Question

Exercise 5-19 Effect of inventory cost flow (FIFO, LIFO, and weighted average) on gross margin LO 5-6 (The following information applies to the questions displayed below.] The following information pertains to Mason Company for 2018: Beginning inventory Units purchased 90 units 310 units @ @ $40 $45 Ending inventory consisted of 30 units. Mason sold 370 units at $90 each. All purchases and sales were made with cash. Operating expenses amounted to $4100.

Answer 1

Question a

In FIFO method, the inventory purchased first is sold first. The inventory remaining at the end of the period is out of latest purchase.

Closing inventory of 30 units will be out of purchases made. Cost of closing inventory will be 30units*$45 p.u. = $1,350

Cost of goods sold = Opening inventory + Purchse - closing inventory

Cost of goods sold = 3,600+13,950-1,350 =$16,200

Gross margin = Sales - Cost of goods sold

Gross margin = 33,300 - 16,200

Gross margin under FIFO metho = $17,100

In LIFO method, the inventory purchased last is sold first. So the closing inventory is out of purchases made in earlier period or out of opening stock.

Closing inventory of 30 units will be out of opening inventory of 90 units.

Cost of closing inventory = 30units*40p.u. = $1,200

Cost of goods sold = opening inventory + purchase- closing inventory

Cost of goods sold = 3,600+13,950-1,200

Cost of goods sold = 16,350

Gross margin = Sales - cost of goods sold

Gross margin = 33,300 - 16,350

Gross margin under LIFO method = $16,950

In weighted average method, the cost per unit is calculted as below:

Cost per unit = (Cost of inventory available for sale)/ total units available for sale

Cost per unit = ((90*40)+(310*45))/(90+310)

Cost per unit = $43.88 per unit

Cost of goods sold = 370*43.88 = $16236

Gross margin= Sales- cost of goods sold

Gross margin = 33,300 - 16,236

Gross margin under weighted average method = $17,064

Question b

Net income = Gross margin - Expenses

Net income under FIFO metho = 17,100 - 4,100 = $13,000

Net income under LIFO method = 16,950-4,100 = $12,850

Net income under weighted average method = 17,064 - 4,100 = $12,964

Question c

The cash flow will be same in all the three method, as it is with respect to cash actually paid and cash actually received during the period. It has nothing to do with the method of inventory valuation.

Cash inflow from customers = Sales = $33,300

Cash outflow for inventory and expenses = Purchase + expenses

Cash outflow for inventory and expenses = $13,950+$4,100 = $18,050

Net cash flow from operating activities for all three methods = 33,300-18,050 = $15,250