Amara Ltd was founded on 1st J
Amara Ltd was founded on 1st January 2019. Amara sells bedframes to customers. The company has adopted a periodic inventorysystem together with the average cost cost-flow assumption (AVCO)to determine the Cost of Goods Sold for the year. The company’sinventory transactions for its first year of operation to December31st, 2019 are as follows:
|
Date |
Description |
Units |
Cost price per unit |
Selling price per unit |
|
Jan 1 |
Beginning Balance |
100 |
$160 |
|
|
Feb 2 |
Purchase |
500 |
$140 |
|
|
Mar 15 |
Sales |
350 |
$200 |
|
|
Jul 28 |
Purchase |
150 |
$120 |
|
|
Oct 25 |
Sales |
200 |
$200 |
|
|
Dec 26 |
Sales |
100 |
$200 |
|
|
Dec 29 |
Purchase |
200 |
$100 |
Required:
(a) What amount will Amara Ltd report as its Inventory balancein the Current Asset section of its Balance Sheet? What amount willAmara report as Cost of Goods Sold for the year ended 2019financial year? (Show all workings)
(b) If Amara Ltd had adopted First-In First-Out (FIFO) as itscost flow assumption on 1st January 2019, what Cost of Goods Soldfigure would have been reported in its Statement of FinancialPerformance for the 2019 financial year? (Show all workings)
(c) Management is aware of another cost-flow assumption; Last-InFirst-Out (LIFO). Which of the three cost-flow assumptions; AVCO,FIFO or LIFO will yield the highest Gross Profit Margin for the2019 year if 80% of Sales are on credit?
There is no specific methods required.
Answer:
| Cost of Goods Available forsale | |||
| Activity | Units | Unit Price | Amount |
| Beginning Inventory | 100 | $ 160.00 | $ 16,000.00 |
| Purchases | |||
| ‘Feb 2 | 500 | $ 140.00 | $ 70,000.00 |
| ‘Jul 28 | 150 | $ 120.00 | $ 18,000.00 |
| ‘Dec 29 | 200 | $ 100.00 | $ 20,000.00 |
| Total | 950 | $ 124,000.00 |
Units in ending inventory = 950 – 350 – 200 – 100 = 300units
(a) Average Cost per unit = $124,000 / 950 = $130.53 perunitCost of ending inventory = 300 x $130.53 = $39,159Cost of Goods Sold = $124,000 – $39,159 = $84,841
(b) FIFO method of Inventory Valuation –
| FIFO | Cost of Goods Available for sale | Cost of Goods Sold | Ending Inventory | ||||||
| Activity | Units | Unit Price | Amount | Units | Unit Price | Amount | Units | Unit Price | Amount |
| Beginning Inventory | 100 | $ 160.00 | $16,000.00 | 100 | $ 160.00 | $16,000.00 | |||
| Purchases | |||||||||
| ‘Feb 2 | 500 | $ 140.00 | $ 70,000.00 | 500 | $ 140.00 | $ 70,000.00 | |||
| ‘Jul 28 | 150 | $ 120.00 | $ 18,000.00 | 50 | $ 120.00 | $ 6,000.00 | 100 | $ 120.00 | $12,000.00 |
| ‘Dec 29 | 200 | $ 100.00 | $ 20,000.00 | 200 | $ 100.00 | $20,000.00 | |||
| Total | 950 | $124,000.00 | 650 | $ 92,000.00 | 300 | $32,000.00 |
(c)LIFO method results in highest gross profit margin. In LIFO method,goods purchased at last are sold first. Since prices for purchaseare decreasing on every purchase, cost of goods sold being latestpurchases is with lower purchase price resulting in lower cost ofgoods sold and higher gross profit. Gross Profit is Sales revenueless cost of goods sold.
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