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  • Inventory Valuation-Problems

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    Karan
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    No, I do not agree with the analyst. The choice of inventory valuation method alone does not necessarily explain the difference in net income between the two companies. Other factors such as sales volume, expenses, asset utilization, etc. could also contribute to the profit difference. While FIFO produces a higher profit compared to LIFO under rising prices, the inventory valuation method is just one accounting policy and does not provide enough information to conclude it as the sole reason for the higher net income of Company A.

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    No, I do not agree with the analyst. The choice of inventory valuation method alone does not necessarily explain the difference in net income between the two companies. Other factors such as sales volume, expenses, asset utilization, etc. could also contribute to the profit difference. While FIFO produces a higher profit compared to LIFO under rising prices, the inventory valuation method is just one accounting policy and does not provide enough information to conclude it as the sole reason for the higher net income of Company A.

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    4K views3 pages

    Inventory Valuation-Problems

    Uploaded by

    Karan
    No, I do not agree with the analyst. The choice of inventory valuation method alone does not necessarily explain the difference in net income between the two companies. Other factors such as sales volume, expenses, asset utilization, etc. could also contribute to the profit difference. While FIFO produces a higher profit compared to LIFO under rising prices, the inventory valuation method is just one accounting policy and does not provide enough information to conclude it as the sole reason for the higher net income of Company A.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Flag for inappropriate content
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    of 3

    Problems on Inventory Valuation

    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.

    Purchase Sales Stock

    Dec.31, 2009 200 units @ Rs.5


    Jan.25, 2010 170 units @ Rs.6
    Jan.29, 2010 150 units
    May28, 2010 190 units @ Rs.7
    June 7, 2010 230 units
    Nov.20, 2010 150 units @ Rs.8
    Dec.15, 2010 100 units

    Perpetual Inventory Sytem- FIFO Method

    Date Receipts Issues Balance


    Units Rate Amount Units Rate Amount Units Rate Amount
    Rs. Rs. Rs. Rs. Rs. Rs.
    2009
    31-Dec 200 5 1,000
    2010
    25-Jan 170 6 1,020 200 5 1,000
    170 6 1,020
    29-Jan 150 5 750 50 5 250
    170 6 1,020

    28-May 190 7 1,330 50 5 250


    170 6 1,020
    190 7 1,330

    7-June 50 5 250
    170 6 1,020
    10 7 70 180 7 1,260

    20-Nov 150 8 1,200 180 7 1,260

    150 8 1,200

    15-Dec 100 7 700 80 7 560


    150 8
    1,200
    2. Specialty Stores uses a periodic inventory system but needs to determine the approximate
    amount of inventory at the end of each month without taking a physical inventory. The stores

    have provided the following data:

    Cost Retail
    Price Selling
    Price
    Rs. Rs.

    Inventory of merchandise, June 30 6,00,000 10,00,000


    Purchases during July 4,44,000 8,00,000
    ---------- -------------
    Goods available for sale during July 10,44,000 18,00,000
    Net sales during July 12,00,000

    (i) Estimate the cost of goods sold and the cost of July 31 inventory using the retail
    method of evaluation.

    Cost of goods sold = 12/18*10,44,000 =696,000 inventory 10,44,000-696,000 =348,000

    (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.

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