Question

Assume that AB Tire Store completed the following perpetual inventory transactions for a line of tires:

May 1 Beginning merchandise inventory 16 tires @ \( 65 each

11 Purchase 10 tires @ \) 78 each

23 Sale 12 tires @ \( 88 each

26 Purchase 14 tires @ \) 80 each

29 Sale 18 tires @ $ 88 each

Requirements

4. Which method results in the largest gross profit, and why?

Short answer

FIFO method would result in the highest gross profit due to valuing issued inventory (COGS) at the historical prices and yielding the lowest COGS.

Step-by-step solution

Step-by-Step-SolutionStep 1: Gross profit under FIFO, LIFO, and Average Method

In the given case, the gross profit computed under each method is as follows –

	Gross Profit
FIFO	$500
LIFO	$350
Weighted Average	$450

The method that has resulted in the highest gross profits is the FIFO method.

Reason for the FIFO method to yield the highest gross profit

FIFO method computes the cost of issued inventory on a historical basis. So, in comparison to other methods, the cost computation under FIFO would always be lower. The reason is that the market prices have a general trend of rising. So the cost today would always be lower than the cost tomorrow.

In such a case FIFO method would always fetch the highest profit.