Question

Gladstone Limited tracks the number of units purchased and sold throughout each accounting period but applies its inventory costing method at the end of each period, as if it uses a periodic inventory system. Assume its accounting records provided the following information at the end of the annual accounting period, December 31.

Transactions		Units				Unit Cost
Beginning inventory, January 1			1,400				$	7.00
Transactions during the year:
a.	Purchase, January 30		2,600					12.00
b.	Sale, March 14 ($15 each)		(1,000	)
c.	Purchase, May 1		1,200					20.00
d.	Sale, August 31 ($15 each)		(1,900	)

Required:
1. Compute the amount of goods available for sale, ending inventory, and cost of goods sold at December 31, under each of the following inventory costing methods. For Specific identification, assuming that the March 14, sale was selected two-fifths from the beginning inventory and three-fifths from the purchase of January 30. Assume that the sale of August 31, was selected from the remainder of the beginning inventory, with the balance from the purchase of May 1. (Do not round Weighted average cost per unit. Round your final answers to the nearest dollar amount.)

2-a. Of the three methods, which will result in the highest gross profit?

• Weighted average cost

• First-in, first-out

• Specific identification

2-b. Of the three methods, which will result in the lowest income taxes?

• Weighted average cost

• First-in, first-out

• Specific identification

Answer 1

Let us Caculate amount of goods available for sale, ending inventory, and cost of goods sold at December 31, under each of the following inventory costing methods :

Particulars FIFO LIFO Weighted Avg Specific Identification

1) Goods available 5200 units 5200 units 5200 unit 5200 units

for Sale

2) Ending Inventory (in $)    37200 20600    28750 24800

(1100*12+1200*20) (1400*7+900*12) (2300*12.5) (400*12+1000*20)

3)Cost of Goods 27800 44400 36250 35000

Sold (1400*7+1500*12) (1200*20+1700*12) (2900*12.5) (1400*7+600*12+900*20)

Out of the 3 methods Weighted Avg, FIFO, and Specific Identification As the Ending Inventory is highest in case of FIFO method thus cost of goods sold would be lower. As expenses are lower thus it shall lead to highest gross profit.

Out of the 3 methods Weighted Avg, FIFO, and Specific Identification lowest inventory is under Specific identification method thus it would lead to higher expenses and lower gross profit and ultimately lowest taxes on profit.