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Hi there) I have a good concepts of LIFO(last in first out) valuation method but the question i am going to post below is a difficult one hence i need help.
Q:W Ltd has closing inventory at 31 july of 400 units valued at $10,000 using LIFO inventory movements in july were:5 july,300 units bought for $25/unit
10 july,500 units issued
15 july,400 units bought for $22/unit
20 july,200 units issued
What was the value of the opening inventory?
A)$11,200
B)10,000
C)$9,400
D)Cannot be foundAccording to kaplan the correct answer is A but i have no idea how they came up with that answer ?
10/7 issue uses 300 from 5/7 purchase and 200 from opening inventory.
20/7 issue uses 200 from 15/7 purchase, leaving 200 from that purchase costing 22 each. This purchase contributes 200 units costing 4400 to the closing balance of 400 costing 10,000. The rest of the closing inventory must come from opening inventory and must represent 200 units costing 10000 – 4400 = 5600.
Opening inventory of 400 must have cost 2 x 5600 = 11200.
@Gromit said:
10/7 issue uses 300 from 5/7 purchase and 200 from opening inventory.20/7 issue uses 200 from 15/7 purchase, leaving 200 from that purchase costing 22 each. This purchase contributes 200 units costing 4400 to the closing balance of 400 costing 10,000. The rest of the closing inventory must come from opening inventory and must represent 200 units costing 10000 – 4400 = 5600.
Opening inventory of 400 must have cost 2 x 5600 = 11200.
Thanks Sir! for the help all clear almost but at the end why you multiplied 5600 by 2 ?
Because we were told there were 400 units in opening inventory. 5600 is the value of only 200 units.
@Gromit said:
Because we were told there were 400 units in opening inventory. 5600 is the value of only 200 units.No we were told there were 400 units in closing inventory not the opening inventory.
if we assume there are only opening inventory for the issue of 10/7 you will find that there are 200 units of $ 5600. now calculate per unit value i.e 5600/200=28/per unit.
now when you put this in the question you will find the closing inventory is 200 less. it means more 200 units were in the inventory. so total opening inventory is 400@28/per unit=11200.
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