Question

Problem 2.

You have the following information for Divine Diamonds. The company uses the periodic method of accounting for its inventory transactions. Divine Diamonds only carries one brand and size of diamonds—all are identical. Each batch of diamonds purchased is carefully coded and marked with its purchase cost.

March 1 Beginning inventory 150 diamonds at a cost of $300 per diamond.
March 3 Purchased 200 diamonds at a cost of $350 each.
March 10 Purchased 350 diamonds at a cost of $375 each.
During the month, Devine Diamonds sold 500 diamonds for $650 each.

Problem 2: Instructions

(a) Assume that Divine Diamonds uses the specific identification cost flow method.

1. Demonstrate how Divine Diamonds could maximize its gross profit for the month by specifically selecting which diamonds to sell.

2. Demonstrate how Divine Diamonds could minimize its gross profit for the month by selecting which diamonds to sell.

(b) Assume that Devine Diamonds uses the FIFO cost flow assumption. Calculate cost of goods sold. How much gross profit would Devine Diamonds report under this cost flow assumption?

(c) Assume that Devine Diamonds uses the LIFO cost flow assumption. Calculate cost of goods sold. How much gross profit would the company report under this cost flow assumption?

(d) Assume that Devine Diamonds uses the weighted average cost flow assumption. Calculate cost of goods sold. How much gross profit would Devine Diamonds report under this cost flow assumption?

(e) Which cost flow method should Gold Nugget Gems select? Explain.

Answer 1

(a)
1.

		Cost of goods available for sale	Cost of Goods Sold		Ending Inventory
Date	Activity	Units	Unit Price	Amount	Units	Unit Price	Amount	Units	Unit Price	Amount
Mar-01	Beginning Inventory	150	$         300.00	$          45,000	150	$          300.00	$          45,000
Mar-03	Purchase	200	$         350.00	$          70,000	200	$          350.00	$          70,000
Mar-10	Purchase	350	$         375.00	$       1,31,250	150	$          375.00	$          56,250	200	$          375.00	$          75,000
	Total	700		$       2,46,250	500		$       1,71,250	200		$          75,000
	Sales Revenue	$       3,25,000
	Cost of Goods Sold	$       1,71,250
	Gross Profit	$       1,53,750

2.

		Cost of goods available for sale	Cost of Goods Sold		Ending Inventory
Date	Activity	Units	Unit Price	Amount	Units	Unit Price	Amount	Units	Unit Price	Amount
Mar-01	Beginning Inventory	150	$         300.00	$          45,000				150	$          300.00	$          45,000
Mar-03	Purchase	200	$         350.00	$          70,000	150	$          350.00	$          52,500	50	$          350.00	$          17,500
Mar-10	Purchase	350	$         375.00	$       1,31,250	350	$          375.00	$       1,31,250
	Total	700		$       2,46,250	500		$       1,83,750	200		$          62,500
	Sales Revenue	$       3,25,000
	Cost of Goods Sold	$       1,83,750
	Gross Profit	$       1,41,250

(b) FIFO

Sales Revenue	$       3,25,000
Cost of Goods Sold	$       1,71,250
Gross Profit	$       1,53,750

(c) LIFO

Sales Revenue	$       3,25,000
Cost of Goods Sold	$       1,83,750
Gross Profit	$       1,41,250

(d) Weighted Average

Sales Revenue	$       3,25,000
Cost of Goods Sold	$ 1,75,893
Gross Profit	$       1,49,107

(e) FIFO method should be selected as usually inventory purchased first is sold first, moreover it will give highest gross profit hence highest net income