Problem Solving Survival Guide to accompany Financial Accounting, 8th Edition

SOLUTION TO EXERCISE 6-7

TIP: The use of FIFO with a perpetual system always yields the same results as the use of FIFO with a periodic system. The same does not hold true with the LIFO or average cost methods.

TIP: When using the average method and a perpetual system, a new average unit cost must be computed only after each new purchase; a sale will not affect the average unit cost.

TIP: Examine your solution to the exercise above and judge the reasonableness of your answers. What do you expect the relationship of the answers to be for the periodic system?

1. Because the trend of the acquisition costs was upward, the ending inventory computed under LIFO should be lower than the ending inventory figure computed under FIFO.
2. The cost of the ending inventory determined by using the average cost method should be between the amount of the ending inventory determined by using the LIFO method and the amount of ending inventory determined by using the FIFO method.

**ILLUSTRATION 6-1: FORMULAS FOR ESTIMATING INVENTORIES (L.O. 8)

The retail method can be used as a cost (pricing) method ...