Question

The Breeze trading company discloses the following information for the month of August 2016.

Aug. 01: Beginning inventory, 600 units @ $5 each each.
Aug. 10: Sold 400 units @ $12 each.
Aug. 11: Purchased 1,600 units @ $6 each.
Aug. 15: Sold 1,000 units @ $12.50 each.
Aug. 20: Purchased 1,000 units @ $6.50 each.
Aug. 27: Sold 600 units @ $13.50 each.
Required:

Assume the Breeze trading company uses periodic inventory system, compute cost of goods sold (COGS), ending inventory and gross profit under:
(a). FIFO
(b). LIFO
Assume the Breeze company uses perpetual inventory system, compute cost of goods sold (COGS), ending inventory and gross profit under:
(a). FIFO
(b). LIFO
Explain the reason of higher gross profit under FIFO than LIFO?

Answer 1

Periodic system: FIFO ; COGS= $11400, closing inventory = $7700, gross profit=$14000. LIFO = closing stock= 6600, COGS=$12500, gross profit=12900.

perpetual system: FIFO ;COGS=11400, closing stock= $7700, gross profit= $11400. LIFO ; COGS=$12500, closing stock= $6600, gross profit = $12900

Reason for a higher gross profit in FIFO than LIFO is some of the stock ends up not being sold as they are maybe old, out-fashioned, and obviously new trend come about everyday.

Step-by-step explanation:

PERIODIC

DR purchases account CR

11-Aug bank 9600 inventory 16100

20-Aug bank 6500

16100 16100

FIFA cost of sales

opening balance 3000

purchases 16100

closing 7700

cost of sales 11400

gross profit 14000

sales 25400

cost of sales 11400

closing inventory 7700

200 units from 11 aug 1200

1000 units from 20 aug 6500

LIFO

closing balance 6600

600 units from 01 aug 3000

600 units from 11 aug 3600

Cost of sales

opening stock 3000

purchases 16100

closing stock 6600

cost of sales 12500

gross profit 12900

sales 25400

cost of sales 12500

perpetual inventory system

FIFA

cost of sales 11400

10-Aug 2000

15-Aug 5800

27-Aug 3600