Craig Company buys and sells one product. Its beginning inventory, purchases, and sales during calendar-year 2019 follow. Additional tracking data for specific identification: (1) January 15 sale—200 units @ $14, (2) April 1 sale—200 units @ $15, and (3) November 1 sale—200 units @ $14 and 100

Question

Craig Company buys and sells one product. Its beginning inventory, purchases, and sales during calendar-year 2019 follow.

Additional tracking data for specific identification: (1) January 15 sale—200 units @ $14, (2) April 1 sale—200 units @ $15, and (3) November 1 sale—200 units @ $14 and 100 units @ $20.

Required
1. Compute the cost of goods available for sale.
2. Apply the four methods of inventory costing (FIFO, LIFO, weighted average, and specific identification) to compute ending inventory and cost of goods sold under each method using the periodic system.
3. Compute gross profit earned by the company for each of the four costing methods in part 2. Also, report the inventory amount reported on the balance sheet for each of the four methods.
4. In preparing financial statements for year 2019, the financial officer was instructed to use FIFO but failed to do so and instead computed cost of goods sold according to LIFO. Determine the impact of the error on year 2019’s income. Also determine the effect of this error on year 2020’s income. Assume no income taxes.

Accepted Answer

PLANNING THE SOLUTION

Compute cost of goods available for sale by multiplying the units of beginning inventory and each purchase by their unit costs to determine the total cost of goods available for sale.
Prepare a periodic FIFO computation starting with cost of units available and subtracting FIFO ending inventory amounts to obtain FIFO cost of goods sold (see Exhibit 6A.3).
Prepare a periodic LIFO computation starting with cost of units available and subtracting LIFO ending inventory amounts to obtain LIFO cost of goods sold (see Exhibit 6A.4).
Compute weighted average ending inventory and cost of goods sold using the three-step process illustrated in Exhibits 6A.5a and 6A.5b.
Prepare a table showing the computation of cost of goods sold and ending inventory using the specific identification method (see Exhibit 6A.2).
Compare the year-end 2019 inventory amounts under FIFO and LIFO to determine the misstatement of year 2019 income that results from using LIFO. The errors for years 2019 and 2020 are equal in amount but opposite in effect.

1. Cost of goods available for sale (this amount is the same for all methods).

2a. FIFO periodic method.

2b. LIFO periodic method.

2c. Weighted average periodic method.

2d. Specific identification method.

3.

4. Mistakenly using LIFO, when FIFO should have been used, overstates cost of goods sold in year 2019 by $2,450, which is the difference between the FIFO and LIFO amounts of ending inventory. It understates income in 2019 by $2,450. In year 2020, income is overstated by $2,450 because of the understatement in beginning inventory.

Question 6.6: Craig Company buys and sells one product. Its beginning inve...

Related Answered Questions

Verified Answer:

Using the retail method and the following data, estimate the cost of ending inventory. ...

Verified Answer:

Verified Answer:

Verified Answer:

A company reported the following December purchase and sales data for its only product. ...

Verified Answer:

Verified Answer:

A company reported the following December purchases and sales data for its only product. The company uses a periodic inventory system. Determine the cost assigned to ending inventory and to cost of goods sold using (a) specific identification, (b) FIFO, (c) LIFO, and (d) weighted average. (Round ...

Verified Answer: