Ask Experts Questions for FREE Help !
    rollerboat1's Avatar
    rollerboat1 Posts: 3, Reputation: 1
    New Member

    Dec 1, 2008, 06:27 PM
    Calculate cost of goods sold, ending inventory, & gross profit for LIFO, FIFO &
    Hello, I have tried this example several times but do not seem to get the correct answer . I would appreciate your help with this one. Thanks:

    Twin Co. is a retailer operating which uses the perpetual inventory method. All sales returns from customers result in the goods being returned to inventory. The inventory is not damaged. There are no credit transactions & all amounts are settled in cash. This information is for the month of January 2007.

    Date... -Description... -Quantity and Unit Cost
    Dec 31 -Ending inventory... $160... and... $18
    Jan 2 -Purchase... $100... and... $20
    Jan 6 -Sale... $180... and... $40
    Jan 9 -Sale return... $10... and... $40
    Jan 9 -Purchase... $75... and... $24
    Jan 10 -Purchase return... $15... and... $24
    Jan 10 -Sale... $50... and... $45
    Jan 23 -Purchase ... $100... and... $28
    Jan 30 -Sale... $140... and... $50

    For LIFO and FIFO :Assume sales returns had a cost of $18 and purchase returns had a cost of $24. And for moving-average, round cost per unit to 3 decimal places.

    Cost of Good Sold:
    LIFO $
    FIFO $
    Moving average $

    Ending Inventory
    LIFO $
    FIFO $
    Moving average $

    Gross Profit:
    LIFO $
    FIFO $
    Moving average $
    ArcSine's Avatar
    ArcSine Posts: 969, Reputation: 106
    Senior Member

    Feb 23, 2012, 10:15 AM
    Yeah, this one's got a thick layer of dust on it and rollerboat1's probably gone on to a long and successful career in accounting since posting this one, but the question belongs to a general category that gets asked about quite a bit; so maybe a couple of tips could prove helpful for future viewers of the post.

    For FIFO and LIFO, think "layers". All the inventory on hand at any given moment should be seen as composed of multiple layers, with a new layer being added with each purchase.

    As of Jan 2 in this particular example, the company had 260 units on hand, which was composed of two layers: The beginning layer of 160 units at a cost of $18 each, and then a new layer added on Jan 2 of 100 units at a cost of 20 each.

    Come Jan 6 the company sells 180 units. Which layer(s) did these 180 units come from? This is where FIFO and LIFO differ. Under FIFO the sales are deemed to come from the oldest layers first. This would mean that the 180 units sold on Jan 6 would consist of the entire first layer (160 units which cost 18 each), and then 20 units from the second layer. Now the first layer is completely gone, and the company's inventory at that point consists of 80 units remaining of the second layer.

    Thus the Cost of Goods Sold under FIFO is easily seen as being 160 units x $18 (all of the first layer) plus 20 units x 20 (from the newer layer), for a total COGS of $3,280. Also, the ending inventory after the Jan 6 sale (still under FIFO) would be 80 second-layer units at 20 per, for a total of $1,600.

    LIFO on the other hand takes the opposite viewpoint. Under LIFO sales are deemed to come from the newest layers first, and sales "eat through" the layers in reverse order.

    So the Jan 6 sales under LIFO would be deemed to consist of all 100 units of the new layer added Jan 2, plus another 80 units coming from the original layer.

    The ending inventory after the Jan 6 sale is just what you'd expect from this LIFO approach: the new Jan 2 layer was completely erased by the Jan 6 sale, and what's left on hand is 80 units of the original layer.

    You can see then that the Jan 6 COGS would total (100 x 20) plus (80 x 18) = $3,440.

    That same basic methodology is then just applied throughout the remainder of the month. Add a new layer with each purchase, and treat each sale as being drawn from the layers in the order they were acquired (under FIFO) or in the reverse order of their purchases (under LIFO).

    Moving average, though, is an animal quite different from LIFO and FIFO. Forget the notion of layers. With each purchase of new inventory you just recompute a new average cost for all units. Then this newly-recalculated average cost becomes the COGS to be used on all subsequent sales (at least until there's another inventory purchase, at which time the 'average' is recomputed once again).

    Going back to the initial transactions posted in this particular problem, after the Jan 2 purchase the company has 260 items on hand, which have cost a total of (160 x 18) + (100 x 20) = $4,880. This gives us an average unit cost of 4,880 / 260 = $18.77 each.

    Now we forget layers. We just have 260 units on hand, all of which are assigned a cost of 18.77 per. On Jan 6 when we sell 180 units, we just calculate the COGS as being 180 x 18.77 = $3,378.60 and we figure our ending inventory following the sale is 80 units at 18.77 each.

    That's the FIFO, LIFO, and moving average approaches in a nutshell. The purchase returns and the sales returns are handled pretty intuitively, in accordance with the particular method being employed, as described above.

    Hope that helps a bit.

Not your question? Ask your question View similar questions


Question Tools Search this Question
Search this Question:

Advanced Search

Add your answer here.

Check out some similar questions!

Need to find ending inventory, gross profit and net income [ 4 Answers ]

Please help, need directions to finding "ending Inv" ; "Gross profit" ; "net Income(loss)" Any formulas I can use to finish the rest of the problems that go with this one? They all vary in filling in the blanks. Truly appreciate the help! Sales.. . 60,000 Cost of goods sold ...

Compute inventory cost of goods sold using periodic FIFO and LIFO [ 3 Answers ]

Thompson sells a basketball, NBA, that is popular with basketball players. Below is information relating to Thompson's purchases of NBA baskeballs during September. During the same month, 118 NBA baskeballs were sold. Thompson uses a periodic inventory system. Sept 1 Inventory 15 $97 ...

Cost of goods sold and gross profit [ 1 Answers ]

Need help computing cost of goods sold and gross profit under FIFO, LIFO, Average cost. Beginning inventory 20 rolls @ $200, Purchase 8 rolls @ 300, Sale 15 rolls @ 500.

Find Cost of goods sold and ending inventory using.average cost/FIFO/LIFO [ 2 Answers ]

I'm having a hard time with the fifo and lifo method... of this question Began with 73 yards @ 23 per yard During the month the company made the following purchases. March 3/4 113 yards @ 27 3/12 81 yards @ 29 3/19 167 yards @ 32 3/25 44 yards @ 35

FIFO Calcuating Gross Profit and Ending Inventory [ 1 Answers ]

Bradley Corp produces a product with the following costs as of July 1, 2007: Material: $2 per unit; Labor $4 per unit: Overhead: $2 per unit Beginnning inventory: at these costs on July 1st, was 3000 units. From July 1 - Dec 1, 2007, Bradley produced 13,000 units. These units had:...

View more questions Search