Demonstration Problem

Chapter 5 – Problem 27

Cost Flow Assumptions – FIFO and LIFO Using Periodic and Perpetual Systems

AccountingWhat the Numbers Mean 9e

Problem Definition

The inventory records of Kuffel Co. reflected the following information for the year ended December 31, 2010:

Number Unit Total Date Transaction of Units Cost Cost

1/1 Beginning inventory. . . . . . . . . . 150 $30 $4,500 2/22 Purchase . . . . . . . . . . . . . . . . 70 33 2,310 3/7 Sale. . . . . . . . . . . . . . . . . . . . . . . (100) -- -- 4/15 Purchase . . . . . . . . . . . . . . . . . 90 35 3,150 6/11 Purchase. . . . . . . . . . . . . . . . . 140 36 5,040 9/28 Sale. . . . . . . . . . . . . . . . . . . . . (100) -- -- 10/13 Purchase. . . . . . . . . . . . . . . . . 50 38 1,900 12/4 Sale. . . . . . . . . . . . . . . . . . . . . (100) -- --

a. Assume that Kuffel Co. uses a periodic inventory system. Calculate cost of goods sold and ending inventory under FIFO and LIFO.

b. Assume that Kuffel Co. uses a perpetual inventory system. Calculate cost of goods sold and ending inventory under FIFO and LIFO.

c. Explain why the FIFO results for cost of goods sold and ending inventory are the same in your answers to parts a and b, but the LIFO results are different.

Problem Definition

Problem Solution

Solution approach: Calculate goods availablefor sale in units and dollars, and ending inventoryin units. These amounts are the same for bothFIFO and LIFO under either a periodic orperpetual inventory system.

Problem Solution

Calculation of goods available for sale:

Beginning inventory. . . . . . . . . . 150 @ $30 = $ 4,500

Beginning inventory is a distinct layer - separate from each purchase layer added during the period.

The number of units of each layer of inventory is multiplied by the cost per unit to get total costs.

Problem Solution

Calculation of goods available for sale:

Beginning inventory. . . . . . . . . . 150 @ $30 = $ 4,500Purchases . . . . . . . . . . . . . . . . . . 70 @ 33 = 2,310 90 @ 35 = 3,150 140 @ 36 = 5,040 50 @ 38 = 1,900

Each of the purchases during the period is treated as a separate layer of inventory.

Problem Solution

Calculation of goods available for sale:

Beginning inventory. . . . . . . . . . 150 @ $30 = $ 4,500Purchases . . . . . . . . . . . . . . . . . . 70 @ 33 = 2,310 90 @ 35 = 3,150 140 @ 36 = 5,040 50 @ 38 = 1,900Goods available for sale. . . . . . . 500 $16,900

Beginning inventory plus the total purchases made during the period equals goods available for sale.

Problem Solution

Calculation of goods available for sale:

Beginning inventory. . . . . . . . . . 150 @ $30 = $ 4,500Purchases . . . . . . . . . . . . . . . . . . 70 @ 33 = 2,310 90 @ 35 = 3,150 140 @ 36 = 5,040 50 @ 38 = 1,900Goods available for sale. . . . . . . 500 $16,900Sales . . . . . . . . . . . . . . . . . . . . . . (300)Ending inventory . . . . . . . . . . . . 200 units

The number of units sold is subtracted from goods available to arrive at ending inventory (in units).

Problem Solution

a. FIFO periodic:

Cost of goods sold . . . . . . . 150 @ $30 = $ 4,500

To calculate the FIFO cost of goods sold amount, you must identify the first-in 300 units and their associated costs. Start with beginning inventory of 150 units…

Problem Solution

a. FIFO periodic:

Cost of goods sold . . . . . . . 150 @ $30 = $ 4,500 70 @ 33 = 2,310 and then add succeeding layers…

Problem Solution

a. FIFO periodic:

Cost of goods sold . . . . . . . 150 @ $30 = $ 4,500 70 @ 33 = 2,310 80 @ 35 = 2,800 until the first-in 300 units and their associated costs

have been identifed.

Problem Solution

a. FIFO periodic:

Cost of goods sold . . . . . . . 150 @ $30 = $ 4,500 70 @ 33 = 2,310 80 @ 35 = 2,800 $ 9,610

Cost of goods sold under FIFO periodic represents

the cost of the first 300 units that were added to inventory.

Problem Solution

a. FIFO periodic:

Cost of goods sold . . . . . . . 150 @ $30 = $ 4,500 70 @ 33 = 2,310 80 @ 35 = 2,800 $ 9,610

Ending inventory. . . . . . . . 10 @ 35 = $ 350 Ending inventory includes the cost of 10 of the 90

units purchased on 4/15 since the cost of only 80 of these units were added to cost of goods sold.

Problem Solution

a. FIFO periodic:

Cost of goods sold . . . . . . . 150 @ $30 = $ 4,500 70 @ 33 = 2,310 80 @ 35 = 2,800 $ 9,610

Ending inventory. . . . . . . . 10 @ 35 = $ 350 140 @ 36 = 5,040 50 @ 38 = 1,900 Ending inventory also includes the cost of the other

layers that were not added to cost of goods sold.

Problem Solution

a. FIFO periodic:

Cost of goods sold . . . . . . . 150 @ $30 = $ 4,500 70 @ 33 = 2,310 80 @ 35 = 2,800 $ 9,610

Ending inventory. . . . . . . . 10 @ 35 = $ 350 140 @ 36 = 5,040 50 @ 38 = 1,900 $ 7,290 $16,900

Cost of goods sold plus ending inventory equals goods available of sale.

Problem Solution

a. LIFO periodic:

Cost of goods sold . . . . . . . 50 @ $38 = $ 1,900

To calculate the LIFO cost of goods sold amount, you must identify the last-in 300 units and their associated costs. Start with the last purchase made during the year…

Problem Solution

a. LIFO periodic:

Cost of goods sold . . . . . . . 50 @ $38 = $ 1,900 140 @ 36 = 5,040 90 @ 35 = 3,150

and then work backwards adding more layers…

Problem Solution

a. LIFO periodic:

Cost of goods sold . . . . . . . 50 @ $38 = $ 1,900 140 @ 36 = 5,040 90 @ 35 = 3,150 20 @ 33 = 660 until the last-in 300 units and their associated costs

have been identified.

Problem Solution

a. LIFO periodic:

Cost of goods sold . . . . . . . 50 @ $38 = $ 1,900 140 @ 36 = 5,040 90 @ 35 = 3,150 20 @ 33 = 660 $10,750

Cost of goods sold under LIFO periodic represents

the cost of the last 300 units that were added to inventory.

Problem Solution

a. LIFO periodic:

Cost of goods sold . . . . . . . 50 @ $38 = $ 1,900 140 @ 36 = 5,040 90 @ 35 = 3,150 20 @ 33 = 660 $10,750

Ending inventory. . . . . . . . 150 @ 30 = $ 4,500 Ending inventory includes the cost of the beginning

inventory...

Problem Solution

a. LIFO periodic:

Cost of goods sold . . . . . . . 50 @ $38 = $ 1,900 140 @ 36 = 5,040 90 @ 35 = 3,150 20 @ 33 = 660 $10,750

Ending inventory. . . . . . . . 150 @ 30 = $ 4,500 50 @ 33 = 1,650 plus the cost of the first 50 units that were purchased

on 2/22.

Problem Solution

a. LIFO periodic:

Cost of goods sold . . . . . . . 50 @ $38 = $ 1,900 140 @ 36 = 5,040 90 @ 35 = 3,150 20 @ 33 = 660 $10,750

Ending inventory. . . . . . . . 150 @ 30 = $ 4,500 50 @ 33 = 1,650 $ 6,150 $16,900

Cost of goods sold plus ending inventory equals goods available of sale.

a. Assume that Kuffel Co. uses a periodic inventory system. Calculate cost of goods sold and ending inventory under FIFO and LIFO.

b. Assume that Kuffel Co. uses a perpetual inventory system. Calculate cost of goods sold and ending inventory under FIFO and LIFO.

c. Explain why the FIFO results for cost of goods sold and ending inventory are the same in your answers to parts a and b, but the LIFO results are different.

Problem Definition

Problem Solution

b. FIFO perpetual: Cost of goods sold . . . . . . . 100 @ $30 = $ 3,000

To calculate the FIFO cost of goods sold amount under perpetual, apply the same FIFO rules but identify the first-in 100 units and their associated costs for each of the three sales transaction as they occur throughout the year.

The sale of 100 units on 3/7 is assumed to have come from beginning inventory…

Problem Solution

b. FIFO perpetual: Cost of goods sold . . . . . . . 100 @ $30 = $ 3,000 50 @ 30 = 1,500 50 @ 33 = 1,650 while the sale on 9/28 is assumed to have exhausted

the 50 units remaining from beginning inventory plus the first 50 units of the 70 units purchased on 2/22...

Problem Solution

b. FIFO perpetual: Cost of goods sold . . . . . . . 100 @ $30 = $ 3,000 50 @ 30 = 1,500 50 @ 33 = 1,650 20 @ 33 = 660 80 @ 35 = 2,800

and the 12/4 sale is assumed to have exhausted the remaining 20 units from the 2/22 layer plus the first 50 units of the 4/15 layer.

Problem Solution

b. FIFO perpetual: Cost of goods sold . . . . . . . 100 @ $30 = $ 3,000 50 @ 30 = 1,500 50 @ 33 = 1,650 20 @ 33 = 660 80 @ 35 = 2,800 $ 9,610

Cost of goods sold under FIFO perpetual represents

the cost of the first 300 units that were added to inventory – the same result as FIFO periodic!

Problem Solution

b. FIFO perpetual: Cost of goods sold . . . . . . . 100 @ $30 = $ 3,000 50 @ 30 = 1,500 50 @ 33 = 1,650 20 @ 33 = 660 80 @ 35 = 2,800 $ 9,610

Ending inventory. . . . . . . . 10 @ 35 = $ 350 Ending inventory includes the cost of 10 of the 90

units purchased on 4/15 since the cost of only 80 of these units were added to cost of goods sold.

Problem Solution

b. FIFO perpetual: Cost of goods sold . . . . . . . 100 @ $30 = $ 3,000 50 @ 30 = 1,500 50 @ 33 = 1,650 20 @ 33 = 660 80 @ 35 = 2,800 $ 9,610

Ending inventory. . . . . . . . 10 @ 35 = $ 350 140 @ 36 = 5,040 50 @ 38 = 1,900

Ending inventory includes all layers that were not added to cost of goods sold.

Problem Solution

b. FIFO perpetual: Cost of goods sold . . . . . . . 100 @ $30 = $ 3,000 50 @ 30 = 1,500 50 @ 33 = 1,650 20 @ 33 = 660 80 @ 35 = 2,800 $ 9,610

Ending inventory. . . . . . . . 10 @ 35 = $ 350 140 @ 36 = 5,040 50 @ 38 = 1,900 $ 7,290 $16,900

Cost of goods sold plus ending inventory equals goods available of sale.

Problem Solution

b. LIFO perpetual: Cost of goods sold . . . . . . . 70 @ $33 = $ 2,310 30 @ 30 = 900 To calculate the LIFO cost of goods sold amount

under perpetual, apply the same LIFO rules but identify the last-in 100 units and their associated costs for each of the three sales transaction as they occur throughout the year.

The sale of 100 units on 3/7 is assumed to have come from the then last-in 100 units… try it!

Problem Solution

b. LIFO perpetual: Cost of goods sold . . . . . . . 70 @ $33 = $ 2,310 30 @ 30 = 900 100 @ 36 = 3,600 By the time the sale of 100 units occurred on 9/28

the last-in 100 units would have been redefined based on the most recent purchase transaction.

Problem Solution

b. LIFO perpetual: Cost of goods sold . . . . . . . 70 @ $33 = $ 2,310 30 @ 30 = 900 100 @ 36 = 3,600 50 @ 38 = 1,900 40 @ 36 = 1,440 10 @ 35 = 350 By the time the sale of 100 units occurred on 12/4

the last-in 100 units would have been redefined again based on the most recent purchase transactions.

Problem Solution

b. LIFO perpetual: Cost of goods sold . . . . . . . 70 @ $33 = $ 2,310 30 @ 30 = 900 100 @ 36 = 3,600 50 @ 38 = 1,900 40 @ 36 = 1,440 10 @ 35 = 350 $10,500

Cost of goods sold in LIFO perpetual represents the cost of the last-in 100 units that were added to inventory at the time each sale transaction occurred throughout the year.

Total cost of goods sold differs from LIFO periodic.

Problem Solution

b. LIFO perpetual: Cost of goods sold . . . . . . . 70 @ $33 = $ 2,310 30 @ 30 = 900 100 @ 36 = 3,600 50 @ 38 = 1,900 40 @ 36 = 1,440 10 @ 35 = 350 $10,500

Ending inventory. . . . . . . . 120 @ 30 = $ 3,600 80 @ 35 = 2,800 Ending inventory in LIFO perpetual is what is left.

Problem Solution

b. LIFO perpetual: Cost of goods sold . . . . . . . 70 @ $33 = $ 2,310 30 @ 30 = 900 100 @ 36 = 3,600 50 @ 38 = 1,900 40 @ 36 = 1,440 10 @ 35 = 350 $10,500

Ending inventory. . . . . . . . 120 @ 30 = $ 3,600 80 @ 35 = 2,800 $ 6,400 $16,900

Cost of goods sold plus ending inventory equals goods available of sale.

a. Assume that Kuffel Co. uses a periodic inventory system. Calculate cost of goods sold and ending inventory under FIFO and LIFO.

b. Assume that Kuffel Co. uses a perpetual inventory system. Calculate cost of goods sold and ending inventory under FIFO and LIFO.

c. Explain why the FIFO results for cost of goods sold and ending inventory are the same in your answers to parts a and b, but the LIFO results are different.

Problem Definition

c. Under FIFO, the periodic and perpetual inventory systems always result in the same dollar amounts being assigned to ending inventory and cost of goods sold – once first-in, always first in – and the timing of the application of the FIFO rules makes no difference.

(continued)

Problem Solution

c. (concluded)

Under LIFO, the “last-in cost” changes each time another inventory item is purchased. Thus, the timing of the application of the LIFO rules is relevant, and different results will occur under the periodic and perpetual systems.

Problem Solution

AccountingWhat the Numbers Mean 9e

David H. MarshallWayne W. McManus

Daniel F. Viele

You should now have a better understandingof the FIFO and LIFO cost flow assumptions under the

periodic and perpetual systems.

Remember that there is a demonstration problem for each chapter that is here for your learning benefit.