HOMEWORK (CHAPTER 6)
E6-5:
Units in ending inventory: 93−74=19(units)
Calculate the ending inventory at May 31 using:
(a) FIFO: 19 × $ 11=$ 209
(b) LIFO: 19 × $ 9=$ 171
(c) Average-cost: 19 × $ 10.086∗¿ $ 191.634
*(Weighted-average price: $ 938 ÷ 93=$ 10.086)
Cost of goods sold using:
(a) FIFO: $ 938 – $ 209=$ 729
(b) LIFO: $ 938 – $ 171=$ 767
(c) Average-cost: $ 938 – $ 191.634=$ 746.366
E6-7:
(a) Compute:
Total units available for sale: 120+370+200=690 (units)
Total cost of goods available for sale: $ 600+ $ 2,220+$ 1,400=$ 4,220
Weighted-average price: $ 4,220 ÷ 690=$ 6.116
FIFO LIFO Average Cost
Cost of
ending 200 × $ 7+30 × $ 6=$ 1,580 120 × $ 5+110 × $ 6=$ 1,260 230 × $ 6,116∗¿ $ 1406,767
inventory
Cost of
goods $ 4,220 – $ 1,580=$ 2,640 $ 4,220 – $ 1,260=$ 2,960 $ 4,220 – $ 1406,767=$ 2813,233
sold
(b) Because of the period of inflation, the average price level of a basket of selected goods
and services in an economy increases over some period of time ( $ 5< $ 6< $ 7). Therefore,
FIFO gives the highest ending inventory (because ending inventory is calculated by
taking the unit cost of the most recent purchases) and LIFO gives highest cost of goods
sold (because cost of goods sold is calculated by taking the unit cost of the most recent
purchases).
(c) Regardless of the changing prices, the average-cost values for ending inventory and cost
of goods sold always lie between the ending inventory and cost of goods sold for FIFO
and LIFO.
(d) For example: The company purchased a products at $5, b products at $6 and c products at
$7. Under average-cost method, to calculate the weighted-average cost, we use the
following formula:
5× a+6 × b+7 × c
a+ b+c
Assume that a=b=c. Then, we have:
5× a+6 × a+7 × a (5+6+7)× a 5+ 6+7
= = =$ 6
a+ a+a 3×a 3
Therefore, if the quantity of each type of goods is the same, the average cost is $6.
However, the quantity of each type of goods in Jeters Company is not the same
(120 ≠ 370≠ 200), that’s why the average cost is not $6. In conclusion, 6-dollar average
cost does not reflect accurately the differences among the quantity of each type of goods
available for sales.
P6-5A:
(a) Compute:
Sales Revenue: 100 × $ 35+60 × $ 40+ 110 × $ 40=$ 10,300
Units of goods sold: 100+60+110=270 (units)
Total units available for sale: 60+120+100+70=350 (units)
Cost of goods available for sale: 60 × $ 24+ 120× $ 26 +100× $ 27+70 × $ 29=$ 9,290
Units in ending inventory: 350 – 270=80 (units)
Weighted-average price: $ 9,290 :350=$ 26.543
LIFO FIFO Average-cost
Cost of 60 × $ 24+ 20× $ 26=$ 1,96070 × $ 29+10 × $ 27=$ 2,30080 × $ 26.543=$ 2,123.44
ending
inventor
y
Cost of $ 9,290 – $ 1,960=$ 7,330 $ 9,290 – $ 2,300=$ 6,990 $ 9,290 – $ 2,123.44=$ 7,166.56
goods
sold
Gross $ 10,300 – $ 7,330=$ 2,970 $ 10,300 – $ 6,990=$ 3,310 $ 10,300 – $ 7,166.56=$ 3,133.44
profit
Gross $ 2,970 $ 3,310 $ 3,133.44
×100=28.83 % ×100=32.14 % ×100=30.42 %
$ 10,300 $ 10,300 $ 10,300
profit
rate
(b) The LIFO method produces the lowest ending invetory, highest cost of goods sold, and
thus lowest gross profit and profit rate (because cost of goods sold is calculated by taking
the unit cost of the most recent purchases in period of inflation). Conversely, the FIFO
method products highest ending inventory, lowest cost of goods sold, and thus highest
gross profit and gross profit rate (because ending inventory is calculated by taking the
unit cost of the most recent purchases in period of inflation). Meanwhile, the results
under average-cost method are always between the results produced by LIFO and FIFO.
