Calculate Deal's Cost of Goods Sold and Analyze the Impact of FIFO Method

1. What is Deal's Cost of Goods Sold using the average method? 2. How would Deal's cash flow change if they used the FIFO method for inventory? 3. How would Deal's revenues change if they used the FIFO method for inventory?

To calculate Deal's Cost of Goods Sold (COGS) using the average method, we need to consider the beginning inventory, purchases, and ending inventory.

1. Deal's Cost of Goods Sold using the average method

Beginning Inventory: Deal had 750 bulbs costing $3 each. Therefore, the cost of the beginning inventory is $2250. Purchases: The first purchase includes 300 bulbs at $3.10 each ($930) and the second purchase includes 900 bulbs at $2.90 each ($2610). Ending Inventory: After selling 1540 bulbs, the remaining inventory is 410 bulbs. Next, we calculate the average cost per bulb: Average cost per bulb = (Beginning Inventory + Purchases) / (Beginning Inventory Quantity + Purchases Quantity) Average cost per bulb ≈ $2.50. Finally, we calculate the COGS: COGS = Quantity sold * Average cost per bulb COGS = 1540 bulbs * $2.50/bulb COGS = $3850.

2. Impact of FIFO Method on Deal's Cash Flow

If Deal used the FIFO method for inventory, the cash flow would not change. FIFO assumes that the first items purchased are the first ones sold, hence maintaining the COGS at $3850.

3. Impact of FIFO Method on Deal's Revenues

Revenues are calculated based on the selling price per bulb, which is $54. Using the FIFO method, the revenues would be: Revenues = Quantity sold * Selling price per bulb Revenues = 1540 bulbs * $54/bulb Revenues = $83,160.

In business, the Cost of Goods Sold (COGS) is a crucial metric that directly impacts the profitability of a company. It represents the total cost of manufacturing and selling products, including direct costs such as materials and labor. The average method of calculating COGS is one of the common accounting practices where the total cost of beginning inventory and purchases is divided by the total quantity of units to determine the average cost per unit. This method provides a more balanced view of inventory costs, especially when prices fluctuate. On the other hand, FIFO (First-In, First-Out) is another inventory valuation method where the costs associated with the earliest purchases are the first to be recognized when goods are sold. This method is often used to match current revenues with current costs and can impact the reported profitability of a company. By analyzing Deal's inventory transactions and applying these methods, we can see how different accounting practices can influence financial results. Understanding these calculations is essential for making informed business decisions and managing cash flow effectively.

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