19E_4 - Horngren'S Financial And Managerial Accounting

Question

Question: Assume that Toys Galore store bought and sold a line of dolls during December as follows:

Dec. 1 Beginning merchandise inventory 13 units @ \( 9 each

8 Sale 8 units @ \) 22 each

14 Purchase 16 units @ \( 14 each

21 Sale 14 units @ \) 22 each

Requirements

4. Which method results in a higher cost of ending merchandise inventory?

Step-by-Step Solution

Answer

The FIFO method would provide a higher Ending inventory.

Step-by-Step-Solution Step1: Ending Inventory under FIFO and LIFO

Under FIFO cost of goods sold is valued at historical prices. So, the ending inventory would be at the current cost. In the same way, the cost of goods sold is valued at the current prices under the LIFO method and so the ending inventory under LIFO would be valued at the historic prices. 

 

So it depends upon the fluctuation of the market price to report the highest and lowest ending inventory under the two methods.

 

In case of rising prices, LIFO would provide a higher COGS and lower ending inventory. Whereas, in case of falling prices the FIFO would provide a higher and would result in the lowest ending inventory.

 

Step 2: Ending Inventory in the given case

In the given case, it can be seen that the cost price has been increased during the month.

 So, in case of rising prices,FIFO would provide ending inventory at the lowest amount.Similarly in case of falling prices, 

The ending inventory under the FIFO method was $98 and under the LIFO method was $73.