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Chapter 6: Q 20-4 (page 363)

Assume that AB Tire Store completed the following perpetual inventory transactions for a line of tires:

May 1 Beginning merchandise inventory 16 tires @ \( 65 each

11 Purchase 10 tires @ \) 78 each

23 Sale 12 tires @ \( 88 each

26 Purchase 14 tires @ \) 80 each

29 Sale 18 tires @ $ 88 each

Requirements

4. Which method results in the largest gross profit, and why?

Short Answer

Expert verified

FIFO method would result in the highest gross profit due to valuing issued inventory (COGS) at the historical prices and yielding the lowest COGS.

Step by step solution

01

Step-by-Step-SolutionStep 1: Gross profit under FIFO, LIFO, and Average Method

In the given case, the gross profit computed under each method is as follows 鈥�

Gross Profit

FIFO

$500

LIFO

$350

Weighted Average

$450

The method that has resulted in the highest gross profits is the FIFO method.

02

Reason for the FIFO method to yield the highest gross profit

FIFO method computes the cost of issued inventory on a historical basis. So, in comparison to other methods, the cost computation under FIFO would always be lower. The reason is that the market prices have a general trend of rising. So the cost today would always be lower than the cost tomorrow.

In such a case FIFO method would always fetch the highest profit.

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Most popular questions from this chapter

Right Now Electronic Center began October with 100 units of merchandise inventory that cost \(70 each. During October, the store made the following purchases:

Oct. 3 35 units @ \) 82 each

12 45 units @ \( 84 each

18 75 units @ \) 90 each

Right Now uses the periodic inventory system, and the physical count at October 31indicates that 130 units of merchandise inventory are on hand.

Requirements

2. Net sales revenue for October totaled $26,000. Compute Right Now鈥檚 gross profitfor October using each method.

Question:The periodic inventory records of Flexon Prosthetics indicate the following for the month of July:

Jul. 1 Beginning merchandise inventory 6 units @ \( 60 each

8 Purchase 5 units @ \) 67 each

15 Purchase 10 units @ \( 70 each

26 Purchase 5 units @ \) 85 each

At July 31, Flexon counts four units of merchandise inventory on hand.

Compute ending merchandise inventory and cost of goods sold for Flexon using theLIFO inventory costing method.

Question:Golf Unlimited carries an inventory of putters and other golf clubs. The sales price of each putter is \(119. Company records indicate the following for a particular line ofGolf Unlimited鈥檚 putters:

Date Item Quantity Unit Cost

Nov. 1 Balance 24 \) 53

6 Sale 20

8 Purchase 30 70

17 Sale 30

30 Sale 2

Requirements

2. Journalize Golf Unlimited鈥檚 inventory transactions using the weighted-averageinventory costing method. (Assume purchases and sales are made on account.)

When does an inventory error cancel out, and why?

Fit Gym began January with merchandise inventory of 78 crates of vitamins that cost a total of \(4,290. During the month, Fit Gym purchased and sold merchandise on account as follows:

Jan. 5 Purchase 156 crates @ \) 64 each

13 Sale 180 crates @ \( 100 each

18 Purchase 114 crates @ \) 75 each

26 Sale 150 crates @ $ 116 each

Requirements

1. Prepare a perpetual inventory record, using the FIFO inventory costing method, and determine the company鈥檚 cost of goods sold, ending merchandise inventory, and gross profit.
See all solutions

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