The following information pertains to Porter Company for 2011.
Beginning inventory 70 units @ $13
Units purchased 280 units @ $18
Ending inventory consisted of 30 units. Porter sold 320 units at $30 each. All purchases and sales were made with cash.
a. Compute the gross margin for Porter Company using the following cost flow assumptions: (1) FIFO, (2) LIFO, and (3) weighted average.
b. What is the dollar amount of difference in net income between using FIFO versus LIFO? (Ignore income tax considerations.)
c. Determine the cash flow from operating activities, using each of the three cost flow assumptions listed in Requirement a. Ignore the effect of income taxes. Explain why these cash flows have no differences.
a. To compute the gross margin for Porter Company using different cost flow assumptions, we first need to calculate the cost of goods sold (COGS) and then subtract it from the net sales. Here's how you can do it for each cost flow assumption:
1. FIFO (First-In, First-Out):
- To calculate the COGS, we assume that the units sold are from the beginning inventory followed by the units purchased earlier in the year.
- The cost of goods sold can be calculated as follows:
COGS = (Beginning inventory units sold x Beginning inventory cost) + (Units purchased x Purchase cost) - Ending inventory cost
= (70 units x $13) + (250 units x $18) - (30 units x $18)
= $910 + $4,500 - $540
= $4,870
- Gross margin = Net sales - COGS
= (320 units x $30) - $4,870
= $9,600 - $4,870
= $4,730
2. LIFO (Last-In, First-Out):
- To calculate the COGS, we assume that the units sold are from the most recent purchases first, followed by the units from the beginning inventory.
- The cost of goods sold can be calculated as follows:
COGS = (Units purchased x Purchase cost) + (Beginning inventory units sold x Beginning inventory cost) - Ending inventory cost
= (280 units x $18) + (40 units x $13) - (30 units x $18)
= $5,040 + $520 - $540
= $5,020
- Gross margin = Net sales - COGS
= (320 units x $30) - $5,020
= $9,600 - $5,020
= $4,580
3. Weighted Average:
- To calculate the COGS, we take the weighted average of all inventory costs available (beginning inventory and purchases) and apply it to the units sold.
- The cost of goods sold can be calculated as follows:
COGS = (Weighted average cost per unit x Units sold)
= (($13 x 70) + ($18 x 280)) / (70 + 280) x 320
= ($910 + $5,040) / 350 x 320
= $5,950 / 350 x 320
= $9,520
- Gross margin = Net sales - COGS
= (320 units x $30) - $9,520
= $9,600 - $9,520
= $80
b. The dollar amount of difference in net income between using FIFO versus LIFO can be calculated by taking the difference in the COGS between the two methods and multiplying it by the selling price per unit:
Difference in net income = (COGS FIFO - COGS LIFO) x Selling price per unit
= ($4,870 - $5,020) x $30
= ($-150) x $30
= -$4,500
c. The cash flow from operating activities using each cost flow assumption will be the same because cash flows are not affected by the choice of cost flow assumptions. The cash flows from operating activities are calculated based on the actual cash received from sales and the actual cash paid for purchases. The timing of cash flows is independent of the cost flow assumptions used to calculate COGS. Therefore, there are no differences in cash flows regardless of whether FIFO, LIFO, or weighted average is used for calculating COGS.
a.
To compute the gross margin for Porter Company using FIFO, LIFO, and weighted average, we need to calculate the cost of goods sold (COGS) and the gross margin for each assumption.
1. FIFO (First-In, First-Out):
Beginning inventory: 70 units @ $13 = $910
Purchases: 280 units @ $18 = $5,040
COGS = 320 units (Beginning inventory + Purchases) - Ending inventory
= (70 + 280) - 30 = 320 units
Gross margin = Sales - COGS
= 320 units * $30 - COGS
= $9,600 - COGS
2. LIFO (Last-In, First-Out):
Beginning inventory: 70 units @ $13 = $910
Purchases: 280 units @ $18 = $5,040
COGS = Ending inventory + (Beginning inventory + Purchases) - 320 units
= 30 + (70 + 280) - 320 = 60 units
Gross margin = Sales - COGS
= 320 units * $30 - COGS
= $9,600 - COGS
3. Weighted Average:
Total cost of beginning inventory: 70 units * $13 = $910
Total cost of purchases: 280 units * $18 = $5,040
Total units available for sale: 70 + 280 = 350 units
Weighted average cost per unit = (Total cost of beginning inventory + Total cost of purchases) / Total units available for sale
= ($910 + $5,040) / 350 units
= $5,950 / 350 units
= $16.99 per unit
COGS = 320 units * $16.99
Gross margin = Sales - COGS
= 320 units * $30 - COGS
= $9,600 - COGS
b.
To find the difference in net income between using FIFO and LIFO, we need to calculate the net income for each assumption and find the difference.
Net Income (FIFO) = Sales - COGS (FIFO)
Net Income (LIFO) = Sales - COGS (LIFO)
Difference in net income = Net Income (FIFO) - Net Income (LIFO)
c.
The cash flow from operating activities will be the same for all three cost flow assumptions (FIFO, LIFO, and weighted average). This is because the cash flow is determined by the actual cash received from sales and the actual cash paid for purchases. The cost flow assumptions only affect the calculation of COGS and gross margin, which are not directly related to cash flow calculations. Therefore, the cash flows will be the same regardless of the cost flow assumption used.