In the Financial Statement Analysis book, Reading 35, Section 2, there’s a 2nd Scenario: Rising Prices. I don’t understand how COGS and EI are calculated. Exhibit 1 (the next page) has a brief explanation as to how this is calculated, but even so, I’m not understanding how the QUANTITY is determined. FIFO ======================================== COGS…EI 200 @ $10 = $2000 100 @ $14 = $1400 100 @ $11 = $1100 150 @ $13 = $1950 100 @ $12 = $1200 50 @ 12 = 600 ------------------------ ------------------------- 400…$4300_____300… $3950 ========================================= Thanks!
Just keep in mind the formula: COGS + EI = BI + Purchases Given those important relationship, you can solve for any one of those terms such as: COGS = BI + Purchases - EI and, EI = BI + Purchases - COGS
There are two missing variables: EI and COGS. So that’s no really telling me much. But thanks anyway.
Yeah I forgot, for that case, you have to calculate for the purchases first using another way aside from the given formula. After that everything will follows as the usual way in finding the other variable but unfortunately I already forgot how to find the Purchases. Can someone here help us? (If I still recall, I encounter that same problem when I was reading the Corporate Finance.)
This is given before and under the table on 304: BI=200 units, Units Sold=400 units (100 per quarter) and Ending inventory=300 units.
Under FIFO, in the COGS you have : BI of 200 units@ $10, plus 100 units@ $11 plus 100 out of the 150 units @ $12, for a total of $4,300 In EI you will have remaining 50 units @ $12, plus 150 units @ $13, plus 100 units @ $14, for a total of $3,950
I think I understand it. I’ll check it as soon as I get home. Thanks, guys! I really appreciate it.