Question

P6-6A You are provided with the following information for Gobler Inc. Gobler Inc. uses the periodic method of accounting for its inventory transactions. Compare specific identification, FIFO, and LIFO under periodic method: use cost flow assumption to justify price increase. (LO2) March 1 Beginning inventory 2,000 liters at a cost of 60€ per liter. March 3 Purchased 2,500 liters at a cost of 65€ per liter. March 5 Sold 2,300 liters for $1.05 per liter. March 10 Purchased 4,000 liters at a cost of 72€ per liter. March 20 Purchased 2,500 liters at a cost of 80c per liter. March 30 Sold 5,200 liters for $1.25 per liter. Instructions (a) Prepare partial income statements through gross profit, and calculate the value of ending inventory that would be reported on the balance sheet, under each of the fol- lowing cost flow assumptions. (Round ending inventory and cost of goods sold to the nearest dollar.) (1) Specific identification method assuming: (i) The March 5 sale consisted of 1,000 liters from the March 1 beginning inven tory and 1,300 liters from the March 3 purchase; and (ii) The March 30 sale consisted of the following number of units sold from begin- ning inventory and each purchase: 450 liters from March 1; 550 liters from March 3; 2,900 liters from March 10; 1,300 liters from March 20. (2) FIFO. (3) LIFO. (b) How can companies use a cost flow method to justify price increases? Which cost flow method would best support an argument to increase prices? (a) Gross profit: (1) Specific identification $3,715 (2) FIFO (3) LIFO $3,930 $3,385

Answer 1

a.

GOBLER INC.

Income Statement (partial)

	Specific Identification Method	FIFO Method	LIFO Method
Revenue	$8,915	$8,915	$8,915
Opening/Beginning Inventory	$1,200	$1,200	$1,200
Purchases	$6,505	$6,505	$6,505
Cost of goods available for sale	$7,705	$7,705	$7,705
Closing/Ending inventory	$2,505	$2,720	$2,175
Cost of goods sold	$5,200	$4,985	$5,530
Gross profit	$3,715	$3,930	$3,385

Workings:

1. Revenue = (2300*$1.05+5200*$1.25) = $8915
2. Purchase = (2,500 * $ 0.65) + (4,000 * $0.72) + (2,500 * $0.80) = $6505
3. Specific identification ending inventory consists of:

Opening inventory (2,000 liters – 1,000 – 450)	550 * $0.60	$330.00
Purchase on March 3 (2,500 liters – 1,300 – 550)	650 * $0.65	422.5
Purchase on March 10 (4,000 liters – 2,900)	1,100 * $0.72	792
Purchase on March 10 (2,500 liters – 1,300)	1,200 * $0.80	960
	3,500 liters	$2,504.50

b.

Firms should choose a cost transfer method that creates the highest possible price and lowest gross profit for goods sold in order to justify price rises. LIFO provides the lowest gross profit and best support for through selling prices in this case.