(a) (1)
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.
To Determine: The selection of diamonds for selling that should follow by J Gems to maximize the gross profit.
(a) (1)
Explanation of Solution
To maximize gross profit, J Gems should sell the diamonds with the lowest cost.
Calculate cost of goods sold and sales revenue.
Date | Cost of goods sold | Sales revenue | ||||
Units | Cost ($) | Total cost ($) | Units | Cost ($) | Total cost ($) | |
(A) | (B) | (C) = (A) × (B) | (D) | (E) | (F) = (D) × (E) | |
March 5 | 150 | 310 | 46,500 | 180 | 600 | 108,000 |
30 | 350 | 10,500 | 390 | 650 | 253,500 | |
March 25 | 170 | 350 | 59,500 | |||
220 | 375 | 82,500 | ||||
Total | 570 | 199,000 | 570 | 361,500 |
Table (1)
Calculate gross profit.
Therefore, the gross profit is $162,500.
(2)
The selection of diamonds for selling that should follow by J Gems to minimize the gross profit.
(2)
Explanation of Solution
To minimize gross profit, J Gems should sell the diamonds with the highest cost.
Calculate cost of goods sold and sales revenue.
Date | Cost of goods sold | Sales revenue | ||||
Units | Cost ($) | Total cost ($) | Units | Cost ($) | Total cost ($) | |
(A) | (B) | (C) = (A) × (B) | (D) | (E) | (F) = (D) × (E) | |
March 5 | 180 | 350 | 63,000 | 180 | 600 | 108,000 |
390 | 650 | 253,500 | ||||
March 25 | 330 | 375 | 123,750 | |||
20 | 350 | 7,000 | ||||
40 | 310 | 12,400 | ||||
Total | 570 | $206,150 | 570 | $361,500 |
Table (2)
Calculate gross profit.
Therefore, the gross profit is $155,350.
(b)
To Calculate: The cost of goods sold and gross profit under FIFO method.
(b)
Explanation of Solution
Calculate cost of goods sold.
Step 1: Calculate cost of goods available for sale.
Cost of Goods Available for Sale | ||||
Date | Particulars | Units ($) | Unit cost ($) | Total cost ($) |
(a) | (b) | (c = a × b) | ||
March 1 | Beginning inventory | 150 | 310 | 46,500 |
March 3 | Purchase | 200 | 350 | 70,000 |
March 10 | Purchase | 330 | 375 | 123,750 |
Total | 680 | $240,250 |
Table (3)
Step 2: Calculate ending inventory under FIFO method.
FIFO Method | |||
Date | Units | Unit cost ($) | Total cost ($) |
(a) | (b) | (c = a × b) | |
March 10 | 110 | 375 | 41,250 |
Total | 110 | 41,250 |
Table (4)
Step 3: Calculate cost of goods sold under FIFO method.
Particulars | Amount ($) |
Cost of goods available for sale | 240,250 |
Less: Ending inventory | (41,250) |
Cost of goods sold | $199,000 |
Table (5)
Calculate gross profit.
Gross Profit - FIFO | |
Details | Amount ($) |
Sales | 361,500 |
Less: Cost of goods sold | (199,000) |
Gross profit | $162,500 |
Table (6)
(c)
To Calculate: The cost of goods sold and gross profit under LIFO method.
(c)
Explanation of Solution
Calculate cost of goods sold.
Step 1: Calculate cost of goods available for sale.
Cost of Goods Available for Sale | ||||
Date | Particulars | Units ($) | Unit cost ($) | Total cost ($) |
(a) | (b) | (c = a × b) | ||
March 1 | Beginning inventory | 150 | 310 | 46,500 |
March 3 | Purchase | 200 | 350 | 70,000 |
March 10 | Purchase | 330 | 375 | 123,750 |
Total | 680 | $240,250 |
Table (7)
Step 2: Calculate ending inventory under LIFO method.
LIFO Method | |||
Date | Units | Unit cost ($) | Total cost ($) |
(a) | (b) | (c = a × b) | |
March 10 | 110 | 310 | 34,100 |
Total | 110 | $34,100 |
Table (8)
Step 3: Calculate cost of goods sold under LIFO method.
Particulars |
Amount ($) |
Cost of goods available for sale | 240,250 |
Less: Ending inventory | (34,100) |
Cost of goods sold | $206,150 |
Table (9)
Calculate gross profit.
Gross Profit - LIFO | |
Details | Amount ($) |
Sales | 361,500 |
Less: Cost of goods sold | (206,150) |
Gross profit | $155,350 |
Table (9)
(d)
To Explain: The cost flow method that should use by J Gems.
(d)
Explanation of Solution
J Gems should select FIFO method because, the ending inventory and gross profit amount is greater than the LIFO method.
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Chapter 6 Solutions
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