Question

Exercise 8-16 You are the vice president of finance of Nash Corporation, a retail company that prepared two different schedules of gross margin for the first quarter ended March 31, 2020. These schedules appear below. Sales ($5 per unit) $158,400 158,400 Cost of Goods Sold $137,300 141,984 Gross Margin $21,100 16,416 Schedule 1 Schedule 2 The computation of cost of goods sold in each schedule is based on the following data. Beginning inventory, January 1 Purchase, January 10 Purchase, January 30 Purchase, February 11 Purchase, March 17 Units 10,100 8,100 6,100 9,100 11,100 Cost per Unit $4.20 4.30 4.40 4.50 4.60 Total Cost $42,420 34,830 26,840 40,950 51,060 Patricia Johnson, the president of the corporation, cannot understand how two different gross margins can be computed from the same set of data. As the vice president of finance, you have explained to Ms. Johnson that the two schedules are based on different assumptions concerning the flow of inventory costs, i.e., FIFO and LIFO. Schedules 1 and 2 were not necessarily prepared in this sequence of cost flow assumptions. Prepare two separate schedules computing cost of goods sold and supporting schedules showing the composition of the ending inventory under both cost flow assumptions.

Answer 1

Solution:

Nash Corporation

Schedules of Cost of Goods Sold

For the First Quarter Ended March 31, 2020

	Schedule 1 First in ,First out	Schedule 2 Last in, last out
Beginning inventory	$42,420	$42,420
Add: Purchases	$153,680	$153,680
Cost of goods available for sale	$196,100	$196,100
Less: ending inventory	-$58,800	-$54,116
Cost of goods sold	$137,300	$141,984

* $34,830 + $26,840 +$40,950 + $51,060

Schedules Computing Ending Inventory

	Units
Beginning inventory	10,100
Add: Purchases	34,400(8,100+6,100+9,100+11,100)
Units available for sale	44,500
Less: sales	31,680($158,400÷ $5)
Ending inventory	12,820

The unit computation is the same for both schedules, but the cost assigned to the units of ending inventory are different.

First in, First-out (Schedule 1)
1,720 units	at $4.50	=$7,740
11,100 units	at $4.60	=$51,060
12,820		$58,800
Last in, First out (Schedule 2)
2,720 units	at $4.30	=$11,696
10,100 units	at $4.20	=$42,420
12,820 units		$54,116