Chapter E, Problem E.6E

1.

To determine

To Calculate: The ending inventory, cost of goods sold, and gross profit for 2015, assuming the Company uses LIFO with a periodic inventory system.

Answer to Problem E.6E

The ending inventory costs of goods sold and gross profit for 2015 under LIFO with a periodic inventory system are $6,660, $23,130, and $3,870 respectively.

Explanation of Solution

Periodic Inventory System:

Periodic inventory system 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.

Last-in-Last-Out:

In Last-in-First-Out method, the costs of last purchased items are considered as the cost of goods sold, for the items which are sold first. The value of the closing stock consists of the initial purchased items.

Calculate the ending inventory, cost of goods sold, and gross profit for 2015 under LIFO method.

Calculate the Cost of Ending Inventory.

LIFO Method
Date	Transaction	Units (a)	Unit Cost (in $) (b)	Total Cost (in $) $\left(\text{c}\right)=\left(\text{a}\right)\times \left(\text{b}\right)$
January 1	Beginning inventory	70	83	5,810
April 7	Purchase	10	85	850
	Total	80		6,660

Table (1)

Calculate cost of goods sold.

LIFO Method
Date	Transaction	Units (a)	Unit Cost (in $) (b)	Total Cost (in $) $\left(\text{c}\right)=\left(\text{a}\right)\times \left(\text{b}\right)$
April 7	Purchase	180	85	15,300
October  9	Purchase	90	87	7,830
	Total	270		23,130

Table (2)

Calculate gross profit.

Gross Profit - LIFO
Particulars	Amount ($)
Sales	27,000
Less: Cost of goods sold	23,130
Gross profit	$3,870

Table (3)

Working Note:

$\begin{array}{c}\text{Sales revenue=Number of units sold}\times \text{Selling price per unit}\\ \text{=270}\text{units}\times \text{\$100}\\ \text{=\$27,000}\end{array}$

2.

To determine

To Calculate: The ending inventory cost of goods sold, and gross profit for 2015, assuming the Company is using FIFO.

Answer to Problem E.6E

The ending inventory, cost of goods sold, and gross profit for 2015 under FIFO with a periodic inventory system are $6,960, $22,830, and $4,170 respectively.

Explanation of Solution

Periodic Inventory System:

Periodic inventory system 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:

In First-in-First-Out method, the costs of the initially purchased items are considered as cost of goods sold, for the items which are sold first. The value of the ending inventory consists of the recent purchased items.

Calculate the ending inventory, cost of goods sold, and gross profit for 2015 under FIFO method.

Calculate the Cost of Ending Inventory.

FIFO Method
Date	Transaction	Units (a)	Unit Cost (in $) (b)	Total Cost (in $) $\left(\text{c}\right)=\left(\text{a}\right)\times \left(\text{b}\right)$
October  9	Purchase	80	87	6,960
	Total	80		6,960

Table (4)

Calculate cost of goods sold.

LIFO Method
Date	Transaction	Units (a)	Unit Cost (in $) (b)	Total Cost (in $) $\left(\text{c}\right)=\left(\text{a}\right)\times \left(\text{b}\right)$
January 1	Beginning Inventory	70	83	5,810
April 7	Purchase	190	85	16,150
October 9	Purchase	10	87	870
	Total	270		22,830

Table (5)

Calculate gross profit.

Gross Profit - LIFO
Particulars	Amount ($)
Sales	27,000
Less: Cost of goods sold	22,830
Gross profit	$4,170

Table (6)

Working Note:

$\begin{array}{c}\text{Sales revenue=Number of units sold}\times \text{Selling price per unit}\\ \text{=270}\text{units}\times \text{\$100}\\ \text{=\$27,000}\end{array}$

3.

To determine

To Explain: The effects in the Company’s income statement and balance sheet of using FIFO instead of LIFO to account for inventory.

Explanation of Solution

The effects in the Company’s income statement and balance sheet of using FIFO instead of LIFO to account for inventory are as follows:

• As the gross profit under FIFO method is higher ($4,170) than LIFO method ($3,870), using FIFO method instead of LIFO method to account for inventory results in higher income of $300 $\left(\$4,170-\$3,870\right)$.
• Similarly, as the ending inventory under FIFO method is higher ($6,960) than LIFO method ($6,660), using FIFO method instead of LIFO method to account for inventory results in higher assets of $300 $\left(\$4,960-\$4,660\right)$.