Advantages and disadvantages of fifo lifo and weighted average

1. You own Widgets ‘R Us and are preparing your year-end financial statements: What inventory accounting method do you use and why (FIFO, LIFO, or Weighted-Average)? What are its advantages and disadvantages?

2. You own Widgets ‘R Us and are preparing your year-end financial statements: What activities should you perform to correctly account for your inventory at year-end?

3. You own Widgets ‘R Us and are preparing your year-end financial statements: Why is it important to track inventory? What does this information tell you about your business?

Exercise 5-1A

For each of the following situations indicate whether FIFO, LIFO, or weighted average.

a. In a period of falling prices, net income would be highest.

b. In a period of falling prices, the unit cost of goods would be the same for the ending inventory and cost of goods sold.

c. In a period of rising prices, net income would be highest.

d. In a period rising prices, cost of goods sold would be highest.

e. In a period of rising prices, ending inventory would be highest.

Exercise 5-2 A

Jones Co. started the year with no inventory. During the year, it purchased two identical inventory items at different times. The first purchase over 1,060 and the other, 1,380. Jones sold one of the items during the year.

Required Based on the information, how much product cost would be allocated to cost of goods sold and ending inventory on the year-end financial statements, assuming use of

a. FIFO?

b. LIFO?

c. Weighted average?

Exercise 5- 3A

Cortez Company sells chairs that are used at computer stations. Its beginning inventory of chairs was 100 units at $60 per unit. During the year, Cortez made two batch purchases of this chair. The first was 150-unit purchase at $68 per unit; the second was a 200-unit purchase at $72 per unit. During the period, it sold 270 chairs.

Required

Determine the amount of product costs that would be allocated to cost of goods and ending inventory, assuming that Cortez uses

a. FIFO

b. LIFO

c. Weighted average

Exercise 5-4A

The following information pertains to Mason Company for 2016

Beginning Inventory

90 units@$40

Unit Purchased

310 units @$45

Ending inventory consisted of 30 units. Mason sold 370 units at $90 each. All purchases and sales were made with cash. Operating expenses amounted to $4,100.

Required

a. Compare the gross margin for Mason Company using the following cost flow assumptions: (1) FIFO. (2) LIFO. (3) weighted average.

b. What is the amount of net income using FIFO, LIFO, and weighted average? (Ignoring income tax considerations.)

c. Compare the amount of ending inventory using (1) FIFO (2) LIFO (3) and weighted average.

Exercise 5-5 A

The Shirt Shop had the following transactions for T- shirts for 2016, its first year of operation:

Jan. 20

Purchased 400 units @$8

=

$3,200

Apr. 31

Purchased 200 units @$10

=

2,000

July 25

Purchased 280 units @$13

=

3,640

Sept 19

Purchased 90 units

@ $15

=

1,350

During the year, The Shirt Shop sold 810 T- shirts for $30 each.

Required

a. Compute the amount of ending inventory. The Shirt Shop would report on the balance sheet, assuming the following cost flow assumptions: (1) FIFO (2) LIFO and (3) weighted average.

b. Record the above transaction in general journal form and post to T- accounts assuming and T- accounts for each method. Assume all transactions are cash transactions.

c. Compute the difference in gross margin between the FIFO and LIFO cost flow assumptions.