Question

The following data apply to the next two questions.

	Units	Price
Beginning Inventory	200	$1.20
First Purchase	400	$1.30
Second Purchase	250	$1.40
Sales	550	$2.00

11. Assuming a FIFO cost flow, the amount of gross margin reported on the income statement would be

a.    $405.

b.    $695.

c.    $415.

d.    None of the above.

12. Assuming a LIFO cost flow, the amount of ending inventory reported on the balance sheet would be

a.    $240.

b.    $415.

c.    $130.

d.    $370.

I do not know HOW please explain.

Answer 1

11)

Total value of opening Inventory and purchases

= 200 x $1.20 + 400 x $1.30 + 250 x $1.40

= $240 + $520 + $350

= $1,110

Under FIFO valuation, units sold are issued first from the old Inventory and closing inventory consists of the latest purchases

So, cost of goods sold for 550 units

= 200 x $1.20 + (550 – 200) x $1.30

= $240 + $455

= $695

So, Gross margin

= Sales value – Cost of goods sold

= 550 x $2 - $695

= $1,100 - $695

= $405

So, as per above calculations, option a is the correct option

12)

Under LIFO assumption, cost of goods sold consists of latest inventory and the closing inventory consisted of oldest purchases

Closing Inventory quantity

= Opening Inventory + Purchases – Sales

= 200 + 400 + 250 – 550

= 300 units

So, Value of closing Inventory

= 200 x $1.20 + (300 – 200) x $1.30

= $240 + $130

= $370

So, as per above calculations, option d is the correct option