Question

Military Surplus began July 2018 with 90 stoves that cost ​$20 each. During the​ month, the company made the following purchases at​ cost:

The company sold 338 stoves and on July 31, the ending inventory consisted of 62 stoves The sales price of each stove was $ 45

July 6 120 stoves @ 130 stoves @ 60 stoves @ $25 = $ $30 = $35 = 3,000 3,900 2,100

1. Determine the cost of goods sold and ending inventory amounts for July under the​ average-cost, FIFO, and LIFO costing methods. Round the average cost per unit to two decimal​ places, and round all other amounts to the nearest dollar.

2. Explain why cost of goods sold is highest under LIFO. Be specific.

3. Prepare the Military Surplus income statement for July. Report gross profit. Operating expenses totaled $ 4500. The company uses average costing for inventory. The income tax rate is 32​%.

Answer 1

1.
Average Cost Method

	Units	Unit Cost	Total Cost
Beginning Inventory	90	$              20.00	$              1,800.00
Purchases
July 6	120	$              25.00	$              3,000.00
July 18	130	$              30.00	$              3,900.00
July 26	60	$              35.00	$              2,100.00
	400	$              27.00	$           10,800.00

Average Cost = Total Inventory Cost / Total Units
= $10800 / 400 = $27 per unit

Cost of Goods Sold = 338 x $27 = $9126
Ending Inventory = 62 x $27 = $1674

FIFO Method
Under FIFO method, inventory purchased first is sold first, therefore ending Inventory Consists of Purchases made at last

Ending inventory
60 units from July 26 Purchase i.e. 60 x $35 = $2100
Balance 2 units from July 18 Purchase i.e. 2 x $30 = $60
Total Ending Inventory = $2160

Cost of Goods Sold = Total Inventory Cost - Ending Inventory
= $10800 - $2160 = $8640

LIFO Method
Under LIFO method, inventory purchased last is sold first, therefore ending Inventory Consists of Purchases made at earliest

Ending Inventory
62 units from Beginning Balance i.e. 62 x $20 = $1240
Cost of Goods Sold = $10800 - $1240 = $9560

2.
Cost of Goods Sold under LIFO is highest because sales is made from purchases made at last which is compartively at higher cost than the purchases made earlier.

3. Average Cost

Income Statement
Sales Revenue	$     15,210
Cost of Goods Sold	$       9,126
Gross Profit	$       6,084
Operating Expenses	$       4,500
Operating Income	$       1,584
Income Tax @32%	$           507
Net Income	$       1,077