Accounting HW Pg 310 CP 6-3 Costing Inventory

1. 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 (5,432,000/400,00)= $13.58 62,000 units at $12.20= $756,400
25,600 units at $14.50=$371,200 *64,000 units at $13.58 +2,000 units at $13.00= $26,000
16,000 units at $14.95= $239,200 =$882,800 =64,000 units $808,000
+16,000 units at $16.00= $256,000
=64,000 units $957,600
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 Net Sales 5,200,000 Net Sales 5,200,000
COMS -4,474,400 COMS -4,549,200 COMS -4,624,000
=$725,600 =$650,800 =$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
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2. 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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