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McLean Company Inc. had a beginning inventory of 300 units of Product MLN at a cost of $8 per unit. During the year, purchases were:

Feb. 20 700 units at $ 9
Aug. 12 600 units at $11
May 5 500 units at $10
Dec. 8 100 units at $12 McLean Company uses a periodic inventory system. Sales totaled 1,800 units. Instructions
(a) Determine the cost of goods available for sale.
(b) Determine the ending inventory and the cost of goods sold under each of the assumed cost flow methods (FIFO, LIFO, and average cost). Prove the accuracy of the cost goods sold under the FIFO and LIFO methods
(c) Which cost flow method results in the lowest inventory amount for the balance sheet? The lowest cost of goods sold for the income statement?

1 Answer

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(a) the cost of goods available for sale is $21,500.

Beginning inventory: 300 units * $8 per unit = $2,400

Purchases:

Feb. 20: 700 units * $9 per unit = $6,300

Aug. 12: 600 units * $11 per unit = $6,600

May 5: 500 units * $10 per unit = $5,000

Dec. 8: 100 units * $12 per unit = $1,200

Total cost of purchases: $6,300 + $6,600 + $5,000 + $1,200 = $19,100

Cost of goods available for sale = Beginning inventory + Total cost of purchases

Cost of goods available for sale = $2,400 + $19,100 = $21,500

Therefore, the cost of goods available for sale is $21,500.

(b) To determine the ending inventory and cost of goods sold under each cost flow method, we will calculate them using FIFO, LIFO, and average cost methods.

FIFO (First-In-First-Out):

Ending Inventory: The 100 units purchased on December 8 at $12 per unit, as they are the latest purchases.

Ending Inventory = 100 units * $12 per unit = $1,200

Cost of Goods Sold: Beginning inventory and earlier purchases are considered.

Cost of Goods Sold = Cost of Goods Available for Sale - Ending Inventory

Cost of Goods Sold = $21,500 - $1,200 = $20,300

LIFO (Last-In-First-Out):

Ending Inventory: The 100 units purchased on December 8 at $12 per unit, as they are the earliest purchases.

Ending Inventory = 100 units * $12 per unit = $1,200

Cost of Goods Sold: Beginning inventory and earlier purchases considered.

Cost of Goods Sold = Cost of Goods Available for Sale - Ending Inventory

Cost of Goods Sold = $21,500 - $1,200 = $20,300

Average Cost:

Ending Inventory: Average cost per unit is calculated by dividing the total cost of goods available for sale by the total number of units available.

Average cost per unit = Total cost of goods available for sale / Total units available

Average cost per unit = $21,500 / (300 + 700 + 600 + 500 + 100) = $8.21 (rounded to two decimal places)

Ending Inventory = Number of units in ending inventory * Average cost per unit

Ending Inventory = 100 units * $8.21 per unit = $821

Cost of Goods Sold: Beginning inventory and earlier purchases are considered.

Cost of Goods Sold = Cost of Goods Available for Sale - Ending Inventory

Cost of Goods Sold = $21,500 - $821 = $20,679

To prove the accuracy of the cost of goods sold under the FIFO and LIFO methods, we can observe that in this scenario, since there are no changes in the cost per unit during the year, the cost of goods sold is the same under both methods ($20,300).

(c) The cost flow method that results in the lowest inventory amount for the balance sheet is LIFO. In this case, since the latest purchases are considered part of the ending inventory, the inventory is valued at lower, older costs. The cost flow method that results in the lowest cost of goods sold for the income statement is FIFO. FIFO assumes that the older units are sold first, resulting in lower costs being allocated to cost of goods sold.

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