Habicht Company was formed in 2018 to produce a single product. The production and sales for the next 4 years were as follows:
Required:
- 1. Determine the gross profit for each year under each of the following periodic inventory methods:
- a. FIFO
- b. LIFO
- c. Average cost (Round unit costs to 3 decimal places.)
- 2. Next Level Explain whether the company’s return on assets (net income divided by average total assets) would be higher under FIFO or LIFO.
1.
Ascertain the gross profit under the periodic inventory system for each year as per the inventory cashflow methods.
Explanation of Solution
First-in-First-Out (FIFO): In this method, items purchased initially are sold first. So, the value of the ending inventory consists the recent cost for the remaining unsold items.
Last-in-First-Out (LIFO): In this method, items purchased recently are sold first. So, the value of the ending inventory consists the initial cost for the remaining unsold items.
- a) Calculate the gross profit for the four years under FIFO method:
Particulars | 2018 | 2019 | 2020 | 2021 |
Amount ($) | Amount ($) | Amount ($) | Amount ($) | |
Net sales | $400,000 | $550,000 | $750,000 | $600,000 |
Cost of goods sold | ||||
Beginning inventory | $ 0 | $ 40,000 | $ 58,500 | $ 19,000 |
Add: Production | $ 200,000 | $ 234,000 | $ 247,000 | $ 240,500 |
Goods available for sale | $ 200,000 | $ 274,000 | $ 305,500 | $ 259,500 |
Less: Ending inventory | (1) $ 40,000 | (2) $ 58,500 | (3) $ 19,000 | (4) $ 37,000 |
Cost of goods sold | $ 160,000 | $ 215,500 | $ 286,500 | $ 222,500 |
Gross Margin | $ 240,000 | $ 334,500 | $ 463,500 | $ 377,500 |
Table (1)
Working Note (1):
Ending inventory for 2018 is $40,000
Working Note (2):
Ending inventory for 2019 is $58,500
Working Note (3):
Ending inventory for 2020 is $19,000
Working Note (4):
Ending inventory for 2021 is $37,000
- b) Calculate the gross profit for the four years under LIFO method:
Particulars | 2018 | 2019 | 2020 | 2021 |
Amount ($) | Amount ($) | Amount ($) | Amount ($) | |
Net sales | $400,000 | $550,000 | $750,000 | $600,000 |
Cost of goods sold | ||||
Beginning inventory | $ 0 | $ 40,000 | $ 59,500 | $ 20,000 |
Add: Production | $ 200,000 | $ 234,000 | $ 247,000 | $ 240,500 |
Goods available for sale | $ 200,000 | $ 274,000 | $ 306,500 | $ 260,500 |
Less: Ending inventory | (5) $ 40,000 | (6) $ 59,500 | (7) $ 20,000 | (8) $ 38,500 |
Cost of goods sold | $ 160,000 | $ 214,500 | $ 286,500 | $ 222,000 |
Gross Margin | $ 240,000 | $ 335,500 | $ 463,500 | $ 378,000 |
Table (2)
Working Note (5):
Ending inventory for 2018 is $40,000
Working Note (6):
Ending inventory for 2019 is $59,500
Working Note (7):
Ending inventory for 2020 is $20,000
Working Note (8):
Ending inventory for 2021 is $38,500
- a) Calculate the gross profit for the four years under Average cost method:
Compute the cost of goods sold for average cost method:
Year | Beginning inventory | Production | Goods available for sale | Average Unit | |||
Units | Cost | Units | Cost | Units | Cost | Cost | |
2018 | 0 | $ 0 | 100,000 | $ 200,000 | 100,000 | $ 200,000 | $ 2.00 |
2019 | 20,000 | $ 40,000 | 120,000 | $ 234,000 | 140,000 | $ 274,000 | $ 1.957 |
2020 | 30,000 | $ 58,710 | 130,000 | $ 247,000 | 160,000 | $ 305,710 | $ 1.911 |
2021 | 10,000 | $ 19,110 | 130,000 | $ 240,500 | 140,000 | $ 259,610 | $ 1.854 |
Table (3)
Year | Ending inventory | Cost of goods sold | ||
Units | Cost | Units | Cost | |
2018 | 20,000 | $ 40,000 | 80,000 | $ 160,000 |
2019 | 30,000 | $ 58,710 | 110,000 | $ 215,290 |
2020 | 10,000 | $ 19,110 | 150,000 | $ 286,600 |
2021 | 20,000 | $ 37,080 | 120,000 | $ 222,530 |
Table (4)
Calculate the gross profit for the four years under Average cost method
Particulars | 2018 | 2019 | 2020 | 2021 |
Amount ($) | Amount ($) | Amount ($) | Amount ($) | |
Net sales | $400,000 | $550,000 | $750,000 | $600,000 |
Cost of goods sold | ||||
Beginning inventory | $ 0 | $ 40,000 | $ 58,710 | $ 19,110 |
Add: Production | $ 200,000 | $ 234,000 | $ 247,000 | $ 240,500 |
Goods available for sale | $ 200,000 | $ 274,000 | $ 305,710 | $ 259,610 |
Less: Ending inventory | $ 40,000 | $ 58,710 | $ 19,110 | $ 37,080 |
Cost of goods sold | $ 160,000 | $ 215,290 | $ 286,600 | $ 222,530 |
Gross Margin | $ 240,000 | $ 334,710 | $ 463,400 | $ 377,470 |
Table (5)
2.
Identify would return on asset would be greater under FIFO and LIFO.
Explanation of Solution
The net income and assets are higher under the FIFO method. There is a difference in the net income under both the methods.
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Chapter 7 Solutions
Intermediate Accounting: Reporting And Analysis
- Assume your company uses the periodic inventory costing method, and the inventory count left out an entire warehouse of goods that were in stock at the end of the year, with a cost value of $222,000. How will this affect your net income in the current year? How will it affect next years net income?arrow_forwardFava Company began operations in 2018 and used the LIFO inventory method for both financial reporting and income taxes. At the beginning of 2019, the anticipated cost trends in the industry had changed, so that it adopted the FIFO method for both financial reporting and income taxes. Fava reported revenues of 300,000 and 270,000 in 2019 and 2018, respectively. Fava reported expenses (excluding income tax expense) of 125,000 and 120,000 in 2019 and 2018, which included cost of goods sold of 55,000 and 45,000, respectively. An analysis indicates that the FIFO cost of goods sold would have been lower by 8,000 in 2018. The tax rate is 21%. Fava has a simple capital structure with 15,000 shares of common stock outstanding during 2018 and 2019. It paid no dividends in either year. Required: 1. Prepare the journal entry to reflect the change. 2. At the end of 2019, prepare the comparative income statements for 2019 and 2018. Notes to the financial statements are not necessary. 3. At the end of 2019, prepare the comparative retained earnings statements for 2019 and 2018.arrow_forwardLast year, Nikkola Company had net sales of 2,299,500,000 and cost of goods sold of 1,755,000,000. Nikkola had the following balances: Refer to the information for Nikkola Company above. Required: Note: Round answers to one decimal place. 1. Calculate the average inventory. 2. Calculate the inventory turnover ratio. 3. Calculate the inventory turnover in days. 4. CONCEPTUAL CONNECTION Based on these ratios, does Nikkola appear to be performing well or poorly?arrow_forward
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