Zingle’s buys and then resells a single product as its primary business activity. Following is information concerning the Zingle’s inventory activity for the product during August 2004:
August 1: 210 units on hand @5.10 per unit
August 5: Sold 80 units
August 7: Purchased 160 units @5.25 per unit
August 11: Purchased 110 units @ 5.30 per unit
August 15: Sold 200 units
August 21: Purchased 55 units @ 5.70 per unit
August 25: Purchased 290 units @ 5.80 per unit
August 29: Sold 350 units
a. Assuming Zingle’s employs a perpetual inventory system, calculate cost of goods sold (units and cost) for the month of August using the following:
1. FIFO cost flow assumption
2. LIFO cost flow assumption
3. Average cost method (round all unit cost calculations to the nearest penny)
b. Which of the three methods resulted in the highest inventory amount for Zingle’s August 31 balance sheet?
c. How would the differences among the three methods affect Zingle’s income statement and balance sheet for the month?”
ROBERTA from Japan
a) To calculate cost of goods sold on FIFO, or LIFO or average cost method is very easy. FIFO means first in first out. It means, you will sell the product on the cost price of product which you buy first. But in LIFO, you will sell the first that product whose you have bought in the last. Average cost is just average of bought at different time.
b) We can solve this problem, only after getting the result from first figures. Actually closing stock is the difference between purchase and sales.
c) When the figure of cost price will different, value of cost of goods sold and value of closing stock will be different. It means profit will be different in all these methods. So, it will effect the income statement. It will also effect the balance sheet because, balance sheet also show closing stock as asset and profit in liability side. So, with different figure, balance sheet will show different position.