Inventory Valuation and Cost of Goods Sold
A retail business uses a perpetual inventory system and the FIFO cost flow method. At the beginning of May, inventory consisted of 100 units at $10 each. During May, the following transactions occurred: May 5: purchased 200 units at $12 each; May 10: sold 150 units; May 15: purchased 100 units at $14 each; May 20: sold 200 units; May 25: purchased 50 units at $15 each. The business uses a periodic inventory system for financial reporting but maintains perpetual records for management. At month-end, a physical count shows 90 units on hand. The sales price per unit was $25 for all sales.
1. Calculate the cost of goods sold for May and the value of ending inventory under FIFO, assuming no shrinkage.
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Under FIFO, sales are fulfilled from the oldest costs first.
Beginning inventory: 100 units @ $10 = $1,000 May 5 purchase: 200 units @ $12 = $2,400 May 15 purchase: 100 units @ $14 = $1,400 May 25 purchase: 50 units @ $15 = $750 Total goods available: 450 units, cost $5,550.
Sales: May 10: 150 units. Taken from beginning inventory: 100 @ $10 = $1,000, and 50 from May 5 purchase @ $12 = $600. Total cost for May 10 sale = $1,600. Remaining after May 10: 150 units from May 5 @ $12 = $1,800.
May 20 sale: 200 units. First, 150 from May 5 @ $12 = $1,800, then 50 from May 15 @ $14 = $700. Total cost for May 20 sale = $2,500. Remaining after May 20: 50 units from May 15 @ $14 = $700, plus 50 units from May 25 @ $15 = $750. Total remaining = 100 units, cost $1,450.
Total cost of goods sold = $1,600 + $2,500 = $4,100. Ending inventory (before shrinkage) = 100 units, cost $1,450.
Check: Goods available cost $5,550 - COGS $4,100 = $1,450. Correct.
2. Given the physical count of 90 units, calculate the inventory shrinkage and its value under FIFO. What journal entry is needed to record the shrinkage?
Read the worked answer
Perpetual records show 100 units on hand, but physical count shows 90 units, so shrinkage = 10 units. Under FIFO, the most recent costs are in ending inventory: 50 units @ $15 = $750, and 50 units @ $14 = $700. The shrinkage of 10 units would be valued at the most recent cost, which is $15 per unit (since the last layer is 50 units @ $15). So shrinkage value = 10 x $15 = $150.
Journal entry to record shrinkage: Debit Inventory Shrinkage Expense $150 Credit Inventory $150
After adjustment, ending inventory = $1,450 - $150 = $1,300 (90 units: 40 @ $15 = $600, 50 @ $14 = $700, total $1,300).