Question

Exercise 8-16

You are the vice president of finance of Swifty Corporation, a retail company that prepared two different schedules of gross margin for the first quarter ended March 31, 2020. These schedules appear below.

		Sales ($5 per unit)		Cost of Goods Sold		Gross Margin
Schedule 1		$143,800		$127,006		$16,794
Schedule 2		143,800		132,334		11,466

The computation of cost of goods sold in each schedule is based on the following data.

		Units		Cost per Unit		Total Cost
Beginning inventory, January 1		10,150		$4.30		$43,645
Purchase, January 10		8,150		4.40		35,860
Purchase, January 30		6,150		4.50		27,675
Purchase, February 11		9,150		4.60		42,090
Purchase, March 17		11,150		4.70		52,405

Linda Williams, the president of the corporation, cannot understand how two different gross margins can be computed from the same set of data. As the vice president of finance, you have explained to Ms. Williams that the two schedules are based on different assumptions concerning the flow of inventory costs, i.e., FIFO and LIFO. Schedules 1 and 2 were not necessarily prepared in this sequence of cost flow assumptions.

Prepare two separate schedules computing cost of goods sold and supporting schedules showing the composition of the ending inventory under both cost flow assumptions.

Answer 1

Here two schedules are based on different assumptions concerning the flow of inventory costs, FIFO for scedule 1 and and LIFO for schedule 2.

The FIFO method assumes that the oldest material/ inventory have been sold first. So at the time of selling that material is issued first which was purchased first. This procedure will be consistent till the last. At the end of period the balance under this method will be the cost of latest purchases. We see in the given case that balance under FIFO is $74,669  for 15990 Units against under LIFO ($69,341) as cost per unit is increasing.

The LIFO method assumes that the recent or newest material/ inventory have been sold first. So at the time of selling that material is issued first which was purchased recently. This procedure will be consistent till the last. At the end of period the balance under this method will be the cost of the oldest purchases. We see in the given case that balance under LIFO ($69,341) is less than the balance under FIFO($74,669) for 15990 Units as cost per unit is increasing.

Finally, we can conclude that when prices of material are increasing FIFO will provide more profit in comparison to LIFO as the oldest material is cheaper which is issued first in FIFO. Same as Balance will have more values under FIFO in comparison to LIFO as it relates higher cost due to recent costs material is left (which has a higher cost)).

For details we may go through following calculations under both assumptions-

FIFO Method-

Date	Purchase	Cost of goods sold	Inventory balance
	Units	$/Units	$ Total	Units	$/Units	$ Total	Units	$/Units	$ Total
Jan-01				Opening Balance	10150	4.3	43,645
Jan-10	8150	4.4	35,860				10150	4.3	43,645
							8150	4.4	35,860
Jan-30	6150	4.5	27,675				10150	4.3	43,645
							8150	4.4	35,860
							6150	4.5	27,675
Feb-11	9150	4.6	42,090				10150	4.3	43,645
							8150	4.4	35,860
							6150	4.5	27,675
							9150	4.6	42,090
Mar-17	11150	4.7	52,405				10150	4.3	43,645
							8150	4.4	35,860
							6150	4.5	27,675
							9150	4.6	42,090
							11150	4.7	52,405
Mar-31				10150	4.3	43,645	4840	4.6	22,264
				8150	4.4	35,860	11150	4.7	52,405
				6150	4.5	27,675
				4310	4.6	19,826
	Cost of goods sold	28760		$127,006
		Closing Balance	15990		$74,669

LIFO Method-

Date	Purchase	Cost of goods sold	Inventory balance
	Units	$/Units	$ Total	Units	$/Units	$ Total	Units	$/Units	$ Total
Jan-01				Opening Balance	10150	4.3	43,645
Jan-10	8150	4.4	35,860				10150	4.3	43,645
							8150	4.4	35,860
Jan-30	6150	4.5	27,675				10150	4.3	43,645
							8150	4.4	35,860
							6150	4.5	27,675
Feb-11	9150	4.6	42,090				10150	4.3	43,645
							8150	4.4	35,860
							6150	4.5	27,675
							9150	4.6	42,090
Mar-17	11150	4.7	52,405				10150	4.3	43,645
							8150	4.4	35,860
							6150	4.5	27,675
							9150	4.6	42,090
							11150	4.7	52,405
Mar-31				11150	4.7	52,405	5840	4.4	25,696
				9150	4.6	42,090	10150	4.3	43,645
				6150	4.5	27,675
				2310	4.4	10,164
	Cost of goods sold	28760		$132,334
		Closing Balance	15990		$69,341

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