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.
First-in-First-Out (FIFO): 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.
Last-In, First-Out (LIFO): 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.
Gross profit ratio 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 Compute: The gross profit and gross profit ratio for 2019.
1.
Explanation of Solution
Compute the gross profit and gross profit ratio.
Gross Profit Ratio | |
Details | Amount ($) |
Net Sales (A) | 54,000,000 (1) |
Less: Cost of Goods Sold | (27,000,000) (2) |
Gross Profit (B) | 27,000,000 |
Gross Profit Ratio (B ÷ A) | 50% |
Table (1)
Working Notes:
Compute the sales revenue.
Compute cost of goods sold.
Therefore, the gross profit and gross profit ratio is $27,000,000 and 50% respectively.
2.
To Compute: The gross profit and gross profit ratio for 2019 assuming 15,000 units are purchased during 2019.
2.
Explanation of Solution
Compute the gross profit and gross profit ratio.
Gross Profit Ratio | |
Details | Amount ($) |
Net Sales (A) | 54,000,000 (1) |
Less: Cost of Goods Sold (Refer Table 3) | (25,000,000) |
Gross Profit (B) | 29,000,000 |
Gross Profit Ratio (B ÷ A) | 53.7% |
Table (2)
Working Notes:
Compute the sales revenue.
Compute cost of goods sold.
Calculation of Cost of Goods Sold | |||
Details | Number of Units | Rate per Unit ($) | Total Cost ($) |
2019 | 15,000 | 1,000 | 15,000,000 |
2018 | 6,000 | 900 | 5,400,000 |
2018 | 4,000 | 800 | 3,200,000 |
2018 | 2,000 | 700 | 1,200,000 |
Cost of Goods Sold | 27,000 | 25,000,000 |
Table (3)
Therefore, the gross profit and gross profit ratio is $29,000,000 and 53.7% respectively.
3.
To Explain: The effects due to the decrease in inventory in gross profit and gross profit ratio using LIFO method.
3.
Explanation of Solution
C Incorporation has sold 27,000 units and purchased 15,000 units during 2019. When current sales are higher than current purchases during a period, LIFO liquidation occurs. It occurs when a company uses the Last in, First out (LIFO) method for inventory costing.
Hence, the gross profit computed in requirement 1 (Assuming the company purchased 28,000 units) is lower than requirement 2 (Assuming the company purchased 15,000 units).
Thus, in this case, the decrease in inventory quantity results in LIFO Liquidation Profit. If the company had purchased at least the number of units sold (27,000) during 2019, then there would no LIFO Liquidation. In this case, the LIFO Liquidation profit is $2,000,000 (Computed below) is material. Hence, C Incorporation must disclose it in a note.
Calculate the LIFO liquidation profit.
LIFO Liquidation Profit | ||||
Units Liquidated | Current Cost ($) | Acquisition Cost ($) | Difference between Current and Acquisition Cost ($) | Profit ($) |
B | C | D | [C – D] | [B× E] |
6,000 | 1,000 | 900 | 100 | 600,000 |
4,000 | 1,000 | 800 | 200 | 800,000 |
2,000 | 1,000 | 700 | 300 | 600,000 |
LIFO Liquidation Profit | 2,000,000 |
Table (4)
4.
To Compute: The gross profit and gross profit ratio for 2019 assuming C Incorporation used FIFO.
4.
Explanation of Solution
Compute the gross profit and gross profit ratio.
Gross Profit Ratio | |
Details | Amount ($) |
Net Sales (A) | 54,000,000 (1) |
Less: Cost of Goods Sold | (24,100,000) (3) |
Gross Profit (B) | 29,900,000 |
Gross Profit Ratio (B ÷ A) | 55.4% |
Table (5)
Working Note:
Compute cost of goods sold.
Calculation of Cost of Goods Sold | |||
Details | Number of Units | Rate per Unit ($) | Total Cost ($) |
2018 | 5,000 | 700 | 3,500,000 |
2018 | 4,000 | 800 | 3,200,000 |
2018 | 6,000 | 900 | 5,400,000 |
2019 | 12,000 | 1,000 | 12,000,000 |
Cost of Goods Sold | 27,000 | 24,100,000 |
Table (6)
Therefore, the gross profit and gross profit ratio is $29,900,000 and 55.4% respectively.
5.
To Explain: The effects due to the decrease in inventory in gross profit and gross profit ratio using FIFO method.
5.
Explanation of Solution
When FIFO method is used for inventory, then the number of units purchased has no effect on the cost of goods sold. This is because, in FIFO, at first the beginning inventory costs are included in the computation of cost of goods sold regardless of the inventory purchased during the current period.
Therefore, the gross profit computed assuming 28,000 units purchased during 2019 is same as it is computed assuming 15,000 units purchased during 2019.
Want to see more full solutions like this?
Chapter 8 Solutions
GEN CMB INTRM ACCTG; CNCT 9E 2
- LIFO Liquidation Profit Hammond Company adopted LIFO when it was formed on January 1, 2017. Since then, the company has had the following purchases and sales of its single inventory item: In December 2020, the controller realized that because of an unexpected increase in demand, the company had sold 22,000 units but had purchased only 19,000 units during the year. In 2020, each unit had been sold for 19, and each unit purchased had cost 10. The income tax rate is 21%. Required: 1. Next Level If Hammond makes no additional purchases in 2020, how much LIFO liquidation profit will it report? 2. Prepare the appropriate annual report disclosures for 2020. 3. Next Level if Hammond purchases an additional 7,000 units in December 2020, how much income tax will the company save? 4. Next Level If Hammond purchases the additional 7,000 units, how much income tax has the company saved over the 4-year period by using LIFO instead of the FIFO cost flow assumption?arrow_forward(3a) Complete the chart below for the ending inventory of Samuel Corporation. NRV Less Designated Final Replacemt NRV Profit Margin Market Inventory Item Cost Cost (Ceiling) (Floor) Value Value ABC 80,000 92,000 100,000 90,000 DEF 90,000 98,000 95,000 91,000 GHI 75,000 85,000 80,000 65,000 JKL 85,000 78,000 95,000 80,000 Total 330,000…arrow_forwardLIFO Layer Liquidations and Net Income.The following information is taken from the annual report of The Claremont Corporation: (in millions) Year 2 Year 1 Net income before tax $368 $24 The company uses the LIFO method to value its inventory. In addition, the footnotes to the company's annual report revealed that, during Year 2 and Year 1, inventory usage resulted in liquidations of LIFO inventory quantities, and the effect of these liquidations was to reduce the cost of goods sold by $28 million and $6 million in Year 2 and Year 1, respectively. Calculate the company's net income before tax assuming that the LIFO inventory liquidations had not occurred. Year 2 Year 1 Restated net income Answer Answerarrow_forward
- B Limited sells inventory to its parent, W Limited at cost price plus 125% mark-up. • Closing inventories in the records of W Limited on 30 June 2022 amount to R157 500.• Net realisable value of inventory on hand in the books of W limited amounts to R107 500 on 30 June 2022. • Ignore tax implications Clearly illustrate how write-down of inventory will be with regard to the above information, showing inventory at selling price, value according to the group, net realisable value, write-down in W Limited’s records, Unrealised profit from the group’s perspective and additional elimination of unrealised profit required through pro forma consolidation journal.arrow_forwardLIFO Layer Liquidations and Net Income.The following information is taken from the annual report of The Claremont Corporation: (in millions) Year 2 Year 1 Net income before tax $375 $29 The company uses the LIFO method to value its inventory. In addition, the footnotes to the company's annual report revealed that, during Year 2 and Year 1, inventory usage resulted in liquidations of LIFO inventory quantities, and the effect of these liquidations was to reduce the cost of goods sold by $28 million and $6 million in Year 2 and Year 1, respectively. Calculate the company's net income before tax assuming that the LIFO inventory liquidations had not occurred. Year 2 Year 1 Restated net incomearrow_forward15.ABC Store purchased P100,000 from XYZ Supplies on July 1, 20X1. Terms: 5%, 3%, 2/15, n/30. FOB Shipping point, freight prepaid. Shipping costs was P2,000. Insurance for the shipment was P500 and non refundable tax was P1,000. At what amount should ABC recognize as cost of the inventory under the net method? 91,807 93,807 93,650 95,650arrow_forward
- inv 3Company A sells only one product X. At the inventory on 31/12/20X5 it was found that there were 500 pieces of X in the warehouse at a cost of EUR 30 per piece. The net realisable market value of X was estimated at EUR 28 per piece but X also has a written non-cancellable agreement to sell 300 pieces of X to company B at EUR 31 per piece. At what value will X's stock be valued?In FY20X6 all the beginning inventory was sold. In particular, the 200 pieces that were valued to KAP were sold at € 35 per piece.Carry out the journal entries resulting from the above events up to the calculation of gross profit.arrow_forward8–6 Various inventory costing methods; gross profit ratio ● LO8–1, LO8–4, LO8–7 Topanga Group began operations early in 2024. Inventory purchase information for the quarter ended March 31, 2024, for Topanga’s only product is provided below. The unit costs include the cost of freight. The company uses a periodic inventory system to report inventory and cost of goods sold. Date of Purchase Units Unit Cost Total Cost Jan. 7 5,000 $4.00 $20,000 Feb. 16 12,000 4.50 54,000 March 22 17,000 5.00 85,000 Total purchases 34,000 $159,000 Sales for the quarter, all at $7.00 per unit, totaled 20,000 units leaving 14,000 units on hand at the end of the quarter. Required: Calculate Topanga’s gross profit ratio for the first quarter using: FIFO LIFO Average cost Comment on the relative effect of each of the three inventory methods on the gross profit ratio.arrow_forwardMa3. Hall Inc. has beginning inventory of 100,000 units (cost of $15 per unit) accounted for using the LIFO inventory method. During the year, the company sold more items than purchased, causing the ending inventory balance to drop to 65,000 units. Assuming a tax rate of 25%, and a current replacement cost of inventory of $28 per unit, what is the LIFO liquidation effect on after-tax income? Select one: a. $341,250 b. $455,000 c. $633,750 d. $113,750arrow_forward
- Bla Limited sells inventory to its parent, Whi Limited at cost price plus 125% mark-up. • Closing inventories in the records of Whi Limited on 30 June 2022 amount to R157 500. • Net realisable value of inventory on hand in the books of Whi limited amounts to R107 500 on 30 June 2022. Ignore tax implications Required:Clearly illustrate how write-down of inventory will be with regard to the above information, showing inventory at selling price, value according to the group, net realisable value, write-down in Whi Limited’s records, Unrealised profit from the group’s perspective and additional elimination of unrealised profit required through pro forma consolidation journalarrow_forward2. Martindale Company, a 100% owned subsidiary of Weisman Corporation, sells inventory to Weisman at a 20% profit on selling price. The following data are available pertaining to inter-company purchases by Weisman: Inter-company sales: Unsold at year end (based on selling price): 2020: $18,000 2020: $4,000 2021: $19,400 2021: $6,000 2022: $21,500 2022: $8,000 Martindale's profit numbers were $125,000, $142,000 and $265,000 for 2020, 2021, and 2022, respectively. Weisman received dividends from Martindale of $25,000 for 2020 and 2021, and $30,000 for 2022. Assume Weisman uses the equity method to account for its investment in Martindale. What is the balance in pre-consolidation Income (loss) from subsidiary for 2022? Select one: A. $268,600 B. $235,000 C. $265,400 D. $264,600arrow_forwardExhibit7.5 Sullivan Produce Co. switched from FIFO to LIFO on January1,2018, for external reporting and income tax purposes, while retaining FIFO for internal reports. On that date, the FIFO inventory equaled $360,000. The ensuing three-year period resulted in the following: December31,2018 Year-End Costs $438,000 Cost Index 1.05 December 31,2019 Year-End Costs $460,000 Cost Index 1.15 December 31, 2020 Year-End Costs $520,000 Cost Index 1.25 Refer to Exhibit 7-5, The ending inventory at December 31,2020, using the dollar-value LIFO method would be a. $422,000 b. $402,000 c $426,000 d. $420,400 Refer to Exhibit7-5, the ending inventory at December 31,2019, at base-year price is: a.$400,000 b. $402,000 c.$406,000 d.$424,000arrow_forward
- Financial AccountingAccountingISBN:9781337272124Author:Carl Warren, James M. Reeve, Jonathan DuchacPublisher:Cengage LearningAccounting (Text Only)AccountingISBN:9781285743615Author:Carl Warren, James M. Reeve, Jonathan DuchacPublisher:Cengage LearningCorporate Financial AccountingAccountingISBN:9781305653535Author:Carl Warren, James M. Reeve, Jonathan DuchacPublisher:Cengage Learning
- Intermediate Accounting: Reporting And AnalysisAccountingISBN:9781337788281Author:James M. Wahlen, Jefferson P. Jones, Donald PagachPublisher:Cengage Learning