Questions:
Our company had 5000 laptops, each of them valued at $1000 inventory at the start of the year. During the year, we made purchases of 2000 units at $1200 in January, 1000 at $800 in July and 900 at $750 in September. We sold 3000 units in February, 3000 in August and 2000 in December. 

How would these transactions be recorded on the relevant balance sheets and income statements according to the Weighted Average method, First-in-First-Out (FIFO) method and Last-in-Last-Out (LIFO) method?

Going forward, which of these would you expect to lead to the highest profit?

Reference answers:
# WAC

The weighted average method assigns the average cost of production to given product. 

Cost of goods of 3000 in Feb = 3000 x $997 = $2.991M

Cost of goods of 3000 in Aug = 3000 x $997 = $2991K

Cost of goods of 2000 in Dec = 2000 x $997 = $1994K

(Impact on Income Statement)
Total COGS = $7.976M 

(Impact on Balance Sheet)
Ending Balance = Beginning + net purchases - COGS = $5M + $3.875M - $7.976M = $0.899M

# FIFO

For the FIFO method the oldest cost of an item in an inventory will be removed first when one of those items is sold.

Cost of goods of 3000 in Feb = 3000 x $1000 = $3M 

Cost of goods of 3000 in Aug = 2000 x $1000 + 1000 x $1200 = $2M + $1.2M 

Cost of goods of 2000 in Dec = 1000 x $ 1200 + 1000 x $800 = $1.2M + $0.8M  

(Impact on Income Statement)
Total COGS = $8.2M

(Impact on Balance Sheet)
Ending Balance = Beginning + net purchases - COGS = $5M + $3.875M - $ 8.2M = $0.675 M

# LIFO

LIFO accounting method assumes that latest items bought are the first ones to be sold.

Cost of goods of 3000 in Feb = 900 x $750 + 1000 x $800 + 1100 x $1200 = $675K + $800K + $1.32M 

Cost of goods of 3000 in Aug =  900 x 1200 + 2100 x $1000 = $1.08M + $2.1M 

Cost of goods of 2000 in Dec =  2000 x $1000 = $2M 

(Impact on Income Statement)
Total COGS = $7.975M

(Impact on Balance Sheet)
Ending Balance = Beginning + net purchases - COGS = $5M + $3.875M - $7.975M = $0.9M

Based on the purchase costs during the year, it is clear that the market prices are decreasing. In this scenario, the LIFO will have the lowest cost of goods sold and the highest profit among the three methods.