Question 2

Hane Business began in 2021 with an inventory of 100 units that cost $2,000 each. During January 2021, Hane Business completed these inventory transactions: Jan 2 Purchase 80 units @ $1,800 each Jan 5 Sale 60 units Jan 12 Purchase 120 units @ $1,500 each Jan 25 Sale 90 units For the specific identification method, assume that ending inventory is made up of 80 units from Jan 2 purchases and remaining ending inventory units from Jan 12 purchases.

(a) Using the perpetual inventory system, identify and compute the ending inventory cost and cost of goods sold for January 2021 under:

(i) FIFO method.

(ii) Specific identification method.

(b) If inventory costs were increasing, explain which inventory method would give the highest net profit.

(c) Tory Business has been using weighted average method to value its inventory. In the last few months, business has been very slow and the CEO is desperate for additional funding from the banks. Examining the draft financial statements prepared by you, he was concerned the banks might not approve the loans. If so, he would have no choice but to end the business. The CEO re-calculated the figures himself using FIFO method and found that it would enhance the chances of securing a loan. He thus asked you to change the inventory method to FIFO when applying for bank loans. Explain whether you agree or disagree with the CEOs suggestion to change the inventory costing method.