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8 March, 05:11

Tiny Trikes began April with 200 units of their basic tricycle having a unit cost of $20 in inventory. Relevant information is listed as follows: If Tiny Trikes uses the FIFO cost assumption method, what amount will it report for cost of goods sold for April for the basic tricycle?

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  1. 8 March, 05:39
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    Cost of goods sold = $2,850 (answer)

    Explanation:

    Since the question lacks complete information and my objective is to provide you with the best way to deal with this sort of questions on your own, therefore, I am using the following information to solve the question

    Sales during April were 500 units Beginning inventory 200 units at a cost of $5 per unit Purchase 1 was 250 units at $6 per unit Purchase 2 was 400 units at $7 per unit

    In order to solve this question, we first need to know about the following key concepts:

    Period inventory system:

    A system to record the inventory flow. Calculates the inventory on hand only periodically. It uses purchases account to record the inflow of the inventory. Total of purchases will determine the cost of goods sold available for sale at the end of particular inventory period. The cost of goods sold is calculated as follows:

    Cost of goods sold available for - ending inventory

    First in First Out (FIFO) Method:

    An assumption used to value the inventory. Assumes that the inventory purchased first is sold first. This implies that the ending inventory will consist of only the latest purchases, subject to the units sold during the period.

    Cost of goods sold:

    Cost incurred or to be incurred to sell the goods. An expense to the organisation. Gross profit = Revenue - Cost of goods sold Cost of goods sold is established in order to set the selling price for a particular period.

    Ending inventory:

    Inventory left out at the end of a particular period. Ending inventory should be valued at cost or market value which is less. The cost of ending inventory will be estimated using the two methods - FIFO or LIFO. It is reported under the current assets of the Statement of Financial Position. Calculations:

    Step 1:

    Calculate the units of ending inventory

    Units of ending inventory = Units available for sale - Units sold

    Units of ending inventory = (Beginning inventory + Purchase 1 + Purchase 2) - 500 units

    Units of ending inventory = (200 units + 250 units + 400 units) - 500 units

    Units of ending inventory = 350 units

    Explanation:

    FIFO method assumes that inventory purchased first is sold first. It implies, that units sold are from the opening inventory, purchase 1 and part from the purchase 2. Ending inventory will consist of the units purchased in purchase 2.

    Step 2

    Calculate the ending inventory:

    We are determining the amount of inventory as per FIFO method as follows:

    Ending inventory would be the balance from purchase 2:

    Ending inventory = Balance from purchase 2

    Ending inventory = Number of units in ending inventory * Cost per unit

    Ending inventory = 350 units * $7 per unit

    Ending inventory = $2,450

    Step 3:

    Calculate the cost of goods available for sale

    Value of opening inventory = 200 units * $5 per unit = $1,000 (A)

    Value of purchase 1 = 250 units * $6 per unit = $1,500 (B)

    Value of purchase 2 = 400 units * $7 per unit = $2,800 (C)

    Adding A+B+C = $1,000 + $1,500 + $2,800 = $5,300 = Cost of goods available for sale

    Step 4:

    Cost of goods sold as per FIFO method:

    Cost of goods sold = Cost of goods available for sale - Ending inventory

    Cost of goods sold = $5,300 - $2,450

    Cost of goods sold = $2,850 (answer)
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