Question

P6-6A You are provided with the following information for Gobler Inc. Gobler Inc. uses the periodic method of accounting for its inventory transactions. Compare specific identification, FIFO, and LIFO under periodic method: use cost flow assumption to justify price increase. (LO2) March 1 Beginning inventory 2,000 liters at a cost of 60€ per liter. March 3 Purchased 2,500 liters at a cost of 65€ per liter. March 5 Sold 2,300 liters for $1.05 per liter. March 10 Purchased 4,000 liters at a cost of 72€ per liter. March 20 Purchased 2,500 liters at a cost of 80c per liter. March 30 Sold 5,200 liters for $1.25 per liter. Instructions (a) Prepare partial income statements through gross profit, and calculate the value of ending inventory that would be reported on the balance sheet, under each of the fol- lowing cost flow assumptions. (Round ending inventory and cost of goods sold to the nearest dollar.) (1) Specific identification method assuming: (i) The March 5 sale consisted of 1,000 liters from the March 1 beginning inven tory and 1,300 liters from the March 3 purchase; and (ii) The March 30 sale consisted of the following number of units sold from begin- ning inventory and each purchase: 450 liters from March 1; 550 liters from March 3; 2,900 liters from March 10; 1,300 liters from March 20. (2) FIFO. (3) LIFO. (b) How can companies use a cost flow method to justify price increases? Which cost flow method would best support an argument to increase prices? (a) Gross profit: (1) Specific identification $3,715 (2) FIFO (3) LIFO $3,930 $3,385

Answer 1

Working note:

Calculation of closing value of inventory under

(I) Specific identification method:

Closing inventory out of

March 1st opening (2000-1000-450) =550*0.6$= 330$

March 3 purchase (2500-1300-550)= 650*0.65$=422.5

March 10 purchase (4000-2900)= 1100*0.72$= 792$

March 20 purchase (2500-1300)= 1200*0.80$= 960$

Value of Closing stock = 2524.5$

(ii) FIFO

Date	opening			Purchases			Issues			Closing
	Stock	cost p.u	value	stock	cost p.u.	value	stock	cost p.u	value		Cost p.u	value
Mar 1	2000	0.6	1200							2000	0.6	1200
3				2500	0.65	1625				2500	0.65	1625
5							2000	0.6	1200
							300	0.65	195	2200	0.65	1430
10				4000	0.72	2880				2200	0.65	1430
										4000	0.72	2880
20				2500	0.80	2000				2200	0.65	1430
										4000	0.72	2880
										2500	0.80	2000
30							2200	0.65	1430
							3000	0.72	2160	1000	0.72	720
										2500	0.80	2000

Closing stock as per FIFO = 2000+720= 2720$

(iii) LIFO

Date	Opening			Purchases			Issues			Closing
	Stock	cost p.u	value	Stock	cost p.u	value	stock	cost p.u	value	stock	cost p.u	Value
Mar 1	2000	0.6	1200							2000	0.6	1200
3				2500	0.65	1625				2500	0.65	1625
5							2300	0.65	1495	2000	0.6	1200
										200	0.65	130
10				4000	0.72	2880				2000	0.60	1200
										200	0.65	130
										4000	0.72	2880
20				2500	0.80	2000				2000	0.60	1200
										200	0.65	130
										4000	0.72	2880
										2500	0.80	2000
30							2500	0.80	2000
							2700	0.72	1944	2000	0.60	1200
										200	0.65	130
										1300	0.72	936

Closing stock as per LIFO (1200+130+936)= 2266$

Partial income statement - March

Particulars	Specific identification	FIFO	LIFO
Sales(2300*1.05)+(5200*1.25)	8915	8915	8915
Less:
Cost of Goods sold	5180.5	4985	5439
	(1200+6505-2524.5)	(1200+6505-2720)	(1200+6505-2266)
Gross profit	3734.5	3930	3476

b) Global Inc company has three inventory costing methods from which to choose. The choice is important because it influences your cost of goods sold, net income and income tax payable.

Last-in, first-out, or LIFO, uses the most recent costs first. When prices are rising, you prefer LIFO because it gives you the highest cost of goods sold and the lowest taxable income. First-in first-out, or FIFO, applies the earliest costs first. In rising markets, FIFO yields the lowest cost of goods sold and the highest taxable income. But specific identification method doesnt make any change as we know the prices of goods we are issuing. We are issuing in a random basis out of the available stock. We cannot justify the cost of Goods sold out of this method as we are not issuing goods purchased in a single process.

Thank you