Question

Inventory information for Part 311 of Monique Aaron Corp. discloses the following information for the month of June.

June 1 Balance 300 units @ \(10 June 10 Sold 200 units @ \)24

11 Purchased 800 units @ \(12 15 Sold 500 units @ \)25

20 Purchased 500 units @ \(13 27 Sold 300 units @ \)27

Instructions

(a) Assuming that the periodic inventory method is used, compute the cost of goods sold and ending inventory under(1) LIFO and (2) FIFO.

(b) Assuming that the perpetual inventory method is used and costs are computed at the time of each withdrawal, what is the value of the ending inventory at LIFO?

(c) Assuming that the perpetual inventory method is used and costs are computed at the time of each withdrawal, what is the gross profit if the inventory is valued at FIFO?

(d) Why is it stated that LIFO usually produces a lower gross profit than FIFO?

Short answer

The COGS under period inventory by LIFO and FIFO are $12,500 and $11,400, respectively. Whereas, under perpetual inventory, the COGS are $11,900 and $11,700, respectively.

Step-by-step solution

Cost of goods sold and ending inventory under the periodic inventory

1) By using LIFO Method

$\begin{array}{rcl}\mathrm{Ending}\mathrm{Inventory}\left(\mathrm{Units}\right)& =& \mathrm{Total}\mathrm{Available}\mathrm{goods}\mathrm{for}\mathrm{sale}-\mathrm{Total}\mathrm{Sale}\\ & =& (300+800-500)-(200+500+300)\\ & =& (1,600-1,000)\\ & =& 600\mathrm{Units}\end{array}$

$\begin{array}{rcl}\mathrm{Value}\mathrm{of}\mathrm{ending}\mathrm{inventory}& =& \mathrm{Beginning}\mathrm{Inventory}\mathrm{Value}+\mathrm{June}11\mathrm{Purchase}\mathrm{value}\mathrm{for}300\mathrm{units}\\ & =& 300\times \$10+300\times \$12\\ & =& \$3,000+\$3,600\\ & =& \$6,600\end{array}$

$\begin{array}{rcl}\mathrm{Cost}\mathrm{of}\mathrm{goods}\mathrm{sold}& =& \mathrm{Value}\mathrm{of}\mathrm{total}\mathrm{inventory}\mathrm{available}\mathrm{for}\mathrm{sale}-\mathrm{Value}\mathrm{of}\mathrm{ending}\mathrm{Inventory}\\ & =& (300\times \$10+800\times \$12+500\times \$13)-\$6,600\\ & =& \$19,100-\$6,600\\ & =& \$12,500\end{array}$

2) By using FIFO method

$\begin{array}{rcl}\mathrm{Ending}\mathrm{Inventory}\left(\mathrm{Units}\right)& =& \mathrm{Total}\mathrm{Available}\mathrm{goods}\mathrm{for}\mathrm{sale}-\mathrm{Total}\mathrm{Sale}\\ & =& (300+800-500)-(200+500+300)\\ & =& (1,600-1,000)\\ & =& 600\mathrm{Units}\end{array}$

$\begin{array}{rcl}\mathrm{Value}\mathrm{of}\mathrm{ending}\mathrm{inventory}& =& \mathrm{Beginning}\mathrm{Inventory}\mathrm{Value}+\mathrm{June}11\mathrm{Purchase}\mathrm{value}\mathrm{for}300\mathrm{units}\\ & =& 500\times \$13+100\times \$12\\ & =& \$6,500+\$1,200\\ & =& \$7,700\end{array}$

$\begin{array}{rcl}\mathrm{Cost}\mathrm{of}\mathrm{goods}\mathrm{sold}& =& \mathrm{Value}\mathrm{of}\mathrm{total}\mathrm{inventory}\mathrm{available}\mathrm{for}\mathrm{sale}-\mathrm{Value}\mathrm{of}\mathrm{ending}\mathrm{Inventory}\\ & =& (300\times \$10+800\times \$12+500\times \$13)-\$7,700\\ & =& \$19,100-\$7,700\\ & =& \$11,400\end{array}$

Ending inventory under the perpetual method by using LIFO

Computation of cost of goods sold	Units	Cost Price	Cost of goods sold
June 10 Sales	200	$10	$2,000
June 15 Sales	500	$12	$6,000
June 27 sales	300	$13	$3,900
Total			$11,900

$\begin{array}{rcl}\mathrm{Value}\mathrm{of}\mathrm{ending}\mathrm{inventory}& =& \mathrm{Beginning}\mathrm{inventory}+\mathrm{Total}\mathrm{purchases}-\mathrm{Cost}\mathrm{of}\mathrm{goods}\mathrm{sold}\\ & =& \$3,000+(\$9,600+\$6,500)-\$11,900\\ & =& \$19,100-\$11,900\\ & =& \$7,200\end{array}$

Ending inventory under the perpetual method by using FIFO

Computation of cost of goods sold	Units	Cost Price	Cost of goods sold
June 10 Sales	200	$10	$2,000
June 15 Sales	100	$10	$1,000
	400	$12	$4,800
June 27 sales	300	$12	$3,900
Total			$11,700

$\begin{array}{rcl}\mathrm{Gross}\mathrm{Profit}& =& \mathrm{Total}\mathrm{sales}\mathrm{value}-\mathrm{Cost}\mathrm{of}\mathrm{goods}\mathrm{sold}\\ & =& (200\times \$24+500\times \$25+300\times \$27)-\$11,700\\ & =& \$25,400-\$11,700\\ & =& \$13,700\end{array}$

Difference in gross profit under LIFO and FIFO

Under the LIFO method, the cost of goods sold is valued at the current prices as only the latest inventory cost is taken for computation. Whereas, under FIFO, historical costs are used for computing COGS.

Current costs are generally higher than the historical cost. So the COGS would be higher under LIFO than FIFO.

Thus the gross profit would be reported lower under the LIFO method.