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Inventory Valuation-Problems
Inventory Valuation-Problems
1. Based on the following information, calculate the cost of goods sold and the cost of ending
inventories under FIFO, LIFO and Weighted Average method.
7-June 50 5 250
170 6 1,020
10 7 70 180 7 1,260
150 8 1,200
Cost Retail
Price Selling
Price
Rs. Rs.
(i) Estimate the cost of goods sold and the cost of July 31 inventory using the retail
method of evaluation.
(ii) Was the cost of inventory, as a percentage of sales price, higher or lower in July than
it was in June? Explain.
3. Inventory accounting is based on certain cost flow assumptions and techniques for
estimating the cost of goods sold and the ending inventory. For each of the
statements given below, indicate the cost flow assumption or the technique used:
(i) A pattern of transferring unit costs from the inventory account to the cost of goods sold
that may parallel the physical flow of merchandise. Specific identification
(ii) The only flow assumption in which all units of merchandise are assigned the same per-
unit cost. Weighted average
(iii) The method used to record the cost of goods sold when each unit in the inventory is
unique. Specific identification
(iv) The most conservative of the flow assumptions during a period of sustained inflation.
LIFO
(v) The flow assumption that provides the most current valuation of inventory in the
balance sheet. FIFO
(vi) A technique for estimating the cost of goods sold and the ending inventory that is
based on the relationship between the cost and sales price during the current
accounting period.
Retail Method
4. Two identical companies A and B have reported net income of Rs.6,00,000 and Rs.5,50,000
respectively. An analyst attributes the higher profit of company A to its use of FIFO method
of valuing inventory as against the LIFO method by company B under business conditions
attended by rising prices. Do you agree with the analyst? Explain your answer.