Question

PA7-1 Analyzing the Effects of Four Alternative Inventory Methods in a Periodic Inventory System [LO 7-3]

Gladstone Company tracks the number of units purchased and sold throughout each accounting period but applies its inventory costing method at the end of each period, as if it uses a periodic inventory system. Assume its accounting records provided the following information at the end of the annual accounting period, December 31.

Transactions		Units			Unit Cost
Beginning inventory, January 1			1,600		$	45
Transactions during the year:
a.	Purchase, January 30		2,300			49
b.	Sale, March 14 ($100 each)		(1,250	)
c.	Purchase, May 1		1,000			75
d.	Sale, August 31 ($100 each)		(1,500	)

Assuming that for Specific identification method (item 1d) the March 14 sale was selected two-fifths from the beginning inventory and three-fifths from the purchase of January 30. Assume that the sale of August 31 was selected from the remainder of the beginning inventory, with the balance from the purchase of May 1.

Required:
1.	Compute the amount of goods available for sale, ending inventory, and cost of goods sold at December 31 under each of the following inventory costing methods: (Round intermediate calculations to 2 decimal places and final answers to the nearest whole dollar amount.)

         

2-a.	Of the four methods, which will result in the highest gross profit?
	Last-in, first-out Weighted average cost First-in, first-out Specific identification

2-b.	Of the four methods, which will result in the lowest income taxes?
	Last-in, first-out Weighted average cost First-in, first-out Specific identification

Answer 1

LIFO Method
Periodic Inventory method
Cost of goods available for sale
Date	Explanation	Units	Per unit	Total
Jan.1	Beginning inventory	1,600	45	72,000
jan.30	Purchase	2,300	49	1,12,700
May.1	Purchase	1,000	75	75,000
	Total	4,900		2,59,700
Ending inventory
Date	Units	Per unit	Total
Jan.1	1,600	45	72,000
jan.30	550	49	26,950
Total	2,150		98,950
Cost of goods available for sale			2,59,700
Less: Ending inventory			98,950
Cost of goods sold			1,60,750

Average cost method
Periodic Inventory method
Cost of goods available for sale
Date	Explanation	Units	Per unit	Total
Jan.1	Beginning inventory	1,600	45	72,000
jan.30	Purchase	2,300	49	1,12,700
May.1	Purchase	1,000	75	75,000
	Total	4,900		2,59,700
Average cost per unit=		259700/ 4900 =		53.00
Particulars		Units	Per unit	Total
Ending inventory		2,150	53.00	1,13,950
Cost of goods available for sale				2,59,700
Less: Ending inventory				1,13,950
Cost of goods sold				1,45,750

FIFO Method
Periodic Inventory method
Cost of goods available for sale
Date	Explanation	Units	Per unit	Total
Jan.1	Beginning inventory	1,600	45	72,000
jan.30	Purchase	2,300	49	1,12,700
May.1	Purchase	1,000	75	75,000
	Total	4,900		2,59,700
Ending inventory
Date	Units	Per unit	Total
May.1	1,000	75	75,000
jan.30	1,150	49	56,350
Total	2,150		1,31,350
Cost of goods available for sale			2,59,700
Less: Ending inventory			1,31,350
Cost of goods sold			1,28,350

Specific identification Method
Cost of goods available for sale
Date	Explanation	Units	Per unit	Total
Jan.1	Beginning inventory	1,600	45	72,000
jan.30	Purchase	2,300	49	1,12,700
May.1	Purchase	1,000	75	75,000
	Total	4,900		2,59,700
Cost of goods sold
Date	Units	Per unit	Total
Mar.14	500	45	22,500
Mar.14	750	49	36,750
Aug.31	1,100	45	49,500
Aug.31	400	75	30,000
Total	2,750		1,38,750
Cost of goods available for sale			2,59,700
Less: Ending inventory			1,38,750
Cost of goods sold			1,20,950

2-a

Method	Sale value	Cost of goods sold	Gross profit
LIFO	2,75,000	1,60,750	1,14,250
Weighted average	2,75,000	1,45,750	1,29,250
FIFO	2,75,000	1,28,350	1,46,650
Specific identification	2,75,000	1,38,750	1,36,250

Gross profit is highest in FIFO.

2-b

Gross profit is lowest in LIFO, it results in lowest income taxes.