Question

Chapter 5 HW E5-21A FIFO versus LIFO versus average-cost Assume that a Firestone Tire Store completed the following perpetual inventory transactions for a line of tires. Beginning Inventory…………………………………………………………………………… 34 tires @ $82 Purchase……………………………………………………………………………………………. 25 tires @ $88 Sale…………………………………………………………………………………………………….. 40 tires @ $134 Requirements 1. Compute cost of goods sold and gross profit under FIFO. 2. Computer cost of goods sold and gross profit using LIFO. 3. Computer cost of goods sold and gross profit using average cost. Round average cost per unit to the nearest cent and all other amounts to the nearest dollar. 4. Which method results in the largest gross profit and why?

Answer 1

• All working forms part of the answer
• Working for Requirement 1,2 and 3

FIFO	Cost of Goods available for sale			Cost of Goods Sold			Ending Inventory
	Units	Cost/unit	COG for sale	Units sold	Cost/unit	COGS	Units	Cost/unit	Ending inventory
Beginning Inventory	34	$    82.00	$    2,788.00	34	$    82.00	$       2,788.00	0	$    82.00	$                   -
Purchases:
	25	$    88.00	$    2,200.00	6	$    88.00	$          528.00	19	$    88.00	$      1,672.00
TOTAL	59		$    4,988.00	40		$       3,316.00	19		$      1,672.00
LIFO	Cost of Goods available for sale			Cost of Goods Sold			Ending Inventory
	Units	Cost/unit	COG for sale	Units sold	Cost/unit	COGS	Units	Cost/unit	Ending inventory
Beginning Inventory	34	$    82.00	$    2,788.00	15	$    82.00	$       1,230.00	19	$    82.00	$      1,558.00
Purchases:
20-Jan	25	$    88.00	$    2,200.00	25	$    88.00	$       2,200.00	0	$    88.00	$                   -
TOTAL	59		$    4,988.00	40		$       3,430.00	19		$      1,558.00
Average Method	Cost of Goods available for sale			Cost of Goods Sold			Ending Inventory
	Units	Cost/unit	COG for sale	Units sold	Cost/unit	COGS	Units	Cost/unit	Ending inventory
Beginning Inventory	34	$    82.00	$    2,788.00
Purchases:
20-Jan	25	$    88.00	$    2,200.00
30-Jan			$                 -
			$                 -
			$                 -
TOTAL	59	84.54	$    4,988.00	40	84.54	$       3,382.00	19	$    84.54	$      1,606

• Requirement 1, 2 and 3 – based on above workings

	FIFO	LIFO	Weighted Average Method
Sales Revenue	$    5,360.00	$    5,360.00	$    5,360.00
(-) Cost of Goods Sold (as calculated above)	$    3,316.00	$    3,430.00	$    3,382.00
Gross Margin	$    2,044.00	$    1,930.00	$    1,978.00

• Requirement 4

FIFO method is resulting in highest Gross Profits of $ 2,044.This is because,

--the prices show increasing trend,
--cost of goods sold is valued on earlier purchases (at cheaper rate) than current purchases.
---Cost of Goods sold value is comparatively less than in other methods.
---Ending inventory is valued at ‘increased’ prices as inventory valuation is based on latest purchase price.