EXERCISE 6.

(a) FIFO
Beginning inventory (23 X HK$970).......... HK$ 22,310
Purchases
Sept. 12 (45 X HK$1,020)......................... HK$45,900
Sept. 19 (20 X HK$1,040)......................... 20,800
Sept. 26 (44 X HK$1,050)......................... 46,200 112,900
Cost of goods available for sale................... 135,210
Less: Ending inventory (11 X HK$1,050)..... 11,550
Cost of goods sold......................................... HK$123,660

Proof
Date Units Unit Cost Total Cost
9/1 23 HK$ 970 HK$ 22,310
9/12 45 1,020 45,900
9/19 20 1,040 20,800
9/26 33 1,050 34,650
121 HK$123,660

Average-Cost
Cost of goods available for sale......................................... HK$135,210
Less: Ending inventory (11 X HK$1,024.32*).................... 11,268
Cost of goods sold............................................................... HK$123,942
*Average unit cost is HK$1024.32 computed as follows:
HK$135,210 (Cost of goods available
for sale) = HK$1,024.32 (rounded)
132 units (Total units available for sale)
Proof
121 units X HK$1,024.32 = HK$123,943 (HK$1 difference due
to rounding)
(b)
Cost of

}
FIFO HK$11,550 (ending inventory) + HK$123,660 (COGS) = HK$135,210 goods
available
Average-cost HK$11,268 (ending inventory) + HK$123,942 (COGS) = HK$135,210
for sale

Under both methods, the sum of the ending inventory and cost of goods sold
equals the same amount, HK$135,210, which is the cost of goods available for
sale.
EXERCISE 6.6

(a) FIFO
Beginning inventory (200 X £5)................................ £1,000
Purchases
June 12 (300 X £6)............................................. £1,800
June 23 (500 X £7)............................................. 3,500 5,300
Cost of goods available for sale.............................. 6,300
Less: Ending inventory (160 X £7).......................... 1,120
Cost of goods sold.................................................... £5,180

AVERAGE-COST
Cost of goods available for sale.............................. £6,300
Less: Ending inventory (160 X £6.30*)................... 1,008
Cost of goods sold.................................................... £5,292
*Average unit cost is:

£6,300 (Cost of goods available for sale)

= £6.30
1,000 units (Total units available for sale)

(b) The FIFO method will produce the higher ending inventory because
costs have been rising. Under this method, the earliest costs are
assigned to cost of goods sold and the latest costs remain in ending
inventory.
For Howsham Interiors, the ending inventory under FIFO is £1,120 or
(160 X £7) compared to £1,008 or (160 X £6.30) under average-cost.

(c) The average-cost method will produce the higher cost of goods sold
for Howsham Interiors. The cost of goods sold is £5,292 or [£6,300 –
£1,008] compared to £5,180 or (£6,300 – £1,120) under FIFO.
EXERCISE 6.15

(1) FIFO
Date Purchases Cost of Goods Sold Balance
June 1 (200 @ £5) £1,000
June 12 (300 @ £6) £1,800 (200 @ £5)
(300 @ £6) }
£2,800
June 15 (200 @ £5) £1,000
(200 @ £6) 1,200 (100 @ £6) £ 600
(100 @ £6)
June 23 (500 @ £7) £3,500 (500 @ £7) } £4,100

June 27 (100 @ £6) 600

(340 @ £7) 2,380 (160 @ £7) £1,120
£5,180

Ending inventory: £1,120. Cost of goods sold: £6,300 – £1,120 = £5,180.

(2) Moving-Average Cost

Date Purchases Cost of Goods Sold Balance
June 1 (200 @ £5) £1,000
June 12 (300 @ £6) £1,800 (500 @ £5.60) £2,800
June 15 (400 @ £5.60) £2,240 (100 @ £5.60) £ 560
June 23 (500 @ £7) £3,500 (600 @ £6.767) £4,060
June 27 (440 @ £6.767) £2,977 (160 @ £6.767) £1,083
£5,217

Ending inventory: £1,083. Cost of goods sold: £6,300 – £1,083 = £5,217.

(b) FIFO gives the same ending inventory and cost of goods sold values
under both the periodic and perpetual inventory system. Moving
average gives different ending inventory and cost of goods sold
values under the periodic and perpetual inventory systems, due to the
average calculation being based on different pools of costs.

(c) The simple average would be [(£5 + £6 + £7) ÷ 3)] or £6. However, the
moving-average cost method uses a weighted-average unit cost that
changes each time a purchase is made rather than a simple average.
 PROBLEM 6.5

Cost of Goods Available for Sale

Date Explanation Units Unit Cost Total Cost
October 1 Beginning Inventory 60 €24 €1,440
9 Purchase 120 26 3,120
17 Purchase 70 27 1,890
25 Purchase 80 28 2,240
Total 330 €8,690

Ending Inventory in Units: Sales Revenue

Units available for sale 330 Unit
Sales (100 + 65 + 120) 285 Date Units Price Total Sales
Units remaining in ending inventory 45 October 11 100 €35 € 3,500
22 65 40 2,600
29 120 40 4,800
285 €10,900
(a)
(1) FIFO

(i) Ending Inventory (ii) Cost of Goods Sold

October 25 45 @ €28 = €1,260 Cost of goods available
for sale € 8,690
Less: Ending inventory 1,260
Cost of goods sold € 7,430

(iii) Gross Profit (iv) Gross Profit Rate

Sales revenue €10,900 Gross profit € 3,470
= 31.8%
Cost of goods sold 7,430 Net sales €10,900
Gross profit € 3,470

(2) Average-Cost
cost of goods available for sale
Weighted-average cost per unit:
units available for sale
€8,690
= €26.333
330

(i) Ending Inventory (ii) Cost of Goods Sold

45 @ €26.333 = €1,185* Cost of goods available
for sale €8,690
*rounded to nearest dollar Less: Ending inventory 1,185
 Cost of goods sold €7,505

(iii) Gross Profit (iv) Gross Profit Rate

Sales revenue €10,900 Gross profit € 3,395
= 31.1%
Cost of goods sold 7,505 Net sales €10,900
Gross profit € 3,395

(b) Average-cost produces the lower ending inventory value, gross

profit, and gross profit rate because its cost of goods sold is higher
than FIFO.

*PROBLEM 6.8

(a)
Sales:
Date
January 6 150 units @ £40 £ 6,000
January 9 (return) (10 units @ £40) (400)
January 10 50 units @ £45 2,250
January 30 160 units @ £50 8,000
Total sales £15,850
(1) FIFO
Date Purchases Cost of Goods Sold Balance
January 1 (150 @ £19) £2,850

January 2 (100 @ £21) £2,100

(150 @ £19)
(100 @ £21) } £4,950

January 6 (150 @ £19) £2,850 (100 @ £21) £2,100

January 9 (–10 @ £19) (£ 190) ( 10 @ £19)

January 9 ( 75 @ £24) £1,800 (100 @ £21) } £4,090

( 75 @ £24)
( 10 @ £19)

January 10 (–15 @ £24) (£ 360)

(100 @ £21)
( 60 @ £24)
} £3,730

January 10 ( 10 @ £19)
( 40 @ £21) } £1,030 ( 60 @ £21)
( 60 @ £24) } £2,700

}
January 23 (100 @ £26) £2,600 ( 60 @ £21)
( 60 @ £24) £5,300
(100 @ £26)
January 30 ( 60 @ £21) £1,560
 }
( 60 @ £24) £3,740 ( 60 @ £26)
( 40 @ £26) £7,430 }
(i) Cost of goods sold = £7,430. (ii) Ending inventory = £1,560. (iii) Gross
profit = £15,850 – £7,430 = £8,420.

(2) Moving-Average
Date Purchases Cost of goods sold Balance
January 1 (150 @ £19) £2,850
January 2 (100 @ £21) £2,100 (250 @ £19.80)a £4,950
January 6 (150 @ £19.80) £2,970 (100 @ £19.80) £1,980
January 9 (–10 @ £19.80) (£ 198) (110 @ £19.80) £2,178
January 9 ( 75 @ £24) £1,800 (185 @ £21.503) b £3,978
January 10 (–15 @ £24) (£ 360) (170 @ £21.282) c £3,618
January 10 ( 50 @ £21.282) £1,064 (120 @ £21.282) £2,554
January 23 (100 @ £26) £2,600 (220 @ £23.427) d £5,154
January 30 (160 @ £23.427) £3,748 (60 @ £23.427) £1,406
£7,584
a c
£4,950 ÷ 250 = £19.80 £3,618 ÷ 170 = £21.282
b d
£3,978 ÷ 185 = £21.503 £5,154 ÷ 220 = £23.427
(i) Cost of goods sold = £7,584. (ii) Ending inventory = £1,406. (iii)
Gross profit = £15,850 – £7,584 = £8,266.

(b)
FIFO Moving-Average
Sales £15,850 £15,850
Cost of goods sold 7,430 7,584
Gross profit £ 8,420 £ 8,266
Ending inventory £ 1,560 £ 1,406

In a period of rising costs, the moving-average cost flow assumption

results in the higher cost of goods sold and lower gross profit. FIFO
gives the lower cost of goods sold and higher gross profit.

On the statement of financial position, FIFO gives the higher ending

inventory (representing the most current costs); moving-average gives
the lower ending inventory.