Question

The Shirt Shop had the following transactions for T-shirts for 2018, its first year of operations:

Jan. 20	Purchased	400	units	@	$	4	=	$	1,600
Apr. 21	Purchased	90	units	@	$	5	=		450
July 25	Purchased	250	units	@	$	7	=		1,750
Sept. 19	Purchased	60	units	@	$	9	=		540

During the year, The Shirt Shop sold 650 T-shirts for $14 each.

Required
a. Compute the amount of ending inventory The Shirt Shop would report on the balance sheet, assuming the following cost flow assumptions: (1) FIFO, (2) LIFO, and (3) weighted average. (Round intermediate calculations to 2 decimal places and final answers to the nearest whole dollar amount.)

b. Compute the difference in gross margin between the FIFO and LIFO cost flow assumptions.

Answer 1

Sol. (a) Computation of closing inventory unier

(i) FIFO - Total Units Sold 650 Units - Purchased on 20 Jan 400 units - 90 units on 21 April - 160 units out of 250 units pur. on 25 July

Thus closing balance = 7 * (250-160) + 9 * 60 = 630 + 540 = $1170

(ii) LIFO - Total Units Sold 650 Units - Purchased 60 units on Sept. 19 - 250 units on 25 July - 90 units on April 21 - 250 units out of 400 units pur. on 20 January

Thus closing balance = 4 * (400-250) = 4 * 150 = $600

(iii) Weighted average cost per unit = 1600+450+1750+540 / 400+90+250+60 = 4340/800 = 5.425

Units left on closing day = 400 + 90 +250 + 60 - 400 = 400 units

Closing inventory cost as per weighted avg. = 400 * 5.425 = $2170

(b) As under FIFO method value of closing inventory is higher as compared to LIFO method so it will result in lower gross margin in comparison to LIFO. As the purchase cost of material will be higher under FIFO and lower in LIFO method. Method of closing inventory determines the cost to be charged to trading account.

Thus we can say that Gross margin under LIFO will be higher.