Question

Problem 5-1 The following information pertains to Ramos Company for 2018. 700 units @ $21 2100 units $12 Beginning Inventory Units Purchased Ending inventory consisted of All purchases and sales were made with cash. 140 units. Ramos sold2,660 units at 40 per unit REQUIRED Compute the gross margin for Ramos Company using the following cost flow assumptions: (1) FIFO, (2) LIFO, and (3) weighted average. a. b. What is the dollar value of ending inventory for FIFO and LIFO? Determine the cash flow from operating activities, using each of the three cost flow assumptions listed in Requirement a. lgnore the effect of income taxes. Explain why these cash flows have no differences. c.

Answer 1

SOLUTION :

a. Gross Margin

Gross Margin = Revenue - Cost of Goods Sold

Cost of Goods Sold = Opening Inventory + Purchases - Closing Inventory

Gross margin under three cost flow assumptions

	FIFO			LIFO			W.A.
	Units	($)	Value ($)	Units	($)	Value ($)	Units	($)	Value ($)
(a) Opening Inventory	700	21.00	14700.00	700	21.00	14700.00	700	21.00	14700.00
(b) Purchases	2100	12.00	25200.00	2100	12.00	25200.00	2100	12.00	25200.00
(c) Closing Inventory	140	21.00	2940.00	140	12.00	1680.00	140	84.88	11883.20
(d) Cost of Goods Sold (a)+(b)-(c)	2660		36960.00			38220.00			28016.80
(e) Total Revenue	2660	40.00	106400	2660	40.00	106400	2660	40.00	106400
(f) Gross Margin (e) - (d)			69440.00			68180.00			78383.20

b. Dollar value of ending inventory for FIFO and LIFO

FIFO = $ 2940

LIFO = $ 1680

(Please refer to row '(c)' in the table above)

c. Cash flow from Operating Activities

Cash Flow From Operating Activities (Direct Method)	FIFO ($)	LIFO ($)	W.A. ($)
(a) Cash receipts from customers	106400.00	106400.00	106400.00
(b) Cash paid to suppliers	25200.00	25200.00	25200.00
(c) Net Cash from Operating Activities (a) - (b)	81200.00	81200.00	81200.00

Reason for no difference in cash flow : Inventory valuation is done purely for the purpose of ascertaining trading profit / loss and is carried out majorly using the three methods mentioned herein. If we take the trading results under these three alternatives, then it is obvious that the results will be different as is evident from answer 'a'. But cash flow statement is a technique of which the sole purpose is finding out in what all ways, LIQUID CASH (and cash equivalents) has come in and gone out of the entity. The only consideration is cash received and cash paid and not other aspects like cost or profit elements. The purchase price and selling price does not vary according in to difference in inventory valuation. Hence, ther is no difference in Net Cash from Operating Activities under all three alternatives.

NOTE :

W.A. (Weighted Average Method)

Cost of a unit = Total units of beginning and purchased inventory / Total of beginning and purchase cost

= (700+140) / (21+12) = 84.88