Question

Suppose a Robak store in Fillmore​, ​Missouri, ended May 2016 with 800 comma 000 units of merchandise that cost $ 8 each. Suppose the store then sold 60 comma 000 units for $ 760 comma 000 during June. ​Further, assume the store made two large purchases during June as​ follows: June 9 10,000 units @ $6.10 = $61,000 25 40,000 units @ $5.20 = $208,000 Requirements 1. Calculate the​ store's gross profit under both FIFO and LIFO at June 30. 2. What caused the FIFO and LIFO gross profit figures to​ differ?

Answer 1

Answer:

Beginning Inventory June 1 (Ending inventory of May): 800,000 units @ $8 = $6,400,000

Purchases in June:

June 9 10,000 units @ $6.10 = $61,000

June 25 40,000 units @ $5.20 = $208,000

Sale during June

Sale during June is 60,000 units for $760000

As date of sale is not given it is assumed the firm follows periodic inventory.

Ending inventory in units = 800000 + 10000 + 40000 - 60000 = 790,000 units

Hence:

FIFO:

FIFO Ending inventory of June = 208000 + 61000 + (800000 - 60000) * 8 = $6,189,000

Cost of goods sold = Beginning inventory + Purchases - Ending inventory

= 6400000 + (61000 + 208000) - 6189000

= $480,000

FIFO Gross Profit = Sales - Cost of goods sold = 760000 - 480000 = $280,000

LIFO:

LIFO ending inventory will be from beginning inventory. The 60000 units sold will consist of 50000 units purchased and 10000 units from beginning inventory

LIFO Ending inventory of June = (800000 - 10000) * 8 = $6,320,000

Cost of goods sold = Beginning inventory + Purchases - Ending inventory

= 6400000 + (61000 + 208000) - 6320000

= $349,000

LIFO Gross Profit = Sales - Cost of goods sold = 760000 - 349000 = $411,000

Hence:

FIFO Gross Profit = $280,000

LIFO Gross Profit = $411,000

We observe from above that the gross profit under two methods differ and LIFO gross profit is higher by (411000 - 280000 =) $131,000.

The inventory prices are falling as beginning inventory cost is $8 and purchases were made on Jun 9 and Jun 25 at $6.10 and $5.20 respectively.

As such under LIFO method cost of goods sold will be lower and ending inventory will be higher resulting in higher gross profit.

When prices are falling FIFO will have higher cost of goods sold and lower ending inventory resulting in lower gross profit.