Question

Brief Exercise 6-6

In its first month of operation, Franklin Company purchased 131 units of inventory for $7, then 218 units for $8, and finally 153 units for $9. At the end of the month, 196 units remained.

Compute the amount of phantom profit that would result if the company used FIFO rather than LIFO. The company uses the periodic method.

The amount of phantom profit

$

Answer 1

Sollution

The phantom profit was=cost under LIFO - cost under FIFO

($2601-$2317)

$284

Step -1
Calculation of cost under Lifo method of 306 units	Units	Price	Total value
1. we would have used all of the inventory from Ending first	153	9	$1377
2. 153 units (306 units sold - 153 units ) to be taken from next inventory purchase.	153	8	$1224
Total cost under Lifo method	306		$2601
Step 2
Calculation of cost under fifo method of 306 units	Units	Price	Total value
1. we would have used all of the inventory from begnning Firstly	131	7	$917
2. Balance 175 units (306 units sold - 131 units ) to be taken from next inventory purchase.	175	8	$1400
Total cost under fifo method	306		$2317

step 3

Units sold =Units purchased -closing units remained. = 502-196 =306 units