workshop 6: inventory valuation Question 1. Valley Electronics uses the perpetual inventory system: DATE EXPLANATION UNITS UNIT COST TOTAL COST 1/1 BEG INV 100 10 1000 15/04 PURCHASE 200 2200 24/06 PURCHASE 300 12 3600 SEE Sales( 550) 27/11 PURCHASE 400 13 5200 September 10, the company sold 550 units. Required: 1. compute the COST of ending inventory and cost of goods sold using FIFO, LIFO and average method. 2. which method do you prefer? explain. FIFO METHOD Date Purchases Sales Balance 100*10 - 1000 1/1 Beg 15/04 200*11 = 2200 100*10 = 1000 200*11=2200 24/06 300*12 = 3600 100*10 - 1000 200*11 = 2200 300*12-3600 0*10/09 (sales 550 units) 50*12 - 600 100*10 - 1000 200*11 -2200 250*12-3000 27/11 400013 - 5200 50*12600 400*13 - 5200 Total ending value- 5800 weighted average method DATE 1/1 15/04 24/06 Sales (550 units) 27/11 EXPLANATION UNITS BEG INV 100 PURCHASE 200 PURCHASE 300 UNIT COST 10 11 12 TOTAL COST 1000 2200 3600 PURCHASE 400 13 5200 September 10, the company sold 550 units. Average cost = beginning inventory in $ + purchases $ 12,000/1000 = 12 5 per unit Beginning inventory units + purchases units CGS? Ending inventory = (400 +50) * 12 = 5400 CGS = 1000 + (2200 + 3600 + 5200) - 5400 = 6.600 II Method FIFO LIFO AVERAGE Ending inventory 5800 5700 5400 CGS 6200 6300 6600 What is the best method ??? NET INCOME = revenues - expenses If the company uses average method, expenses increase, net income decrease If the company uses FIFO, expenses decrease, net income increase The choice of the accounting method depends on managers objectives. 1. If the manager wants to pay less tax (less net income, more expenses)!!! use average method. 2. If the manger wants to raise capital, to have bank loan, (more net income, less expenses) ... use FIFO method. Question 2. Hubbs Distributing Company completed the following merchandising transactions in the month of April. At the beginning of April, the ledger of Hubbs showed Cash of $9,000 and Capital $9,000. April 2 Purchase merchandise on account from Leshner Supply Co.$5900, terms 2/10,n30 April 4 Sold merchandise on account $5200, FOB destination (the seller will pay the freight), terms 2/10, n/30. (cost 4000) April 5 Paid $200 freight on April 4 sale. April 6 Received credit from Leshner Supply Co. for merchandise returned $300. April 11 Paid Leshner Supply Co. in full. April13 Received collections in full. Less discount, from customers billed on April 4. April 14 Purchase merchandise for cash $4400. April 16 Received refund from suppliers on cash purchase of April 14, $500. April 18 Purchase merchandise from Testa Distributors $4200, FOB shipping point (the purchaser will pay the freight expenses), terms 2/10,n/30. April 20 Paid freight on April 18 purchases $100. April 23 Sold merchandise for cash S6400. Instructions: Journalize the transactions for the month of April for Travel Warehouse using perpetual inventory system. Credit Date April 2 Debit 5900 Accounts title and explanation Merchandise Inventory + purchase Account payable + (purchase on account, terms 2/10,1/30) Account receivable + 5900 $200 April 4 (first entry) 5200 Sales Cost of goods sold 4000 April 4 (second entry) Merchandise inventory 4000 April 5 200 Freight out (destination) expenses 200 Cash (freight on sales: FOB destination) April 6 April 11 April 13 April 14 April 16 April 18 April 20 April 23