Question

Dunbar Distribution markets CDs of numerous performing artists. At the beginning of March, Dunbar had in

beginning inventory 2,500 CDs with a unit cost of $7. During March Dunbar made th following purchases of CDs.



March 5 - 2,000 @ $8
March 13 - 3,500 @ $9
March 21 - 5,000 @ $10
March 26 - 2,000 @ $11


During March 12,000 units were sold. Dunbar used a periodic inventory system.

a. Determine the cost of goods available for sale
b. Determine 1. the ending inventory and 2, the cost of goods sold under each of the assumed cost flow methods
(FIFO, LIFO, and average cost). Prove te accuracy of the cost of goods sold under the FIFO and LIFO mehtods.
(Note: for average cost, round cost per unit to three decimal places.)
c. Which cost flow method results in 1. the highest inventory amount for the balanc sheet abd 2. the highest cost of
goods sold for the income statement?

Answer 1

The FIFO method results in the highest inventory amount for the balance sheet, while the LIFO method results in the highest cost of goods sold for the income statement.

Step-by-step explanation:

The two cost flow methods commonly used in accounting are the first-in, first-out (FIFO) method and the last-in, first-out (LIFO) method.

1. If Dunbar Distribution wants to report the highest inventory amount for the balance sheet, they should use the FIFO method. This is because FIFO assumes that the goods purchased first are sold first, which means the ending inventory would reflect the most recent purchases and therefore have a higher value.

2. On the other hand, if Dunbar Distribution wants to report the highest cost of goods sold for the income statement, they should use the LIFO method. LIFO assumes that the goods purchased last are sold first, which means the cost of goods sold would reflect the most recent and potentially higher-cost purchases.

Answer 2

Dunbar Distribution

Opening inventories 2,500 CDs @ $7 = $17,500

Purchases/additions to inventory:

1. Mar 5 - 2,000 CDs @ $8 = $16,000
2. Mar 13 - 3,500 CDs @ $9 = $31,500
3. Mar 21 - 5,000 CDs @ 10$ = $50,000
4. Mar 26 - 2,000 CDs @ $11 = $22,000

Total Inventory added 12,500 @ $9.56 = $119,500

A. Cost of Goods available for sale is $119,500 + $17,500 = $137,000

B.i. Closing Inventory is:

Under FIFO Cost Method (If 12,000 units was sold):

Cost of goods available for sale minus (Opening Inventory + item i and ii + 4000 Cds of item iii )

=$137,000 - ($17500+$16,000+$40,000)

=$63,500

Under LIFO Cost Method (If 12,000 units was sold):

Cost of goods available for sale minus (item iv, iii, & ii + 1,500 Cds of item i)

=$137,000 - ($22,000+$50,000+$31,000+12000)

=$22,000

B.ii. Cost of Goods sold is:

Under FIFO Cost Method (If 12,000 units was sold):

Cost of goods sold (Opening Inventory + item i and ii + 4000 Cds of item iii )

=($17500+$16,000+$40,000)

=$73,500

Under LIFO Cost Method (If 12,000 units was sold):

Cost of goods Sold (item iv, iii, & ii + 1,500 Cds of item i)

=($22,000+$50,000+$31,000+12000)

=$115,000

C.i. The FIFO Cost method leaves the Higher inventory Balance in the Balance sheet ($63,500)

C.ii. The LIFO Cost method gives the Higher Cost of goods sold in the Income statement ($115,000)

Step-by-step explanation: