Question

Refer to the information in Exercise 5-7 and assume the periodic inventory system is used. Determine the costs assigned to ending inventory and to cost of goods sold using (a) FIFO and (b) LIFO. Then (c) compute the gross margin for each method.

Short answer

Method	Ending Inventory	Cost of goods sold	Gross profit
FIFO	$4,900	$13,850	$21,350
LIFO	$2,300	$16,450	$18,750

Step-by-step solution

Definition of Gross Profit Rate

Rate reflecting the percentage of sales converted into the gross margin is known as the gross profit rate.

FIFO Method

Particular	Units	X	Per unit cost	=	Total cost
Oct 26	100	X	$25	=	$2,500
July 30	120	X	$20	=	$2,400
Total cost of ending inventory	$4,900

Particular	Amount $
Cost of goods available for sale	$18,750
Less: Cost of ending inventory	(4,900)
Cost of goods sold	$13,850

Particular	Amount $
Sales$\left(880\times \$40\right)$	$35,200
Less: Cost of goods sold	(13,850)
Gross profit	$21,350

LIFO Method

Particular	Units	X	Per unit cost	=	Total cost
Beginning Inventory	200	X	$10	=	$2,000
March 14	20	X	$15	=	$300
Total cost of ending inventory	$2,300

Particular	Amount $
Cost of goods available for sale	$18,750
Less: Cost of ending inventory	(2,300)
Cost of goods sold	$16,450

Particular	Amount $
Sales$\left(880\times \$40\right)$	$35,200
Less: Cost of goods sold	(16,450)
Gross profit	$18,750