ACCG 8307 Module 2

Example 2.1

Note based on terminology used in the question, Capricorn Ltd is using the periodic method
rather than perpetual method of accounting for inventory. To explain this example, I will
make an assumption that opening inventory, purchases and closing inventory is all
$100,000. This is what Cost of Goods Sold (COGS) would look like using weighted average
cost

  X5 X4
     

Opening inventory 100,000 100,000

Purchases 100,000 100,000

Closing Inventory (100,000) (100,000)

Cost of Goods sold 100,000 100,000

After the change of policy to First in First out (FIFO), the inventory for X5 increases by
$26,000 and X4 to $52,000. Therefore the COGS calculation should look like this

  X5 X4
     

Opening inventory 152,000 100,000

Purchases 100,000 100,000

Closing Inventory (126,000) (152,000)

Cost of Goods sold 126,000 48,000

So as can be seen above, X4 cost of goods sold should be $52,000 ($100,000 – $48,000)
lower, which means profit should be $52,000 higher.

In X5, cost of goods sold should be $26,000 higher ie ($126,000 – 100,000). Therefore the
profit should be $26,000 lower.

1
 ACCG 8307 Module 2

If you wanted to illustrate with journals it would look like this

DATE DETAILS DR CR
30 June X4 Inventory (SOFP) 52,000

COGS- Closing Inventory (SOPLOCI) 52,000

DATE DETAILS DR CR
30 June X5 COGS – Opening Inventory (SOPLOCI) 52,000

Opening Retained Earnings 52,000

( This journal not illustrated in notes as
would automatically be brought forward)

Inventory (SOFP) 26,000

COGS- Closing Inventory (SOPLOCI) 26,000