Question

Required information [The following information applies to the questions displayed below.] The Shirt Shop had the following transactions for T-shirts for Year 1. its first year of operations: Jan. 20 Apr. 21 July 25 Sept. 19 Purchased Purchased Purchased Purchased 570 units @ $ 10 = 370 units @ $ 12 = 450 units @ $ 15 = 260 units @ $ 17 = $5,700 4,440 6,750 4,420 During the year. The Shirt Shop sold 1,320 T-shirts for $26 each c. Compute the difference in gross margin between the FIFO and LIFO cost flow assumptions. Difference in gross margin between the FIFO and LIFO cost flow assumptions

Answer 1

FIFO stands for First In First Out which means that cost of goods sold must consider cost of those goods earlier. As a result, ending inventory will contain cost of recent purchases. LIFO stands for Last In First Out which means that cost of goods sold must consider cost of those goods recently. As a result, ending inventory will contain cost of initial purchases or beginning inventory. (a) x (b) Under FIFO: Workings: (a) (b) Units Rate Amount $10 $5,700 $4,440 $6,750 $4,420 $21,310 Ending inventory of 330 units shall consist of 260 units from Jan. 20 570 $12 Sep. 19; balance 70 units from Jul. 25's purchase. Therefore, 370 Apr. 21 Jul. 25 $15 450 Ending inventory from Jul. 25 Ending inventory from Sep. 19 Cost of Ending inventory $1,050 $4,420 $5,470 [70 units x $15] $17 Sep. 19 260 [260 units x $17] Available for sale 1,650 Units sold 1320 $21,310 [Ref: Workings] $15,840 $21310 - $5470] $34,320 $18,480 [$34320 - $15840] Available for sale Ending inventory units 330 Cost of Goods Sold Sales revenue [1320 units x $26] Gross profit under FIFO assumption Therefore,

Gross profit under FIFO assumption Gross profit under LIFO assumption $18,480 $16,310 $2,170 ($18480 $16310) Under LIFO: Ending inventory of 330 units shall consist of 330 units from Jan. 20 itself. Therefore, Difference in Gross profit between FIFO and LIFO Ending inventory from Jan. 20 Cost of Ending inventory [330 units x $10] $3,300 $3,300 $21,310 $18,010 $21310 $3300] [Ref: Workings] Available for sale Cost of Goods Sold Sales revenue $34,320 $16,310 $34320 - $18010] [1320 units x $26] Gross profit under LIFO assumption