Question

Fermento sells a wine it purchases from a local brewer. Fermento stocked up on the wine throughout the year, preparing for a special millenium sales event in late December. On January 1,Fermento had 84.0 bottles on hand that cost $3.00 each. They also made the following purchases: 75 bottles for $4 each on Mar. 28 66 bottles for $7 each on Sep. 14 52 bottles for $8 each on Nov. 5 Fermento's sales were as follows: 76 from the beginning inventory 30 from the Mar. 28 purchase 20 from the Sep. 14 purchase 16 from the Nov. 5 purchase All of the wine was sold for $12 per bottle Assume Fermento uses LIFO for inventory costing. What was Fermento's gross margin on the wine for the year? Assume Fermento uses FIFO for inventory costing. What was Fermento's gross margin on the wine for year? Which method would result in the greatest cash flow to Fermento, assuming inflation? (FIFO or LIFO) Please read all the way to the bottom of the feedback section.

Answer 1

Ans 1 Periodic inventory System: In this system, the cost of sales and inventory are determined as the end of the accounting period. Last in, first out method (LIFO): In this method it is assumed that inventory which is purchased last will be sold first and the inventory will consist of old purchases. Cost of Goods Sold Date Amount Nov 5 $416 Sep 14 $462 Mar 28 $96 142 $974 Unit Rate Sales (142 x $12] $1,704 Less: Cost of Good sold ($974) Gross Profit $730 Gross Margin ($730/$1704] 42.84% Ans 2 First in, first out method (FIFO): In this method it is assumed that inventory which is purchased first will be sold first and the inventory consist of recent purchases. Cost of Goods Sold Date Unit Rate Amount Jan 1 $252 Mar 28 $232 142 $484 Sales (142 x $12] Less: Cost of Good sold Gross Profit Gross Margin ($1220/$1704] $1,704 ($484) $1,220 71.60% Ans 3 FIFO method will result in greatest cash flow to Fermento