# 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.

 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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