Concept explainers
(a)
Periodic Inventory System: It is a system in which the inventory is updated in the accounting records on a periodic basis such as at the end of each month, quarter or year. In other words, it is an accounting method which is used to determine the amount of inventory at the end of each accounting period.
In First-in-First-Out method, the cost of initial purchased items are sold first. The value of the ending inventory consists the recent purchased items.
In Last-in-First-Out method, the cost of last purchased items are sold first. The value of the closing stock consists the initial purchased items.
In Average Cost Method the cost of inventory is priced at the average rate of the goods available for sale. Following is the mathematical representation:
Gross profit rate is the financial ratio that shows the relationship between the gross profit and net sales. Gross profit is the difference between the total revenues and cost of goods sold. It is calculated by using the following formula:
To Calculate: The ending inventory, cost of goods sold, gross profit, and gross profit rate under LIFO, FIFO, and Average-cost method.
(a)
Explanation of Solution
Step 1: Calculate the Total Cost and units of Goods Available for Sales.
Date | Particulars | Units ($) | Unit cost ($) | Total cost ($) |
(a) | (b) | (c = a × b) | ||
October 1 | Beginning inventory | 60 | 24 | 1,440 |
October 9 | Purchase | 120 | 26 | 3,120 |
October 17 | Purchase | 100 | 27 | 2,700 |
October 25 | Purchase | 70 | 29 | 2,303 |
Total | 350 | 9,290 |
Table (1)
Step 2: Calculate total sales.
Date | Units | Unit cost ($) | Total cost ($) |
(a) | (b) | (c = a × b) | |
October 11 | 100 | 35 | 3,500 |
October 22 | 60 | 40 | 2,400 |
October 29 | 110 | 40 | 4,400 |
Total sales | 270 | 10,300 |
Table (2)
Step 3: Calculate ending inventory.
(1)
To Calculate: The ending inventory, cost of goods sold, gross profit, and gross profit rate under LIFO method.
(1)
Explanation of Solution
(i)
Calculate the Cost of Ending Inventory.
LIFO Method | |||
Date | Units | Unit cost ($) | Total cost ($) |
(a) | (b) | (c = a × b) | |
October 9 | 20 | 26 | 520 |
October 1 | 60 | 24 | 1,440 |
Total | 80 | 1,960 |
Table (3)
(ii)
Calculate cost of goods sold.
Cost of Goods Sold | |
Details | Amount ($) |
Total goods available for sale | 9,290 |
Less: Ending inventory | (1,960) |
Cost of goods sold | 7,330 |
Table (4)
(iii)
Calculate gross profit.
Gross Profit - LIFO | |
Details | Amount ($) |
Sales | 10,300 |
Less: Cost of goods sold | (7,330) |
Gross profit | 2,970 |
Table (5)
(iv)
Calculate gross profit percentage.
(2)
To Calculate: The ending inventory, cost of goods sold, gross profit, and gross profit rate under FIFO method.
(2)
Explanation of Solution
(i)
Calculate the Cost of Ending Inventory.
FIFO Method | |||
Date | Units | Unit cost ($) | Total cost ($) |
(a) | (b) | (c = a × b) | |
October 17 | 10 | 27 | 270 |
October 25 | 70 | 29 | 2,030 |
Total | 80 | 2,300 |
Table (6)
(ii)
Calculate cost of goods sold.
Cost of Goods Sold | |
Details | Amount ($) |
Total goods available for sale | 9,290 |
Less: Ending inventory | (2,300) |
Cost of goods sold | $6,990 |
Table (7)
(iii)
Calculate gross profit.
Gross Profit - FIFO | |
Details | Amount ($) |
Sales | 10,300 |
Less: Cost of goods sold | (6,990) |
Gross profit | $3,310 |
Table (8)
(iv)
Calculate gross profit percentage:
(2)
To Calculate: The ending inventory, cost of goods sold, gross profit, and gross profit rate under Average-cost method.
(2)
Explanation of Solution
(i)
Calculate the Cost of Ending Inventory.
Step 1: Calculate the Weighted-average cost.
Step 2: Calculate the amount of Ending Inventory.
(ii)
Calculate the Cost of Goods Sold.
(iii)
Calculate the gross profit.
Gross Profit - FIFO | |
Details | Amount ($) |
Sales | 10,300.00 |
Less: Cost of goods sold | (7,166.80) |
Gross profit | $3,133.20 |
Table (9)
(iv)
Calculate gross profit percentage:
(b)
To Compare: The results for the above three cost flow assumptions.
(b)
Answer to Problem 6.5AP
Compare results of the three methods.
Method/Results | Cost of Goods Sold | Gross Profit | Gross Profit Percentage |
LIFO |
$7,330 (Highest) | $2,970 | 29% |
FIFO | $6,990 |
$3,310 (Highest) |
68% (Highest) |
Average-cost | $7,166.80 | $3,133.20 | 30% |
Table (10)
Explanation of Solution
As it is a case if rising prices, the cost of goods sold is the highest in LIFO and Gross profit is the highest in FIFO method
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Chapter 6 Solutions
Financial Accounting: Tools for Business Decision Making, 8th Edition
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