Saturday, 12 March 2016

During 2015, Trombley Incorporated has the following inventory transactions.

Exercise 6-5 Calculate inventory amounts when costs are declining (LO3)
[The following information applies to the questions displayed below.]


During 2015, Trombley Incorporated has the following inventory transactions.


  Date Transaction Number
of Units
Unit
Cost
   Total Cost
  Jan. 1      Beginning inventory 18      $ 20       $ 360    
  Mar. 4      Purchase 23      19       437    
  Jun. 9      Purchase 28      18       504    
  Nov. 11      Purchase 28      16       448    


97      $ 1,749    





 
For the entire year, the company sells 71 units of inventory for $28 each.
Required:
1.
Using FIFO, calculate ending inventory, cost of goods sold, sales revenue, and gross profit.
 save image
Explanation:
1.
  Date Transaction Number
of Units
Unit
Cost
Ending Inventory
Nov. 11 Purchase 26 $ 16        $ 416

  
  Date Transaction Number
of Units
Unit
Cost
Cost of Goods Sold
Jan. 1        Beginning inventory 18        $ 20       $ 360       
Mar. 4        Purchase 23        19       437       
Jun. 9        Purchase 28        18       504       
Nov. 11        Purchase 2        16       32       


71*      $ 1,333       






* First 71 units purchased are assumed sold
 

Sales revenue = 71 units × $28 = $1,988
  
Gross profit = Sales revenue − Cost of goods sold
= $1,988 − $1,333 = $655

2.
Using LIFO, calculate ending inventory, cost of goods sold, sales revenue, and gross profit.
 save image
Explanation:
2.
  Date Transaction Number
of Units
Unit
Cost
Ending Inventory
  Jan. 1       Beginning Inventory 18       $ 20       $ 360     
  Mar. 4       Purchase 8        19       152     


26       $ 512     





    
  Date Transaction Number
of Units
Unit
Cost
Cost of Goods Sold
  Mar. 4       Purchase 15     $ 19       $ 285     
  Jun. 9       Purchase 28     18       504     
  Nov. 11       Purchase 28     16       448     


71*    $ 1,237     






* Last 71 units purchased are assumed sold
 
Sales revenue = 71 units × $28 = $1,988
  
Gross profit = Sales revenue – Cost of goods sold
= $1,988 − $1,237 = $751


Which method will result in higher profitability when inventory costs are declining?

FIFO LIFO Weighted
Average  
  Gross profit $ 655 $ 751 $ 708

     LIFO results in higher profitability when inventory costs are declining.