Applying and Analyzing Inventory Costing Methods

At the beginning of the current period, Chen carried 1,000 units of its product with a unit cost of $40. A summary of purchases during the current period follows. During the period, Chen sold 2,800 units.

UnitsUnit CostCostBeginning Inventory1,000$ 40$ 40,000Purchase #11,8004479,200Purchase #28005241,600Purchase #31,2005869,600

(a) Assume that Chen uses the first-in, first-out method. Compute both cost of good sold for the current period and the ending inventory balance. Use the financial statement effects template to record cost of goods sold for the period.

Ending inventory balance$Answer

Cost of goods sold$Answer

Use negative signs with your answers, when appropriate.

Balance Sheet

TransactionCash Asset+Noncash

Assets

=Liabilities+Contributed

Capital

+Earned

Capital

Record FIFO cost of goods soldAnswer

Answer

Answer

Answer

Answer

Income Statement

Revenue

-

Expenses

=Net

Income

Answer

Answer

Answer

(b) Assume that Chen uses the last-in, first-out method. Compute both cost of good sold for the current period and the ending inventory balance.

Ending inventory balance$Answer

Cost of goods sold$Answer

(c) Assume that Chen uses the average cost method. Compute both cost of good sold for the current period and the ending inventory balance.

Ending inventory balance$Answer

Cost of goods sold$Answer

(d) Which of these three inventory costing methods would you choose to:

1. Reflect what is probably the physical flow of goods?LIFOFIFOAverage Cost2. Minimize income taxes for the period?LIFOFIFOAverage Cost3. Report the largest amount of income for the period?LIFOFIFOAverage Cost