Alternative Inventory Methods Garrett Company has the following transactions during the months of April and May: Date Transaction Units Cost/Unit April 1 Balance 500 17 Purchase 200 $5.20 25 Sale 150 28 Purchase 100 5.90 May 5 Purchase 250 5.20 18 Sale 300 22 Sale 50 The cost of the inventory on April 1 is $5, $4, and $2 per unit, respectively, under the FIFO, average, and LIFO cost flow assumptions. Required: 1. Compute the inventories at the end of each month and the cost of goods sold for each month for the following alternatives: FIFO periodic Cost of Goods Sold Ending Inventory April $ 750 $ 3,380 May $ 1,750 $ 2,930 FIFO perpetual Cost of Goods Sold Ending Inventory April $ 750 $ 3,380 May $ 1,750 $ 2,930 LIFO periodic Cost of Goods Sold Ending Inventory April $ 850 $ 1,780 May $ 1,820 $ 1,260 LIFO perpetual (Round your intermediate calculations to the nearest cent.) Cost of Goods Sold Ending Inventory April $ 780 $ 1,850 May $ 1,890 $ 1,260 Weighted average (Round unit costs to 4 decimal places and final answers to the nearest dollar.) Cost of Goods Sold Ending Inventory April $ $ May $ $ Moving average (Round unit costs to 2 decimal places and final answers to the nearest dollar.) Cost of Goods Sold Ending Inventory April $ $ May $ $ 2. Reconcile the difference between the LIFO periodic and the LIFO perpetual results. If an amount is zero, enter "0". April Cost of Goods Sold Ending Inventory Difference $ $ May Cost of Goods Sold Ending Inventory Difference $ $ 3. If Garrett uses IFRS, which of the previous alternatives would be acceptable, and why? If Garrett Company uses IFRS, it may report its inventory under FIFO, average, or specific identification. It may not use LIFO under IFRS because it is not consistent with any presumed physical flow of inventory. Also, LIFO is not allowed for tax purposes in most other countries, so there is no tax incentive for a company to use LIFO . Note that companies that use IFRS and have rising inventory costs will report a higher income because they include holding gains in income. Feedback 1a FIFO periodic For April Step 1 Calculation for ending inventory units: Units Beginning inventory Purchases Units available for sale Less: Sales Ending inventory Step 2 Assign a value to the ending inventory under the FIFO periodic cost flow assumption. First-in, first-out (FIFO) assumes costs move through inventory in chronological order. In other words, the first costs incurred are the first transferred to cost of goods sold. Therefore, the FIFO cost flow assumption results in the earliest (and oldest) costs incurred being allocated to cost of goods sold, while the most recent costs are allocated to ending inventory. You should note that a company using a periodic inventory system does not maintain a continuous record of the physical quantities (or costs) of inventory on hand. It takes physical counts periodically and this is the only time when it knows the physical quantities on hand, and, therefore, the quantities used or sold during the period. Step 3 Calculation for Cost of Goods Sold FIFO Beginning inventory $ Purchases Cost of Goods Available for Sale Less: Ending inventory Cost of Goods Sold Note: The beginning inventory for April is given. For May The calculations for May follow the same pattern as the April calculations. You should note that the beginning inventory for May is the same as the ending inventory for April. 1b FIFO perpetual For April Calculate the ending inventory and assign a value to the ending inventory under the FIFO perpetual cost flow assumption. First-in, first-out (FIFO) assumes costs move through inventory in chronological order. In other words, the first costs incurred are the first transferred to cost of goods sold. Therefore, the FIFO cost flow assumption results in the earliest (and oldest) costs incurred being allocated to cost of goods sold, while the most recent costs are allocated to ending inventory. You should note that a company using a perpetual inventory system keeps a continuous record of the physical quantities in its inventory. It records the purchase, or production, and use of each item of inventory in its accounting records as it occurs. Therefore, management knows the dollar amount of inventory and cost of goods sold at all times. The following partially completed table will help you to organize the information and calculations for this step. Date Description Cost of Goods Sold Inventory Balance April 1 Beginning Inventory 500 units @ $5.00/unit = $2,500 Purchase 500 units @ $5.00/unit = $2,500 200 units @ $5.20/unit = 1,040 $3,540 25 Sale 28 Purchase Total CGS $ Note: The beginning inventory for April is given. For May The calculations for May follow the same pattern as the April calculations. You should note that the beginning inventory for May is the same as the ending inventory for April. 1c LIFO periodic For April Step 1 Calculation for ending inventory units: Units Beginning inventory Purchases Units available for sale Less: Sales Ending inventory Step 2 Assign a value to the ending inventory under the LIFO periodic cost flow assumption. The last-in, first-out (LIFO) cost flow assumption allocates the cost of goods available for sale between ending inventory and cost of goods sold based on the assumption that the most recent purchases (the last in) are the first ones sold (the first out). Therefore, the LIFO cost flow assumption results in the most recent costs incurred being allocated to cost of goods sold, while the earliest (and oldest) costs are allocated to ending inventory. You should note that a company using a periodic inventory system does not maintain a continuous record of the physical quantities (or costs) of inventory on hand. It takes physical counts periodically and this is the only time when it knows the physical quantities on hand, and, therefore, the quantities used or sold during the period. Step 3 Calculation for Cost of Goods Sold LIFO Beginning inventory $ Purchases Cost of Goods Available for Sale Less: Ending inventory Cost of Goods Sold Note: The beginning inventory for April is given. For May The calculations for May follow the same pattern as the April calculations. You should note that the beginning inventory for May is the same as the ending inventory for April. 1d LIFO perpetual For April Calculate the ending inventory and assign a value to the ending inventory under the LIFO perpetual cost flow assumption. The last-in, first-out (LIFO) cost flow assumption allocates the cost of goods available for sale between ending inventory and cost of goods sold based on the assumption that the most recent purchases (the last in) are the first ones sold (the first out). Therefore, the LIFO cost flow assumption results in the most recent costs incurred being allocated to cost of goods sold, while the earliest (and oldest) costs are allocated to ending inventory. You should note that a company using a perpetual inventory system keeps a continuous record of the physical quantities in its inventory. It records the purchase, or production, and use of each item of inventory in its accounting records as it occurs. Therefore, management knows the dollar amount of inventory and cost of goods sold at all times. The following partially completed table will help you to organize the information and calculations for this step. Date Description Cost of Goods Sold Inventory Balance April 1 Beginning Inventory 500 units @ $2.00/unit = $1,000 17 Purchase 500 units @ $2.00/unit = $1,000 200 units @ $5.20/unit = 1,040 $2,040 25 Sale 28 Purchase Total CGS $ Note: The beginning inventory for April is given. For May The calculations for May follow the same pattern as the April calculations. You should note that the beginning inventory for May is the same as the ending inventory for April. 1e Weighted average For April Step 1 Calculation for ending inventory units: Units Beginning inventory 500 Purchases Units available for sale Less: Units sold Ending inventory Step 2 Calculation for Cost of Goods Available for Sale Units Cost Beginning inventory 500 $2,000 Purchases Goods available for sale Step 3 Calculation of weighted average cost per unit Weighted Average Cost per Unit = Cost of Goods Available for Sale Units Available for Sale Step 4 Assign costs to ending inventory and cost of goods sold. Under the average cost flow assumption, the cost of ending inventory and cost of goods sold is based on the average of the cost of goods available at a particular point in time. When a company uses the periodic inventory system, the average cost method is known as the weighted average method. The company uses this weighted average cost to determine the value for the units in both its ending inventory and the cost of goods sold. For May The calculations for May follow the same pattern as the April calculations. You should note that the beginning inventory for May is the same as the ending inventory for April. 1f Moving average Under the average cost flow assumption, the cost of ending inventory and cost of goods sold is based on the average of the cost of goods available at a particular point in time. When a company uses the periodic inventory system, the average cost method is known as the weighted average method. Under this method, the weighted average cost per unit for the period is computed as follows: Weighted Average Cost per Unit = Cost of Goods Available for Sale Units Available for Sale The company uses this weighted average cost to determine the value for the units in both its ending inventory and the cost of goods sold. When a company uses a perpetual inventory system, it applies the same principles. However, it is known as a moving average method because a new weighted average cost must be calculated after each purchase. The new weighted average is computed in the same way as in the weighted average method. This weighted average cost is used to determine the cost of each sale made until the next purchase when a new average cost is calculated. The following partially completed table will help you to organize the information and calculations for this step. Date Description Cost of Goods Sold Inventory Balance April 1 Beginning Inventory 500 units @ $4.00/unit = $2,000 Purchase 500 units @ $4.00/unit = $2,000 200 units @ $5.20/unit = 1,040 700 $3,040 $3,040/700=$4.34/unit 25 Sale 28 Purchase Total CGS $ For May The calculations for May follow the same pattern as the April calculations. You should note that the beginning inventory for May is the same as the ending inventory for April.