Question

A friend of yours has asked for your assistance in determining the gross profit for her new promotions company that distributes branded refillable water bottles to her only client. The agreed upon selling price to her customer for the entire year was $5.00 per unit.

Her beginning and ending inventory were 500 units and there was no inventory shrinkage or returns. Assume the starting inventory cost per unit was $2.00. She uses a periodic inventory method. Her purchases were as follows, which included shipping charges.

Quarter	Cost w/ Shipping	Quantity Ordered
Quarter 1	$2.00 per unit	1,200
Quarter 2	$2.05 per unit	1,000
Quarter 3	$2.15 per unit	1,300
Quarter 3	$2.25 per unit	1,500

What was her total gross profit for the year? Which inventory cost flow assumption did you use and why (either FIFO, LIFO, Avg.)? Formulate a thoughtful response in 100 to 250 words. Include the accounting principle(s) you used.

Answer 1

Solution : LIFO Method

ending inventory : 500 units x $ 2.25

= $ 1,125

Cost of goods sold = Begning inventory + Purchases - Ending inventory

= $ 1,000 + $ 10,620 - $ 1,125

= $ 10,495

Gross profit margin = Total sales - Cost of goods sold

= $ 25,000 - $ 10,495

= $ 14,505

Working : Begning inventory = 500 units x $ 2 = $ 1,000

Purchases = 1200 units x $2 + 1000 units x $2.05 + 1300 units x $ 2.15 + 1500 units x $ 2.25

= $10,620

Ending inventory = 500 units x $ 2.25 = $ 1,125

Sales units = opening inventory + Purchases - Ending inventory

= 500 units - 5000 units - 500 units

= 5000 units

Sales Value = 5000 units x $ 5 = $ 25,000

We are using Lifo method , due to following reasons :

LIFO method results in the lowest taxable income , when prices are rising. The internal revenue service allows companies to use LIFO for tax purposes only, if they use LIFO for financial reporting purposes.

Use of LIFO , leads to a better matching of costs and revenue.

With the use of LIFO , the income statement reports both sales revenue and cost of goods sold in current dollars. The resulting profit margin is a better indicator of management's ability to generate income.