Question 2 OR (b)

FIFO: closing inventory, cost of goods sold and profit for a month

6 marks

Time to write
About 12 minutes
Topic
Inventory valuation and AS 2
Notes
Crux notes

Question

Question 2 OR (b) · 6 marks

Kaveri Fuels is a leading petrol distributor. When the books are closed at the end of each month, a detail inventory of petrol is taken. At the end of month this information is available:

Sales₹ 56,70,000
General overheads cost₹ 1,50,000
Inventory at the beginning1,00,000 litres @ ₹ 18 per litre
Purchases:
June 1Two lakh litres @ ₹ 17.10
June 30One lakh litres @ ₹ 18.18

Closing inventory 1.30 lakh litres By the FIFO method, compute the following:

  1. The value of inventory on June 30

  2. The amount of cost of goods sold for June

  3. The Profit/Loss for the month of June

Reworded from the university paper: names and figures differ, the task is the same. The original paper belongs to the University of Delhi. See DU's question bank.

Before you write

Read off the question and its marks

12 minfor 6 marks

Read from the question

  • (i)–(iii)3 items, each marked on its own: give each its share.
  • computeFormula first, then the working, then the answer with its unit (₹, %, units).

What the paper leaves open

  1. The month is June: the opening inventory is at the start of June and the closing inventory of 1.30 lakh litres is counted at June 30, after the June 30 purchase.
  2. Under FIFO the closing litres are taken from the latest purchases.
  3. The profit for June is sales less the cost of goods sold and the general overheads.

Write it in this order

  1. Read the data; note exactly what is asked 1 min
  2. 1 Litres sold and FIFO closing inventory 2 marks 3 min
  3. 2 Cost of goods sold, with check 2 marks 3 min
  4. 3 Profit for the month 2 marks 3 min
  5. Check: arithmetic, units (₹, %), final answer underlined 2 min

Final answer

Check your own figures against these.

Closing inventory
₹23,31,000
Cost of goods sold
₹47,07,000
Profit
₹8,13,000

Try it first. About 12 minutes for 6 marks. Write it out, then open the solution and check your figures against the final answer.

Solution

Hover or tap a marked figure, like 72,000, to see how it is made and where else it appears.

Under FIFO, the goods purchased earliest are released first for sale, so the closing stock consists of the latest purchases. The result is the same whether costs are moved out with each sale or at the month end: perpetual and periodic FIFO agree.

Litres available = 1,00,000 + 2,00,000 + 1,00,000 = 4,00,000; closing 1,30,000; sold 2,70,000 litres.

(i) Value of inventory on June 30

LayerLitresRate (₹)Value (₹)
Purchase of June 30 (latest)1,00,00018.1818,18,000
Purchase of June 1 (balance)30,00017.105,13,000
Closing inventory1,30,00023,31,000

(ii) Cost of goods sold for June

Layer consumed (oldest first)LitresRate (₹)Cost (₹)
Opening inventory1,00,00018.0018,00,000
Purchase of June 11,70,00017.1029,07,000
Cost of goods sold2,70,00047,07,000

Check: opening 18,00,000 + purchases (34,20,000 + 18,18,000) − closing 23,31,000 = ₹47,07,000 ✓.

(iii) Profit for June

Trading and Profit & Loss Account for June

Dr₹Cr₹
To Cost of goods sold (FIFO, part ii)47,07,000By Sales56,70,000
To General overheads1,50,000
To Net Profit for June8,13,000
56,70,00056,70,000
Dr₹
To Cost of goods sold (FIFO, part ii)47,07,000
To General overheads1,50,000
To Net Profit for June8,13,000
56,70,000
Cr₹
By Sales56,70,000
56,70,000

The average selling price (₹21 a litre) is above every purchase cost, so net realisable value exceeds cost and the FIFO cost stands. General overheads are a period cost, charged in full.

Result: closing inventory ₹23,31,000 · cost of goods sold ₹47,07,000 · profit ₹8,13,000.

Where the 6 marks sit

#ComponentMarks
1Litres sold and FIFO closing inventory (₹23,31,000)2
2Cost of goods sold (₹47,07,000), with check2
3Profit for the month (₹8,13,000)2
Total6
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