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Davila Jonathan Davila BUSA 7 MW 7 May 2012 HW Pg 310 CP 6-3 Costing Inventory 1. FIFO Average Cost LIFO 6,400 units at $14.25= $91,200 25,600 units at $14.50=$371,200 16,000 units at $14.95= $239,200 +16,000 units at $16.00= $256,000 =64,000 units $957,600 (5,432,000/400,00)= $13.58 *64,000 units at $13.58 =$882,800 62,000 units at $12.20= $756,400 +2,000 units at $13.00= $ 26,000 =64,000 units $808,000 2. In order to calculate the Gross Profit of all three methods, you must subtract your Net Sales from Cost of Merchandise Sold which will give you the Gross Profit. FIFO Average Cost LIFO Net Sales 5,200,000 COMS -4,474,400 =$725,600 Net Sales 5,200,000 COMS -4,549,200 =$650,800 Net Sales 5,200,000 COMS -4,624,000 =$576,000 The Gross Profit for the three methods are: FIFO= ($725,600) Average cost= ($650,800) LIFO= ($576,000) 3a. Based on the outcome when using the three methods I have determined that all three of these methods can best reflect the results of operations for 2012. When using the FIFO method, the first units purchased are assumed to be sold and the ending inventory is made up of the most recent purchases. FIFO usually reports higher gross profit and net income than LIFO when costs are increasing. When using the LIFO method, the last units purchased are assumed to be sold and the ending inventory is made up of the first purchases. The LIFO method most nearly matches current cost with current revenues. This method reflects the most current operations due to the fact that the last item received has to be sold first. When using the Average Cost Method, the cost of the units sold and in ending inventory is an average of the purchase costs. The Average Cost Method is also a compromise between LIFO and FIFO, which uses the average 1

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Page 1: Accounting Costing Inventory LIFO FIFO CP 6-3

Davila

Jonathan DavilaBUSA 7 MW7 May 2012

HW Pg 310 CP 6-3 Costing Inventory

1. FIFO Average Cost LIFO

6,400 units at $14.25= $91,20025,600 units at $14.50=$371,20016,000 units at $14.95= $239,200

+16,000 units at $16.00= $256,000 =64,000 units $957,600

(5,432,000/400,00)= $13.58*64,000 units at $13.58

=$882,800

62,000 units at $12.20= $756,400+2,000 units at $13.00= $ 26,000

=64,000 units $808,000

2. In order to calculate the Gross Profit of all three methods, you must subtract your Net Sales from Cost of Merchandise Sold which will give you the Gross Profit.

FIFO Average Cost LIFONet Sales 5,200,000COMS -4,474,400 =$725,600

Net Sales 5,200,000COMS -4,549,200 =$650,800

Net Sales 5,200,000COMS -4,624,000

=$576,000The Gross Profit for the three methods are:FIFO= ($725,600) Average cost= ($650,800)LIFO= ($576,000)

3a. Based on the outcome when using the three methods I have determined that all three of

these methods can best reflect the results of operations for 2012. When using the FIFO method,

the first units purchased are assumed to be sold and the ending inventory is made up of the

most recent purchases. FIFO usually reports higher gross profit and net income than LIFO

when costs are increasing. When using the LIFO method, the last units purchased are assumed

to be sold and the ending inventory is made up of the first purchases. The LIFO method most

nearly matches current cost with current revenues. This method reflects the most current

operations due to the fact that the last item received has to be sold first. When using the Average

Cost Method, the cost of the units sold and in ending inventory is an average of the purchase costs.

The Average Cost Method is also a compromise between LIFO and FIFO, which uses the average

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Page 2: Accounting Costing Inventory LIFO FIFO CP 6-3

unit cost for determining both the Cost of Merchandise Sold and Less Ending Inventory.

3b. The method that best reflects the replacement cost of inventory on the balance sheet at the

end of the year is FIFO. When using FIFO, cost are included in the order they were purchased.

This is often the same as the physical flow of the merchandise. This method would help the

company know the exact quantities they are selling and it would also help them save more

money.

3c. The costing method I would choose for my income taxes would have to be the LIFO

method, because it offers income tax savings during periods of increasing costs. This is

important because LIFO reports the lowest amount of gross profit and taxable net income.

3d. In a Perpetual Inventory System, some of the advantages is having an accurate method for

calculating inventories because of the different merchandise being sold. This is extremely

important because it helps keep control while managing the large amounts of inventory. An

example of this would be at the beginning of they year when the company was buying mass

amounts of units. By using the Perpetual Inventory System they could have prevented this

problem. Some disadvantages using the Perpetual Inventory System is that it takes a lot of time

to calculate the inventories of the different merchandise being sold. Based on all the data

presented there was definitely an adequacy of inventory levels during the year.

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