Cost methods—determining the cost of goods sold. Top Printer S.R.L. is a local wholesaler of printers. On December 1st, 20X8, the opening inventory of model X300 printers consists of 100,000 lei (100 printers × 1000 lei/piece). In December 20X8, the company carried out the following transactions

Question

Cost methods—determining the cost of goods sold. Top Printer S.R.L. is a local wholesaler of printers. On December 1st, 20X8,
the opening inventory of model X300 printers consists of 100,000 lei (100 printers × 1000 lei/piece). In December 20X8, the company carried out the following transactions involving the X300 printers:
• On December 3rd, the company purchased 100 pieces at the unit price of 1100 lei/piece, an acquisition which involved delivery costs in amount of 10,000 lei;
• On December 15th, 120 printers were sold at a selling price of 1500 lei/piece;
• On December 18th, the company purchased 20 printers at the unit cost of 1600 lei/piece;
• On December 23rd, 90 printers were sold at a selling price of 1800 lei/piece.
A 19% VAT is applicable to all of the above transactions.
Determine the X300 printers closing inventory as of December 31st, the cost of the printers sold, as well as the profit of Top Printer S.R.L. under each of the cost formulas that can be used and interpret the obtained results.

Accepted Answer

The following cost formulas can be used in order to determine
the cost of the goods sold by the company:

a) FIFO;
b) WAC after each purchase;
c) WAC at the end of the accounting period;
d) LIFO—this method is allowed only according to the national
accounting regulations (OMPF 1802/2014).

a) The impact of applying FIFO as cost formula for model X300
printers is reflected in following table:

Merchandise inventory—X300 printers—December 20X8

Date	[latex]Acquisitions^{a}[/latex]			Disposals			Closing inventory
	Q (units)	UC (lei/unit)	TC (lei)	Q (units)	UC (lei/unit)	TC (lei)	Q (units)	UC (lei/unit)	TC (lei)
1.12.20X8							100	1000	100,000
3.12.20X8	100	[latex]1200^{b}[/latex]	120,000				100	1000	100,000
							100	1200	120,000
							200		220,000
15.12.20X8				100	[latex]1000^{c}[/latex]	100,000	80	1200	96,000
				20	1200	24,000
				120		124000
18.12.20X8	20	1600	32,000				80	1200	96,000
							20	1600	32,000
							100		128,000
23.12.20X8				80	1200	96,000	10	1600	16,000
				10	1600	16,000
				90		112,000
31.12.20X8							10	1600	16,000

[latex]^{a} [/latex]where: Q—quantity, UC—unit cost, TC—total cost;
[latex]^{b} [/latex] For each acquisition, the initial recognition of the inventory implies determining the acquisition cost as follows:
Acquisition cost = Purchase price – Trade discounts + Expenses directly related to the acquisition which are not to be recovered Therefore, acquisition cost 03.12.2018 (TC) = 100 × 1100 + 10,000 = 120,000 lei => UC = TC/Q = 120,000/100 = 1200 lei/unit;
[latex]^{c} [/latex] On the disposals column the cost of the goods sold is disclosed, determined by using one of the cost
formulas. The selling price of the sales transaction is not to be disclosed in the disposals column

After applying the FIFO cost formula, the final closing inventory of X300 printers as of December 31st, 20X8, consists of 10 pieces of 1600 lei/piece, having a total cost of 16,000 lei.
b) The impact of applying WAC (weighted average cost) after each purchase as a cost formula for the model X300 printers is reflected in the following table:

Merchandise inventory excerpt—X300 printers—December 20X8[latex]^{a}[/latex]

Date	[latex]Acquisitions^{a}[/latex]			Disposals			Closing inventory
	Q (units)	UC (lei/unit)	TC (lei)	Q (units)	UC (lei/unit)	TC (lei)	Q (units)	UC (lei/unit)	TC (lei)
1.12.20X8							100	1000	100,000
3.12.20X8	100	1200	120,000				100	1000	100,000
							100	1200	120,000
							200		220,000
							WA[latex]C_{1}[/latex] = TC/Q
							= 220,000/200 = 1100 lei/pc
15.12.20X8				120	1100	132,000	80	1100	88,000
18.12.20X8	20	1600	32,000				80	1100	88,000
							20	1600	32,000
							100		120,000
							WA[latex]C_{2}[/latex] = TC/Q
							= 120,000/100 = 1200 lei/pc
23.12.20X8				90	1200	96,000	10	1200	12,000
31.12.20X8							10	1200	12,000

[latex]^{a}[/latex] Comments from previous table apply here as well

After applying the WAC after each purchase, the closing inventory of X300 printers as of December 31st, 20X8, consists of 10 pieces valuated at 1200 lei/piece, resulting in a final account balance of 12,000 lei.
c) The impact of applying WAC (weighted average cost) at the end of the accounting period as cost formula for model X300 printers is reflected as follows:

Merchandise inventory excerpt—X300 printers—December 20X8[latex]^{a}[/latex]

Date	[latex]Acquisitions^{a}[/latex]			Disposals			Closing inventory
	Q (units)	UC (lei/unit)	TC (lei)	Q (units)	UC (lei/unit)	TC (lei)	Q (units)	UC (lei/unit)	TC (lei)
1.12.20X8							100	1000	100,000
3.12.20X8	100	1200	120,000				100	1000	100,000
							100	1200	120,000
							200		220,000
15.12.20X8				120	1145	137,400
18.12.20X8	20	1600	32,000				100	1000	100,000
							100	1200	120,000
							20	1600	32,000
							200		252,000
23.12.20X8				90	1145	103,050
31.12.20X8							100	1000	100,000
							100	1200	120,000
							20	1600	32,000
							220		252,000
							WAC = TC/Q
							= 252,000/220 = 1145
							lei/pc
							10	1145	11,450

[latex]^{a}[/latex] Comments from previous table apply here as well

After applying the WAC at the end of the accounting period, the closing inventory of X300 printers as of December 31st, 20X8, consists of 10 pieces valuated at 1145 lei/piece, resulting in a final account balance of 11,450 lei.
d) The impact of applying LIFO as a cost formula for the model
X300 printers is reflected as follows:

Merchandise inventory excerpt—X300 printers—December 20X8[latex]^{a}[/latex]

Date	[latex]Acquisitions^{a}[/latex]			Disposals			Closing inventory
	Q (units)	UC (lei/unit)	TC (lei)	Q (units)	UC (lei/unit)	TC (lei)	Q (units)	UC (lei/unit)	TC (lei)
1.12.20X8							100	1000	100,000
3.12.20X8	100	1200	120,000				100	1000	100,000
							100	1200	120,000
							200		220,000
15.12.20X8				100	1200	120,000	80	1000	80,000
				20	1000	20,000
				120		140,000
18.12.20X8	20	1600	32,000				80	1000	100,000
							20	1600	32,000
							100		112,000
23.12.20X8				20	1600	32,000	10	1000	10,000
				70	1000	70,000
				90		102,000
31.12.20X8							10	1000	10,000

After applying the LIFO cost formula, the closing inventory of X300 printers as of December 31st, 20X8, consists of 10 pieces
valuated at 1000 lei/piece, resulting in a final account balance of 10,000 lei.
The impact of each cost formula in the entity’s financial statements is reflected in the following table:

The impact of the inventory cost formula in the financial statements of Top Printers S.R.L

Cost formula	Closing inventory[latex]^{a}[/latex]	Cost of goods sold[latex]^{b}[/latex]	Revenues from the sale of merchandise[latex]^{b}[/latex]	Profit from the sale of X300 printers (revenues – cost of goods sold)
FIFO	16,000 lei	124,000 + 112,000 = 236,000 lei	120 × 1500 + 90 ×1800 = 342,000 lei	106,000 lei
WAC after each purchase	12,000 lei	132,000 + 108,000 = 240,000 lei	342,000 lei	102,000 lei
WAC at the end of the period	11,450 lei	137,400 + 103,050 = 240,450 lei	342,000 lei	101,950 lei
LIFO	10,000 lei	140,000 + 102,000 = 242,000 lei	342,000 lei	100,000 lei

[latex]^{a}[/latex]Representing the value of goods for resale as part of current assets in the balance sheet (statement of financial position)
[latex]^{b}[/latex]Representing the value of expenses with merchandise in the income statement (Profit & Loss Account)
[latex]^{c}[/latex]Revenues from the sale of merchandise are determined as unit selling price multiplied by quantity sold for each selling transaction

The numbers confirm the previously highlighted impact in a context of an inflationist economy. Hence, applying the FIFO method results in the lowest expense amount and, therefore, the highest profit level. Analysing the amounts in comparison to the other three methods going down towards LIFO, the expenses of merchandise exponentially increase, reaching the highest value using LIFO and the profit decreases to its lowest value using LIFO. Furthermore, using LIFO, the company would have to disclose the lowest value of goods for resale, which is not consistent with the market price evolution at the end of the financial year, thus altering the true and fair view.

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