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

GOBLER INC
PARTIAL INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 2017
ACCOUNTS	SPECIAL IDENTIFICATION	FIFO	LIFO
SALES REVENUE	$                                 8,915	$       8,915	$       8,915
BEGINNING INVENTORY	$                                 1,200	$       1,200	$       1,200
COST OF GOODS PURCHASED	$                                 6,505	$       6,505	$       6,505
COST OF GOODS AVAILABLE FOR SALE	$                                 7,705	$       7,705	$       7,705
ENDING INVENTORY	$                                 2,505	$       2,720	$       2,175
COST OF GOODS SOLD	$                                 5,200	$       4,985	$       5,530
GROSS PROFIT	$                                 3,715	$       3,930	$       3,385
Workings
Sales
Mar 5 : 2300*1.05	2415
Mar 30:5200*1.25	6500
Total	8915
Cost of goods sold	FIFO
Mar 5 sales :2300	1395
(2000 from beg inventory   remaining 300 from Mar 3 purchases)
so
2000*0.60 + 300*0.65
Mar 30 sales	3590
(2200 from Mar 3 ; 3000 from Mar 10)
2200*0.65+3000*0.72
Total	4985
Cost of goods sold	LIFO
Mar 5 sales :2300	1840
(LIFO periodic : so this is taken from Mar 20
purchases)
(2300*0.80)
Mar 30 sales : 5200	3690
(Mar 20 : 200 units *0.80 + Mar 10 :4000*0.72+Mar3:1000*.65)
total	5530
	Specific identification
Mar 5 (it is given in question)	1445
(1000*0.60+1300*0.65)
Mar 30 (it is given in question)	3755
(450*.60+550*.65+2900*.72+1300*.80)
total	5200
Companies may decide on a cost flow method that produces the highest possible cost of goods sold and lowest gross profit to justify price increases. In this example, LIFO produces the lowest gross profit and best support to increase selling prices