in, first-out.

3. Last-in, first-out.

Answer 1

Under average cost, FIFO, and LIFO inventory costing methods, the calculations for ending inventory and cost of goods sold differ because they use different techniques to assign costs to inventory units.

Step-by-step explanation:

Kirtland Corporation uses a periodic inventory system and we need to calculate the goods available for sale, ending inventory, and cost of goods sold using different inventory costing methods.

Calculations under Average Cost Method:

Goods available for sale = (400 units x $3) + (600 units x $3.2) + (460 units x $3.5) = Total Cost of Inventory.

Average cost per unit = Total Cost of Inventory / Total Units Available for Sale.

Ending Inventory and Cost of Goods Sold (COGS) are calculated using the Average Cost per unit.

Calculations under FIFO (First-in, First-out):

Ending Inventory is calculated based on the cost of the latest units purchased.

COGS is calculated based on the cost of the oldest units available.

Calculations under LIFO (Last-in, First-out):

Ending Inventory is based on the cost of the oldest units purchased.

COGS is calculated using the cost of the newest units first.

Under average cost, FIFO, and LIFO methods, the calculations for goods available for sale, ending inventory, and COGS vary because of the cost assigning technique. The periodic inventory system uses historical cost information, hence different costing methods result in different financial outcomes.