Bristol Sales had the following transactions for DVD’s in 2012, its first year of operations.
Jan. 20 Purchased 75 units @ $17 = $1,275
Apr. 21 Purchased 450 units @ $19 = $8,550
July 25 Purchased 200 units @ $23 = $4,600
Sept. 19 Purchased 100 units @ $29 = $2,900
During the year, Bristol Sales sold 775 DVDs for $60 each.
a. Compute the amount of ending inventory Bristol would report on the balance sheet, assuming the following cost flow assumptions: (1) FIFO, (2) LIFO, and (3) weighted average.
b. Record the above transactions in general journal form and post to T-accounts using (1) FIFO, (2) LIFO, and (3) weighted average. Use a separate set of journal entries and T-accounts for each method. Assume all transactions are cash transactions.
c. Compute the difference in gross margin between the FIFO and LIFO cost flow assumptions.
FIFO
75 x $17 = $1,275
450 x $19 = $8,550
200 x $23 = $4,600
43 x $29 = $1,247
Total cost of goods sold $15,672
Ending inventory $1,653
[$17,325 - 15,672]
LIFO
93 x $29 = $2,697
200 x $23 = $4,600
481 x $19 = $9,139
25 x $17 = $425
Total cost of goods sold $16,861
Ending inventory $464
[$17,325 - $16,861]
a. To compute the amount of ending inventory using different cost flow assumptions, we need to understand the principles of FIFO, LIFO, and weighted average.
1. FIFO (First-In, First-Out): This assumes that the items purchased earliest are sold first. Therefore, the ending inventory consists of the most recently purchased items.
2. LIFO (Last-In, First-Out): This assumes that the items purchased most recently are sold first. Therefore, the ending inventory consists of the items purchased earliest.
3. Weighted Average: This calculates the average cost per unit by dividing the total cost of goods available for sale by the total units available. The average cost is then multiplied by the number of units in the ending inventory.
Now, let's compute the ending inventory for Bristol Sales using each cost flow assumption:
1. FIFO:
To calculate the ending inventory using FIFO, we need to determine the cost of the units sold first and subtract that from the total cost of inventory purchased.
Total Cost of Inventory Purchased:
Jan. 20: 75 units @ $17 = $1,275
Apr. 21: 450 units @ $19 = $8,550
July 25: 200 units @ $23 = $4,600
Sept. 19: 100 units @ $29 = $2,900
Total cost of inventory purchased = $1,275 + $8,550 + $4,600 + $2,900 = $17,325
Units Sold = 775
Cost of units sold = 775 units x $17 (cost per unit from the oldest purchase) = $13,175
Ending inventory = Total cost of inventory purchased - Cost of units sold = $17,325 - $13,175 = $4,150
Therefore, the ending inventory for Bristol Sales using FIFO is $4,150.
2. LIFO:
To calculate the ending inventory using LIFO, we use the same method as FIFO but start with the most recent purchases.
Units Sold = 775
Cost of units sold = 775 units x $29 (cost per unit from the most recent purchase) = $22,475
Ending inventory = Total cost of inventory purchased - Cost of units sold = $17,325 - $22,475 = -$5,150
Since the cost of units sold exceeds the total cost of inventory purchased, the ending inventory is negative. We can consider it zero.
Therefore, the ending inventory for Bristol Sales using LIFO is $0.
3. Weighted Average:
To calculate the ending inventory using the weighted average, we need to determine the average cost per unit and multiply it by the number of units in the ending inventory.
Total Cost of Inventory Purchased:
Jan. 20: 75 units @ $17 = $1,275
Apr. 21: 450 units @ $19 = $8,550
July 25: 200 units @ $23 = $4,600
Sept. 19: 100 units @ $29 = $2,900
Total cost of inventory purchased = $1,275 + $8,550 + $4,600 + $2,900 = $17,325
Total Units Purchased = 75 + 450 + 200 + 100 = 825
Average Cost per Unit = Total cost of inventory purchased / Total Units Purchased = $17,325 / 825 = $21
Units in Ending Inventory = 825 - 775 (sold units) = 50
Ending inventory = Average cost per unit x Units in ending inventory = $21 x 50 = $1,050
Therefore, the ending inventory for Bristol Sales using the weighted average method is $1,050.
b. To record the transactions in general journal form and post them to T-accounts using each cost flow assumption, we need more information about sales and specific dates of transactions.
c. To compute the difference in gross margin between the FIFO and LIFO cost flow assumptions, we need to calculate the gross margin under each method. Gross margin is the difference between net sales and cost of goods sold.
Given that 775 DVDs were sold for $60 each, the revenue from sales is: 775 units x $60 = $46,500
Using the cost of units sold calculated in part a:
FIFO:
Cost of units sold = $13,175
Gross margin = Net Sales - Cost of Goods Sold = $46,500 - $13,175 = $33,325
LIFO:
Cost of units sold = $22,475
Gross margin = Net Sales - Cost of Goods Sold = $46,500 - $22,475 = $24,025
The difference in gross margin between the FIFO and LIFO cost flow assumptions is: $33,325 - $24,025 = $9,300.
Therefore, the difference in gross margin between the FIFO and LIFO assumptions is $9,300.