Question

Fossil specializes in designer watches and leather goods. Assume Fossil began June holding 10 wristwatches that cost $50 each. During June, Fossil bought and sold inventory as follows: Sold 8 units for $100 each Jun 3 Purchased 10 units @ $56 each 16 Sold 8 units for $100 each 23 Requirements 1. Prepare a perpetual inventory record for Fossil using FIFO, LIFO, and Average cost. 2. Journalize all of Fossil's inventory transactions for June under all three costing methods 3. Show the computation of gross profit for each method. 4. Which method maximizes net income? Which method minimizes income taxes?

Answer 1

Part-1)

a) FIFO

Revenue
Jun-16	10 units	$55	$550

COGS
Jun-03	8 units	$50	$400
Jun-23	2 units	$50	$100
	6 units	$55	$330
			$830

Ending inventory
Jun-23	4 units	$55	$220

　

b) LIFO:

Revenue
Jun-16	10 units	$55	$550

COGS
Jun-03	8 units	$50	$400
Jun-23	8 units	$55	$440
			$840

Ending inventory
Jun-23	2 units	$50	$100
	2 units	$55	$110
			$210

　

c) Average cost:

Revenue
Jun-16	10 units	$55	$550

COGS
Jun-03	8 units	$50	$400
Jun-23	8 units	$54.17	$433
			$833

Ending inventory
Jun-23	4 units	$54.17	$217

　

Part-2)

FIFO:

Date	Particulars	Debit	Credit
Jun-03	Accounts Receivable	800
	Sales Revenue		800
	Cost of goods sold	400
	Inventory		400
Jun-16	Inventory	550
	Accounts Payable		550
Jun-23	Accounts Receivable	800
	Sales Revenue		800
Jun-30	Cost of goods sold	430
	Inventory		430

　

LIFO:

Date	Particulars	Debit	Credit
Jun-03	Accounts Receivable	800
	Sales Revenue		800
	Cost of goods sold	400
	Inventory		400
Jun-16	Inventory	550
	Accounts Payable		550
Jun-23	Accounts Receivable	800
	Sales Revenue		800
Jun-30	Cost of goods sold	440
	Inventory		440

　

Weighted average:

Date	Particulars	Debit	Credit
Jun-03	Accounts Receivable	800
	Sales Revenue		800
	Cost of goods sold	400
	Inventory		400
Jun-16	Inventory	550
	Accounts Payable		550
Jun-23	Accounts Receivable	800
	Sales Revenue		800
Jun-30	Cost of goods sold	433
	Inventory		433

　

Part-3)

FIFO: $1600 - $830 = $770

LIFO: $1600 - $840 = $760

Gross Profit: $1600 - $833 = $767

　

Part-4) FIFO gives maximum net income

LIFO minimizes the taxes