Question

Orion Iron Corp. tracks the number of units purchased and sold throughout each year but applies its inventory costing method at the end of the year, as if it uses a periodic inventory system. Assume its accounting records provided the following information at the end of the annual accounting period, December 31.

  

Transactions	Units			Unit Cost
a. Inventory, Beginning		250		$	10
For the year:
b. Purchase, April 11		600			12
c. Purchase, June 1		400			12
d. Sale, May 1 (sold for $45 per unit)		250
e. Sale, July 3 (sold for $45 per unit)		350
f. Operating expenses (excluding income tax expense), $18,800

  

Required:

1. 1. Calculate the number and cost of goods available for sale.
2. 2. Calculate the number of units in ending inventory.
3. 3. Compute the cost of ending inventory and cost of goods sold under (a) FIFO, (b) LIFO, and (c) weighted average cost.
4. 4. Prepare an income statement that shows under the FIFO method, LIFO method and weighted average method.
5. 6. Which inventory costing method minimizes income taxes?

Answer 1

1) Calculate following

	Unit	Unit Cost	Total Cost
Inventory, Beginning	250	10	2500
Purchase, April 11	600	12	7200
Purchase, June 1	400	12	4800
Total	1250		14500

Number of goods available for sale = 1250 Units

Cost of goods available for sale = $14500

2) Ending inventory units = 1250-250-350 = 650 Units

3) Calculate following

	FIFO	LIFO	Weighted average
Cost of ending inventory	650*12 = 7800	(250*10+400*12) = 7300	14500/1250*650 = 7540
Cost of goods sold	14500-7800 = 6700	14500-7300 = 7200	14500-7540 = 6960

4)) Income statement

	FIFO	LIFO	Weighted average
Sales	600*45 = 27000	27000	27000
Cost of goods sold	6700	7200	6960
Gross profit	20300	19800	20040
Operating income	18800	18800	18800
Income before tax	1500	1000	1240

5) LIFO costing method has minimize income taxes