   Chapter 6, Problem 68BPSB ### Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881

#### Solutions

Chapter
Section ### Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881
Textbook Problem
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# Inventory Costing MethodsTerpsichore Company uses a perpetual inventory system. For 2018 and 2019, Terpsichore has the following data: Required:1. For each year, compute cost of goods sold, the cost of ending inventory, and gross margin using FIFO.2. For each year, compute cost of goods sold, the cost of ending inventory, and gross margin using LIFO.3. For each year, compute cost of goods sold, the cost of ending inventory, and gross margin using the average cost method. ( Note: Use four decimal places for per-unit calculations and round all other numbers to the nearest dollar.)4. CONCEPTUAL CONNECTION Which method would result in the lowest amount paid for taxes?5. CONCEPTUAL CONNECTION Which method produces the most realistic amount for income? For inventory? Explain your answer.6. CONCEPTUAL CONNECTION Compute Terpsichore’s gross profit ratio and inventory turnover ratio under each of the three inventory costing methods. ( Note: Round answers to two decimal places.) How would the choice of inventory costing method affect these ratios?

To determine

(a)

Inventory costing methods:

FIFO, LIFO and average cost method, are those method which used for calculation of closing inventory and cost of goods sold.

The cost of ending inventory, the cost of goods sold and gross margin using the FIFO.

Explanation

The given information for the year 2018 is as follows:

Total available units are:

Opening inventory=100 units @ $45 each Purchases=700 units @$52 eachPurchases=500 units @ $56 eachPurchases=400 units @$58 each

Total Purchased units = 1600

Total available quantity = 100+1600= 1700 units

Sales=600+600 units=1200 units

Closing inventory =Beginning inventory + PurchaseSales=100+16001200=500 units

The given information for the year 2019 is as follows:

Total available units are:

Opening inventory=100 units @ $56 each=400 units @$58 each

Purchases=900 units @ \$62 each

Total Purchased units = 900

Total available quantity = 500+900= 1400 units

Sales=400+200 units=600 units

Closing inventory =Beginning inventory + PurchaseSales=500+900600=800 units

Calculation of Closing Inventory as per FIFO Method:

Under this method, which material purchased first, issued first for production. However closing inventory includes last purchased materials in stock. Due to latest purchase in closing inventory, higher value of latest purchase effects cost of goods sold as lower and profit margin will be high

To determine

(b)

Inventory costing methods:

FIFO, LIFO and average cost method, are those method which used for calculation of closing inventory and cost of goods sold.

The cost of ending inventory, the cost of goods sold and gross margin using the LIFO.

To determine

(c)

Inventory costing methods:

FIFO, LIFO and average cost method, are those method which used for calculation of closing inventory and cost of goods sold.

The cost of ending inventory, the cost of goods sold and gross margin using the average cost method.

To determine

(d)

Inventory costing methods:

FIFO, LIFO and average cost method, are those method which used for calculation of closing inventory and cost of goods sold.

The method for determining the lowest amount paid for tax.

To determine

(e)

Inventory costing methods:

FIFO, LIFO and average cost method, are those method which used for calculation of closing inventory and cost of goods sold.

The method for determining the most realistic amount for inventory.

To determine

(f)

Gross profit margin ratio:

The gross margin ratio is a type of profitability ratio which is used to measure the returns and earning after direct expenses and compute the ratio in respect to the sales of the business.

Inventory Turnover ratio:

The ratio which measures the efficiency of the company in managing their inventory by diving the cost of goods sold by the average inventory.

The gross margin ratio and inventory turnover ratio.

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