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In: Accounting

In its first month of operation, Hoffman Company purchased 100 units of inventory for $6, then...

In its first month of operation, Hoffman Company purchased 100 units of inventory for $6, then 200 units for $7, and finally 140 units for $8. At the end of the month, 180 units remained. The company uses the periodic method.

Compute the amount of phantom profit that would result if the company used FIFO rather than LIFO.
Phantom Profit

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Expert Solution

Cost of Purchases =   (100 * $6)+(200*$7)+(140*$8) = $3,120
FIFO method
Cost of ending inventory               180 units given. Cost of goods sold = Cost of purchases - Cost of ending inventory.
(140*$8)+(40*$7) = $1,400                =      $3,120 - $ 1,400
               =    $1,720
LIFO method
Cost of ending inventory               180 units given. Cost of goods sold = Cost of purchases - Cost of ending inventory.
(100*$6) + (80* $7) = $1,160                =      $3,120 - $ 1,160
               =    $1,960
Profit is increased by ( $1,960 - $ 1,720) = $240 , if company uses FIFO method instead of LIFO for valuation of inventory.

ekkarill92 answered 2 years ago
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