Question

Periodic Inventory System

If this business uses First in First out inventory system instead of Last in Last out then what will the net income be for the month described below? Will it be Higher, lower, the same or unknown? Explain your reasoning.

Cost of Goods Available for Sale:

Date		# of units	$ per unit
1/1	Beginning Inventory	25	$50
1/4	Purchase of units	15	$45
1/20	Purchase of units	20	$42
1/30	Purchase of units	10	$37

Retail Sale of Goods:

Date		# of units	$ per unit
1/18	Sold units	20	$62
1/28	Sold units	25	$62

Answer 1

Total number of units sold = 20 + 25 = 45 units

Sales revenue = 45 × 62 = $2,790

Gross profit = sales - cost of goods sold

COST OF GOODS SOLD UNDER FIFO

Cost of goods sold under FIFO method

= (25 × 50) + (15 × 45) + (5 × 42) = $2,135

Cost of goods sold under FIFO is $2,135

Gross profit under FIFO = 2,790 - 2,135 = $655

Gross profit under FIFO method is $655

COST OF GOODS SOLD UNDER LIFO

Cost of goods sold under LIFO

= (10 × 37) + (20 × 42) + (15 ×45) = $1,885

$1,885 is cost of goods sold under LIFO

Gross profit under = 2,790 - 1,885 = $905

Gross profit under LIFO is $905.

Net income will be LOWER

The company use FIFO instead of LIFO, the net income of the company is lower. Because under FIFO method cost of goods sold ($2,135) is higher than LIFO cost of goods sold ($1,885). Higher cost cost of goods sold is lead to lower net income. The reason for higher cost of goods sold in FIFO is INVENTORY  PURCHASE COST INCREASE. 1/1 Purchase cost is $50, 1/4 purchase cost is $45, 1/20 purchase cost is $42 and 1/30 the purchase cost is decreased to $37.

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