Question

A friend of yours has asked for your assistance in determining the gross profit for her new promotions company that distributes branded refillable water bottles to her only client. The agreed upon selling price to her customer for the entire year was $5.00 per unit.

Her beginning and ending inventory were 500 units and there was no inventory shrinkage or returns. Assume the starting inventory cost per unit was $2.00. She uses a periodic inventory method. Her purchases were as follows, which included shipping charges.

Quarter	Cost w/ Shipping	Quantity Ordered
Quarter 1	$2.00 per unit	1,200
Quarter 2	$2.05 per unit	1,000
Quarter 3	$2.15 per unit	1,300
Quarter 3	$2.25 per unit	1,500

What was her total gross profit for the year? Which inventory cost flow assumption did you use and why (either FIFO, LIFO, Avg.)? Formulate a thoughtful response in 100 to 250 words. Include the accounting principle(s) you used.

Answer 1

Computation of Gross Profit :

1. FIFO(first in first out) :

Stock valuation : opening stock = 500 × 2 = $ 1000

Closing stock = 500× 2.25 = $ 1125

( In FIFO method, it is assumed that stock that is acquired first will be sold first. So the closing stock will be out of purchases made at last)

Gross Profit = sales - cost of goods sold

= Sales - ( opening stock+ purchases- closing stock )

= ( 5000×5) - (1000+10620-1125)

= $ 14,505

2. LIFO ( last in first out ):

Stock valuation: opening stock = 500 × 2 = $ 1000

Closing stock = 500×2 = $ 1000 (in LIFO method, it is generally assumed that, the stock that is acquired last are sold first, hence the closing stock is from the opening stock )

Gross profit = sales - cost of goods sold

= (5000× 5) - (1000+10620-1000)

= $ 14,380

3. Average method :

Average cost per unit = total cost / total units

= (500×2)+ (1200×2)+(1000×2.05)+(1300×2.15)+(1500×2.25)/500+1200+1000+1300+1500

= 11620/5500 = $ 2.11 per unit

Gross Profit = (5000×2) - [ (500+5000-500)×2.11]

= 25000 - 10550

= $ 14,450.