Sheridan Company's Inventory Calculation under FIFO Method
Explanation:
The inventory records of Sheridan Company indicate the following data:
- Inventory, January 1: 10,800 units at $10.00 per unit
- Purchases on June 18: 8,300 units at $7.50 per unit
- Purchases on November 8: 6,900 units at $5.00 per unit
A physical inventory count on December 31 reveals that there are 6,900 units on hand.
According to the First in First Out (FIFO) method of inventory valuation, the cost of goods sold and ending inventory are calculated based on the assumption that the first units acquired are the first to be sold. Therefore, the units sold can be determined using the formula:
Units Sold = Opening Inventory + Purchases - Closing Inventory
Substituting the given values:
Units Sold = 10,800 + (8,300 + 6,900) - 6,900 = 19,100 units
Under the FIFO method, the cost of goods sold is determined based on the oldest batches of inventory in stock. The cost of goods sold will be calculated using the prices of stock in the following order:
10,800 units at $10.00
8,300 units at $7.50
19,100 units total
Therefore, the remaining 6,900 units represent the closing inventory valued at the unit cost of $5.00 per unit, which is the price of the oldest batch as of December 31. The value of the December 31 inventory under the FIFO method is:
Value of Closing Inventory = 6,900 units x $5.00 = $34,500