Question

Mercer Inc. is a retailer operating in British Columbia. Mercer uses the perpetual inventory method. All sales returns from customers result in the goods being returned to inventory; the inventory is not damaged. Assume that there are no credit transactions; all amounts are settled in cash. You are provided with the following information for Mercer Inc. for the month of January 2015.

  Date     Description Quantity Unit Cost or Selling Price

January	1		Beginning inventory		100		$18
January	5		Purchase		140		22
January	8		Sale		110		33
January	10		Sale return		10		33
January	15		Purchase		55		24
January	16		Purchase return		5		24
January	20		Sale		90		36
January	25		Purchase		20		26

(a)

For each of the following cost flow assumptions, calculate (i) cost of goods sold, (ii) ending inventory, and (iii) gross profit.

1.  

LIFO.

2.  

FIFO.

3.  

Moving-average cost. (Round average cost per unit to 3 decimal places.)

(b)

Compare results for the three cost flow assumptions.

Answer 1

Part (a):

	LIFO	FIFO	Moving Average
Cost of Goods Sold	$      4,280.0	$                           3,780.0	$                3,950.2
Ending Inventory	$      2,320.0	$                           2,820.0	$                2,649.8
Gross Profit	$      2,260.0	$                           2,760.0	$                2,589.8

-

Gross Profit
	LIFO	FIFO	Moving Average
Sales less return	$   6,540.00	$                        6,540.00	$             6,540.00
Cost of Goods Sold	$   4,280.00	$                        3,780.00	$             3,950.18
Gross Profit	$   2,260.00	$                        2,760.00	$             2,589.82

Sales= 110*33 + 90*36 = 6870

Sales return= 10*33 = 330

Net= $ 6540

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Workings:

Lifo

Formula

Fifo

Formula:

Moving Average

Formula

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Part (b):

Cost of goods sold is high in case of LIFO method compared to FIFO method and Moving Average cost method and lower in case of FIFO method. Hence, Value of Ending inventory and gross profit is higher in case of FIFO method and lower in case of LIFO method.

Values under Moving Average cost method is always in between FIFO method and LIFO method.

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