Question

				UNITS		FIFO		LIFO		AVG. COST
Beginning Inventory (160,000 at $2)				160,000		320,000		320,000		320,000
Purchase 1 (60,000 at $2.50)				60,000		150,000		150,000		150,000
Purchase 2 (60,000 at $3.50)				60,000		210,000		210,000		210,000
Goods for Sale				280,000		680,000		680,000		680,000
Ending Inventory (30,000 units)				30,000		105,000		60,000		72,857
Cost of Goods Sold				250,000		575,000		620,000		607,143

1. Assuming the company has NOT determined which inventory method to use, Which method should they
	use for income tax purposes? Why? 2. The sold units had an average price of $6.00. Calculate gross profit and gross profit % using the method you chose in (1).

Answer 1

Req 1: LIFO method.

To lower the income tax liability, the LIFO method shall be used as the the cost of inventory purchased is rising. The LIFO states that the issue shall be recorded at current prices which will be at higher rate. This resulted in higher cost of goods sold. This will ultimately result in lower gross profit and lower income tax liability.

Req2. Gross Profit as per LIFO:

Sales units: Beginning balance in units + Puchases in units - Ending units = 160,000 units + 120,000 units -30,000 units = 250,000 units

Sales revenue (250,000 units @ $ 6): $ 1500,000

Less: Cost of goods sold(given):          $ 620,000

Gross profit:                                          $880,000

Gross profit margin = Gross profit/ sales *100 = 880000 /1500,000 *100 = 58.67%