Question

The following three identical units of Item A are purchased during April:

Answer 1

Answer:

Determination of Gross Profit and Ending Inventory:

a. First-in, First-out (FIFO)

1. Determination of Gross Profit:

Sales               $118

Cost of Sales    68

Gross profit    $50

2. Determination of Ending Inventory:

Apr. 14  Purchase 1 $73

Apr. 28 Purchase 1  75

Total 2         $148

b. Last-in, First-out (LIFO):

1. Determination of Gross Profit:

Sales               $118

Cost of Sales    75

Gross profit    $43

2. Determination of Ending Inventory:

Apr. 2  Purchase 1 $68

Apr. 14 Purchase 1 $73

Total 2                  $141

c. Weighted average cost methods:

1. Determination of Gross Profit:

Sales              = $118

Cost of Sales =   72

Gross profit  =  $46

2. Determination of Ending Inventory:

Ending inventory = 2 x $72 = $144

Explanation:

FIFO, LIFO, and Weighted Average Cost Methods are different techniques for allocating costs of products to the cost of goods sold and the ending inventory.  They produce different results.  FIFO assumes that units sold are taken from the units purchased first.  LIFO assumes that units sold are taken from the units purchased last.  Weighted Average Method uses the average cost to determine the cost to allocate to cost of sales and ending inventory.  The average cost is obtained by summing the total inventory costs and dividing it by the units available for sale.  Then this average cost is applied to the quantity sold and the quantity remaining to obtain cost of goods sold and value of ending inventory.