Question

Learning Objectives 2, 3 P6-28A Accounting for inventory using the perpetual inventory system- FIFO, LIFO, and weighted average Fit Gym began January with merchandise inventory of 78 crates of vitamins that cost a total of $4,290. During the month, Fit Gym purchased and sold merchandise on account as follows: 2. Ending Merch. Inv., $990 Jan. 5 Purchase 156 crates @ $ 64 each 180 crates @ $ 100 each 13 Sale 18 Purchase 26 Sale 114 crates @ $ 75 each 150 crates @ $ 116 each Requirements 1. Prepare a perpetual inventory record, using the FIFO inventory costing method, and determine the company's cost of goods sold, ending merchandise inventory, and gross profit. 2. Prepare a perpetual inventory record, using the LIFO inventory costing method, and determine the company's cost of goods sold, ending merchandise inventory, and gross profit. 3. Prepare a perpetual inventory record, using the weighted average inventory cost- ing method, and determine the company's cost of goods sold, ending merchandise inventory, and gross profit. (Round weighted average cost per unit to the nearest cent and all other amounts to the nearest dollar.) 4. If the business wanted to pay the least amount of income taxes possible, which method would it choose?

Please explain your answer. Thank you.

Answer 1

FIFO - Perpectual inventory Goods Purchased Cost of Goods Sold Date # of Units Cost per # of Units Unit Sold Cost per Unit Cost of Goods Sold Inventry Balance # of Cost Inventory Units per Unit Balance Sold 78 S 55.00 S 4,290 78 S 55.00 S 4,290 156 S 64.00 S 9,984 Jan-01 Jan-05 156 S 64.00 Jan-13 78 S S 55.00 64.00 S S 4,290 6,528 102 54 Jan-18 114 $ 75.00 S 64.00 S 64.00 S 75.00 S S $ 3,456 3,456 8,550 114 Jan-26 54 96 S S 64.00 S 75.00 S S 3,456 7,200 21,474 18 Total S 75.00 S S 1,350 1,350 Total Cost of ending inventory Cost of Goods Sold $ 4290+6528+3456+7200 Gross Profit $ 35400 - $ 21474 $ $ $ 1,350 21,474 13,926

LIFO - Perpectual inventory Goods Purchased Cost of Goods Sold Inventry Balance Date # of Units Cost per # of Units Unit Sold aits | Coste Cost per Unit | Goods Sola Cost of Goods Sold Units pe r tot extent cream # of Units Sold 78 78 156 Jan-01 Jan-05 Cost per Unit S 55.00 S 55.00 S 64.00 Inventory Balance S 4,290 S 4,290 S 9,984 156 S 64.00 Jan-13 156 24 S S 64.00 55.00 S S 9,984 1,320 54 S 55.00 S 2,970 Jan-18 114 S 75.00 S 55.00 S S 75.00 S 2,970 8,550 Jan-26 114 S 75.00$ S 55.00 $ S 54 114 8,550 1,98018 21,834 S 55.00 S 990 990 Total Cost of ending inventory Cost of Goods Sold $ 9984+1320+8550+1980 Gross Profit $ 35400 - $ 21834 $ $ $ 990 21,834 13,566

3) Weighted Average Cost - Perpetual inventory Goods Purchased Cost of Goods Sold Date # of Units Cost per # of Units Unit Sold Cost per Unit Cost of Goods Sold 1 Jan-01 Jan-05 Inventory Balance # of Inventory Units Sold per Unit Balance 78 $ 55.00 S 4,290 78 S 55.00 S 4,290 156 S 64.00 S 9,984 234 S 61.00 S 14,274 54 8 61.00 S 3,294 156 S 64.00 Jan-13 180 S 61.00 S 10,980 Jan-18 114 S 75.00 54 114 168 18 8 61.00 S 3.294 S 75.00 S 8,550 $ 70.50S 11,844 S 70.50S 1,269 Jan-26 S 70.50 S 10,575 Cost of ending inventory Cost of Goods Sold $ 10980+10575 Gross Profit $ 35400 - $ 21555 $ $ $ 1,269 21,555 13,845

Working Notes: Total Sales = 180 + $ 100 + 150 * $ 116 = $ 35,400 Gross Profit = Sales - Cost of Goods Sold Gross Profit under the following inventory systems FIFO inventory method $ LIFO inventory method $ Weighted Average Cost inventory method $ 13,926 13,566 13,845 If the business want to pay least amount of income tax, then it's gross profit should be low. On comparision of Gross Profits under the above inventory methods, LIFO method of inventory system consists the lowest gross profit. Hence management should choose LIFO inventory method to pay the least amount of taxes.