Question

The Shirt Shop had the following transactions for T-shirts for Year 1, its first year of operations:

Jan. 20	Purchased	400	units	@	$	8	=	$	3,200
Apr. 21	Purchased	200	units	@	$	10	=		2,000
July 25	Purchased	280	units	@	$	13	=		3,640
Sept. 19	Purchased	90	units	@	$	15	=		1,350

During the year, The Shirt Shop sold 810 T-shirts for $20 each.

Required

1. Compute the amount of ending inventory The Shirt Shop would report on the balance sheet, assuming the following cost flow assumptions: (1) FIFO, (2) LIFO, and (3) weighted average.
2. Compute the difference in gross margin between the FIFO and LIFO cost flow assumptions.

Answer 1

Solution:

	FIFO	LIFO	Weighted average
Ending inventory	2260	1280	1682
Sales	16200	16200	16200
Cost of goods sold	7930	8910	8513
Gross profit	8270	7290	7687

FIFO has higher gross profit compared to LIFO and weighted average

Explanation:

Total purchases = 400 + 200 + 280 + 90 = 970

sales = 810

Ending inventory = 970 - 810 = 160units

FIFO

Cost of goods sold:= (400 X 8) + (200 X 10) + (210* X 13) = 7930

*210 = 280 - 70

Ending inventory = (90 x 15) + (70* x 13) = 2260

*70 = 160 - 90

LIFO

Cost of goods sold: = (90 X 15) + (280 X 13) + (200 X 10) + (240* X 8) = 8910

Ending inventory = 160 x 8 = 1280

*240 = 400 -160

Weighted average price = Total cost / total units = 10190 / 970 = 10.51

Cost of goods sold = 10.51 x 810 = 8513

Ending inventory = 10.51 x 160 = 1682