Fundamental Financial Accounting Concepts
Fundamental Financial Accounting Concepts
10th Edition
ISBN: 9781259918186
Author: Thomas P Edmonds, Christopher Edmonds, Frances M McNair, Philip R Olds
Publisher: McGraw-Hill Education
Question
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Chapter 5, Problem 4AE

a.

To determine

Compute the gross margin for Company M using the FIFO cost flow assumption.

a.

Expert Solution
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Explanation of Solution

(1)

First-in-First-Out:

In First-in-First-Out method, the costs of the initially purchased items are considered as cost of goods sold, for the items which are sold first. The value of the ending inventory consists of the recent purchased items.

Compute the gross margin for Company M using the FIFO cost flow assumption as follows:

FIFO Units Unit Cost (in $) Amount (in $) Cost of Goods Sold (in $)
Sales 370 90   33,300
Less: Cost of goods sold:        
Beginning inventory 90 40 3,600  
Purchases 280 45 12,600 (16,200)
Gross margin 1,500 $17,100

Table (1)

Hence, the gross margin for Company M using the FIFO cost flow assumption is $17,100.

(2)

Last-in-Last-Out:

In Last-in-First-Out method, the costs of last purchased items are considered as the cost of goods sold, for the items which are sold first. The value of the closing stock consists of the initial purchased items.

Compute the gross margin for Company M using the LIFO cost flow assumption as follows:

LIFO Units Unit Cost (in $) Amount (in $) Cost of Goods Sold (in $)
Sales 370 90   33,300
Less: Cost of goods sold:        
Purchases 310 45 13,950  
Beginning inventory 60 40 2,400 (16,350)
Gross margin 1,500 $16,950

Table (2)

Hence, the gross margin for Company M using the LIFO cost flow assumption is $16,950.

 (3)

Weighted-average cost method:

Under Weighted average cost method, the company calculates a new average cost after every purchase is made. It is determined by dividing the cost of goods available for sale by the units on hand.

Compute the gross margin for Company M using the weighted average cost flow assumption as follows:

Weighted Average Units Unit Cost (in $) Amount (in $) Cost of Goods Sold (in $)
Sales 370 90   33,300
Less: Cost of goods sold:        
Average cost per unit 370 43.875 16,234 (16,234)
Gross margin 1,500 $17,066

Table (3)

Working Note:

Compute the average unit cost:

Cost per unit=Total costTotal Units=($3,600(Table 1)+$13,950(Table 2))400=$17,550400=$43.875

Hence, the gross margin for Company M using the weighted average cost flow assumption is $17,066.

b.

To determine

Ascertain the amount of net income using FIFO, LIFO, and weighted average.

b.

Expert Solution
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Explanation of Solution

Net Income:

Net income is the sum total of all the revenues generated in a particular accounting period after deducting cost of goods sold and expenses and losses, such as rent expense, depreciation of that particular accounting period.

Ascertain the amount of net income using FIFO, LIFO, and weighted average as follows:

 

FIFO

LIFO

Weighted Average
Sales $33,300 $33,300 $33,300
Less: Cost of Goods Sold (16,200) (16,350) (16,234)
Gross Margin 17,100 16,950 17,066
Less: Operating Expenses 4,100 4,100 4,100
Net Income $13,000 $12,850 $12,966

Table (4)

Hence, the amount of net income using FIFO, LIFO, and weighted average are $13,000, $12,850, and $12,966 respectively.

c.

To determine

Compute the amount of ending inventory using FIFO method.

c.

Expert Solution
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Explanation of Solution

Ending Inventory:

It represents the quantity and price of the goods unsold and laying at the store at the end of a particular period.

(1)

Compute the amount of ending inventory using FIFO method as follows:

Units Unit Cost (in $) Ending Inventory (in $)
FIFO 30 45 1,350

Table (5)

(2)

Compute the amount of ending inventory using LIFO method as follows:

Units Unit Cost (in $) Ending Inventory (in $)
LIFO 30 40 1,200

Table (6)

(3)

Compute the amount of ending inventory using weighted average method as follows:

Units Unit Cost (in $) Ending Inventory (in $)
Weighted Average 30 43.875 1,316

Table (7)

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