Maxell Company uses the FIFO method to assign costs to inventory and cost of goods sold. The company uses a periodic inventory system. Consider the following information: Date Description # of units Cost per unit
January 1 Beginning inventory 140 $4
June 2 Purchase 80 $3
November 5 Sales 160

Requried:
What amounts would be reported as the cost of goods sold and ending inventory balances for the year?

a. Cost of goods sold $640; Ending inventory $140
b. Cost of goods sold $700; Ending inventory $210
c. Cost of goods sold $560; Ending inventory $240
d. Cost of goods sold $620; Ending inventory $180

Option d Cost of goods sold $620; Ending inventory $180 is the correct answer.

Explanation:

Under the periodic FIFO or First In First Out of inventory valuation, we calculate the value of inventory available for sale and at the end of the period we calculate the cost of goods sold by taking the first purchased inventories to be the ones that are sold first.

Thus, under the FIFO method, the cost of goods sold comprises of the cost of inventories that were purchased first and the cost of ending inventory comprises of the cost of most recently purchased inventories.

Jan 1 Beginning Inventory ( 140 * 4)   =    560

June 2 Purchase  (80 * 3)                    =   240

Cost of goods available for sale         =    800

On November 5, 160 units are sold. Out of these 160 units, under FIFO, 140 units are from the beginning inventory and the remaining 20 units from June purchases.

So, Cost of goods sold is,

COGS = 140 * 4 + 20 * 3

COGS = 620

Ending inventory = 800 - 620  = 180

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