Exercise-9 (Computation of ending inventory under FIFO and LIFO)

By: Rashid Javed | Updated on: September 7th, 2022

The Alpha Merchandising Company purchases product DX-5 directly from manufacturers and sells it to small retailers as well as customers. The following transactions occurred during the last month of  2016:

  • Dec. 01: 800 units on hand @ $40 each.
  • Dec. 08: 600 units sold @ $76 each.
  • Dec. 14: 1,200 units purchased @ $50 each.
  • Dec. 18: 1,080 units sold @ $76 each.
  • Dec. 30: 800 units purchased @ $60 each.

Required:

  1. Assuming the Alpha Merchandising Company uses periodic inventory method, compute the cost of inventory on hand at December 31, 2016 under the following cost flow assumptions:
    (a). First in, first out (FIFO)
    (b). Last in, first out (LIFO)
  2. Assuming the Alpha Merchandising Company uses a perpetual inventory method, compute the cost of inventory on hand at December 31, 2016 under the following cost flow assumptions:
    (a). First in, first out (FIFO)
    (b). Last in, first out (LIFO)

Solution:

(1) Periodic inventory method:

Number of units on December 31, 2016 = Units in beginning inventory + Units purchased during the month – Units sold during the month
= 800 units + *2,000 units – **1,680 units
= 1,120 units

*1,200 + 800
**600 + 1,080

a. FIFO method:

Cost of inventory on December 31, 2016 = (800 units × $60) + (320 units × $50)
= $48,000 + $16,000
= $64,000

b. LIFO method:

Cost of inventory on December 31, 2016 = (800 units × $40) + (320 units × $50)
= $32,000 + $16,000
= $48,000

(2). Perpetual inventory method:

We can determine the value of ending inventory by preparing two perpetual inventory cards – one using FIFO method and one using LIFO method.

a. FIFO method:

exercise-9-icm-img1

Under perpetual-fifo, the cost of inventory on December 31, 2016 is $64,000 (see last row of balance column).

b. LIFO method:

exercise-9-icm-img2

Under perpetual-lifo, the cost of inventory on December 31, 2016 is $62,000 (see last row of balance column).

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