Question

Topanga Group began operations early in 2021. Inventory purchase information for the quarter ended March 31, 2021, for Topanga’s only product is provided below. The unit costs include the cost of freight. The company uses a periodic inventory system to report inventory and cost of goods sold.

Date of Purchase	Units		Unit Cost			Total Cost
Jan. 7	6,000		$	5.00			$	30,000
Feb. 16	15,000			6.00				90,000
March 22	19,000			7.00				133,000
Totals	40,000						$	253,000

Sales for the quarter, all at $8 per unit, totaled 24,000 units leaving 16,000 units on hand at the end of the quarter.

Required:
1. Calculate Topanga's cost of goods sold for the first quarter using:

1. FIFO
2. LIFO
3. Average cost

2. Calculate Topanga's gross profit ratio for the first quarter using FIFO, LIFO, and Average cost.
3. Comment on the relative effect of each of the three inventory methods on the gross profit ratio.

• Req 1A
• Req 1B
• Req 1C
• Req 2
• Req 3

Calculate Topanga's cost of goods sold for the first quarter using FIFO.

	FIFO: Cost of Goods Available for Sale Cost of Goods Sold - Periodic FIFO Ending Inventory - Periodic FIFO # of units Cost per unit Cost of Goods Available for Sale # of units sold Cost per unit Cost of Goods Sold # of units in ending inventory Cost per unit Ending Inventory Beginning Inventory Purchases: January 7 February 16 March 22 Total

• Req 1B
• Req 1C
• Req 2
• Req 3

Calculate Topanga's cost of goods sold for the first quarter using LIFO.

	LIFO Cost of Goods Available for Sale Cost of Goods Sold - Periodic LIFO Ending Inventory - Periodic LIFO # of units Cost per unit Cost of Goods Available for Sale # of units sold Cost per unit Cost of Goods Sold # of units in ending inventory Cost per unit Ending Inventory Beginning Inventory Purchases: January 7 February 16 March 22 Total

Calculate Topanga's cost of goods sold for the first quarter using average cost. (Round average cost per unit to 4 decimal places.)

	Average Cost Cost of Goods Available for Sale Cost of Goods Sold - Average Cost Ending Inventory - Average Cost # of units Unit Cost Cost of Goods Available for Sale # of units sold Average Cost per Unit Cost of Goods Sold # of units in ending inventory Average Cost per unit Ending Inventory Beginning Inventory Purchases: January 7 February 16 March 22 Total

Calculate Topanga's gross profit ratio for the first quarter using FIFO, LIFO, and Average cost.

	Choose Numerator: ÷ Choose Denominator: = Gross Profit Ratio ÷ = Gross profit ratio FIFO ÷ = LIFO ÷ = Average cost ÷ =

Comment on the relative effect of each of the three inventory methods on the gross profit ratio.

	In situations when costs are rising, LIFO results in a    cost of goods sold and therefore, a    gross profit ratio than FIFO.

Answer 1

COST OF GOODS AVAILABLE FOR COST OF GOODS SOLD ENDING INVENTORY- PERIODIC FIFO

SALE

FIFO	# OF UNITS	COST PER UNIT	COST OF GOODS AVAILABLE FOR SALE	# OF UNITS	COST PER UNIT	COST OF GOODS SOLD	# OF UNITS IN ENDING INVENTORY	COST PER UNIT	ENDING INVENTORY
PURCHASES
JAN 7	6000	5	30,000				6000	5	30,000
FEB 16	15,000	6	90,000				6000	5	30,000
							15,000	6	90,000
MARCH 22	19,000	7	133,000				6,000	5	30,000
							15,000	6	90,000
							19,000	7	133,000
TOTAL	40,000		253,000				6,000	5	30,000
							15,000	6	90,000
							19,000	7	133,000
SALES				6,000	5	30,000
				15,000	6	90,000
				3,000	7	21,000	16,000	7	112,000
TOTAL				24,000		141,000	16,000		112,000

COST OF GOODS AVAILABLE FOR COST OF GOODS SOLD ENDING INVENTORY- PERIODIC LIFO

SALE

LIFO	# OF UNITS	COST PER UNIT	COST OF GOODS AVAILABLE FOR SALE	# OF UNITS	COST PER UNIT	COST OF GOODS SOLD	# OF UNITS IN ENDING INVENTORY	COST PER UNIT	ENDING INVENTORY
PURCHASES
JAN 7	6000	5	30,000				6000	5	30,000
FEB 16	15,000	6	90,000				6000	5	30,000
							15,000	6	90,000
MARCH 22	19,000	7	133,000				6,000	5	30,000
							15,000	6	90,000
							19,000	7	133,000
TOTAL	40,000		253,000				6,000	5	30,000
							15,000	6	90,000
							19,000	7	133,000
SALES				19,000	7	133,000
				5,000	6	30,000	6,000	5	30,000
							10,000	6	60,000
TOTAL				24,000		163,000	16,000		90,000

COST OF GOODS AVAILABLE FOR COST OF GOODS SOLD ENDING INVENTORY- AVERAGE COST

SALE

AVERAGE COST	# OF UNITS	COST PER UNIT	COST OF GOODS AVAILABLE FOR SALE	# OF UNITS	COST PER UNIT	COST OF GOODS SOLD	# OF UNITS IN ENDING INVENTORY	COST PER UNIT	ENDING INVENTORY
PURCHASES
JAN 7	6000	5	30,000
FEB 16	15,000	6	90,000
MARCH 22	19,000	7	133,000
TOTAL	40,000		253,000				40,000	6.325	253,000
SALES				24,000	6.325	151,800
							16,000	6.325	101,200
TOTAL				24,000		151,800	16,000		101,200

SALES= 24,000*8= 192,000

	CHOOSE NUMERATOR	/	CHOOSE DENOMINATOR	=	GROSS PROFIT RATIO
	SALES- COGS	/	SALES	=	GROSS PROFIT RATIO
FIFO	192,000-141,000	/	192,000	=	26.5625%
LIFO	192,000-163,000	/	192,000	=	15.1047%
AVERAGE COST	192,000-151,800	/	192,000	=	20.9375%

IN SITUATIONS WHEN COST ARE RISING, LIFO

RESULTS IN A HIGHER COST OF GOODS SOLD THEREFORE A LOWER GROSS PROFIT RATIO THAN FIFO.