Principles of Financial Accounting.
24th Edition
ISBN: 9781260158601
Author: Wild
Publisher: MCG
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Textbook Question
Chapter 6, Problem 8BP
Periodic: Income comparisons and cost flows A1 P3
Shepard Company sold 4,000 units of its product at $100 per unit during the year and incurred operating expenses of $15 per unit in selling the units. It began the year with 840 units in inventory and made successive purchases of its product as follows.
| Jan. 1 | Beginning inventory. | 840 units $58 per unit |
| Apr. 2 | Purchase | 600 units & $59 per unit |
| June 14 | Purchase | 1,205 units <a $61 per unit |
| Aug. 29 | Purchase | 700 units $64 per unit |
| Nov. 18 | Purchase | 1,655 units #$65 per unit |
| Total | 5,000 units |
Required
1. Prepare comparative income statements similar to Exhibit 6.8 for the three inventory costing methods of FIFO, LIFO, and weighted average. (Round all amounts to cents.) Include a detailed cost of goods sold section as part of each statement. The company uses a periodic inventory system, and its income tax rate is 40%.
2. How would the financial results from using the three alternative inventory costing methods change if the company had been experiencing decreasing prices in its purchases of inventory?
3. What advantages and disadvantages are offered by using (a) LIFO and (b) FIFO? Assume the continuing trend of increasing costs.
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Cost Flow Methods
The following three identical units of Item P401C are purchased during April:
Item Beta
Units
Cost
April 2
Purchase
1
$100
15
Purchase
1
120
20
Purchase
1
140
Total
3
$360
Average cost per unit
$120
($360 ÷ 3 units)
Assume that one unit is sold on April 27 for $300.
Determine the gross profit for April and ending inventory on April 30 using the (a) first-in, first-out (FIFO); (b) last-in, first-out (LIFO); and (c) weighted average cost method.
Gross Profit
Ending Inventory
a. First-in, first-out (FIFO)
$
$
b. Last-in, first-out (LIFO)
$
$
c. Weighted average cost
$
$
Cost Flow Methods
The following three identical units of Item LO3V are purchased during April:
April 2
April 15
April 20
Total
Average cost per unit
Item Beta
Units
Cost
Purchase
1
$291
Purchase
1
294
Purchase
297
3
$882
$294
($882 ÷ 3 units)
Assume that one unit is sold on April 27 for $426. Determine the gross profit for April and ending inventory on April
(b) last-in, first-out (LIFO); and (c) weighted average cost method,
a. First-in, first-out (FIFO)
b. Last-in, first-out (LIFO)
c. Weighted average cost
Gross Profit
Ending Inventory
$
Cost flow methods
The following three identical units of Item P401C are purchased during April:
Apr. 2
Apr. 15
Apr. 20
Total
Average cost per unit ($348 ÷ 3 units)
Item Beta Units
Cost
Purchase
1
$114
Purchase
1
116
Purchase
1
118
3
$348
$116
Assume that one unit is sold on April 27 for $159.
Determine the gross profit for April and ending inventory on April 30 using the (a) first-in, first-out (FIFO); (b) last-in, first-ou
and (c) weighted average cost method.
a. First-in, first-out (FIFO)
b. Last-in, first-out (LIFO)
c. Weighted average cost
Gross Profit
Ending Inventory
$
$
$
Chapter 6 Solutions
Principles of Financial Accounting.
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