Question

Athletic World began January with merchandise inventory of 95 crates that cost a total of $3800. During the month Athletic World purchased and sold merchandise as follows.

Jan 5 Purchase 155 crates @ $71 each

13 Sale 180 crates @ $110 each

18 Purchase 193 crates @ 75 each

26 Sale 200 crates @ $114 each

1.

Prepare a perpetual inventory​ record, using the FIFO inventory costing​method, and determine the​ company's cost of goods​ sold, ending merchandise​ inventory, and gross profit.

2.

Prepare a perpetual inventory​ record, using the LIFO inventory costing​method, and determine the​ company's cost of goods​ sold, ending merchandise​ inventory, and gross profit.

3.

Prepare a perpetual inventory​ record, using the​ weighted-average inventory costing​ method, and determine the​ company's cost of goods​ sold, ending merchandise​ inventory, and gross profit.​ (Round weighted-average cost per unit to the nearest cent and all other amounts to the nearest​ dollar.)

4.

If the business wanted to pay the least amount of income taxes​ possible, which method would it​ choose?

Answer 1

Ans.1	Perpetual FIFO:
	Purchase				Cost of goods sold			Balance
	Date	Quantity	Rate	Total cost	Quantity	Rate	Total cost	Quantity	Rate	Total cost
	1-Jan							95	40	3800
	5-Jan	155	71	11005				95	40	3800
								155	71	11005
	13-Jan				95	40	3800
					85	71	6035	70	71	4970
	18-Jan	193	75	14475				70	71	4970
								193	75	14475
	26-Jan				70	71	4970
					130	75	9750	63	75	4725
	Total				Cost of goods sold		24555	Ending inventory		4725
	Gross profit = Total sales - Cost of goods sold
		42600 - 24555
		18045
Ans.2	Perpetual LIFO:
	Purchase				Cost of goods sold			Balance
	Date	Quantity	Rate	Total cost	Quantity	Rate	Total cost	Quantity	Rate	Total cost
	1-Jan							95	40	3800
	5-Jan	155	71	11005				95	40	3800
								155	71	11005
	13-Jan				155	71	11005
					25	40	1000	70	40	2800
	18-Jan	193	75	14475				70	40	2800
								193	75	14475
	26-Jan				193	75	14475
					7	40	280	63	40	2520
	Total				Cost of goods sold		26760	Ending inventory		2520
	Gross profit = Total sales - Cost of goods sold
		42600 - 26760
		15840
Ans.3	Weighted Average method:
	Purchase				Cost of goods sold			Balance
	Date	Quantity	Rate	Total cost	Quantity	Rate	Total cost	Quantity	Rate	Total cost
	1-Jan							95	40	3800
	5-Jan	155	71	11005				250	59.22	14805
	13-Jan				180	59.22	10660	70	59.22	4145
	18-Jan	193	75	14475				263	70.80	18620
	26-Jan				200	70.8	14160	63	70.80	4460
	Total				Cost of goods sold		24820	Ending inventory		4460
	Gross profit = Total sales - Cost of goods sold
		42600 - 24820
		17780
Ans.4	To pay the minimum income tax the business must choose the LIFO inventory method as its gross profit is lowest.
	*Other notes:
	*In LIFO method the units that are purchased last are sold first.
	*In FIFO method the units that are purchased Fist are sold first.
	*In Weighted average method the average cost per unit is calculated after each purchase
	by dividing the total cost by the total units available & units are sold on the same rate of previous transaction.