Intermediate Accounting 4

Brian Miller is an entrepreneur. He started a small-town friendly grocery store. People stopped by his store to pick up things they did not want to run to the regular grocery store for. In 3 years, because of popular demand, he started adding more items on his shelf and pretty soon, he had grown into a regular grocery store. People loved his store because he knew everyone by their first name and would try to fulfill everyone’s requests. He now needs some help with his inventory. He hired a CPA firm that would give him some advice on how he should maintain his inventory.

You are his CPA. You want to give Brian an overview on the inventory system, some different methods of recording cost of goods sold, and educate him on the accounting side of recording inventory and recording cost of goods sold.

Part 1

1. Explain to Brian the perpetual and periodic inventory systems, covering the main differences between the two systems, and why companies use perpetual inventory system.
2. Contrast the 4 methods of recording cost of goods sold:
   • Specific identification
   • Average cost
   • First in, First out (FIFO)
   • Last in, Last out (LIFO)
3. ABC, a grocery company, uses a periodic inventory system. They have the following information for the month of January:
   

   Beginning inventory	Jan 1: 400 units @ $10 each
   Purchases	Jan 10: 300 units @$12 each Jan 15: 200 units @$15 each
   Sales	Jan 5: 200 units @ $15 each Jan 12: 200 units @ $20 each Jan 18: 100 units @ $25 each
   Ending inventory	Jan 31: 400 units

   • Will LIFO or FIFO generate the highest cost of goods sold? Why? Show all calculations.
   • Will the ending inventory balance will be higher under LIFO or FIFO? Why? Show all calculations.
   • What is the cost of goods sold under LIFO? Show all calculations.
   • What is the cost of goods sold under FIFO? Show all calculations.