On May 1, Pharoah Company had 430 units of inventory on hand, at a cost of $4.00 each. The company uses a perpetual inventory system. All purchases and sales are on account. A record of inventory transactions for the month of May for the company is as follows:

★

Purchases

Sales

May 4

1,500

@

$4.20

May 3

260

@

$7.00

14

780




$4.30

16

1,100

@

$7.00

29

400




@ $4.75

18

570

@

$7.50

(a)

Calculate the cost of goods sold and ending inventory using FIFO.

Cost of goods sold

Ending inventory.

Search

$

To calculate the cost of goods sold (COGS) and ending inventory using the First-In, First-Out (FIFO) method, we need to follow the sequence of inventory purchases and sales throughout May. Here's the detailed process:

**Inventory on hand at the beginning:**
- 430 units at $4.00 each

**Purchases during May:**
1. May 4: 1,500 units at $4.20 each
2. May 14: 780 units at $4.30 each
3. May 29: 400 units at $4.75 each

**Sales during May:**
1. May 3: 260 units at $7.00 each
2. May 16: 1,100 units at $7.00 each
3. May 18: 570 units at $7.50 each

Now, let's calculate the COGS and ending inventory using FIFO:

1. **Sales on May 3: 260 units**
   - 260 units from beginning inventory at $4.00 each
   - COGS: 260 * $4.00 = $1,040

2. **Sales on May 16: 1,100 units**
   - 170 units from beginning inventory (remaining) at $4.00 each = $680
   - 930 units from May 4 purchase at $4.20 each = 930 * $4.20 = $3,906
   - COGS: $680 + $3,906 = $4,586

3. **Sales on May 18: 570 units**
   - 570 units from May 4 purchase (remaining) at $4.20 each = 570 * $4.20 = $2,394
   - COGS: $2,394

Now, let's summarize the COGS:

\[
\text{Total COGS} = \$1,040 + \$4,586 + \$2,394 = \$8,020
\]

Next, let's determine the ending inventory:

- **Remaining inventory after May 3 sale:**
  - Beginning inventory: 170 units at $4.00 each
  - May 4 purchase: 1,500 - 930 - 570 = 0 units remaining
  - May 14 purchase: 780 units at $4.30 each
  - May 29 purchase: 400 units at $4.75 each

- **Ending Inventory Calculation:**
  - May 14 purchase: 780 units at $4.30 each = 780 * $4.30 = $3,354
  - May 29 purchase: 400 units at $4.75 each = 400 * $4.75 = $1,900
  - Remaining beginning inventory: 170 units at $4.00 each = 170 * $4.00 = $680

\[
\text{Total Ending Inventory} = \$680 + \$3,354 + \$1,900 = \$5,934
\]

**Summary:**

- **Cost of Goods Sold (COGS):** $8,020
- **Ending Inventory:** $5,934

Do you want more details or have any questions?

Here are 5 questions you might want to ask:
1. How does the FIFO method affect the financial statements compared to LIFO?
2. What are the advantages of using a perpetual inventory system?
3. Can you explain the impact of inventory valuation on net income?
4. How do different inventory costing methods affect tax liabilities?
5. What are some common challenges in inventory management?

**Tip:** When using the FIFO method in a period of rising prices, the ending inventory will be valued higher, and the cost of goods sold will be lower compared to other methods, which can result in higher reported profits.

Learn how to calculate the cost of goods sold (COGS) and ending inventory using the First-In, First-Out (FIFO) method with a detailed step-by-step solution. This problem involves inventory costing principles and real-world transactions, suitable for professionals and students studying inventory management.

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