Question

Effie Company uses a periodic inventory system. Details for the inventory account for the month of January, 2013 are as follows: Units Per unit price Total Balance, 1/1/13 200 $5.00 $1,000 Purchase, 1/15/13 100 5.30 530 Purchase, 1/28/13 100 5.50 550 An end of the month (1/31/13) inventory showed that 140 units were on hand. If the company uses FIFO, what is the value of the ending inventory

Answer 1

Ending inventory value is $762 (100 units at $5.50 each, i.e. $550 + 40 units at $5.30 each, i.e. $212).

Step-by-step explanation:

The FIFO inventory system assumes that the units bought first will be utilized first. It is called First-in, First-out.

The implication is that for the 140 units ending inventory for January 2013, the value will be split between the purchases on January 28 and January 15. Therefore, the first 100 units from the 140 are costed at the purchase price of $5.50 per unit while the remaining 40 units are costed at the purchase price of $5.30 per unit.

There are other methods of valuing inventory, including LIFO (Last in, First Out), Weighted Average Method, e.t.c. which are not discussed here.

Answer 2

The answer is $762

Step-by-step explanation:

Without doubt the 140 units on hand at month end would comprises of:

100 bought units on 1/28/13 for $5.50 each $550

40 units purchased on 1/15/13 $5.30 each $212

Total value of closing inventory $762

The value of closing inventory at the end of the month using FIFO method of valuing inventory is $762

FIFO First In First Out method assumes that the first sets of stock purchased are sold first which is in sharp contrast with LIFO Last In First Out where the last sets of inventory are assumed to be sold first.

However, the LIFO method tends to overvalue inventory in a period of rising inflation