The Mitchum Company Has A Beginning Inventory For July Of 375 75 Uni
The Mitchum Company has a beginning inventory for July of $ units at $5/unit and makes the following purchases and sales of tapes during July: (40 pts) 07/07 Purchase 50 units @ $7, 07/12 Sales 100 units, 07/20 Purchase 125 units @ $8, 07/28 Sales 90 units. Compute the cost of sales and the ending inventory for July if the firm uses the following: a. The perpetual inventory system and the FIFO cost flow assumption b. The perpetual inventory system and the LIFO cost flow assumption For the FIFO method, you have to show the cost of sales (cost of goods sold) and the value of ending inventory. For the LIFO method, you have to show the cost of sales (cost of goods sold) and the value of ending inventory.
Paper For Above instruction
The task involves calculating the cost of goods sold (COGS) and ending inventory for the Mitchum Company during July, considering two inventory valuation methods: FIFO and LIFO, under a perpetual inventory system. The data provided includes an initial inventory, purchase transactions, and sales transactions, which are essential for performing the calculations.
Introduction
Inventory valuation methods significantly impact a company's financial statements and tax liabilities. FIFO (First-In, First-Out) assumes that the oldest inventory items are sold first, thus cost of goods sold reflects the cost of the earliest inventory, while LIFO (Last-In, First-Out) assumes that the most recent inventory is sold first, impacting reported profits and ending inventory values. The perpetual inventory system continuously updates inventory accounts after each transaction, providing real-time data necessary for accurate valuation under either method.
Data Summary
Beginning inventory: 375 units at $5 each
Purchase on 07/07: 50 units @ $7
Sale on 07/12: 100 units
Purchase on 07/20: 125 units @ $8
Sale on 07/28: 90 units
Step 1: Determine Beginning Inventory and Purchases
The initial inventory consists of 375 units at $5 each, totaling $1,875. The subsequent purchases increase inventory as follows: 50 units at $7 ($350) on 07/07 and 125 units at $8 ($1,000) on 07/20. These transactions expand the inventory pool for sales during July.
Step 2: FIFO Calculations
Under FIFO, the earliest inventory is sold first. This means that when sales occur, the company depletes the oldest inventory before moving onto newer stock.
On 07/12, selling 100 units:
First, 375 units at $5: use 100 units, costing $500 (100 × $5)
Remaining inventory after this sale: 275 units at $5
On 07/20, purchase 125 units at $8: inventory now includes 275 units at $5 and 125 units at $8
On 07/28, selling 90 units:
Sell 90 units, depleting 90 units from the oldest inventory:
All from $5 inventory: 90 units at $5 costing $450
Calculations for FIFO:
Cost of Goods Sold (COGS):
First sale: 100 units at $5 = $500
Second sale: 90 units at $5 = $450
Total COGS = $950
Ending Inventory:
Remaining from initial inventory after sales:
275 units at $5 = $1,375
Remaining inventory from the July 20 purchase:
125 units at $8 = $1,000
Total ending inventory = $2,375
Step 3: LIFO Calculations
In LIFO, the latest inventory is sold first. Accordingly, after each sale, the most recent inventory is depleted.
On 07/12, selling 100 units:
First, 125 units at $8 are available:
Use 100 units at $8 costing $800
Remaining inventory after sale:
25 units at $8
375 units at $5
50 units at $7
On 07/20, purchase 125 units at $8:
Inventory now includes:
25 units at $8
50 units at $7
125 units at $8 (new purchase)
375 units at $5
On 07/28, sales of 90 units:
Deplete 90 units starting with most recent inventory:
Use 90 units from 125 units at $8, costing $720
Calculations for LIFO:
Cost of Goods Sold (COGS):
First sale: 100 units at $8 = $800
Second sale: 90 units at $8 = $720
Total COGS = $1,520
Ending Inventory:
Remaining inventory:
15 units at $8 (remaining from 125 units at $8 after sales)
50 units at $7
375 units at $5
Values:
15 units at $8 = $120
50 units at $7 = $350
375 units at $5 = $1,875
Total ending inventory = $2,345
Conclusion
Under the perpetual inventory system, FIFO results in lower COGS and higher ending inventory compared to LIFO during periods of rising prices, as is evident in this scenario. Conversely, LIFO produces higher COGS and lower inventory values, which could have significant tax implications. Accurate application of these methods ensures reliable financial reporting and inventory management.
References
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