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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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Habicht Company was formed in 2018 to produce a single product. The production and sales for the next 4 years were as follows:

Chapter 7, Problem 15E, Habicht Company was formed in 2018 to produce a single product. The production and sales for the

Required:

  1. 1. Determine the gross profit for each year under each of the following periodic inventory methods:
    1. a. FIFO
    2. b. LIFO
    3. c. Average cost (Round unit costs to 3 decimal places.)
  2. 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.

To determine

Ascertain the gross profit under the periodic inventory system for each year as per the inventory cashflow methods.

Explanation

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.

  1. a)      Calculate the gross profit for the four years under FIFO method:
Particulars2018201920202021
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(20,000 units×$2.00).

Working Note (2):

Ending inventory for 2019 is $58,500(30,000 units×$1.95).

Working Note (3):

Ending inventory for 2020 is $19,000(10,000 units×$1.90).

Working Note (4):

Ending inventory for 2021 is $37,000(20,000 units×$1.85).

  1. b)     Calculate the gross profit for the four years under LIFO method:
Particulars2018201920202021
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(20,000 units×$2

2.

To determine

Identify would return on asset would be greater under FIFO and LIFO.

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