Question & Answer: Analyzing and Interpreting the Financial Statement Effects of Periodic FIFO, LIFO, and Weighted Average Cost [LO 7-3]…..

Analyzing and Interpreting the Financial Statement Effects of Periodic FIFO, LIFO, and Weighted Average Cost [LO 7-3]

Orion Iron Corp. tracks the number of units purchased and sold throughout each year but applies its inventory costing method at the end of the year, as if it uses a periodic inventory system. Assume its accounting records provided the following information at the end of the annual accounting period, December 31.

Transactions	Units		Unit Cost
a. Inventory, Beginning		300	$	12
For the year:
b. Purchase, April 11		900		10
c. Purchase, June 1		800		13
d. Sale, May 1 (sold for $40 per unit)		300
e. Sale, July 3 (sold for $40 per unit)		600
f. Operating expenses (excluding income tax expense), $19,500

Expert Answer


Calculation of cost of goods sold ,ending inventory value and Net Operating Incomeusing FIFO periodic inventory system
Units in ending Inventory = Beginning Inventory + Purchases – Sales = 300 units + 1700 units – 900 units = 1100 units
As we are following FIFO method , the Units in ending inventory will be out of latest purchases.
*Value of Units in ending Inventory = (800 units $13) + (300 units * $10) = $13400**
Cost of goods sold = Value of beginning Inventory + Cost of purchases – Value of Ending Inventory
*Cost of goods sold = (300 units $12) + [(900 units $10)+(800 units $13)] – $13400 = $9600**

Calculation of Net Operating Income (FIFO Method)
Sales	$36,000
Less : Cost of goods sold	$9,600
Gross Margin	$26,400
Less : Operating Expenses	$19,500
Net operating Income	$6,900

Calculation of cost of goods sold ,ending inventory value and Net Operating Incomeusing LIFO periodic inventory system
Units in ending Inventory = Beginning Inventory + Purchases – Sales = 300 units + 1700 units – 900 units = 1100 units
As we are following LIFO method , the Units in ending inventory will be out of old purchases.
*Value of Units in ending Inventory = (300 units $12) + (800 units * $10) = $11600**
Cost of goods sold = Value of beginning Inventory + Cost of purchases – Value of Ending Inventory
*Cost of goods sold = (300 units $12) + [(900 units $10)+(800 units $13)] – $11600 = $13400**

Calculation of Net Operating Income (LIFO Method)
Sales	$36,000
Less : Cost of goods sold	$13,400
Gross Margin	$22,600
Less : Operating Expenses	$19,500
Net operating Income	$3,100

Calculation of cost of goods sold ,ending inventory value and Net Operating Income using Weighted Average periodic inventory system
Units in ending Inventory = Beginning Inventory + Purchases – Sales = 300 units + 1700 units – 900 units = 1100 units
Weighted Average cost per unit = (Cost of beginning Inventory+Cost of purchases) / (Units in Beginning Inventory + Purchased Units)
Weighted Average cost per unit = ($3600 + $19400) / (300 units + 1700 Units) = $11.50 per unit
Cost of goods sold = Units sold * Weighted Average cost per unit
*Cost of goods sold = 900 units $11.50 = $10350**
*Value of ending Inventory = 1100 units $11.50 = $12650**

Calculation of Net Operating Income (Weighted Average Method)
Sales	$36,000
Less : Cost of goods sold	$10,350
Gross Margin	$25,650
Less : Operating Expenses	$19,500
Net operating Income	$6,150

Analysis
Net operating Income and value of ending inventory using FIFO method is on higher side compared to LIFO and Weighted average method.

Still stressed from student homework?

Get quality assistance from academic writers!

Order now